Foot Locker - Q1 2025

Transcript

Operator (participant)

Good morning, and welcome to Foot Locker's first quarter 2024 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 global economic and market conditions, currency fluctuations, customer preferences, and other risks and uncertainties described more fully in the company's press releases and 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 Robert Higginbotham, Senior Vice President, FP&A, Investor Relations, and Treasurer. You may begin.

Robert Higginbotham (SVP, FP&A, Investor Relations, and Treasurer)

Thank you, operator. Welcome everyone to Foot Locker, Inc.'s first quarter earnings call. We'll begin with prepared remarks by Mary Dillon, our President and Chief Executive Officer. Frank Bracken, our Executive Vice President and Chief Commercial Officer, will then give more detail on our results across our banners and geographies. Mike Baughn, our Executive Vice President and Chief Financial Officer, will review our first quarter results in more detail as well as our 2024 outlook. Following our prepared remarks, Mary, Frank, and Mike will take your questions. To note, today's call will reference certain non-GAAP measures. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We also have a slide presentation posted on our investor relations website with information that will be referenced during the call.

Finally, for future planning purposes, we tentatively plan to release our second quarter 2024 results on Wednesday, August 28th. Now I will turn it over to Mary.

Mary Dillon (CEO)

Thank you, Rob. I'll start this morning with a brief overview of our first quarter results and then provide an update on the ongoing execution of our Lace Up Plan. Our team delivered a solid start to the year with better than anticipated non-GAAP earnings per share and comparable sales performance in line with the guidance we provided on our last earnings call. Comps declined 1.8%, which was in line with our expectations of down flat to low single digits, and which included a 220 basis point headwind from the repositioning of our Champs Sports banner. On a global basis, our Foot Locker and Kids Foot Locker banners comped up 1.1%, and we were pleased to see comps sequentially improve through the quarter, led by our stores as customers responded to our fresh spring assortments.

Our average unit retail prices were nicely positive and gross margins were also in line with our expectations. We delivered improvements in our markdown levels compared to the fourth quarter. We also saw sequential moderation in our markdown levels throughout the first quarter as we began to dial down promotional levels. Non-GAAP earnings per share of $0.22 reflect our disciplined expense management, as well as some favorable expense timing shifts from the first quarter into the second quarter, which Mike will give more color on later in the call. Importantly, our overall first half results are trending in line with our expectations, and we still expect a return to positive comp growth and EBIT margin expansion this year, as demonstrated by our reiterated $1.50-$1.70 full-year non-GAAP EPS guidance.

While we continue to expect the external environment to remain dynamic as our customers contend with prolonged inflation, reduced savings balances, and higher interest rates, we remain committed to making progress this year towards our EBIT margin target of 8.5%-9% by 2028. Now I'll provide an update on our Lace Up plan and the strategic initiatives we're executing on to deliver sustainable growth and shareholder value creation. We continue to be guided by our vision for Foot Locker to be the go-to destination for discovering and buying sneakers globally and by our mission to unlock the inner sneakerhead in all of us. The Lace Up plan is about giving us the tools to achieve our vision and mission. We remain intently focused on creating a strong flywheel of demand, and we've made significant progress over the last several quarters.

With all of the efforts we have underway, we're exercising operating and investment discipline with an emphasis on maximizing return on investment. This discipline is coupled with the actions we're taking to rightsize our cost structure, including through our Cost Optimization Program, which is expected to deliver $80 million in savings this year. Now let me walk through how we progressed against our four strategic imperatives in the quarter. Starting with our first imperative, expand sneaker culture, which aims to serve more sneaker occasions and provide more choice. We continue to make great progress in meeting our customers' desire for choice and offering an exciting array of sneaker brands and styles. We've elevated our approach with our partners as we lead with customer insights unique to our business and collaborate on multiyear growth plans.

Through this new approach, especially under our new merchant and buying team structure, we expect the composition, productivity, and flow of our assortments to continue to improve throughout the year. In addition, with our first quarter inventories well-positioned, we see flexibility in the second quarter and beyond as we pivot more of our open-to-buys towards higher productivity brands and franchises... We feel good about our brand diversification efforts and the composition of our inventory with our brand partners. Recall, we exited the fourth quarter with 40% of sales being generated outside of our top brand, Nike. We believe we currently have an appropriate mix in our business, and longer term, our intent is to deliver balanced growth across our entire portfolio of brand partners. Turning to our top partner, Nike, Frank and I were pleased to participate in Nike's innovation event in Paris in April.

We're very encouraged by the pipeline of innovation that was shared, beginning with the Paris Olympics and into the back half of 2024 and then 2025, as Nike accelerates their multi-year innovation cycle, supported by powerful storytelling. As such, we remain excited to return to growth with them later this year during the holiday quarter. Longer term, we believe we are well positioned to benefit as Nike refocuses on the wholesale channel, as we continue to emphasize our sharp pillars with them of basketball, kids, and sneaker culture. We're confident that the investments we're making in our business will continue to enhance our partnership as we collaborate and build our capabilities in digital and loyalty, as well as through our investments in our in-store experience.

This means you'll see us lean into our basketball business through The Clinic, our program with Nike and Jordan Brand, which continues to evolve as we celebrate the culture of basketball on and off the court. We will also leverage our proprietary HomeCourt basketball concept across all of our basketball partners to invite more consumers into the sport and lifestyle of basketball. This will be led by the greatest assortment of next-gen signature athletes, like Nike, Sabrina Ionescu, Devin Booker and Ja Morant, Jordan's Jayson Tatum and Luka Dončić, to our exclusive franchises from adidas, the AE 1, and the LaMelo Ball from PUMA. Next to that, we'll continue to celebrate the culture of basketball, particularly with our young, multicultural consumer, for whom the game is so important.

From global events, like the NBA All-Star Game celebration, to local community moments in cities like New York and Atlanta, we'll continue to invite even more consumers to wear and enjoy sneaker icons like the Dunk, Air Force 1, AJ1, Superstar, New Balance 550, and others. We also see the running category as another powerful platform to expand sneaker culture by offering more choice and serving more consumers for more occasions. First, we're happy to participate in the launch of the Nike Air Max Dn in the first quarter. We welcome it as an exciting innovation for the Air Max family and look forward to delivering it to more doors going forward. We also are seeing ongoing strength through the heritage running piece of our business. New Balance continues its momentum through door expansions in both women's and kids, as well as like for like gains.

Next to that, we're seeing strong global momentum with ASICS in multiple franchises across men's, women's, and kids. On the performance side, we're catering to consumers seeking performance sneakers such as On and HOKA by increasing our allocations and adding new doors this year, including with kids in both On and HOKA. Finally, as we think about our lifestyle category, we again see strategic gains being made, specifically in the women's and kids segments of our business. adidas, through their terrace leadership, are setting the pace for global style, and our current spring trend campaign with influencer Coi Leray is helping to tell a worldwide story to female consumers.

Likewise, brands like UGG continue to be a larger part of our plans, and we look forward to a really productive back to school and holiday season with our partners there, as our consumer insights continue to drive strategic door growth and improve consumer acquisition campaign targeting. And finally, as we drive greater distinction in our assortments, our exclusive penetration in the quarter was 13%, down 200 basis points year-over-year, as we saw some impacts from softer private label performance, in part from our reduced Champs Sports store count. The second pillar of Lace Up is power up the portfolio, which means transforming our real estate footprint and creating clear lanes for our banners. On real estate transformation, we successfully unveiled our reinvented retail concept that truly brings the Heart of Sneakers to life this month in Willowbrook Mall in Wayne, New Jersey.

This immersive retail experience celebrates the Foot Locker brand in a visually elevated store environment designed to enhance the power of our Stripers through modern technology and an improved customer shopping experience. Driven by powerful brand storytelling, enhanced visual merchandising across men's, women's, and kids, this 12,000 selling sq ft store features a distinct communal try-on zone designed to drive connectivity with our Stripers and sneaker culture. Response to this new format has been very positive from both our Stripers and our customers. We've seen higher traffic, conversion levels, and basket sizes, and meaningfully increased penetration of women's in store compared to the balance of the chain. In fact, the store has quickly become one of our top North American locations. Our survey work is also showing increases in how the customer perceives and connects with the Foot Locker brand after visiting the store.

This positive response is echoed by our brand partners as this differentiated format enhances how shoppers are engaging with their brands through enhanced product presentations and elevated storytelling. We plan to launch four additional locations this year, including Thirty-Fourth Street in New York City, Melbourne, Delhi, and Paris, which is opening tomorrow in time for the Summer Olympics. As we learn through this concept, elements and insights will be applied to our 2025 openings and beyond, as these stores will provide the blueprint for how our stores show up as the Heart of Sneakers and the go-forward expression of our brand. Through this new concept, along with our other formats, we're continuing to evolve our in-store experience, with our new formats now representing 16% of our global square footage, up from 11% last year, and moving further towards our 2026 target of 20%.

In addition to these new retail concepts, we're delivering a meaningful store refresh program, which aligns with the design principles of our new retail concept, and which aims to create a more consistent and elevated brand experience globally. In the first quarter, we completed 13 refreshes on top of the 100 we executed in the back half of 2023, and we'll continue to scale the program through the balance of the year. We remain committed to refreshing approximately two-thirds of our global Foot Locker and Kids Foot Locker doors through the end of 2025. These refreshes are fairly capital light, and from a timing perspective, can be executed in under 72 hours in most cases. This gives us confidence that we can execute the plan by the end of next year. Early reads on our refreshes also remain positive, hitting our internal hurdle rates and payback periods.

And finally, we're making strides in our shift to off-mall. Penetration reached 39% of North American square footage, up 5 points from a year ago, and closer to our goal of 50% by 2026. Within simplifying and creating distinct lanes, our repositioning of Champs Sports continues to take hold. Comps declined 13.4% in the quarter, a slight deceleration from the fourth quarter. Champs Sports continues its evolution into the home of head-to-toe sports style, and our assortments are getting sharper, more productive, and aligned with the updated positioning. Our brand partners have also been supportive of and have invested behind our efforts at Champs Sports as we lead through the lens of the sports style enthusiasts and those with an active lifestyle, particularly in the areas of performance running, apparel, and accessories.

In the first quarter, Champs Sports formally kicked off a monthly run club with events in Southern California, New York City, and Tampa. ASICS and Brooks have been strong partners of the program. Results have been encouraging, with the number of participants growing each month and strong repeat participation. Connecting to our target audience in authentic ways, such as the run club, speaks to the traction we're making in repositioning the banner through the lens of active performance. Just six quarters into the repositioning, Champs Sports is becoming a meaningful partner for our brands to represent their full offerings. Case in point, in the first quarter, Champs Sports became the lead apparel partner for New Balance. With clearer communication of the brand's positioning to come, we remain optimistic about Champs Sports' potential in the marketplace.

Our third pillar is deepen our relationship with our customers, which is focused on building brand equity, reaching a broader set of customers, and enhancing our loyalty and overall CRM capabilities. On building brand equity, as we discussed in our last earnings call, we celebrated NBA All-Star 2024 weekend in February with an interactive pop-up Foot Locker Home Court experience in downtown Indianapolis with the support of partners including Nike, Jordan Brand, adidas, PUMA, Converse, and Under Armour. Our activations and events from the weekend earned Foot Locker and our partners over 1 billion media impressions. We also debuted The Clinic with Nike and Jordan Brand, which brings the best of the court and culture to basketball fans, sneaker enthusiasts, and local communities.

We kicked off The Clinic with our first NBA ad spot starring Nike's Kevin Durant and Jordan Brand's Jayson Tatum, which aired on broadcast TV, digital video, and social media channels. As the latest installment of The Clinic with Nike, we debuted an inspiring new story entitled Dropping Gems, featuring WNBA Seattle Storm superstar Jewell Loyd. It's powerful co-branded marketing investments like these that are continuing to support our already high levels of brand awareness. It's also encouraging to see how our investments in our basketball leadership, including our NBA partnership and The Clinic, are lifting customer perception and consideration for the brand, as well as the association of basketball and Foot Locker. Particularly, as we celebrate the Foot Locker brand's fiftieth anniversary this year, we recognize that basketball is a key part of our heritage and our positioning with our brand partners, as well as with our customers.

Through our investments, we're further cementing our leadership position at the intersection of basketball and sneaker culture. Turning to loyalty, 26% of our sales in the first quarter were through our current loyalty program, up 200 basis points compared to last year. Looking ahead, a key milestone for our business will be relaunching our loyalty program, FLX Rewards, across the U.S., following our successful Canadian pilot last year. The new program, which we'll launch here in the second quarter, will allow us to attract new customers and more deeply engage our existing customers. The addition of cash back and other perks are designed to drive frequency and share of wallet. Through our Canada test, customer reaction to the program has been positive across a variety of KPIs, including higher engagement with the first-time redeemers, higher average order values, higher units per transaction, and higher trip frequency.

When we think about the opportunity with our enhanced loyalty program, we know our average customer shops with us close to 2 times a year, but that they shop for our category between 3-5 times per year. Driving that incremental purchase with us through the program has the potential to be a meaningful lever for our business. Even for our most valuable customers who shop with us multiple times a year across both stores and digital, we believe that we can see higher frequency and higher share of wallet, particularly as we enhance our own omni-channel and loyalty capabilities. As we leverage the program's wider appeal to reach our 50% target by 2026, we'll use this data to drive insights about our most valuable customers and their preferences.

This will help fuel our demand flywheel as we leverage that data for improved CRM and personalization of offers. With our partners, we can also deliver actionable insights as we collaborate through data sharing capabilities. We look forward to updating you on the wider rollout of our reimagined FLX Rewards program here in the U.S. on our next call. Turning to our final pillar, to be best-in-class omni, which means improving our digital presence and better integrating our customer journey across channels. Our digital penetration in the quarter increased to 17.1%, up 80 basis points year-over-year. On an enterprise level, global digital comps were up 4%, and we continue to make meaningful strides in our online conversion rate.

In 2024, our focus is on additional improvements to the customer experience through elevated site content and messaging, enhanced navigation and search capabilities, and importantly, a full product detail page redesign. We're also on track to roll out a new Foot Locker mobile app later this year, which will provide a faster, more modern shopping experience, along with greater product inspiration and storytelling, and serve as a hub for our new loyalty program. We're making strong progress on our digital transformation and continue to target about 25% e-commerce penetration by 2026. Switching to stores, at Foot Locker, we know our Stripers are essential to the overall experience and drive our strong NPS results in stores. In the quarter, we continued to invest behind our expanded suite of Striper training tools focused on driving advanced omni-selling behaviors.

Through our store refresh activity alongside these new Striper trainings, we're continuing to drive better conversion, margins, and overall productivity levels. In closing, we're pleased with our performance in the first quarter and are on target to reach our full year outlook. Through the Lace Up Plan, we're positioning Foot Locker to be the global destination for all things sneakers. Our strategies are continuing to gain momentum as we create a strong demand flywheel through our focus on leading with customer analytics and insights, elevating our in-store experiences through our store refreshes and new concepts, expanding our digital and loyalty capabilities, differentiating our positioning by leaning into our iconic Stripers and Heart of Sneakers brand platform. Now, let me hand it over to Frank to provide more details on our category and banner performance.

Frank Bracken (EVP and Chief Commercial Officer)

Thank you, Mary, and good morning, everyone. Starting with first quarter product and vendor performance, footwear comps positive, low single digits. Our basketball business was driven by both performance and lifestyle franchises throughout the quarter. Nike Sabrina 1, Ja 1, and Book 1 sold very well throughout Q1, flanked by a strong performance in Jordan's Tatum 2. Meanwhile, our exclusive adidas AE 1 continued to connect with consumers as Anthony Edwards establishes himself as one of the NBA's best players, and his sneaker became our fastest growing signature franchise. Alongside our exclusive PUMA MB.03 franchise, Foot Locker continues to be the go-to destination for marquee basketball sneakers. Within the culture of basketball, Nike's Dunk and Air Force 1 and the Jordan AJ 1 continue to be the icons that consumers demand most.

As Nike rebalances supply in the marketplace to manage these critical franchises, we are confident that we are positioning Foot Locker to be a net winner as we reengage the young, multicultural consumer through our elevated storytelling and marketing partnership programs, including The Clinic, Home Court, and, of course, the NBA. And in a category unto himself, we are very pleased to be a key partner in the Kobe basketball journey in the first quarter. As we respect and celebrate the legacy of Kobe and his love of the game and greater inclusivity, we were honored to help tell the story of his impact on basketball and how together we can make it more accessible to more consumers, especially young women.

Further to that point, we view the momentum around women's basketball to be at a tipping point, whereby female participation, athlete innovation, fan excitement, and media coverage will continuously accelerate, making the game of basketball bigger, stronger, and more inclusive than ever. Foot Locker looks forward to being a critical access point to female consumers for our brand partners as they invest to serve the needs of female athletes. As we turn to the running category, New Balance continues to drive consumer excitement at scale, as they are trending positively with consumers globally, importantly, including our women's, men's, and kids' consumers. Franchises like the 9060, the 2002R, and the 530 are among our best sellers, commanding full price retails and connecting to consumers with exceptional marketing and storytelling.

With two exclusive packs in Q1, featuring Storm Reid and Jack Harlow, respectively, and our Q2 activation of New Balance Grey Day on 5/16 and a coming campaign with Flo Milli in June, we are very enthusiastic about our partnership with New Balance for the remainder of 2024. We were also very pleased to celebrate Air Max Day in March alongside our partners at Nike, helping to launch the Air Max Dn across all of our geographies. Dynamic Air represents a new platform that is resonating well with our young, diverse consumer and provides compelling innovation across style and comfort.... With our exclusive Tuned Air franchise, the Vomero 5 and P-6000 franchises, we are seeing AURs and productivity improvement within our Nike lifestyle running business that is very encouraging.

With the Olympics beginning towards the back half of our Q2, we believe that momentum will continue to build behind the Nike brand with an even stronger pipeline of running innovations to come. Additionally, On Running continues to fuel growth as that brand becomes younger and more multicultural through access to our Foot Locker customer base. The Cloudmonster and Cloudtilt are two of the franchises that are bringing innovation, style, and comfort that our customers are adopting as part of their sneaker wardrobe. Meanwhile, we more than doubled the HOKA business again this quarter, as consumers increasingly get to know the performance and comfort characteristics of the HOKA brand. As momentum builds between our two companies, we are sharing consumer insights that will help us drive sustained growth through customer acquisition and inventory productivity.

Turning to the lifestyle category, the adidas brand continued to accelerate in Q1 across all of our global retail divisions. This impressive growth was led by our women's business, but also included strong global momentum in men's and kids. Samba, Gazelle, and Campus have formed a formidable foundation upon which we will drive continued sales growth in Q2 and into the fall and holiday seasons. As we layer in strong marketing and improved in-store presentation in support of the adidas brand, we're very pleased to have returned to offense with this critical partner. Challenges persisted in our apparel business, with comps down mid-teens, as we know we have work to do to stabilize the category, including delivering more innovation and more compelling brand stories, and also improving transitions between seasons.

We have seen some bright spots in our shorts and bottoms business, as well as new collections from Jordan, New Balance, and our private label offering. Finally, our accessory business comped down low single digits. Switching to channel performance, comparable sales in our stores decreased 3%. While traffic and transactions were down year-on-year, average tickets saw nice gains led by increases in our AURs as well as UPTs. Our store refresh program, alongside our new striper selling behaviors, will continue to help drive better conversion, margin profile, and overall store productivity. Meanwhile, digital comps increased 4%. We were pleased to see growth in our customer file in the quarter across both new and reactivated customers, and we delivered higher digital conversion levels for the quarter as our agile digital product teams continue to make progress in improving the omni customer experience. Now for performance by banner and geography.

In North America, overall comps were down 2.5%, including a 320 basis point negative impact from the Champs Sports repositioning efforts. At Foot Locker North America, comps rose by 0.8% as customers responded to our fresh assortments into March and April, especially within our basketball, running, and women's categories. Kids' Foot Locker comps were up 6.4% as we continue to see this differentiated concept demonstrate momentum and take share in the marketplace. At Champs Sports, comps were down 13.4% as repositioning efforts are continuing to take hold. Importantly, while top-line results remain down year-over-year, results are in line with our expectations. Also noteworthy, markdown levels at the Champs banner meaningfully moderated as we moved throughout the quarter, as customers are beginning to respond to Champs' improved assortment and in-store presentation.

Moving to WSS, the banner delivered comps down 5.8% in the first quarter, as ongoing inflationary pressures continue to impact the discretionary spend of the WSS shopper. The WSS management team continues to focus on delivering compelling value and selection to their core consumer, including strengthening our assortments in the sub-$100 footwear, the culture of football, as well as the work and private label categories. Turning to Europe, comps for our Foot Locker banner were up 1.6%. The environment in Europe remains dynamic across many countries, so we were pleased to grow in that region. The team there continues to focus on improving the customer experience through our store refresh program and flowing productive assortments to our stores and digital sites.

And our team in France is very excited to help play host to the 2024 Olympic Games beginning in July, where our stores will be an important connection point for our brand partners in the delivery of innovation, athlete, and sports style storytelling. In Asia Pacific, comps were down 5.5%. The Foot Locker banner saw comps fall 8.7%, reflecting a challenging Australian marketplace as consumer confidence continues to be impacted by higher inflation. And finally, at atmos, comps were up 0.3%, reflecting a resilient domestic business in Japan. The team also opened 2 beautifully remodeled stores during the quarter, including our flagship property at Sendagaya in Tokyo and our Shinsaibashi store in Osaka.

To conclude, as Mary referenced in her remarks, we have built a new commercial offense that is grounded in consumer analytics and insights, that is enabled through our elevated in-store experience and emerging digital capability, and that is differentiated through our Stripers and Heart of Sneakers brand platform.... and we remain confident that momentum is continuing to grow within our brand partner relationships as well as with our consumers, specifically for those variables that we can control. I'll now hand the call over to Mike to go over the financials and guidance in more detail.

Mike Baughn (EVP and CFO)

Thank you, Frank, and good morning, everyone. In the first quarter, starting with revenue, total sales fell by 2.8%, led by comps down 1.8%, which was in line with our prior guidance of flat to down low single digits. As Mary noted, the Champs Sports repositioning represented a 220 basis point comp headwind. February was down mid-single digits, March was down low single digits, and April was approximately flat. Accounting for the Easter shift, combined, our March and April comp trends showed progression from February and were down low single digits and better overall compared to the first quarter trend. Moving to margins, gross margin for the quarter declined 120 basis points to 28.8%.

Merchandise margins fell by 140 basis points, driven by sequentially improved markdown levels compared to the holiday quarter as we worked to transition the consumer off of an elevated promotional cadence. Importantly, our markdown cadence improved throughout the quarter as well, which also coincided with our improvements in comp trends into March and April. Occupancy as a percent of sales leveraged 20 basis points, which was in line with our plans. Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line. For the quarter, our SG&A rate came in at 24.6%, representing deleverage of 220 basis points. Investments in technology and brand building, as well as ongoing inflationary pressures, were partially offset by savings from the cost optimization program of approximately $10 million.

Collectively, our Cost Optimization Program generated total savings of approximately $20 million in the first quarter. The quarter benefited from ongoing expense discipline, as well as a shift in the timing of expenses out of the first quarter and into the second quarter, which approximated $9 million. Finally, EPS was $0.09 for the quarter, and non-GAAP earnings came in at $0.22 per share. Turning to the balance sheet, we ended the quarter with $282 million of cash and total debt of $446 million. Our $600 million credit facility remained undrawn, with 0 outstanding at the end of the quarter. At quarter end, inventories were down 5.6% versus last year, as we remain committed to keeping our inventories controlled, flowing product to better match customer demand, and improving our overall inventory turns in 2024.

On to our 2024 outlook. We're reaffirming our full-year non-GAAP EPS guidance of $1.50-$1.70. It's important to note that our guidance assumes ongoing challenges with the consumer and macro backdrop, as we still anticipate that our customers will be choiceful with their discretionary dollars amid ongoing inflation, reduced savings levels, and higher interest rates. We still expect full-year comps of +1% to +3% as we build momentum through the year.

This will be driven by several factors, including the rollout of our enhanced FLX Rewards program in the U.S. in the second quarter, improving assortments and product flows from our new merchant to buying team structure beginning in the second quarter, productivity impacts of a new workforce management tool, refresh activity in the stores, building from the over 100 projects executed to date, returns on our ongoing brand building and marketing efforts, the launch of our new mobile app, and the return to growth with Nike in the fourth quarter. This outlook embeds the following drivers: Overall, our store count will be down approximately 4% in 2024, with square footage down approximately 1%. We still expect to open roughly 40 new stores in the year and to close approximately 140.

Including an approximate 1-point drag from lapping the extra week, total sales for 2024 are expected to be down 1% to up 1%. On gross margin, we still expect gross margin expansion of 210-230 basis points to a rate of 29.8%-30% for the year as we begin to recapture the promotional pressure from 2023. On SG&A, we expect deleverage between 170 and 190 basis points to a rate of 24.4%-24.6%, driven by our ongoing investments in technology, digital, and brand building, as well as a return to more normalized levels of incentive compensation.

As Mary noted earlier, we remain committed to operational and investment management with a constant eye on maximizing returns, coupled with ongoing progress on our cost optimization program, through which we continue to target $80 million in savings this year. Switching to cash flows, our capital expenditure outlook for the year remains approximately $345 million and is driven by our investments in the store experience as well as technology. While annual CapEx figures may vary in the next few years, we are still committed to that $1 billion figure cumulatively from 2024 to 2026. Looking to the second quarter, let me also provide some additional context for our expectations.

On the top line, for the second quarter, we expect ongoing acceleration in our comps and that we will deliver a flat to slightly positive comp sales result in Q2. With momentum continuing to build through the year based on the initiatives I called out earlier, we expect to deliver comps of 1%-3% for the year. On gross margin, we expect reported levels to be approximately flat year-over-year in Q2, with progress building towards the back half of the year against last year's easier comparisons and as our initiatives take hold. Recall that we will see an impact of $15 million or an approximate $0.10 EPS charge from our initial FLX Rewards transition within the second quarter, which flows through our sales line but impacts our gross margin rate.

Excluding that impact, our underlying gross margin rates in the second quarter would be up to last year, improving sequentially from the first quarter. On SG&A, we expect deleverage year-over-year, including the impact of a shift in the timing of our expenses out of the first quarter and into the second quarter, which will approximate $9 million. In terms of earnings, recall that last quarter we talked to our first quarter representing 5%-10% of annual earnings and the second quarter being approximately breakeven. Post our first quarter results, we still expect our first half to be that same 5%-10% of annual earnings and are pleased to be reiterating our full-year non-GAAP EPS outlook of $1.50-$1.70.

We remain focused on building our momentum through our Lace Up Plan execution and look forward to updating the market on our progress next quarter. With that, operator, please open the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Christina Fernandez with Telsey Advisory Group. Please go ahead.

Cristina Fernandez (Analyst)

Good morning, and thank you for taking my questions. I wanted to ask about the dynamics you saw in the first quarter. As it progressed, you were able to pull back on promotions, the Comp trends improved a little bit sequentially. As you look at that, how much is it, you know, the industry getting better, inventories cleaner, better innovation versus some of the company-specific changes you've made?

Mary Dillon (CEO)

Well, Christina, thank you. It's Mary. I'll start. Let me just start by saying, you know, there are several factors that have come together that we see that's helping our Lace Up Plan gain traction. So I'm pleased that we trended in line with expectations on comps and gross margin. And what I would say in terms of the comps is that we saw a sequential improvement as we went through the quarter, and so as we also were pulling back on promotions. So that's a good thing. We're happy to see that. Also, our AURs were positive, which does show our customers' willingness to pay for assortment at full price. And also, we saw Foot Locker and Kids Foot Locker global comp up 1. So I think those are all good factors.

You know, as we're looking ahead, we expect to continue to see comp improvement versus the first quarter trend, and we're on track to meet expectations for the year. And so in terms of comp progression through the year, we think there are several dynamics, you know, in terms of industry, but really what, I guess, we control and our go-to-market strategy. So, you know, one is that our brand partner relationships are reinvigorated, and we're really, I think, leading through consumer insights, joint multi-year growth planning. Our new merchant buying and planning team structure is working really well and really well integrated with our marketing team. That's all leading to better assortments, access, planning, receipt flows, and I'd say, most importantly, how we're showing up to customers to drive demand.

And so as we look through the year, we see several comp potential future drivers, which is, you know, we're gonna continue to improve our experience in store and online. Think refresh activities, digital improvements. We're continuing to invest in our brand building, such as the Heart of Sneakers campaign, the NBA. We're also rolling out our new loyalty, FLX program, which we think is gonna be a nice enhancement. We've tested that in Canada, launching a new mobile app, and, you know, we see growth with all of our brand partners, and I'd call out specifically return to growth with Nike in the fourth quarter. So on top of all that, we remain committed to keeping our inventory fresh, which allows our customers to keep seeing new and exciting things.

Cristina Fernandez (Analyst)

Thank you. And then a second question: Can you expand on your conversations with Nike in the past few months? Has anything changed as it relates to the inventory allocations for the rest of the year, and how the brand is gonna show up in your stores or online with the refocus on wholesale partnerships?

Mary Dillon (CEO)

Yeah, I mean, I, I would say overall, we feel like we're really well positioned with Nike. We feel very good about the relationship. You know, we focus on areas that differentiate Foot Locker in the marketplace. So our sharp focus on basketball, kids, and sneaker culture with Nike is very important and our young and diverse trendsetting customer base. So we've been working very closely on multi-year growth plans. Our teams are working closely together. We are at the Paris Innovation Summit, as Frank said, and saw some very exciting innovation coming in Air. You know, we're really pleased to support the DN launch, that Max Air Dn launch and their innovation pipeline that we see. We're really excited about that, and that we'll be returning to growth with them by the fourth quarter.

I think we're well positioned as they refocus on wholesale, and we're committed to driving growth together. And I'd say as we raise our game, which is improving the customer experience in-store and online, you know, a more enticing loyalty program, better data sharing, et cetera, I think that's good for our brand partners, too, including Nike.

Frank Bracken (EVP and Chief Commercial Officer)

... Yeah, I would just add that, our teams were out in Portland two weeks ago, working very carefully and looking at both the innovation pipeline and assortment, and then combining that with our 25 commercial plans. And I think we're reiterating our return to growth at holiday with our Nike partners, but also see line of sight to strong growth in 2025, backed by an even stronger product pipeline, and also the new capabilities that we talked about, FLX Rewards, Store Refresh, Store of the Future, as well as our co-investment in The Clinic and basketball culture. So we feel very optimistic. The relationship is in a very good place, and we're spending a lot of time together working on combined joint go-to-market plans.

Operator (participant)

Thank you. The next question comes from Tom Nikic with Wedbush. Please go ahead.

Tom Nikic (Analyst)

Hey, everyone, thanks for taking my question. I want to ask about, you know, WSS. You know, that's been a laggard the last couple of quarters, and, you know, I know that, you know, Mary, when you first came aboard, you know, you were pretty excited about the opportunities there. Can you talk about, you know, turning that around? Because, you know, it kind of seems like core Foot Locker banner is, you know, comping positive again, and Champs obviously is going through a reset, and WSS kind of seems like the straggler here. So just kind of wondering, you know, what the plan is there.

Mary Dillon (CEO)

Got it. Let me start by saying, you know, we believe that the banner is really well positioned against an important and growing segment of the population in the U.S., which is the Latino families. And as you know, WSS serves the family needs from work to sports to fashion, everything in between. You know, that is right now, especially with our concentration in certain states, I'd say, a customer that's under a little bit more pressure economically, and so that puts some pressure on their disposable income. And so we're seeing that, we're feeling that in the business. And I think what we're doing is just making sure that we've got... First of all, we've got a great leadership team. We're sharpening, you know, how we execute in the stores.

We're looking at our pace of new store growth as that's happening, as we're waiting to see the customer get a little bit stronger in terms of their discretionary spend. But we feel committed to the concept and who we're positioned against for the long term, as well as our brand partners also support our work in that area.

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, I would just add that with the new management team there, they've really sharpened our positioning and looking at our assortment. You know, a couple of areas that we're working really hard, sub-$100 footwear, where there has probably, over the last several years, been sort of a lack of innovation. And so as the vendor community sort of reengages that consumer and that price point, WSS will certainly benefit from that. We're also looking really closely at the culture of football in an Olympic year, World Cup year. I think that category resonates really well, and we are starting to see some green shoots there, and the team is building some better assortments, in-store presentations and some connectivity to the consumer. Also, workwear is a category that we continue to build really strongly across both footwear and apparel.

Then lastly, we see opportunity in private label, particularly from a value standpoint, to be a little more aggressive and deliberate there. So again, I think I'll reiterate what Mary said, is our long-term belief in that consumer, the population growth seems to continue to be very, very positive, and we're optimistic about that. We're just working through some of the transitory economic challenges that that consumer is really facing. Again, recall, California, I think Mary alluded, is over 70% of our store base and therefore, our consumer population, where we're seeing high inflation and high cost of living, so working through that.

Tom Nikic (Analyst)

Understood. Thanks very much, and best of luck the rest of the year.

Operator (participant)

The next question comes from Michael Binetti with Evercore ISI. Please go ahead.

Michael Binetti (Analyst)

Hey, guys, congrats on a nice quarter. I'm just curious, with the 2Q guidance pointed to the long-awaited shift to a positive comps here, congrats on that. Happy to see it. What are you seeing that today, and maybe what are some of the, you know, impactful changes to the KPIs that you think will drive that inflection, I guess, in the second quarter, in the 1-year, in the multiyear run rate in the business today? I know you have... the reason I ask that, I know you have a number of different initiatives rolling out at different times in the year, so I'm just trying to understand what we'll see a little bit sooner versus what we'll see a bit later in the year.

And then on loyalty and the refreshes, could you give us a couple tangible examples of the better use of data you've been able to deploy in the Canada test, and how you pencil that out as you launch in the U.S.? And then, if you're willing to share, or frame any kind of sales lift you're seeing early days in the refreshed stores. Thanks.

Mary Dillon (CEO)

Michael, this is Mike. Thanks for the questions.

Michael Binetti (Analyst)

Hey, Mike.

Frank Bracken (EVP and Chief Commercial Officer)

I'll start on the guidance items, and then, Frank, maybe you can jump in on FLX. So from a guidance perspective, you know, we're pleased with how Q1 shaped up and the progression that we saw in the March, April timeframe, you know, with the combined period being low single digits and better than the overall quarter trend, combined with, you know, starting to pull back on the markdown levels and seeing the resulting improvement. You know, that's what's really given us the confidence here, is our ability to reduce the markdown levels and see the movement in sales in the right direction, to give the guidance for Q2 for the flat to slightly positive comp sales, coupled with, you know, margin that we're indicating as approximately flat.

Important to note within there, though, that that approximately flat includes a headwind from the FLX accounting charge that will occur within this quarter. Without that charge, we would be delivering a positive margin profile within the second quarter. From an initiative build perspective, the launch of FLX Rewards in the US is obviously impactful to Q2.

Mike Baughn (EVP and CFO)

...Our refreshes will accelerate. We talked about 13 in the first quarter. That will meaningfully accelerate the rate of refresh activity in the second quarter. Our workforce management tool will be rolling out across the back half of the second quarter. And then I think we've also indicated that our new merchant and buying structure, those teams and their product flows and their inventory buys really start to impact us in the second quarter here, heading into back to school. You know, beyond Q2, we've really got the mobile app later this year, the return to growth with Nike. And all throughout the year, I think we're confident that the improvements we've made in our brand building and marketing efforts are lifting across the year.

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, Michael, this is Frank. I'll just add a couple of tangible sort of notes that you inquired about. So in FLX Rewards, we're definitely seeing enrollment in the program, so just the consumer response to the added benefits. So the penetration of sales through loyalty in Canada has improved. We're also seeing engagement with the program significantly outpace our current baseline program. And thereby, we're seeing frequency and also basket increases with the consumer, which is also obviously driving, you know, net revenue and the top line up. In terms of the store refresh, as we look at the comps, we're seeing a comp improvement versus the balance of chain. So the top line is showing a nice beat to the balance of chain.

Also, a healthier margin profile as we've done some of our assortment planning and put in some of our better assortments and working through our visual merchandising and improved service. We're seeing the sell-throughs as well as margin profile improve in those stores. And then lastly, consumer satisfaction, we measure it through NPS, is beating balance of chain there. So really feel good about that. Mike mentioned, you know, we did 13 refreshes in Q1, and that's gonna accelerate to well over 100 refreshes per quarter globally to help us stay on pace there. So we feel very good about the investment and the return and payback we're seeing.

Adrian Radai (Analyst)

Thanks a lot, guys.

Operator (participant)

The next question comes from Adrian Radai with Guggenheim. Please go ahead.

Adrian Radai (Analyst)

Hi, good morning. Thanks for taking our questions. Can you please expand on women's? What are the biggest wins so far? It sounded like you made great progress on the basketball business. I guess also, what are the challenges, low-hanging fruit going forward, categories, brands that are doing well? And I guess, can you please also talk about the actual commercial impact from the Paris Olympics this year? I don't know if you can quantify. I'm just trying to grasp the commercial significance of the event versus just the innovation brand showcase.

Mary Dillon (CEO)

Hi, sorry, we couldn't hear you very well. Could you repeat the question and maybe speak a little directly more into your phone?

Adrian Radai (Analyst)

Yeah, sorry. Can you hear me now?

Mary Dillon (CEO)

Yeah, that's better.

Adrian Radai (Analyst)

Awesome. Sorry. Can you please expand on women's? I guess the biggest win so far. I know you guys made a great progress on basketball. What are the challenges there also, like low-hanging fruit, any categories, brands that are doing well? And I guess, can you please also talk about the actual commercial impact from the Paris Olympics this year? I don't know if you can quantify it. Just trying to grasp the commercial significance of the event versus the innovation brand showcase.

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, I'll start with that one. On the consumer side, specifically, what we're seeing, certainly one of the big structural changes post-COVID is more consumers are wearing sneakers, and amongst those new consumers, women are really leading not only the commercial side of it, but also they're leading trends. So when we think about court, when we think about terrace, and the next trend, which we think is coming, is low profile, it's really women and specifically the teen girl, who are leading those trends. So it was amongst our fastest growing categories globally across all of our core banners, so feel very good about that. And the other thing is that our vendor partners are really investing resources in product creation as well as demand creation.

Then we are backing it up with more in-store space, better storytelling, and better service to our female consumer. And I'll just put in a plug for our Store of the Future, you know, our women's section is outperforming the balance of the chain by significant margins. So we feel very good in terms of both our refresh and Store of the Future concept. Turning to basketball, feeling very good. In fact, I'd say it's one of the areas we feel best about moving forward. We see brand diversification in terms of signature, so we've talked about Nike, Jordan, adidas, PUMA, and Under Armour, all having great signature offerings, and we are the go-to destination for that.

And then we also are gonna see, I think, a resurgence in the culture of basketball, and we will continue to invest in partnerships like Home Court, the NBA, The Clinic with Nike and Jordan, to make sure that we keep those franchises in a pull state, and that we're realizing better margin and also doing our part for demand creation and elevating the storytelling and service. So I think feel very good about culture of basketball and where that's headed. Lastly, in the Olympics, you know, France is our strongest. It's actually our number one country in Europe. We have about 145 stores there, so we do expect a local impact to the games.

More importantly, we think our stores are gonna be an important consumer connection point for our brand partners to tell great stories around innovation, around athletes, and sports style. And so we're partnering with several of our brand partners to do store takeovers, pop-ups, and some special experiences across a number of cities in France later this summer for the Olympic Games. So it's an important cultural and sport culture moment and sneaker culture moment, and so we see it as a bit of an ignition point. I think, you know, we talked about some of the great work that our partners at Nike have in terms of the running innovation and basketball innovation that'll be unveiled there. So we feel very, very good and very bullish that that's gonna be an ignition point for the category.

Adrian Radai (Analyst)

Got it. Thank you. Best of luck.

Operator (participant)

The next question comes from Jay Sole with UBS. Please go ahead.

Jay Sole (Analyst)

Great. Thank you so much. Frank, I want to just follow up on that answer that you just gave to the last question. You know, Nike has had some great innovation over the last few years, like the Alphafly series and running, but it seems like it hasn't necessarily... That the credit from the consumer for those innovations hasn't necessarily cascaded down to the mass market and driven the running business, you know, broadly, and some of just the, you know, even the lifestyle running business broadly. Do you think that the innovation that you're talking about, that you're seeing from Nike, is going to lead to just a, a halo around the brand that leads to strong growth, really across the brand, across all the running and running connected part of the assortment that can benefit Foot Locker? Thank you.

Frank Bracken (EVP and Chief Commercial Officer)

Yeah. So, you know, again, I think Mary mentioned John and Craig were kind enough to invite us to Paris to see the innovation summit and also get a sneak peek into the late 2024, 2025, 2026 pipeline, and feel very good about the innovation work that they're doing around Pegasus, Structure Triax, Vomero, and then also some of the lifestyle platforms. You know, we talked about the launch of Air Max DN and some of the derivatives that will come off of that and feel very good about that. You know, look, I think it's fair to say Nike's going back on offense.

Some of the demand creation and brand marketing that they gave us a quick preview of in Portland last week was incredibly exhilarating, kind of the thing that makes your hair stand up on your arms and gets you really excited. So, you know, we couldn't be, you know, more proud of the progress we've made in our relationship with them. So across running, across basketball, and across lifestyle, we feel very good about our return to growth and then also just their pipeline and their demand and brand creation efforts that they're investing in.

Jay Sole (Analyst)

Maybe just to follow up on that, too. I mean, you mentioned in your prepared remarks that women's basketball seems to be at a tipping point. I mean, can you just talk about, you know, your outlook for women's basketball, for that footwear business? I mean, how meaningful can it be? I mean, presumably, it's a very small part of the basketball business today. So what can it be? And then are there any other brands in women's basketball besides Nike that are meaningful?

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, absolutely. So there's already been some great progress we've made with Nike around the Sabrina 1, you know, PUMA with the Stewie signature line has been great. And then, needless to say, Caitlin Clark has brought another level of excitement, and having just signed with Nike, we, we're very bullish and optimistic about the plans there. But if you look across the league, again, we referenced excitement in media, grassroots participation in terms of females playing, and then also just the commercial opportunities. So we think it's gonna be a place where our brand vendors invest across the board. So we think about Nike, we think about Jordan, adidas, PUMA, Under Armour.

I think all of them are gonna have participation in the female side of basketball, and we're gonna be right there to invest with storytelling, with some open-to-buy and with some co-marketing to help support that growth. So we're very excited that this is gonna help round out and increase participation, inclusivity in the sport.

Jay Sole (Analyst)

Got it. And then maybe just a comment on apparel. Obviously, still a work in progress. What's next? What's the plan going forward to get that business to where you want it to be?

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, so I'd say there's, you know, some things that, as an industry, we need to get back on offense in terms of innovation, and so delivering innovation through material, through fabric, through color, I think. We think is an opportunity. You know, COVID, there was certainly a strong sort of athleisure moment there, but a lot of neutrals and basics and grays and blacks and whites, and we think a return to color and, and then some more interest beyond fleece in terms of, maybe nylons and some mixed materials is an opportunity, but also just seasonal transitions, things that we can control. We're working on that.

So we're going to more of a, I'd say, a key item focus that allows us to make sure we're in-depth and in stock and color and size for the most important items in the category for our consumers. Those are some of the things that we're doing, as well as some of the demand creation. And then also just, you know, connectivity head to toe back to the sneaker and telling better stories from an integrated head-to-toe look is something that we probably lost a little bit of discipline as an industry, as a company, that we're going back to. With supply chain now sort of normalized, we're able to deliver those packages in more harmony, which allows us to deliver them to the store and get them on our websites at the same time and tell better stories.

Jay Sole (Analyst)

Got it. Thank you so much.

Operator (participant)

The last question today comes from Janine Stichter with BTIG. Please go ahead.

Speaker 10

Hey, good morning. You've got Ethan on for Janine. I've got a couple questions. First, on the new store in Wayne, New Jersey, just would love to hear how you're planning to incorporate any of the learnings here into future stores. On top of that, what your expansion plans are for these store formats beyond the 4 additional locations opening this year. Then secondly, if you could just give some color on what you're seeing in terms of the current macro environment, and especially, you know, how the lower income versus upper income consumers are each performing, that would be helpful. Thanks.

Mary Dillon (CEO)

Great. Let me start with the view of the consumer, and then we'll go backwards from that, which is that I think we all know that the consumer has been exposed to prolonged inflation, you know, reduced savings, higher interest rates, and that does affect discretionary income. No question about it. That said, you know, sneakers is a discretionary category for our consumers that they prioritize, and I would say spending with purpose. So for the right exciting product at the right key moments, call it Mother's Day, Father's Day, back to school, holiday, you know, they're spending. So I think it's just it's our job to serve up to our guests what they want, when and how they want it, and that's what our Lace Up Plan is focused on doing.

And so for us, it's about, you know, continuing to pay close attention to how our customer is feeling, but really executing with excellence is really what it's about, to capture their discretionary dollar in a category they care a lot about.

Frank Bracken (EVP and Chief Commercial Officer)

Yeah, and I'll pick it up from there in terms of Store of the Future and Refresh. So it was really one brief that sort of guided our work on both of those endeavors, and they're happening in parallel, and they're very closely connected. But our goal there was really to improve the consumer journey and help with discovery and telling consumers what's most important in the store. We also listened to the voice of our brand partners, and so brand storytelling and merchandising was also a critical part of the brief. And then lastly, really just elevating our service and our Stripers and making them a bigger and more important part of the journey. And so the Store of the Future really accomplishes that very well.

We're seeing the diversification of brands, the consumer diversification, come through in the results very strongly. It's also informed our store refresh program, which I said we're seeing outsized results there, and we're gonna continue to invest throughout the rest of 2024 and then into 2025.

Speaker 10

Got it. That's helpful. Thank you.

Mary Dillon (CEO)

Great. So let me just wrap us up. Thanks, everybody, for joining us today. I remain confident that we're on the path towards delivering sustainable, profitable long-term growth and shareholder value. Through the Lace Up Plan, we're positioning Foot Locker to be the global destination for all things sneakers. I want to extend my thanks to the entire Foot Locker team, and in particular, our global Striper community, for their passion and their commitment to working with excellence every day across our entire enterprise, our stores, and our distribution centers. So we look forward to updating you on our progress next quarter. Thank you.

Operator (participant)

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