Foot Locker, Inc. (NYSE:FL) Q4 2022 Earnings Call Transcript

Foot Locker, Inc. (NYSE:FL) Q4 2022 Earnings Call Transcript March 22, 2023

Robert Higginbotham: Welcome to Foot Locker, Inc.’s 2023 Investor Day, Lacing Up For The Future. Thank you to everyone for being with us in the room today, and thank you to everyone else for listening online. We are incredibly excited to present to you the new strategic vision of our company. Before we get into that, a couple of formalities. First, our disclosure on forward-looking statements. Then a quick run of show. In a moment, I’ll walk you through the highlights of our fourth quarter results. Then our Chief Executive Officer, Mary Dillon, will come on to introduce to you our new strategic framework and growth plans. We’ll then have our executive team begin to walk you through the details of that plan. At around 9:45, we’ll take about a 15-minute break.

We’ll then resume presentations until around 10:30 and then we’ll wrap up with some Q&A. So let’s get into it. Starting with our fourth quarter results. We had an exceptional fourth quarter. Our comps grew 4.2%, well ahead of guidance for down 6% to 8%, driven by strong holiday demand and access to high-quality inventory. As we continue to diversify our assortment, our non-Nike sales grew mid-single digits, with our Nike mix down only slightly, much better than we originally expected. By region, we saw broad-based momentum. In North America, our core Foot Locker banner was up over 13%, while Champs was down 10% as we repositioned that banner. EMEA comps grew 14% with ongoing strength in key markets, and APAC grew nearly 6%, given our investments in stores, our brand and community experience.

Our gross margins overall were down 290 basis points, given promotions were higher than the prior year, but in line with our plan. Our inventory up 30% with high-quality product positions us well for 2023. And our non-GAAP EPS came in at $0.97, above our guidance for $0.45 to $0.53. By category, footwear led the way, up mid-single digits, but with apparel not far behind, up low single digits. And we were above guidance in each month of the quarter, with particular strength in December, especially during those key shopping dates during the holidays. Again, our gross margins were down overall by 290 basis points, 310 basis points from planned promotions against the still favorable environment from a year before. And our comp increase helped us drive occupancy leverage of 20 basis points.

SG&A leveraged by 10 basis points with the early benefits from our cost optimization program being largely offset by inflation. So that’s the quarter. We will spend the rest of the day looking forward. And so now let me bring on our Chief Executive Officer, Mary Dillon.

Mary Dillon: Okay. Good morning, everybody. Thank you so much for being here today in the room or on the webcast. We really appreciate your time. In the last 6 months or so since I joined Foot Locker, I’ve been spending my time learning about our business, the industry, our team, our brand partners and really confirming many of the hypotheses that I had when I decided to join the company, which is that we have an exciting opportunity ahead. So today, along with all my leaders, I’m excited to show you our direction for the future, which we call our Lace Up Plan. So let’s start and let me just give some context at the top. Foot Locker as a company has many strong assets to leverage, and we will talk about those today. We also operate in an exciting growth category with strong tailwinds.

And we have insights about the category and the consumer that provide clear pathways to position our banners for growth. And I believe that with the right focus, the right investments and new capabilities, we will drive long-term profitable growth at Foot Locker. So let me talk about our strengths first. Foot Locker has a strong and unique place in the sneaker ecosystem. We are the OG. Foot Locker is the #1 global brand synonymous with sneakers and sneaker culture. We have a 50-year authentic history around street basketball and youth culture. And we’re truly a global iconic brand with over 90% brand awareness and social media engagement, that’s incredible. If you look at just Foot Locker alone, we have over 12 million followers and that’s 5x the combined followership of our next 4 competitors, true brand engagement.

Everybody knows and loves and grow up with Foot Locker. In fact, just a couple of weeks ago, the Foot Locker Striper was a clue on jeopardy. That tells you a lot. We’re a favorite brand with teams, and we know teams are the ultimate arbiter of what’s We have tremendous brand partnerships with the #1 wholesale partner for leading brands in the industry. And we have over 40,000 store associates who are truly trusted experts and provide exceptional service. I would also add, and this is something we’re really proud about, Foot Locker is a true job creator often a first job for young global people — young diverse people around the world, and we provide tremendous career possibilities. In fact, in the U.S., over 90% of our store teams are Black or Hispanic.

Now let’s talk about the sneaker category. And everybody here knows it’s a large and growing category. Sneakers alone are $80 billion of sales in North America and Europe. And the category is projected to grow at a mid-single-digit rate. It’s a category with high engagement, that’s a lot like beauty. It’s about individual expression, newness and innovation matter, physical and digital experiences matter. And there’s plenty of factors that point to support for the continued growth of the category. So mass casualization. I think we all know that hybrid work is here to stay. And so whether it’s that or sneakers with your tuxedo or your dress, we are not going back to less comfort in our lives. I can tell you that. Also, second factor, performance is becoming mainstream.

Traditional and new performance sneaker brands are becoming fashion statements. And third, the sneakerhead mindset is on the rise, with sneakers becoming a favorite avenue for individual expression where newness and collectibility truly fuel demand for more. And all the sneaker wearing and category participation is driving demand for a variety of brands, consumers want choice, and we can give that to them. In fact, sneakers are becoming a larger share of the footwear market, and there’s still lots of room for a sneaker wardrobe to grow in closets. And more brands are serving these customer needs than ever before. Of course, Nike, adidas, New Balance and PUMA, 2 newer brands like On Running and HOKA, people are building a sneaker wardrobe and not just niche sneakerhead collectors.

And we see it in our own data. 40% of our transactions have multiple brands and the majority of our highest frequency shoppers by multiple brands. So what I’d like to do next is dive a little deeper into demographics and psychographics or mindset in motivation. Let me start with the demographics of our Foot Locker portfolio. We have a solid base across demographics relative to the category today. You can see the data up on the slide with a skew towards younger and more diverse customers, which we believe is a strategic advantage. These are the fastest-growing consumer segments in the U.S. and are rapidly expanding in their purchase power. If you don’t win with young diverse consumers in this category, you don’t win in the long run. But driving demand and growth is also not just about putting people in a demographic box, it’s about unlocking growth by understanding and tapping into the mindset of shoppers in the category.

So in other word, a sneakerhead is a mindset where the sneakerhead can be somebody of any age, race or income. That’s why we’re focused on unlocking the inner sneakerhead in all of us. So let me explain more. We just completed our most exhaustive consumer segmentation study yet and we will leverage those insights to differentiate our banners and provide new pathways to growth. So let me just share some of the highlights. It’s a lot to digest. There’s a broad set of shopping occasions and motivations for consumers within the sneaker market, which is true for almost any consumer category. These diverse motivations can be translated into specific consumer segments, which allow us to hone in on the mindset of shoppers and better meet their needs.

So let me talk about the segments, and you might recognize yourself in one of these. There’s a Sneaker Maven. This is the biggest segment in the marketplace. Sneaker obsessed shoppers who represent themselves through their shoes. Fashion Forward Expressionist, they want to look and feel cool and fashionable and sneakers play a big role in that. The Active Athlete prioritizes performance when shopping for shoes and often adds an apparel item to their shopping trip. Quality Seekers. A Quality Seeker is a practically mined shopper, focused on well fitting shoes and well-known brands. And the Deal Finder who focuses on price is their highest priority. And by the way, these segments are not completely discrete. So consumers might start in one segment and then grow their sneaker wardrobe by moving into another segment as well.

So I, for example, have long been in the Active Athlete segment as a runner. But now I’m moving into the Fashion Forward Expressionist segment and displacing a lot of heels on my closet in the process. Unfortunately, one of my daughters has my shoe size. She’s got some nice heels now. But as evidenced by my Nike Air Max 97 “Gold Bullet” shoes today that I chose to match my jacket. So Fashion Forward Expressionist and Active Athlete. The Foot Locker portfolio overindexes with the Sneaker Maven and captures a strong business with the Fashion Forward Expressionist. Both of these segments skew younger and more diverse. And while they over-index in their love of Nike and Jordan, they also have other brands in their consideration set like adidas, PUMA, New Balance and Converse.

And you may have guessed, we have an incredibly strong relationship with that customer. They love the brands we carry, the energy that we bring to the category and especially our in-store experience. And our portfolio today also attracts customers across the other segments, given our range of banners and the brands that we offer within them. So our Lace Up Plan will create pathways for growth in both our areas of historic strength and our opportunity areas for the future. So we’ll leverage our sneaker authority at the center of seeker culture to grow in 2 ways: expanding our wallet share with Sneaker Mavens and Fashion Forward expressionist and broaden our reach with the other segments. So we’ll start with the Sneaker Maven and Fashion Forward Expressionist.

As we showed in the previous slide, we overindexed with Sneaker Mavens and have a strong business with the Fashion Forward Expressionist already today. Our community stores really bring this relationship to life. So community stores are located in neighborhoods with a passion for sneakers, and those stores have an average order value that’s over 20% higher than the balance of the chain, and we serve the full family needs in those stores. Our partnership with Crocs is just one example of how we build sneaker culture for our brand partners as well. So 70% of our Crocs sales are going to women and children. And the way that we’re able to connect that brand with sneaker cultures and our customers has allowed that brand to both drive more productivity and create higher pricing power than before, especially with exclusive tie-ins like Crocs and General Mills.

So as we walk through our Lace Up Plan today, you will see how our key actions from a relaunch of the Foot Locker brand to new store concepts, to exciting brand partnerships, to relaunch of our loyalty will all work together to drive even more loyalty and growth with these key segments. So secondly, while the Active Athletes, the Quality Seeker, the Deal Finders had different motivation than those first 2 segments, sneakers are a part of their everyday lives and increasingly so over time. So given our current share in those segments, we have opportunity to broaden our reach and better invite them into our portfolio. And we’ve already started to do just that. So for example, in 2022, we acquired over 10 million new customers in the U.S. with brands like On Running and HOKA driving 2x the acquisition of other brands.

And 60% of those new consumers are women. So brand partnerships like these are helping us to bring in new customers into our franchise as well as helping them expand to a younger and more diverse customer set that they may have today. So in addition to new brand offerings, new store formats and locations will also be a key strategy for us to reach those key segments. Example, our Power Store — new Power Store in Dallas-Fort Worth has a focus on running and basketball and our best expression of sneakers, and it’s attracting a older and higher income shopper. In fact, the household median income of the Dallas-Fort Worth store is 30% higher than our average fleet in the fleet. So these are just a couple of examples of early wins that we’re seeing in our ability to both expand wallet share and broaden our customer reach, which gives us great confidence in our growth plans.

So with this category segmentation as a backdrop, we’ve created a sneaker growth plan, positioning our banners to play each a distinct role. So you’ll see as we go through our strategic priorities today, we’ll bring these distinctions to life by providing the right offerings and experiences for each banner and segment, combined with a powerful new set of demand creation tools and loyalty in CRM and a much improved e-commerce experience. So Foot Locker will continue to focus on the Sneaker Maven, while we broaden Foot Locker’s reach to new segments. Kids Foot Locker as the #1 kids-focused sneaker retailer, we believe in this brand’s ability to broaden and serve more kids and more occasions. Champs will reposition to go after the more suburban active athlete serving their footwear and apparel needs.

WSS has a distinct focus on Hispanic families and more price-sensitive consumers. And then atmos, which serves the premium customer with a focus on Japan and Japanese culture. So bringing it all together, our vision is that by leveraging our sneaker culture, passion, authority and expertise in that of our store teams, we will position our banners to deliver all things sneakers and unlock the inter sneakerhead in all of us. So let me show a quick video to bring this to life.

Jacob Lund/Shutterstock.com

Mary Dillon: So what we’re going to do next is walk through the key strategic pillars of our plan, but I’d like to provide an overview on each first. So the first strategic pillar is all about expanding sneaker culture. So as a pioneer in the space, Foot Locker has been committed to developing sneaker culture over the last 50 years. We will leverage the passion and the commitment that we have for sneakers to serve more sneaker occasions, provide more choice and drive greater distinction. Of course, our strong relationships with our brand partners in the industry is where it all starts. In fact, our relationships with our brand partners have been a top priority for me and my team as I joined the company. And I’ve met with the top leaders of all of our largest brand partners to begin to share our vision for Foot Locker and our growth plans with them.

Of course, Nike is our largest brand partner and a leader — the leader in the industry. From day 1, I’ve been welcomed to the industry by John and Heidi and their team. And my team and I have spent a great deal of time with Nike, revitalizing our partnership, developing a shared vision of the future marketplace, aligning on growth plans in key strategic areas like basketball, kids and sneaker culture. We’ve reestablished joint planning as well as data and insight sharing so that we can better serve customers. And the fruits of our renewed commitment to one and other will begin to show up in holiday this year as we build increasing momentum to 2024 in the 50th anniversary of Foot Locker. So I’d like to thank John and Heidi and their entire leadership team for helping us revitalize the partnership and a path forward towards consumer-led ideas and growth.

Now of course, there are so many other wonderful brands that our customers love today or are beginning to love, New Balance, PUMA, adidas, Vans, HOKA, On Running, Crocs, UGG, Brooks, ASICS, the list goes on. And I look forward to building collaborative partnerships and plans with all of our key partners as we strengthen our position at the center of sneaker culture. So Chris Santaella, our Chief Merchandising Officer, will cover the first strategic imperative. The second imperative we call powering up our portfolio. Frank Bracken, our Chief Commercial Officer and Tony Aversa, our SVP of Store Development, will together walk through how we’ll reshape our banner portfolio with focus, intent and innovation. We are so excited about a major relaunch of the Foot Locker and Kids Foot Locker brands and creating clear differentiation for the rest of our portfolio as well as transforming our real estate to support our growth ambitions.

The next imperative is deepening our relationships with customers. Frank will then come back to cover the critical topic of investing in all things digital, specifically reinventing our loyalty program and building our CRM capabilities to create deeper relationships with new and current customers. And that our last imperative is all about being best-in-class omni. So after a break, Peter Scaturro, our SVP of Strategic Planning and Growth and Elliott Rodgers, our new Chief Operations Officer, will describe how we’ll accelerate and enable our omni offense, increasing our digital mix, by removing friction and having better connectivity between channels to drive a greater penetration of digital in our business. So together, all these strategic priorities will create value for all of our stakeholders, our customers, our communities, our team members and our investors alike.

So there is work to do, and — but we know what it takes, and we’re ready to do that. First, it’s about simplifying our organization, closing underperforming businesses to reinvest those resources and focus on the banners and the geographies that will drive profitable growth. We like to say it’s getting focused on all things sneakers. Investing in the technology and capabilities that will allow us to have a more targeted and personalized demand engine over time, changing our mindset as an organization to becoming truly customer-led. And finally, creating a culture that leads to the lenses of functional expertise, enterprise thinking and collaboration and putting our customers and our stripers in the center of everything we do. It doesn’t happen overnight.

So we’ve already begun, though. We’ve already begun simplifying our organization with the closure of Team Sales Eastbay, Footaction, Sidestep and transitioning most of Asia to a licensed model. 2023 is a year where we will reset the business, our relationship with our brands, our banner repositioning and store optimization. We’ll begin to execute on our cost savings, while at the same time, investing in technology and new capabilities and our global brand platform. So that in 2024 and beyond, our core banner focus new concepts and better digital and loyalty capabilities will drive sustainable growth. I couldn’t be prouder of the team that’s taken the field with me. We have an amazing mix of better and knowledge and fresh perspectives. I’d like to mention 2 of our newest members who are joining us here today, Adrian Butler, our Chief Technology Officer, who recently joined us from Casey’s General Stores, bringing incredible experience as a technology leader across restaurant and retail.

And Kim Waldmann, who is joining us officially next Monday, but we’ve announced this today. She’s joining us as she’s most recently the Chief Digital and Marketing Officer of Athleta. And prior to that, the General Manager of e-commerce at SEPHORA, and she’ll be our Chief Customer Officer. So let me wrap this section up by just highlighting our targets and aspirations, and we’ll walk through all of this today. I believe that our Lace Up Plan to simplify, invest and grow and execute across the strategic pillars I just gave you an overview on will truly create value for all stakeholders and set us on a path to exceed $10 billion in revenue over time and to exceed a 10% EBIT margin. Now let me bring up our Chief Merchandising Officer, Chris Santaella, to begin walking you through our strategic imperatives.

Chris Santaella: All right. Thanks, Mary, and good morning, everyone. Sneaker culture has been the driving force behind Foot Locker for the last 49 years and will be the driving force behind the next 50. The last few years has created a lot of change in the industry, and one of the most positive changes has been the evolution of the consumer. I will take you through the first strategic imperative on expanding sneaker culture and how Foot Locker continues to evolve with the consumer. As Mary touched on, sneaker culture continues to evolve and be much more inclusive. More people are wearing sneakers on more occasions than ever before. No longer are sneakers only for sport and for weekends. They are part of every aspect of life for many people.

The broadening consumer base continues to keep sneakers top of mind. The Sneaker Maven is looking for a pair of Nike Panda Dunks. The Fashion Forward Expressionist is looking for hunting the New Balance 9060. The Active Athlete is looking for performance innovation from brands like On and HOKA. The Quality Seeker and Deal Finder are looking for authentic brands and great price value in their sneaker shopping occasion. Sneaker culture was built on accessibility and inclusivity. We had passion for sneakers, whether it’s for style, comfort or performance, there was something for everyone. That inclusivity was a great foundation for the future broadening consumer base. Foot Locker was there from the beginning, providing access to a world of consumers through our global store fleet and our passionate striper community.

The broadening consumer base has created a broader brand portfolio as more consumers are seeking more brands to satisfy their footwear occasions. Foot Locker has evolved our brand portfolio to include a much broader brand representation. In the last few years, Vans, Crocs, UGG, On Running and HOKA have all been added to our brand portfolio, in addition to our long-standing partnerships with premium athletic brands such as Nike, adidas, PUMA, New Balance and Under Armour, just to name a few. There are more consumers seeking more brands to support their desire to wear sneakers on more occasions. As more consumers are wearing sneakers for more occasions, Foot Locker has evolved their merchandise strategies to focus on these areas. The first is broadening our footwear assortment to satisfy more footwear occasions.

The Sneaker Maven and Fashion Forward Expressionist will continue to drive our core business through premium lifestyle product. This could be a Jordan Retro, adidas Superstar or UGG Mini Classic. Premium lifestyle footwear will continue to be the sharp point for Foot Locker. In addition to style, we will expand our assortment to the Active Athlete, focused on performance innovation in their sneaker shopping occasion. This could be running innovation from On Running or HOKA or the next performance basketball model, such as the upcoming Jayson Tatum launch from Brand Jordan. The second focus area is broadening our brand portfolio. Our highest value customers purchase 3 footwear brands per year. They crave a multi-branded environment for their sneaker shopping occasion, providing choice, both from a brand and category perspective, are critical to satisfying the evolving consumer appetite and providing our customer the best premium multi-brand experience in the marketplace.

The third focus is on sneaker distinction. Our customer creates scarcity and a differentiated marketplace. Foot Locker will utilize our global sneaker community to elevate our exclusive product opportunities and creating a more differentiated marketplace in the future. Foot Locker will continue to lead in basketball exclusivity, in addition to developing exclusive product concepts in other categories. These principles drive customer loyalty, in addition to broadening our reach and diversifying our brand portfolio. In addition to more consumers and more brands driving the future of sneaker culture, there are also more shopping occasions that are providing Foot Locker opportunity to expand our reach and increase wallet share from our existing customers.

The global pandemic, a new hybrid work environment has created an increased desire for performance footwear, both from a style and performance perspective. Comfort and versatility is driving customer, along with the desire to stay fit through a changing hybrid lifestyle. Sneaker Innovation is deeply rooted in Foot Locker’s DNA, both from a style and performance perspective, and delivering new performance innovation has been a big part of Foot Locker’s 50-year journey. We have accelerated this opportunity and performance product with the development of new brands such as On and HOKA, along with aggressive growth plans with ASICS, Brooks and Nike. Foot Locker is well positioned to capitalize on the performance opportunity. The second footwear opportunity is the casual business.

The broadening customer base has looked for comfort and style as they increase their sneaker wearing occasions. Foot Locker has deep heritage with premium athletic brands and has now expanded our brand portfolio to include many premium casual brands. Over the last 5 years, Foot Locker’s added Vans, Crocs and UGG, in addition to long-standing meaningful business with Timberland and Converse. This segment is critical to our growth opportunity in women’s and kids as the casual business has a deeper customer connection with her than the male consumer. The third opportunity is, under $100. Foot Locker will continue to focus on the premium segment of the marketplace. But through WSS and Champs, we will have — we have the opportunity to expand our reach more aggressively in the under $100 marketplace.

We have strong relationships with our brand partners, such as Vans, Converse and Crocs, in addition to developing opportunities with our premium athletic brands. Our acquisition of WSS has allowed us to better understand the underhanded marketplace and where we can play authentically in this opportunity. Performance, casual and under $100, all provide meaningful incremental growth and allow Foot Locker to authentically evolve our footwear category portfolio. In addition to category opportunity, we continue to develop our brand partnerships. Nike will continue to be the largest brand partner, and we’ve revitalized our Nike relationship, and both companies are committed to growth. The partnership is focused on creating a strategy that is complementary to the Nike direct-to-consumer strategy.

The focus is on consumer sharp points, along with an integrated marketplace. The consumer strategy is rooted in Foot Locker’s strengths and heritage and sneaker culture. Basketball Culture and House of Hoops will lead our partnership as our shared passion to elevate the next generation of basketball icons such as Jayson Tatum and Devin Booker is critical to our customer and the continued development of the sneaker industry. Our second aligned focus is kids. And through Kids Foot Locker and Foot Locker globally, we will partner with Nike to develop the next generation of sneaker enthusiasts. Similar to developing the next generation in basketball, developing the next generation of sneakerheads is critical to Foot Locker and Nike’s long-term growth.

The third partnership strategy is sneaker culture. Foot Locker and Nike’s relationship is close to 50 years old. And the celebration of sneaker culture has been a key consumer connection throughout the journey. The global Tuned Air franchise anchors our position outside of basketball, and we have some big plans to celebrate the 25-year anniversary of that model later this year. Beyond the consumer short points, we are parting across planning and loyalty to develop an integrated marketplace. The revitalized alignment has positioned Nike and Foot Locker to return to growth in 2024. In addition to growth, the partnership is committed to developing unrivaled experiences for our consumers. We will reset House of Hoops with elevated product positions, along with reimagining the overall experience.

Starting holiday ’23, Foot Locker will have elevated access in LeBron and KD Retro models, LeBron Signature and global Air Force 1 models. Kids Foot Locker will continue to lead to be the Nike Kids leader as the only retail partner, 100% focused on kids. KFL will outpace the market in kids growth from Nike. The Nike and Foot Locker partnership has always been deeply rooted in celebrating sneaker moments. As the partnership evolves, sneaker moments will continue to play an important role. 2023 is the 25-year anniversary of the exclusive Tuned Air franchise. Nike and Foot Locker will have a global celebration of that anniversary in holiday ’23. Following that, in 2024, Foot Locker and Nike will partner on an exclusive product concept celebrating Foot Locker’s 50-year anniversary.

The concept will include some of the most iconic models in the industry, along with an elevated go-to-market strategy, celebrating our 50-year partnership. In addition to Nike, we have focused on expanding our brand portfolio to reach more consumers on more occasions. Foot Locker’s market share in non-Nike brands continues to be in the high single-digit range, but much lower than the mid-teen market share Foot Locker has in total. We have significant opportunity across brands like adidas, New Balance and PUMA, just to mention a few. The growth opportunity is rooted in long-range planning, elevated go-to-market strategies and co-created product franchises. One example is our Puma LaMelo Ball franchise, where we collaborated on a multiyear journey with elevated go-to-market strategies, such as Rick and Morty launch last month during NBA All-Star Weekend.

Foot Locker will also partner with PUMA on a leadership position with the recently announced Rihanna and Fenty collaboration planned for later this year. We are excited about the energy Rihanna can bring to an already very strong women’s footwear market. In addition to PUMA, Foot Locker has accelerated growth plans with running brands such as New Balance, On and HOKA. We have also seen record growth in casual brands such as Crocs and UGG. And our brand portfolio in footwear is stronger and broader than ever. Foot Locker is well positioned to capture more consumer occasions in the future. As we broaden our brand and category portfolio, driving marketplace distinction and scarcity play an important role to make Foot Locker the must-shop destination.

Our customer craves scarcity. And by utilizing our global leadership position, we have the ability to develop and create more exclusive product opportunities for our customer. That competitive advantage will increase our exclusive product mix from 15% to 25% of our product assortment. I mentioned Nike Tuned Air and PUMA LaMelo Ball franchises as earlier as 2 current examples of exclusive leadership. In 2023, Foot Locker will launch a signature basketball model from Anthony Edwards with adidas, along with exclusive color positions with Nike LeBron 21 and PUMA Scoot Henderson. In addition to Signature Athlete positions, we have partnered with several brands on exclusive third-party collaborations PUMA L.O.L. Surprise! and Crocs Cinnamon Toast are 2 of the best examples.

Elevating exclusivity is critical in developing a differentiated marketplace for a consumer who craves scarcity in a marketplace that needs differentiated retail. As Mary stated, our aspirations are clear, broaden and expand sneaker culture through more consumers and more occasions, revitalize the Nike relationship and diversify our brand portfolio. Nike will continue to lead our brand portfolio and be 55% to 60% of our mix. Accelerate growth plans of our non-Nike partners at 2x the average growth plans. Foot Locker’s brand portfolio is the strongest in the industry and positioned well to serve more consumers and more sneaker occasions. Lastly, increase our exclusive mix to 25%. Basketball will continue to be the sharp point for exclusivity, along with elevating other opportunities across all categories and brands.

Foot Locker is well positioned with all of our brand partners to deliver against these aspirations as we move forward to the next 50 years. Thank you, and I will turn it over to Frank Bracken.

Franklin Bracken: scale of our relationship with our customers and our emerging capability to harvest insights from that data is of great value to our brand partners. Can you guys hear me because I prefer not to . In turn, the scale of our relationship with our customers and our emerging capability to harvest insights from that data is of great value to our brand partners. We will increasingly build that customer insight function and capability led through technology and our refresh loyalty program in order to be of even greater value to our brand partners. This also allows us to work upstream with our partners to build more exclusive propositions to create more relevant content and media plans and ultimately, to create more demand for our banners and our brand partners.

Now one of the most important actions we’ve taken over the last 2 years is the simplification of our banner portfolio. Simply stated, we had too much overlap between our banners. And some of our smaller banners were adding complexity to our operating model and also diluting our profitability. In North America, we have closed the Lady Foot Locker banner, the Footaction banner and most recently, the Eastbay.com banner. In Europe, we had previously shut down the Runners Point Group. And in January this year, we announced the wind down of our Sidestep banner, which we expect to be complete by the end of Q2 this year. And then lastly, in Asia, we’ve converted our business model from owned and operated to a license model. In fact, just today, we announced the transfer of our business operations in Singapore and Malaysia to MAP Active.

We expect that transition to also be complete by the end of our fiscal Q2 this year. Moving forward in Asia Pacific, we will have owned and operated businesses in Australia, New Zealand and South Korea. Now as we position our banners for future growth and customer connection, we have a very deliberate purpose and role for each of those banners. If you recall, Mary introduced what we call our Sneaker Growth Map. In this framework, we’ve identified the 5 consumer segments that we will focus on as a company. We’ve also identified the 4 major sneaker shopping occasions that drive the majority of customer purchase intent. And we position each of our banners at the intersection of their core customer focus and the most compelling occasions that drives their sneaker buying behaviors.

These positionings will drive everything we do, including real estate site selection, product merchandising, omni marketing and, of course, great customer service. The Foot Locker banner will focus on the Sneaker Maven and Fashion Forward consumer, while also broadening to serve more Active Athletes through the lens of basketball and running specifically. Kids Foot Locker will also target the Sneaker Maven and the Fashion Forward consumer, albeit younger ones, and will continue to be the #1 destination for kids and their parents to find all things sneakers. Champs Sports will sharpen its position against the Active Athlete and Quality Seeker, which includes moving more of the assortment to performance and athleisure in both footwear and apparel.

And we will further continue to differentiate Champs Sports from Foot Locker to drive incremental consumers in the fitness and lifestyle categories, the apparel category and under $100 footwear. The WSS is very clearly positioned against the Quality Seeker and the Deal Finder with an even sharper point of view on the Hispanic family. This is driven by our real estate, a more value-driven assortment, and the great connectivity to the Hispanic community. Finally, atmos will play a key role in serving sneaker culture in their home market of Japan, while also pioneering new ideas and concepts that can inform the rest of our banner portfolio. I’m now going to transition into a few slides on each of the banners to go just a bit deeper on the strategy for each, starting with our lead brand, Foot Locker.

Full Locker is the undeniable leader of sneaker culture globally. As you look at the stats on the page, which I’m not going to read probate them, you can see the strength and even the untapped potential of the brand. The brand has better consumer awareness than any other retail brand in the industry. Our stripers are trusted as advisers and members of their local communities, and our social engagement is simply unrivaled. That brand health, which we built over the last 50 years, provides a great foundation for us to lead sneaker culture for the next 50 years. Our ambition for the global Foot Locker brand is to grow at a mid-single-digit CAGR, delivering over $6 billion of sales by 2026. We will accomplish that goal with 4 clear global strategies: First, we’ll introduce a refreshed brand platform; next, we’ll intentionally broaden our assortment with key brand partners; third, we’ll unleash the power of our store fleet and our new retail concepts; and lastly, we will double down on stripers as the most authentic sneaker experts in the world.

So let me take a minute to talk about each of these strategies. As the global leader of sneaker culture, we are very excited to introduce a new brand platform and campaign later this year. The objective of the platform is very clear. It’s to invite more consumers than ever before to participate in sneaker culture. From the Sneaker Maven to the Fashion Forward and all the way to the Active Athlete, if it’s the best of sneakers that consumers want, we will unleash their inner sneakerhead. Upon launch, you will see the Foot Locker brand come to life through our unmistakable stripers and our iconic brand equities. You will see more brands and more sneakers featured than ever before. And our media plans will engage a wider audience than we have over the last decade, including men and women as part of the core brief.

We’ll launch our first campaign at holiday this year, and we’ve got a great road map that extends into 2024 that will enable us to celebrate our 50th anniversary as a brand. And as Chris said earlier, we have the full support of all of our key brand partners to make this more than just a commemorative moment, but a truly commercial moment. Chris did a great job walking through the overall broadening strategies for Foot, Inc. For the Full Locker banner, we’ll continue to diversify and dimensionalize basketball culture through new signature athletes, exclusive concepts and stories and the best offering of basketball classics in the world. We plan our basketball leadership to grow to be a multibillion-dollar business by 2026. And as Mary and Chris alluded to earlier, we’re very excited by the innovation of the Nike and Jordan brands and what they’re bringing to market, particularly this holiday, and how that will fuel our exclusive position in House of Hoops.

Next to that, we will reignite our commitment to serving runners in the lifestyle running category through expanded assortments and digital and community activations. The door count and assortment of HOKA and On Running are 2 great examples of newer brand partners thriving in the Foot Locker retail environment. Finally, Foot Locker will continue to build our assortment of casual sneaker and seasonal footwear, which further supports our brand diversification efforts and also helps us connect with more female consumers who want to participate in sneaker culture. So think of brands like UGG, Timberland, Crocs and Hey Dude as brands that have a clear role in sneaker culture with our Foot Locker consumer. Now to give our world-class assortment, the best experience that we can, we’ve also kicked off our Store of the Future project.

Our objective is to deliver a globally scalable technology and striper powered Foot Locker experience that brings to life our leadership of all things sneakers. The core tenets of this experience will be the following: clear sneaker leadership demonstrated through our brand selection, expanded assortments and crisp storytelling; dedicated men’s and women’s and kids spaces so that we are more inclusive of all sneaker shoppers and can provide exceptional choice in merchandising variety; a digitally connected retail environment with stripers who can access a seamless omni-channel experience, including access to inventory across our entire store fleet; and finally, deliberate design choices that optimize our front of house sales productivity while also maximizing our back-of-house operational productivity.

Our first pilot store will open here in New York City in Q1 of 2024, with other pilots planned next year in Italy and the U.K., and those pilots will inform a broader rollout of the store concept beginning in 2025. Now the last topic I want to touch on for Foot Locker is our stripers. Plainly stated, our stripers are the backbone of our company, and we couldn’t be more proud of their iconic status in our industry. And we will continue to invest and leverage their sneaker expertise as a key differentiator and part of our brand’s value proposition. We will double down on product training, leveraging our Lace Up app, which is available to all of our stripers. We will continue to equip stripers with handheld technology and integrated POS systems that unlock inventory across the entire system and also help us better acknowledge and serve our FLX members.

And it’s great ambassadors for our brand, they will continue to be present in the communities that we serve and also play a starring role in our social media and coming brand campaigns. So that’s our plan for global Foot Locker. Now I’d like to turn to our Kids Foot Locker banner. As the only kids-focused retailer with a full range of sneaker brands, KFL is a truly unique asset and value proposition in the marketplace and a banner that we will continue to invest in. As this slide illustrates, KFL is by far the favorite place for customers to shop for kids sneakers. Almost 50% of those surveyed said that we were their favorite brand, more than 15 points over the next highest retailer. Kids Foot Locker is also the leader in market share with nearly 2x the closest competitor when you include both KFL and Foot Locker Kids sales.

And we are differentiated by our premium product positioning versus most others in the marketplace who are focused on the low end of the category. So much like Foot Locker is the leading brand in the adult space so as kids, the clear leader for sneakers with kids. And importantly, beyond its direct value as a business, KFL also has significant strategic value to our larger portfolio and our long-term growth strategies. As you can see from our lifetime value data, customers who are acquired through KFL are approximately 20% more valuable than those acquired through other banners. Additionally, the lifetime value from Kids Foot Locker customers, nearly half of that value is captured by other banners in the portfolio. In other words, customers acquired through KFL are a strong pipeline of business for our adult-based banners as oftentimes parents will shop for themselves at a Foot Locker and as grade school-age kids become teens and where adult sizes were able to graduate them into the Foot Locker banner as well.

So having KFL as a customer acquisition and recruitment vehicle is not only good business in the short term, it also provides compelling long-term benefits to our portfolio. And while we are the clear leader in the kids category, what gives us further confidence that there’s still plenty of room to grow for KFL as presented on the page here. Our brand awareness of 74%, while strong, is still below that of Foot Locker’s 90%, demonstrating that we still have consumers who aren’t thinking of KFL as their first sneaker destination. Next to that, when surveying consumers who don’t shop at KFL and asking them why they did not shop there, 22% of them cited a lack of physical availability as the top barrier to purchase. And finally, when our market planning team looked at the demand potential in our top 15 existing KFL markets alone, we modeled the potential to double our KFL sales in those markets.

So clearly, there is more demand and more opportunity for the KFL banner. So then how do we take KFL to the next level? Our path to making KFL a $1 billion banner requires us to deliver a high single-digit to low double-digit CAGR over the next 4 years. Our KFL merchants will continue to take a kids-first approach to building the most compelling assortments in the marketplace and also drive exclusive content. This is something they’ve done very successfully over the last couple of years, including ideas like L.O.L. Surprise! with PUMA and the Crocs General Mills collaboration. To help accelerate sales, our net KFL square footage will grow high single digits per year through 2026. And our new House of Play concept, which is delivering great 4-wall results, will be a big part of those plans.

Lastly, the team has shown that our digital acquisition and inclusion of KFL in our loyalty program is a winning combination to acquire and retain more households, something we tested last back-to-school and continue to invest in this year. So there is a high level of confidence that we can continue to grow our KFL banner. The next banner I’ll cover is Champs Sports. For over a decade, Champs has been a $1 billion-plus banner for us in North America. And it’s easy to understand why when you look at the stats on this page. There’s a very strong consumer awareness of the Champs Sports brand, particularly when compared to other sporting goods retailers. The Champs banner is also strongest in the markets that matter the most, those with high populations and high concentrations of consumers who are spending against their fitness and wellness needs.

Finally, the Champs consumer is highly engaged in social media with an impressive digital footprint in the marketplace. As a destination in the mall for great sport lifestyle and sneakers, Champs Sports has been a strong #2 banner next to Foot Locker. But with our reset, we see an opportunity to be even sharper with the Champs banner in the future. As Foot Locker and Kids Foot Locker lead with the Sneaker Maven and the Fashion Forward, there’s a large and highly engaged consumer segment that Champs can serve within our portfolio. It starts with widening their current focus from the teen and high school athlete to a broader segment of consumers that we call the Active Athlete. As a segment, these are consumers who are highly connected to sport, they’re inspired by what’s warned by the best in the game and they seek elevated authentic shopping experiences.

Next to that, they prefer one-stop shopping for both their footwear and apparel needs. The Active Athlete represents 21% of the Sneaker Growth Map, which makes it the second biggest consumer segment, along with the Fashion Forward. And the category itself is forecasted to grow in the mid-single digits over the next 4 years, making it an attractive segment to position Champs within. To reposition and reset this business, we are taking key decisions to strengthen the core of Champs Sports so that we can stabilize the banner as a $1 billion business. First, we are closing approximately 125 underperforming stores this year, focused on exiting nonpriority markets and older format stores that are not the current expression of the brand nor do they receive the best assortments and allocations.

Moving forward, we are then prioritizing 4 key geographic markets where Champs has historical strength. And there are also very favorable consumer demographics and demand and specifically in the states of California, Texas, Florida, Georgia and the Tri-State area. And we are using Champs as our lead banner for apparel, driving more head-to-toe connectivity for the consumers shopping for their performance and athleisure needs. In summary, our ability to use Champs to further extend our consumer footprint and serve incremental occasions is what makes the totality of our North America banner portfolio even stronger moving forward. Now in October of 2021, we acquired WSS, which was then a private company. In the time since we’ve grown in our conviction that not only is WSS the next billion-dollar business for Foot, Inc.

but the WSS is a highly differentiated and incredibly well positioned in its core consumer focus on the Quality Seeker and the Deal Finder segments, 2 consumer segments that Foot Locker previously did not directly serve. Now as I said, WSS is a banner that’s very unique in our portfolio and in the marketplace, and it’s nearly entirely complementary and incremental to our existing banner portfolio and well positioned for growth in the coming years. It is the #1 Hispanic-focused retailer in athletic footwear with a special connection to the communities that it serves. It is a 100% off-mall concept, offering a fully bilingual shopping experience and hosting over 300 community events per year. WSS has a full family offering with more than 50% of its sales coming from kids and women, and the concept carries all of the globally relevant brands that the consumer wants, but at more accessible price points as well as having a strong and growing private label business.

It has an incredibly effective loyalty program as well with nearly 4 million members that represent 85% of its sales and who spend 20% more per visit. So as many of you may have not had a chance to see WSS store, there is a short video that I’d like to play for the team to give you a sense of what the banner is all about.

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Q&A Session

Franklin Bracken: All right. With energy like that, you can see why we’re excited about the future of WSS. And with a focus on the Hispanic family, we have very favorable demographic trends in spending habits to anchor our growth over the next several years. The Hispanic population is expected to grow over 30% in the next 20 years, adding 10 million people to the U.S. population in the next decade alone, ultimately represent 25% of the total U.S. population in the medium term. Importantly, Hispanic consumers tend to shop more in stores and spend more than other consumer segments on the footwear category. And as we position to capture that growing population and spending power, we see the opportunity for over 300 WSS stores over time.

Our desire to scale the WSS brand into new markets and also fill in opportunity trade zones within existing markets is backed up by strong 4-wall economics. An average WSS store requires a net investment of approximately $1.7 million, with year 3 planned revenues of nearly $5 million per store and a 15% 4-wall operating profit, these stores generate a 40% ROI and take less than 3 years to pay back. And what gives us confidence in the growth trajectory is how successfully this concept has traveled from the home market of California to new markets like Phoenix, Dallas, Houston and San Antonio. And our newest market, Miami, is coincidentally opening tomorrow, and we’ll have 5 stores open in the Miami market by the end of Q2 this year. With a strong and unique value proposition, a tremendous amount of white space, a growing market segment and strong unit economics, we see a clear runway for profitable growth.

This year, we will open at least 25 new doors, and we will accelerate that growth beyond to 40 stores a year in 2024 to 2026 to get to at least 280 stores by the end of that period. And by 2026, we forecast our revenues for WSS to be $1.3 billion, a 20% CAGR over the next 4 years. The second acquisition we made in October of 2021 was the atmos banner. In atmos, we gained a brand that has a very strong market position in Japan, the third largest sneaker in the world. And atmos as a brand is incredibly well respected by the Sneaker Mavens across the world, and it’s also sought after as a product collaborator for exclusive footwear drops and retail experiences. We bought a business that has a great omni-channel composition and is also quite profitable.

Atmos has the highest digital penetration of any of the banners in the globe at 50%, and it also delivers strong double-digit profitability. Our objective with atmos is to grow the banner at a high single-digit to low double-digit CAGR to over $250 million annually, while maintaining the strong profitability that it delivers today. That growth will largely come from comp growth in the home market of Japan as well as strategic investments in North America. Meanwhile, atmos plays a strategic role in our portfolio that’s enabled due to its relative size and agility, and we’ll continue to use atmos to test new store and digital experiences. We’ll also look to atmos to pioneer new product ideas at the highest level of sneaker culture, and that includes collabs and exclusive concepts as well as a premium private label brand, the atmos label, which brings a unique Japanese Streetwear Aesthetic.

So that takes you through our banner portfolio and how we’ve architected our retail banners to serve more consumers with more sneaker choice, while having very distinct roles for each of those banners with consumers, minimal real estate overlap and a path to total revenue of over $9.5 billion by 2026. So to take you through even more detail on our real estate and store plans, I’d like to introduce Tony Aversa, our Senior Vice President of Store Development.

Anthony Aversa: All right. Thank you, Frank, and good morning, everybody. So as Frank noted, I’ll be taking you through the second part of powering up our portfolio, which is transforming our real estate. The way we’ll do this is 3 key strategies: First, we’ll be scaling new concepts with bigger footprints to offer more engaging experiences with a broader product assortment; second, we’ll be strengthening our portfolio off-mall, while also optimizing risk and rationalizing underperforming stores; and third, we will optimize our international portfolio with key focus on European markets and transitioning Asia to a licensed model. So let’s start with scaling new concepts. We’ll expand our new formats to deliver uniqueness and reach in the marketplace.

The first of those formats are Community Stores. Community Stores are a 15,000 on average square foot best-in-class expression of our Foot Locker brand. They offer tailored assortments and experiences relevant to the local communities and neighborhoods that we serve. Great examples of these Community Stores would be Compton in the Los Angeles market; 69th Street, Upper Darby in the Philadelphia market, our newest addition, Mondawmin in Baltimore City, and from an international flavor, we have Santoni in Paris, France. These are meaningful expressions in our communities and our activations truly inspire and engage. And as Mary noted early on, these Community Stores also offer first-time job opportunities for much of the community, which is extremely important.

The second concept that will scale will be Power Stores, 10,000 square feet on average, but a similar positive and powerful expression of our Foot Locker brand. You’ll find these in shopping centers, high streets internationally and A and B malls across North America. They offer a full-family assortment with broader reach, and it allows us the ability to expand our product assortment. This concept unlocks our ability to be more things to more people. Examples such as American Dream in Northern New Jersey; Arden Fair in Northern California; and most recently, our larger square footage Power Store in the Dallas-Fort Worth market. These stores are seeing a significant increase in suburban consumers with increasingly higher household incomes. This is showing that we can have a broader reach at Foot Locker.

Our last concept of scale is House of Play, a larger format Kids Foot Locker at approximately 7,500 square feet. This design offers elevated storytelling and product presentations. Engaging experiences have already proven to be a hit with our kids and their parents as we recruit our next generation of Foot Locker families. We are extremely excited by these concepts, not only because they’re achieving top and bottom line plans, but because they’re driving higher Net Promoter Score and overall customer satisfaction. These new concepts allow us to stay focused on our core consumer while also acquiring new as both Mary and Frank noted. Currently, these formats represent approximately 120 stores in our portfolio, and we will grow them to 400-plus by 2026 by opening up 300 new concept stores in the future.

So next, I’ll talk about strengthening our portfolio. As we lean into the newer formats, as I discussed to drive demand and connect with new customers, we will also rationalize our store base, closing a meaningful amount of underperforming mall stores in North America. From now through 2026, we will close approximately 400 stores, including nearly 200 C and D malls and 200 of our lower-performing A and B malls across North America. We will also look to reduce our term in those C and D malls to 1.5 years, offering us flexibility and optionality with our partners. These 400 stores represent nearly 10% of our total sales, but they also averaged 800 basis points less in profit than the rest of the chain. This will result in 80 basis points of total margin improvement for the company.

So as we think about malls and we talk about malls, I want to focus on A and B malls for a moment where we have seen sales growth over the last few years. Now traffic has decreased by 6%, but that’s due to increased customer discovery and pre-shopping on their mobile device. The good news is this creates intent, which is evident by our 8% increase in conversion since 2019 more than outpacing the traffic declines. Thus, the result is an 8% increase in sales across these centers. This sets up very nicely for us to expand in these centers with our Power Store concept into the future. Lastly, I will quickly touch on optimizing our international portfolio, and we’re going to do that in 2 different ways: First, optimizing our footprint; and second, tailoring our growth by region.

In Europe, we recently announced the shutdown of Sidestep to focus on our Foot Locker banner and to continue that focus. We will spend against key market opportunities in Europe with 2/3 of our capital being spent in key countries. Larger footprints and the expansion of our Power and Community stores will also be a focus in the region. In Asia this morning, we announced the closures in Hong Kong and Macau, and we’re also converting our own Singapore and Malaysia stores to a licensed model in partnership with MAP Active. This, along with our other strong partnerships with the Alshaya and Fox Groups, will allow us to further grow in the markets across the EMEA regions and Asia Pacific regions. So quickly, let me tie this all back together for you.

We will power up our portfolio, and we’ll do it by transforming our real estate. We’re going to optimize our store counts down approximately 10% through 2026 to 2,400 stores. But we will increase our square footage by 10% to over 14.5 million square feet as we open up larger, more experiential expressions of our brands with a wider product assortment. New formats will surpass 400 locations and represent over 20% of our square footage. Foot Locker will play a key role with Community and Power stores. Kids Foot Locker will play a key role with the growth of House of Play. And then we will increase our off-mall penetration to over 50% in North America. And as Frank noted, the strength and the growth of WSS, which is 100% off-mall catering to the Hispanic community, will play a major role there.

All of these actions will provide us a much stronger real estate foundation as we, Lace Up For The Future, and I couldn’t be more excited to lead this team. Now I’ll hand it back to Frank, so he can talk about our third strategic imperative, which is deepening our relationships with our customers. Thank you.