John A. Maurer - Foot Locker, Inc. Lauren B. Peters - Foot Locker, Inc. Richard A. Johnson - Foot Locker, Inc..

Kate McShane - Citigroup Global Markets, Inc. Robert Ohmes - Bank of America Merrill Lynch Paul Trussell - Deutsche Bank Securities, Inc. Camilo Lyon - Canaccord Genuity, Inc. Scott D. Krasik - The Buckingham Research Group, Inc. Sam Poser - Susquehanna Financial Group LLLP Omar Saad - Evercore Group LLC Christopher Svezia - Wedbush Securities, Inc.

Robert Drbul - Guggenheim Securities LLC.

Good morning, ladies and gentlemen, and welcome to Foot Locker's Third Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll 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 and customer preferences, economic and market conditions worldwide, and other risk and uncertainties described in the company's press release and SEC filings.

We refer to you the 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 produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.

If you have not received today's release, it is available on the Internet at www.prnewswire.com or www.footlocker-inc.com. Please note that this call is being recorded. I will now turn the call over to John Maurer, Vice President and Treasurer and Investor Relations. Mr. Maurer, you may now begin..

Thank you, Tommy. Hello, everyone. We're pleased to have you join us this morning to discuss Foot Locker, Inc.'s results for the third quarter of 2017.

Joining us on today's call are Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, who will start our prepared remarks with a detailed review of our financial results and an update of our outlook for the rest of fiscal 2017; and Dick Johnson, Chairman and Chief Executive Officer, who will discuss how we are positioning the company for success in the midst of the changes we see with our customer and within the broader athletic industry.

First, though, I'll provide you with a brief summary of the company's results which were broadly in line with our expectations going into the quarter. We reported a comparable sales decline of 3.7%, and net income of $156 million (sic) [$157 million] which equated to earnings of $0.81 per share.

These results included a $13 million pre-tax charge related to reducing and reorganizing our divisional and corporate staff, which both Lauren and Dick will touch upon further. This charge equals $0.06 per share, thus on a non-GAAP basis, our adjusted EPS in the quarter was $0.87.

A reconciliation of our GAAP to non-GAAP results is provided in the press release issued earlier this morning. I will now turn the call over to Lauren..

Thank you, John. Good morning to all of you and thank you for your interest in Foot Locker. As John mentioned, third quarter comparable sales declined 3.7%, within the down 3% to 4% guidance we provided on our prior call and, as expected, an improvement over the decline we experienced in the second quarter.

Our comp was negatively affected by hurricanes Harvey, Irma, and Maria. Overall, we had almost 450 stores closed at some point during the third quarter, as a result of these storms. Although for the most part, sales recovered in Texas and Florida within the quarter.

The primary impact on us was actually from Hurricane Maria, which shut down all 56 of our stores in Puerto Rico and the Virgin Islands. And most of these stores remain closed for a month or more after that devastating storm hit in mid-September.

Our thoughts are with the people in the Caribbean and elsewhere, including hundreds of our own associates who are continuing to cope bravely with the devastation left behind by this season's hurricanes. We estimate that the net sales loss primarily due to Maria, lowered our overall comp by 20 basis points to 40 basis points.

The hurricanes also led to significant inventory losses which I'll get to when I talk about SG&A. In terms of Cadence, comp results were steady throughout the period, with results in August, September, and October all within the quarterly guidance. Let's now review the details of our performance starting with our families of business.

As expected, Footwear remains challenged and decreased mid single-digits. Apparel, on the other hand, was strong, producing a mid single-digit comparable sales gain, with increases across men's, women's and kids. Accessories, such as socks and hats, comps down double digits.

Within Footwear, sales of men's shoes were down low single-digits; kids decreased mid single-digits; and women's posted a double digit decline.

Running remains the strongest category in men's footwear, finishing with a high single-digit comp gain, which was driven by VaporMax, Tuned Air [Air Tuned] and Air Max 97 from Nike and, NMD, Tubular Shadow, EQT, and Ultra Boost from Adidas.

Although the men's basketball category decreased mid single-digits, this trend improvement over the double digit decline in Q2 was driven by stronger sell-throughs of select Jordan Retro releases compared to Q2 and other casual basketball styles such as Air Force 1s from Nike.

Finally, within men's, casual styles posted a double digit drop, as strong demand for Vans, especially old school and skate high styles, was more than offset by a decline in Converse and a slower start to our Timberland business compared to last year.

Decline in children's footwear sales was driven by the shifts away from signature basketball and casual court style.

However, the overall downtrend in the kids business did improve versus Q2, due to the higher sell-throughs for the Jordan Retro releases I just mentioned, a solid running category led by Tubular Shadow and Xplorer, and positive results for the LeBron 15, and LeBron Soldier.

On top of the ongoing slow sell throughs of Superstars and Stan Smiths, trends in our women's footwear softened further during the quarter, due to a lack of new on trend offerings to offset last year's strong demand for PUMA Fenty styles.

The weaker footwear sales had the biggest impact at SIX:02 and led to a double digit comp decline for that banner. Turning to our apparel business, we were quite pleased that it was up mid single-digits with strong gains across most of our geographies and banners.

Branded fleece and wind wear assortments from Nike, Adidas and Champion were the key on trend items during the quarter. Our branded T-shirt business also had a strong quarter. Overall, ASPs in apparel were up high single-digits, reflecting the more premium assortments in our inventory, while units were down low single-digits.

Our children's apparel business was up high single-digits. Men's apparel posted a solid mid single-digit gain, while women's was up double digits, however, the gain in women's apparel was largely mark-down driven. Breaking out the comparable sales results by segment, direct-to-customer posted a 6.1% increase, while our stores were down 5.1%.

Starting with the direct-to-customer segment, Eastbay generated a high single-digit top line increase. Our store banner dot-com businesses in the U.S. and Europe were both up mid single-digits, while our digital sales in Canada increased at a strong double-digit rate.

Overall, direct-to-customer sales increased to 13.8% of total sales, up from 12.8% a year ago. Within our store divisions, Foot Locker Canada and Footaction posted solid results, both generating low single-digit comp increases, led by double digit gains in apparel and mid single-digit gains in men's footwear.

The other store divisions posted comparable sales decline. In the U.S., Foot Locker was down low single-digits, while Kids Foot Locker and Champs Sports were each down mid single-digits. Overall, traffic at our U.S. stores declined mid single-digits. Internationally, traffic also declined mid single-digits.

Comparable sales at Foot Locker Asia Pacific and Sidestep were down mid singles, while Foot Locker Europe and Runners Point were both down low double-digits.

Sales at Foot Locker Europe, which has a relatively high penetration of Adidas, were pressured by further declines of Superstars and Stan Smiths, and lower than expected sell-throughs of some other Adidas styles. Moving on to the rest of the income statement, gross margin decreased 290 basis points to 31% of sales.

The lower rate was driven by a 190 basis point decrease in our merchandise margin, a 10 basis point increase in shipping expense, and 90 basis points of deleverage on our occupancy and buyers compensation expenses.

The lower merchandise rate, both year over year and compared to last quarter's guidance, was the result of higher markdowns, both in store and online. The higher markdowns reflect our ongoing efforts to drive traffic and clear slow-moving inventory in the current promotional retail environment.

Despite this even greater than anticipated markdown pressure, average selling prices in footwear were actually up low single-digits, while units were down high single-digits. Our SG&A expense rate rose in the quarter by 30 basis points to 19.7% of sales.

Included in SG&A were $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses.

Although we did not adjust our non-GAAP results for these costs, which total about $0.03 per share, SG&A would have levered by 10 basis points during the quarter, had these hopefully one-time costs not been incurred.

The expense rate performance was driven by the team's consistently strong expense management, which helped offset some of the pressures from minimum wage increases and higher health care costs.

The $13 million reduction in force and reorganization charge that John mentioned was part of an overall strategy to address the challenges we are facing in today's fast-changing retail environment. The vast majority of the charge relates to severance.

The changes, while difficult, position us to create a more agile, flexible organization that will concentrate on those strategies that we believe will most effectively drive our long-term earnings growth. Dick will comment further about these initiatives in a few minutes.

Depreciation expense increased to $44 million from $40 million in the prior year. The increase reflects the investments we have made and continue to make in our store fleet, digital capabilities, and logistics network. On a GAAP basis, our tax rate came in at 34.7%, 380 basis points higher than last year.

As you may recall, the lower rate in the third quarter last year reflected the benefit from an intellectual property valuation reassessment in Europe. On a non-GAAP basis, our tax rate was 34.8%. Inventory ended the quarter down 3.4% from a year ago compared to an overall sales decrease of 0.8%.

On a constant currency basis, inventory decreased 4.9% compared to a 2.3% total sales decrease. Our proactive markdown actions during the quarter helped ensure that we are headed into the holidays with the ability to flow in good quantities of our improving product assortments.

We ended the quarter with $890 million of cash and cash equivalents, an increase of $25 million from the end of Q3 last year. We mentioned on our last call that we and our board are fully confident in the ability of our business to reaccelerate over time, and that we would consider a full range of share repurchase alternative.

Given that, and in light of the value we saw in the price of the company's stock, we significantly accelerated our buyback program, spending $304 million to repurchase 8.7 million shares during the quarter. In addition, we returned $38 million to our shareholders through our quarterly dividends.

In total, we have returned $482 million to shareholders year-to-date. Capital expenditures in the quarter were $54 million, bringing our total through the first nine months of the year to $204 million. We are on track to spend almost all of the $277 million we planned for 2017. Turning to real estate.

We ended the third quarter with 3,349 company-owned stores, a decrease of 10 from the end of the second quarter. For the year, we currently expect to close 150 stores, up from the 135 we mentioned on the last call. We'll open about 90 stores and relocate or remodel 180 stores.

Before I turn the call over to Dick, let me make some comments about how we see Q4 unfolding. We now expect comparable sales to decline 2% to 4%, slightly better than the previous guidance of down 3% to 4%. Gross margin is likely to decrease 220 basis points to 240 basis points in Q4 on a 13-week basis.

This decline is steeper than our guidance in August due to the anticipated need to maintain relatively high markdowns in Q4 to move through slow-moving inventory to position ourselves for a stronger 2018. SG&A is likely to increase by 60 basis points to 80 basis points as a rate of sales.

This is improved from the guidance we gave on the last call due in large measure to the recent reduction in force I mentioned, and a timing shift of certain projects into early 2018. In total, EPS is likely to decrease between 15% to 25% in the fourth quarter.

Please remember that this guidance does not include the 53rd week, which we still estimate will be worth an incremental $0.12 per share. With that, let me turn the call over to Dick to discuss our initiatives that we believe will reposition the company for long-term growth.

Dick?.

Thank you, Lauren, and good morning, everyone. It's great to have you join us to discuss Foot Locker's performance and outlook for the future. Before I get started describing the current business dynamics, I want to circle back to the third quarter reorganization charge.

While it was a very important step in keeping us headed in the right direction on this journey through the turbulence that defines the retail industry today, it was also a very difficult and painful step. It was hard to see people who had contributed a great deal to the company leave the business, and I want to sincerely thank them for all they did.

At the same time, I want to thank the outstanding team of associates at the company today for their leadership in positioning Foot Locker for continued success in our industry. With the disruption we are witnessing in retail in general and the athletic industry more specifically, we will have to make many critical decisions as we shape our future.

However, the actions we are taking now are not meant to simply enable us to survive in the evolving retail market. Rather, we are proactively adjusting our course to ensure that Foot Locker will continue to thrive at the center of sneaker culture or more broadly, youth culture.

Through the creation of outstanding customer engagement, experience and satisfaction, we believe we will also thrive financially in terms of shareholder returns over the long term. Let me tell you about a few of the things we are doing to achieve that.

First, we are reorganizing our North American businesses to give all channel responsibility to the general managers of each of our banners under the leadership of Jake Jacobs. The level of coordination between the store divisions and our digital commerce team in Wisconsin has improved tremendously over the years.

However, having the two groups managed separately, while an effective strategy for the past 20 years is no longer the best approach to creating a seamless brand experience. A critical step in the process of removing friction points for our customers is having fully integrated sales channel responsibility for each banner.

At the same time, we are investing in the creation of a North America product marketing strategy team, led by Andy Gray, which will work closely with our vendors in the cultivation and development of unique product platforms and stories that only a partner with the power and reach of Foot Locker Inc. can scale globally.

The primary charter of Andy's team is to create significant incremental revenue streams through new brand and product ideas.

A perfect example of the sort of vendor collaboration with our portfolio of brands that this team will be amplifying is today's formal announcement of Foot Locker's partnership with Nike on Sneakeasy, NBA Player Editions at House of Hoops, and Nike Pro Associates at Foot Locker.

Sneakeasy, for example, is a window to what's next in the world of sneakers, which will come to life next week during Foot Locker's Week of Greatness. In this case, Nike is clearly demonstrating what differentiated retail looks like for them, and how their top strategic partners, like us, play a key ongoing role in bringing it to reality.

I'll let you learn more of the details from our joint press release with Nike, which is coming out shortly. But suffice it to say, we are very excited for the future, as these truly innovative ideas turn into great experiences for our customers.

Another key initiative, as you know, is concentrating a significantly greater portion of our capital and operating spending in enhancing our digital capabilities. We are making solid progress on several fronts, including three of the biggest initiatives which I have discussed previously.

Our new digital e-commerce platform, our mobile app platform development, and our new POS technology. Each of these multi-year projects will play a key role in enhancing how our customers experience and engage with our banners.

Among many other customer-facing benefits, we expect to leverage greater visibility of the shopping and buying patterns of individual customers and households into much more effective loyalty and marketing program initiatives, have quicker visibility and access to inventory across our entire enterprise thus speeding up customer access to all of our great product, and create elevating storytelling and alignment between our stores, digital sites and mobile apps, all of which should lead to higher customer satisfaction and ultimately even higher rates of converting shoppers into buyers.

These three initiatives have a very important behind-the-scenes benefit as well. All of our e-commerce sites globally will finally be on the same platform. Our mobile apps will also be on a common global platform and for the first time ever all of our stores around the world will be operating the same POS software.

Once fully rolled out, the common platforms and software will greatly enhance the efficiency and speed at which we can make ongoing upgrades and improvements across all of our banners, in turn enabling us to stay at the forefront of technology, which we know is extremely important for our always on, always connected consumers.

Among other benefits, this simplified architecture will facilitate enhanced data analytics, which is a key component of connecting ever more personally with our existing customers as well as those potential consumers who share key characteristics with our top customers.

We are currently in the process of prioritizing a number of other digital projects, based on projected returns, balanced with incremental cost and risk. While speed is important, we know there's nothing that slows down an organization's progress more than having to stop and rework a critical system that was not implemented thoughtfully and carefully.

Put together, though, we are confident these investments will be critical to keeping our banners top of mind with our customers, as well as with our top vendors when it comes time to cement strategic partnerships such as the ones we are announcing today with Nike.

Related to digital functionality, we are also making significant investments in our supply chain capabilities.

The first step, which is well underway, is the process of reconfiguring our primary warehouse in Kansas, to be able to fulfill direct to consumer shipments, easing the constraints on the DTC facility in Wisconsin, which came with the original Eastbay acquisition. This step should be complete by the middle of next year.

To facilitate faster delivery of products bought online, we are going to test the mini hub concept in certain major metropolitan areas. These mini distribution hubs will hold inventory to replenish stores more quickly and efficiently than from Kansas thereby, over time, reducing the need for expensive backroom retail space.

Even more importantly, we expect mini hubs to facilitate next day or perhaps even same day delivery for DTC orders. We are upgrading a facility in New Jersey as well as an existing logistics facility in central Pennsylvania to handle large sections of the East Coast, and we will test other locations in 2018.

With all this discussion about digital and supply chain investments, I don't want to overlook that the majority of our capital is still spent on our store fleet, which after our people, is one of our most important competitive advantages.

Keep in mind that our store banners collectively still do less than 10% of their sales digitally despite the fact that we've had internet sites and DTC fulfillment capabilities for 20 years. And the core customers of most of our banners, young males from about 12 to 25 years old, were essentially born with a mobile device in their hand.

Our customers value a compelling store experience and the integration of the digital in-store experience remains a critical element of fulfilling the customer's desire for an emotional connection with the premium sneakers and apparel that we sell. Kids today, our core customers, aren't just sitting at home buying shoes on a screen or device.

They want to be part of something, engaged with the things that are important to them. Our banners and stores are a key component in their connection to the sneaker and youth culture that they share with their friends.

Not just their friends in the classroom at school, but like-minded people they found through social media who could be anywhere in the world. So we are continuing to invest judiciously in our store fleet. In some cases these are pinnacle locations, including four Foot Locker stores that we'll open in the next few weeks.

In Rome this weekend, on Champs-Elysees in Paris next week, in Oslo, our first store in what will be our 24th country the week after, and finally, right before Christmas, a flagship store on Hollywood and Highland in L.A. that will feature another great SIX:02 shop in shop.

We have another set of strong stores across our banners that we believe will generate a significant sales lift through remodeling into our most current formats. We have engineered most of these remodels to be less expensive than in prior years, lowering the comp hurdle required to improve ROIC.

And while we will continue to close underperforming locations, our sales and even more important profit performance of those stores in relatively weaker malls and shopping centers have tended to hold up relatively well this year.

Since most of these profitable doors already have low rents and short-term leases, it makes no sense to us to rush and close hundreds of them and leave the customers who still shop in them day in and day out without a clear choice for accessing the premium product we offer.

I want to close by saying that I hope what you take away from my comments this morning is that we are not in this game to get a ribbon for participation. We are in this game to win it.

We are partnering with our vendors to win together in connecting emotionally with the customer, creating great experiences, and delivering innovative premium product when and where they want it.

We see our biggest vendor, Nike, on the verge of a major breakthrough in terms of product innovation and customer engagement, and, of course, we are working closely with them on that. Adidas, meanwhile, has certainly proven that they too can compete at the highest levels.

We also have a number of other key suppliers that fill important roles in the athletic marketplace and we collaborate with them constantly on ideas big and small. Our position at the center of sneaker culture is strong, but not guaranteed or inevitable.

We work hard every day in understanding what is influencing and motivating our customers that day, whether it be a global music icon, a young artist popular on social media, or rebuilding a playground in their neighborhood.

We intend to continue partnering with our vendors on this challenging, but exhilarating journey, making course adjustments as necessary, as we retain and build on our strong leadership positions in the athletic industry. Tommy, let's go ahead and open up the call for questions now..

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. One moment, please for our first question. And we get our first question on the line from Kate McShane with Citi. Please go right ahead..

Hi, thank you, good morning..

Good morning, Kate..

With regards to your CapEx spend, I know you said you're reallocating more to be on the digital side, but will there be any change to your longer term CapEx guidance that you've provided? Will it be increasing, or is it really just the shift away, or shift more into digital?.

Well, there's no change to the guidance that we've given. We're allocating, according to the comments that we just made, a little bit more of it going to digital, stores still important, and obviously the supply chain investments as well..

Okay. Great. And then my bigger picture question is just on the relationship with Nike. They told us a lot a couple of weeks ago at their analyst day about how they're evolving the marketplace. It's clear that Foot Locker is one of the key partners based on what they said and what you have to highlight today.

Could you maybe work through some of the three initiatives that Nike has in place with you, Sneakeasy and the Nike Pro in the stores, and what exactly it will mean in terms of how your stores look and how the relationship evolves over the next few years?.

Yeah, well, each of them is very different and unique, right? So Sneakeasy is a pop-up retail space, and while I'm not going to go into a lot of details because it's about discovery, and I can tell you that it will open up down at 30 Wall Street next week during the Week of Greatness.

And it really is a look into the future of sneakers and how we will work with Nike. The format itself may or may not be a pop-up somewhere else, but it's really a view in how we want to digitally empower our consumers, draw them into a physical space, and have them interact with us and Nike, the Foot Locker and Nike brands together.

The Nike Pros in store is something that we're testing in the New York City market.

In the holiday season, beginning next week with our Week of Greatness., it will put dedicated Nike resources in the store, our employees, but Nike experts in the store, to talk about the stories and the product in a little bit more depth to enhance the experience that the consumer will undoubtedly start from a digital perspective, but be able to make a great connection in store when they interact with the Pro, along with our stripers in store.

And then the third element was the player exclusives that were really one of the mainstays of the House of Hoops when we opened the House of Hoops 10 years ago.

We'll start to see those returning to the House of Hoops as well, which again will add some excitement back to the basketball footwear assortment, specifically in House of Hoops as those player editions become available..

Thank you..

Thanks, Kate..

Thank you very much. We'll get to our next question on the line from Robert Ohmes from Bank of America Merrill Lynch. Please go ahead..

Oh, hey, guys..

Hi, Robby..

Actually, two questions, Dick. I think the first one, just the – I thought it was interesting that your ASPs are up. I think the overall industry may not be seeing that in footwear. Was there a mix shift that supported the ASPs even though there was a lot of discounting going on, or maybe mix away from kids, or just curious on what's driving that.

And then the second question is just in the press release, you mentioned the availability of premium product for holiday improving. What premium product wasn't available, and what are you getting? Maybe give us some insight on that. Thanks..

I'll start with the ASPs, Robby. We talk a lot about our ASPs not being a simple function of plus this, minus that. It's across the families of business, size, scale, gender, and the mix mixed out, so it really is a change in mix that drove it.

Again, we've got some great high-end product when you think about foamposites, when you think about VaporMax, when you think about Ultra Boost, but it's also across the range that we're seeing nice pops in some of our apparel pricing. So there's just a real complex model behind ASPs and it washed out positively, even given the markdowns.

So again, I think our team did a great job of managing the markdowns while selling premium product. When it comes to availability, we've talked about it all year that the availability of key silhouettes would become more – there would be more quantities available in the back half, specifically as we got into Q3 and Q4, later in Q3 and into Q4.

So it's things like more quantities of VaporMax. It's the right quantities of Jordan retros. It's Ultra Boost and Yeezys in bigger quantities.

So it's not that we didn't have availability, it's that the quantities have now started to ramp up a little bit more commercially in the marketplace, and we're getting access to those quantities that we need to drive the business from a commercial point of view..

Thank you, Robby..

Thank you very much. We'll get to our next question on the line from Paul Trussell with Deutsche Bank Research. Please go right ahead..

Hey, good morning..

Good morning, Paul..

Help us understand your mindset on expenses. You clearly took some pretty meaningful steps this quarter to reduce cost, but you're also making investments for the long term around digital supply chain, the store fleet, the customer experience, as you spoke about.

Just how should we think about the ability to leverage expenses over time, and SG&A growth rate, et cetera?.

Well, we described, I think, fairly thoroughly the reorganization and the positioning of ourselves to get out to those long-term growth opportunities to make sure that the organization is set up to do that.

But as we evidenced in the third quarter, we really have very strong expense management culture, and we look for the opportunities to lever at lower comps. That leverage point has been mid-single digit comps for our structure this year. But we look to manage cost sales per payroll hour. That's the biggest function within SG&A, selling wages.

So we look to make sure that we have got the very best salespeople in the store at the peak hours, that management of scheduling is very important. And then we look to make sure that the marketing money that we spend is driving what we want it to, increased traffic and increased conversion. But, Paul, we look at every lever.

We manage our electricity through using things like LED bulbs because they're much more cost effective. Yeah, so every lever, but SPH and sales per square foot are obviously very meaningful..

But as we said, we will continue to invest in the things that are going to allow us to be more agile and flexible, and that does include people, data analytics, supply chain – all of the things that we mentioned. But Lauren's right. We've got a culture of managing expenses tightly, and we'll continue to do that..

Got it. Thank you. And then some of the initiatives that you've announced with Nike obviously sound exciting.

Just wondering if you can maybe spend some time talking about some of the partnerships and initiatives you have ongoing with some of the other brands, and maybe detail a bit how just the assortment on the shelves has been transforming a bit in terms of where customers are shaking out on trends today..

Paul, if you think about – and I know you get into our stores, but if you get into our Times Square and 34th Street store, you can see experiential spaces that we've worked on with Adidas, and the assortment and the storytelling, the connectivity of footwear and apparel in those faces is critical, and you can see that happening.

The Legends Club with Timberland is another one that we look at and say, we bring in unique product into that space. Very seasonally driven at this point, but again, very strong statements about product and connectivity.

And most importantly, we work with our brand partners to create great social connectivity and great digital connectivity with our consumers that ultimately end up driving consumers into a physical experience with us.

So we've got across our various banners, each banner has different relationships and different engagement opportunities with the consumers, and they work with all the various brands to create some excitement in store.

So it's – some of it is physical space but a lot of it really is making sure that the engagement which we know is going to begin digitally is intriguing to the consumer, and it helps them move through their journey into a physical space in many cases to make their purchase..

Thanks a lot. Best of luck..

Thanks, Paul..

Thanks, Paul..

Thank you very much. We will get to our next question on the line from Camilo Lyon with Canaccord Genuity. Please go right ahead..

Thank you, good morning, everyone..

Good morning, Camilo..

I was hoping you could provide a little color as to where you think you are in the markdown and inventory clearance cycle and when you would expect to be in the right inventory position to begin expanding gross margins again.

You have done a very good job of working down that inventory for the past two quarters, and obviously the commentary today on the fourth quarter expectations suggests that there's more work to be done there.

I'm just trying to understand when you feel – when we can expect that, the balance of both better product, larger quantities of that better product, as well as diminishing the slower turning inventory will start to unfold so that you can get back on this gross margin expanding trend..

Thank you for calling out what we have done on the inventory for the last couple of quarters because that is really the thought process to make sure that we are keeping the inventory fresh and that we have got capacity to bring in those improving assortments. So I – and I'm not going to get into expectations around 2018 at this point.

It's a little bit premature. But we do believe that the actions that we're taking, we continue to take through the fourth quarter, will set us up well to come into 2018 with strong inventory..

I think the adjunct to that, Camilo, is the customer is moving quickly, right? So the old marked down model will have to be adjusted a bit to respond.

Actually, it's the whole buying model will have to be adjusted a bit to respond to that faster life cycle of product and effectively having a good, clean inventory to start that with is the place that we want to start as we head into 2018..

And certainly the speed initiatives that our suppliers are working on and that we are partnering with them on are helpful to that formula and that expectation..

Do you feel that your receipts, incoming receipts over the next few weeks, over the next few months accurately represent where the demand is most vibrant?.

Absolutely. I mean I'm a merchant at heart, Camilo, and you never buy a product that you don't like. So we believe that our team is aligned with where the customer is. We have worked hard with our vendor partners to get in position of bringing the right quantities, the right product and we like the way that the quarter lines up.

As Lauren talked to, our expectation is a little bit better than it was when we were here a quarter ago. We are still not where we want to be, but I like the way our product lines up for the quarter..

Great.

And then, just the last one for me is could you just remind us when we should expect to lap the Stans and Superstar surge and when you can kind of get a better kind of inventory position on that particular category, considering it's had a big drag on the casual piece of your business?.

Yes, it's different in the markets, right? Europe was on the court classics from Adi before the US market was. So Europe is starting to lap it.

The slowdown has definitely happened in our stores in the US and I would expect that we will start to see it get a little bit better Q2 of next year is really when the peak was and that we should be working down off that..

Perfect. Best of luck in the holiday. Thank you..

Thanks, Camilo..

Thank you very much. We will get to our next question on the line from Scott Krasik of Buckingham Research. Please go ahead..

Yes. Hey, everyone, nice job laying out everything you control. So that's important..

Thank you..

Just wondering specifically around basketball, what do you think drove the improvement in the retro business? Was it just the stories that were told? Were there specific styles? And then in terms of the basketball go-forward how do you think about that until we start to lap the worst numbers in the sort of mid next year?.

Well, it's a combination of a number of things, right? We all know that no two retros are created equally and that there is different storytelling that goes with them. And clearly in Q3, the stories and the retros that launched with the effective management of quantities in the marketplace led to higher pushes and better results.

So I think that that bodes well as we think about Q4. The other piece is that we have seen some things like the LeBron 15, the LeBron Soldier, some Kyrie products, some Paul George product, a little bit of push in some places there that is slightly better than it's been.

So, again, when the consumer sees the right price value relationship, when they see some excitement around the product in the storytelling, basketball shoes are certainly in high demand.

But they have so many alternatives that everything has got to be right in that equation, the price value relationship, the storytelling, the digital connectivity, it all helps. So, we're going to continue obviously supporting basketball across a number of brands, and we see some excitement coming..

No. That's great. And then, one of your peers gave specific guidance for next year to account for some of the investments. You laid out a handful of investments reorg initiatives.

Just wondering how you sort of balance those investments plus some margin pressure probably early in the year and at least on a 52-week to 52-week basis, how you view next year's earnings growth right now..

Yes, it's too early for us, Scott. We are in the middle of our planning process for next year and it has been our practice. We'll share much more detail about 2018 when we get to our end-of-year call in February. But our job is to balance that pressure.

Our job is to figure out how and where and when to invest, and I feel comfortable and confident that the team has got that in mind as we lay out 2018..

Great. Okay, thanks. Good luck..

Thank you, Scott..

Thank you. And our next question on the line from the line of Sam Poser with Susquehanna Financial Group. Please go right ahead..

Thanks for taking my questions. I just want to follow up on the inventory. What percentage of the inventory still needs to be worked through to sort of get that residual underperforming inventory in the right place, so you can then open up more open-to-buy dollars to bring in the better products that's becoming available (48:12).

Yes, Sam, I'm not going to go into the detail of what those percentages look like. Just suffice to say that we have standards that we have in place at this organization, runs the business by to make sure that the inventory is in a good place. So, that has been a discipline that has served us well for years and we are sticking to that..

And I know you are not guiding 2018 yet, but I mean, is this situation – I mean, given the sort of way the comparisons work that there'll be – that we would expect some residual gross margin pressure probably into the first quarter of next year? Is that a fair way to think about it?.

We're merchants, Sam, as you know, and there's always gross margin pressure. Our team has done a great job of getting the inventory in good shape. If our sales expectations are met in Q4, we would see us ending the quarter with inventory in a strong position.

Again, with the faster life cycle of product, I'm just not sure that the old markdown model will be as effective going forward. So, our team reads and reacts and adjusts quickly, utilizing all of the channels that we can to move through product that may become an issue.

But there will continue, I believe, to be some gross margin pressure as we enter 2018..

Thank you. And just two more things. Number one, we're going in -we're anniversarying the 53rd week next year.

And because of that, I think there's a big shift in between the last week of Q2 into Q3 as a big week of back-to-school shifts from Q3 to Q2, which would mean that in theory, your comp, a flat comp for the sake of argument, would give you very big – in Q2, would give you a very large increase and a flat comp in Q3, because of the shift sales would decrease, all other things being equal.

Am I thinking about that correctly? Because, I mean, it's always very entertaining when we get to how the quarterly model for next year, for the year following the....

Yes, the 53rd week creates certainly some shifts, Sam. You've got that right. As we talked about, we'll give clearer guidance around 2018 when we get to our February call..

And then lastly, outside of, let's say, the big five of Adidas, Nike, Puma, Under Armour, Timberland, let's say, New Balance arguably as well, what are you doing to test and grow new brands, brands that may have been on the back burner for a while? I noticed in windows in a couple stores you've got some Reebok Classics and so on.

What are you doing there? And as we look into next year, are there a chance to, I would guess, commercialize them with yourselves in a greater way? And what are you looking from entering into new vendors, or old new vendors, or however you want to talk about it?.

Yes, the team has a test and try and react sort of mentality, Sam. And if you take a look in the stores today, brands like Champion on the apparel side, we've got a couple of banners that are testing, Fila on the footwear and apparel side. We've had a tremendous run with Vans and we think that there's more opportunity there.

So, each of the banners, because their use customer is a little bit different, each of them tests and tries different brands. And clearly, when you've got a division that has a number of stores across Europe, we get some insight from that as well.

So, all of those brands that you named are critically important to us, yet we're testing and trying and looking to commercialize quickly some of these new old brands, or old new brands depending on how you want to look at it..

Yes, thanks for the question, Sam. Dick has mentioned a couple times the next call being in February, but it currently is scheduled to be March 2..

Oh is that the 53rd week?.

Yes, there you go. It shifts because of the 53rd week,.

Sorry about that..

All right, next question, please..

Thank you all very much..

Thanks, Sam..

Thank you. And we'll get to our next question on the line. It's on the line of Omar Saad with Evercore ISI. Please go right ahead..

Thanks for taking my questions, and great job kind of laying out how you guys are evolving to the marketplace and the quick react and respond as you kind of right-size your cost structure. You're clearly attuned to what's going on in the marketplace.

Can you talk a little bit about what's happening with some of these new limited edition sneaker launches? It feels like a lot of them are – a lot of the brands are using their own sneaker apps to launch some of these things.

What's your take on this new development with that kind of core fashion-oriented sneakerhead consumer, and what Foot Locker's role will be in some of these digital launches, and how you see that evolving? Thanks..

Yes, we know that our vendor partners have DTC objectives, right, and we know that the boutique sort of launches have been part of our industry for a long, long time. And our vendors utilizing their apps and some of the boutique partners is something that we certainly expect to continue.

I think the group that I mentioned, our North American product and marketing strategy group that Andy Gray is going to lead, is working with each of our vendor partners to identify things that we can, in fact, take a bigger commercializable position in.

I think that those heat sort of launches that they do in their own apps and in the sneaker boutique stores, I think, are good for the industry, right? It adds heat, it adds excitement.

So, as much as we want to participate, at some point, the truth is that it's a big ecosystem, and you need to bring heat into it to make sure that the consumer sees the excitement around sneakers that we believe is there every day. And we'll find a way to commercialize as we work with our vendor partners..

But the connection of apps, releases by app, there's store connection as well. And this is an advantage for us, that we have a store fleet that can complement that experience. And our vendor partners appreciate that asset that we have..

Yes, understood. Agreed. Thanks very much. Good luck..

Thank you..

Thanks, Omar..

Thank you very much. And we'll get to our next question on the line from Christopher Svezia from Wedbush Securities. Please go right ahead..

Good morning. Thanks for taking my questions, and congratulations in operating in a pretty tough environment. I guess, first, I just want to clarify just on the inventory, just so I understand this clearly and the commentary about better product that you're seeing in the marketplace right now.

Against a more challenging gross margin expectations for Q4, is that just a function of your view that you want to go into 2018 as clean as possible? Or is it just a simple fact that still what's in the marketplace is potentially taking a little bit higher markdowns in order to actually move that product? I'm just trying to understand the dynamic between those two observations?.

It's a combination, right. We want to manage our inventory because that's really the only piece that we can control, right. We can't control what others do in the marketplace.

We occasionally react to it, but our markdown strategy is based on our being competitive in the marketplace, making sure that we move through the product that we need to on a given season, so that we can enter the next season with the ability to flow in the best goods possible and chase goods if needed. So, it's really a combination.

The marketplace is competitive. The marketplace is driven by markdowns. We stay focused and remain focused on being the premium retailer of athletic specialty shoes. So, the sneakers that we've got are going to be at the premium end.

If we see something not selling to the expectations that we've got, we're certainly going to be aggressive with our markdowns to make sure that we move through the product..

Thank you. And then, when you think about, as you step into next year, the All-Star game and the comments about basketball, the All-Stars in L.A.

this year versus New Orleans last year, just how do you think about that in terms of how it could be a positive for the business just in general? Just overall thoughts on the year-over-year comparison, how we think about that?.

Well, simply the L.A. market versus NOLA is right, I mean, it's an easy comparison to say we think All-Star game will be better in 2018 than it was in 2017. But more importantly, the excitement that I believe is going to be generated out of basketball product in the marketplace in general, I think will be a positive.

We've got plans in the works to activate, of course in the L.A. market put to work on activating basketball across the marketplace in our House of Hoops and across all of our geographies.

So, certainly, the impact of Los Angeles versus New Orleans should be a positive, but I would caution that with I expect that the tax check flow in 2018 will be similar to 2017, which is significantly different than it was in 2016. So, it's about timing of money in the market and product in the market to go along with the All-Star game..

Fair enough. Lastly, just on Europe, I know you referenced Adi and Superstar, Stan Smith exposure. Anything else you can call out in terms of positive or negative that's impacting that region for you whether it's either other categories, it's just strictly traffic? Just any color on Europe and what's going on there would be helpful. Thank you..

We talked about traffic being down mid singles in Europe and it's pretty spread across the continent and the UK. So, I don't know if it is the cumulative effect of some terrorist-type activities, some unrest. There's all sorts of things that go on in the various markets in Europe. Running continues to be the most important category there.

The core product that you mentioned in Adidas, Superstars and Stan Smiths have slowed down, but our team continues to reinvest into some great running platforms. And while we've seen negative comps for a few quarters, I have a lot of confidence in our team there to be able to turn it around and get positive..

Okay. Thank you. And all the best around the holidays to you, guys..

Thanks, Chris..

All right, Tommy, I think we have time for one more question..

Certainly. We'll get to our next question on the line from Bob Drbul from Guggenheim Securities. Please go right ahead..

Hi, good morning. Two quick questions. I think the first one is you guys were pretty aggressive around the share buyback this most recent quarter. Just give us an update in terms of where you are with the program and how you're approaching it going forward.

And the second one is I think you mentioned shared inventory proposition with some of your vendors. Dick, I wondering if you could just elaborate a little bit more how that would work and sort of how long it would take to get to such an initiative..

Yes, on the share buyback, we ended the third quarter with the remaining $863 million of our original $1.2 billion authorization.

So, the share buyback is not a formulaic, it is – our number one priority is investing in the business, but a very important objective is meaningful returns cash to the shareholders and certainly, we've demonstrated that this year. But where we see value, we act appropriately..

And in the shared inventory comment, Bob, I didn't comment about shared inventory with our vendor partners as of yet, but it's something that we're certainly looking to explore and figure out how we can make the inventory and the sneaker ecosystem more productive. My commentary was around better access across our portfolio of brands and banners.

So, better utilization of our own supply chain to make sure that all of our inventory is available and visible to our consumers, and that we can deliver it to them as quickly and efficiently as possible..

Great. Thanks very much..

Great, thank you..

Thanks, Bob..

Thank you, everybody, for your questions today. I'll be back at my desk shortly if we didn't get to your question or to answer any follow-up questions you may have. Again, the next call currently is scheduled for March 2. In the meantime, happy holidays, everyone, and thanks again and goodbye..

Thank you very much. Thank you, everyone. And ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may now disconnect your lines. Have a good day, everyone..