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

Mitch Kummetz - Pivotal Research Group Randy Konik - Jefferies & Company Paul Trussell - Deutsche Bank Sam Poser - Susquehanna Financial Group, LLLP Kate McShane - Citigroup Robert Drbul - Guggenheim Securities LLC Christopher Svezia - Wedbush Securities, Inc..

Good morning, ladies and gentlemen, and welcome to Foot Locker's Fourth Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

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

Management undertakes no obligation to update these forward-looking statements which are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described more fully in the company's press releases and in reports filed with the SEC including the most recently filed Form 10-K or Form 10-Q.

Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. Please note that this conference is being recorded. I will now turn the call over to John Maurer, Vice President and Treasurer and Investor Relations. Mr.

Maurer, you may begin..

Thank you, Dorothy, and good morning, everyone. I'd like to welcome you to Foot Locker, Inc's fourth quarter and 2017 full year earnings conference call. Thank you for joining us.

We have a lot to cover today and will follow our usual format with Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, starting us off with a detailed review of our financial results for the quarter and the year; followed by Dick Johnson, Chairman and Chief Executive Officer, who will update you on some of the key initiatives we are executing now to drive future business performance as well as some of the big picture industry trends affecting the business.

Our prepared remarks will conclude with an overview by Lauren of our current annual and quarterly expectations for fiscal 2018. Before we get to that though, let me orient everyone on a fourth quarter that included many moving parts. As reported, our loss for the quarter was $0.40 per share.

However, this result was heavily impacted by several significant onetime charges. Starting first with our tax-specific items, we recorded incremental U.S. tax expense of $99 million in the quarter, related to what is commonly described as the toll charge or the deemed repatriation of offshore earnings.

Second, we recorded $2 million of tax expense in the fourth quarter related to a tax rate change in France. And third, we incurred an $8 million tax valuation allowance related to the Runners Point Group, primarily due to the fact that our ability to utilize the tax laws carry-forwards we had previously recorded is no longer considered likely.

These tax items totaled $109 million or $0.90 per share. Without them, non-GAAP EPS would have been a positive $0.50. Turning to some pre-tax items, we impaired $4 million of mostly store assets at Runners Point and Sidestep. And we booked a pre-tax charge of $16 million, $10 million after tax to impair certain store assets of SIX:02.

These banners are underperforming relative to the financial standards we set for all of our businesses. Finally, we also recorded an incremental $128 million pre-tax charge or $81 million after-tax for pension litigation based on the Supreme Court's recent decision not to consider our appeal of a lower court's decision against the company.

Taken together, these additional charges were $148 million pre-tax and $95 million after tax or an incremental $0.76 per share. Adding this back to the $0.50 per share just noted, brings non-GAAP EPS to a $1.26. This EPS figure is comparable to the most recent facts that consensus earnings projection of $1.25.

2017 also contained an extra week and as expected this 53rd week produced $0.12 per share of earnings, but the 13-week non-GAAP earnings for Q4 to which we will be referring today and next year is the $1.14 A complete reconciliation of our GAAP to non-GAAP results is provided via reference in the press release issued earlier this morning.

The $1.14 of Q4 earnings brought our full year 52-week non-GAAP earnings to $3.99. Again, this is the 2017 earnings base against which we will be comparing our performance throughout fiscal 2018. One last point before I turn the call over to Lauren. Since our prepared remarks are expected to run a bit longer than usual today.

We have included a table in the press release that provides some of the items Lauren typically discloses in her commentary. That way she and Dick can focus their comments on today's most important matters.

Lauren?.

Thanks for the detailed recap, John. And thank you all for joining us this morning. As noted on our press release, comparable sales declined 3.7%, within but towards the lower end of our expectations going into the quarter.

When we gave comp guidance for Q4 on our previous call, we were tracking November comp that were running up low-single-digits, which encouraged us to slightly improve our expected comp range for the quarter. December comp is down low-mid-single digits, within our expectation.

However, with few big shopping moments in January, product heat fell off a bit, as did traffic, leading to a low double-digit cost decline in that month that was below our expectation. Total sales on a 13-week basis were essentially flat, but the impact of stronger foreign currencies, contributing approximately $50 million to the top line.

The 53rd week also added $95 million of sale. In terms of segments or direct-to-customer businesses collectively produced an overall comparable sales gain of 4.3%. As a percent of total sales, DTC increased to 16.1% for the quarter, up from 15.3% a year ago. As a group, our store division posted a 5.1% comparable sales decline.

Similar to the results we experienced in the third quarter, apparel was a highlight, delivering a comparable sales gain at the high-end of mid-single-digits, its 7th consecutive quarter with positive comp growth. Results were driven by branded fleece and big logo T-shirts, which remains very much on trend, as well as the new NBA apparels from Nike.

Footwear remains challenged, declining mid-single-digits. Footwear comps were down low-single-digits in men's, mid-single-digits in kids', and double-digits in women. By category, men's running was again the strongest component of Footwear and posted a high-single-digit comp gain, while men's basketball was down high-single-digits.

Finally, sales of casual styles in men's footwear dropped off by double-digits. A strong sales of Vans' classic style were more than offset by declines in Timberland boots, certain Adi styles and Converse. In terms of the rest of the income statement, gross margin declined 230 basis points to 31.4% of sales on a 14-week basis.

The lower rate was driven by a 210 basis point decrease in our merchandise margin rate and 20 basis points of deleverage of our occupancy and buyers' compensation expenses.

The lower-than-expected merchandise rate was driven by higher markdowns on Footwear, both in stores and online, as we work diligently to clear slow-moving products and maintain a healthy inventory position going into 2018. Across most of our geographies and channels, markdowns were heaviest in court classics and select casual running silhouettes.

Despite the higher markdown, overall average selling prices were up in the quarter, with units down mid-single-digits. Our SG&A expense rate increased to 19.1% of sales, also on a 14-week basis from 18.7% of sales a year ago.

Although our teams managed expenses tightly in the quarter and throughout the year, the deleverage reflects some of the investments we are making to drive the business forward over the long term, which Dick will be talking about in a moment, as well as continuing wage pressures and higher healthcare cost.

Higher FX rates also added 10 basis points to our SG&A rate in the quarter. Our fourth quarter non-GAAP tax rate was 31.7%, below last year's 35.1%, much of which was due to the impact of U.S. tax reform, which enabled us to apply a tax rate to our full year net income that was a blend of pre and post-tax reform rates.

Turning to capital allocation, we invested approximately $270 million of capital in the business in 2017, reflecting management's and the board's confidence in our ability to fund and execute initiatives to drive improved business results in the future.

At the same time, we spent $105 million to repurchase 2.8 million shares during the quarter, bringing the full year outlay to $467 million to repurchase 12.4 million shares or close to 10% of the shares outstanding at the start of the year.

We also returned a $157 million of cash to our shareholders in the form of dividends during 2017, which brought our total return to shareholders for the year to $624 million. As we announced last week, our board declared 11% increase to our quarterly dividend payout rate to $0.345 per share.

And at yearend, we had $758 million remaining on the $1.2 billion share repurchase program that was authorized a year ago. We ended the quarter with $849 million of cash and cash equivalents, down $197 million from the end of Q4 last year. Much of the reduction was due to the prefunding of $150 million of our pension litigation liability.

That cash is still on our balance sheet, but because it is now restricted, it shows up in other assets. We already repatriated some cash from overseas before yearend. And given U.S. tax reform, we now have much greater flexibility to deploy our cash to the highest value opportunities for our business.

As John mentioned, the pension liability increased by another $128 million in the quarter, bringing the total to $278 million. We expect to fund this incremental $128 million during 2018 from available cash. Before I hand the call over to Dick, I'll just briefly on inventory.

That actual FX rate inventory ended the quarter down 2.2% or $29 million from a year-ago. Using constant currencies inventory decreased 5.2% compared to total sales, which as I mentioned were essentially flat on a 13-week basis.

This excellent inventory performance allowed us to actually increased inventory turns slightly for the year, despite the top line challenges. As we were to ensure that we begin 2018 with the flexibility to flow in the depth and variety of exciting product assortments we see coming from our key vendor partners as the year unfold.

I'll be back in a bit to give more specific guidance for 2018, but first, I'll turn the call over to Dick to provide more detail on the key initiatives we are undertaking across our business..

Thanks, Lauren, and good morning, everyone. I appreciate having you on the call today to discuss both our performance in the quarter and how we see the year ahead shaping up.

Last quarter, I've outlined several key initiatives we are executing to rapidly and proactively transform our business, in order to stay engaged with our customers at the center of an exceptionally dynamic youth culture. Connecting with our customers is the foundation of what we do as a company.

As a reminder, our general managers now have fully integrated sales and profit responsibility regardless of channel. We have created North American product to marketing strategy team to leverage the power of our portfolio of banners to scale ideas and stories that resonate powerfully with our consumers.

We are concentrating and accelerating a greater proportion of our capital and operating expenditures on a variety of digital initiatives. We are enhancing our supply chain capabilities, not only as it relates to our primary distribution centers, but also to test mini hub distribution functionality.

And we are continuing to invest in our store fleet, as we execute our remodel program across most banners adding key new doors, which typically include one or more dedicated vendor spaces and testing off-mall retail formats to reduce our exposure to deteriorating malls, even though we remain profitable and almost all of them.

We continue to move forward and all of these long-term initiatives, which are proceeding broadly in line with our expectations, so I won't go into them in any more detail today. We are doing everything we can to accelerate not just our digital initiatives, but every facet of our business.

It's critical for each of us in the business to move faster and embrace the inevitable change that is affecting retail.

Only by doing so can we continue to create meaningful engagement with our customers on their quest for self-expression and fulfill their passion for personalized connections to the people, experiences and products that are important to them.

One additional initiative for 2018, which we expect to begin moving forward on later this year, it's the Foot Locker banners expansion into Asia. We intend to enter the region with an integrated store and e-commerce strategy in Malaysia, Singapore and Hong Kong, and possibly also with the platform partner Mainland China by the end of the year.

While, we are excited about the potential this expansion affords, I would add that for 2018, the sales and P&L estimates are not material with just the few million dollars of capital allocated to get us started.

We expect the opportunity to increase significantly as we get into 2019 and 2020, and we'll keep you updated as we get this initiative up and running. Another initiative, one that took place during the fourth quarter was investing a $15 million stack in Carbon38.

This exciting, vibrant early stage company has quickly become the go-to site for women who value both a luxury experience and beautiful apparel that simultaneously serves her fitness and fashion needs. The core customer of Carbon38 is quite a bit different from SIX:02s customer base.

For one thing, Carbon38's price points tend to be meaningfully higher than SIX:02's. However, there are certainly enough overall similarities between them that we believe there are opportunities to learn a lot from each other to elevate our respective businesses.

The investment is a minority stake, we are not contemplating any cross-selling of owned brands, at least in the near-term. With Lauren now in the Carbon38 Board of Directors, however, there will undoubtedly be a lot of constructive dialogue between us, about how we lever the best of both teams.

We're definitely excited about what this new approach to investing may bring Foot Locker.

While, this was just one relatively small investment for us, we've recognized that there may be additional opportunities to tap into capabilities and talent through partnerships, investments or perhaps acquisitions as we pursue ways to transform our business in serving and increasingly demanding youth culture.

That said, let me add that we don't have any other such details to talk about today, nor will we speculate about any particular potential opportunities. One important external item that happened during the fourth quarter was certainly U.S. tax reform.

While, it took quite a chunk out of our profits in Q4, quite a chunk as a technical accounting finance term that Lauren has taught me over time. It will also increase our future earnings significantly. The extra cash flow certainly gives us good options, although, as we have said, we haven't really been capital constrained in the past.

We made productive investments in the business globally across our stores, supply chain, digital platforms, and other infrastructure. As Lauren just mentioned, we have also returned a lot of cash to our shareholders. What we don't always talk about as much as we should is the investments that we have made in our people.

Over the past couple of years, we have made multimillion dollar investments, in additional compensation for our people. Positively affecting more than 30,000 store associates globally, and keeping us competitive in the marketplace.

We will be making additional multimillion dollar investments in our compensation plans in 2018, especially for our system store managers, recognizing how important these associates are in connecting with our customers and enhancing their experiences within our banners. And we will continue to make investments in our talents in the years ahead.

While, Lauren will give you the details of our outlook for 2018 in just a moment, let me prep her remarks by discussing some of the big picture industry trends as we see them today. First, the disruption that has characterized the retail industry recently is not going away.

Consumers want experiences, they want cool product, and they want it all, fast.

As I pointed out, we are working diligently on our own strategies to adapt to the evolving customer, and we are also working in close collaboration with our key vendors, such as Nike and Adidas, and their initiatives to increase the speed at which athletic footwear and apparel are brought to market.

The partnership to capture speed is a multiyear imperative for all of us in the athletic industry. In the overall relationship with our top vendors continues to be just that, a true partnership in serving sneaker-obsessed consumers.

While, our suppliers all have a growing direct-to-customer business component of their business, they are just as importantly concentrating their much larger wholesale business on the handful of retail partners like us who not only share their vision of connecting and engaging with customers on a personal and exponential basis, but also have the wherewithal to execute that vision effectively.

For our part, we will continue to transform our business to remain the premier destination for the most premium sneakers, apparel and accessories in the market across multiple brands.

We are collaborating with all of our top vendors, Nike, Jordan, Adidas, Puma, Timberland, Under Armour, Vans, New Balance, ASICS and Converse, to name just a few, to cultivate, develop and implement unique product platforms and stories, which we alone have the capabilities and retail footprint to scale globally. But we are doing more than that.

We are redefining our vision statement to move beyond simply being a retailer of shoes and apparel, to truly inspiring and empowering youth culture. We are also creating a new framework to guide and prioritize our strategies. Our work on this effort is not quite finished though, thus we are not ready to unveil the details today.

However, we do expect that later this year we'll be able to gather our investors and analysts together to discuss our ideas for propelling the business successfully into the future. We'll certainly keep you posted on our progress.

Before I turn the call back to Lauren, let me conclude my remarks by saying that most of the challenges we faced in 2017 were not unique to us. The dramatic shifts influencing the expectations and behaviors of our customers affected all of retail.

And while our sales and profit results were not what we expected going into the year, I believe the efforts, passion, intensity, of our global team of associates was every bit as strong this year as it was in recent years of record financial performance, perhaps even more so.

I can't turn the page on 2017 without thanking every one of our associates for their dedication and perseverance in the face of such fundamental changes and challenges as the year brought. I believe they worked hard to successfully position our company for better results in 2018.

And more importantly, they continued that vital work to create a business that will be inspiring and serving youth culture for multiple generations to come. With that summary, I'll let Lauren describe in more detail what that means for next year..

plus $10 million, plus $50 million, minus $60 million, minus $20 million, for a net minus $20 million impact on sales for the year. What's important to remember about these shifts, of course, is that leverage of occupancy and SG&A or deleverage as the case may be, is based on total sales volume in the quarter.

So these rates will be affected by these 53rd week shift. In addition, of course, to FX rates and the store count changes. Another change for 2018 relates to our segment reporting.

With Dick reviewing the business on the basis of integrated sales channel and the General Managers of each of our banners having sales and profit responsibility for all sales channels combined, it no longer makes sense for us to do separate reporting for a stores segment and a direct-to-consumer segment.

Going forward, we will report just one segment. While we will continue to disclose sales by those channels, we will no longer provide operating profit detail. One last item, before we get to your questions. We'll be changing responsibility for Investor Relations over the coming months.

We are in the process of transitioning IR to Jim Lance, our recently appointed Vice President Corporate Finance. Jim has been with the company almost 30 years, serving in a variety of roles, most recently as the CFO of all of our North American banners and responsible for the field organization as well as finance.

In addition to Investor Relations, Jim will also be in charge of the company's financial planning and analysis function, and our field audit team. You will enjoy getting to know Jim. And his deep knowledge of our business and customers will be especially useful for investors.

John, who has been our primary Investor Relations Officer for the past seven years, will continue as Vice President and Treasurer, and is adding significant new risk management responsibilities to his existing portfolio. The transition will not be sudden. It will take place over the next few months.

But it will get started right after this call, when Jim will be with John as he answers whatever questions we can't get to in the next several minutes. Let me end there, and ask Dorothy to open up the call for your question now..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Mitch Kummetz with Pivotal Research is online with a question..

Yes, thanks for taking my questions. I guess a couple things. First of all, just in terms of the guidance, Lauren the way you kind of laid out the year, it doesn't sound like you expect the comps to go positive until the back-half. I'm a little surprised by that.

I mean, Q2 is your easiest comparison, like what are you guys seeing terms of the product pipeline that gives you confidence, that you get to a positive comp in the back-half? And what's happening currently? There seems to be a fair amount of newness out there, but that newness isn't driving better results, particularly against a pretty easy Q2 comparison?.

Well, Mitch - and this is Richard - there is no easy comparison quite honestly. So it's - I understand what your numbers saying, what your math says, but when you have to deliver against it, it's an entirely different equation. So there is some newness and freshness.

And we believe that the depth in that newness and freshness will continue to ramp up throughout this quarter, second quarter and into the back-half. But one of those things you have to remember is that our company makes, places big bets on products, right? So we have some overhang from the fourth quarter.

The marketplace continues to be fairly promotional. As we monitor and drive against our comp in the first quarter, we're trying to make sure that we manage our inventory appropriately, manage your markdowns appropriately and stay fresh for one week. Have the more depth of this heat that we talked about coming to us..

Let me just share - clarify. We're looking for Q2 to be flat, up slightly, as that product flow increases over the year..

And then, Dick, this is a follow-up to that. Some of it obviously or a lot of it obviously is in terms of the new product and your ability to get more of that. But how much of it is also a function of - and you talked about a couple of brands that weren't great for you in the quarter.

How much of it is a function of that there are certain franchises or products that that have been in decline now for the last few quarters and that it just takes some time before you start to sort of fully lap some of those declines? And I don't know if you can even - ever hit this point.

You have the visibility to kind of know when some of those things bottom out.

But I guess you have more confidence that you will be past some of that by back-half versus kind of what your visibility shows you for the first half? Is that - how much of it is a function of that as well?.

Yeah, that's certainly a part of it, Mitch. The fact that we just placed these big bets means that if something slows down quicker than we anticipated, we have to work our way through that inventory. And we've talked about some of the slower moving silhouettes in the past.

We're getting through some of that remaining inventory and we're managing the flow. So we have the clarity. We don't always know when things are going to slow down as quickly as some of them did in 2017.

But we react accordingly and one of the challenges is just the size of the inventory that we have in some of the silhouettes that we have to move through. So you've got the picture painted absolutely correctly..

Okay, all right, thank you..

Thanks, Mitch..

Randy Konik with Jefferies is online with the question..

Hey, just want to kind of elaborate. I think in the press release you talked about flat traffic in the quarter.

So is - these footwear comps, is that - were the units actually up in all the mid-single-digit decline and the comp was driven by ASP reduction? And I think you made also a comment around increasing the depth of premium products I think in the back-half of 2018.

So give us maybe some perspective on the markdown differentiation or differential between the premium product? I'm assuming that the markdown rates there are pretty healthy and low. And how does that compare to a depth of markdown rates that are going on in the, I guess, the non-premium part of the scale or the spectrum..

Well, to be clear, we - Lauren commented a bit, that ASPs were actually up in the quarter. Units were down, but ASPs were up. So even in the markdown realm - markdown world that we were operating in, the mix of our product, the mix of our categories allow the ASPs to be up in the quarter.

So, again, the team does a great job of managing the flow of markdowns against the flow of premium product. And we continue to have a leadership position across the premium product and we will see depth and certain packages continue to expand as we get into the second quarter and certainly in the back-to-school in the back-half..

And then, when give us some perspective on the elevated SG&A related to digital investment, how should we be thinking about the physical footprint, not just in the United States, but if we have over 3,000 stores across 20 plus countries? What do we supposed to be thinking about from the marriage of what's the physical branch should look like versus the digital story over the next couple years? How should we think that changes with the organization over the next three to five years?.

I think we were clear about the 2018 plan. We've about 40 doors that will open in exciting new places and new doors in new countries even. We're going to close - right now, it looks like about 110. Again, we're very opportunistic. Our store development and real estate team does a great job of working with landlords.

The question is on where does the sale take place, where does the transaction take place, because it's going to take place wherever our consumer wants it take place.

We want to provide exciting engaging opportunities for the consumer on their digital device, because that's where they first start interacting with us, and culminate that wherever they choose to buy. If they want to select the buy-now button while they're on our app or on the site, that's great.

If we can motivate them to come to the store and experience the environment there with our associates and the energy that exists in our stores, that's great as well. And that's one of the reasons that the investment in digital is far more than a just commerce platform.

It's about our ability to communicate effectively and create great engagement with our core customers..

Right. It is intended to make that experience, both digitally and in the store, better. To make that experience hang together well across those channels, if you will, and to have a more personalized communication with our customer. We know what's important to them.

To be able to communicate with them down there what's important to them as an individual is really going to be a very powerful thing..

Thanks.

Just lastly, the guidance on the comp for the first quarter, is that reflective of some sudden change in trend that you noted? I think, you said the word was drop-off, when you described the cash flow business being down double-digits in the - I guess, the men's in the footwear in the fourth quarter? Is that kind of where we get a little bit more of the - a lot of the driver if you will of the comp guidance for the - and the margin guidance maybe as well for the first quarter? Is that a big driver the drop-off in the casual business?.

The continuation, Randy, what we saw in Q4, we expected that some of this markdown pressure and promotional pressure in the marketplace might recede. But it clearly hasn't, so we're working to remain competitive in the marketplace and make sure that our inventory is fresh and clean, but it's not a sudden change.

It's truly just a continuation of some of the activity that we saw in Q4..

Understood. I appreciate the answers. Thank you..

Thanks, Randy..

Paul Trussell from Deutsche Bank is online with a question..

Yeah. Good morning..

Good morning, Paul..

The U.S. Foot Locker and Champs Sport businesses according to your table were down just low-single-digits, I believe. But the European business was down double-digits.

What's the reason for that wide variance? And how long should we expect those weak European trends to continue? And while, I know you guide on a consolidated basis, perhaps, just touch a bit more on your expectations for the U.S. marketplace and in terms of moving it a top line that's in positive territory and cleaner margin trends..

Yeah. There's been some traffic challenges in - across Europe, Paul, and we saw that manifest itself certainly in the back half of the year and a little bit more in Q4. Obviously, the weather that's there right now is not helping their start of fiscal 2018, but weather passes. In that traffic is somewhat driven by the changing trends.

The brand heat and the relative nature of certain product categories is different in Europe. So we see a little bit of a traffic difference that the team there is certainly working to get the assortment right and speak loudly to their core consumers.

And a lot of the digital work that we are talking about a lot of the investments that we're making will certainly benefit the European market as well. And we don't really provide guidance by geography or by banner, it's important for us to look at the business from a consolidated point of view.

And as we look at the European business specifically, we know that there are assortment shifts, as we get into the second quarter back-to-school. We see an improving Nike business there. We see depth coming in some of the Adidas product that's been strong for them. So that's why we feel a little bit like we'll see an improving trend there..

Got it. And then just maybe touch on SG&A then a bit more in detail. Last quarter, you made a number of reductions, I believe, across your infrastructure.

You're also highlighting this morning some elevated and accelerated digital investments, just discuss a bit more the puts and takes there?.

Yeah, Paul, the - the reorg restructure that we did in Q3, those savings are contemplated in the guidance that we've given. And indeed, part of the reason for doing that was to make sure that we have the right skill set to drive the initiatives going forward. And our digital investment is significant as we think about that future potential.

So all of that contemplated in the guidance that we gave on SG&A, that and further investments in our field org..

All right, best of luck..

Thanks, Paul..

Sam Poser with Susquehanna Financial is online with a question..

Thank you for taking my question. Good morning..

Good morning..

Just a quick follow-up on the trends by - in the - that sort of divergence between the international business and the majority of the U.S. business, production was down significantly as well as the international markets with the exception of RPG Group.

So could you give us some more color as to what's working or working better at, let's say, Foot Locker, Champs and Kid versus what's going on in the other stores?.

A lot of the same product is working, Sam, and it's how quickly each of the banners get into the product and how much depth they get as they prioritize things with our vendor partners. So we saw - we've had a really nice run with Vans. And some of our brands, we're able to get on Vans a little bit sooner than other of our banners.

Champion Fleece is another great example, where we were able to see some success in the European market with that, and some of the U.S. banners were able to jump on that very quickly. So we have an independent merchant group for each of our banners, obviously, and we have different muses and target consumers for the banner.

So they don't all move in perfect sync. Some have a higher dependency on basketball. Some have a higher dependency on running. And as there are puts and takes across those product categories, you'll see banners that perform or outperform others.

And that's just - that's the nature of the beast that I don't believe we've always - that we've ever had every banner moving in exact synced step..

Okay. And then, you sort of hinted, I mean, the consumer - the speed, you brought up speed earlier, the speed of change, is how do you sort of - scales when the kids attention span might be or the sneaker enthusiast's attention span may be used to be a month, and now it might be two weeks.

How do you - have enough - not too much of product before the kid gets off of it, and then move out of the next thing more quickly? Or is that all the stuff that's about to happen as we look ahead into, I would assume, like you Q1 into Q2 and beyond?.

Well, that's the transition of the entire industry is going through, Sam. We have a very long planning cycles, we have very long production cycles, and we have consumers whose attention span to your point is shortening quickly.

So with our vendor partners and their speed initiatives and our ability to learn from other divisions around the globe, we really are well positioned to move quicker.

But our industry still does move too slow, and I think that our vendor partners are certainly addressing that with their efforts around speed, their developmental cycles are shortening, their ability to produce product is getting quicker.

So as we - and we've sort of started to understand that as well that the big bets that we place have to be bets that are going to disappear on a much quicker product lifecycle. Lauren's got a great visual that she uses that shows the old bell shaped curve of how products sold and how that peak gets really steep at this point.

So our merchant team is learning how to quickly adapt to that speed of the consumer. But we are in an industry that still moves a bit slower than the consumer in the efforts that we've got going on with ourselves and with our vendor partners are really designed to try to get after this customer quicker..

But I guess the question is aren't the big bets going to be - aren't you going to need like the bigger bets are going to get smaller, but you're going to need more of them? So for instance, if you had a shoe that you thought you could sell 100,000 pairs of over 10 weeks, maybe now that shoe only lasts four weeks, and you only need 50,000 pairs.

And then you need the next thing of 50,000 pairs.

I mean, isn't that what it's going to require for the definition of big bets has to change just because the lifecycle of the shoes is less?.

Well, in some cases that maybe true, Sam, right. But I don't think in general, right, I mean, our job is to drive the intensity around the peak and make sure that we've got enough to satisfy that peak. And then be willing to move on to the next, whether, that's a factor of two, like you talked about or factor of a half.

That's what our merchant team - that's what the data analytics that we're using to study the consumer behavior will help inform us about. But I don't believe, it's as simple as an old big bet was 100, the new big is 50 and you move on. The consumer's demand is - we have to satisfy that demand in the moment..

But - one last thing, real quick. Is it better to satisfy the demand or leave a little demand on the table, and then so you think of theirs demand for x, you should have x minus something.

So people are still hungry and ready to go to the next thing, because if you satisfied demand there's a risk that you could end up with excess inventory and have to cleanup on your end?.

Yeah. Don't misunderstand. We believe that there should be demand left on the table, right. We're not going to satisfy the last customer with the last unit. That just simply will not happen..

Our positioning is premium product on the front end. So, yes, we would agree that there should be in that category, demand left on the table..

Absolutely..

Great. Thank you, guys. Good luck..

Thanks, Sam. Thank you..

Kate McShane with Citi Research is online with a question..

Hi, good morning. Thank you for taking my question. My question is on the basketball category.

Just with price points having come down, the fact that there has been a new product, the fact that the NBA is still pretty popular, what brings that category back? And what can we expect with regards to the mix of that business within the Foot Locker banners over the - over 2018?.

Yeah, Kate, I think the excitement always emanates from product, right. I mean, Lauren talked about the NBA apparel that Nike is doing as being more exciting than that apparel have been in the past. And we've seen our customer sort of move that direction. On the Footwear side, it's not necessarily the big game shoe that's driving the excitement.

It's some of the specific player additions that are much smaller hits that are driving the heat. But we certainly are seeing some energy around the LeBron shoe. We're seeing some energy around Kyrie.

I think that as the storytelling around some of the Jordan Retro product gets cleaner and closer to the base consumer that product will continue to resonate as Jordan does a great job of controlling the marketplace with that. So it's - I'm - we're less worried about what the category percentages are, as we've said many times.

We're concentrating on making sure that we've got the right depth and the right heat for the product regardless of what category it falls in. But we do see some heat coming in basketball..

Okay.

And when we think about the comp cadence throughout this year, how should we think about it unit versus price?.

Yeah. We have had this trend of stronger ASPs and our unit challenge for a while now. So as you think about first quarter and - being challenged, second quarter being challenged, but a bit less and improvement in the back half. I don't see a change in the ASP direction, but units would improve..

Okay. Okay, great. And if I can just sneak in one more question about stores, you had mentioned, Dick, in your prepared comments about the door closures and maybe focusing a little bit more on off-mall versus mall. I just wondered, if you could expand on that a little bit more and any indication of what that mix has currently in the U.S.

off-mall versus mall?.

Well, as we see mall starting to deteriorate, we know that even though the mall goes downhill, the customer doesn't leave that neighborhood and wants to be served. So we're testing some off-mall power stores.

We're testing some off-mall formats that we see as great opportunities to stay very relevant and hyper local to that customer, while we try to connect with them digitally, obviously.

But again, we have a fair amount of transactions that are done in cash that - the consumer loves to engage with us digitally, but they want to transact with us in stores. So we continue to test and will evolve that. And we haven't really talked about our mall versus street percentages..

Yeah, we're about - so this is really a U.S. conversation around the mall. We're about 15% off-mall in the U.S. today, 85% mall. But as you look back at our store closure, opening cadence by geography, we've been net closers in the U.S. for quite some time as we have been trimming the underperformers in the fleet.

So we find ourselves at this place, where we still had good traffic in what would be lower-rated malls in the U.S. But we - so, clearly, the customers still want to shop in store. If the mall goes away he's still going to want to shop in his neighborhood. So that's off-mall strategy, to find that property and the format mix that works.

And the profit dynamics off-mall should be attractive..

Thank you..

Bob Drbul with Guggenheim Securities is online with the question..

Hi, good morning. Actually, I have two questions.

The first one is when you - again, the decision on Asia, how many stores will be added, I guess, and when you think about the marketplace there sort of many - mono-brand stores versus multi-branded stores, can you just elaborate on the opportunity there? And the second question is more of a bigger picture question, Dick.

Do you think, in terms of the industry today, are the direct to consumer efforts by some of the big brands impacting the market more and do you think that similar question on like the resale market that's sort of expanding in the marketplace, is that also becoming a bigger factor? Thanks very much..

Well, thanks, Bob. I'll start with Asia and we're not going to get into the door-count. As we said in the prepared remarks, we've got a few million dollars in capital to get us started. And it really is a fully integrated model that we're going to open with, so both stores and digital engagement with the consumers.

And I think if you track historically our industry, markets get full of mono-branded stores and there's a tremendous opportunity to bring a multi-braded store like Foot Locker to bear in those markets. So we believe the timing is right. We believe the market is right.

And we think that there's certainly opportunity based on the sneaker obsession that many of these consumers have. So we're optimistic, but again, we'll bring you along with some results as we start to see them later in this year. And certainly then shifting to your second question, certainly, the vendors all have a DTC component of their business.

We understand that. But I think one of the things that we've been clear about and they have been clear about as well is that that we can both exist in this environment. We both live to serve sneaker obsessed consumers and people that are driven by athletics and fitness and fashion.

And we bring a different formula to the table than a consumer that may be interested in a singular brand today, but may want a different brand tomorrow. So, obviously, we believe that that we can be profitable and successful working with our vendor partners to create great experiences, and localized and personalized experiences for our consumers.

And the aftermarket certainly is an important part of what it is that we do, right? I mean - but you can't have an aftermarket if you don't have the original market, right? So we see a lot of the things that are going on in the aftermarket.

We stay very close to it and it's certainly an important part of keeping sneaker obsession relevant with these core consumers. The hype that it brings is certainly a positive for us..

Okay. Great. Thank you very much..

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

Your final question comes from the line of Christopher Svezia with Wedbush..

Thanks for taking my questions. So, first, I just want to go back to the thought process regarding the comp inflection that you expect for the second quarter.

I guess there can you maybe just talk about what specifically from a product or category perspective do you see that that gives you that confident that you would see that inflection? Maybe certain categories that are difficult, yet, less bad, but just is it something in basketballs or vendors or product, is it in running? Just what gives you that confidence to see that level of inflection? What do you see right now that gives you that confidence? That's my first question..

Chris, it's mostly around the depth of the product that we're starting to introduce right now. So if you think about the Air Max 270, if you think about VaporMax and VaporMax Plus, all very hot.

When you think about a lot of the Jordan business getting a little bit better, certainly as they work hard to control the marketplace we're starting to see some positives there. We got the Epic React from Nike that certainly is going to bring some more heat.

You got Ultra Boost and certain NMD product from Adidas that will have the right amount of depth or better depth. Then you got the [Drocks Run] [ph] from Adidas that we hold high hopes for. So it's a combination of certain categories getting less bad.

As we see some things in basketball starting to have a little bit of resonance and we'll get some depth with those. And then, it really is depth around some of these products that are just starting to launch now or just making their way into the marketplace now..

Okay. And then, with regard to Europe, is that just a function of just traffic or is there also a dynamic between certain types of products or brands that are creating a headwind that some of it to the U.S.

but a greater order of magnitude in terms of depth, you're waiting for new product to hit? Just give us some reference or perspective and in terms of maybe when you can see that elements to your business start to show some level of improvement?.

Well, there's a different vendor mix and different category mix there, right? Adidas has a bigger percentage of their business. Some of the things that we've talked about in the past slowing down and Adidas have had a much bigger impact there than necessarily North America where the brand heat is still growing.

But Adidas has done a great job with their Creators campaign and we're really starting to see some product turn. So there is some optimism there. I don't want to get into pointing specifically to when we believe there will be an inflection in Europe, as we really only guide the overall comp.

But I think the team there is well aware of the challenges and as they shift their product mix and they shift their assortment, they're optimistic that the traffic will return. So again, it's all factored into the comp that Lauren talked about in Q2 and then an increasing comp and improving comp in Qs 3 and 4..

Okay. And a last question, Lauren, for you. Just when you think about the business model and maybe some of the changes that you're making, in the past you've always talked to you need I think low to maybe the high end of mid-single to lever the business.

Maybe as you look at it today how is that changing or how is that evolving or any color you can give us about that, about that leverage point of the business?.

Well, I mean, the mid-single-digit is still the right way to think about it and the product margin is a key component to that. All right, so that was our biggest hit to the rate in 2017.

But we certainly think that with the investments that we're making in the business, things that we've got going on that digital side and that product depth, that those things come together to improve the rate performance..

Okay. Thank you very much and all the best. I appreciate it..

Thanks, Chris..

All right, thank you all for participating on today's call. That's all we have time for today. Please join us on our next earnings call, which we anticipate will take place at 9:00 AM on Friday, May 25th, following the release of our first quarter results earlier that morning.

Jim and I will be at my desk shortly if we didn't get your question and to answer any follow-up questions you may have. In the meantime, thanks again and goodbye..

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