Q4 2016 Real-Time Call Brief

Highlights

The company achieved net income of $189 million in the fourth quarter on a GAAP basis, up from $158 million in the fourth quarter last year.

On a per share basis, we earned $1.42 this year, a 25% increase compared to the $1.14 the company earned in the same period a year-ago.

First item is a tax rate change in France that goes into effect in 2019, but which cost us to write-down the value of certain deferred assets by $2 million in the fourth quarter, reducing GAAP earnings by $0.02 per share.

The second item stems from new regulations issued under Section 987 of the U.S. tax code.

These regulations required the Company to tax effects of the foreign currency translation gains and losses on the balance sheet of foreign businesses that are operated as branches.

This resulted in a $9 million non-cash reduction in current tax expense, which increased our GAAP earnings by $0.07 per share.

Last year, the company recorded a pre-tax charge of $5 million, $4 million after-tax in the fourth quarter to reflect the impairment of certain Runners Point group assets, thus reducing earnings by $0.02 per share.

Excluding these items, fourth quarter non-GAAP EPS was $1.37 and 18% increase over the $1.16 a share we earned on a non-GAAP basis last year.

The strong finish to the year brought our annual non-GAAP net income to $652 million, up 8% from year-ago and our sixth consecutive year achieving record annual earnings.

On a per share basis, adjusted earnings for $4.82 for the full year, an increase to 12% over last year's $4.29.

We produced a 5% comparable sales gain in the quarter bringing our two year stacked comp gain to 12.9%.

A total sales for the year were $7.8 billion, a 4.8% increase over last year's $7.4 billion.

Our store segment posted a 4% comparable sales gain in the quarter.

The top performance was by Champs Sports, which delivered a high-single-digit comparable sale increase, powered by a high-single-digit gain in footwear and a double-digit gain in apparel.

Foot Locker Canada finished off its solid year with its fifth straight double-digit quarterly comp sales increase.

Strong results up north were broad-based with double-digit gains in footwear and apparel and a mid single-digit gain in accessory.

Our 602 banner generated another outstanding performance leading our store segments and comp percentage growth for the second consecutive quarter with a strong double-digit gain.

This encouraging result was fueled by double-digit gains in both footwear and apparel led by lifestyle offerings from Puma, Adidas and Nike.

Foot Locker in the U.S. and Foot Action also delivered strong sales results with both banners up mid single-digit, while Footlocker Europe comps up low single-digits despite traffic challenges across much of the continents.

Kids Foot Locker's comp in the quarter was down at the low end of mid-single-digit.

However, total sales increased low-single-digits, which reflects the addition of 21 net new kid stores in the U.S. during the year.

Foot Locker Asia-Pacific comp sales were down mid-single-digits, largely due to the closer of its high profile George Street store in Sydney for the entire quarter.

Comparable sales at our Runners Point and Sidestep stores continued to decline double-digit.

Overall, our direct-to-customer segment posted another solid performance in the quarter as it has all year, with the comparable sales gain of 11.3%.

This enabled our direct-to-customer business to top $1 billion in annual sales for the first time.

Digital sales our store banners in the U.S. continue to post strong increases, up collectively over 20%.

On the other side of the ledger, sales at Eastbay declined mid-single-digits.

For the quarter, direct-to-customer sales increased to 15.3% of sales up from 14.6% a year ago, and for the year reached 13.2% of sales compared to 12.7% in 2015.

In terms of comparable sales performance for the total company, our monthly cadence was positive throughout the quarter with November and December comps up mid-single-digits and January up high-single-digit.

Average selling prices were up and unlike what we hear from much of the retail industry our traffic in the US increased low-single-digits.

From the family of business perspective, both footwear and apparel posted solid mid-single-digits increases, while accessories which includes socks and hats were down mid-single-digits.

Within footwear, men's and kids were both up mid-single-digits, while women's footwear had an exceptionally strong quarter up in the teens.

Strong demand for lifestyle running products led to a double-digit gain in running overall.

While casual style and basketball were up low single-digits.

Moving down the income statements of gross margin, we produced a 10 basis points improvements in the quarter to 33.7% of sales from 33.6%.

We picked up 20 basis points from an improved merchandised margin.

For the full year, gross margin improved 10 basis points in line with our guidance at the beginning of 2016.

SG&A expense rate decreased to 18.7% of sales from 19.3% of sales a year-ago.

For the full year, our SG&A expense rate improved to 19% from 19.1% last year.

Depreciation expense increased slightly this quarter to $40 million from $39 million a year-ago.

For the full year, depreciation and amortization increased 7% to $158 million due to the ongoing investments in our stores, digital side, logistics network and improvements in technology and other infrastructure.

For the year, our adjusted earnings before interest and taxes topped $1 billion for the first time in the company's history.

As a percentage of sale, EBIT reached a rate of 13%, up from last year's 12.8%.

Our fourth quarter non-GAAP effective tax rate 35.1%, slightly below last year's Q4 rate.

All together, the fourth quarter was another period of strong profitable growth for the company leading to record full year net income margin of 8.4%, just shy of our long range goal of 8.5%.

We invested $284 million of capital into our business in 2016.

We also returned $147 million of cash to our shareholders in the form of dividend during 2016, which combined with our share repurchase program throughout the total cash return to shareholders for the year to $579 million more than 85% of our net income.

We announced last week, our board increased our quarterly dividend payout rate by 13% to $0.31 per share and authorized a new $1.2 billion share repurchase program.

Year end, our inventory was up just 1.7% compared to the 5.3% quarterly sales increase.

In total, apparel and accessory sales were just under 18% of our business, down a bit from the 18.5% in 2015.

In the U.S., sales in a much more matured store banner.com businesses collectively increased almost 20%.

We are planning yet again for a mid-single-digit comparable sales gain and a double-digit percentage EPS increase in 2017.

These plans are based on a comparable 52-week year.

This includes a 53rd week, which we expect will add about $0.12 per share to our fourth quarter and full year 2017 results.

The shift of some capital expenditures from 2016 into 2018, we are now planning this year's capital program to be $277 million.

We finished 2016 having touched just over 40% of the Foot Locker fleet in the U.S. about a third of the fleet in Europe, just under 40% of the Champ Sport fleet and about 0.25 of the Foot Action stores.

Result of that investment as additional depreciation, which we expect to be approximately a $175 million in 2017.

We are planning to open 90 stores and close about 100 stores in 2017.

In addition, we plan to open three SIX:02 stores in 2017, which includes the second New York city location inside our Time Square flagship store.

We are planning interest expense to be relatively flat to the $2 million of expense in 2016.

For taxes, we are planning an effective rate of approximately 34% in 2017.

I would point out however but if the level of stock option exercise activity in 2017 is lower than we assumed in the plan, our tax rate will be closer to the 36% it has been in the past.

Our guidance have a double-digit percentage increase in earnings per share also assumed a lower share count.