John Maurer - Vice President, Treasurer and Investor Relations Dick Johnson - Chairman and Chief Executive Officer Lauren Peters - Executive Vice President and Chief Financial Officer

Matthew McClintock - Barclays Camilo Lyon - Canaccord Genuity Christopher Svezia - Wedbush Securities Pallavi Bakshi - Credit Suisse Jay Sole - Morgan Stanley Randy Konik - Jefferies Scott Krasik - Buckingham Research Sam Poser - Susquehanna Financial Group Matthew Boss - JPMorgan

Good morning, ladies and gentlemen and welcome to Foot Locker's Second 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 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 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 over to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

Thanks Christy and good morning everyone. Welcome to Foot Locker, Inc.'s earnings conference call for the second quarter of 2017. As reported in this morning's press release, the company posted a comparable sales decline of 6% in the quarter. The company's net income was $51 million, which equated to $0.39 per share. These profit numbers include an incremental $50 million pretax charge related to our ongoing pension plan litigation, for which the company previously recorded a $100 million pretax charge in the third quarter of 2015. Adjusting for this year's charge, which equaled $0.23 per share, non-GAAP EPS was $0.62 per share compared to last year's $0.94. As the litigation is still pending, we'll not be able to provide any additional information about the matter at this time. A reconciliation of our GAAP to non-GAAP results is provided in the press release issued earlier this morning. Dick Johnson, Chairman and Chief Executive Officer, will start our prepared remarks today by reviewing the key factors contributing to our recent performance, our sales expectations for the rest of fiscal 2017 and the adjustments we are making to our operations in response to the changed landscape in athletic retail. Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, will then provide additional details on our financial results for the quarter just ended and our outlook for the rest of fiscal 2017. Dick?

Thank you, John. Before I get started with my prepared remarks, I want to acknowledge our teammates in Barcelona. Our thoughts and prayers go out to them as they try and comprehend this senseless tragedy that hit Las Ramblas in downtown Barcelona yesterday. We all stand strong with our team and the people of Barcelona and across all of Spain. Good morning to all of you, and thank you for your interest in Foot Locker. It goes without saying that our second quarter performance clearly fell short of our expectations. We are obviously not satisfied with these results, and we're dedicating all our energy to ensure that we get our performance back on the right track. So before I discuss details specific to the quarter, let me start by outlining what we're seeing in the market more broadly that is affecting our business. The disruption taking place today in our industry, and in retail in general, is the most significant I've seen in my quarter-century in the athletic business. The fact is that we're seeing mobile technology drive shifts in consumer behavior and spending patterns at a faster pace than our industry has been able to keep up with. With constant access to new influences, trends, information and ideas, consumers' attention spans are getting shorter, and we're seeing that they're moving from one style to the next faster than ever before. We, and the leading suppliers in the industry are working hard to significantly shorten the product development cycle, the ordering and manufacturing lead times, the expense of supply chain and the storytelling and marketing timelines. Today, those efforts are much discussed or in practice still in their infancy, and we have a lot more progress to make. Although we recognize the fundamental shift in consumer behavior and have been taking steps to address the new operating environment, it is important to emphasize that we believe premium athletic, which is fueled by casualization and a trend towards healthier, more active lifestyles is still a great place to be in over the long run. Our young customers are still highly passionate about sports, music, style and the other key elements of youth culture. We are committed to adapting our business as quickly as possible in the ever-faster speed at which they move, and we will continue to build more responsive and nimble practices into how new product is brought to market. An excellent example of the initiatives we have been taking to adapt our strategy is devoting an increasing share of capital spending to digital. This includes both customer-facing technology, such as our mobile apps, an enhanced e-commerce platform and new POS software; and back-of-the-house capabilities, such as infrastructure and data analytics. We're also partnering with a leading technology and data analytics company to significantly elevate our omni-channel position in the market in the coming year. Another example of the key initiative is the investment we are making to create a more modern, flexible supply chain network. We believe that with the compression of product life cycles, making these investments and accelerating our efforts will keep us at the heart of sneaker culture. We have succeeded in the past by knowing individual customers better in order to engage with them in the increasingly personal ways they expect, creating and delivering content that they find relevant, adding stores in the key locations they want us to be and improving our ability to deliver products to them ever faster. We believe these will continue to be the key ingredients of our future success. Given the new market realities though, we're taking a hard look at overall capital spending. While this year's estimated spend of $277 million is already mostly committed, we expect to reduce next year's capital spending from the $250 million level we've previously targeted. We do not intend to sacrifice our ability to deliver on our customers' expectations of us, but we are undergoing a comprehensive process of evaluating priorities for next year and beyond, accelerating our commitment to digital, investing in the right stores and speeding up our logistics efforts. In a moment, Lauren will outline some of the other near-term initiatives we are putting in place to protect our earnings as we update our outlook for the rest of fiscal 2017 and navigate this choppy retail environment. But before that, let me spend a few minutes on the second quarter. Reflecting the increased pace of changing consumer influences, sales of some recent top styles fell short of our expectation. In North America, for example, the sell-throughs of certain Jordan models slowed considerably compared to historical rates. In Europe, we planned certain adi original styles, such as Superstars and Stan Smiths, down substantially, but they declined even more than expected. At the same time, we were affected by the limited availability of innovative new products in the market. The old multi-season's seed, ignite and rollout of cheap footwear platforms just doesn't work as effectively anymore. In addition, the absence of sufficient depth and breadth of exciting new styles in the premium athletic channel also seems to have drawn some customers to markdown product. Therefore, the very high level of promotional activity in the market affected us more this quarter than in the past. Importantly, we do not believe we are losing share of the market for premium athletic footwear and apparel. The vast majority of our adult footwear sales are over $100 per pair. And our data makes clear that in this segment, we are still the market leader and probably still gaining share despite the comp loss in the quarter. Looking ahead, we expect some of the trends of the second quarter to persist through the remainder of the year. And our current top line estimate for the second half of the year is for a comparable sales loss in the 3% to 4% range, roughly the same in each quarter. As we noted on our first quarter call, we are excited by the greater availability as the fall season unfolds of select cut styles, such as VaporMax, Dualtone, Special Forces Air Force 1s and various Max iterations from Nike, along with NMDs, Tubular Shadow, EQT, X_PLR and Ultra BOOST from Adidas. At a much smaller scale, we also expect our Vans business to grow nicely. While this improved product growth should lift our comps for the rest of the year from Q2's level, the pluses are not expected to fully offset what we now anticipate will be slower sell-throughs of certain Jordan footwear and apparel styles, a still sluggish signature basketball business and large down-trending platforms such as Superstars, Stan Smiths and Roshe Run. Into next year and over the longer horizon though, we see tremendous opportunities to get the premium end of the athletic industry growing again at a consistently strong pace. The innovation pipeline at Nike continues to be second to none with a number of new ideas coming to market beginning later this year. The speed initiatives that they and the other vendors are investing in should also begin to get scale by some point next year. We expect adi to continue creating new products and connecting them with their assets, such as Kanye West and Pharrell, while some of the other brands, Under Armour, PUMA and Vans, for example, should reap more of the benefits of the investments they are making in product developments and storytelling. For our part, we will continue to invest in creating compelling experiences for our customers. At the premium end of the market, most of our customers don't want to just buy a specific product at the end of spring, they want that product to have a connection to an experience they find meaningful and want to participate in. That experience could be a special event in a store, being notified out or discovering a video on our website or YouTube channel of an athlete or celebrity wearing or discussing the latest product, an interaction with their friends while touching and feeling the product or simply a conversation about sneakers with one of our stripers or other store associates. For that reason, we do not believe our vendors selling product directly on Amazon is an imminent threat. There is no indication that any of our vendors intend to sell premium athletic product, $100-plus interest that we offer directly via that sort of distribution channel. For lower-priced, largely undifferentiated product, sure, Amazon and other online sales channels are increasing their share of the sneaker market. However, we believe our vendors agree with us that consistently selling their premium aspirational product requires great storytelling, great relevance to the influences on our customers' lives as well as engaging in digital and in-store experiences. We also believe that most of our suppliers are seeing more clearly than ever how important and authentic our customer connections are and how our proposition makes Foot Locker, Inc. such a critical partner in their future success. Our proposition is clear, great multi-branded stores in which to shop and buy, great digital sites and mobile connectivity, outstanding knowledgeable sales associates, duke merchants and unparalleled customer insights, all of which leads to great experiences for our consumers. We already have a lot of great stores. And we'll continue to invest in key markets and upgrading our top stores while, at the same time, looking to exit less productive stores. Of course, we've been doing that for years. By the end of the year, we will have closed more than 1,000 stores just since 2010. In this environment though, we are accelerating our ongoing process of reviewing our store portfolio. We'll be as aggressive as necessary in rationalizing our fleet to help improve our occupancy leverage as we navigate the repositioning of malls in the U.S. As a result, we'll be closing more stores this year than the 100 we mentioned at the beginning of the year. However, due to the disciplined investment process we followed in recent years and the related increase of productivity we have achieved, we don't believe we have a store productivity problem in our core banners or store fleet that overall is significantly too large. Stores remain an incredibly important component of the experience most of our customers expect on their journey to select and in purchasing the latest cool sneakers. For now, let me close my part of the prepared remarks by saying our eyes are wide open that the athletic retail game has changed. At Foot Locker, we're not used to going backwards, and we won't be satisfied until we are back on an upwards sales and earnings trajectory. Our entire leadership team is fully engaged in addressing the current challenges, as is our Board of Directors. Given the relatively recent deterioration in comp store sales, remember, comps in March and April were up high single-digits. We are in the process of reviewing with our board the longer-range options to adjust our operations beyond what we are already doing today. While we manage through this transition period, we will stay truly focused on delivering value to our shareholders. The overarching issue, in our opinion, revolves around premium product and the speed at which innovation comes to market in meaningful climates. To that end, we are also fully engaging with our leading suppliers to build even stronger partnerships to address the challenges jointly. With the success we've had together with our vendors in recent years and the capital we have invested in exciting stores and digital experiences for our customers, we believe no one is better positioned to lead the way back to sustained growth importantly. With that, let me turn the call over to Lauren.

Thank you, Dick, and good morning, everyone. As Dick mentioned, our second quarter was far more challenging than we anticipated when we last spoke in May. We highlighted then that as the second quarter got underway, sales were trending lower than the high single-digit gains we achieved in March and April. As it turned out, the trend weakened further during the period, with May comps declining at a low single-digit pace, while June and July finished down towards the high end of mid-single digits. Let's now review some of the factors that contributed to the shortfall. Footwear was our primary challenge with comparable sales down mid-single digits. Sales were down across all genders, with mid-single digit comp declines in men's and women's footwear, while children's footwear sales decreased low double-digits. Similar to the trends we have seen in recent quarters, strong demand for lifestyle running silhouettes, including the NMD, EQT, and Tubular Shadow from adidas and the VaporMax, Tuned Air and Huarache from Nike, led to a double-digit gain in men's running. Our business gain was not enough to offset double-digit declines in both basketball and casual style. The loss in women's footwear was driven by the shift away from Superstars and Stan Smiths that Dick mentioned earlier on, while the kids business experienced the biggest miss to our expectations because of the follow-up of those two styles and a higher exposure to Jordan and marquee basketball. Apparel sales posted a slight gain, while accessories were down low double-digit. Within apparel, our women's business had a strong comp gain, though the double-digit increase was partially driven through markdown. While our men's apparel sales were relatively flat, our kids business was down mid-single digits. A strength in our international markets was offset by softer sales in the U.S. Overall, windwear and branded T-shirts from Nike and Adidas sold well across genders, but were offset by softness across some seasonal apparel, including shorts and licensed products and certain brand Jordan styles. And in the promotional retail environment, ASPs and footwear were up low single-digits. While in apparel, they increased low double-digits, driven by our shift to more premium assortments. Unit sales of both footwear and apparel were down high single-digits. As a group, our store divisions posted a 7.5% comparable sales decline. On the positive side, Foot Locker Canada produced a solid comp increase, driven by gains in both footwear and apparel. Total sales in constant currency at Foot Locker Canada were up double digits compared to a year ago, driven by the comp gain and the addition of some key new stores, including a Jordan Jumpman location in Toronto. SIX:02 posted a high single-digit comp increase, while total sales were up 45%, lifted by the SIX:02 location inside of our New York flagship stores. The rest of our store divisions posted comparable sales declines. Foot Locker in the U.S. and Sidestep were both down mid-single digits. Foot Locker Europe, Champs Sports and Runners Point declined high single-digits, while comp sales at Footaction and Kids Foot Locker decreased double-digit. Our direct-to-customer businesses produced an overall comparable sales gain of 5.4%. This includes a mid-single-digit sales increase at our store banner.com business in the U.S., a low single-digit comp sales gain at Eastbay, and another 20%-plus gain for our digital sales in Europe and Canada. In addition, we successfully launched our e-commerce functionality in Australia during the second quarter. Overall, direct-to-customer sales increased to 12.7% of total sales, up from 11.5% a year ago. Moving down the income statement. Gross margin decreased 340 basis points to 29.6% of sales. The lower rate was driven by a 200-basis-point decrease in our merchandise margins and 140 basis points of deleverage on our occupancy and buyers' compensation expenses. The lower merchandise rate was driven by a higher markdown, both in-stores and online. We took higher markdowns in response to the promotional environment, to drive traffic, which was down mid-single digits in both the U.S. and abroad, and in order to clear slower-moving product prior to back-to-school. SG&A expense dollars decreased 3.1%, compared to the prior year. However, as a percent of sales, SG&A rose to 19.9% from 19.7% last year. As the quarter progressed, we adjusted our variable expenses, such as store wages, partners accruals, banking and marketing to better align with sales. However, the magnitude of the sale slowdown led to the slight deleverage. Depreciation expense was $42 million in the quarter, up $3 million from last year, reflecting the higher level of investments we've been making in our new high-profile stores, store remodels, digital capabilities and supply chain to position ourselves to meet our customer expectations. On a GAAP basis, our tax rate came in at 30.9%. This is 500 basis points lower than last year due to the litigation charge John mentioned, which reduced our U.S. income, where our tax rate is highest. On a non-GAAP basis, our tax rate came in at 34.1%, in-line with our full-year guidance. Turning to the balance sheet. We ended the quarter with $1.3 billion of inventory, a 3.7% decrease from last year's second quarter, as we took aggressive action to ensure that our inventory levels remained in-line with sales, and thus remain productive and turning appropriately in the face of a sales shortfall. On a constant-currency basis, inventory decreased 4.9%, compared to the 4.3% total sales decrease. We ended the quarter with $1.043 billion of cash and cash equivalent, an increase of $98 million from the end of Q2 last year. Our current cash balance is also virtually the same as of the beginning of the year, indicative of the company's ability to deliver good cash flow even in a challenging sales environment. We spent $21 million to repurchase 350,000 shares during the second quarter and returned $41 million to our shareholders through our quarterly dividend. We resumed buying shares following our Q1 conference call. However, once we saw that sales trends had flowed more than expected, we temporarily halted our repurchase activity. That being said, we have almost our entire $1.2 billion share repurchase authorization available, and we remain fully committed to returning cash to investors. With management and the board fully confident in our ability to reaccelerate the business over time, we will consider a full range of share repurchase alternatives, including accelerated share repurchase programs, open market purchases and 10b5-1 programs as we reenter the market to buy back shares. We invested $75 million of capital into the business during the second quarter, bringing our first half total capital expenditures to $150 million. We ended the quarter with 3,359 owned stores, which includes 24 openings, 38 remodels or relocations and 19 store closures. The openings include a new Foot Locker flagship store in Prague, the new Champs Sports location on Chicago State Street and the first Footaction store in Canada. Pending the review of our store base that Dick mentioned, we currently expect to close at least 135 stores, up from the 100 we previously guided to. We still expect to open about 90 new stores, which is unchanged from our previous guidance. So as Dick mentioned, we are now planning comparable sales to decline in the 3% to 4% range in both the third and fourth quarters. With this outlook, we will likely see further deleverage in the second half. Gross margin is likely to decrease 230 to 250 basis points in Q3 and 150 to 170 basis points in Q4 on a 13-week basis. The proportion of occupancy deleverage and lower merchandise margins, as we saw in the second quarter, should be similar in the second half. SG&A will likely be up 70 to 100 basis points of the rate of sales in both the third and fourth quarters. This is more than the 20-basis-point increase in Q2, which included a reversal of Q1 bonus accruals. As a result, we now expect non-GAAP EPS to decrease between 20% to 30% in the second half of 2017. As a reminder, our non-GAAP numbers are on a 52-week basis. We currently expect the 53rd week to produce incremental earnings of approximately $0.12 per share. Before we move on to your questions, I want to reiterate that we are already moving ahead with meaningful expense and operational changes, and our top priority is to continue to assess the best ways to address the top line challenges ahead of us in this exceptional retail environment. As Dick said, these include evaluating our largely productive store base, our total level of future capital spending, as well as the split and timing of spend between digital, stores and logistics, and various SG&A initiatives to creating a more flexible, efficient organization. Of course, we will also continue to manage inventory rigorously. Given our strong financial position, highly collaborative relationships with our vendors and deep connections with our customers, we believe that we remain especially well-positioned to reposition our business and succeed regaining our momentum. Christy, let's go ahead and open up the call for questions now.

Thank you. [Operator Instructions] Our first question comes from the line of Matt McClintock from Barclays. Please go ahead.

Hi guys, good morning everyone.

Good morning, Matt.

Dick, I was wondering if we could talk about the allocations of new and innovative product that you talked about, and that's where some of your optimism is for maybe an improvement in underlying trends. I recall last quarter, you're optimistic about new and innovative product in more allocations in the back half of this year, yet the delta between the back half now and where you were thinking before of mid-single digits before is pretty wide. And I just want to know, did you take down your expectations for EBIT allocations of that product or the underlying performance of that product? And then could you just talk about the sell-through trends that you saw for that type of product, Air, VaporMax, et cetera, this quarter? Did any of that slow at all? Thank you.

Well, let's see. We haven't taken down our expectation of those allocations on the hot products, certainly not. We still see the same thing that we saw when we were on the call in the first quarter. The thing that's a bit different than when we were in the first quarter is how some of the other silhouettes have fallen off. The speed with which some of the platforms that we certainly were cautious about fell off faster than we expected, and that's really what leads to the delta or probably the revised look at the back half. So the innovation, the storytelling, the great product that we talked about in Q1, we still see those allocations and the flow into the marketplace up in the back half of the quarter, of the third quarter and into the fourth quarter, so the back half of the year. But it's really some of the sell-throughs. We continue to see great sell-through when there's a relevant story and excitement around specific launches. But if it's just another shoe that we launch on a Saturday, the consumer, especially in second quarter, where there's not a real drive to the market for consumers, right, it's our smallest quarter by a fairly long shot. And there's no real call to retail now that we get in the back-to-school time frame. Fourth quarter's got holiday. There's some reasons for consumers to be out, and that's what's gives us some guarded optimism, if you will, about the trends improving a bit in the back half.

Okay. And then as a follow-up, if I could ask about the share repurchase. You maintained a pretty sizable cash balance. But historically, you've always maintained a pretty sizable cash balance. And I'd just like to understand how you think about just that cash balance? Where it can go, what's necessary? And what you could potentially dip into should you want to become a little bit more aggressive on share repurchases. Thanks.

Our priorities remain the same. Number one is investing in the business. But you've heard us describe that we're thinking about what that CapEx looks like next year and the split between digital stores and our logistics system. But an equally important priority for us is returns of cash to the shareholders, both through the dividend and share repurchase. So we've got almost the full $1.2 billion. We recognize value. We do have to navigate that. And about 70% of the cash is offshore, but we do have ability to bring some of that back tax efficiently. And we have our revolver. So with all of that said and flexibility, we recognize value, and we'll proceed accordingly.

Thanks a lot. Best of luck.

Thanks Matt.

Thank you. Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please go ahead.

Thanks, good morning. Dick, you made some comments with respect to the product pipeline heading into 2018 that gives you some optimism. Could you maybe articulate and take down a bit more what gives you that confidence that there's an improving innovation that's coming forth? And if that could help turn some of the trends here into early 2018?

Part of it's innovation, Camilo. The React products from Nike will start to flow. But part of it's increased availability of key products like VaporMax, some of the things that we called out in the prepared remarks. And we see various iterations of that, various iterations of Air product coming through, unexpected occurrences of Flyknit and Primeknit shoes coming through. As adi has talked about there's a bit of Boost constraint still, but we see improving allocations around Ultra Boost and some of the key products there. So it's a combination of innovation and actually flowing quantities of that innovative product into the marketplace.

If you think about the mix of the product that's fallen off relative to the things that you are excited about, at what point does that start to favor - at what point in 2018 does that start to turn more positively in favor of the things that are in greater demand? In other words, how long does it really necessitate for you to clear out of the stuff, the slower turn in Jordan, the Roshes, the Stans and the Superstars?

Yes. I mean, the exposures continue to lessen as we go into the year, further into the year. And obviously, we're going to start lapping some softer basketball numbers, which certainly helps us well. But the life cycle of product is moving much quicker. As we've talked about, this consumer has access to an awful lot of information about products. So while we buy on a 6-month future sort of window, trying to carve off some open-to-buy that have more flexibility for in-season opportunity is just really important. So those big platforms, we're a big chain. So we buy big quantities of those platforms. So cycling through them does take some time. We want to be responsible in the marketplace, responsible with our markdowns, et cetera. So - but those exposures do continue to decrease, Camilo.

The final question I have is, you took a few minutes to discuss your thoughts on the Nike-Amazon relationship and where you sit from a premium distribution perspective. Clearly, that's top of mind within the investment community. If you could just maybe give a little bit more detail as to what it is that you guys are having, the types of conversations you're having with your branded partners in terms of distinguishing yourselves truly and making the destination, the Foot Locker destination one that can be distinct from everyone else in the marketplace, such that there isn't this product ubiquity across the channel.

Well, I think it's - probably the deepest conversations, Camilo, are around an integrated marketplace that combines great digital experiences with great physical experiences. We have a great example of that a couple of weeks ago in our Times Square store. We saw - I haven't talked about a Converse shoe on the earnings call for a long time, but we had a great collaboration with Converse One Star and Tyler the Creator, that was available exclusively at Foot Locker, we saw kids lined up. So the physical part of it, being able to come in and interact with some sort of activation, is part of that experience that the consumer's looking for. We know for well that the consumers are on the digital phone constantly, their digital device constantly. And we have to create great content that's relevant and great stories that are relevant to the consumer, but we also know that, that consumer still has an expectation around the physical space, in an integrated marketplace or integrated solution that they find both digital and physical part of the experience that they want when they're looking for premium sneakers.

Okay. Best of luck. Thank you.

Thanks Camilo.

Thank you. Our next question comes from the line of Christopher Svezia with Wedbush Securities. Please go ahead.

Yes Wedbush. Thank you. Good morning everyone. So I guess, first question, just on the inventory component, maybe if you can just talk about where your inventory sit today? What level under your guidance in terms of gross margin assumes probably some level of markdown? So just kind of talk about where your inventory is, how you're positioned relative to those categories you want to be in versus those categories you need to get out of at this point.

Chris, I think the comments were pretty clear. The team did a great job in managing the inventory as the sales started to slow down. So our inventory actually was down a little bit more than our sales loss, which - and my hats off to the team for reacting as quickly as they could in an environment where you place your orders on a future basis. So, we continue to work our way through some of those slower-moving platforms and products that we talked about. Certainly, the guidance that Lauren gave around gross margin is reflective of what we expect our markdown cadence to be in the back half. So the team continues to evolve and move the product assortments. But as I said on the last question, we buy a lot of products. So to move through it does take a little bit of time and takes some markdowns to accomplish.

When you step back and look at the guidance that you've given for the second half, do you feel like you've taken all, at least in terms of visibility, the variables into place, whereby you could see less risks to the story at this point? Or just how do you think about the second half in terms of the puts and takes on each one of the elements, whether it's margin or comp?

Well, we've been pretty thorough as we've looked at the guidance that we were going to provide today, Chris. And given what we see today, and that's always the caveat, when we were on the call in May, we certainly didn't see the business dropping off as rapidly as it did. But I think our team has taken a really strong view of what the reality of the marketplace is. And I think both from a merchandise perspective and from a financial perspective, we've got that built into the forecast. I don't know, Lauren, if you want to add anything.

I don't know what I can add to that. We have taken lessons learned out of Q2 about what the customer - or how they reacted to the product. And we have applied that to what we see coming into the stores and the sites in the back half, and thought through how to think through the margin implications of making sure their inventory ends at a good place. So we remain focused on everything we can do on our SG&A to make sure that that's aligned, and we've added all of that up into the guidance that we've given you.

Okay. And finally, just on the supply chain you mentioned speed to market and things potentially that you can do, what are you doing exactly in the supply chain and when can we see at least some impact through the P&L?

We're making our inventory more readily available, right? Some of the investments that we're making in the IFSC world and our digital infrastructure world is to make it more seamless for our consumer to have access to inventory across all of our stores, their local store, the stores that they might be near. If you think about it, we've got roughly 2,300 distribution points in U.S. And if we leverage that inventory, and that's really what some of the investment is against, that will help. We've got big stores, big volume stores in key cities, where we will start to install some mini hubs that we can be more proactive with both supplying the stores with inventory on a daily basis, but also allow us to do more same-day shipping into some of those key urban areas. So there's - it's ongoing. I don't know that there will be a day Chris that we flip the page and it automatically happens. But these are ongoing improvements that we've been working on and that we're certainly committed to accelerating at this point.

Chris, I'm going to add that in the distribution center, we've had - our largest distribution center historically has been focused on serving the stores and another distribution focused on direct-to-customer shipment. And a big chunk of the investment is making the distribution centers really able to do both effectively to make the best use of the inventory and service the customers as best as we can.

Okay. Thank you and all the best to you, appreciate it.

Thank you.

Thanks Chris.

Thank you. Our next question comes from the line of Christian Buss with Credit Suisse. Please go ahead.

Hi, this is Pallavi on for Christian. We want to know a little bit more about the digital investments that you guys mentioned as part of your initiatives. Should we be expecting changes in your marketing strategy? And then what's the timing of these investments maybe over the near- to medium-term? Thanks.

Very similar to the supply chain, these are ongoing investments. We just launched the - our Launch Reservation app was released on a national basis that have been constrained to a number of states. So that's certainly an improvement and an expansion of that great application for our consumers to make the launch process even a little bit easier for them. Certainly, our expenditures on our digital marketing front and content creation continue to change. Our app development around the Foot Locker app continues to expand. We're going to accelerate, and part of that is a platform conversation as well. We've got a new POS system that's about to be rolled out. So they're all part of this digital evolution. And again, there's been an acceleration of what we're doing, and we continue to expect that acceleration to go on into 2018. And this is sort of an investment that I don't believe will ever be over, right? I mean, we need to continue to adapt to the changing environment that our consumers live and shop in certainly.

Okay, Christy.

Thank you. Our next question comes from the line of Jay Sole with Morgan Stanley. Please go ahead.

Great, thanks so much. I think you talked about Amazon a few times earlier in the call. Can you also talk about how - you mentioned the vendor partnerships that you're working together with key branded partners to create those premium experiences. Can you just talk about, what Foot Locker does combined with what the brand.com's do are working together to segment the market to drive growth for both? Do you see them working collaboratively? Or how is that relationship with your partners developing?

I see we're working very collaboratively, Jay. I think that our vendor partners have been clear that they have their plans around their DTC and other channels, but our vendor partners have been very good at their segmentation and distribution strategies. And that's allowed us to be successful at the premium end of sneaker culture, and that's where we will continue to do our business. So it's very collaborative, and it's really all of us trying to move at the speed of our customer. The supply chain, the product development cycles, the delivery cycles, all of those things need to move faster. And the utilization of the assets and the resources that we got from our distribution centers to our stores, to working closer with our vendor partners to create exciting digital experiences and physical experiences for our consumer is all part of it. But I see it as very collaborative.

This recognition that we effectively have reached that alpha kid, if you will, that style leader, they've got a number of reasons that they want to be able to come in to our stores and on our website, then compare the product across the different brand suppliers, we let them do that efficiently and interact with that breadth of assortments in a way that's tough for them to do, purely digitally, purely with vertical.

Got it. And maybe if I can follow up on that. Just to actually switch topics a little bit. The Jordan brand sounded like some of the styles down-trended in the quarter maybe a little faster than you expected. It seems like there's been a lot of quantity in the marketplace of some of those retro Jordans that are really popular. Can you talk about what you're seeing with that brand? Is it the sneakerhead community has really just switched teams from Jordan to Adidas, and there's just not enough supply of Ultra Boost out there? Or is there something bigger going on? That's the question.

Well, I think there's many things going on, Jay. The relationship with Jordan and Michael himself and the shoes is still incredibly high in the marketplace. But the fact is that today's kid really needed to be connected to a story. When that happens, when the product is right, we see - still see lineups, and we still see Launch Reservation apps that are ready to blow up with the amount of activity. But there's been - even though we saw some slowdown in some key models, we saw some great successes with things like the 6 Rings, the Son of Mars, the Spizike, the Dub Zero, all very, very positive. So it's the right story, the right product, the right connectivity with the customer makes all the difference. And brand Jordan is one of the great brands that we work with. And I know that Larry and the team at Jordan are working as hard to make that connectivity with the customer real every time they launch a product.

Okay great. Thanks so much.

Thanks Jay.

Thank you. Our next question comes from the line of Randy Konik from Jefferies. Please go ahead.

Thanks for taking my question. I just want to go talk about thoughts around, I guess, ASP versus unit velocity as you're thinking about the back-half revenue comp guide. How do you think about that kind of dynamic changing or not changing relative to the front half of the year? That's my first question.

The expectation is not that that changes markedly from what we saw. So again ASPs have been up, units down in footwear. And so the Kid is still looking for us to bring them this marquee level product that is our positioning, and we’re bringing them the cool stuff. We haven't seen price resistance when they are finding the product cool. So we will look for that dynamic to remain in place.

Okay. And then did you see any kind of noticeable difference in comp trend in the quarter in, let's say, your urban markets or urban-located stores versus suburbia-located stores? Just trying to get a sense if there's any kind of differential between, let's say, product promotion or product changes or what have you? I'm just trying to get a sense of what's going on with the business from an urban versus suburban perspective.

Randy, we don't get into deep, deep discussions around that. But the one place that we have seen a little bit of a slowdown is markets that are heavily penetrated by the Hispanic consumer. There's been an awful lot written rated about it. And the share-of-wallet, I'm just not sure of that consumer spending in totality. The hindsight will be 2020 on that. But across - obviously, when we have a change the way that we saw the chain, we saw the change pretty much across the marketplace, across the geographies and across the banners, other than the couple that Lauren called out as the positive.

Got you, okay. And then I appreciate the discipline around capital intensity and bringing it down next year. So how do you think about - I guess, the story sounds more like that the changes that need to occur in the industry are more quicken up the supply chain speed. We need to probably have less SKUs or faster SKU turns or need more product innovation, newness. Is that the real issue from your perspective versus you don't see as much issue with traffic? I know the traffic was down, I think you said mid-single digit in the quarter. Just how are you thinking about the need for the supply chain changes from an industry perspective relative to the real state changes or lack thereof that need to occur in the industry?

There's some of each in the formula. Randy, the consumer has to have a reason to - a compelling reason to shop. And I think that the ability for us to create those experiences and those stories with our vendor partners, market, Nike always uses the phrase, they want to add it to amplify. And I think that means smaller SKU count with better amplification of units, et cetera. And that's how we...

And that can do great stories

Yes. And that's a great point. It's great story that ultimately this consumer is after. So we have to get better as an industry. We have to get faster as an industry. We have to tell better stories in our stores and on our digital sites. And that will keep this consumer. We know that the consumer casualization, the more healthy lifestyle, those are real things. Sneakers are definitely at the center of all of that. It's our making sure that we've got the compelling stories and compelling product and compelling experiences that motivate our consumer to drop that share of wallet in our channels.

Got you. Thanks a lot. Appreciate it.

Thank you, Andy.

Thank you. Our next question comes from the line of Scott Krasik from Buckingham Research. Please go ahead.

Hi thanks for taking my question. I got two, first one on basketball, second one on the stores. So we've seen quarters where the basketball has turned negative, and then it's recovered. Some of it has been price point on the Nike signature. Now it's Jordan retro. I'm just wondering how you think about this business overall being able to comp if basketball is down, both in the back half of this year and next year as well? And then I have a follow-up on the stores.

Scott, we've talked on a number of calls that our buyers and our consumers are really after cool product. And certainly, basketball is an important category for us. Some of the things that I mentioned earlier with - when you think about the React product that's coming from Nike and the Hyperdunk 2017 and the Jordan Super Fly 2017, you think about Nike taking over the NBA jersey side of things, that sponsorship, so the connectivity that you get between all of that and our House of Hoops, there's guarded optimism around the basketball category. But our team is really focused on finding and buying and assorting the best product regardless of category and telling great stories around that to increase the connectivity with our consumers. So basketball, certainly a piece of that, we expect to see some good things from the Paul George products, some of the React product that I talked about, the Harden shoe from Adidas. There's an awful lot of good basketball products out there. When we tell a compelling story around it, we're optimistic that the consumer will buy.

Okay thanks. And then, Lauren, you did accelerate the store closing plan a little bit this year, have you considered what it would look like or your P&L would like, how you manage the SG&A if you decided to close a significant number of stores?

Well, that's the conundrum for us because we have been closing stores. As we've cited that number, 1,000 doors by the end of this year in the last seven years, right, since 2010. So we've been addressing underperforming units all along and focused on lifting their productivity. So when we look at the fleet, it is largely productive. We get into conversations around U.S. malls, the different grades of them of, A, B, C, D and what they look like, I mean, for us, C and D level malls can still be very productive. Ours are very productive doors profit-wise. The volume's going to be lower than A and B, but they're still profitable. So if we look at all of that and we end up focused on where do we think those malls are going to evolve to and how do we position ourselves with as much flexibility to navigate that repositioning, so where we have any concern at all about the long-term health of a mall, we've taken shorter lease life to give ourselves flexibility.

Even as the mall sort of deteriorates, Scott, one thing to remember is that the customer's not leaving those areas. And our customers look to us to be a destination. A fair number of those areas in the stores that I'm assuming you would reference to closing, we transact a lot of business in cash. And that consumer's not necessarily comfortable utilizing their digital device because of a lack of a credit card or choosing not to use credit card, et cetera. So it's about us positioning ourselves in the right places in those markets, not necessarily just closing doors.

Yes. So we have a fair amount of volume certainly outside the U.S., but happens off-mall. We're very experienced in off-mall retail. So we look at all of that and how we think properties will evolve and where we can position ourselves to pick up the traffic should the mall go away.

Right. And just what is your average lease life across the fleet?

Well, where we have no concern about our property, we'll sign up for 10 years plus options. And where we do have concerns, it can be a year or less, right. So on average, it's probably not that helpful.

Okay. Thanks and good luck.

Thanks.

Thanks Scott.

Okay Christy.

Thank you. Our next question comes from the line of Sam Poser with Susquehanna Financial Group. Please go ahead.

Thanks for taking my questions. Okay. I mean, I guess, the question is one of - Michael Gould, the ex-CEO of Bloomingdale's, was on a television financial program yesterday. He was talking about how people are playing it a little safe. Are you guys missing some vendors here? Are you too aligned with, let's say, Adidas and Nike and PUMA and so on? Are there other vendors that are sort of fashion-athletic vendors that are out there that you may historically have not done business with that you're missing and need to get involved with as they are growing, especially those with some heritage? I won't name any, but...

Well, Sam, our team - I think as you know, our team is pretty proactive in trying to find that next big thing. And we haven't done a ton of business in the past to advance. But as that becomes very, very relevant in modern culture, in youth culture today, our team is up the ante with the folks at Vans. And you look at that and say, "Great opportunity for them to take advantage of it." We are challenged a little bit of finding those people with athletic heritage. We've got a nice business with PUMA. We've got a nice business with New Balance. We've got a nice business with ASICS. Many of those players are relatively speaking one genre or one category of shoe. So it's hard for them to get significant penetration in our business. But our team is pretty proactive in going out and trying to find that next thing. It's a little easier on the apparel side because there are things that you can test and try and roll out. But on the footwear side, it's a fairly limited roster.

Okay. I mean - all right. Well, I'll get to that later. I guess, the other question, is the Adidas, I mean, how much of this is not having the right product versus changing the communication like pushing ahead on how you speak to those consumers? I mean, you always have to have the right product. That's a given. It's never good enough even when business is really good. So, I guess, the question is, is the speed of change in the expectations? Is this a product change? Or is this that you guys really had to ramp up the way - you already talked about stories and so on, the way you tell the stories and so on? I mean, what is the more dramatic change there? Because I assume that you guys are never satisfied with the products. So from a communication perspective, how are you changing it? What really needs to get done to do this properly?

Well, the customer's moving so fast, Sam, that we have to stay really relevant with them. The Tyler, the Creator Converse One Star example that I gave you is a good example of how we need to bring excitement to the consumer. The One Star shoe, which Converse is working hard to make relevant again, really hasn't had a lot of traction. But when you get the right combination of creator - along with Tyler, the Creator, along with the shoe and tell that story, the consumer reacts. So it's - part of it is the storytelling and the connectivity with the consumer. Part of it is the right flow of great product. And working with our vendors and collaborating on both is what we're doing.

Alright, well thank you and good luck. Appreciate it.

Thanks Sam.

Alright Christy, I think we’ve got time for one more question.

Perfect. Our next question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Thanks. So Lauren, if we go back to the last period of sustained negative comps, I think it was around eight years ago, gross margins troughed in the mid- to high-20s. I guess, can you talk about what would be different today? And just any actions you can take to protect gross margins if comps were to remain negative multiyear?

Well, we've invested in our systems that help us get right product to right place at the right time, and that certainly has been part of the improvement in gross margin over the years. Those investments still pay dividends. One bit of it, which helps us write that order with all of that intelligence about right place, right time, it is really just coming online to the organization now. So that should bear fruit for us going forward. But then it's really about managing your buy appropriately. The speed initiative will be very helpful and help in that margin, right, because we cut out lead time. We're doing a better job of buy with demand, and that supports the margins. But because we've got that occupancy bit in there, that is leveraged. But we, I think, described pretty thoroughly what we're doing on the fleet side. And then, of course, there's the apparel, which continues to be an opportunity for us, and we believe long-term, a margin opportunity.

Great. And then Dick just as you break down your back comp guidance what are you embedding for traffic in AUR within the down 3 to 4 comps and I guess more micro, is August within this range or how best to think about progression of trends in the quarter?

Well, August is built into - we don't give, to the moment, guidance or updates on where we're at. So obviously, it's certainly built into the guidance that we've given. We continue to see traffic down a bit. AURs, we expect - as Lauren talked about our average selling price, we expect that to be flat to up slightly.

Great. Best of luck.

Thank you.

Thank you.

Okay. Thank you. That's all we have time for today, but we will look forward to talking to you again on our next earnings call, which should be at 9 AM on Friday, November 17 following the release of our third quarter results earlier that morning. Thanks again and goodbye.

Thank you ladies and gentlemen. This concludes today's conference. Thanks for participating. You may now disconnect.