Foot Locker, Inc. (NYSE:FL) Q2 2024 Earnings Conference Call August 28, 2024 9:00 AM ET

Company Participants

Mary Dillon - President, Chief Executive Officer
Frank Bracken - Executive Vice President, Chief Commercial Officer
Mike Baughn - Executive Vice President, Chief Financial Officer
Robert Higginbotham - Senior Vice President, Financial Planning & Analysis, Investor Relations, Treasurer

Conference Call Participants

Janine Stichter - BTIG
Alex Conway - Baird
Adrienne Yih - Barclays
Paul Lejuez - Citi
Michael Binetti - Evercore ISI
Anna Andreeva - Piper Sandler

Operator

Good morning! And welcome to Foot Locker's Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

This conference call may contain forward-looking statements that reflect management's current views or future events and financial performance. Management undertakes no obligation to update these forward-looking statements, which are based on any assumptions and factors, including the effects of global, economic, and market conditions, currency fluctuations, customer preferences, and other risks and uncertainties described more fully in the company's press releases and reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q.

Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in those forward-looking statements. Please note this conference call is being recorded.

I would now like to turn the conference over to Mr. Robert Higginbotham, Senior Vice President, FP&A, Investor Relations and Treasurer. Sir, you may begin.

Robert Higginbotham

Thank you, operator. Welcome everyone to Foot Locker Inc.'s second quarter earnings call. We will begin with prepared remarks by Mary Dillon, our President and Chief Executive Officer. Frank Bracken, our Executive Vice President and Chief Commercial Officer, will then give more detail on our results across our banners and geographies. Then Mike Baughn, our Executive Vice President and Chief Financial Officer, will review our second quarter results in more detail and our 2024 outlook. Following our prepared remarks, Mary, Frank, and Mike will take your questions.

To note, today's call would reference certain non-GAAP measures. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We also have a slide presentation posted on our Investor Relations website with information that will be referenced during the call. Finally, for future planning purposes, we currently plan to release our third quarter 2024 results on Wednesday, December 4th.

And now I will turn it over to Mary.

Mary Dillon

Thank you, Rob. I'll start this morning with a brief overview of our second quarter results. I'll then comment on some recent strategic and organizational updates, and we'll close with an update on our progress against our Lace Up Plan.

To start, the second quarter marks a meaningful inflection point in our business and the execution of our Lace Up Plan. In the quarter, we saw a return to positive total and comp sales growth, while also returning to gross margin expansion, which demonstrates that our strategic investments in support of the Lace Up Plan are taking hold.

Comps increased 2.6%, which was ahead of our expectations of flat to slightly positive. This was led by our global Foot Locker and Kids Foot Locker banners, which comped up 5.2%. Importantly, our comp trend strengthened as we moved through the quarter, with July our strongest month as we saw a solid start to the back-to-school season, especially in our stores, and with that strength continuing into August.

We were also particularly pleased to see stabilization in the Champs Sports banner, as the banner achieved meaningful comp improvement quarter-over-quarter as its repositioning continues to take root.

Gross margin was up 50 basis points year-over-year, led by underlying improvement in merchandise margins from lower promotions as well as occupancy leverage, and offset by the planned impact of a non-recurring charge associated with our recent FLX rewards program transition.

Finally, non-GAAP earnings per share was a loss of $0.05, including a $0.09 impact from the non-recurring FLX charge in the quarter, which was roughly in line with our expectations. As we look forward to the remainder of the year, we have momentum coming off our strong second quarter results, and we are approaching the back half of the year with confidence.

Our strategies across store experience, digital, loyalty, and brand building are continuing to take hold. The impact of our Lace Up Plan is accelerating. Our inventories are well-positioned, and we are flowing product to better match customer demand.

As such, we are reiterating our full-year outlook, calling for a return to comp growth and EBIT margin expansion, and we are maintaining our guidance of non-GAAP EPS of $1.50 to $1.70. We remain focused on progressing against our Lace Up Plan this year and meeting our near and longer-term financial commitments, including our 8.5% to 9% EBIT margin targets by 2028.

With that focus on delivering against our strategic and financial targets in mind, I'd like to comment on the changes we announced this morning to our international operations as well as our corporate real-estate footprint. An overarching principle of our Lace Up Plan is to simplify and optimize our business to ensure that we can invest behind and focus our energy on our core banners and markets in order to drive sustainable growth.

As part of the Lace Up Plan over the past few years, we've made meaningful strides in streamlining areas of our regional and banner portfolio that were adding complexity to our business while also diluting our overall levels of profitability.

In North America, we wound down banners such as Lady Foot Locker, Footaction, Eastbay, and Atmos's limited U.S. presence. In Europe, we closed our Runners Point and Sidestep banners. And in Asia, we converted our operations in Singapore and Malaysia to a licensed model.

As we execute our Lace Up Plan, we've identified additional opportunities for streamlining our operations, leading to this morning's announcement regarding our international business. In our Asia-Pacific region, we will begin to wind down our stores and e-commerce operations in South Korea. In Europe, we will close our stores and e-commerce businesses in Denmark, Norway, and Sweden.

Further, we signed agreements to transfer our operations in Greece and Romania to Fourlis Group, a leading retail group and licensing partner in Southeast Europe. All of these changes are expected to be completed by mid-2025. I want to thank our teams and stripers in these markets who have worked with dedication and passion every day.

Additionally, our agreements with Fourlis Group include future stores and e-commerce expansion in Southeast Europe. Including expansion in Greece and Romania, the ambition is to open over 100 stores in the region over time.

In combination with our plans to enter India later this year with our licensed partners Metro Brands and Nykaa Fashion, the health and contribution of our global licensing portfolio is building as we profitably expand the global reach of our Foot Locker brand in higher growth markets with reduced levels of investment and risk.

Next, I want to address our intention to relocate our corporate headquarters to St. Petersburg, Florida, where we already have a meaningful executive and commercial presence in late 2025. We'll be expanding our footprint in St. Petersburg as we transition from New York City and plan to maintain only a limited presence in New York City going forward. Separately, in September, we will celebrate the opening of our new Global Technology Services Hub in Dallas, which will be a key enabler of our technology infrastructure modernization under Lace Up.

At Foot Locker, we are at our best when we support enterprise-level thinking and collaboration amongst our team members while also looking for ways to operate with financial discipline. Through these actions, we are ensuring ongoing strategic support of our Lace Up Plan and operational efficiency as we focus on driving long-term sustainable growth and shareholder value creation.

Now with that, let me provide an update on our Lace Up Plan and progress against our strategies in the second quarter. Starting with our first imperative; expand sneaker culture, which aims to serve more customers and sneaker occasions through a curated assortment of premium brands and sneakers. With our return to positive comp sales in the second quarter led by our strong results in footwear, we're showing that we are growing our market share through our efforts to expand sneaker culture.

As we return to growth in the second quarter and into the back half, we're excited about achieving growth across all aspects of our product portfolio, including a return to growth with Nike starting in the fourth quarter of this year and into 2025.

We'll achieve this through our emphasis on our mutual pillars of basketball, kids, and sneaker culture and leading into our elevated storytelling and partnerships such as the NBA, Home Court, and The Clinic.

For example, in the second quarter, we collaborated with Nike and Jordan Brand to tap into the growing popularity of women's basketball through a clinic activation featuring WNBA Guard for the Atlanta Dream, Aerial Powers; former WNBA player Linnae Harper of the Chicago Sky; and Jordan Brand athletes, including Mikaylah Williams of the LSU Tigers; Kiki Rice of the UCLA Bruins; and Kiyomi McMiller of Rutgers Scarlet Knights.

In July, we hosted a two day activation in Phoenix featuring a skills and drills clinic with young women hoopers, followed by an engaging panel discussion. Our celebration of women's basketball with the clinic speaks to what we continue to see as a key opportunity for our business as we look ahead, namely our women's business.

Women's has consistently been our fastest growing business for the past few years. Looking out, we continue to see ongoing opportunity in the women's category. As we tap into the women's opportunity broadly, our brand diversification efforts play an important role as we see more women come into our funnel through our wider brand selection.

In the second quarter, we introduced our first ever spring style and trend campaign in partnership with Adidas and New Balance. The campaign strategically targeted women and earned us nearly 3 billion media impressions. Looking ahead, next month marks the Foot Locker brand's 50th anniversary and we have some exciting plans to help celebrate our rich history at the heart of basketball and sneaker culture.

With one-of-a-kind events and exclusive co-created products from Nike, New Balance, Adidas, Puma, and Converse, we can't wait to celebrate where we've been and where we're headed throughout the next 50 years.

And finally, as we drive greater distinction in our assortments, our exclusive penetration in the quarter was 13%, down 100 basis points year-over-year against some tougher franchise comparisons and reflecting stronger relative strength from base aspects of our portfolio, especially among women and kids.

The second pillar of Lace Up is Power Up the Portfolio, which means transforming our real-estate footprint and continuing to differentiate our banners. On real-estate transformation, we're continuing the progress we've made last quarter with our Reimagined Store Concept. We followed up the successful opening of our first concept door in New Jersey this spring with our second concept door in Paris, La Défense in May.

Both stores truly bring the heart of sneakers to life. Response to this new concept has been very positive from our brand partners, stripers, and customers. In both locations, we've seen higher conversion levels and basket sizes and meaningfully increased penetration of women's footwear compared to the balance of chain.

We have formally named this new concept as Foot Locker Reimagined, and these concepts are intended to be the next evolution of our store formats and the go-forward expression of our brand.

Just last week, we were thrilled to reopen our iconic 34th Street store in New York City as our third Foot Locker Reimagined door. This location puts our best and most modern foot forward in the heart of Manhattan and redefines how we engage with sneaker enthusiasts. The store features a pivotal advancement with our new Home Court concept, which recall is our premier multi-branded basketball experience.

Home Court developed in partnership with Nike and Jordan brand embodies our vision to deliver the ultimate global multi-branded basketball experience through customer-centric design, immersive digital experiences, and enhanced technology, all with exceptional service by our strivers. We intend to roll out this latest version of Home Court in select stores going forward.

34th Street also features our updated Kids Foot Locker concept for the first time ever with a new look and feel. Given the strong response we are seeing to our first few Reimagined doors, we are pulling forward three additional locations this year with a total of eight now planned to open in 2024. This will include our new store later this quarter in Delhi, India, which will mark our entry into this market in coordination with our licensing partners, Metro Brands Limited and Nykaa Fashion.

In addition to these new retail concepts, we continue to make headway on our store refresh program, which aims to bring even more of our fleet up to an elevated and consistent brand standard globally. Elements of our refresh program were informed by the same design brief as Reimagined, speaking to how Reimagined is serving as the blueprint of our future brand expression going forward.

In the second quarter, we completed 67 refreshes. These refreshes are in addition to the over 100 doors we've touched over the last few quarters as we've executed the program and will continue to scale as we move through the back half of the year.

We remain on target to ramp the program as we go through the third and fourth quarter, especially given that our execution of these refreshes continues to improve, in some cases turned around in just 24 hours.

From a capital return perspective, we continue to see these refreshes hitting our internal hurdle rates and payback periods, supported by both comps and gross margins outperforming the balance of chain.

Our new concepts, including Foot Locker Reimagined, now represent 17% of our global square footage, up from 12% last year and moving further towards our 2026 target of 20%. Adding our store refreshes on top of our new concepts, we're committed to elevating approximately two-thirds of our global Foot Locker and Kids' Foot Locker doors up to our Reimagined brand standard by year-end 2025.

And finally, we're making strides in our shift to off-mall. Penetration reached 40% of North American square footage, up four points from a year ago and closer to our goal of 50% by 2026. As we work to strengthen our portfolio, a key objective has been to stabilize the Champs Sports banner. As such, we were pleased to see progress with the repositioning of the banner in the second quarter.

Comps declined 3.9%, which was a meaningful improvement from the first quarter and reflecting positive footwear comps. As we make progress in the banner's repositioning, we're seeing increases in brand awareness and share of wallet among the active athlete customer segment.

During the quarter, we took another big step forward with the banner with the launch of Champs Sports' new brand platform titled Sport for Life, which celebrates the powerful connection between sports and the on-the-go lifestyle of our active consumers.

With an assist from Micah Parsons of the Dallas Cowboys; Francisco Lindor of the New York Mets; and Jaylen Waddle of the Miami Dolphins, response from customers and our brand partners to the elevated platform has been positive. We're excited about the expanded and elevated vision for the Champs Sports banner looking ahead, and we'll have more to share in future quarters about the banner's evolution.

Our third pillar is deepen our relationship with our customers, with a key anchor being a redesigned loyalty program and development of overall CRM capabilities. To start, a key milestone for our business was the relaunch of our enhanced FLX rewards program in the U.S. in mid-June.

24% of our sales in the second quarter were through our loyalty program, which was up 200 basis points compared to last year. Through the addition of point redemptions for cash discounts and other perks under the program, we expect to drive greater customer frequency and share of wallet.

We've been very pleased with our members' response to date across a variety of KPIs, including an encouraging pace of enrollments, higher engagement with first-time redeemers, higher average order values compared to non-loyalty members, and higher units per transaction.

As we move into the back-to-school and holiday selling periods, we're continuing to scale and activate the new program of benefits, and we look forward to sharing incremental insights as the program moves towards our 50% loyalty penetration target by 2026.

And turning to our final pillar to be best-in-class omni, which means improving our digital presence and better integrating our customer journey across channels, our digital penetration in the quarter increased to 15.9%, up 40 basis points year-over-year, and we continue to target about 25% e-commerce penetration by 2026. At an enterprise level, global digital comps were up nearly 4%, and we continue to make strides in our online conversion rate.

In the second quarter, we made ongoing improvements to the online customer experience through elevated site content and messaging, enhanced navigation and search capabilities, and importantly, a product detail page redesign. We remain on track to roll out a new Foot Locker mobile app later this year in the fourth quarter, which will provide a faster, more modern shopping experience, along with greater product inspiration and storytelling, and serve as a hub for our new loyalty program.

In our stores, comp sales accelerated meaningfully in the quarter as customers responded to our fresh summer assortments at full price. Our striper trainings focused on omni-channel selling behavior and product education tools that are driving increases in our store-level conversion.

In closing, we see a return to positive sales and comp growth in the quarter, as well as gross margin expansion as proof points that the Lace Up plan is working. We're approaching the remainder of the year with confidence, as our strategies are continuing to build momentum.

And now, let me hand it over to Frank to provide more details on our category and banner performance.

Frank Bracken

Thank you, Mary, and good morning everyone. Starting with second quarter product and brand partner performance, footwear comped positive high single digits. Within the basketball category, we continue to invest and see strength within our portfolio of next-gen signature athletes like Nike's Sabrina Ionescu, Devin Booker, and John Moran, along with the Jordan athlete and NBA champion Jayson Tatum.

Next to that, we continue to drive energy and strong sell-throughs with the Adidas AE1 and the MB.03 from Puma, as we remain confident in the diversity and energy of our signature basketball portfolio, and look forward to delivering even more innovation and excitement later this third quarter as the NBA season tips off.

Importantly, the game of basketball and its influence continues to grow globally, as evidenced by the Olympic Games this past month. As the U.S. women's and men's team both won gold medals, the tournament demonstrated how global, competitive, inclusive, and inspiring the sport has become, and the role it plays in driving both sport and culture across the globe.

Within the culture of basketball, Nike's Dunk and Air Force 1 and the Jordan AJ1 continue to be icons of the sneaker category and remain among our most important franchises with consumers. Likewise, our Jordan Retro business continues to be a critical connection point to a new generation of consumers who celebrate basketball culture and streetwear, and we saw strong sell-throughs as we exited the quarter and then the beginning of back-to-school.

To ensure that Foot Locker stays at the forefront of the basketball category, we are thrilled to have opened our newest home court concept last week at our iconic 34^th Street Foot Locker store in New York City. Designed in partnership with the Nike and Jordan brands, this elevated basketball experience brings together the best of signature, lifestyle, and retro basketball with one-of-a-kind consumer experiences.

This concept will serve as the blueprint moving forward as we are on the journey to deliver 100 home court experiences globally by 2026. Combined with our NBA partnership and the support of all of our brand partners, Foot Locker will continue to lead as the undeniable destination for all things basketball.

Turning to the lifestyle category, Adidas continues to lead the global terrace trend, especially with our women's and kids consumers. Our business with Adidas strengthened in the second quarter as we flowed new colors and powerful retail stories through franchises such as the Samba, Campus, and Gazelle. Our order book and go-to-market plans remain very strong as we go through the back-to-school time period, and we are encouraged by the robust pipeline of innovation and creativity that Adidas has shared with us looking forward.

In lifestyle running, we continued our strong momentum with New Balance, through door expansions in women's and kids, as well as like-for-like gains. Our partners at New Balance continue to engage our shared consumers with strong product innovation, compelling assets and storytelling, and operational excellence to help scale the business. With multiple footwear franchises connecting in the marketplace and a commitment to sport, lifestyle and streetwear, we are confident that we will continue to grow with this important partner.

Another strong brand that is leveraging its authenticity in running is ASICS. We are seeing strong global momentum with ASICS in multiple footwear franchises across men’s, women’s and kids. Next to that, Champ Sports has partnered with ASICS on their performance running line and also executed multiple run club events with consumers this year.

With our partners at Nike, we continue to revitalize the Max Air business through their innovative platform, Dynamic Air. And in the back half of this year, we will increase door count for Air Max DN across all genders, and we are excited to flow new colors and stories into our business.

Next to that, we continue to elevate our exclusive Tuned Air franchise globally, investing in digital content, consumer experiences and elevated in-store merchandising. We also saw momentum with Nike in our second quarter across heritage running franchises, including Vomero, V2K and P-6000. Our door base and depth in these franchises is improving in our back-to-school selling period, as well as the fourth quarter, and we are pleased to dimensionalize the running business with them.

Within performance running, On and Hoka are continuing to bring new consumers into sneaker culture, especially women and kids. We grew with both of these brands on both a door and allocation basis in the second quarter, as we also see our retail banners as helping to introduce younger, more multicultural consumers to their brands.

And while the vulcanized footwear category remains challenged overall, we're seeing encouraging trends out of the Vans brand, especially through their new school franchise. We are building our stock levels in this compelling franchise as we navigate the back half of the year, and we will continue to work with them to connect their classics and innovation to our consumer base.

Finally, as we look ahead to the fall and holiday season, brands like UGG will continue to be a larger part of our plans, especially for our female consumers. Next to that, we are excited for a strong boot season with Timberland this fall and holiday, as they have done a tremendous job linking their iconic brand to fashion and culture, driving great consumer anticipation this fall.

Turning to the apparel business, challenges persisted with comps down mid-teens. While the promotional environment in apparel remains difficult, we believe we can do more to stabilize the category with greater key item and sneaker connectivity, while also filling in gaps in our assortments with a compelling private label offering.

One of the standouts within our apparel business was our Champ Sports private label performance within CSG. CSG comped positive for the quarter, and we have delivered a compelling assortment for the back-to-school season, including new activewear styles, as well as new assortments in bottoms.

Finally, our accessories business comped up mid-single digits as we focused on our complementary socks, shoe care, and headwear categories, which is helping drive our UPTs and drive accretive merchandise margins.

Switching to channel performance, comparable sales in our stores increased 2%. While traffic was down year-on-year, we continue to see gains in conversion, as well as average ticket, including both positive AURs from greater full-price selling, footwear penetration, and higher UPTs.

Meanwhile, digital comps increased 4%. We saw growth again in our customer file in the quarter with both new and reactivated customers. We also delivered higher digital conversion levels for the quarter, as our efforts to improve the customer digital experience continue to take hold. And as Mary mentioned, we look forward to delivering our new digital app experience later this year, which will upgrade the shopping experience for our customers, as well as more seamlessly integrate our FLX program.

Now for performance by banner and geography. In North America, overall comps were up 1.7%, led by Foot Locker North America, which delivered a comp increase of 5.9%. With meaningful store refreshes completed and our inventories well-positioned, customers responded to our assortments and product flows at full price, particularly across women's, running, and the basketball categories.

Our sustained brand building presence with our women's style campaign, our basketball activations with the Clinic and Summer Hoops, and our marketing investments with sneaker season in July, kept us top of mind throughout the quarter and headed into the early days of back-to-school.

Kids Foot Locker comps were flat in the quarter. Coming off a strong first quarter when we pulled forward receipts to match strong demand, it took some time to rebalance stock levels to fully meet demand here in the second quarter. We were able to partner with our vendors to ensure supply for the third quarter and have seen a nice acceleration in the banner in August as a result and believe we are well positioned for the balance of the year.

At Champs Sports, comps were down 3.9%, a nearly 10-point improvement from the first quarter results as we're seeing signs of stabilization at the banner, as its repositioning continues to take hold. As Mary noted, Champs generated positive footwear comps in the quarter. In fact, the top 25 doors at Champs comped positive overall in Q2 with particular strength in July store conversion as assortments reflecting its updated sports style positioning really resonated.

The Champs team also continues to strengthen its brand partnerships and find differentiating consumer ideas to bring to market under its Sport for Life brand platform. For instance, the Champs Sports Run Club continues to gain momentum as the team elevates the assortment and executes consumer activations, including our largest event to-date most recently with Nike.

Additionally, the Champs team has been partnering with Adidas to deliver on the culture of sport and more specifically the look of soccer, including jerseys and jersey-inspired shirts, bottoms and terrace footwear. And as I mentioned briefly before, the Champs CSG assortment has helped deliver against consumer-right trends like lifestyle woven bottoms and activewear, which is proving to be a hit with consumers.

With a strong back-to-school performance thus far, consumers are responding to Champs improved assortment, in-store presentation, and new brand platform, giving us confidence that we have stabilized this critical banner.

Moving to WSS, comps declined by 6.2% in the second quarter, as ongoing inflationary pressures continue to impact the discretionary spend of the WSS shopper as reflected in shopping visits, especially in California. The WSS management team continues to focus on delivering compelling value and selection to their core consumer. However, as we navigate the challenging environment, we believe it's appropriate in the near term to reduce capital for new store openings at WSS, particularly given the strong returns we are seeing with new store concepts out of our other banners.

As a result, our revised plan for 2024 now includes 13 new doors at WSS, down from 20, as we expect to temper our door growth plans in the near term, until we see greater signs of consumer stabilization and recovery. While we are taking this prudent approach in the near term, we still very much believe in opportunities for the banner longer term and serving the fastest growing consumer segment in the U.S.

Turning to Europe, comps were up a strong 7.6%. The environment in Europe remains dynamic and somewhat promotional, especially within apparel, and we acknowledge there's more work to do in the region to drive greater levels of full-price sales. However, our teams in the region saw tremendous success in the quarter in engaging consumers through our store refresh program, as well as compelling brand campaigns, including our Summer of Sport campaign, celebrating the Euro Cup, and of course the Olympics in France.

With our Foot Locker Reimagined store in Paris opening in the quarter and a second in Europe coming later this fall, we are laying the groundwork for elevating the consumer experience along with our store refresh program. Additionally, we continue to make progress with our new merchandising strategies and look forward to coming digital improvements that will elevate the digital experience.

Finally, as mentioned, with the optimization of our footprint in the region, we can continue to focus more resources on the most meaningful European markets where we can drive sustainable and profitable growth. In Asia-Pacific, comps were down 4.5%. At our Foot Locker banner, comps fell 2.2%, reflecting ongoing consumer challenges in the Australian marketplace from higher inflation. Encouragingly, we did see an improving trend as we moved through the month of July.

And finally at Atmos, comps were down 9.6%, reflecting our decision to accelerate shifts from less profitable third-party digital platforms to our own digital site. We will continue this shift into the back half of the year and come out of this with stronger first-party customer relationships and data.

To conclude, we were pleased to deliver a strong second quarter led by our global Foot Locker and Kids Foot Locker banners. Our merchandising and commercial teams are in sync and executing well with the support of our brand partners, leading to a solid back-to-school season thus far and giving us confidence as we look ahead to the holiday season.

I'll now hand the call over to Mike to go over the financials and guidance in more detail.

Mike Baughn

Thank you, Frank. And good morning, everyone. In the second quarter, starting with revenue, total sales increased 1.9% led by comps up 2.6%, which was slightly ahead of our prior guidance of flat to up slightly.

Total revenues included an $11 million non-recurring charge associated with the rollout of the company's enhanced FLX program, which impacted our total sales line and not comps within the quarter.

In terms of monthly cadence, comps improved as we moved through the quarter, with May comps down low single digits, June comps up mid-single digits, and July the strongest month of the quarter with comps up mid-single digits and slightly ahead of June.

Moving to margins, we were pleased to return to gross margin rate expansion in the quarter and accomplishing that while also improving our comp trajectory. On a reported basis, gross margin for the quarter expanded 50 basis points to 27.6%.

Merchandise margins were down 20 basis points. Occupancy as a percent of sales levered 70 basis points on the positive comp. To note, the quarter included an approximate 40 basis point impact related to the non-recurring FLX charge taken in the quarter.

Excluding the FLX charge, gross margin increased approximately 90 basis points, including 20 basis points of merchandise margin expansion due to the reduced promotional levels year-over-year. Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line.

For the second quarter, our SG&A rate came in at 25.1%, representing deleverage of 130 basis points. Investments in technology and brand building, as well as ongoing inflationary pressures, were partially offset by savings from the cost optimization program of approximately $10 million.

Collectively, our cost optimization program generated total savings of approximately $20 million in the second quarter. Finally, our earnings loss per share was $0.13, and non-GAAP earnings per share landed at a loss of $0.05 per share. Included in both our GAAP and non-GAAP earnings per share results was an approximate $0.09 impact from our non-recurring FLX charge.

Turning to the balance sheet, we ended the quarter with $291 million of cash and total debt of $445 million. At quarter end, inventories were down 10% versus last year, as we remained committed to keeping our inventories controlled, slowing product to better match demand, and improving our inventory turns in 2024.

Turning to cash flows. Cash flow from operations was $68 million in the quarter, while capital expenditures were $56 million, yielding a positive free cash flow of $12 million in the second quarter, a significant improvement as compared to the prior year.

We are pleased to see positive free cash flow in the quarter and remain on track to generate positive free cash flow for the year, moving on to the changes towards international operations, as well as our corporate footprint, that were announced this morning. The further streamlining and optimization of our international footprint will impact approximately 30 stores and is expected to be completed by mid-2025.

In 2023, these regions represented approximately 1% of global revenue and over $10 million in operating losses. In addition, we announced our intent to further optimize our corporate footprint by relocating our headquarters to St. Petersburg, Florida in 2025, while maintaining only a limited presence in New York City going forward.

We expect the combined savings from these actions to represent an over 20 basis point tailwind to EBIT margin into 2027 and beyond, before contemplating any added benefit from higher royalty revenues over time.

On to our 2024 outlook. Given the strength of our first half results, we are reaffirming our full-year non-GAAP EPS guidance of $1.50 to $1.70. We still expect full-year comps of plus 1% to plus 3%. Given our solid second quarter trends in June and July, and supported by our performance through August, we still expect our comp momentum to build into the back half as our initiatives take hold.

Overall, our store count will be down approximately 4% in 2024, with square footage down approximately 2%. We expect to open roughly 30 new stores in the year and to close approximately 140. Including an approximate one point drag from lapping the extra week, total sales for 2024 are still expected to be down 1% to up 1%.

On gross margin, we now expect gross margin expansion of 180 to 200 basis points to a rate of 29.5% to 29.7%, down from our prior assumption of a 29.8% to 30% gross margin rate for the year, as we're seeing some promotional pressure in our international banners and in WSS, which we believe will impact the back half.

On SG&A, we expect deleverage between 140 and 160 basis points to a rate of 24.1% to 24.3%, better than the prior assumption of 24.4% to 24.6%. While we are continuing our investments in technology, digital, and brand building, we are finding efficiencies and managing our expenses in order to maintain our bottom line.

As an organization, we are committed to optimizing our investment dollars and focusing on driving efficiency to deliver on our financial and strategic objectives. As a part of that, we remain committed to operational and investment management with a constant eye on maximizing returns, coupled with ongoing progress on our cost optimization program, through which we continue to target $80 million in savings this year.

Switching to cash flows, our adjusted capital expenditure outlook for the year is now $330 million, down from our previous guidance of $345 million, largely from our reduction in new WSS stores this year. It's important to note that the adjusted number includes approximately $55 million of IT investment that is not classified as CapEx from a GAAP perspective. Therefore, what will get reported in our CapEx line on our cash flow statement under investing activities will be approximately $275 million.

The remaining $55 million represents Software-as-a-Service implementation costs, a portion of which is being amortized this year and which is embedded in our 2024 SG&A guidance. The balance that is not being amortized this year flows through our operating cash flows through the change in related asset accounts in our other net line item on the cash flow statement.

Taking a closer look at the back half, let me provide some additional detail on our expectations that will shape each quarter. On the top line, we expect comp momentum to continue to build as we move into the third and fourth quarters to reach our plus 1% to plus 3% comp gain for the year, with the third quarter and fourth quarter being at roughly equivalent positive comp levels.

On gross margin, we expect gross margin expansion to ramp into the third quarter and even more so into the fourth quarter as we lap last year's higher markdowns, especially within apparel. On SG&A, we expect deleverage year-over-year in both the third and fourth quarters.

On a year-over-year percent change basis, we expect SG&A dollar growth to be up in the low double digits in the third quarter and flat to slightly down in the fourth quarter when compared to last year's fourth quarter inclusive of the extra week. For this reason, from an earnings perspective, we expect third quarter to be approximately $0.40 at the midpoint of our non-GAAP guidance range.

Our strategies are building momentum as we move into the fall and holiday seasons, which is giving us confidence as we approach the remainder of the year in addition to our longer-term targets. We look forward to updating you on our Lace Up progress next quarter.

And with that, operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question will come from Janine Stichter with BTIG. Please go ahead.

Janine Stichter

Hi. Good morning. Thanks for taking my question and congrats on all the progress. So, by all accounts, the environment remains really tough, but we're seeing that you're accelerating comps and you're also pulling back on promotions at the same time. Can you elaborate further on what you see is driving this?

And then also curious, any changes you're seeing in your consumer base, particularly with lower-income consumer that you see at WSS? Thank you.

Mary Dillon

Thank you, Janine. Well, first of all, yes, we're really pleased to be returning to positive total company comps and gross margin expansion as we're pulling back on promotions. We've seen this broad base across all of our income cohorts, our regions, our formats.

In fact, as we said to the script, our comp continued to improve through the quarter and continues as we get into back-to-school with strength. And in addition our inventories are controlled. So as we said, down 10% year-over-year. So net-net, I would say our execution is getting better and meeting customer needs. And to us, that's good evidence that the Lace Up plan is working.

On the consumer side, I would say it's an important category to our consumers, and they are prioritizing it right now as a discretionary category. With us having the right offerings at the right time for the key buying occasions, they are responding. So whether it's the brands and products we are offering, often they are buying at full price, our reimagine and refresh store experiences, omni-channel and digital and now FX loyalty, it's really bringing these all together at once.

And for our customers, we have a young, diverse customer base. Really critical to the industry frankly, because they are real trendsetters. They are often students who are early in their career, so their discretionary spending is by definition limited. But I'd say – and also like all consumers, they have experienced pressures from inflation, interest rate, etc. So again, as I said, this is a category they prioritize. And so for the right proposition at the right time, our guests are showing up and I think its evidence in our comps and our positive AURs.

And I'd also note that our Lace Up strategies are inviting new customers into our business. So we're increasing the percentage of women, we're bringing in some higher income customers as well as Gen Alpha shoppers. So in total, we think we've got a good handle on sort of showing up for our customers in the right way at the right time.

You also asked about WSS. And that's a household that I would say has even more pressure. (A) more concentration in a state like California. These are households that have multiple people in the household. So the discretionary dollars go even – or have to be stretched even further. So that's why we're seeing more pressure with that customer side of the business. Thank you.

Janine Stichter

Perfect. Thanks very much. And then just a follow-up on the guidance. You called out SG&A up low double digits in Q3. Is there anything shifting there from Q2 or maybe out of Q4? I just wanted to understand how to think about that, because I think it was a little bit higher than you had talked about previously.

Mike Baughn

Yeah Janine, this is Mike. So within Q3, a little bit of timing, just in terms of how the year flowed with some technology projects. It's not an indication of anything in terms of our progress within it, but just a little bit of timing within the expenses.

And then for the year, we do think Q3 is sort of the peak at up double digits, but then we'll continue to make progress in Q4. Within Q4, we start to lap some of the brand building activities we have from a marketing perspective that really ramped up into Q4, and we start to anniversary that. So we'll make some progress going forward.

Janine Stichter

Perfect. Thanks so much.

Operator

The next question will come from Jonathan Komp with Beard. Please go ahead.

Alex Conway

Yeah, good morning. This is Alex Conway on for John. Could you just walk through the thought process a little bit behind some of the decisions involving the international operations with the plans to close South Korea and Nordics, and then converting Greece and Romania?

Mary Dillon

Sure Alex, thank you for the question. I would step back and say that we're always evaluating the business and all levers that we have to pull in service of achieving the Lace Up plan on strategic and financial goals. And for us, a key theme has been simplification and optimization, as that allows us to continue to focus on both being a global brand, but also focus in on the core market spanners that we think really will drive our future.

So the lenses that we use are things like size and scale of a market, its growth potential, profitability, whether that's current or future potential, certainly fit within the customer segment priorities we've identified. And of course where we believe we'll get the best return on capital versus other investments. So these are not decisions that we take lightly. In fact, in all of these markets we have really terrific striper teams that have done a really fantastic job.

But that said, the decisions on market, so for example, Korea growth potential, yes, but more challenge on profitability for us, and the Nordics was more about size and scale, and lower growth potential. Whereas Southeast Europe, we do feel there's good potential there across the screens that we've used, but better served we think with a capital – with a partner in terms of their capital and execution efficiency. So, we feel good about where we sit on the portfolio today, but we will certainly continue to evaluate from time-to-time.

Alex Conway

Yeah, thank you. That's helpful. And then, Mike, just quickly on the gross margin guidance, you called out the headwinds and WSS and international. Should we take that to mean that Foot Locker U.S. margins are kind of tracking as you planned? And just any more color on that line would be helpful. Thank you.

Mike Baughn

Sure. So as we think through the gross margin guidance, just wanted to call out that while we are adjusting it down slightly, still forecasting and projecting a meaningful acceleration in our gross margin rate year-over-year in both Q3 and Q4.

We did call out the additional markdowns needed, concentrated in international and WSS, so I think we do feel good about how the North American promotional environment and our margin progression is occurring in our North American banners outside of WSS.

As we look to the back half, it's really the European environment still remains tougher and we're seeing promotional activity in apparel, in particular for us to be competitive there. And then at WSS, that consumer still remains in a tougher spot, so we're having to lean into a greater value messaging to drive demand.

I think importantly, both company-wide and for these regions and banners in particular, we feel good about our inventory levels. Mary called out down 10% for the year. We'd expect inventories to remain in the down 6% to down 10% range as we go into Q3, which is where we've been operating at Q1 and Q2 levels. So again, we feel really good about the progress we're making in terms of gross margin rate expansion, but acknowledging some additional pressure in a couple of markets.

Operator

The next question will come from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih

Great. Let me add my congrats on the progress. I guess my first question is the move to St. Pete's. I'm wondering if you can talk to us about kind of where the distribution of kind of human capital, human resources are? Obviously they are in New York now. The design and the merchant team, how they get down there? And then what does remain sort of in the New York market?

And then secondarily, when we talk about the inventory, just to follow-up on that, when you are looking at spring season and the buying of inventory as we enter 2025, when do you kind of open up that open to buy, to give the – kind of give a little more oxygen to comp acceleration? Totally understand that you are sort of playing it very disciplined, but just wondering whether that happens in spring of next year. Thank you very much.

Mary Dillon

Thank you, Adrienne. I'll start on the corporate headquarters. So thank you for asking. What this really does is build on what already is a very meaningful commercial and executive team presence in the St. Pete market. We have a large center of gravity there already. Historically, that was originally the headquarters of Champs Sporting Goods. So we have a large concentration of folks there already, and we think it's a great place for us to continue to grow and do business and continue to attract top talent.

We will maintain a limited presence only in New York, but we will have a presence connecting us to sneaker culture, sports, fashion. We think this is going to continue to give us better opportunities, both for further collaboration across the business, and there's some financial benefits over time as well. It'll be effective late 2025. We wanted to give some visibility to this now.

One other thing I've noticed, we're not requiring relocation, so we really think we'll be able to attract or retain great talent. The details of what departments, where we're still working through, but generally speaking, it's kind of a move to enhance the center of gravity we have already, while maintaining a presence in New York.

Adrienne Yih

Thank you for helping.

Mike Baughn

Yeah, and then just following up on the inventory question around spring in ‘25. So we're certainly planning for growth across the enterprise in ‘25. At the same time, wanting to maintain the good inventory discipline as we look for margin recovery. So certainly there are some brands that we've talked about in previous calls, and I'm sure will come up, that we're planning aggressive growth with.

We also do have the opportunity as our inventories are clean, to be opportunistic and pull forward as we see beats to our sales plans. Some of our partners also take some inventory positions on some key items that we're able to draw upon within the season. And then some of the key franchises are also on replenishment programs that allow us to draw down inventory. So those are some of the mechanisms that we use to try and accelerate the business when there's some tailwinds there.

Adrienne Yih

Great. Thank you very much. Best of luck!

Mary Dillon

Thank you.

Operator

The next question will come from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez

Hey, thanks guys. You mentioned the business strengthened during the quarter. So I'm curious if you could talk about the promotions and how they turned it during the quarter, if you had to pull any promotional levers, specifically in the Americas business. And then second, can you talk about the role Nike plays in the third quarter, fourth quarter sales plan you've got? Thanks.

Mary Dillon

Sure. Well, let me just say that actually I think it's evidenced by our comp results and our AUR improvements. It actually have been pulling back on promotions, particularly in North America. So the strengthening of our comp has really been driven by the confluence of all of the things that we're bringing together at once on our business.

So just to add to that, I'd say, we saw the business strengthen through the quarter and continue into August as we start back-to-school, and that gives us confidence as we get into the second half of the year, because improvements were broad-based and really a function of all the initiatives coming together.

We know there's still some uncertainty out there for our customer, but coming ahead, we still for the rest of the year, we're going to continue to scale things like the improved store experience, digital loyalty, kind of just getting started on our relaunch. That'll all continue to scale into the second half of the year, including holiday.

We mentioned on the script, we'll be launching our new mobile app and returning to growth with Nike in the fourth quarter, and we feel really good about that order book and the launch calendar. That in conjunction with our inventories being well-controlled, we think gives us a lot of flexibility. So, I guess, headline being less reliant on promotion and more about leading through the Lace Up plan and playing our offense.

With Nike, your question, I would just start by saying that I feel very good about our partnership and the momentum on the business. We've been saying this for a while, that we really focus together on the areas that are very specific to both of our businesses, which is leading in basketball, kids, and sneaker culture.

We gave some examples on the call about great collaboration that we're doing across our businesses, whether it's the home court, which is really about bringing the ultimate global multi-branded experience in basketball to our stores, together in collaboration with Nike and Jordan brand. And then the clinic, which is really about taking the NBA to the community level and creating the next generation of Hoopers.

So, there's a lot happening between our businesses, and we feel good about the fact that we will be returning to growth in the fourth quarter, and feel good about the composition of our order book.

Paul Lejuez

Thank you. Good luck.

Mary Dillon

Thank you.

Operator

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

Michael Binetti

Yes, thanks for taking our question here. I guess I just want to ask one more time on the second half gross margin reduction. You mentioned the promotions in international. It sounded like it was largely due to apparel. Is there anything beyond that, any issues with deliveries or Red Sea disruptions that would occur from some other brands? Trying to, I guess, gauge whether those issues are fairly transitory, and if you are seeing that gross margin pressure in the third quarter to-date. And then also what the opportunity is from a cost perspective on the headquarters move or the EBITDA contribution from the Asia and Europe transitions?

Frank Bracken

Hey, Michael, this is Frank. I'll take the first part of that around Europe and then pass it to Mike on the cost question. So yeah, I mean, certainly as I think you know, there's a lot of regulations around pricing and promotion periods in Europe. And so when we're on promotion, we really have to be sharp in terms of what the consumer is responding to, as well as the competitive dynamics and that's part of the challenge operating the business there.

That said, there are probably some pockets of apparel inventory where we're still working through some of those challenges. And then I'd say the other thing is France as a whole was a little more disappointing in the quarter than we had planned. And so there's a little bit of the inventory that we had planned to sell through that we've got to work through here as we get to the back-to-school season.

In terms of deliveries, Q2 was largely normalized. We did see at the end of July and into August some disruption from Red Sea shipments, and that's affecting all brands sort of equally. So we're working through very closely with our partners to get that supply chain normalized as best possible and get new receipts into the business. So it's not something that we're flagging as a real risk to the quarter, and holding our guidance and our forecast on the business there, but certainly something we're monitoring closely. So I'll turn it over to Mike.

Mike Baughn

Yeah, hey Michael. This is Mike. So from a ultimate financial benefit tied to both the corporate headquarters inclusive of the other changes that we're making within the international business, as we normalize that into 2027, it'll be worth 20 basis points of EBIT margin expansion or just above that, and that's before we incorporate additional potential upside from royalty revenues from the new partnership as well.

And then just to add on to the margin improvement question, I think as we look at year-to-date within the quarter specifically in Q2, as the sales improved to the mid-single-digit levels, we did see margin rate accelerates, margin rate improvement accelerates in that time period, which is a trend now that we've seen going back into the latter part of Q1. And we've also seen that trend continue here into August. So all of that's been incorporated into our thinking for the adjustments in the back half of the year.

Michael Binetti

Okay. Thanks a lot guys.

Operator

Your next question will come from Anna Andreeva with Piper Sandler. Please go ahead.

Anna Andreeva

Great. Thanks so much. Good morning, and congrats on making progress. Two quick ones from us. I wanted to follow-up on the guide. So with $0.40 guided for the third quarter, there's a pretty big ramp expected in the fourth quarter to get to the annual guidance range. So can you talk about the confidence levels to get there? Should we think that SG&A decline is the biggest component within that?

And secondly, it sounds like the loyalty program is resonating, which is great. I think you said penetration was up 200 basis points in the short period of time. How should we think about that penetration ramping as we go through the year? Thanks so much.

Mary Dillon

Well, maybe I'll just start in loyalty. Yeah, we are really pleased with the launch and it's going to continue to ramp. I mean, our goal was get to 50% in a couple of years and we're already gotten to 24% capture rate as you've seen, so that'll continue to ramp. And I'll just say that really, we're really pleased with it. The program is broadly appealing. Its cash for points and other perks, plus we keep the launch access.

And some of the things that we've seen is an increase in the pace of enrollments, higher engagement with first time redeemers. So people have had points and now have a reason to engage. And then all the metrics that we really think are important, of course, so spend per member driven by increased frequency, higher units per transaction, higher average order value. So all on track for us to continue to achieve – to ramp and achieve our longer term goals there.

Mike Baughn

And then just from the Q3, Q4 perspective the SG&A improvement is obviously a contribution to that. I would not dimensionalize it as the biggest one. I think as we go through there, we do ramp in increasingly promotional time for us as we go into Q3 and Q4, and Q4 specifically, where we took a lot of specific actions last year to make sure that we got through the year with a clean inventory level.

We do expect loyalty to ramp as we go through the back part of the year. We do expect refresh activity to ramp as we go into the back part of the year. And I think we've got in Q4 then our app launch, return to growth with Nike, and I think all that's incorporated into how we thought about the flow between Q3 and Q4.

Anna Andreeva

All right. Very helpful. Best of luck!

Mary Dillon

Thank you.

Mike Baughn

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Mary Dillon for any closing remarks. Please go ahead, ma'am.

Mary Dillon

Thanks everybody for joining us today. I remain confident that our decisions and our strategies are the right actions to put Foot Locker on the continued path towards sustainable growth and enhanced shareholder value.

Our teams are executing well as we head into the peak back-to-school season and I just want to extent my thanks to the entire Foot Locker team, especially our global striper community for their passion and commitment to ensuring we have a great back-to-school season across our stores, online and our distribution centers.

I look forward to our team week next month and celebrating all of our key accomplishments with all of you. We look forward to updating you on our progress next quarter, so thank you.

Operator

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