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Foot Locker (NYSE:FL)
Q3 2017 Earnings Conference Call
Nov. 17, 2017 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Foot Locker's Q3 2017 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many [Inaudible] factors including the effects of currency fluctuations and customer preferences, economic and market conditions worldwide and other risk and [Inaudible] described in the company's press release and the SEC filings [Inaudible] to Foot Locker Incorporated's most recently filed our Form 10Q for a complete description of these factors. Any change in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements. If you have not received today's release, it is available on the internet at www.PRNewswire.com or www.Foot Locker-Inc.com. Please note this cost is being recorded.

I will now turn the call over to John Maurer, Vice President and Treasurer, Investor Relations. Mr. Maurer, you may now begin.

John Maurer -- Treasurer, Vice President and Head, Investor Relations

Hello, everyone. We're pleased to have you join us this morning to discuss Foot Locker Inc.'s results for the Q3 of 2017. Joining us on today's call are Lauren Peters, Food Locker's Executive Vice President and Chief Financial Officer, who will start with prepared remarks with a detailed review of our financial results and an update of our outlook for the rest of fiscal 2017 and Dick Johnson, Chairman and Chief Executive Officer, who will discuss how we're positioning the company for success in the midst of the changes we see with our customer and within the broader athletic industry.

First, though, I'll provide you with a brief summary of the company's results which were broadly in line with our expectations going into the quarter. We reported a comparable sales decline of 3.7% and net income of 156 million dollars which equated to earnings of $0.81 per share. These results included a 13-million-dollar pre-tax charge related to reducing and reorganizing our divisional and corporate staff which both Lauren and Dick will touch upon further. This charge equaled $0.06 per share but on a non-GAAP basis, our adjusted EPS for the quarter was $0.87.

A reconciliation of our GAAP to non-GAAP results is provided in the press release issued earlier this morning.

I'll now turn the call over to Lauren.

Lauren Peters -- Chief Financial Officer and Executive Vice President

Thank you, John. Good morning to all of you and thank you for your interest in Foot Locker. As John mentioned, Q3 comparable sales declined 3.7% within the down 3% or 4% guidance we provided on our prior call and as expected an improvement over the decline we experienced to the Q2. Our comp was negatively affected by hurricanes Harvey, Irma and Maria.

Overall, we had almost 450 stores closed at some point during the Q3 as a result of these storms although for the most part sales were covered in Texas and Florida within the quarter. The primary impact on us was actually from hurricane Maria which shut down all 56 of our stores in Puerto Rico and the Virgin Islands and most of these stores remained closed for a month or more after that devastating storm hit in mid-September. Our thoughts are with the people in the Caribbean and elsewhere including hundreds of our own associates who are continuing to cope bravely with the devastation left behind by this season's hurricanes. We estimate that the net sales loss primarily due to Maria lowered overall comp by 20 to 40 basis points.

Hurricanes also lead to significant inventory losses which I'll get to when I talk about SG&A.

In terms of [Inaudible] comp results, we're steady throughout the period with results in August, September, and October all within the quarterly guidance. Let's now reveal the details of our performance starting with our families of business. As expected, footwear remains challenged and decrease mid-single digits. Apparel, on the other hand, was strong, producing a mid-single-digit comparable sales gain with increases across men's, women's and kids' accessories such as socks and hats [Inaudible] double-digit. Within footwear, sales of men's shoes were down low single digits, kid's decreased mid-single digits and women's posted a double-digit decline. Running remains the strongest category in men's footwear, finishing with a high single-digit comp gain which was driven by [Inaudible] and Air Max 97 form Nike and MMD [Inaudible] from Adidas.

Although men's basketball category decreased mid-single digit, this trend improvement over the double-digit decline in Q2 was driven by stronger sales [Inaudible] of select Jordan retro releases compared to Q2 and other casual basketball styles such Air Force Ones from Nike. And [Inaudible] men's casual styles posted a double-digit drop as strong demand for Vans, especially Old School, and Skate 5 style was more than offset by a decline in Converse and a slower start to our Timberland business compared to last year.

The decline in children's footwear sales was driven by the shifts away from signature basketball and casual court styles. However, the overall downtrend in the kid's business did improve versus Q2 due to the higher sale [Inaudible] for the Jordan Retro releases I just mentioned, a solid running category led by [Inaudible], Shadow and Explore from Adidas and positive results for the Lebron 15 and Lebron Soldier on top of ongoing slow sales [Inaudible] of Superstars and Stan Smith.

Trends in our women's footwear softened further during the quarter due to a lack of new on-trend offering to offset last year's strong demand for Puma Fancy Style. The weaker footwear sales have the biggest impact at [Inaudible] and led to a double-digit comp decline for that brand.

Turning to our apparel business, we were quite pleased that it was at mid-single digits with strong gains across most of our geographies and banners. Branded [Inaudible] and Wind Wear assortments from Nike, Adidas and Champion were the key on-trend items during the quarter. Our branded T-shirt business also had a strong quarter. Overall ASPs and apparels were up high single digit reflecting the more premium assortment in our inventory while units were down low single digit.

Our children's apparel business was up high single digit, men's apparel posted a solid mid-single-digit gain while women's was up double digits. However, the gain in women's apparel was largely markdown driven.

Breaking up the comparable sales results by segment. Direct to customer posted a 6.1% increase while our stores were down 5.1%. Starting with the direct to customer segment, East Bay generated a high single digit top line increase. Our StoreBanner.com businesses in the US and Europe were both up mid-single digit while our digital sales in Canada increased at a strong double-digit rate.

overall, direct to customer sales increased 13.8% of total sales, up from 12.8% a year ago.

Within our store division, Foot Locker Canada and Foot Action posted solid results, both generating low single-digit comp increases led by double-digit gains in apparel and mid-single-digit gains in men's footwear. The other store divisions posted comparable sales decline. In the US, Foot Locker was down low single digits while kid's Foot Locker and Champ Sports were each down mid-single digits. Overall, traffic at our US stores declined mid-single digit.

Internationally, traffic also declined mid-single digit. Comparable sales at Foot Locker Asia Pacific and [Inaudible] were down mid-singles while Foot Locker Europe and Runner's Point were both down low double-digit sales. Sales at Foot Locker Europe which has a relatively high penetration of Adidas were pressured by further declines of Superstars and Stan Smiths and lower than expected sales [Inaudible] of some other Adidas styles.

Moving on to the rest of the income statement. Gross margin decreased 290 basis points, just 31% of sales. The lower rate was driven by a 190-basis-point decrease in our merchandise margin, a 10-basis-point increase and shipping expense and 90 basis points of de-leverage on our occupancy and buyer's compensation expenses. Lower merchandise rate both year over year and compared to last quarter's guidance is the result of higher markdown both in-store and online.

The higher markdowns reflect our ongoing efforts to drive traffic and clear slow moving inventory in the current promotional retail environments. Despite this even greater than anticipated markdown pressure, average selling prices in footwear were actually up low single digits while units were down high single digits.

Our SG&A expense rate rose in the quarter by 30 basis points to 19.7% of sales. Included in SG&A were 7 million dollars of hurricane-related expenses including lost inventory, damage to fixed assets and repair and maintenance expenses. Although we did not adjust our non-GAAP results for these costs which total about $0.03 per share, SG$A would've levered by 10 basis points during the quarter had these hopefully one-time costs not been incurred.

The expense rate performance was driven by the team's consistently strong expense management which helped offset some of the pressures for minimum wage increases and higher healthcare costs. The 13-million-dollar reduction in force and reorganization charge that John mentioned is part of an overall strategy to address the challenges we are facing in today's fast-changing retail environment. The vast majority of the charge relates to severance. The changes, while difficult, position us to create a more agile flexible organization that will concentrate on those strategies that we believe will most effectively drive our long-term earnings growth.

Dick will comment further about these initiatives in a few minutes.

Depreciation expense increased to 44 million dollars from 4 million in the prior year. The increase reflects the investments we have made and continue to make in our store fleet, digital capabilities, and logistics network. On a GAAP basis, our tax rate came in at 34.7%, 380 basis points higher than last year. As you may recall, the lower rate in the Q3 last year reflected the benefit from an intellectual property valuation reassessment in Europe.

The non-GAAP basis of our tax rate was 34.8%.

Inventory ended the quarter down 3.4% from a year ago compared to an overall sales decrease of 0.8%. On a constant currency basis, inventory decreased 4.9% compared to a 2.3% total sales decrease. Our proactive markdown actions during the quarter helped ensure that we are headed into the holidays with the ability to flow in good quantities of our improving product assortments. We ended the quarter with 890 million dollars of cash and cash equivalents and an increase of 25 million dollars from the end of Q3 last year.

We mentioned on our last call that we and our board are fully confident in the ability of our business to reaccelerate over time and that we would consider a full range of share repurchase alternative. Given that and in light of the value we saw in the price of the company's stock, we significantly accelerated our buyback program, spending 304 million dollars to repurchase 8.7 million shares during the quarter. In addition, we returned 38 million dollars to our shareholders through our quarterly dividends. In total, we have returned 482 million dollars to shareholders year to date.

Capital expenditures in the quarter were 54 million dollars, bringing our total through the first 9 months of the year to 204 million. We are on track to spend almost all of the 277 million dollars we planned for 2017.

Turning your real estate, we ended Q3 with 3349 company-owned stores, a decrease of 10 from the end of the Q2. For the year we currently expect to close 150 stores, up from the 135 we mentioned on the last call. We'll open about 90 stores and relocate or remodel 180 stores.

Before I turn the call over to Dick, let me make some comments about how we see Q4 unfolding. We now expect comparable sales to decline 2% to 4%, slightly better than the previous guidance of down 3% to 4%. Gross margin is likely to decrease 220 to 240 basis points in Q4 on a 13-week basis. This decline is steeper than our guidance in August due to the anticipated need to maintain relatively high markdowns in Q4 to move through slow-moving inventory to position ourselves for a stronger 2018.

SG&A is likely to increase by 68 basis points as rate of sale. This is improved from the guidance we gave on the last call, due in large measure to the recent reduction in force I mentioned and the timing shift of certain projects into early 2018. In total, EPS is likely to decrease between 15% to 25% in the Q4. Please remember that this guidance does not include the 53rd week which we still estimate will be worth an incremental $0.12 per share.

With that, let me turn the call over to Dick to discuss our initiative that we believe will reposition the company for a long-term growth. Dick.

Richard Johnson Thank you, Lauren, and good morning, everyone. It's great to have you join us to discuss Foot Locker's performance and the outlook for the future. Before I get started describing the current business dynamics, I want to circle back to the Q3 reorganization charge. While it was a very important step in keeping us headed in the right direction on this journey through the turbulence that defines the retail industry today, it was also a very difficult and painful step.

It was hard to see people who had contributed a great deal to the company leave the business. I want to sincerely thank them for all they did. At the same time, I want to thank the outstanding team of associates of the company today for their leadership and positioning Foot Locker for continued success in our industry.

With the disruption, we are witnessing in retail in general and the athletic industry more specifically, we will have to make many critical decisions as we shape our future. However, the actions we are taking now are not meant to simply enable us to survive in the evolving retail market. Rather, we are proactively adjusting our course to ensure that Foot Locker will continue to thrive at the center of sneaker culture or more broadly youth culture. Due to the creation of outstanding customer engagement, experience, and satisfaction, we believe we will also thrive financially in terms of shareholder returns over the long term.

Let me tell you about a few of the things we are doing to achieve that. First, we are reorganizing our North American businesses to give all channel responsibility to the general managers of each of our banners under the leadership of James Jacob. The level of coordination between the store divisions and our digital commerce team in Wisconsin has improved tremendously over the years. However, having the two groups manage separately, while an effective strategy for the past 20 years is no longer the best approach to creating a seamless brand experience.

A critical step in the process of removing friction points for our customers is having fully integrated sales channel responsibility for each banner.

At the same time, we are investing in the creation of a North America product marketing strategy team led by Andy Gray, which will work closely with our vendors in the cultivation and development unique product platforms and stories that only a partner with the power and reach of Foot Locker Inc. can scale globally. The primary charter advantage scene is to create significant incremental revenue streams through new brand and product ideas. A perfect example of the sort of vendor collaboration with our portfolio of brands that team will be amplifying is today's formal announcement of Foot Locker's partnership with Nike and Sneak Easy, NBA player editions of House of Hoops and Nike [Inaudible] associates of Foot Locker.

Sneak Easy, for example, is a window to what's next in the world of sneakers which will come to life next week during Foot Locker's Week of Greatness. In this case, Nike is clearly demonstrating what differentiated retail looks like for them and how their top strategic partners like us played few ongoing role in bringing it to reality. I'll let you learn more of the details from our joint press release with Nike which is coming up shortly but suffices to say we're very excited for the future as these truly innovative ideas turn into great experiences for our customers.

Another key initiative, as you know, is concentrating a significantly greater portion of our capital and operating spending in enhancing our digital capabilities. We are making solid progress on several fronts including three of the biggest initiatives which I have discussed previously-our new digital what e-commerce platform, our mobile app platform development, and our new POS technology. Each of these multi-year projects will play a key role in enhancing our customer's experience and engage with our banners. Among many other customer-facing benefits, we expect to leverage greater visibility of the shopping and buying patterns of individual customers and households into much more effective loyalty and marketing program initiative, have quicker visibility and access to Illinois across our entire enterprise that's speeding up customer access to all of our great products and create elevated storytelling in alignment between our stores, digital sites and mobile apps, all of which should do lead the higher customer satisfaction and ultimately even higher rates of converting shoppers into buyer.

These three initiatives have a very important behind-the-scenes benefit as well. All of our e-commerce sites globally will finally be on the same platform. Our mobile apps will also be on a common global platform and for the first time ever all of our stores around the world will be operating the same POS software. Once fully rolled out, the common platforms and software will greatly enhance the efficiency and speed at which we can make ongoing upgrades and improvements across all of our banners, in turn enabling us to stay at the forefront of technology which we know is extremely important for our always-on, always connected consumers.

Among other benefits, the simplified architecture will facilitate enhanced data analytics which is a key component of connecting ever more personally with our existing customers as well as those potential consumers who share key characteristics with our top customers. We are currently in the process of prioritizing a number of other digital projects based on projected returns balanced with instrumental costs and risk. While speed is important, we know there's nothing that slows down an organization's progress more than having to stop and rework a critical system that was not implemented properly and [Inaudible]. Put together though, we are confident these investments will be critical to keeping our banners top of mind of our customers as well as with our top vendors when it comes time to cement strategic partnerships such as the ones we're announcing today with Nike.

Related to digital functionality, we're also making significant investments in our supply chain capabilities. The first step which is well underway is the process of reconfiguring our primary warehouse in Kansas to be able to fulfill direct-to-consumer shipments, easing the constraints on the DTC facility in Wisconsin which came with the original East Bay acquisition. This step should be complete by the middle of next year. To facilitate faster delivery of products bought online, we're going to test the mini-hub concept in certain major metropolitan areas.

These mini distribution hubs will hold inventory to replenish stores more quickly and efficiently than from Kansas, thereby over time reducing the need for expensive backroom retail space. Even more importantly, we expect mini-hubs to facilitate next day or perhaps even same-day delivery for DTC orders. We are upgrading a facility in New Jersey as well as an existing logistics facility in central Pennsylvania to handle large sections of the east coast and we will test other locations in 2018.

With all this discussion about digital and supply chain investment, I don't want to overlook that the majority of our capital is still spent on our store fleet which, after our people, is one of our most important competitive advantages. Keep in mind that our store banners collectively still do less than 10% of their sales digitally despite the fact we've had internet sites and DTC procurement capabilities for 20 years and the core customers of most of our banners, young males from about 12 to 25 years old, are essentially born with a mobile device in their hands. Our customers value a compelling story experience and the integration of the digital in-store experience remains a critical element of fulfilling the customer's desire for an emotional connection with the premium sneakers and apparel that we sell.

Kids today, our core customers, aren't just sitting at home buying shoes on a screen or device. They want to be part of something, engaged with the things that are important to them. Our banners and stores are key components in their connection to the sneaker and youth culture that they share with their friends, not just their friends in the classroom at school but likeminded people they find through social media who could be anywhere in the world.

We are continuing to invest judiciously in our store fleet. In some cases, these are pinnacle locations including four Foot Locker stores that will open in the next few weeks in Rome this weekend, in [Inaudible] and Paris week, in Oslo our first store in what will be our 24th country the week after and finally right before Christmas a flagship store on Hollywood and Highland in LA that will feature another great 602 Shop and Shop. we have another set of strong stores across our banners that we believe will generate significant sales [Inaudible] through remodeling into our most current format. We have engineered most of these remodels to be less expensive than in prior years, lowering the comp hurdle required to improve ROIC.

And while we will continue to close underperforming locations, our sales and even more important, profit performance of those stores in relatively weaker malls and shopping centers have tended to hold up relatively well this year. Since most of these profitable doors already have low rents and short-term leases, it makes no sense to us to rush and close hundreds of them, leaving customers who still shop in them day in and day out without a clear choice for accessing the premium product we offer.

I want to close by saying that I hope what you take away from my comments this morning is that we are not in this game to get a for participation. We're in this game to win it. We're partnering with our vendors to win together and connecting emotionally with the customer creating great experiences and delivering innovative premium product when and where they want. We see our biggest vendor, Nike, on the verge of a major breakthrough in terms of product innovation and customer engagement and of course we're working closely with them on that.

Adidas, meanwhile, has certainly proven that they too can compete at the highest levels. We also have ad number of other key suppliers that play important roles in the athletic marketplace and we collaborate with them constantly on ideas, big and small. Our position at the center sneaker culture is strong but not guaranteed or inevitable. We work hard every day at understanding what is influencing and motivating our customers that day, whether it be a global music icon, a young artist popular of social media, or rebuilding a playground in their neighborhood.

We intend to continue partnering with our vendors on this challenging but exhilarating journey, making course adjustments as necessary as we retain and build our strong leadership positions in the athletic industry.

[Inaudible], let's go ahead and open up the [Inaudible] questions now.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. If you'd like to register a question, press the 1 followed by the 4 on your telephone. You'll hear [Inaudible] prompt to acknowledge the request.

If your question has been asked or you want to withdraw your question, press the 1 followed by 3. If you're on a speakerphone, please place the handset before entering your request. And once you've done [Inaudible] any questions or comments you may have, you may press the 1 followed by the 4 on your telephone keypad.

One moment please, our first question. We'll get our first question on the line from Kate McShane with Citi. Please go ahead.

Kate McShane -- Citigroup -- Analyst

Hi. Thank you. Good morning.

Richard Johnson -- Chief Executive Officer, President and Chairman

Good morning, Kate.

Kate McShane -- Citigroup -- Analyst

With regards to your Cap-Ex spend, I know you said you are reallocating more to be on the digital side but will there be any change to your longer-term Cap-Ex guidance that you've provided? Will it be increasing or is it really just the shift away or shift more into digital?

Richard Johnson -- Chief Executive Officer, President and Chairman

There's no change to the guidance that we've given. We're allocating, according to the comments that we just made, a little bit more of it going to digital, stores still important and obviously the supply chain investments as well.

Kate McShane -- Citigroup -- Analyst

Okay, great. And then my bigger picture question is just in the relationship with Nike. They told us a lot of a couple of weeks ago at their Analyst Day about how they're evolving the marketplace [Inaudible] clear that Foot Locker is one of the key partners based on what they said and what you have to highlight today. Could you maybe work through the three initiatives that Nike has in place with the Sneaky Easy and the Nike Pro in the stores and what exactly it will mean in terms of how your stores look and how the relationship evolves over the next few years?

Richard Johnson -- Chief Executive Officer, President and Chairman

Yeah. [Inaudible] is very different and unique, right? So, Sneak Easy is a pop-up retail space and while I'm not going to go into a lot of details because it's about discovery, I can tell you that it'll open up down at 30 Wall Street next week during the Week of Greatness and it really is a look into the future of sneakers and how we will work with Nike. The format itself may or may not be a popup somewhere else but it's really a view on how we want to digitally empower our consumer's [Inaudible] physical space and have them interact with the Foot Locker and Nike brands together. The Nike Pro is in store.

It's something that we're testing in the New York City market in the Holiday Season beginning next week with our Week of Greatness. It'll put dedicated Nike resources in the store, our employees but Nike experts in the store us to talk about the stories and the product in a little bit more depth to enhance the experience that the consumer will undoubtedly start from a digital perspective but will be able to make a great connection in store when they interact with the Pro along with our [Inaudible] in store. And then the third element was the player exclusives that were really one of the mainstays of the House of Hoops when we opened the House of Hoops 10 years ago. We'll start to see those returning to the House of Hoops as well which again will add some excitement back to the basketball footwear assortment specifically in the House of Hoops as those player editions become available.

Kate McShane -- Citigroup -- Analyst

Thank you.

Operator

Thank you very much. We'll get to our next question on the line from Robert Ohmes from Bank of America/Merrill Lynch. Please go ahead.

Robert Ohmes -- Bank of America / Merrill Lynch -- Analyst

Hey, guys. Actually two questions, Dick. I think the first one is I thought it's interesting that your ASPs are up. I think the overall industry may not be seeing that in footwear.

Was there a mixed shift that supported the ASPs even though there was a lot of discounting going on or mix away from kids. Just curious about what's driving that. And then the second question is in the press release you mentioned the availability of premium product for holiday improving. What premium product wasn't available and what are you getting? Maybe give us some insight on that.

Thanks.

Richard Johnson -- Chief Executive Officer, President and Chairman

I'll start with the ASPs, Robert. We talk a lot about our ASPs not being a simple function of plus this minus that as across the families of business, [Inaudible], scales, gender. The mix mixed out sort of really isn't changing [Inaudible]. Again, we've got some great high-end product when you think about [Inaudible] when you think about Vapor Max when you think about Ultra Boost but it's also across the range that we're seeing nice [Inaudible] in some of our apparel pricing.

So, there's just a real complex model behind ASPs and it washed up positively even given the markdown. So, again, I think our team did a great job of managing the markdowns while selling premium products. When it comes to availability, we've talked about it all year that the availability of [Inaudible] would become more, there would be more quantities available in the back half specifically as we got into Q3 and Q4, later in Q3 and in the Q4, things like more quantities of Vapor Max, the right quantities of Jordan Retros. It's Ultra Boost and Easies in bigger quantities.

So, it's not that we didn't have availability. It's that the quantities have now started to ramp up a little bit more commercially in the marketplace and we're giving access to those quantities that we need to drive business from a commercial point of view.

Robert Ohmes -- Bank of America / Merrill Lynch -- Analyst

Got it. That's helpful. Hey, good luck in the Holiday Season.

Richard Johnson -- Chief Executive Officer, President and Chairman

Thank you, Robert.

Operator

Thank you very much. We'll get to our next question on the line from Paul Trussell with Deutsche Bank Research. Please go ahead.

Paul Trussell -- Deutsche Bank -- Analyst

Hey, good morning. Help us to understand your mindset on expenses. You clearly took some pretty meaningful steps this quarter to reduce cost but you're also making investments for the long term around digital supply chain to store fleet, the customer experience, as you spoke about. How should we think about the ability to leverage expenses over time and SG&A growth rate, etc?

Lauren Peters -- Chief Financial Officer and Executive Vice President

Well, we described, I think, fairly thoroughly the reorganization and the positioning of ourselves to get off to those long-term growth opportunities to make sure that the organization is set up to do that but as we have it, in the Q3 we really have very strong expense management culture and we look for the opportunities to lever at lower cost. That leverage point has been mid single-digit cost for our structure this year but we look to manage sales for payroll [Inaudible] that's the biggest function within SG&A [Inaudible] wages to look to make sure that we have got this. The very [Inaudible] salespeople in the store at the peak hours at management [Inaudible] scheduling is very important. And then we look to make sure that marketing money that we spend is driving what we wanted to-increase traffic and increase conversion.

Paul, we looked at every lever. We manage our electricity through using things like LED bulbs because they're much more cost-effective. So, every lever but SPH and sales per square foot are obviously very meaningful.

Richard Johnson -- Chief Executive Officer, President and Chairman

As I said, we will continue to invest in the things that are going to allow us to be more agile and flexible. That does include people, data analytics, supply chain, [Inaudible] things that we mentioned but Lauren's right. We've got a culture of managing expenses tightly and we will continue to do that.

Paul Trussell -- Deutsche Bank -- Analyst

Got it. Thank you. And then some of the initiatives, the initiatives that you've announced with Nike obviously sound exciting. Just wondering if you can maybe spend some time talking about some of the partnerships and initiatives you have ongoing with some of the other brands and maybe detail a bit how just the assortment on the shelves has been transforming a bit in terms of where customers are shaking out [Inaudible] trends today.

Richard Johnson -- Chief Executive Officer, President and Chairman

Paul, if you think about, I know you get into our stores but if you get into our Times Square and 34th Street store, you can see experiential spaces that we worked on without Adidas and the assortment and the storytelling, the connectivity of footwear and apparel in those spaces is critical and you see that happening. The Legends Club with Timberland is another one that we look at and say we bring in unique product into that space, very seasonally driven at this point but, again, very strong statements about product and connectivity. And, most importantly, we work with our brand partners to create great social connectivity and great digital connectivity with our consumers that ultimately end up driving consumers into physical experience with us but across our various banners, each banner has different relationships and different engagement opportunities with the consumers and they work with all the various brands to create some excitement in store. So, [Inaudible] physical space but a lot of it really is making sure that the engagement which know is going to begin digitally is intriguing to the consumer and it helps them move through their journey into a physical space in many cases to make a purchase.

Paul Trussell -- Deutsche Bank -- Analyst

Thanks a lot.

Operator

Thank you very much. We'll get to our next question on the line from Camilo Lyon with Canaccord Genuity. Please go ahead.

Camilo Lyon -- Canaccord Genuity -- Analyst

Thank you. Good morning, everyone. I was hoping if you could provide a little color as to where you think you are in the markdown in inventory clearance cycle and when you'd expect to be in the right inventory position to begin expanding gross margins. Again, you've done a very good job of working down that inventory in the past two quarters and obviously the commentary today on the Q4 [Inaudible] suggests that there's more work to be done there.

I'm just trying to understand when we could expect that the balance of both better product, larger quantities of better products as well as the slower turning inventory will start to unfold so that you can get back on this gross margin [Inaudible].

Lauren Peters -- Chief Financial Officer and Executive Vice President

Thank you for calling out what we've done on the inventory for the last couple of quarters because that really is the thought process to make sure that we're keeping the inventory fresh and that we've got a capacity to bring in those [Inaudible] assortments. And I'm not going to get into expectations around 2018. At this point, it'll be a little bit premature but we do believe that the actions that we're taking and will continue to take through Q4 will set us up well to coming into 2018 with strong inventory.

Richard Johnson -- Chief Executive Officer, President and Chairman

I think the [Inaudible] is because our customers are moving quickly, right? So, the old markdown model will have to be adjusted a bit to respond. Actually, the whole [Inaudible] model have to be adjusted a bit to respond to that faster lifecycle of a product and effectively having a good clean inventory [Inaudible] is the place that we want to start as we head into 2018.

Lauren Peters -- Chief Financial Officer and Executive Vice President

And certainly the speed initiative that our suppliers are working on and we're partnering with them on are helpful to that [Inaudible] expectation.

Camilo Lyon -- Canaccord Genuity -- Analyst

Do you feel that your incoming receipts over the next few weeks, over the next few months accurately represents where the demand is most vibrant?

Richard Johnson -- Chief Executive Officer, President and Chairman

Absolutely. I'm a merchant at heart. [Inaudible] we will never buy a product that you don't like. So, we believe that our team is aligned with where the customer is.

We work hard with our vendor partners to get in position to bring in the right qualities, the right product and we like the way the quarter winds. As Lauren talked to, our expectation is a little bit better than it was when we were here a quarter ago. We're still not where we want to be but I like the way our product lines up for the quarter.

Camilo Lyon -- Canaccord Genuity -- Analyst

And then just the last one. Could you just remind us when we should expect [Inaudible], the Superstars [Inaudible] get a better kind of [Inaudible] on that particular category considering that it is a big drag on [Inaudible].

Richard Johnson -- Chief Executive Officer, President and Chairman

It's different in the markets, right? Europe was on the court classics from [Inaudible] before the US market was. Europe is starting to lap it but the slowdown has definitely happened in our stores in the US and I would expect that we will start to see a little bit better Q2 of next year is really when the peak [Inaudible] and that we should be working down off that.

Camilo Lyon -- Canaccord Genuity -- Analyst

Perfect. Best of luck in the Holiday. Thank you.

Richard Johnson -- Chief Executive Officer, President and Chairman

Thanks, Camilo.

Operator

Thank you very much. We'll get to our next question on the line from Scott Krassik with Buckingham Research. Please go ahead.

Scott Krassik -- Buckingham Research -- Analyst

Hey, everyone. Nice job laying out everything you control. That's important. Just wondering specifically around basketball, what do you think drove the improvement in the Retro business? Was it just the stories that were told? Were there specific styles? And then in terms of the basketball go-forward, how do you think about that until we start to [Inaudible] the worst numbers in the sort of mid next year?

Richard Johnson -- Chief Executive Officer, President and Chairman

Well, it's a combination of a number of things, right? We all know that no two Retros are created equally and that there is different storytelling that goes with them and clearly in Q3 the stories in the Retro has been launched with the effective management of quantities in the marketplace led to higher pushes and better results. So, I think that that bodes well as we think about Q4. The other piece is that we've seen some things like the Lebron 15 of Lebron Soldier, some [Inaudible] products, some [Inaudible] product, a little bit of push in some places there that that is slightly better than the spend. So, when the consumer sees the right price-value relationship, when they see us some excitement around the product and the storytelling, basketball shoes are certainly in high demand but they have so many alternatives that everything's got to be right in that equation.

Price-value relationship, the storytelling, the digital connectivity, it all helps. So, we're going to continue obviously supporting basketball across a number of brands and we see some excitement coming.

Scott Krassik -- Buckingham Research -- Analyst

That's great. And then one of your peers gave specific guidance for next year to account for some of the investments. You laid out a handful of investments [Inaudible] initiatives. Just wondering how you sort of balance those investments plus some margin pressure probably early in the year and at least on a 52-week to 52-week basis how you view next year's earnings growth right now.

Richard Johnson -- Chief Executive Officer, President and Chairman

Yeah, it's too early for us. Scott, we're in the middle of our planning process for next year and it is has been our practice. We'll share much more detail about 2018 when we get to our early year call in February but our job is to balance that pressure, our job is to figure out how and where and when to invest and I feel comfortable and confident that the team has got that in mind as we lay out 2018.

Scott Krassik -- Buckingham Research -- Analyst

Great. Okay, thanks. Good luck.

Richard Johnson -- Chief Executive Officer, President and Chairman

Thank you, Scott.

Operator

Thank you. And our next question on the line is from the line of Sam Poser with Susquehanna Financial Group. Please go ahead.

Sam Poser -- Sterne Agee -- Analyst

Thanks for taking my question. I just want to follow up on the inventory. What percentage of the inventory still need to be worked through to sort of get that residual underperforming inventory in the right place so you can then open up more [Inaudible] dollars to bring in the better product that's becoming available.

Lauren Peters -- Chief Financial Officer and Executive Vice President

Sam, I'm not going to go into the detail of what those percentages look like but suffices to say that we have standards that we have in place at this organization, once that business [Inaudible] to make sure that the inventory is in a good place. That has been a discipline that has served us well for years and we are sticking to that.

Sam Poser -- Sterne Agee -- Analyst

And I know you're not guiding 2018 yet but, I mean, is this situation, I mean, given the sort of way that comparisons work, that we would expect some residual gross margin pressure probably into the Q1 of next year? Is that a fair way to think about it?

Richard Johnson -- Chief Executive Officer, President and Chairman

We're merchants, Sam, as you know, and there's always gross margin pressure. Our team has done a great job of giving the inventory a good shape. If our sales expectations are met in Q4, we would see us ending the quarter with inventory in a strong position. Again, with the faster life cycle of products, I'm just not sure that the old markdown model will be as effective going forward.

So, our team reads and reacts and adjusts quickly, utilizing all of the channels that we can to move to through product that that may become an issue but there will continue, I believe, to be some gross margin pressure as we enter 2018.

Sam Poser -- Sterne Agee -- Analyst

Thank you. Just two more things. Number one, we're anniversarying the 53rd week next year and because of that, I think there's a big shift in between the last week of Q2 into Q3 as a big a big week of back to school shift from Q3 the Q2 which would mean that in theory your flat comp, for the sake of argument, in Q2 would give you a very large increase and a flat comp in Q3 because of the shift sales would decrease all other things being equal. Am I thinking about that correctly because, I mean, it's always very entertaining when we get how the quarterly model for next year [Inaudible]?

Richard Johnson -- Chief Executive Officer, President and Chairman

Yeah [Inaudible] creates certainly some shifts. You've got that right. And as we talked about, we will give a clear guidance around 2018 when we get to our February call.

Sam Poser -- Sterne Agee -- Analyst

And lastly, outside let's say the big five-Adidas, Nike, Puma, Under Armor, Timberland-and let's say New Balance arguably as well, what are you doing to test and grow new brands, brands that may have been on the back burner for a while. I know [Inaudible] a couple stories, you've got some Reebok Classics and so on. What are you doing there? And as we look into next year, are there a chance to, I would guess, commercialize them with yourselves in a greater way and what are you looking from entering into a new vendors are old new vendors or however you want to talk about it?

Richard Johnson -- Chief Executive Officer, President and Chairman

The team has a test and try and react sort of mentality, Sam, and if you take a look in the stores today, brands like Champion on the apparel side, we've got a couple of banners that are testing [Inaudible] on the footwear and apparel side. We've had a tremendous run with Vans and we think that there's more opportunity there. So, each of the banners, because their customer's a little bit different, each of them tests and tries different brands and clearly when you've got a division that has a number of stores across Europe, we get some insight from that as well. So, all of those brands that you named are critically important to us.

Yet we're testing and trying and looking to commercialize quickly some of these new old brands or old new brands, depending on how you want to look at it.

John Maurer -- Treasurer, Vice President and Head, Investor Relations

Thanks for the question, Sam, and as Dick has mentioned a couple of times the next call being in February, but it currently is scheduled to be March 2nd.

Richard Johnson -- Chief Executive Officer, President and Chairman

It's because of the 53rd week.

John Maurer -- Treasurer, Vice President and Head, Investor Relations

Because of the 53rd week.

Richard Johnson -- Chief Executive Officer, President and Chairman

Sorry about that.

Operator

Thank you. And we'll get to our next question from the line of Omar Saad with Evercore ISI. Please go ahead.

Omar Saad -- Credit Suisse -- Analyst

Thanks for taking my question. And a great job kind of laying out how you guys are evolved into the marketplace and the quick react and respond that you kind of right size your cost structure. You're clearly attuned to what's going on in the marketplace. Can you talk a little bit about what's happening with some of these new limited-edition sneaker launches? It feels like a lot of the brands are using their own sneaker apps to launch some of these things.

What's your take on this new development with that kind of core fashion-oriented sneakerhead consumer and what Foot Locker's role will be in some of these digital launches and how you see that evolving? Thanks.

Richard Johnson -- Chief Executive Officer, President and Chairman

We know that our vendor partners have DTC objectives, right? And we know that the boutique sort of launches has been part of our industry for a long, long time and our vendors utilizing their apps and some of the boutique partners, something that we certainly expect to continue. I think the group that I mentioned, our North American product and marketing strategy group that Andy Gray is going to lead is working with each of our vendor partners to identify things that we can, in fact, take a bigger commercializable position. I think that those [Inaudible] sort of launches that they do in their own apps and then the sneaker boutique stores, I think, are good for the industry. They add excitement.

So, as much as we want to participate at some point, the truth is this it's a big ecosystem and you need to bring heat into it to make sure that the consumer sees the excitement around the sneakers that we believe is there every day and we'll find a way to commercialize as we work with our vendor partners.

Lauren Peters -- Chief Financial Officer and Executive Vice President

That connection of apps releases [Inaudible] store connection as well and this is an advantage for us that we have a store fleet that can complement that experience and our vendor partners appreciate that asset that we have.

Omar Saad -- Credit Suisse -- Analyst

Yeah, understood, agreed. Thanks very much. Good luck.

Richard Johnson -- Chief Executive Officer, President and Chairman

Thanks, Omar.

Operator

Thank you very much. And we'll get to our next question the line from Christopher Svezia with Wedbush Securities. Please go ahead.

Christopher Svezia -- Susquehanna -- Analyst

Good morning. Thanks for taking my questions and congratulations on [Inaudible] in a pretty tough environment. I guess first I just want to clarify something inventory, just [Inaudible] understand this clearly and the commentary about a better product that you're seeing in the marketplace right now. Against a more challenging gross margin expectations for Q4, is that just a function of your view that you want to go into 2018 as clean as possible or is it just the simple fact that still works in the marketplace is potentially taking a little bit higher markdowns in order to actually moved that product.

I'm just trying to understand the dynamics between those two observations.

Richard Johnson -- Chief Executive Officer, President and Chairman

It's a combination, right? We want to manage our inventory because that's really the only piece that we can control. We can't control what others do in the marketplace. We occasionally react to it but our markdown strategy is based on our being competitive in the marketplace, making sure that we move through the product that we need to in a given season so that we can enter the next season with the ability to flow in the best goods possible and [Inaudible] good if needed. So, it's really a combination.

The marketplace is competitive. The marketplace is driven by markdowns. We stay focused and remain focused on being the premium retailer of athletic specialty shoes. So, the sneakers that we've got are going to be at the premium end.

If we see something not selling to the expectations that we've got, we're certainly going to be aggressive with our markdowns to make sure that we move through the product.

Christopher Svezia -- Susquehanna -- Analyst

Thank you. And then when you think about, as you step into next year, the All-Star Game and the comments about basketball, the All-Star is in LA this year versus [Inaudible]. How do you think about that in terms of how it could be a positive for the businesses in general. Just overall thoughts on [Inaudible] comparison, how you think about that.

Richard Johnson -- Chief Executive Officer, President and Chairman

Well, simply the LA market versus NOLA, it's an easy comparison to say we think All-Star Game will be better in 2018 then it wasn't 2017 but more importantly, the excitement that I believe is going to be generated on basketball product and in the marketplace in general, I think, will be a positive. We've got to plans in the works to activate of course in the LA market but work on activating basketball across the marketplace in the House of Hoops and across all of our geographies. So, certainly, the impact of Los Angeles versus New Orleans should be a positive but I would caution that with I expect that the [Inaudible] flow in 2018 will be similar to 2017 which is significantly different than it was in 2016. So, it's about finding of money in the market and product in the market to go along with the All-Star Game.

Christopher Svezia -- Susquehanna -- Analyst

Lastly, just on Europe, I know you referenced [Inaudible] and Superstar, Stan Smith, Exposure. Anything else you can call out in terms of positive or negative that's impacting that region for you year whether it's either other categories, just strictly traffic. Just any color on Europe and what's going on there would be helpful. Thank you.

Richard Johnson -- Chief Executive Officer, President and Chairman

We talked about traffic being down to mid singles in Europe and it's pretty spread across the continent and the U K. So, I don't know if it is the cumulative effect of some terrorist type activities, some unrest. There are all sorts of things that go on in various markets in Europe. Running continues to be the most important category there.

The core product that you mentioned-Adidas Superstars and Stan Smith – have slowed down but our team continues to reinvest into some great running platforms and while we've seen negative comps for a few quarters, I have a lot of confidence in our team there to be able to turn it around and get positive.

Christopher Svezia -- Susquehanna -- Analyst

Okay. Thank you and all the best for the Holidays, you guys.

John Maurer -- Treasurer, Vice President and Head, Investor Relations

I think we have time for one more question.

Operator

We'll get to our next question on the line from Bob Drbul from Guggenheim Securities. Please go ahead.

Bob Drbul -- Guggenheim -- Analyst

Hi. Good morning. Two quick questions. I think the first one is you guys were pretty aggressive round the share buyback this most recent quarter.

Just give us an update in terms of where you are with the program and how you're approaching going forward. And the second one is I think you mentioned that shared inventory proposition with some of your vendors. Dick, I was wondering if you could just elaborate a little bit more how that would work and sort of how long it would take to get to such an initiative.

Lauren Peters -- Chief Financial Officer and Executive Vice President

On the share buyback, we ended the Q3 with remaining 863 million of our original billion two authorization. The share buyback is a not a formulaic. Our number one priority is investing in the business but a very important objective is a meaningful return of cash to the shareholders and certainly, we've demonstrated that this year but where we see value, we act appropriately.

Richard Johnson -- Chief Executive Officer, President and Chairman

And in the shared inventory comment, Bob, I didn't comment about shared inventory with our vendor partners as of yet. It's something that we're certainly looking to explore and figure out how we can make the inventory in the sneaker ecosystem more productive. My commentary was around better access across our portfolio of brands and banners. So, better utilization of our own supply chain to make sure that all of our inventory is available and visible to our consumers and that we can deliver to them as quickly and efficiently as possible.

Bob Drbul -- Guggenheim -- Analyst

Thanks very much.

John Maurer -- Treasurer, Vice President and Head, Investor Relations

Thanks, everybody, for questions today. I'll back at my desk shortly. If we didn't get to your question or didn't answer any follow-up questions you may have, again, the next call currently is scheduled for March 2nd. In the meantime, Happy Holidays, everyone and thanks again and goodbye.

Operator

Thank you very much. Thanks, everyone. Ladies and gentlemen, this concludes today's conference. Thank you for participating.

You may now disconnect your line. Have a good day, everyone.

Duration: 62 minutes

Call Participants:

John Maurer -- Treasurer, Vice President and Head, Investor Relations

Lauren Peters -- Chief Financial Officer and Executive Vice President

Richard Johnson -- Chief Executive Officer, President and Chairman

Kate McShane -- Citigroup -- Analyst

Robert Ohmes -- Bank of America / Merrill Lynch -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Camilo Lyon -- Canaccord Genuity -- Analyst

Scott Krassik -- Buckingham Research -- Analyst

Sam Poser -- Sterne Agee -- Analyst

Omar Saad -- Credit Suisse -- Analyst

Christopher Svezia -- Susquehanna -- Analyst

Bob Drbul -- Guggenheim -- Analyst

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