Good morning, and welcome to the First Quarter 2021 Foot Locker, Incorporated Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Jim Lance.

Please go ahead..

Thanks, operator. Welcome, everyone, to Foot Locker, Inc.'s first quarter earnings conference call. As described in today's earnings release, we reported first quarter net income of $202 million compared to a net loss of $110 million for the first quarter of last year, and net income of $172 million for the first quarter of 2019.

On a per share basis, first quarter earnings were $1.93 compared to a loss per share of $1.06 last year and earnings per share of $1.52 for the first quarter of 2019.

This year's quarter includes pretax charges of $2 million related to the impairment of one of the company's minority investments, and $2 million primarily related to severance costs in connection with the reorganization of certain support functions.

Excluding these items, first quarter non-GAAP earnings were $1.96 per share, a significant reversal to the loss per share of $0.67 for the first quarter of last year and up 28.1% compared to earnings per share of $1.53 for the first quarter of 2019.

Unless otherwise noted, the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We'll begin our prepared remarks with Dick Johnson, Chairman and Chief Executive Officer.

Andy Gray, Executive Vice President and Chief Commercial Officer, will then provide additional insights into the business drivers in the quarter. Andrew Page, Executive Vice President and Chief Financial Officer, will then review our first quarter results and provide some directional color around the second quarter and full-year 2021.

Following our prepared remarks, Dick and Andrew will respond to your questions. With that, I'll now turn it over to Dick..

Foot Locker, Kids Foot Locker, Champs Sports and Eastbay. We are currently in the process of assessing the Footaction fleet to determine the best decision for each location.

First, as we've discussed on prior calls, the flexibility we have with respect to our portfolio management will allow us to take advantage of a number of lease expirations over the next two years.

Second, we plan to convert approximately one-third of the top performing Footaction locations into new Foot Locker stores, establishing a bolder women's and kids presence as well as new Champs Sports and Kids Foot Locker stores.

We are excited about the opportunities to expand our women's and kids presence within our Foot Locker and Champs Sports banners. But a decision like this is never easy. I'd like to personally thank and commend the Footaction team for their tireless efforts over the years.

Through their contributions, we've gained valuable learnings and consumer insights. As we look ahead, we see this as an opportunity to strengthen our global portfolio of brands, increase our value to our shareholders and vendor partners and ultimately position Foot Locker, Inc. to better serve our consumers in a post-COVID marketplace.

As part of our broader brick-and-mortar strategy, we will also continue to flex our powerful and expansive real estate portfolio to our advantage to accelerate our pivot off-mall, while continuing to invest in our community and Power Store assets.

We also intend to grow the Champs Sports homefield concept, with extended assortment for men's, women's and kids that will expand to include lifestyle and performance categories.

Before I turn the call over to Andy, let me say that I'm extremely pleased with our strong start to the year and our ability to perform at such a high level even in the face of ongoing macro headwinds. It truly speaks to the power of this category and our consumers appetite for cool, premium product.

For over a year now, we have been tested by the COVID pandemic and have prevailed as a leader in our industry. Most importantly, COVID has taught us to innovate, to move faster and to go above and beyond for our consumers as we strive to inspire and empower youth culture.

As we look ahead, we must acknowledge that although the light at the end of the tunnel is getting brighter, the path back to normal is only just taking shape. Many parts of the world are still dealing with lockdowns due to emerging COVID variants and uneven vaccine distribution.

We continue to feel that impact on our business in Europe and Canada, where roughly 230 stores are temporarily closed. That said, there is a lot to be excited about right now in our business and industry. Trends and momentum are strong. Our strategic direction and focus have never been sharper.

Our financial position is in excellent shape and our bench of talent is deep. I am confident in our team's ability to take advantage of the many opportunities we see as the year progresses and the world continues to recover. With that, let me pass it over to Andy..

Thanks, Dick, and good morning, everyone. Let me also extend my welcome to Andrew. I'm looking forward to the partnership ahead. Throughout the quarter, we remain focused on our strategies to strengthen our competitive advantages, while reinforcing our existing relationships and bringing new consumers into our business.

We did that by building on three key areas of strength.

Our product leadership and diversity; continuing to create a pipeline of new products, new brands, new categories and new ideas to excite our consumers; our omni experiences, utilizing our global scale and investments to enhance and further connect the digital and physical journey for our consumers; and our commitments to our communities, being of the community and in the community, and personalizing our relationships to make a meaningful impact on our consumers lives.

All of that was evident in the first quarter as we delivered new products, new content and new experiences to delight our consumers. In total, all our families of business were strong. Our footwear business increased over 70%, while our apparel and accessory businesses were both up triple digits.

Both families of business also increased as compared to 2019. The strength in footwear was broad-based with gains across all regions, led by North America and Asia Pacific. Similarly, we saw strong double-digit increases across men's, women's and kids footwear with our women's business driving the largest gain.

By category, men's basketball continued to see healthy momentum, delivering a high double-digit increase led by the Jordan brand, key Nike icons and some compelling new initiatives by Puma and Reebok. Additionally, we brought new consumers into the business with an increased focus on our seasonal category.

This helped to drive a triple-digit increase with gains in UGG, Birkenstock and new brand introductions, including Crocs. Meanwhile, men's running increased strong double digits, led by the key franchises of Max Air, Adidas Nomad, Puma RS-X and strong momentum in our partnership with New Balance.

It was also a strong quarter for our apparel business, which was up triple digits compared to the first quarter of last year and up double digits versus the first quarter of 2019. Men's and kids led the way up triple digits, while women's increased strong double digits.

The casualization of society remained the catalyst for our business, and we saw all major categories increase with shorts driving the largest gain with momentum across many brands, including our own.

And across all product areas, our customers continue to respond well to elevated storytelling, with our consumer concept offense delivering exciting exclusive programs. These included, City to the World from Nike, and All Day I Dream About Sneakers with Adidas, which both feature unique versions of their respective iconic silhouettes.

We also partnered with We Need Leaders and New Balance to pay homage to the leaders of the street running movement, and we created some fun with our Sesame Street and Champion collaboration. Looking ahead, there's a lot coming to market to keep our consumers engaged.

The culture of basketball remains strong with new launches from Adidas, Puma and New Balance bringing further dimension to the category. We are continuing our seasonal expansion with UGG, Crocs, Converse and Vans, and we have a very strong pipeline of ideas and inventory in apparel to maximize the ongoing momentum in the category.

And we will continue to enhance our storytelling in Q2 through our celebration of the 25th anniversary of the Griffey 1 with our Nike concept and our second installment of All Day I Dream About Sneakers with Adidas.

We also have exciting collaborations in the pipeline with the likes of Kids of Immigrants and Vans, Louis de Guzman and New Balance, and Puma and White Castle, to name a few.

Beyond product, I also remain enthusiastic about our community initiatives and how we continue to lead with purpose and extend our community stores across the globe and expand our local geo teams to ensure that we are more deeply rooted in the neighborhoods we serve. That includes local experiences, local products and local give back.

And we continue to bring this to life with the openings of Foot Locker and Kids Foot Locker in Old Spanish Trail in Houston and Champs Sports in the Oakbrook Mall in Chicago. We also continue to fuel the future of our industry for the next-generation of creators through our Greenhouse incubator and our homegrown and lead initiatives.

On the latter, in addition to our work to advance education and economic opportunities for the Black communities we serve, we have also established partnerships with 45 new Black-owned brands and creators to provide a platform to showcase their design collaborations this year.

Next to that, we also continue to invest in growing our membership and enhancing our consumer journey through the geographic rollout of FLX and adding millions of new members to our business in Q1, expanding our drop-ship initiative, elevating our mobile app experience, enhancing our buy online and pick-up in-store journey, providing new payment options and much more, all to better serve our consumer.

So a lot of work against our key strategic initiatives as we continue to push our consumer offense forward. It's a combination of product leadership and diversity, our enhanced omni capabilities and our focus on community and purpose that will keep us moving forward and strengthen our relationship with our consumers.

Let me now pass the call over to Andrew..

Thank you, Andy. It is my pleasure to join you today to discuss our first quarter results. As a consumer of this brand, Foot Locker always stood out to me as a source of inspiration and empowerment of youth culture. Now as a member of the Foot Locker family, this is more evident than ever, and I see that passion in all that we do.

In my short time with the company, my observations have reaffirmed my belief that this is a very special organization, one that is positioned for ongoing success and value creation. It's no secret that the retail environment is rapidly changing. The pandemic has only accelerated the change.

Everything from the customer journey, the process of discovery and the magnitude of digital engagement has evolved and intensified. It's clear to me that our team is focused on key initiatives that amplify the consumer experience across all of our touch points.

Supporting our transformative initiatives is our financial position, which is as strong as it's ever been and will allow us to remain opportunistic as we pursue our strategic plans.

No doubt, there are challenges that stand before us, as well as key strategic decisions, such as the rationalization of our real estate portfolio that Dick mentioned earlier.

But as we continue to emerge from the pandemic, our objectives will center around executing our growth strategy, amplifying our unique value proposition to our consumers and vendor partners and returning value to our shareholders.

Let me say once again, I am glad to be here working with Dick and the broader team, and I look forward to sharing more as we continue to evolve the omnichannel retail experience for our consumers.

Before we get into the numbers, I'd like to note that in addition to comparing our results to last year, I will also reference comparisons to the first quarter of 2019 where it's helpful. Now let's talk about our performance in the first quarter.

We delivered exceptionally strong top and bottom line results in Q1, especially when considering the impact the pandemic continue to have on our operations. Our comp sales increased 80.3% in spite of store closures in Europe and Canada and supply chain pressures in the U.S. and EMEA.

The combination of robust demand for our assortment and lean with fresh inventory composition led to significantly lower levels of promotional activity this quarter. As a result, we had strong gross margin recovery compared to Q1 of 2020 as well as expansion versus Q1 of 2019.

This coupled with leverage on our SG&A expense drove a meaningful swing in first quarter earnings per share versus last year's loss and a nearly 30% increase over Q1 of 2019. Taking a closer look at our results. Total sales increased 83% over last year and 3.6% over Q1 of 2019. On a constant currency basis, sales increased 79% over Q1 of 2020.

The strength was primarily driven by our stores, which increased 99%. Let me remind you that our fleet was open 83% of potential operating days in the quarter versus 48% last year. While our U.S.

and Asia Pacific banners were essentially fully opened, EMEA and Canada continued to face pressure due to COVID restrictions, opened roughly 39% and 75% of potential operating days, respectively. Our direct-to-consumer channel remained quite healthy as well, with sales up 47% as customers truly embraced our omnichannel offering.

DTC was 25% of total sales for the quarter compared to 31% last year. Despite being much less promotional, average selling prices were down low-single digits in the quarter, while units nearly doubled. The decline in ASP was driven primarily by product mix. We had a higher level of apparel and accessories in our mix this year versus last year.

In general, apparel and accessories carry lower ASPs than footwear. In addition, we lapped last year's strong digital performance, which was heavily penetrated in footwear. Clicking down to our regions. North America saw impressive growth nearly across the board, led by Champs, where comps increased triple digits. The rest of the U.S.

banners follow with comps up over 90% and Foot Locker Canada posted a low 70% gain as it contended with store closures as we previously discussed. Eastbay was up middle single digits for the quarter, which was an improvement from recent trends. The gradual return to group sports participation sparks sales of hard goods and team performance products.

Recall, that unlike our other banners, Eastbay did not comp against store closures last year. Foot Locker Asia delivered a triple-digit comp gain, while Foot Locker Pacific increased in the mid-90% range. Turning to Europe. Despite extensive COVID restrictions, Foot Locker Europe still posted a high 30% comp increase.

Sidestep, which experienced the most store closures, decreased in the high teens. Encouragingly, the direct businesses remained very strong for both banners. Moving down the income statement. Gross margin was 34.8% compared to 23.0% last year. When compared to a more normal Q1 2019, gross margin improved 160 basis points.

Our merchandise margin rate improved 250 basis points over last year and 80 basis points over 2019, as the meaningful reduction in markdowns more than offset the higher freight expense that comes with increased penetration of digital sales.

Looking ahead, we expect the promotional environment to remain favorable through most of the year, but to a lesser extent than what we experienced in Q1. As a percent of sales, our occupancy and buyers compensation returned to more normal levels versus last year's abnormally high rate.

Inclusive of approximately $5 million of COVID-related rent abatements in the quarter, our occupancy costs leveraged 80 basis points over Q1 of 2019. Our SG&A expense rate came in at 19.4% of sales in the quarter, as our strong sales results provided us with 750 basis points of leverage over last year and 60 basis points of leverage compared to 2019.

In addition to careful expense control, we received approximately $10 million in government subsidies, which partially offset nearly $2 million of incremental PPE expense and 90 basis points of higher bonus expense. For the quarter, depreciation expense was up slightly to last year at $45 million.

Net interest expense increased $1 million compared to last year due to lower levels of interest income on our cash balance. As we previously disclosed, given the considerable improvement in credit markets, we amended our credit facility, which will result in lower fees moving forward. Our tax rate came in at 28.7% versus 22.0% in Q1 last year.

We ended the quarter in a strong liquidity position with over $1.9 billion of cash, an increase of $951 million as of the end of Q1 last year. Our higher inventory turn and slower receipt flow rate was a significant source of cash, building upon the cash we accumulated through our preservation efforts last year.

We currently have no outstanding borrowings on our $600 million credit facility. At the end of Q1, inventory was down 30% compared to last year. However, keep in mind that at the end of Q1 2020, our inventory was up 20%, which was due to the elevated store closures resulting from the pandemic.

We expect our inventory levels to begin building back up in Q2. We invested approximately $51 million into our business during the quarter. This funded the opening of 12 new stores as well as the remodeling or relocating of 15 stores.

We also closed 58 stores in the quarter, primarily in the U.S., leaving us with 2,952 company-owned stores at the end of Q1. For the full-year, we now expect to open approximately 160 stores, remodel or relocate 120 and close 240. These amounts reflect the Footaction stores we plan to close or reposition in 2021.

Looking ahead, we are tracking toward approximately $275 million in capital expenditures this year, in line with our prior guidance. In terms of shareholder returns, we paid out $21 million in dividends this quarter and repurchased approximately 620,000 shares for $34 million.

Given the ongoing uncertainty of the pandemic and its continued impact on our visibility across our global portfolio, we are not providing detailed guidance at this time. However, the following directional considerations for Q2 and the full-year maybe helpful.

For the second quarter, looking at sales, keep in mind that our comps were up nearly 19% last year and what is historically our lowest volume quarter of the year. This was due to pent-up demand, high promotional activity and government stimulus.

Due to delays in inventory receipts in Q1 of the current year, some sales have shifted into Q2 and as a result, we expect Q2 total sales to be relatively in line with last year. With respect to gross margin, given the level and freshness of our inventory, we expect less promotional pressure on merchandise margins as compared to Q2 last year.

Please keep in mind that we face a $6 million headwind for rent abatements we obtained in Q2 last year. Compared to the second quarter of 2019, we expect to see some modest gross margin expansion. With respect to SG&A, bear in mind, our strong Q2 sales last year helped to provide leverage beyond our expense management efforts.

We anticipate SG&A to be elevated compared to 2020 as we lap the unique elements that benefited Q2 last year, including $17 million in government subsidies and reduced store operating costs. Given our strong start to fiscal 2021 and assuming a continued recovery from the pandemic, our current high-level expectations for the full-year are as follows.

Total sales to increase at a low double-digit to low-teens rate over fiscal 2020, meaningful gross margin expansion over fiscal 2020, largely reflecting a more rational promotional environment, when compared to fiscal 2019, we expect to see modest gross margin improvement. SG&A rates to be roughly in line with fiscal 2019.

Looking at our non-GAAP tax rate, for the full-year, we expect it to be lower than fiscal 2020, but somewhat higher than fiscal 2019. With that, operator, please open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Janine Stichter from Jefferies. Please go ahead..

Welcome, Andrew. I want to ask a bit about the decision to close Footaction. Curious how you went through this thought process.

Maybe you could share some details on what the overlap is between Footaction store base in the same malls as Foot Locker? Any overlap on customer base? And then any sense of how much sales do you think you can transfer as you close these stores? Thank you..

Thanks for the question, Janine. We periodically go through the portfolio review process, the banner review process. And as we did in 2020 with the closing of Runners Point, we identified key points in time that if we have to make moves, then we'll make moves.

So, I think the math tells us that 85% of our Footaction stores are located in proximity of one of our other banners.

So, there is a fair amount of overlap from a store base, there's a fair amount of overlap from a consumer base even though the great work that the Footaction team has been doing of late to try to separate with different product assortments, et cetera.

We went through the process in 2020 of testing some shifts from Footaction into Foot Locker, specifically in the L.A. area on Whittier Boulevard and on Broadway in Downtown L.A. and the Gotham Plaza in Harlem, and we saw those spaces become more productive.

So given the timing of the lease expiries, given the timing of the digital effort that we've seen, this is the time to make this decision.

And obviously, as we go through the process, we know that we'll relocate – or I'm sorry, reposition probably a third, maybe a little bit more than a third of the Footaction banners into either Foot Locker Champs Sports, which will allow us to elevate our women's and kids' presence and our apparel presence in those stores, and we'll be able to – because of natural lease expiries, probably move out of – in the next two years, approximately 40% of the Footaction stores at natural lease expiry.

So, we've got a little bit of a residual that we'll have to deal with, but just given the timing of the lease expiries that we know are coming, the tests that we did to see the productivity gains and the portfolio review and the shift to digital that we've seen, now is the logical time to make the decision.

As difficult as the decision is to do that, it's the right thing to make sure that we continue to drive value for our shareholders, and we continue to drive productivity up for all of our banners that are remaining..

Okay. Great.

And then anything you can share in terms of the profitability of Footaction versus the rest of the banners?.

We can share that the profitability and productivity of Footaction trails the portfolio. So again, as we reviewed the entire portfolio and we had doors that we were planning to close in 2021 regardless. But as we review the entire portfolio, Footaction's productivity and profitability run below the portfolio's average..

Okay. Great. Thanks very much and best of luck..

Thanks, Janine..

The next question comes from Omar Saad from Evercore ISI. Please go ahead..

Good morning. Great quarter. Thanks for taking my question..

Thanks, Omar..

Good morning. I wanted to ask a follow-up on GOAT, get you guys to give an update there.

Do you see opportunities behind that kind of strategic partnership side, joint ventures you're doing together, any opportunities to link inventory between stores and website? And I also wanted to ask a follow-up around your plans to expand the SKUs online by adding more product into that drop ship program.

Is that a sign of maybe moving towards more of a shared inventory 3P system in your digital ecosystem? Thanks..

Well, I'll start with GOAT Omar. As we've talked about, our responsibility is to make sure that we have a clear line of demarcation between the primary market that we service so well and the secondary market that GOAT services.

So, we continue to work with Eddy Lu and the team out of GOAT to learn about customer experience, how we can enhance that experience, how they can leverage some of the supply chain heft that we have. At the same time, we look at how we can ingrain some of their customer experience principles into our business. So, the relationship is great.

We continue to evolve with them. And Eddy and the team are doing a great job. But we really – we're focused on making sure that there is clear line between the primary market and the secondary market.

So as much enthusiasm as we have for the relationship, we move very slowly to make sure that we don't run a follow of any customer expectations on either of our side. The second question around the Nike dropship program, we saw some good progress in the quarter. And we added more SKUs.

The vast majority of the SKUs were added in the performance category, and it ended up being SKUs that we had, that we might not have had a size or might not have had in stock at the moment.

So, as we continue to extend into the – expand into the extended aisle view with the Nike dropship program, we think that it creates a great opportunity to offer our customer more product, creates great connectivity with our partnership with Nike, and continues to take care of our customers, which is ultimately what we're here to do is make sure that we satisfy their demand.

So, good progress during the quarter. We'll work, as we talked about in our prepared remarks, to add a couple of the other banners to their dropship program as we move forward.

And again, making the inventory in the broader sneaker ecosystem more productive helps all of us, from a – keeping the market clean to making sure that the customers get satisfied with what they're looking for. So again, progress in both cases, Omar, never moving as fast as we'd like..

And are you agnostic financially whether the sale comes through one mechanism or the other? Is it really just relatively neutral and all about the customer experience?.

It's about the customer experience, absolutely, Omar. And as we work to the – getting the volumes up, the economics will balance out pretty well. So, at the end of the day, it's about once we've got a customer into our ecosystem, making sure that we take care of that customer and getting them what they want.

So again, the volume is not significant yet as we make sure that the plumbing works. And as I said, as we add more – as we add more SKUs to the extended aisle, we believe that the volumes will get up and truly will be agnostic on the economics, and we'll take care of the customer better..

Great. Thanks. Nice work..

Thank you, Omar..

Our next question comes from Paul Lejuez from Citi. Please go ahead..

Hey, thanks, guys. Curious, what level of sales do you think shifted out of 1Q into 2Q? Also curious about how you're thinking about merch margin in 2Q versus last year, but also versus F2019. I think you made a comment that your AURs were down this first quarter.

Curious if maybe you could talk about that versus 2019 as well and within that footwear versus apparel? Thanks..

Yes. I'll talk a little bit to the sales that shifted from Q1, Q2, and then I'll turn it over to Andrew. Again, we won't get into the details of the inventory that we know pushed from Q1 to Q2.

But again, based on the port situation, which we see improving, we know that there is a fair amount of receipts that moved from Q1 to Q2, which will fuel the start of Q2 and obviously, into the back-to-school season. I think Andrew talked about in his opening remarks, or Andy did, that our inventory will start to improve.

Our inventory levels will start to improve in the second quarter, and some of that is that pushed out inventory. Some of it is the cleaning up of the port. So I'll turn it over to Andrew to let him talk about our average unit retail and talk about some of the other questions that you have, Paul..

Well, thank you. As I stated in our prepared remarks, our ASPs were down low single-digits in Q1 when compared to Q1 of last year. And that was really driven by product mix. We definitely – we sold a lot more apparel and accessories in Q1 this year as compared to last year. The apparel and accessories generally carry a lower price point than footwear.

Given the significant store closures that we had in Q1 of last year, there was a higher level of footwear transactions in our digital platforms, which carry higher price points. When you think about ASPs in comparison to 2019, our ASPs in comparison to 2019 were relative – were in line 2019.

So the decline was much more related to the anomaly of 2020 in the higher footwear sales penetration..

Thanks, Andrew.

And how about the merchandise margin plan for 2Q?.

Yes. As I stated in our prepared remarks, I see the continued favorable environment, not to the same extent that we saw in Q1. So we had favorable markdown trends in Q1. I continue to see that as being a trend in the year, but to a lesser extent than we saw in Q1.

And so that's really – as far as Q2 guidance is concerned, that's the extent that I'm prepared to speak on margins for Q2..

Okay. Thank you. Good luck..

Thanks, Paul..

The next question comes from Adrienne Yih from Barclays. Please go ahead..

Good morning. Let me add my congratulations. Nicely done..

Good morning, Adrienne. Thank you..

Absolutely. Andrew, I guess my questions are a couple fold. So on many other calls, I'd say the vast majority of them, we've spent a huge amount of focus, time on COVID-related expenses and freight, specifically kind of the freight component of both inbound and outbound.

Can you talk to those, what the trends are that you're seeing in those? And what is baked into guidance as we go through the rest of the year, please? Thank you..

Yes. As our digital penetration continues to tick up, we're undoubtedly going to incur, as we have additional freight costs. With regard to what we're seeing as trends, I mean, what we saw in Q1 is really the best visibility that we're comfortable giving insight on. Again, we have seen favorable results with regard to selling our product at full price.

That favorability has been able to offset the increased freight costs that we've incurred as a result of our increased digital penetration..

Okay. Very helpful. And then another just clarifying question. The gross margin for the second quarter is supposed to expand modestly over 2019 for 2Q on similar sales to last 2Q. So over 2019, sales are up 17%. Gross margin expanded a little bit over the 30% two years ago.

What are the kind of puts and takes that would not allow kind of more leverage flow through into the gross margin line over LLY? Thank you..

Again, I think that the trend that we're seeing in 2021 is really the fresher product and the quicker turn of our inventory. So we have fresh product. We have desirable product in the market. And so what's happening is we are seeing less promotional activity than we've seen before than we saw in 2020 and even comparison to 2019.

So if you think about what headwinds we face is that the promotional environment, which – if that goes backwards, that could be a challenge to margins. But otherwise, I think that's as far as we want to go with regard to looking out and predicting gross margins in the future..

Okay. That's very helpful..

The thing that I would add to that, Adrienne, would be that as we open up Europe, as we've managed through the inventory in Europe, the summertime is their sales season.

So again, depending on the appetite for sale product in Europe, that could be one of the things that may – as pent-up demand comes in, if there's a higher desire around markdown product and sale product, that could be one of the headwinds as well..

Okay. Very helpful. Best of luck. Thank you very much..

Thanks, Adrienne..

The next question comes from John Kernan from Cowen. Please go ahead..

Yes, excellent. Thanks for taking my question and congrats on a strong Q1 and the obvious momentum into Q2..

Thanks, John..

Andrew, can you talk to Foot Locker store base as a competitive advantage and your vision for the business and the real estate footprint and how that's developing since you've joined?.

Repeat the first part of your question. I'm sorry, I didn't get the very first part..

Yes, sure.

Can you talk to your view on Foot Locker store base as a competitive advantage? And just your view on real estate – how your vision for the Foot Locker real estate portfolio is going to be, going forward?.

Sure. I mean, the Foot Locker banners in and of itself are, as I stated in my prepared remarks, it's a special organization. From a customer perspective, Foot Locker does – it's phenomenal at engaging the customer, we create the customer experience that is a competitive advantage for us.

People like to come into our stores, they like to touch and feel and see our product.

So it's anchored in our DNA that our presentation in the market and our touch points for the customer – when I say our touch point, I'm talking about across all of our touch points, whether it be our physical stores or our digital environment, is a key competitive advantage for us.

As we continue to think about our real estate portfolio, it's no doubt that the retail market is changing. It's no doubt that the customer preference and how they buy their decision point is happening a lot earlier in the process, which includes the digital environment.

So as we continue to see trends in the market, we will continue to flex our real estate portfolio to ensure that we are delighting the customer where they make their decision. And as Dick pointed out, sometimes that means flexing our real estate portfolio to ensure that we are meeting the customer where they make their decision..

And John, I would just add to that, that we've got a strong push into our power stores and community stores. So as Andrew said, taking that store base to where the customer wants to shop is one of our big initiatives as we think about the future.

So we believe in an omnichannel world and across our geographic regions, our stores are sort of the secret weapon that we've got..

Understood. Maybe one quick follow-up question.

Just how should we expect the flow of inventory into Q2 and then into the back half of the year as you start to cycle fairly significant inventory declines?.

Yes, we start to see a better flow, John. As we talk about – the port situation is clearing up. There's still some vessels anchored, some container vessels anchored. But we've worked with our vendor partners to test other ports to look at expedited shipping, et cetera. We see by the end of Q2, inventory getting roughly back in line.

But again, as we look at the end of Q1, I'd remind you that last year's inventory was probably inflated by about 20%, given our store closures at the time. So the good news is we continue to sell a lot of product in that – as we get it in, we sell it. The customer is happy with the assortments that we've got.

But we do see better flow going into the back half, partly just based on the port situation. And knowing where our order book is right now, I think we'll be more moderated with the inventory in the back half. So we see opportunities to get back to last year's numbers from an inventory perspective..

Excellent. Thanks, guys..

Thanks, John..

The next question comes from Christine Fernandez from Telsey Advisory Group. Please go ahead..

Hey, good morning and congratulations on the quarter as well..

Thanks, Christine..

You're welcome. I wanted to ask about the full-year guidance.

Can you talk about what you're assuming as far as the sales transfer from the Footaction stores that you're closing or you're moving to other concepts? And also what are your expectations for back-to-school for the year?.

Yes, I'll hit on that. And then, Andrew, if you want to add some color after I wrap up. But again, we haven't given formal guidance for the year. But as Andrew said, we look at the back half and we look at what we see for the back-to-school season. And our total sales for 2021, we see up low double-digits to low teens.

So again, there's a lot of energy in our category. And we think that that will carry through the back half of the year. We're just spreading up our back-to-school, as we truly believe that the kids will be physically back at school, it will be a much different pattern than last year. They'll be back at school, they'll be back in sports.

So it helps a lot of things from our point of view. So back-to-school starts at the end of Q2 for us and rolls into Q3. So we'll have what I think is a positive impact on both. But we will be able to transfer as we close.

And as I mentioned earlier, 85% of our Footaction stores are within close proximity to either a Foot Locker, Kids Foot Locker, Champs Sports stores. So we see a good transference of sales. As I talked about changing some of the Footaction doors into Foot Locker stores, we saw more productivity and more profitability when we tested that.

So again, we won't get into the specifics of what we've got modeled from a transference point of view, but we think that it will yield more productivity and profitability over the long haul.

Andrew, I don't know if you want to comment on any other thoughts about the full-year?.

Yes. I think you hit on all the points. But just to reiterate quickly, the guidance that I gave for the full-year, in short, we don't see any impact in top line as we continue through our order book in 2021. The Footaction decisions was contemplated in the numbers that I provided to you earlier..

Thank you. And then my second question, I wanted to ask about the alternative payment options you're offering. Are you starting to see consumers moving away from cash, which has traditionally been a pretty high number for Foot Locker and evolve into some of these other alternative payment methods? Thanks..

Cash is still critical for our customer. Again, in a lot of our neighborhoods, cash is king. And while we want to offer as many payment options as possible to make sure that our consumers can shop however they want with whatever form of payment they want, we continue to see cash as a really important element in our store business.

And there's puts and takes each quarter. But again, a lot of neighborhoods that we operate in, Christine, cash is absolutely king..

Our next question comes from Jay Sole from UBS. Please go ahead..

Great.

Dick, my question is, as you've seen April turn into May, how much do you think that some of the really robust numbers that you've had be a result of continuing the effects of stimulus? Or how much do you think that reopening is starting to be the key driver of the business? And what does that tell you about what to expect for the back-to-school season?.

Jay, it's a great question, and we've got various models that look at stimulus tax payments, reopenings, et cetera. And it's truly a mix. Certainly, the stimulus and consumers liking the product in our category and our distribution is key.

And we've said it many, many times from our old conversations about taxes in February, when our core consumer has cash in his pocket, whether it comes from their jobs, whether it comes from government stimulus or whether it comes from tax refunds, they love to shop with us. And that's what we see.

So clearly, as we get more openings, as we get fewer capacity restrictions, et cetera, it becomes a more normalized world like we used to see. The question will – as the economy starts to open up and people have other choices, that is one of the things that we have to be aware of as well. Last year, the stimulus started in the second quarter.

This year, it's waning a bit as the quarter comes on. So again, we're studying the puts and takes. If anybody can give you the exact breakdown of what impact they think stimulus has in their sales number, Jay, I'd love to hear it. Because it's a quandary and a conundrum that we look at, but I don't have a good answer for you.

But it's certainly something that we study..

Got it. And then maybe if I can ask you about fashion trends a little bit. There's a lot of talk that as the consumer comes back out, there's maybe a shift to some of the categories that maybe weren't as popular last year, like denim or just more of the spring/summer seasonal items.

How well do you think the assortment is going to be positioned for that transition going forward?.

Jay, no matter what they wear, they got to have a cool pair of sneakers, right? And that's where we fit the bill, regardless of whether it's casual, athleisure, business casual, whatever it is. Sneakers are an everyday thing.

We continue to see tremendous opportunity on the fleet side of things, that sort of become the comfort cozy, and I don't see consumers going away from that. So again, we've got the breadth of assortment. And our product team does a great job making sure that the sneakers that we've got look good with whatever you choose to wear.

So I think that there will be some puts and takes on the fashion element of it, the lifestyle element, albeit some changes, Jay, but I think that we've certainly got the assortment to satisfy our customers regardless of what they choose to wear..

Got it. Sounds great. Thanks, Dick..

Thanks, Jay..

This concludes our question-and-answer session. I'd like to turn the conference back over to Jim Lance for any closing remarks..

Thank you for joining us today. Please join us again for our next earnings call, which we anticipate will take place at 9:00 a.m. on Friday, August 20. The call will follow the release of our second quarter results earlier that morning. Thanks again, and goodbye..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..