Ken Hicks - Chairman, President, Chief Executive Officer Dick Johnson - Executive Vice President, Chief Operating Officer Lauren Peters - Executive Vice President, Chief Financial Officer John Maurer - Vice President, Treasurer, Investor Relations.

Jay Sole - Morgan Stanley Paul Trussell - Deutsche Bank Matthew Boss - JP Morgan Omar Saad - Evercore ISI Camilo Lyon - Canaccord Genuity Kate McShane - Citi Research Scott Krasik - Buckingham Research Chris Svezia - Susquehanna Financial Seth Sigman - Credit Suisse Eric Tracy - Janney Capital Markets Robby Ohmes - Bank of America Merrill Lynch Michael Binetti - UBS.

Good morning ladies and gentlemen and welcome to Foot Locker’s Third Quarter 2014 Financial Results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

This conference call may contain forward-looking statements that reflect management’s current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company’s press releases and SEC filings.

We refer you to Foot Locker Incorporated’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 product 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’ll now turn the call over to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin..

Thank you, Richard. Welcome everyone and good morning. Thank you all for joining us today to discuss Foot Locker Inc.’s third quarter results. In this morning’s press release, we reported net income of $120 million in the third quarter, a 15% increase over the $104 million that the company earned in the third quarter of 2013.

On a per-share basis, we earned $0.82 this year on a GAAP basis compared to $0.70 a year ago, an increase of 17%. Year-to-date, our net income totals $374 million or $2.55 per share on a GAAP basis, an increase of 25% over earnings per share in the comparable nine month period last year.

As noted in our release, we incurred approximately $1 million of Runners Point Group integration costs. Excluding this expense, third quarter non-GAAP EPS was a penny higher at $0.83, a 22% increase over the $0.68 a share we earned on a non-GAAP basis last year.

A reconciliation of our GAAP to non-GAAP results is included in our press release, and except as noted otherwise, the numbers mentioned during our remarks this morning will be based on the non-GAAP results.

As I’m sure you’re all aware, we had an important development at the beginning of the month with Ken Hicks announcing his retirement as Chief Executive Officer, effective December 1, and Dick Johnson’s election by our board of directors as his replacement. Ken will remain Executive Chairman of the board until our annual meeting in May of 2015.

Ken and Dick will touch on that transition during their remarks, but first Lauren Peters, Executive Vice President and Chief Financial Officer will provide a detailed review of our third quarter and year-to-date financial results.

Lauren will be followed by Dick, who will provide color on the key trends in the business and the most important drivers of our recent operational performance. Ken will close our prepared remarks with an assessment of our progress on the strategic initiatives that have us well along the path to achieving many of our current long-term objectives.

As always, we look forward to answering your questions after our prepared comments. First up, Ms. Peters..

Thank you John, and good morning to you all. We appreciate your interest in Foot Locker and our ongoing development as a high performance company. Our success in the quarter started with excellent top line growth with our comparable sales increasing 6.9%.

The momentum was driven by our continued sharp focus on improving the productivity of our three primary assets - our inventory, our real estate, and most importantly our talented team of associates in whom we continue to invest in order to give them every opportunity to win with our customers.

The productivity gains led to a higher gross margin rate at 33.2% of sales this year compared to 33.1% a year ago, and a 20.4% of sales SG&A rate this year, 60 basis points better than last year’s third quarter.

Looking at our sales gains in detail, our comparable sales gain was driven by footwear, which was up low double digits, while apparel was down mid-single digits. Within footwear, men’s sales were up high single digits, women’s was up strong mid-single digits, and children’s was once again up double digits.

Not only was our quarterly comp gain in line with our year-to-date trend, our sales increases by segment were also similar to the second quarter with athletic store sales up 5.8% this quarter versus 6.1 in Q2, while sales in our direct-to-customer segment increased 15.5% versus 14.9% last quarter.

Within the direct segment, Eastbay was up mid single digits in the quarter, a somewhat stronger performance than Q2, while our U.S. store banner dot-com sales continued to increase at close to a 40% pace.

Although store banner dot-com sales remain our fastest growing business, we have yet to reach our goal of having them represent in aggregate at least 10% of brick and mortar sales.

Turning to our store segment, the differentiation of our store banners in both customer experience and product assortment has been a fundamental driver of our success over recent years, and with that differentiation comes naturally a certain diversity of short-term results, given the varying strength of fashion trends within each banner.

With that said, I am pleased to be able to report that all of our banners posted comparable sales gains in the third quarter. We were led this quarter by Foot Action, which produced a low double-digit gain, followed closely by Foot Locker in the U.S. and Kids Foot Locker, both with high single digit gains.

Lady Foot Locker achieved another strong mid-single digit gain, the second such quarter in a row. You heard us talk about green shoots and green fuzz - well, the grass in our women’s business continues to grow in nicely.

Unlike our men’s division, the strength in Lady Foot Locker was led by apparel which was up in the teens, while footwear was up mid-singles. Our Foot Locker Europe and Foot Locker Asia-Pacific divisions both achieved mid-single digit comparable sales gains.

In Europe, the Foot Locker banner comps positively in almost all countries while Runners Point Group was also up in the quarter overall, although their comp result was only part of our consolidated comparable sales number for the month of October. Finally, Champs Sports and Foot Locker Canada both had small gains.

Champs Sports in particular was affected by a relatively large number of stores being closed for remodeling late in the quarter. In terms of cadence through the quarter, we posted a high single-digit comp gain in August, a low double-digit gain in September, and we managed to end up just on the right side of positive in October.

Let me put that cadence in perspective for you. First, we had a very strong back-to-school season in August and September. To use an old retail cliché, we succeeded in the quarter by taking our best shot when the ducks were flying.

October is by far the smallest month of the quarter; accordingly, significant timing shifts can have a disproportionate effect on comps in October, and we did in fact have a couple of key product shifts, one a Jordan retro, the other the delayed LeBron 12.

The Jordan and the bulk of the LeBron 12 moved out of October into Q4, and the fact that we had a positive comp in October despite these shifts is a testament to the strength of our base business.

Finally, that shifted Jordan retro did launch successfully this past Saturday, leading our month-to-date comp gain for November to currently stand at low double-digits. Just as you can’t look at October alone, you also have to put our current month-to-date results in the proper context.

These two and a half weeks are low volume relative to the big holiday selling season coming up. If you look at our comp results for October and November to date combined, it is basically running mid-single digits, and our month-to-date performance is considered in our plans for a mid-single digit comparable sales gain for Q4.

Turning to the rest of the income statement, I mentioned earlier the 10 basis point improvement in our gross margin rate. This was achieved primarily by leveraging our fixed costs as we continue to push to improve sales per square foot and reduce occupancy expense as a percent of sales.

This leverage was partially offset by a lower merchandise margin rate which included a negative 20 basis point impact related to the liquidation of CCS merchandise. Meanwhile, the trends of lower initial mark-up rates and lower shipping income continued in the third quarter.

We did also manage to significantly lower our markdown rates while maintaining the freshness of our inventory. All these pluses and minuses added up to produce the overall 10 basis point improvement in gross margin.

Our expense management teams had another excellent performance in the third quarter to produce the 60 basis point decrease in our SG&A rate to 20.4%. The payback from the investment in various training programs and technology tools can be seen in improvement in sales per hour in every one of our divisions.

We did also manage to keep our marketing expense in line with last year in the quarter despite the shift from Q2 that Q3 that we mentioned during last quarter’s call. Depreciation expense actually decreased to $34 million, $1 million below last year. The decline this quarter was primarily a function of a true-up of capital accruals.

Going forward, we still expect depreciation to increase year-over-year, reflecting the ongoing investments we are making in our store fleet, our digital businesses, and various system technologies. Overall, these investments are expected to drive productivity improvements in both the near term and over the next several years.

At the very beginning of the year, we set a plan of $220 million in capital expenditures for 2014. We’re currently tracking towards $210 million as economies of scale in purchasing and improved designs have produced savings in some of our store capex programs, and the timing of technology projects has been refined.

Our Q3 tax rate was 35.8%, higher than last year’s 35% rate. Both periods benefited from one-time tax audit settlements that allowed us to release tax reserves, causing our tax rate to come in lower than our normal 36.5%.

Putting it all together, we were able to flow through 25% of our $109 million sales gain to the bottom line, producing another record for quarterly profits, $121 million on a non-GAAP basis. Contributing to our strong results is the improving productivity of our inventory.

We posted an inventory increase of less than 1% compared to a total sales gain of 6.7%, leading to a solid increase in our inventory turn rate. A stronger U.S.

dollar reduced reported inventory in the quarter somewhat, but even using constant currencies, our inventory increased less than 3%, still well within our standard of having inventory increase no more than half the rate of sales increases.

We ended the quarter with $916 million of cash on the balance sheet, the result of another quarter of strong operating cash flow. We continue to invest in the business and return cash to our shareholders through our dividends and share repurchase programs.

During the quarter, the pending announcement of Ken’s retirement did prevent us from executing any open market repurchases in the quarter. The $38 million we spent to repurchase 683,000 shares in the third quarter was all done under programs set up before the quarter began.

We are not currently aware of any constraints to open market repurchases during the fourth quarter.

Year-to-date, we have repurchased more than 3.5 million shares, spending $174 million in the process, and we have returned an additional $96 million through our dividend program, meaning we have returned almost three-quarters of our year-to-date net income to shareholders.

Turning to real estate, we ended the third quarter with 3,474 company-operated stores, an increase of 14 from the end of the second quarter and one more than we started the year with. We currently expect to reduce our store count by about 25 stores by the end of the year.

On the other hand, gross square footage is projected to increase more than 2% from the beginning of the year. The stores we are opening tend to be larger than the stores we are closing, and we frequently add a House of Hoops or other vendor shop-in-shop concept to remodeled stores.

These shops require additional space, but they also direct traffic and improve the overall productivity of the stores. Speaking of traffic, it was down less than 1% in the quarter, and some of that decline was due to a large number of remodel projects towards the end of the quarter.

Average selling prices continued to rise while units were off somewhat, primarily due to a decline in our apparel penetration. Before I turn the call over to Dick to cover the merchandise highlights, let me make a couple of quick guidance comments.

In August, we told you we expected 20 to 40 basis points of gross margin leverage in the second half of the year with the third quarter pressured by the liquidation of CCS inventory. We’re still right on track there.

In terms of SG&A due to our strong third quarter comp gain and our success in reducing certain variable expenses, in Q3 we exceeded the 30 to 50 basis point improvement we expected over the back half, but some of those expenses shifted to Q4. We are in good shape to deliver our back half leverage guidance.

Finally, the stronger dollar is a bit of an earnings headwind. It has not been a significant factor through the first three quarters; however, FX could lower our EPS in the fourth quarter by one or two cents at current exchange rates.

Unlike recent quarters, our total sales percentage increase in Q4 is expected to be lower than our comparable sales gain because of the currency headwind. As a reminder, total sales are calculated using actual exchange rates, whereas our comps are calculated on a constant currency basis.

Overall, we are on track to achieve the top and bottom line guidance we gave you for the back half of 2014, a mid-single digit comparable sales increase and a double-digit gain in EPS. Let me now turn the call over to Dick..

Thanks Lauren, and good morning everyone. Let me start by thanking the entire team at Foot Locker Incorporated for working so diligently to produce another record result for our business.

I know from experience how difficult the game retail is, and to put together the long string of successful quarters that the team has accomplished is a testament to the skill, hard work, leadership and dedication of every player on the team.

I couldn’t be prouder or more humbled to have been elected the leader of this outstanding group beginning next month. Lauren mentioned some remarkably consistent financial results between this quarter and last, and much the same can be said of our merchandise trends.

I can sum it all up by saying we continue to have excellent results around the globe with lifestyle running product and boots, while the Jordan brand and marquee basketball footwear also continue to drive solid sales gains, especially in the U.S. Meanwhile, apparel remains a challenge, especially in Europe and at Champs Sports.

Let me dive a little deeper into those themes for you. First, the lifestyle running category remains firmly on trend. In men’s, total running footwear was up in the teens with a high single-digit gain in the U.S. and a gain well into the double digits internationally.

The Roshe Run, Huarache, and Max Air programs from Nike are performing very well, as is the ZX Flux from Adidas. In performance running, some of the more technical brands are facing challenges, although Brooks in our women’s business is a notable exception with solid sell-throughs.

We are also seeing initial success with certain smaller programs from New Balance and Puma. We are tailoring the offerings of those and all our brands to create strong running assortments that reflect the diversity of our segmented customer bases in each of our unique banners.

Turning to our other big growth category, basketball footwear was also up double digits. As I’ve said before, Jordan product remains very strong in all its components. Jordan marquee was strong, Jordan sportswear was outstanding, and retros were up in the quarter despite the shift that Lauren mentioned of a significant launch into November.

Within signature basketball from Nike, the big three players - Kobe, KD and LeBron - continued to produce healthy gains, and we’re seeing the beginning of what we expect could be a significant Kyrie Irving business in the future.

At the same time, D Rose product [indiscernible] seems to be at a positive inflection point as he is working his way back onto the court, and Under Armour has gotten into the game with their successful Clutch Fit shoe, worn by Steph Curry.

Finally, we produced a great start to the boot season by making significant early investments in Timberland and Nike Boots. The inventory turn improvements that Lauren mentioned are mainly coming in footwear as our apparel assortments for the most part are still not turning as fast as we’d like.

As I mentioned, the areas with the largest apparel challenges were the same as last quarter. The declines were about the same as last quarter as well with apparel down double digits at Foot Locker Europe and down mid-single digits at Champs Sports.

Both divisions were once again affected by the fashion shift away from certain lifestyle apparel programs that had in prior years helped drive strong results in the category.

On top of that, these divisions - in fact, virtually all of our male-oriented divisions - have seen a major shift out of licensed apparel, which is definitely not on trend right now. That said, our combined U.S.

Foot Locker divisions - Foot Locker, Kids Foot Locker, Lady Foot Locker and Foot Action - again generated a mid-single digit comparable sales increase in apparel.

Among the male banners, the gains were strongest at Foot Action where we have developed an assortment of established brands mixed with smaller fashion forward vendors that has really resonated with the Foot Action customer. Overall, the apparel results in the U.S.

lacquered divisions were led by branded fleece, including trend-right pants and hoodies as well as t-shirts, shorts and hats that tie back to our premium footwear. Tech fleece from Nike was strong, and Tiro pants from Adi continue to sell well.

I’m now supposed to turn the call over to Ken, but before I do that, I’d like to offer him my deepest gratitude on behalf of the entire team here at Foot Locker. The accomplishments of the company over the last five years have certainly been a true team effort, but clearly Ken has been the catalyst to build the momentum we have in our business today.

He’s been an inspirational leader to everyone, a true friend, coach and mentor to me, and I can hardly thank him enough for all he’s done - but I’ll give it my best shot. Ken, thanks very, very much from all of us at Foot Locker..

Thanks Dick, I really appreciate that. It’s been a real pleasure to work with you, the executive committee, and everyone in the Foot Locker community.

That includes all of our terrific associates in the stores and facilities worldwide, our world-class vendor partners, our excellent landlords, and all of our other suppliers; and of course, that includes you on this call, our shareholder who have supported and believed in the company during its transformation, as Lauren said, into a high performance company.

I feel very fortunate to have had the opportunity to work with this team to contribute to the favorable situation the company is now in, which is we’ve achieved a strong market position and solid financial footing.

We have substantial growth opportunities ahead over the near, medium and long-term horizon, and a strong leadership team soon to be led by Dick that operates within a collaborative winning culture and that has the capability to build on our strengths, seize our opportunities, and develop new ideas to keep the momentum going, which I believe will be for a long time.

We’re on a path in the near term to achieve or come close to many of the long-term financial objectives laid out in our strategic plan in early 2012. We believe we’re headed to the end zone in 2014, but we’re not there yet, so we aren’t ready to describe our next major game plan to you just now.

We expect to share that with you in the spring of next year. For now, I’ll just touch again on some of our key accomplishments. First, we produced 19 consecutive quarters of meaningful sales and profit growth, a remarkable record of consistency that we believe can continue. Second, we’re in the perpetual process of differentiating our banners.

We’ve made tremendous progress from a merchandising and marketing perspective. We’ve also developed exciting new store designs and we’re still in the early chukkas [ph] of building those out.

Third, through organic growth in stores and direct-to-customer, plus the successful acquisition and integration of Runners Point Group, we have successfully increased our European penetration. Our European business has held up financially through challenging economic times and continues to be a significant profit generator for the company.

Fourth, we stepped up our children’s business to be a more meaningful part of our overall business, both in the U.S. and internationally, and we’re still seeing double-digit gains there. Fifth, we focused significant resources on our store banner dot-com business, which has been growing at close to a 40% pace for over the past two years.

Sixth, we’ve developed an exciting new concept for women, 602, which we believe will soon become a leader in serving the footwear and apparel needs of the athletically active young woman. Over the long term, we believe that 602 will become a billion-dollar opportunity for us.

Seventh, we have very strong vendor partnerships which can be seen in the depth of our merchandise assortments, the variety of vendor shop-in-shops we developed in concert with them, and crucial for our future, the alignment of our key growth strategies with theirs.

Finally, we’ve made investments in the business in our store remodels, in systems, in facilities, and above all in our people to improve our capabilities and productivity.

I believe our associates at every level have the skills, training and tools at their disposal to build on our momentum and deliver great product and services to our customers wherever and however they want.

With that, let me stop and just say again how grateful I am for the opportunity I’ve had to lead this tremendous organization over the last five-plus years as its CEO. With all due respect to all the many other fantastic people I’ve worked with over the years, this has certainly been the best job of my career and I’ll miss it.

That said, I know that this is the right time for me to hand the baton to Dick. He’s ready and the company has earned the privilege of leading this great company on the next leg of its journey to being the leading global retailer of athletically-inspired shoes and apparel. Thank you all very much. Let’s go ahead now and get to your questions..

[Operator instructions] Our first question online comes from Mr. Jay Sole from Morgan Stanley. Please go ahead..

Hi, good morning. On the leadership transition, it’s an exciting time in the company.

Can you just take us behind the scenes a little bit and talk about some of the planning and the thought process that went into the transition, and the thought process around the timing of it?.

Well, the transition has actually been going on for quite some time. We’ve been making sure that Dick had great exposure within the company in terms of the different operations and activities, from leading our direct-to-customer business, our international business, and our largest banners in the United States, and then the corporate opportunity.

We’ve also worked to have him more involved in the investment community, on an outside board to enhance his development.

As we look at the timing, both longer term and the immediate, in the longer term we’re coming out with a new plan and I believe that the new leader, or the leader who presents that plan and develops that plan should also lead during the planning period. That means that I think it’s the right time for Dick to take over.

On the micro sense, the way our business works, now is a good time to transition so that Dick will be in place to make sure that we’re prepared for next back-to-school and next year.

We’ve got our program for this holiday in place, and it’s really an execution program, and for our February business, so now is a very good time to make that hand-off, and I know that Dick is ready and prepared for it.

Dick?.

Yeah, I appreciate that, Ken. I think the timing, as Ken said, there are no down cycles in retail. It’s a new game every day, so it’s a matter of picking the right point, and I guess the big benefit that we’ve got is that Ken’s going to be around as executive chairman and continue to be a bit of a mentor to me through our shareholder meeting in May.

So the CEO position transitions December 1, and we’re fortunate to have Ken around for a few more months. .

Got it. Thanks so much. .

Thank you. Our next question online comes from Mr. Paul Trussell from Deutsche Bank. Please go ahead..

Good morning. Congrats Dick on the new position, Ken on new beginnings, and for a great new set of Week of Greatness commercials. .

Glad you like them, Paul..

They're fun, aren’t they?.

So the footwear business is humming here. Just wanted to talk about some of the other areas, and Dick, maybe you can give us a little bit more color on apparel and just how we kind of self-correct that, both U.S. and Europe.

What are expectations going forward? And then also the women’s business, just want to understand a bit more how we get to the billion-dollar opportunity around 602 and what that means for the Lady Foot Locker banner, given that it has stabilized in sales..

Well I’ll start with the apparel business, and as I said, the two weak points in apparel right now are Foot Locker Europe and Champs Sports, but some of our other banners are actually having some significant success in apparel, so it’s just the penetration in those two banners happens to be a little bit higher.

They have suffered a little bit as the trends have changed. They had some significant lifestyle programs in the past that really drove the business, and those programs have fallen out of favor a little bit with the consumer.

We’re seeing some success in certain items, but we don’t have strong entire programs to drive those businesses right now, so as we see success with items and we grow around that, I think that we’ll see those businesses improve. I know the team over in Europe and the team at Champs is working hard to make those changes.

I also believe that over time as we get our remodel program a little bit farther along, those remodels are being done to help us tell better stories and showcase apparel, so as that all comes together, I really do believe that the apparel business will improve across the board.

As it relates to the women’s business and 602, the long-term optimistic view is that we can get that to be a billion-dollar business. We’ve got a number of billion-dollar men’s banners; there’s no reason that we shouldn’t have a billion-dollar women’s banner. Over time, Paul, we’ll transition properties.

I mean, the challenge with our Lady Foot Locker stores, and you’re 100% correct - they have stabilized themselves a bit as the team has focused on getting the product assortment right, et cetera, the 602 stores - and I think you’ve seen a couple of those, Paul - are slightly bigger, and we need a bigger footprint to drive the apparel business the way that we expect it to be driven for this active female consumer.

So I think that when we get to spring and we roll out our new plan, we’ll have a lot more to talk about on the women’s side; but we are optimistic about how we’re going about the process, and as we’ve talked about, there is a portfolio of Lady Foot Locker stores that we have to manage our way through.

It’s not that we can just slap up a 602 sign and move forward, so the team’s evaluating where we’re at from a lease perspective, the timing of the rollout, et cetera. We’ll have a lot more to talk about that when we get to our new plan this spring..

Thank you, that’s very helpful color. Just turning quickly to the European business, if you can just discuss a bit more about consumer there in those markets.

What’s kind of the store rollout plan as you see it going forward, especially given a full year now of integration with RPG?.

We continue to see good opportunity in western Europe, Paul. We’ve got growth opportunities with our Foot Locker banner. We’re also remodeling stores over there, so the real estate strategy is a combination of door rollout, remodels, and vendor shops similar to what we do here in the U.S.

As it relates to rollout with RPG, we’re going through the process that we went through a few years ago here in the U.S. of segmenting Runners Point, Sidestep and Foot Locker, making sure that they can co-exist on the high streets in the malls in Europe, so that plan continues to develop.

Again, while we’ve got the running piece of the business segmented in our Runners Point stores, we’re still working on what it looks like in Sidestep. The one area that we haven’t talked about a lot, specifically in western Europe, is the growth of kids there as well. We’ve got a few Kids Foot Locker stores that we’re testing.

We do a great kids business inside our Foot Locker stores, so we think that presents a great opportunity in the European market as well..

Thanks a lot for the color..

Thanks Paul..

Thank you. Our next question online comes from Mr. Matthew Boss from JP Morgan. Please go ahead..

Hi, good morning, and congrats on a great run, Ken.

Can you guys talk about progress with localization and opportunity with your merchandise allocation system pilot that you guys have been working on?.

The pilot is really farther along in western Europe. We’ll see a lot of advantage come from that as the learning system begins to learn and anticipate how we’re buying and selling product.

I think that that will truly help our localization as we’ll be able to flow the right product in the right color and the right sizes back into the stores quickly after we see what the initial reaction to the product is, and while we’re optimistic about the rollout of the system, it will take some time to take full advantage of the benefits that we’ll have.

We believe that the benefits are many, so as we continue to get ready to pilot that system in the U.S., we’re cautiously optimistic about the benefits..

And they should be more than just localization too. Right place, right product, right time, it’s going to help us with in-stocks, it should help us with more full-price selling, and it will help turns, so we’re very excited about it..

Great, and then can you just walk through some of the underlying components of the gross margin in the quarter, specifically core merchandise margins, buying and occupancy leverage, and was there any impact from FX?.

FX, no. The components were again leverage on the fixed, and we had some minuses, about 20 basis points, due to the CCS inventory liquidation, so that was a unique item.

As we’ve talked about before, the continued pressure on IMU, which is really a result of vendor and category mix, has been a drag, but we’ve been able to offset that somewhat with our continued improvement in the assortment allocation, et cetera, that’s led to lower markdowns.

So it’s a lot of ins and outs that added up to that 10 basis point improvement, but we would continue to expect the leverage dynamic going in our favor with that pressure in IMU somewhat offset by markdowns..

Okay, great. Best of luck..

Thanks Matt..

Thank you. Our next question comes from Omar Saad from Evercore ISI. Please go ahead..

Thank you. Ken, congrats also on a great run, and Dick on your new role ahead. A question on international. It sounds like you’re doing an investor day or an analyst day next year, but kind of want to see how you guys are thinking about international beyond--get an update on how you’re thinking about international beyond Europe.

I kind of kept hearing that term, global dominant retailer in the category. I would love to hear your thoughts there, maybe from both of you..

Well, I’ll start out, Omar. We’ve got stores down in New Zealand and Australia as well, and we have stores in Canada, which is an international location obviously. We look at markets and evaluate markets all of the time and contemplate should we be there, how should we be there.

We’ve got franchise arrangements in the Middle East and in Korea that stretch our brand a bit as well. So we’ll continue to evaluate markets and opportunities, and I hate to keep referring to the spring but we’ll talk a little bit more about what some of those could be; but at this point, there’s nothing on the short time frame..

Yeah Omar, we are looking all the time at opportunities, but we also want to make sure those opportunities are accretive to the overall company. I think that one of the things that you see within the industry from the vendors, the growth opportunities, quite ironically, are really North America and western Europe are the developing countries.

They are providing some of the strongest growth, and we happen to be strong there so we’re taking advantage of that, but that’s not to say that we don’t look at other opportunities.

We do, but we feel based upon the items that I laid out in my discussion between women’s, kids, apparel, the format opportunities that we have, and dot-com, that we have a tremendous opportunity where we are, and we don’t want to pull away from that at this time..

Understood, thank you guys. A quick question for Lauren. Just on the gross margins again, the 20 to 40 BPs for the second half going from plus-10 in 3Q implies an acceleration in 4Q. Is just the CCS, working through that and having that behind you in fourth quarter, is that really the big swing factor, or are there other things going on there? Thanks..

Yeah, when you compared Q3, Q4, yes, it was unique in Q3 that we had that CCS liquidation..

Thank you..

Thank you. Our next question online comes from Camilo Lyon from Canaccord Genuity. Please go ahead..

Thanks. Let me add my congrats to Ken, and all the best to you in your future endeavors. Just had a couple questions. Lauren, we’ve talked a lot about the IMU pressure that you’re facing, and you’ve been able to offset that through better inventory markdown management.

Is there any outlook that you can provide into next year on how that will play out? Are we kind of plateauing at a level of IMU pressure, or should we expect the same level of increase in IMU pressure that you’ll have to offset next year? Any helpful insights there would be appreciated..

Well as we’ve said, this year’s been a result of category and vendor mix, so we’ll see how that plays out next year; but our focus is on controlling what we can control, and that’s improving our flow, getting those assortments as good as they can be, and investing in technology, as we’ve already talked about that allocation tool should help us.

The levers remain the same. Our mission is to get the most out of what we can control..

Yeah, the real focus for us is on productivity, and we see the opportunity into the future based upon what we’re doing with investments and steps we’re taking to improve productivity of the three major resources that Lauren talked about in her presentation as opportunities to continue to improve gross margin and as we work on things like our new allocation system that should also help us in both productivity and the markdowns that we have..

You know, when we hit the top of our game on apparel, that would--.

Apparel is another one. That should be accretive also. So there’s three things that we control that we think will help us improve there..

So if we were to assume that vendor and product mix does not change next year, there’s a reasonable expectation that merch margins should be up based on all the things you just said?.

Yeah, so we’ll talk a lot more about our expectations for next year in the spring..

Okay, fair enough.

My second question is could you help us understand the comp impact in the third quarter from the push-out of those two key launches?.

Yeah, we’re not going to peel that back. It gets a little bit too finite to try to do that..

I think Lauren did a good job of putting October and November together, which is really the way that you have to look at it..

Right, and the LeBron 12 is now launching on the 1st of December, so that should be an incremental benefit to the December comp year-over-year, correct?.

We’ve got a lot of launches when we look at the launch calendar, and we like the way the launches line up going into the holiday season..

Perfect. All the best to you guys. Thanks very much..

Thank you..

Thank you. Our next question online comes from Kate McShane from Citi Research. Please go ahead..

Hi, thank you. Good morning. Ken, congratulations, and Dick, congratulations as well. My question is on the port disruptions. It sounds like for most of the companies that we follow, that Q4 is okay with regards to that; but when it comes to Q1, there might be a little bit more uncertainty.

With inventory being so tight on the balance sheet, are you a little bit more concerned about what the port disruptions could mean going into 2015?.

Well, we work with our supply chain and as appropriate, we make decisions on how we route product into the U.S.

We’re confident that cooler heads will prevail, and hopefully the slowdown or shutdowns are avoided; but our supply chain, I think, does a really good job of evaluating the situation and working with our vendors to route things so that we don’t face any shortages..

Okay, thank you. My second question is just with regards to performance running. There was some commentary around the category that maybe sounded a little bit weaker, with the exception of Brooks.

Can you expand on that a little bit more?.

I think the running silhouette is such a strong silhouette, and sometimes the innovation, if you will, comes through the more technical brands like the Colors that Run campaign we did with Asics, where that splash of colors was really vibrant and moved the needle with the consumer.

Right now, the consumer is more on lifestyle running from a silhouette perspective and continues to like that product offering.

I think that the performance running, and we’re seeing what that does in our Runners Point Group, obviously it’s still an important piece of the business, but Brooks was the standout on the technical side in our women’s business.

So the running silhouette is still strong, and I know that we’ve shared before that the truth is most of the running shoes that are bought are not bought to really hit the roads or the track or the trail to run, so it’s a lifestyle piece whether it’s a technical brand, technical shoe or not.

We like the running category and feel comfortable where we’re at today..

Great, thank you so much..

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

Yeah, hi everyone, and let me add my congratulations and good luck, Ken..

Thanks Scott..

So just wanted to ask about pricing, and maybe specifically pricing in basketball. I think there’s been some growth in the retro pricing, the LeBron on the new 12 that was launched a few weeks ago was the same as last year. Do you expect to continue to benefit from pricing overall in the next year, and how are some of those decisions made? Thanks..

Yeah, I think that we have not seen the end of the pricing elevation. We certainly think that as long as our vendors continue to bring excitement and innovation, our consumers are more than ready and prepared to pay for that product. We have a wide range of price points in our stores, and they inch their way up in some of the key marquee products.

There is still some price increases going on, and to this point our consumers have been willing to pay. They think that the value for those marquee shoes in those higher price points is definitely there..

Okay, thank you. And then Timberland seems to be having a second life, or a third life. How significant, if you could just remind us, is boots in your fourth quarter, and can that move the needle? Thanks..

Well, our boot business is a small part of our overall business. I mean, it’s certainly important and our Timberland investments and Nike investments are paying off very well right now.

The needle moves based on our category and assortments, and of the big ones, boots are not quite as important to us but clearly a key piece headed into the fourth quarter..

Okay, thanks and good luck..

Thank you. Our next question comes from Chris Svezia from Susquehanna Financial. Please go ahead..

Good morning everyone. Congratulations Ken, and all the best to you, Dick.

I’m curious - just on the remodels for Champs and Foot Locker, are they completed at this point as they enter into the fourth quarter, particularly for Champs at this point, and any color about what you’re seeing - I know you’re not going to quantify it, but just puts and takes in terms of what you’re seeing? I guess apparel is doing better there than the regular base.

Just any color around that as well, please..

Yeah, from a calendar year or fiscal year perspective, we go into a bit of a quiet period for remodels now through the holidays, obviously. We’ll start back up in January with some projects, but as we’ve said many times, our goal is to have about 50% of the fleet touched by the end of 2017, and that’s our global fleet.

So we are seeing some benefits to the remodels from an apparel perspective.

Apparel penetration is better in our remodeled stores than our non-remodeled stores, specifically in Champs, so we believe that as the remodel program - and I think I mentioned that earlier - as the remodel program continues to roll out, we will in fact see some improvements in our apparel business..

Okay. Then on 602, just curious - I don’t know if you want to add any color about what you’re seeing there, but I think previously you might have commented that you’re seeing very high conversion out of those stores. I think it was a traffic issue.

Could you just maybe add any color about what you’re seeing or what’s been going on with 602 on that front?.

Yeah, you called it exactly, Chris. Our conversion is high, our traffic is improving but still not where we need it to be. We’re doing some fantastic grassroots marketing.

We just hosted a 602 kilometer run down in Dallas and had great turnout on a less-than-ideal day for a road race, but we really gained significant social impact from the social media impact of the run and the after-events.

So we open our 15th 602 today or tomorrow, so then we’re done for this year; but as we get more stores and get them clustered in markets, we expect the brand recognition to go up, which will in fact help the traffic. So again, we’re optimistic about the brand..

When we get her across the threshold, she likes what she finds. We’re the place where she can go and get the head-to-toe look that works for her, and that’s important to this customer..

Right, okay. Last question I have is just on the product pipeline in marquee basketball.

Besides Jordan retro and the LeBron, are there any other shifts you see coming, or does it line up pretty well? You’ve got some good product coming down, you have higher price points, it looks like that Jordan Retro 6 in those more traditional colors right on Black Friday, looks like it could be really strong for you guys.

Just any color about what you see in the pipeline would be helpful, thanks..

As I’ve said, Chris, we like the way the released shoes line up going into the holidays. Obviously our Week of Greatness is a significant campaign for us.

We try to stretch what was a Black Friday impact through a week-plus, and then when you look at the launch calendar, and I know you all have access to launch calendars, as you look at the launches that go out through the holidays, we like the way things line up..

And for our business, it even goes beyond the holidays with the December 25 shoes that the players wear and what we do after Christmas. So we feel good about that, and we feel good about the line-up that we’re seeing that goes into February too. So from what we have visibility of, it’s a strong calendar..

Okay, sounds great. All the best to you guys. Happy holidays. Thanks..

Okay, thanks Chris..

Thank you. Our next question on the line comes from Seth Sigman from Credit Suisse. Please go ahead..

Great, thanks, and I’d like to add my congratulations as well.

If I could just follow up on the 602 commentary, the billion-dollar target you mentioned, what does that imply for the ultimate store build-out for that concept, and what’s the right way to be thinking about unit growth for that business on an annual basis? And then I guess the second piece of the question is more just on the competitive landscape in that category and how you see that ultimately evolving.

Thanks..

I think when you look at the build-out, we will be thoughtful and somewhat methodical. One of our competitors was very proud that they build their 100th store in their eighth year with the brand. We should beat that quite handily based upon the success and what we’re seeing, but we’re still going to do it in a thoughtful way.

As Dick said, we’re looking at markets where we can be more concentrated. We also feel we offer something very different from the competitors in the point that we have brands that a customer can put together that have their best product.

We offer, as Lauren said, head-to-toe with apparel and footwear, and the best, if you will, of footwear and the best brands. So we’re differentiated, and if a person just wants one fit or one style, the specialty stores, some of the other competitors, that’s what they offer.

We offer an assortment that a woman can’t get anywhere else, and so we feel good about our positioning and we also feel good about this, as Dick was just talking about, and the customer has come back and said, I really like this.

We just need to get more customers to know about it, because once they know about it, they come, they buy, and they buy a lot because in addition to having higher conversion, it also has high average tickets..

And if she comes to us, we can give her great customer service and help her get her fit right. That’s not something everybody brings. .

For sure. Okay, that’s helpful. Just shifting gears to the Foot Action business, nice acceleration in that business this quarter.

Were there specific product drivers that maybe helped that, or is it just more representative of other changes you’re making within that banner?.

It’s a combination of both. I think the mix that they found from an apparel perspective with the true core athletic brands, and then some of the faster fashion brands from a lifestyle perspective, have really benefited Foot Action. We’re in our prototype phase of our rollout of remodels there, and the early indications are very positive as well.

So I think it’s really a combination that they found that sort of faster lead lifestyle vendor mix as well as a focus on customer service and doing the right things in the store to hook things up, and some really solid grassroots marketing around specific stores and specific events..

Okay, thanks and good luck ahead..

Thank you. Our next question online comes from Eric Tracy from Janney Capital Markets. Please go ahead..

Hi guys. Good morning, and I know these congratulations sound sort of obligatory and cliché, but honestly Ken, tremendous job, and Dick, really wish you the best of luck on the next step..

Thank you, Eric..

So I guess if I could for either Ken or Dick, on the product pipeline as it relates to basketball, I know you guys feel really good about sort of the positioning into holiday, but as we kind of step back bigger picture, how do you balance working with the vendors in terms of the price point, the escalation there, sort of what is the right level, and then maybe even from a unit perspective making sure that these launches aren’t getting kind of flooding the market with new product.

Clearly the demand is there as it stands now, but how do you think about balancing that, not just in holiday but really on a go-forward basis?.

Well you know, I think it’s not just balancing it in basketball, Eric. It’s balancing it across categories as well.

I think that certainly we see some price escalation on the marquee product that I talked to earlier, but we’ve also got some great product in lifestyle running that may be the shoe of choice for the consumer on that given day, whether it be the ZX Flux, the Roshe - I mean, those are also very fashion-right and desirable shoes for our consumers.

So we work--I think our teams do a great job working with the vendors in terms of addressing price points, elevating where we can, making sure that we’ve got the right price-value relationship, making sure that there’s innovation in the product, whether it be color, whether it be technology, whether it be taking some older shoes and contemporizing them for today’s consumer.

I mean, that’s the New Balance reference that I made before. We talk a lot about basketball, but I just have to keep stressing how important the running business is as well, especially outside of the U.S. but even in the U.S. with the comp gain we had.

So our consumer moves fairly quickly, and while they love their basketball sneakers without a doubt, they may feel like slipping on a running shoe for this occasion, and that’s where I think the strength of our assortment and our vendor mix really comes through. .

Okay, fair enough. If I could switch a little bit to the apparel business, is there any chance that the vendors are somewhat limiting the branded component of that business? Clearly it’s shifted away from licensed to branded. Women’s clearly is resonating quite well, because it seems to be an underserved sort of distribution for women’s apparel there.

But as you think about the brands and they’re trying to segment the market, is there any limitation of what they can sort of put through the Foot Locker banners, or is it just literally the timing and getting to that stage?.

Yeah, I don’t see, Eric, that we’ve got any limitations. I think that it’s more timing and our decision-making process on when to move from silhouette or style or assortment piece. So it’s we’ve just got to get our decision-making and their assortment presentations lined up together, so there is no limitations.

I think that from a segmentation point of view, they understand that we sell premium footwear and we want to hook up the right premium apparel and accessories with that. So I think, as I’ve said, we’re getting better but we still have work to do on apparel..

Okay, and just lastly, capital allocation - obviously a tremendous job in terms of returning value to shareholders in dividends and buybacks.

As you think about the international opportunity, is there--again, without commenting specifically, but other things in play where you think maybe just not going organic, that there are some other assets potentially in play. I guess the question, are there some other things that we think about, M&A potentially, in the future as a--.

Yeah Eric, we constantly look at opportunities. We obviously--the Runners Point was a very interesting, very good transaction that Dick and Lauren led, and it has been accretive since the day we bought it. But we also look at smaller things. We went into the Czech Republic, we bought a nine-store chain there that helped us establish a position.

So we’re looking at opportunities in Europe that will allow us to position ourselves properly in each of the markets that we’re in, which is just about all in western and central Europe.

So if we see the right opportunity, but we also want to make sure that it’s a positive opportunity, and I think from what you’ve seen, when we’ve done something, it’s been a positive opportunity and we haven’t done something that is going to create a problem. .

Absolutely. Thanks guys. Best of luck. .

Thank you. Our next question online comes from Robby Ohmes from Bank of America Merrill Lynch. Please go ahead..

Morning. Thanks for taking my question, and Dick, congrats on your new role, and Ken, best of luck in any and all next endeavors that you have. I wanted to just ask you guys about the promotional environment.

One of your competitors had an uptick in their promotions this season following some excess inventory in some Nike product, and then I also wanted to see if you guys had any view on the increase in apparel that we’re seeing in Nike and Under Armour at Macy’s as we head into holidays, and just sort of what your outlook is in both footwear and apparel--in athletic footwear and apparel in the malls, and if you’re seeing any uptick in competitive promotional activity.

Thanks..

Well, we monitor the marketplace all the time, Robby, and I think the basic premise of our business model is that we sell premium products. I think that our vendors do a really good job of segmenting those products and making the right distribution calls in the right channels, so we have markdowns in the store.

Some of those are things that we bought too much of, didn’t move as fast as we wanted it to - whatever.

So it’s not that we don’t have promotional markdowns, but again, based on the strength of our business in the premium end, I feel comfortable with where our promotional cadence is, and obviously that’s something that we evaluate on a daily-weekly basis.

In terms of the mix of apparel that’s going into Macy’s, we have seen some expansion and some extensions. They do apparel different than we do. They can dedicate a lot more space to apparel, so I think that our team is doing a better job of picking the sharp points and making sure that we get the right product.

So it’s not about more for us, it’s about more of the right stuff for us..

Yeah, we don’t have our head in the sands, and where appropriate we’re taking pricing action; but we got the sales increases that we got with lower markdowns than last year, as Lauren said, and part of it is the way we present the service, the level of assortment, part of it is the exclusivity that we have on products, and we will continue to work on that.

But it’s one of the reasons why we’re being more thoughtful as we expand the apparel, is we are a premium house and we will have a strong Black Friday, and we won’t have all the promotions that some of the other people do. We have a different strategy than some of our competitors.

They get into situations that may cause them to have some pricing issues. We work hard, having tight inventory control, having tight assortment control, making sure we work closely with the vendors to try to minimize that impact..

That sounds great. Thanks so much, guys. .

Okay Operator, we have time for one more call, or one question, rather..

Our last question comes from Mr. Michael Binetti from UBS. Please go ahead..

Hey guys, good morning, and let me add my congratulations Dick and Ken. Lauren, if I could just ask for a little bit of detail for our model on the gross margins here, because I think it will be important.

In the past, on the kind of comp that you just did, we’ve seen somewhere to the tune of 70 to 80 basis points of leverage on the buying and occupancy line in the gross margin.

I mean, is it directionally wrong to think that that’s where you ended up this quarter with a similar comp, and if that extends going forward, it looks like you’d be able to give up anywhere from 30 to 50 basis points on the merchandise margin to get to your guidance for the year.

Is there any way that at a high level directionally, you would bless that kind of thinking?.

We guided to 20 to 40 basis points..

Yeah Michael, as Lauren went through, there are a lot of puts and takes to get to where we came out. We continue to see those into the future that will be on the positive side, so--.

We get good leverage on the fixed, Michael, but going back 70 to 80 would be going back a ways..

Okay. If I could just talk about Europe then for a minute, obviously you guys brought up the segmentation. I think we talked about that a little bit in the quarter, Lauren. Where are you, because obviously the segmentation you did between Foot Locker and Champs and Foot Action in 2010 has driven a lot of good results here.

Can you tell us what we’re going to be looking at over the next few quarters as you guys start to put a segmentation strategy in play in Europe, and then as we’ve talked about in the past, Europe has traditionally been able to achieve operating margins that are above the U.S.

Can you talk about where that business is today, and does that have a chance to go back above the U.S.

as you guys start to put that strategy in play?.

Yeah, from a segmentation point of view, I think we talked about it either last quarter or the quarter before, we will span the gamut from Sidestep being more fashion-forward, so connect that a bit, if you would, with Foot Action except there’s no apparel.

Foot Locker will sort of be in the middle - sport, fashion, leisure, athletic, casual driven, and then Runners Point will be out on the performance--you know, more on the performance end, not that they won’t have lifestyle running options as well and a little bit of apparel for the technical runner.

So we’re through Phase 1 of that - we’ve got the Runners Point stores in Germany situated the way that we want. They’re working to change out the assortment, making it a better his-and-hers sort of environment with men’s on one side, women’s on the other. So all of the work is in process with Runners Point.

Foot Locker is well established with their assortment in their key customers, target customers in Germany, and the next step is to get Sidestep positioned properly in Germany. Once we feel like we’ve got the model right in Germany, we’ll look at testing that model across the border and outside of Germany to see where it can roll out.

We have a lot of premises. We believe that Runners Point may be more successful in the north than the south. We think that Sidestep could have a better future in the south than the north, so we’ll have to play the testing game a bit to figure out exactly what the rollout looks like.

But we’re confident that the three of them can coexist, very similar to the positioning of Foot Locker, Foot Action and Champs from the male perspective.

Obviously Foot Locker does a lot of women’s footwear business and a lot of kids footwear business in Europe, and we throw in the KFLs that we’re testing and we feel like we’ve got a great portfolio to roll out over the future.

In terms of the profitability, Europe is definitely profitable - highly profitable - for us, and we believe that it will continue to be and continue to gain some leverage as we go forward..

And Michael, we’re riveted on our productivity no matter where we operate, and there’s nothing structurally that doesn’t let Europe be as productive and gain in productivity from the great segmentation that Dick just described..

Right, okay. Thanks a lot guys. Congrats on a good quarter..

Thanks Michael..

Thank you very much..

Thank you all. .

[end of Q&A]:.

Thanks again for your participation on today’s call. We look forward to having you join us on our next call, which we anticipate will take place at 9:00 am on Friday, March 6 following the release of our fourth quarter and full year earnings earlier that morning. Thanks again, and happy holidays..

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