Foot Locker, Inc. (NYSE:FL) Q4 2024 Earnings Conference Call March 5, 2025 8:00 AM ET

Company Participants

Robert Higginbotham - SVP, Corporate Finance, IR, and Treasurer
Mary Dillon - President and CEO
Frank Bracken - EVP and CCO
Mike Baughn - EVP and CFO

Conference Call Participants

Anna Andreeva - Piper Sandler
Adrienne Yih - Barclays
Michael Binetti - Evercore ISI
Janine Stichter - BTIG
Jay Sole - UBS

Operator

[Abrupt Start] Please note that this conference is being recorded. I will now turn the call over to Mr. . Robert Higginbotham, Senior Vice President, Corporate Finance, Investor Relations, and Treasurer.

Sir, you may begin.

Robert Higginbotham

Thank you, operator. Welcome, everyone, to Foot Locker, Inc.'s fourth 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 fourth quarter results and our 2025 outlook.

Following our prepared remarks, Mary, Frank, and Mike will take your questions. To note, today's call will reference certain non-GAAP financial 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 first quarter 2025 results on May 29, 2025. And now, I will turn it over to Mary.

Mary Dillon

Thank you, Rob. I'll start this morning with a review of our financial results and outlook and then will provide an update on the progress we continue to make with our Lace Up Plan. At a high level, we made meaningful progress with our Lace Up strategies in 2024 and closed out the year with performance in the fourth quarter that was better than our previously revised expectations.

Our team's execution during the year helped drive three consecutive quarters of positive comp sales and year-over-year gross margin expansion. Our performance demonstrates that our strategies are driving results even as we navigate an increasingly dynamic external environment. As we look ahead in 2025 and beyond, we're focused on continuing our progress and further advancing towards our long-term operational and financial goals.

We are confident we have the right plans in place to continue to drive profitable market share gains over time as we maintain our disciplined approach to managing and investing in the business. Turning to our results. Our total comp increase of 2.6% in the fourth quarter was in line with our expectations and led by share gains out of our global Foot Locker and Kids Foot Locker banners, which comps up 3.6%, a strong build during peak holiday sales drove the gains.

At Champs Sports, the fourth quarter marked the second consecutive quarter of positive comps since the banner's repositioning began, with comps up 1.8%. Next, on gross margin, we saw an improvement of 300 basis points year-over-year, led by merchandise margin recovery against the prior year's higher level of promotions and ahead of our revised expectations. This was despite an elevated promotional environment across both the DTC and wholesale channels.

At the same time, we continued the execution of our cost savings plan, which generated $35 million in total in the fourth quarter. Our non-GAAP earnings per share in the quarter were above our revised expectations at $0.86% compared to our $0.70% to $0.80% guidance. As we reflect on 2024, I'm proud of the progress we've made with our Lace Up Plan in what's proven to be a dynamic consumer and category backdrop.

During the year, we achieved some important financial milestones, including a return to positive enterprise comp sales growth, gross margin expansion, and positive free cash flow, all of which we expect to continue into 2025. Similarly, through our continued execution of the Lace Up Plan, we made significant progress in 2024, and we'll look to build upon these efforts in 2025. First, in stores, we're upgrading our customers' experience through both our new Reimagine concept and extensive Store Refresh program, both of which remain an important part of our plans looking ahead, which I'll speak to in a few minutes.

We now have eight Reimagined doors open across North America, Europe, and Asia. The response to our Reimagined doors has been extremely positive from our customers, our brand partners, and our landlords, and we're accelerating our focus on Reimagined as part of our efforts in 2025. In 2024, we also completed over 400 Refreshes, which elevated and improved consistency across our global Foot Locker and Kids Foot Locker doors, and we're planning for roughly 300 more Refreshes in 2025.

In digital, we made meaningful advancements in the customer experience, including the rollout of our new mobile app in the US in November, and it increased our digital penetration a 100 basis points to 18.2%. Moving to loyalty, we relaunched our FLX Rewards Program in the US mid-year, and we've been pleased with the adoption by new and existing members as well as improvements across a variety of KPIs, including increased frequency of purchase. After some improvements to the enrollment process this fall, we saw a meaningful step-up in our sales capture rate in the fourth quarter, reaching 49% of sales in North America in the quarter and just under our 50% 2026 target two years ahead of plan.

Next, we're continuing to strengthen our basketball leadership through marketing partnerships such as the NBA and Chicago Bulls. We've also elevated our collaborations through the clinic with Nike and Jordan brand, as well as the rollout of our co-designed Home Court experience in select Reimagined doors. Additionally, we made strides against our cost structure.

In 2024, we achieved $100 million in savings as part of our $350 million cost savings plan, which was ahead of our expectations of $90 million in the year, and we're targeting incremental savings of $60 million to $70 million in 2025. Further, we continue to take actions to optimize our business and real estate footprint. In 2024, we announced our plans to exit international markets, including South Korea and Norway, Sweden and Denmark.

We also made the decision to convert select markets in Europe to a license model. Overall, we made meaningful strides with our strategies in 2024, and we're looking ahead in 2025 to continue to execute our Lace Up Plan and drive our comp sales and gross margin progress. That said, as we move through February, we saw consumers be more cautious and sensitive, which has impacted our business quarter-to-date.

We're seeing consumers respond and come out to spend during compelling activations, key shopping events, and product launches or newness. They spend when there's a call to action, but they are more cautious in those in between periods. Within the approach we've taken heading into 2025, we've adjusted some of our capital and spending plans to further prioritize where we're generating the strongest returns on investment.

More specifically, we're maintaining our focus on our customer-facing investments, which have been driving our return to comp growth and share gains and are also exceeding our hurdle rates. At the same time, we'll be slowing the investment cadence of some of our technology investments to ensure an appropriate pacing of these expenses against our top line. Our teams have been making great progress in updating our core technology stack, but we have decided to slow the cadence going forward.

To be clear, we're continuing to prioritize our Lace Up strategies and execution, but we're balancing the near and longer-term business needs as we make our investments. And we believe the adjustments we are making to our investments will best position us to continue to deliver on the top line while also continuing to make progress toward our longer-term financial goals. Now, let me turn to the progress we've made with our Lace Up Plan in the quarter and how we're further advancing our initiatives in 2025.

Starting with our first imperative, which is to expand sneaker culture. We're continuing to strengthen our basketball leadership through our strategic partnerships and collaborations as we know basketball is a category our customers are passionate about. Now in year two of our NBA partnership, we just hosted one of our largest basketball activations ever at NBA All-Star 2025 in San Francisco with a two-storey interactive multi-brand experience.

We showed a bigger and bolder this year and had lines wrapped around the block for four days throughout the activation. We hosted over 20,000 visitors and the excitement we generated across customers and the industry at large earned Foot Locker 3 billion media impressions. We had great support from our brand partners, including Nike, Jordan Brand, Adidas, Puma, Converse, Crocs, New Era, and ANTA as we launched high heat sneaker drops and featured top NBA talent appearances, all designed to connect with the basketball community and inspire the next generation on and off the court.

We also brought back The Clinic, our program with Nike and Jordan brand, featuring an LED chord, our daily basketball programming with top athletes, reinforcing the strength of our partnership. As always, our engaging stripers brought the energy and inspired our customers throughout the weekends. This immersive experience further cemented our position as a leader in basketball and sneaker culture.

Turning to Nike, our partnership is strong and fully reset as serving our multicultural customers continues to be a top priority for both of our businesses. Our Lace Up strategies, coupled with their building product pipeline and focus on storytelling, will position both our businesses for growth long term. That said, we know we're balancing marketplace and category dynamics as we move into 2025 to make way for future innovations to come later in the year and into 2026.

Looking out, we have full confidence in our partnership and the steps the Nike team is taking for the brand and marketplace long term. In addition, our results with brands such as Adidas, New Balance, On, HOKA, ASICS, Saucony, Crocs, UGG, and Timberland continue to reinforce our proposition as a multi-brand retailer. Sales in those brands were up a combined double-digit in the fourth quarter across men's, women's, and kids, and we continue to have room for growth on both an allocation and door count basis with a multitude of brands as we look to 2025.

And finally, looking at our exclusive penetration in the quarter, it was 15%, in line with last year. We continue to target exclusives progress as we look to 2025 and still aim for about 20% penetration by 2026. Moving to our second pillar, which is power up the portfolio.

Taking a step back, our teams have made a lot of progress in optimizing our real estate portfolio over the last several years. Since 2019, we've closed over 20% of our global doors, including the exiting of non-core banners and the exit or conversion of select international markets. In the last two years alone, we've also paired back our store exposure at the Champs Sports banner as part of its repositioning.

While we are continuing some of that closure work in 2025, it's important to note that after this year, we will be at a new baseline in our fleet. And going forward, we'll be operating with a tighter, stronger store base with reduced exposure to lower-tier malls. Now, among that optimized fleet, a key objective in this pillar is to elevate, optimize, and standardize our store experience and to bring the fleet to our newly designed brand standard.

We began this journey through our Refresh program, which was our capital-light and quickest mechanism to impact a large percentage of the fleet swiftly with elevated and consistent signage, fixturing to support brand partner storytelling and an improved customer experience. We did this while testing and ultimately proving out our new Reimagine concept, which builds upon those same design principles to deliver a customer-centric experience, support brand storytelling, create fun and immersive customer experiences, and enhance the power of our stripers, including with technology tools. In 2025, we intend to refresh approximately 300 doors, and this is on top of the over 400 refreshes we accomplished in 2024, including 160 in the fourth quarter.

Coming out of 2025, there will be over 800 stores that we've elevated through our Refresh program in a 2.5%-year timeframe. With our Refresh program set to slow after 2025, now our focus shifts to scaling our Reimagined concept going forward. As such, we expect to open or convert 80 additional Reimagined locations by the end of 2025 on top of the eight we ended with in 2024.

We intend to at least maintain, if not accelerate, that pace of Reimagined openings as we look out over the next few years. We anticipate the majority of our Reimagined projects to be completed via conversions or relocations of existing locations. We're making this deliberate push given the strong returns these projects are delivering, as detailed in our investor presentation.

Through the efforts we've made so far, as of the end of 2024, we now have 44% of our footage at brand standard representing 44% of sales. Going forward, we expect to reach approximately 65% of our footage at brand standard and over 70% of sales by year-end 2026, including both Refreshes and Reimagines. Turning to our off-mall exposure.

In the quarter, our penetration was up 3 percentage points from a year ago to 42% of North American square footage and closer to our goal of 50% by 2026. Now, moving to our third pillar, which is deepen our relationship with our customers. Focusing on loyalty, we made meaningful progress after the relaunch of our FLX Rewards program in the US mid-2024, with our loyalty penetration in North America at 49% of our sales in the fourth quarter, which was up nearly 30 percentage points compared to last year and just under our 50% 2026 Lace Up target.

Improvements to the FLX sign-up process in stores towards the end of the third quarter drove that meaningful improvement in the sales capture rate as well as the pace of new enrollments. We also expanded on how we're activating around the program in the holiday quarter, including through the use of member-only events in stores and online across banners. In the quarter, we added 3.2% million FLX members here in North America, and we're coming into 2025 with the loyalty mix in our business at a fundamentally higher baseline.

Further, at just a few quarters into the enhanced FLX Rewards program, we've been pleased with the adoption by new and existing members as well as the response across a variety of KPIs, including frequency of purchase. We're excited about the progress we made with loyalty in 2024 and expect to build upon that further in 2025, including through bringing the program to Europe later this year. And turning to our final pillar, be best-in-class omni.

In stores, comp sales were up slightly positive in the quarter. Traffic outside of the key selling periods proved more challenging. That said, we continued to see conversion increases in the quarter as our initiatives around product, in-store experience, striper training, and planning tools drove results. Turning to digital, global enterprise digital comps were up 12.4% in the fourth quarter as we saw increases in organic traffic, AOV, and conversion.

Customers responded to our proven experience, particularly through our new mobile app, which launched in November, as well as inventory depth in key styles. Our digital penetration in the quarter increased 230 basis points year-over-year to 21.8% of sales, and we continue to target about 25% e-commerce penetration by 2026. Particularly for our mobile savvy and younger customer base, having a new and improved mobile app across the US that provides a faster, more modern shopping experience is a key advantage and we look forward to building upon that work in 2025, including through the launch of store mode capabilities, which enables customers to scan product SKUs in store and checkout product availability, including sizes.

We plan to roll out enhanced mobile apps for our Champs Sports and Kids Foot Locker banners later this quarter. We're confident, based on our results to date, that an improved mobile experience across multiple banners can be a significant lever for us to drive both our digital and loyalty penetration over time. So, in closing, we were pleased with our progress in the fourth quarter and 2024 overall, led by completing the year with three consecutive quarters of comp sales growth and year-over-year gross margin expansion.

Our Lace Up Plan is delivering results across multiple aspects of the business, and our disciplined approach is driving free cash flow. In 2025, we're planning to build off those results. Now, let me hand you over to Frank to provide more details on our category and banner performance.

Frank Bracken

Thank you, Mary, and good morning, everyone. Starting with fourth quarter product and brand partner performance, footwear comped positive high single-digits. Gains in both our base business as well as a strong launch calendar drove comp sales in the quarter.

These gains were led by growth and momentum from a broad portfolio of our brand partners. The Jordan brand delivered gains thanks to very compelling launches in the quarter and a complementary sportswear business. Meanwhile, Adidas, New Balance, On, HOKA, ASICS, Saucony, Crocs, UGG, and Timberland all contributed meaningfully to the success of our footwear business at holiday.

As Nike rebalances their product portfolio and inventory levels in the short term in an effort to make way for future innovation, we are continuing to navigate some impacts on our business. Throughout this process, we continue to align closely with them to optimize our merchandise mix and inventory levels to support full-price sales and partner with them to bring health back to critical consumer franchises like Air Force 1, Dunk, and the AJ1. And as we look to 2025, we are encouraged by their innovation pipeline across basketball, performance running, Shox and the reinvigoration of the Max Air business.

Our recent NBA All-Star activation in San Francisco demonstrated again the power of our brands coming together to elevate consumer experiences, serve athletes and push sneaker culture forward. Lineups and community excitement for the Nike All-Star Backpack, the Kobe 6 and Galaxy Foamposite demonstrated just how powerful the Nike brand is to our core consumer. Now, turning to performance by footwear category.

Within the basketball category, customers continue to respond to next-gen signature athletes such as Nike's Ja 2, Sabrina 2, Adidas' AE 1 and Puma's Melo 04. We also had a phenomenal launch result with the Nike Kobe franchise, which brought renewed energy to the marketplace. And as mentioned, Jordan delivered a powerful launch assortment this quarter led with premium executions of the Retro 9, Retro 3 and the Carolina Blue Retro 11, all of which were sellouts with consumers.

Moving to lifestyle footwear, Adidas continues to see strength as they lead the Terrace trend, especially within our women's and kids segments, and we were pleased that this momentum occurred on a global scale, positively impacting all GEOs and banners. In 2025, we will continue to diversify this category with energy from Handball Spezial and Superstar. Turning to the running category, New Balance continues to see momentum across women's, men's, and kids.

Franchises like the 9060 have consistently ranked among our top sellers and we were pleased with the performance of other styles like the 1906 and 530 in which premium executions resonated strongly with our Sneaker Maven and Fashion Forward consumers. Brand searches, full price selling, and a pipeline of innovation give us confidence that New Balance will continue to be one of the fastest growing brands in the industry. ASICS continues to see global momentum across men's and women's with running-inspired styles such as the GEL-NYC, the 1130, and the GT-2160.

We're adding doors, elevating the presentation and ramping up our marketing with Asics as we look into 2025. We expect both globally and across multiple banners in North America that ASICS will continue to trend with young multicultural consumers and remain excited about growth potential with this important partner. As lifestyle running continues to be a powerful connection point with consumers, we are proactively bringing in new ideas to keep the consumer engaged.

We recently introduced Saucony into the assortment and have been pleased with customers' response to styles such as the ProGrid Omni 9 and Millennium. Within performance running, On and HOKA are continuing to resonate in our business. We continue to see healthy sales gains with these partners, and we plan to expand doors with them globally in 2025.

Within seasonal, UGG played a leading role in our business this quarter, especially within our global Foot Locker banner. With exciting content and must-have styles such as the Tasman and Ultra Mini, UGG continues to drive excitement during the gifting season. And the success we had with the sneaker-inspired Lowmel gives us confidence that there is a broader opportunity with this brand moving forward.

Also, within the boot category, we saw strength in Timberland as customers responded to their exciting collaborations and marketing. Turning to the apparel business, challenges persisted with comp declines down in the mid-teens. While we continue to see innovation within apparel lagging compared to the footwear business, we are beginning to be even more aggressive in pursuing our private-label strategy, which has worked for us in recent quarters, particularly at Champs Sports.

Alongside that, we will continue to work upstream with our brand partners to encourage more newness in materials, silhouette, sneaker connectivity, and speed-to-market. We know that apparel allows for more exciting retail presentations, better integrated storytelling, and an opportunity to build the consumer's basket. Finally, our accessories business comped up high single-digits as we see shoppers respond to our refreshed assortments through categories such as socks, headwear, and shoe care.

Switching to channel performance, comparable sales in our stores were up slightly. While traffic was down to last year, we continue to see gains in conversion as well as average ticket led by positive AURs. A special thank you to our amazing striper teams who delivered great customer service while driving conversion increases during the holiday season.

Meanwhile, digital comps rose 12.4%. We saw increases in traffic, AOV, and conversion as our efforts to improve the customer digital experience continue to resonate. This included the launch of our new Foot Locker app, which immediately drove conversion gains and an improved customer shopping experience.

Now for performance by geography and banner. In North America, overall comps were up 3.6%, including our Foot Locker North America banner comping up 5.5%. Our Foot Locker banner saw a record-breaking build in the business in the final week leading up to Christmas, led by gains in running, seasonal, as well as strong launches.

The combination of Reimagined stores, Refresh stores, our new digital capabilities, and the power of our hardest sneakers platform clearly registered with consumers. Kids Foot Locker comped up 4% in the quarter. Growing in both stores and online, KFL delivered a strong performance in the quarter, mirroring many of the same dynamics driving the Foot Locker banner.

In fact, towards the end of the quarter, we opened our first standalone Kids Foot Locker Reimagined location at Bay Plaza in the Bronx. We are thrilled to have our first KFL Reimagined store in the heart of New York city sneaker culture as a way to introduce our youngest sneaker enthusiasts to the category. While very early days, results from the Bay Plaza store have been very positive, which is validating of our Reimagined strategy as we look to add additional locations in 2025 and beyond.

At Champs Sports, comps were up 1.8%, which marks the second quarter in a row of positive banner comps since the repositioning. Customers are responding to the banner's updated head-to-toe sports style positioning with differentiated assortments from partners such as Nike, New Balance, Adidas, ASICS, Brooks, and our CSG label. Champs Sports also continues to build momentum with its Run Club program and strong positioning of performance and lifestyle running products.

Champs held 12 Run Club events in 2024 with strong brand partnership support from Nike, ASICS, and Brooks. And in 2025, the team is looking to scale this program to over 30 events and include even more brand partners as co-sponsors of Run Club. We are confident that our improved assortments and sharper brand positioning will continue to support Champs Sports' momentum into 2025, and we are proud of the team leading that work.

Moving to WSS, comparable sales were down 3.3%. Despite strong results over the Black Friday sales period, we saw our WSS customers be cautious with their discretionary dollars into December and January as they contend with ongoing inflation as well as impacts from the Los Angeles fires. Our WSS team continues to position the banner with compelling assortments with an emphasis on value, including below $80 footwear, as well as global football and workwear, as they support the local communities and neighborhoods they serve.

Nonetheless, we will continue to take a prudent approach to capital with the WSS banner in 2025 when it comes to new store openings. As such, we are planning for one new store opening in 2025 for WSS as we shift investment into other real estate projects that are driving higher returns. Longer term, we still believe in the unit growth potential of the WSS banner, but we do believe a more conservative view in the near term is the right path.

Turning to Europe, comps were up 1.9%. The environment in Europe was choppy and competitive throughout the quarter, and the promotional environment included aggressive actions in both the footwear and apparel categories. Looking ahead, our team in Europe plans to continue to invest prudently in store refreshes to elevate the customer experience and improve our competitive positioning.

Simultaneously, we will work with our brand partners to move back towards a pull market with more full-price selling. But we do expect that 2025 will be a transition year in the European marketplace. In Asia Pacific, comps were down 7.6%.

At our Foot Locker banner, comps fell 7.2%, reflecting competitive marketplace dynamics in Australia as consumers there continue to deal with prolonged inflation, A reminder that we began to wind down our business in South Korea during the quarter, including shutting down our e-commerce operations at the end of the calendar year, and we expect that our store operations will largely be wound down by the end of the fiscal first quarter of 2025. And finally, at Atmos, comps were down 8.7% reflecting our decision to shift sales to our own digital site and away from less profitable third-party digital platforms. To close, we were pleased to deliver another quarter of positive comps and solid gross margin expansion in the quarter led by our global Foot Locker and Kids Foot Locker banners and sustained strength at our Champs Sports banner.

Our Lace Up strategies continue to gain traction and in 2025 we will continue working closely with our brand partners to be led by consumer insights while we elevate the consumer experience across channels and we are taking a prudent and agile approach this year by focusing on capital investments with the highest returns while maintaining inventory and expense discipline. 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 fourth quarter, starting with revenue, total sales were down 5.8%, with the majority of the decline led by the lapping of the 53rd week in 2023, along with additional pressures from foreign currency headwinds and store closures. Our total comp was positive 2.6%, which was in line with the midpoint of our guidance and led by our global combined Foot Locker and Kids Foot Locker banners at plus 3.6%.

This represented our third consecutive quarter of positive comps. [Technical Difficulty] November was down mid-single-digits, December comps accelerated to positive mid-single-digits partly due to the shift in Cyber Monday and finally, January was positive mid-single-digits as well. Moving to margins.

Gross margin for the quarter expanded 300 basis points versus last year to 29.6%, which was ahead of our revised expectations and highlighting our progress in recovering last year's heightened promotions despite elevated sector inventories. Merchandise margins were up 300 basis points year-over-year due to lower markdown levels, while occupancy as a percent of sales was flat on a year-over-year basis. Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line.

On SG&A, our fourth quarter rate came in at 22.3%, representing an improvement of 10 basis points versus last year. SG&A dollar declines of 6% was better than our prior expectation of dollars down approximately 2% to 3% as we made additional progress against our cost savings program along with tightly managed expenses and lower incentive compensation levels. Our cost optimization program generated $25 million in savings within our SG&A line. Collectively, our cost optimization program generated total savings of approximately $35 million in the fourth quarter and $100 million for fiscal 2024, which was ahead of our prior expectation of approximately $90 million.

Finally, our earnings per share from continuing operations was $0.57% and our non-GAAP earnings per share was $0.86%. Turning to the balance sheet, we ended the quarter with $401 million of cash and total debt of $446 million. At quarter end, inventories were up 1.1% versus last year, slightly ahead of our expectation for approximately flat levels exiting the year as we pulled forward spring receipts to ensure smooth product flows into the first quarter.

From a composition and aging standpoint, our inventories are well-positioned as we head into 2025. For the year, we improved our inventory turns, turning the business at approximately 2.8% times, a 5% improvement versus 2023. While acknowledging we still have room to improve that further as we continue to make progress relative to our medium-term goal of approximately three times.

This emphasis on inventory control and working capital management supported our free cash flow generation, with the business having generated $105 million in free cash flow in fiscal 2024. Moving on to our 2025 outlook. At a high level, following our performance over the last three quarters of 2024, we expect ongoing comp sales growth and margin expansion into 2025.

That said, we recognized heightened levels of consumer and marketplace uncertainties as we move into the new fiscal year. As Mary noted, we saw a softer start to the year in February. We've seen customers respond well to peak moments such as NBA All-Star weekend, holidays, and trending product and key launches like the Retro 12 last week. We've also seen our customers sensitive to external factors like the timing of tax refunds, and we've experienced increased pressure in the lulls between key events.

As such, we've incorporated this consumer dynamic into our 2025 outlook. For the year, we are issuing guidance for non-GAAP EPS of $1.35% to $1.65%, representing growth of approximately 10% at the midpoint relative to the $1.37% we reported in fiscal 2024. Our guidance also assumes approximately $0.05% in foreign currency headwinds.

Our outlook embeds the following drivers. Total sales for 2025 are expected to be from down 1% to up 0.5%, including a roughly 100 basis point adverse impact of changes in foreign currency exchange rates. We expect comps of between plus 1% to plus 2.5%.

The upper end of our comp range assumes we continue to drive comps at our more recent run rate from the last three quarters, led by the impact of our strategic initiatives and a relatively stable macro backdrop. The lower end does factor in some impacts related to marketplace and consumer uncertainty. Overall, our store count is expected to be down approximately 4% in 2025, with square footage down approximately 2%.

We expect to add roughly 20 new stores in a year and to close approximately 110. As Mary noted, following our net closure trajectory over the last several years, combined with our store investments including Refresh and Reimagine, we expect that 2025 will be a year where we've appropriately re-baselined to a healthier store fleet size from which we can operate in the near term and grow in the future. We expect to end the year with a meaningful portion of our tighter and optimized fleet at brand standard, which we expect can continue to fuel positive comps and competitive share gains over time.

Turning to gross margin, we expect gross margin expansion of between 40 basis points to 80 basis points to a rate of 29.3% to 29.7%. While we expect margin recapture this year, our expectations are being somewhat tempered by the elevated consumer uncertainty and marketplace backdrop. On SG&A, we expect deleverage between 20 basis points and 40 basis points to a rate of 24.3% to 24.5%.

Excluding some ongoing normalization of our incentive compensation levels in 2025, we do expect modest leverage on an underlying basis within our cost structure. Our plans include ongoing progress in our cost optimization efforts, including an additional $60 million to $70 million in cost savings targeted this year, after which our $350 million savings plan will be completed. Switching to cash flows.

Our adjusted capital expenditure outlook for the year is approximately $300 million, which is lower than the average implied $330 million to $340 million in our prior $1 billion cumulative CapEx guidance from 2024 through 2026. Recognizing the need to better match our capital spending with our top line, we're moderating our CapEx spend as we come into 2025 with an emphasis on our customer-facing investments. Embedded in that $300 million figure is a greater emphasis on our store projects including Reimagines and Refreshes versus the prior year.

As you can see highlighted within our investor presentation, the reason why we are leaning into these investments is because of the solid cash on cash returns and favorable paybacks they are generating. For our average Reimagined location, we are seeing roughly $4 million to $5 million in sales and 20% EBITDA margins in year one and are generating cash on cash returns of approximately 50%. For our Refreshes, we are also seeing attractive cash on cash returns of 35% to 45% driven by annualized sales productivity lifts in the low to mid-single-digit dollar growth range and mid-single-digit lifts in merchandise profit dollars.

As we complete 300 plus Refreshes in 2025 following over 400 last year, we will shift to investing in Reimagined formats going forward and expect our store investments to continue to drive returns and generate cash for the business. While our technology investments will continue in the next few years, we are adjusting the timing of some of the non-customer-facing technology investments so we can prioritize the projects with highest cash on cash returns in the medium term. For the year, we expect to continue to be free cash flow generative in 2025 as our sales and margin recovery continues, along with our broader inventory and working capital management efforts.

Moving on to our assumptions on the shape of the year, recall that we will be lapping the non-recurring FLX charge from the second quarter of 2024 which we will get back in this year's results. That charge represented an approximate $11 million revenue but not comp headwind in the second quarter, a 40 basis point drag on our gross margin in the quarter, and a [$0.09%] (ph) detriment to our EPS last year. With our strategic initiatives building through the year, specifically in real estate, we expect comps to accelerate from the first half to the second with the first half closer to the lower end and the second half closer to the upper end of our guidance. We expect our gross margin improvements to be greater in the second half compared to the first half as our initiatives continue to build and allow us to pare back on promotional levels. On earnings, we expect our first half earnings in total flat compared to the prior year inclusive of lapping of that $0.09% FLX charge from the second quarter.

As such, our earnings growth is expected to be weighted towards the second half of the year. Within the first half of the year specifically, we expect profitability to be weighted toward the second quarter as we lapped the non-recurring FLX charge from last year. Before we turn it over to questions, I want to reiterate that we remain confident in our execution of the Lace Up Plan as well as the profitable market share gains we are seeing as we implement our strategies and manage our expense and investment profile to generate sustainable shareholder value creation.

We look forward to updating you on our progress against our goals next quarter. And with that, Operator, please open the call for questions.

Operator

[Operator Instructions] And the first question will come from Anna Andreeva with Piper Sandler. Please go ahead.

Anna Andreeva

Great. Thank you so much. Good morning.

Thank you for all the color and taking our question. First to Mary, just on quarter-to-date, can you provide a bit more color on what you're seeing. You mentioned the more cautious consumer.

Are you seeing that across demos and regions. And, Mike, what are you factoring into outlook for 1Q. And can you guys also speak to what you're expecting for Nike either for the year or the first half as they continue to rationalize the marketplace here in the first -- in the near term.

Thank you.

Mary Dillon

Thank you, Anna. I'll start with your question about the consumer quarter-to-date. Coming out of holiday, we felt really good about the momentum in the business.

And January, in fact, was the strongest month of the quarter. Our global comps for the quarter were plus 2.6%. So it felt good.

As we came into February, I'd say we just started to see some consumer uncertainty begin to pick up. I'd say that was kind of across the board. It led to some choppy performance.

So what we're seeing is, for sure, people coming out to buy when there's an exciting call to action, but cautious in between those times. So, we talked about just now our All-Star weekend activation, Valentine's Day, last weekend we had a Jordan Retro 12, all of those were really exciting call to action for consumers and worked well. I'd say in between, what we're just looking at is consumers with some uncertainty.

So, our customers are young, by definition, they're more limited in their discretionary budgets. This is for sure a category that they prioritize in their lives. But we're watching -- as they're thinking about overall cost of living, plus some uncertainty about tariffs.

So, we factored that into our 2025 outlook. Reiterating, we know our Lace Up strategies are working and our customers are responding really well to those. So we're going to continue to drive those this year, whether it's store improvements, digital, loyalty, et cetera.

So I'll turn it to Mike to give a little more detail about the assumptions about the consumer and our guidance.

Mike Baughn

I think when we think about the full year outlook, really in our guide of 1% to 2.5% comp, really at the lower end we're factoring in some of that recent consumer uncertainty that Mary just highlighted. And at the higher end is really where we've run for the last three quarters and it factors in our initiatives continuing to perform in a more stable macro environment. I think as you think about our initiatives for the year, it's important to think through both the wraparound benefits from what we did in '24 and the new benefits that we'll add in '25. From a Refresh standpoint, the 400 stores we did in '24 were really back half-loaded and we -- you called out in our investor presentation, they're generating low to mid-single-digit sales and profits slightly above that.

And then from a store investment in '25, 90% of the Refresh and Reimagines that we will complete will really occur in the first three quarters of the year. Across the digital space, our mobile app really launched in November of '24 within the US and then we'll have that expand into KFL and Champs in the first part of the year. FLX was really a mid-year benefit in the US from the new program and we'll add that mid-year in EMEA in '25 as well.

And then we'll continue to add doors with key and trending brands like On and HOKA. So a lot of initiatives that are supporting our comp build but want to ensure we acknowledge there is some consumer uncertainty that we're seeing in the beginning part of the year. As we think about the marketplace more generally, I think coming into 2025, channel inventories do seem to be in better shape.

The promotional tenor in DTC specifically seems to be moderating as we come through the year, and then as we move through the year closer back to school and holiday, we do think the pace of innovation and newness will keep moving in the right direction, which should be supportive of more full-price selling.

Anna Andreeva

Okay. That's terrific. Thank you so much.

And can I ask just a follow-up to Mike. On SG&A, I guess, why aren't you guys seeing bigger cost savings coming through a bit more. Why aren't we seeing more SG&A leverage this year.

And thank you again.

Mike Baughn

Absolutely, Anna. So, acknowledging a lot of moving pieces in our results, structurally we have made progress, but also acknowledge that 24% SG&A is not supportive of our long-term profit targets and we'll continue to make steps to lower that. Our '25 guide is modestly leveraged, excluding the normalization of some incentive comp.

And said differently, if you sort of look at what we comped or what we guided coming into '24 versus what we're guiding into '25 which would have normalized incentives, we are showing some leverage within the SG&A category and you'll continue to see us work on that going forward.

Anna Andreeva

All right. Well, thank you so much for all the color.

Operator

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

Adrienne Yih

Great. Thank you very much, and congrats on the progress. Mary, I wanted to talk about the Nike relationship and sort of, I'll use the word surprise for us like during the quarter with how promotional they got in their own channel which then created kind of a halo of promotionality.

According to their guidance, they are sort of really taking a lot more gross margin hit in this next quarter. And so I know there's a delay between the marketplace and their business. How far along is this big three franchise management through in the system, in the marketplace.

And if you can talk about you're probably starting to see some of the new innovation coming down the pipeline for fall, winter. So if you can talk about anything that you're seeing there that is surprisingly exciting. And then really quickly I have to ask the tariff question.

I know the answer, but I got to ask it anyway. Can you talk about kind of your direct exposure to China, Mexico, Canada. And then in the last iteration of it in 2018, '19, how well were you able to negotiate kind of to partner and kind of split some of that cost or passing along.

Thank you so much.

Mary Dillon

Great. It’s a big two-parter question. I'll start with your tariff question first.

And I mean certainly, this is a rapidly evolving situation and it's on consumers minds. We're watching it closely of course how this would impact overall cost and pricing for consumers across multiple categories could have impact. I would say, first of all, the industry has done some good work over the years to diversify portfolio outside of China.

So that's an advantage. And also I would say that our direct exposure is pretty moderate to small. And I'll have Mike add a little bit more detail on that.

But what we're doing is really just working with our brand partners in communication regularly as the situation continues to unfold. Mike, do you want to add some more.

Mike Baughn

Just a couple of specifics. Within our direct business, we do have some modest exposure to China. It's about half of our private label business.

But for total Foot Locker, it's really a low single-digit percentage of our sales. We also do have some minor exposure tied to fixtures across China, Mexico, and Canada. Pretty modest impact to how we're thinking about our capital plans this year.

And our return profile for those investments are still very healthy. So we'll continue to monitor that as we go.

Mary Dillon

Great. And then let’s just on Nike, let me step back big picture and then I'll also ask Frank to add more. But one of the things I'm just -- I'm really proud about the strength of our partnership is we're focused on our key pillars of basketball, kids, and sneaker culture.

We have a nice strategic partnership with The Clinic and Home Court with Nike and Jordan brand and All-Star Weekend activation, I think is a great example of the power of our partnership. We have a lot of faith in Elliott and his team. The actions they're taking we think are good for the brand and the overall marketplace and longer term for us as they rebalance their portfolio to make way for the future innovations.

And we feel good about what's in the pipeline, I'd say at a high level. And there's been some real recent wins like the Black Label Pack, the Jordan Retro 12, et cetera. So, we did return to allocation growth in the fourth quarter, but now we're actually really focused on longer-term strategies and growth plans between our two companies, which we're quite excited about.

I might just add though that, of course, we're also leaning into our wider product portfolio which still remains very much in focus for us. It's reflected in what our consumers want, which is seeing Foot Locker, I guess all things sneakers, we like to say, and we've seen double-digit growth in the rest of the portfolio, led by Adidas, New Balance, ASICS, On, HOKA, and Timberland. So, all drove really positive comps in the quarter.

So we're balancing that well, I would say. I'll ask Frank to add a little bit more about Nike.

Frank Bracken

Sure. Yeah, as Mary said, very happy with the partnership and the level of engagement with Nike. As we said in the prepared remarks, we did return to allocation growth in Q4 and you saw that read-through in our results in the Jordan brand launch business.

So we really do consider the business to be reset, so to speak. This year, as you mentioned, we're really focused on optimizing our merchandise mix and do see sequential top line as well as gross margin recovery with the Nike partnership. We're definitely supportive of the actions being taken on those big three basketball classic franchises and we're actually quite bullish on some of the innovation and storytelling that's coming in the latter part of the year and think that we'll be net benefactors of that delivery.

Meanwhile, very excited about the future in terms of innovation. Nike Shox, the running construct with Peg, Vomero, and Structure all looks incredible and the recent launches have been well received by the consumer. Basketball of course continues to see diversification.

Ja, Sabrina, Book, Kobe, all performing well with consumers, and then the Max Air franchise again, we're launching DNA later this week and super excited about our go to market plans globally for that franchise. So we're very clear-eyed and working closely with our Nike partners in '25 to improve the performance of the business. More importantly, the long-term outlook is very strong with our partners there.

Adrienne Yih

Fantastic. That's great to hear. Best of luck.

Thank you.

Operator

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

Michael Binetti

Thanks for taking our question here. So as we look at the guidance you just gave, at the high end this year, the algorithm is 2.5% same store sales growth with EBIT margins up 60 basis points on that level of comp and SG&A levering 30 basis points. Obviously, the first quarter and the first half are below that rate.

But is that a rate that you can look at and say this is -- the high end of this rate you've referred to a couple times as normal. Is that a normal algorithm. Can you do 60 basis points of EBIT on a 2% to 3% comp going forward.

And should we think about it for next year for 2026 when the consensus model has, I think, only 30 basis points of total margin expansion, particularly considering, I think, with this year's guidance, gross margins will still be more than 200 basis points below 2019 levels.

Mike Baughn

Michael, this is Mike. We do feel comfortable with that algorithm, especially in the next few years as we're continuing to recapture some improvement in margin that we owe. We'll continue to make SG&A leverage as we continue to focus on our cost structure.

And I think the other thing that will be supportive of that, Mary alluded to it in her earlier comments, is just the health of our store fleet and the work that we've done to have a tighter, healthier store portfolio. But the high end of that comp range and the 60 basis point of EBIT raise growth we do feel comfortable with.

Michael Binetti

And if I -- let me ask you about the stores you're going to add, you're going to refresh 300 more this year. We heard the Reimagined plan. I'm curious, it seems like they're fairly low-touch, not disruptive refreshes.

I think the capital was quite low and you didn't have to have them closed for long. Why slow to 300 this year from 400 given over 2,000 stores globally. And I understand the brand standard math you're doing as we think about more of the fleet being refreshed and reimagined.

But talk about the bottom part of the fleet. What do you think you need for the stores that aren't eligible for refresh or won't be converted into reimagined. How do you think about what to do with the bottom part of the fleet to help it contribute more to the overall P&L of the company going forward.

Mike Baughn

Yeah. So, Michael, this is Mike. A couple of things tied to that.

One is the 800 stores from a refresh standpoint that we'll have completed by the end of this year are really the store portfolio or the store composition that we feel comfortable can generate the returns that we committed to within our investor profile. As we look forward with the Reimagined concept, we do have stores that would have been more costly to do from a refresh standpoint and are in markets or locations that are worthy of the full Reimagined scope. I think as we think through our broader portfolio, one of the things that we're really pleased with is when you look at I think 2019 versus 2024, we have about 20 points more of our penetration into the higher-end AB malls and off-mall and we've really reduced our exposure into the underperforming or the lower tiered malls.

So again, I'd like you to take away from this that we feel really good about the construct of our real estate portfolio, especially with the remaining actions we take to close another set of stores this year.

Michael Binetti

Okay, guys. Thanks a lot. Appreciate the detail.

Operator

The next question will come from Janine Stichter with BTIG. Please go ahead.

Janine Stichter

Hey, good morning. Thanks for taking my question. As a follow-up to the real estate piece of things.

It sounds like you're reallocating CapEx to new concept refreshes and then pulling back on some of the IT spend. Can you just elaborate on the areas that you're pulling back and how you think about the tech investments or IT investments that might be needed over the medium term. Thank you.

Mike Baughn

Hi, Janine, this is Mike. So we are, from a technology perspective, very much maintaining the consumer-facing side of our technology investments and the aspects that would be tied to the digital experience and the mobile app and setting up FLX in EMEA, for example. So we're very focused on that.

We do have core technology pieces that we are really moderating or adjusting the timing of that, just acknowledging that. We do have these investments that are paying back quicker that we want to lean into. So, I'd like you to take away from this the reinvestment or the reallocation into more consumer facing and strong cash on cash return projects and an elongation of the technology investments that are more sort of back of house related.

Janine Stichter

Great. And then maybe just on WSS, obviously the consumer has been pressured there and you're pulling back on the store growth. What do you think is the fix there and what would it take for you to reaccelerate the unit growth there.

Frank Bracken

Yeah, this is Frank. I'll jump in there. So first of all, I think the team has been very focused on the consumer and been sensitive to some of the conditions that they've been going through.

Prolonged inflation, particularly in the state of California where more than two-thirds of our store fleet lies. But also just some of the recent dynamics going on with the consumer which has caused them to be even more cautious. So we are doubling down on our value proposition.

So really recommitting to sub $100 footwear, really tapping into some of the passion points of global football, but also acknowledging workwear is a key category and instrument of growth for us. We're doing a lot of work on the merchandise mix and our pricing strategy and we continue to connect with the consumer at a very local level. So we're being very prudent as we talked about in terms of capital allocation.

So really only one new store in 2025. And our focus is really on improving the profitability and productivity of our existing fleet here while we go through this transitory period with the consumer. Long term, we have a lot of faith in that Hispanic community in terms of what they mean to the marketplace and their purchase power.

And so we're going to stay the course and work through this.

Janine Stichter

Great. Thanks so much.

Operator

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

Jay Sole

Great. Thank you so much. Maybe if you could elaborate a little bit on what you're seeing in Europe and the differences there between Europe and North America, that'd be super helpful.

Thank you.

Frank Bracken

Yeah, I can jump in. It's Frank again. So definitely it's been a challenging macro, both from an economic as well as a political environment.

Very choppy and volatile to say the least. That said, really proud of the work that the team did, turning in a 2% comp gain in Q4 and comp positive sales for the year with good market share gains in the footwear category. We do feel that while it was relatively promotional in both footwear and apparel, we are seeing channel inventories clean up and directionally headed in the right direction.

We also, as Mike mentioned, have an aggressive refresh program in 2025. So over two-thirds of the refreshes will happen in Western Europe and the UK. So that's going to significantly improve the productivity as we've seen in terms of sell-through margins and cash on cash returns in that marketplace.

And then meanwhile, we're working very closely with our brand partners upstream on new ideas in both footwear and apparel to excite the consumer and make sure our inventories stay fresh and our margin and top line continues to move in the right direction.

Jay Sole

Got it. And the can you just clarify what the comments on the guidance for the first half of the year. How should we think about Q1 really in that context.

Thank you.

Mike Baughn

Jay, this is Mike. So, I think from the -- really articulating that we think the first half in general is going to be flattish overall from a profit standpoint to what we had versus last year in Q2 from a year-over-year standpoint would benefit from the FLX charge, not anniversarying which is worth $0.09%. So that does put some pressure on how we're thinking about the first quarter.

Jay Sole

Got it. And then is there a difference in the sales growth expectation for Q1 versus Q2.

Mike Baughn

I would say across -- if you think about the guidance of the first half being at the lower end and the second half being at the higher end of our guide, we would expect somewhat of a ramp across the Q1 to Q2 within that.

Jay Sole

Got it. Okay. Thank you so much.

Mike Baughn

Thanks, Jay.

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.

Mary Dillon

Thanks, everybody, for joining us today. We remain confident that our strategies and actions are putting Foot Locker on the continued path towards sustainable growth. I want to extend my thanks to the entire Foot Locker team, from our global striper community, to those working on distribution centers, to our headquarters for their dedication, passion, and commitment every day.

We look forward to updating you on our progress next quarter. And thank you.

Operator

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