Jim Lance - VP, Corporate Finance and IR Lauren Peters - EVP and CFO Dick Johnson - Chairman and CEO

Matt McClintock - Barclays Janine Stichter - Jefferies Eric Tracy - Buckingham Research Michael Binetti - Credit Suisse Kate McShane - Citi Mitch Kummetz - Pivotal Research Susan Anderson - B Riley FBR Incorporated Sam Poser - Susquehanna Financial Group Pallav Saini - Canaccord Genuity Paul Trussell - Deutsche Bank

Good morning, ladies and gentlemen, and welcome to Foot Locker’s Second Quarter 2018 Fiscal 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. Management undertakes no obligation to update these forward-looking statements which are based on many assumptions and factors, including the effects of currency fluctuations, customer performances, economic and market conditions worldwide, and other risks and uncertainties described more fully in the Company’s press releases and in reports filed with the SEC, including the most recently filed Form 10-K and Form 10-Q. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. Please note that this conference is being recorded. I will now turn the call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

Thank you, Kim. Welcome everyone to Foot Locker, Inc.’s second quarter earnings conference call. As reported in this morning’s press release, the Company reported net income of $88 million in the second quarter compared to $51 million in the second quarter of last year. On a GAAP basis, this year’s net income was $0.75 per share compared to $0.39 per share in the second quarter of 2017. Included in these results is an incremental pretax charge of $3 million related to the pension litigation matter we have previously disclosed, offset by $2 million of tax benefits related to the tax reform toll charge and other changes in regulations as detailed in the press release. Included in last year’s earnings per share is a $50 million charge related to the same pension litigation. Excluding these items, on a non-GAAP basis, second quarter earnings were $0.75 per share, a 21% increase versus last year’s $0.62 per share. Unless otherwise noted, the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning’s press release. We will begin our prepared remarks with Lauren Peters, Foot Locker’s Executive Vice President and Chief Financial Officer, who will provide details on our second quarter financial results along with our financial outlook for the balance of the year. Dick Johnson, Chairman and Chief Executive Officer, who then will review the key drivers of our second quarter performance along with an update on our 2018 real estate and ongoing initiatives. Lauren?

Thank you, Jim, and good morning everyone. Reported earlier this morning that we generated 0.5% comparable sales in the second quarter, which is within the guidance we provided the last time we spoke. We are encouraged by this positive inflection in comp sales, expansion in our gross margin rate and an improving assortment of fresh and exciting products. Given that, it all starts with the top-line. So, let’s drill down there. By month, comp sales in May increased low single digits. June was down low single digits, and July picked back up to post a low single digit gain. Our total reported sales increased 4.8%. The percent difference between our comp gain and the total sales increase was primarily due to the 53rd week sales shift impact. Additionally, the effects from foreign exchange rates increased sales by $15 million. Within our families of business, footwear posted a slight comp decline with average selling prices up, while units were down. Apparel had another strong performance, up double digits, its eighth consecutive quarter of positive comp sales. Both ASPs and units were up in apparel, reflecting our customers’ strong appetite for our more premium, branded assortment. Lastly, accessories were down double digits, as strong demand for bags was offset by sales declines in hats and socks. Digging into footwear. Men’s produced a low single-digit comp gain, reflecting the improving breadth and depth in our product assortment, while women’s and kids both posted low single digit comp declines. Turning to the banners. We had some strong performances in our North American businesses. The positive results were led by East Bay, which generated a high single-digit comp gain. The next strongest banner was Champ Sports, with an increase at the high end of mid single digits. Kids Foot Locker was up low single digits and both Foot Locker U.S. and Foot Locker Canada had slight gains. Yet store banners posted comparable sales decline. Foot Action, which has a high penetration of Jordan and signature basketball, was down mid single digits, while our SIX:02 women’s banner was also down mid single-digits. Our international divisions continued to work through some challenges during the quarter. Foot Locker Europe and Foot Locker Asia Pacific were each down low single digits. Sidestep was down mid single digits, while Runners Point comp down double digits. In Europe, the market remains promotional overall, with some markets, such as Germany, impacted more than others, which contributed to the softer top-line results at Runners Point and Sidestep. In a few minutes, Dick will provide further color around the products that drove these results. By channel, comparable sales at our stores posted a 0.8% decline, while comp sales at our direct-to-customer channel were up 9.3%. As a percent of total sales, DTC was 13.5% for the quarter, up from 12.7% last year. Overall, store traffic was down low single digits for the quarter, with traffic at our U.S. banners essentially flat and down high single digits at our international banners. Moving on to the rest of the income statement. Our gross margin came in at 30.2% in the second quarter, up 60 basis points versus 29.6% last year. The increase in the rate reflects a 30 basis-point improvement in our merchandise margin rate and 30 basis points of leverage in our occupancy and buyers’ compensation. The higher merchandise margin rate was primarily the result of lower markdowns at our U.S. banners, which more than offset the ongoing promotional environment in our international markets and led to a better margin results than our guidance. Our SG&A expense rate came in at 21.3% in the quarter, up 140 basis points as a percent of sales compared to 19.9% in the prior year. The higher SG&A expense reflects the ongoing investments we are making in our digital capabilities as well as higher incentive compensation expense. As we described in our prior call, in Q2 of last year, we reduced our bonus accruals to be in line with our outlook for 2017. For 2018, SG&A expense includes a more normalized bonus accrual. In addition, we had a legal charge, which contributed 10 basis points of the deleverage. Depreciation expense was $44 million in the quarter, up $2 million from last year, as a result of our ongoing investments to elevate our customer experience, while interest income was $1 million, flat to last year. On a GAAP basis, the tax rate came in at 23.6%; this was 730 basis points lower than the prior year, due to the impact of the 21% federal income tax rate as well as the benefit from concluding a foreign tax audit. On a non-GAAP basis, the rate came in at 25.1%, higher than the GAAP rate due to several tax adjustments detailed in the non-GAAP reconciliation. Turning to the balance sheet. We ended the quarter with $950 million of cash and cash equivalents, a decrease of $93 million from the end of Q2 last year. We spent $54 million on capital expenditures during the quarter and are on track to spend the annual plan of $230 million. We returned $133 million to shareholders during the quarter. This included our $0.345 which we increased by 11% at the beginning of this year along with the repurchase of about 1.8 million shares for $92.5 million. In total, we have returned $286 million of cash to shareholders this year through our dividend and the buyback of close to 4.5 million shares. Looking at real estate. We ended the second quarter with 3,276 Company-owned stores, a decrease of 8 stores from the end of the first quarter. During Q2, we opened 13 new stores including the new Power Stores in London and Liverpool. In addition, we remodeled or relocated 33 stores and closed 21 stores. For the full year, we are on track to open 45 new doors including our expansion into Malaysia, Hong Kong and Singapore. We still expect to close approximately 120 stores. Before I turn the call over to Dick, I want to touch on a few more topics including inventory and the outlook for the remainder of the year. We had solid inventory management during the quarter, with inventory down 2.8% from a year ago, compared to a sales increase of 4.8%. On a cost and currency basis, inventory decreased 2.4% compared to a 3.9% total sales increase. This disciplined approach combined with an improving flow of products, is making our inventory more productive overall. And we feel that we’re well-positioned to drive stronger results in the back half of 2018. That starts with Q3 and the important back-to-school period. For the remainder of the year, we are encouraged about the improving top-line trends. For the third quarter, we still expect comparable sales to be up low single digits with Q4 strengthening further within that low single digit range. For gross margin, we anticipate Q3 to be up 10 to 40 basis points. Merchandise margin gains coming from the stronger product assortments, partially offset by deleverage on our occupancy expense, due to the impact of the 53rd week shift. As you may recall, about $60 million of sales, move out of Q3 due to the shift. SG&A expense is likely to increase by 140 to 160 basis points as a percent of sales. This increase is primarily due to the digital capability investments that we are making, along with wage pressures, the normalized incentive compensation as well as the 53rd week shift. Also as a reminder, in the third quarter of last year, SG&A expense included $7 million of hurricane related charges. Given all of that, for the full year, we still expect comparable sales to be up low single digits and EPS growth in the double-digit range over the 52-week non-GAAP EPS of $3.99 in 2017. Also on a 52-week basis, we still expect gross margin to improve by 10 to 30 basis points, while we now expect SG&A to increase 100 to 110 basis points, as a percent of sale. I’ll now hand the call over to Dick, to cover the product highlights in more depth, along with an update on our 2018 real estate and digital initiatives. Dick?

Thank you, Lauren. Good morning, everyone, and thank you for joining us today. Overall, the second quarter was in line with our expectations, as we posted a positive comp gain, and grew earnings per share by 21%. This performance reflects the work we are doing on several fronts, so that we are well-positioned to succeed in a rapidly evolving environment. Our customers are moving fast. Our industry is adapting to get closer and faster to market, and we are changing our business, to not only keep up with the change, but to come out ahead of it. Let me start by focusing on three areas that are all meant to bring us even closer to our customer. The first area is product. We have improved the breadth and depth of many of the top trending footwear styles across categories. We have also upgraded our apparel offerings and we are continuing to see very encouraging results from these efforts. The second area of focus is around our real estate strategy. We are introducing Power Stores in key markets to create more immersive and community-oriented customer experiences. At the same time, we are entering new markets that we believe have strong growth potential, while expanding our global footprint. We continue to be selective about store locations to ensure we are only pursuing our highest potential opportunities. And third, we are strengthening our digital platforms across our businesses, creating a better customer experience to drive improved customer engagement, while repositioning our loyalty program away from a transactional coupon-based plan to an experiential one, oriented around strategic brand moments. In short, we have a robust operating game plan and our results this quarter demonstrate solid progress. With that overview, let’s take a look at our second quarter product performance. Men’s footwear was up low single digits. This was driven by up-trending running platforms, along with an uptick in casual styles. And while basketball was down, there were some bright spots. Men’s running drove a mid single digit comp increase. The momentum carried over from the first quarter in key styles from Nike like the Air Max 270, Max 97s and Tuned Air as well Deerupt, Explorer, and Yeezy from adidas. We anticipate that the momentum for these on-trend offerings will carry through the important back-to-school and holiday selling periods. Overall, casual footwear was up strong double digits, fueled by must have classic styles from Vans and Fila. Slides also performed very well and have become a part of our customers’ go-to summer look. Men’s basketball was down high single digits. As I noted on our last call, the Jordan brand has strategically been pulling back at units in the marketplace. So, while we continue to see better full price sell-throughs, we still face top-line headwinds which we expect to abate over the course of the fourth quarter. Signature basketball was down double digits due to the ongoing softness across various platforms. However, LeBron was a clear bright spot with strong demand for the LeBron Low, Soldier and Game shoe. Our apparel business continued to perform well, due to the steps we have taken to focus on elevated brand assortments and stories. This momentum was evident across most geographies, channels and size ranges. These results continued to be led by branded assortments from Nike and adidas as well as on-trend offerings from Champion and Fila. In terms of our omni comp performance, Champs Sports was up mid single digits, fueled by strong growth in Max Air across multiple styles like Tuned Air, Max 270s and 97s as well as Air Force 1s and LeBron. From Adidas, Yeezy and Swift also provided solid gains. Champs saw robust sales from the Fila brand, specifically in women’s footwear. Apparel had a strong double digit increase, driven by sales of premium branded assortments including fleece and windwear from Nike, Jordan, adidas and Champion. NBA apparel from Nike posted another strong quarter across multiple teams, and we see continued opportunity with the new uniforms and recent player movement. Our Kids Foot Locker banner, delivered a low single-digit comp gain. This was driven by strong double-digit gains in apparel, partially offset by a low single digit decline in footwear. Apparel was led by Nike and Champion, as we saw strong sale-throughs in fleece, shorts, windwear and infant sets. In footwear, Nike Air Max was a big hit with our kids, as Tuned Air, and Max 270s led the way. Vans, LeBron, and Slides were also big winners. Similar to the men’s business, the pullback in Jordan units, presented improved sell-through with top-line headwinds. Turning to Foot Locker U.S. comp sales were up slightly. Foot Locker benefited from strong double-digit comp gains in apparel and mid single digit growth in women’s footwear. Apparel was led by Nike, Jordan and Champion with strong sell-throughs in tees, shorts, fleece and windwear, while women’s footwear growth was driven by Nike Air Max, and Vans. Men’s footwear was down low single digits, while kids’ footwear was flat. Nike Air Max fueled impressive gains in running. Additionally, Nike Air Force 1s, Vans, Yeezy and Slides also contributed growth in a meaningful way. Conversely, Foot Locker was impacted by difficult Jordan Retro comparisons, along with a down trending signature basketball category, with LeBron, being the notable exception. As we look at Foot Locker Europe, sales were down low single digits with footwear and apparel both posting comp declines in that range. While still down, this result was an improvement from the declines we experienced over the past several quarters. In footwear, the Nike Air Max platforms resonated with our consumers. Similar to the U.S. Nike Air Force 1s and the Fila Disruptor, also produced solid increases. From adidas, Deerupt, Yeezy, and Continental 80 led the way. The results also reflect the plans we laid out during the last earnings call to use the legislated promotional periods in the second quarter to clear slower moving styles from adidas and Puma. While we still have more work to do, we anticipate that Foot Locker Europe will progress in the back half of the year, driven by the excellent flow of newness from Nike in both Innovation and Classics. We will also celebrate the 20th anniversary of Tuned Air throughout the fall, with cutting edge executions and consumer activations throughout Europe. We also see the adidas business in Europe stabilizing somewhat through the Classics business and the new pipeline of offerings. Additionally, we’re building key positions in other brands, including Fila, UGGs, Vans, Champion and others. Lastly, I want to update you on our East Bay business, which was up high single digits for the quarter. This strong result was led by many of the same footwear and apparel styles we just mentioned, as well as gains in performance styles, including training, baseball, volleyball, and Soccer, along with football cleats from Nike and adidas. Our team sales business gained traction, powered by our digitally led model, which is providing our school partners and their athletes with greater access to the best performance footwear and apparel. We are committed and focused as ever on connecting with our customers in cool, elevated ways. This includes exciting fresh product from our existing powerful vendor base and an ever-evolving brand portfolio and unique in-store experiences, like gaming activation events. We are doing all of this in a manner that is meant to be both convenient and tailored to our customer shopping preference whether in-store or through one of our newly enhanced digital sites. As is likely no surprise to you, our customer is always on with their digital device, and it is our mission to make sure that we remain relevant and top of mind with them 24/7. Suffice it to say, we remain bullish on our customer connected journey as we progress through 2018 and beyond. As I mentioned at the outset, another important way we continue to elevate the customer experience is through our store design elements, like the two Power Stores that recently opened in Europe. In fact, Lauren and I just visited these stores, and it was readily apparent that they were designed to inspire youth culture and connect to and celebrate their local communities. For example, at our Liverpool store, we commissioned a local artist to create a piece of art work, which is now showcased at the front of the store. We also leveraged this art work to create special product like bags and tees which resonated with our customers. The other Power Store is located on London’s iconic Oxford Street. Here, customers were able to showcase their gaming skills through an Xbox experience zone, some while queuing up for a loops haircut or a sneaker cleaning. In short, these are just a few examples of the test that we are conducting to create a more immersive customer experience. Lastly, from a real estate perspective, I’m proud to announce that we will be opening our first store next week in Singapore, Century Square Mall along with the launch of our online channel in that market. This is an important first step as we expand our global reach. During the third quarter, our first Power Store slated to open in Kowloon, Hong Kong along with two more stores in Singapore. We will round out the year with the opening of our first location in Kuala Lumpur, Malaysia during the fourth quarter. We’ve been hard at work on our digital capabilities and have made some notable progress during the second quarter. To start with, the first of our mini hub distribution center test is now live, and we expect to have the second test operational by the end of August. These two mini hubs will be servicing both stores and DTC orders, allowing for quicker store replenishment and next day service to over 6,000 ZIP codes in the U.S. We are excited about the potential to improve the overall customer experience. Looking at the ongoing upgrade efforts on our digital platforms. During the quarter, we completed further upgrades of our digital sites to our new, more responsive platform. As we move through 2018, we will continue to roll out the upgrade across all our banners with greater functionality, added over time. One example of this includes a more streamlined, My Account and VIP section that will allow for a much more straightforward signup process to our loyalty program and more personalization for our customers. Speaking of loyalty, we have mentioned how important experiences in the connections to those key authentic moments have become to our customer. In response, we are working to reshape our loyalty program around strategic brand moments. This is an opportunity to unify the banners on one platform, providing us with more opportunities to leverage data and create a more personalized and relevant program for our members. In turn, members will get credit for their purchases, no matter which banner or channel they choose to shop at. We are looking forward to bringing this new program to life and expect to have our first pilot up and running in early 2019. Our customers are willing to share their pertinent data with us, as long as we are transparent and use it to create more relevant experiences for them. Having said that, we are proceeding carefully to ensure that the program is in full compliance with the various privacy laws and regulations across the U.S. and abroad. In terms of the outlook for the balance of the year, we remain optimistic that the improving product flow and depth in premium styles will help us deliver against our comp guidance. Not only do we anticipate more innovative product from our vendor partners, we will also introduce unique footwear and apparel exclusives and collaborations with multiple brands throughout the back half. For example, this week, we announced the Discover Your Air campaign with Nike, featuring Jayson Tatum in exclusive Nike Air sneakers. This campaign will service the creative platform for all Nike Air product and related content at Foot Locker. We believe these types of introductions will further enhance our leadership position in the marketplace. In closing, none of this would be possible without our associates’ energy, passion and ongoing contributions to the business. I want to express my thanks to each and every one of them as we continue on our journey to inspire and empower use culture and drive the long-term success of our business. Jim, you can now open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Matt McClintock from Barclays has a question. Go ahead.

Hi. Yes. Good morning, everyone. Dick and Lauren, the guidance is for low single digit comps in the back half with an acceleration in that range. I’m just trying to think as we get into 2019, what could get us out of the low single digit range, maybe a little higher? Is it going to take basketball coming back or maybe comparing against some of the malaise that we’ve seen in basketball this year to really to start to get the comp to accelerate or is this kind of longer term the range that we should be thinking about? Thank you.

Thanks for the question, Matt. It’s really a combination of many things. Our merchant team is doing great work with our vendor partners to create exciting stories and compelling product and that really drives the heat and the interest. Certainly getting basketball silhouettes included in that product assortment is critical for us, making certain that the running silhouettes continue to drive strength and the casual items as well. So, I think it’s many, many things. We’ve had a strong apparel business now for eight quarters that certainly helps our comp business, and a broad assortment of silhouettes across the footwear side of the business, men’s, women’s and kids. We really need to heat on many cylinders. And while we’ve got a lot of strength going, some acceleration across that range will certainly drive higher comps.

Okay. Thank you for that. And just as a follow-up. The SIX:02, could you maybe dive into that a little bit more, in more detail, I mean, with apparel gain as strong as it was this quarter, overall I’m just trying to parse where some of the decline at SIX:02 came from?

Well, SIX:02, Matt, had a good quarter in apparel, but was up against some really strong FENTY product and FENTY launches from last year. And the model in SIX:02 is a little bit different and that it’s not driven as much by launch product heat on Saturdays et cetera. So, when we had it a year ago and didn’t have it this year, created a pretty big gap. And Carol and the team did a great job, to reassort the product and push against those launches, but they were just so prolific last year that we really didn’t have the ammunition this year to up against them.

Janine Stichter from Jefferies is on the line with the question.

Hi. Yes. Good morning. I just wanted to ask a bit about the Jordan business. I know, we have seen that business under some pressure just due to the pullback in units in the market. Can you give us some perspective on the timeline? How we should think about that headwind abating and when we start to lap the changes in distribution strategy? Thank you.

Can you just repeat the end of that? You started to fade out a little bit.

Yes, sure. Just when we start to lap the changes in the distribution strategy and when we kind of get on apples to apples basis when we’re lapping the changes that made the pullback on units in the market? Thank you.

Yes. I mentioned that, Janine, in my prepared remarks. We start to see some of that overlap start to occur, when we get to fourth quarter. The sell-through on launch day continues to improve. We don’t have the tail, because the units have been pulled back, but we really expect that to start to abate in the fourth quarter.

Eric Tracy from Buckingham Research is on the line with the question.

Hey, everyone. Good morning. I guess, if I could just go to -- as we think about the comps accelerating in the back half, maybe just the assumptions embedded within that from a product perspective. And where I am going is, is there a assumption that you are getting deeper within some of the existing platforms that have already been launched or scaling with those, or is there visibility to new platforms coming? And then, obviously, just within that, sort of the assumption around basketball in total, you mentioned Jordan and how that abates to just basketball overall? Thanks.

Well, our merchant team, as I mentioned, has been hard at work to create some exciting things, and some of those will be certainly on platforms that exist already, some of them will be with new vendor partners, some of them will be on new platforms. So, it’s a combination of many things. And certainly, as we start to see some strength return or some -- I shouldn’t say strength return, we expect to abate against some of the Jordan numbers that will certainly help the comp in the back half. Basketball, again, it has to be seen as cool by our consumer. And I think some of the same things that are driving the NBA apparel with the player movement and some of the excitements that there will be around the lead when it starts back up this fall, I think it will certainly help the basketball business. But, I’ve said at many times, our kid, Eric, is not focused as much on categories as they are on cool. And the fact that they’re finding cool in a lot of different places right now, whether it be categories or different brands. They’ve got a broad range of interests. So, I think that bodes really well for the work that we’re doing with our vendor partners for the fall and holiday seasons.

And then, if I could just follow up on some of the exclusive campaigns you talked about with Nike around Air. But clearly, there is a lot of concern out there just in terms of the brand DTC evolving. So, maybe just speak to, Dick, if you could, things like those type of campaigns, and if there are other examples? And particularly, as it relates to sort of the launch schedule that you all continue to garner some level of exclusivity that’s driving either traffic to the store and/or your digital platforms.

Well, we’ve had a number in the second quarter. We launched East meets West with ASICS, we’ve got the Find Your Air campaign that we’ve just talked about. I’m not going to get into the future ones. That’s part of the discovery that our customer has. The last thing I would do to our merchant and marketing team is bring some of those launch dates with this group when they want to drive the excitement to our core consumers, so. But there is an awful lot of work going on. I can’t reiterate that strong enough that working with many vendor partners to create exclusive platforms to create heat and energy around the product. And you’re right. The vendor DTC is going to continue to grow, but it’s about having an integrated marketplace. Those are all the conversations we have with our vendors. And we’ve got deep, deep connections with our core consumers. And our consumers truly enjoy being in the stores. We’ve talked about traffic being essentially flat in the U.S., down a little bit in Europe. But that consumer is still being driven to the store. They interact -- all of them interact with their digital device, but they like the store environment. And our merchant and marketing teams are doing a great job driving heat to both our digital sites and our physical sites.

Our suppliers recognize that connection to our customer and our customer wants to engage with the product physically and compare it across brands. And so, they recognize we’re in a very efficient channel to get to that customer.

Michael Binetti from Credit Suisse has a question on the line.

Hey, guys. Thanks for taking our question. So, I just want to -- Lauren, maybe we can go back to where we were 90 days ago. And then kind of think ahead little bit here today. But, Europe was down I think low double digits in the first quarter. And then, you said you were able to take advantage of some of the promotional periods there. And I think you said down low single digits this quarter. So, it seems like there is some good progress. I’m kind of wondering forward here, what’s embedded in your second half, low single digit comp guidance by region in the U.S. and Europe. Is the thinking that Europe will slow again, now that we’re passed the promotional period there? And if so, what inning do you think you’re in on cleaning the channel there? I was little surprised that maybe you didn’t lift the gross margin guidance for the year, given that big acceleration in the comps in Europe. I would have thought you’ve been able to say hey, we’re feeling a lot cleaner about the product than maybe we were 90 days ago.

The inventory discipline that we’ve described and you’ve certainly seen from extended period of time, applies across the region. Our European team, doing what they need to do to keep that inventory fresh and dealing with slow moving items, so that we can get to a position where we feel really good about the product set. And so, they have been hard at work on that and that’s the reason why we describe an improving trend in our Foot Locker Europe business and encourage that that’s a product that the customer is responding to improves as we move through the back half. But, all of that said, right, we’ve guided to a gross margin for the third quarter of 10 basis points to 40 basis points improvement, recognizing that while we’ve got merchandise margin improvement being less promotional in that period that with the shift that 53rd week, we’ve got some delever. And so that is the dynamic, as you think about the third quarter. Does that help?

Definitely. And then, as I look at the B&O leverage, buying and occupancy leverage you pointed to, that was the best leverage you’ve seen in years on that line, albeit off a very low positive comp. Would you mind just reminding us that what caused the change in leverage point in 2Q, and then, maybe a little bit more thinking on the rest of the year. Thank you.

This is -- after you go up against the 53rd week, we’ve got this quarterly difference. So, in Q2, we had that benefit from that 53rd week shift, and that helped that leverage point on occupancy in Q2.

Kate McShane from Citi is on the line with the question.

Hi. Good morning. Thanks for taking our question. My question is centered around traffic. We’ve heard from several retailers this week that they saw significant lift in traffic. And while sequentially your traffic improved, it was still flat for the quarter. So, I just wondered with what seemed to be a stronger consumer, why do think traffic is still flat at the store. And is there any way to reconcile, I guess, the guidance that you gave at the beginning of the year kind of being the same versus what seems to be a stronger consumer?

Good morning, Kate. Yes. The consumer certainly is out and about. And as we look to the U.S. market, we did have flat traffic. And there is puts and takes by geography and within the U.S. there is a pretty strong customer sentiment here. So, we anticipate to see some traffic trends that will likely improve as we get deeper into the back to school season. Our consumers really are driven by the heat and the excitement that we generate. So, we have to make sure that we’re driving them to the stores. But, you bring up a really valid point. We expect that there is some positive traffic out there. Certainly, customer sentiment in the U.S. seems to be high, based on some of the other things that we’re reading. But, we do continue to face traffic challenges across Europe, the sentiment is not quite as high. The traffic patterns are significantly different across most of the geography in Western Europe.

Mitch Kummetz is on the line with the question.

Yes. Thanks. I just wanted to follow up on Michael’s question earlier about Europe and kind of what’s embedded in the guidance, because obviously nice sequential improvement go from Q1 to Q2. You do have easier compares there in the back half. I mean, are you assuming that that business goes positive in the back half, or you think it still stays negative, just wanted to get your thoughts on that?

Yes. We don’t get into that much granularity. But, as we talked about in the prepared remarks, we do see the business sequentially improving. The product mix, and Lauren just referenced the good work that the European team did from an inventory management perspective. So, as they turn the assortment, we certainly expect to continue to see sequential improvement with the European business.

Okay. And then, on the Jordan business, I know that the tighter distribution was a drag to comp in the quarter, I imagine that the better sell through helped the merch margin. Is that what you expect in the third quarter as well as the part of the expected merch margin lift in Q3? And I am just wondering if it’s -- is it a more positive impact in Q3, or how does that look?

We won’t get into that level of nuance. But, as we said, we see the overall headwind for the Jordan abating a bit in the fourth quarter. So, you can infer from that that we’re going to see some of the same going into the third quarter that we saw in the second quarter, right. And some of it just depends on how the launch dates move around, how the quick strikes deliver et cetera. So, it’s always a work in progress with the Jordan brand. But, we certainly see some of those headwinds abating going into the fourth quarter.

Just real quick one for Lauren, on the SG&A, you’re expecting it to delever, I think a 100 to 110 basis points this year. Can you say how much of that is from the digital investments versus maybe other discrete items, and how does that -- how should that -- how should we think about that going into 2019? Would you expect to continue to invest this heavily on the digital side, or does that start to pare back a little bit?

The digital capability investments is a big chunk of SG&A delever that we’re expecting. But, there are other elements in it. We have this year the fact that we’ve got more normalized incentives that we’re providing. And as we have been talking about for a while now, higher minimum wages, selling wages is a big piece of our SG&A and medical costs as well. So, the guidance that we have given of 100 to 110 contemplates well with that. But specific to your question about digital capabilities and the future outlook for that, the customer is connected 24/7, and their expectations are that we’re keeping pace with how technology evolves and we want to use it to the best we can, our best capabilities to drive our business and make sure that we’re connected to that customer. So, I am not ready to call 2019 yet, but it’s hard to see a business that doesn’t continue to invest in those capabilities.

Susan Anderson from B Riley FBR Incorporated is on the line with the question.

Hi. Good morning. Thanks for taking my questions. I just wanted to follow-up on the SIX:02 stores and the women’s business there. So, should we not necessarily expect that to improve until we start to cycle the compares from last year? And then, maybe two, if you could just kind of give us an update on those stores and the strategy there going forward. Thanks.

Well, Susan, we talked a little bit about the fact that SIX:02 is not as driven by launch products, so when we are up against significant launches from a year ago, specifically around FENTY. It’s going to continue to provide some headwinds in the back half, but certainly not as dramatic as the second quarter. The assortment mix and the change with some of the vendors that are represented in the SIX:02 stores is going very well. Carol and the team are doing a great job of reassorting the mix and getting it right. So, we see in stores like 34 Street, like Times Square, Hollywood and Highland where SIX:02 is connected to a Foot Locker that drives significant traffic. We’re able to see a really nice sales model. Some of the other mall-based stores that may not be in exactly the right place, the right location, we need to continue to work on. And clearly, there is an emphasis on growing the brand as a digitally led brand to make sure that the brand recognition is out there, the brand name is known. It’s been a long time since we launched the new brands. And while we continue to put a lot of energy in it, it takes a lot of energy to get a brand name to be recognized by the consumers. So, we will continue to lead the brand digitally, continue to try to find the right rhythm in the stores, and the vendor assortment continues to improve. So, a lot of pluses on the SIX:02 business. It doesn’t necessarily come through on the sales line in a quarter like the second quarter just given some of the headwinds that we saw.

And I can’t help myself certainly to add that female customer is responding when we’re bringing something special. And as Dick said, you can see it in the stores where it’s within a Foot Locker, she comes in shopping, maybe she was coming to shop for him, but when she finds that special space that’s got great product for her, she is delighted with the experience. And while she is not as launch-driven, we’ve introduced product, we had the introduction of Good American, and she lined up for that. So, she likes special product, just like he does, and that’s what we are trying to deliver to her.

Sam Poser from Susquehanna Financial Group is on the line with the question.

Good morning. Thank you for taking my question. A few ones. One, could you talk about the actual change in the sell-through rates in Jordan, more specifically, what kind of rates you saw last year, what kind of rates you saw this year? And secondly, can you talk about the fashion or the lifestyle running businesses where you’re seeing that and the lifestyle businesses in more detail as an offset to basketball because you brought up on numerous occasions the kid doesn’t care necessarily, it’s basketball shoe or running shoe or casual shoe. So, can you give us some details on how do you those offsets and momentum in those other categories? Thanks.

Sure, Sam. We’re not going to get into the specifics of our sell-through numbers on Jordan, clearly. But, suffice it to say that we are seeing better sell-through on day of launch. We just don’t have the tail because of the reduction impairs in the marketplace. So, absolutely seeing better sell-throughs and somebody asked a question earlier about does that have a positive impact on the margin. And certainly, it does. We’re seeing -- I think, as you’re all students of the business, you see the chunky midsole sort of phenomenon right now. Whether it’s the Fila Disruptor or some models from our other vendor partners, it’s all the rage on the women’s side of the business and it’s having an impact on the men’s side of the business as well. We see things with Reebok, like Alter the Icon, where we’ve been able to do some really unique things. And again, not basketball led, more of running silhouettes, in most cases are our casual silhouettes that are certainly helping offset some of the softness across the signature basketball side of things. At the same time, you look at the Air Force 1 business, which is a great classic basketball silhouette, and it continues to be one of the strengths across our fleet. So, there is a lot of offsets to the marquee/player basketball. And the fact that we’ve seen some early views of the new LeBron shoe, I think there will be some heat coming back to signature basketball. It’s just going to take a little while to get there.

Okay. And then, secondly, the flow of product, the flow of newness, the speed initiatives from the brands and so on, how is that helping your flow, and are you able to write orders closer to need now and so on, and how is that evolving?

Well, it continues to evolve, Sam. I mean, all of our vendor partners are working on getting closer to market, but it’s with the small percentage of the inventory at this point. But, we’re changing our processes to make sure that we’ve got open to buy available a little bit closer to market, because there are products that are becoming available closer to market. And we’re seeing great work by all of our vendor partners to try to figure out that new model to build shoes faster, to get shoes into the marketplace faster. And we’re seeing some success, but it’s still with a relatively small portion of our inventory.

All right. And lastly, in your guidance and the improvement in the same-store sales, what kind of change are you predicting in basketball in that number, or is it basically basketball as is and it improves as the mix and depth of the stuff that’s performing well now improves?

Sam, I’ve said many, many times that our consumer is driven by cool. And if cool happens to be in basketball, our consumer will be motivated by that and by basketball. Right now, there is some wins, and we talked about those in the LeBron side of things. At the same time, we’re seeing such tremendous strength across the Max Air platform, Yeezys, all sorts of silhouettes, the Fila Disruptor that have nothing to do with basketball that the consumer is really excited to buy. So, the guidance for the back half reflects what we see and what we know in the marketplace today and the flow of product that we’ve got coming in the next two quarters.

Camilo Lyon from Canaccord Genuity is on the line with the question.

Good morning, this is Pallav Saini on for Camilo. Thanks for taking our question. Dick, you mentioned that you’re getting more depth behind some of the strong trending platforms. Can you give us a sense of magnitude, maybe some examples on the magnitude of the increase in allocation in the second half versus the first half?

Again that’s stuff that we really don’t disclose. I mean, those are very competitive positions, they are all part of our relationship with our vendor partners. So, we don’t get into the specifics of how product is allocated or how our allocations change quarter-to-quarter. We’ve seen the order books, we know the order books, we know the flow of product, and that’s all embedded in the guidance that we gave you.

Got it. And my second question is on the Power Stores. Is there any plan of opening Power Stores in the U.S.? And given the traction you’re seeing with the elevated experience that you’re offering in your stores in the UK, are you following a similar strategy in the U.S.? Can you maybe elaborate on some examples where you are elevating the in-store experience in the U.S. or you plan to do in the future?

Absolutely, our Power Store strategy is a multi-geographic strategy. It’s not specific to the UK. We just simply had the first two opportunities based on lease and construction times to open the store at Liverpool and the store at Marble Arch on Oxford Street in London. We’ve got certainly plans to open up some Power Stores in the U.S. Probably the first one that you’ll see will be in the Detroit market. We’ve taken some of the elements. We actually just reopened the store down on 14th Street here in New York that while I wouldn’t qualify it as a Power Store, it’s got many of the elements that we saw when we were over in London in Liverpool that we’ve been able to bring into a more traditional store. And I think it represents the great work that our real estate and our construction team and our brand marketing teams have done to really bring the key elements of the Power Stores into a more traditional sort of store. So, that work will continue across all of our geographies. We’ll open up a Power Store in Kowloon, Hong Kong in the third quarter, again, very exciting, but again it was driven by the fact that we were able to get the right property, the right lease terms, and the right construction period to make it happen.

Paul Trussell from Deutsche Bank is on the line with the question.

If we take a step back to the beginning of the year, you were coming off a few tough quarters in ‘17, but you were cautiously kind of optimistic on the turn happening here in fiscal ‘18 and guided to flat to up low single digit comps at the time. Now, halfway through the year, just where do you feel like you’ve had the greatest successes, and what are still some of the more meaningful challenges you’re facing? I’m thinking about things such as your ability to attain key product from vendors, the ability for stores to generate traffic, how you’ve managed inventory, profitability turning around in certain categories and geographies, et cetera?

Well, the strength of the business, Paul, was clearly in the U.S., traffic flat, the categories -- the product heat was significant, the vendors certainly found us both digitally and online. So, I feel really good about the work that’s going on in North America. The opportunities that we’ve got, continue to be getting things straightened out in Europe. We’ve talked a little bit about that in a couple of other questions where they did what they needed to from an inventory management perspective over the legislated sales periods in the summer time here. And now, they’ll work hard to get that inventory turned, and that presents some opportunity. The team did a great job managing the expenses. I think, one of the strengths of our business is that we’re able to flex expenses up and down pretty well in most cases. We continue to invest significantly in the customer facing things, getting our digital presence stronger, the mini hub tests that we talked about that we’ll learn more of certainly more about as we roll them out -- roll the second one out here at the end of August. So, we’ve made a lot of progress. We’ve got a lot of work to do. Retail is an everyday sort of focus on the details and the team is focused on delivering against what we’ve talked about.

Fair enough. And then, also, you touched earlier, Lauren, on the digital investments being made and the impact it’s having to SG&A this year. But, just wanted to inquire a little bit more big picture on where you think we all are in terms of the investment cycle. Certainly, I know you’re not giving guidance for 2019. But, is it fair to think that the expense growth rate and the leverage hurdle will come down a bit as we look beyond this year?

We are laying some foundational stuff and beginning to see some of that come online with the investments that we’ve made in the mobile capabilities and website. And those changes roll out banner by banner. So, we’ll see the benefit as we get further into that. We talked a lot about our loyalty program and the changes that we’re making there, and some of this technology is certainly intended to enable that element. So, it will bear fruit as we go forward, it’s bearing some now but more as we go forward. But, as I described, I’m not yet ready to tell you how that investment plays out over the longer term. I don’t see us not continuing to invest there.

I now turn the call back to Mr. Lance.

Okay. Thank you for joining us today. I’ll be back in my desk shortly to take follow-up calls. And please join us again for next earnings call which we anticipate will take place at 9 am on Wednesday, November 21st. The call will follow the release of our third quarter results earlier that morning. Thanks again, and good bye.

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