Foot Locker, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good morning, ladies and gentlemen and welcome to Foot Locker's Fourth Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company's press releases and SEC filings. We refer you to Foot Locker, Inc.'s most recently filed Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements. If you have not received today's release, it is available on the Internet at www.prnewswire.com or www.footlockerinc.com. Please note that this conference is being recorded. I will now turn the call to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

[John A. Maurer:]

Thanks, Kathy. Greetings, everyone. Welcome to Foot Locker, Inc.'s earnings conference call for the fourth quarter and full year 2016. As reported in this morning's press release, the company achieved net income of $189 million in the fourth quarter on a GAAP basis, up from $158 million in the fourth quarter last year. On a per share basis, we earned $1.42 this year, a 25% increase compared to the $1.14 the company earned in the same period a year ago. As also noted in our release, we had one-time items in fourth quarter both this year and last. This year, there were two large non-recurring items affecting our tax expense. We have adjusted our GAAP results for these items to drive our 2016 non-GAAP results. The first item is a tax rate change in France that goes into effect in 2019, but which caused us to write-down the value of certain deferred tax assets by $2 million in the fourth quarter, reducing GAAP earnings by $0.02 per share. The second adjustment stems from new regulations issued under Section 987 of the U.S. Tax Code. These regulations require the company to determine the tax effects of the unrealized foreign currency gains and losses on the balance sheets of foreign businesses that are operated as branches. This resulted in a $9 million non-cash reduction in current tax expense, which increased our GAAP earnings by $0.07 per share. Last year, the company recorded a pre-tax charge of $5 million, $4 million after tax in the fourth quarter to reflect the impairment of certain Runners Point Group assets, thus reducing earnings by $0.02 per share. Excluding these items, fourth quarter non-GAAP EPS was $1.37, an 18% increase over the $1.16 a share we earned on a non-GAAP basis last year. A reconciliation of our GAAP to non-GAAP results is included in our press release, and except as otherwise indicated, the numbers mentioned during the balance of our remarks this morning will be based on the non-GAAP results. The strong finish to the year brought our annual non-GAAP net income to $652 million, up 8% from a year ago and our sixth consecutive year achieving record annual earnings. On a per share basis, adjusted earnings were $4.82 for the full year, an increase of 12% over last year's $4.29. For a more detailed look at our fourth quarter financial performance, I'm joined this morning by Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer. She will be followed by Dick Johnson, Chairman and Chief Executive Officer who will touch on product trends and the progress we've made towards our long-term financial objectives as we execute our strategic initiatives. Lauren will round out our prepared remarks with our initial outlook for 2017. Lauren?

[Lauren B. Peters:]

Thank you, John. Good morning to all of you and thank you for joining us this morning. I'm pleased to report that we delivered another great performance by our company in the fourth quarter. Starting with sale, we produced a 5% comparable sales gain in the quarter bringing our two-year stacked comp gain to 12.9%. Our total sales for the year were $7.8 billion, a 4.8% increase over last year's $7.4 billion. Our store segment posted a 4% comparable sales gain in the quarter. The top performance was by Champs Sports, which delivered a high single digit comparable sales increase, powered by a high single digit gain in footwear and a double digit gain in apparel. Foot Locker Canada finished off a stellar year with its fifth straight double digit quarterly comp sales increase. The strong results up north were broad based, with double digit gains in footwear and apparel and a mid single digit gain in accessories. Our SIX

[Richard A. Johnson:]

Thanks, Lauren. Good morning, everyone, and thank you for your participation on the call this morning. In today's challenging fast-changing retail landscape, the results Lauren just described are a truly exceptional achievement. It took an incredibly talented team of associates to produce the sixth consecutive year of all-time best financial performance as an athletic specialty company. And I want to start off my remarks by sincerely thanking each of our associates for their dedicated efforts in the quarter and throughout 2016. Their work has firmly positioned our banners at the center of sneaker culture, which not only has produced strong results in recent years, but has also established a strong foundation upon which to build and shape our business in the future. This work is an ongoing effort. We introduced a new strategic framework at the beginning of 2015, and revised the key strategic initiatives that the company has been working on diligently since 2010. These initiatives are

[Lauren B. Peters:]

Thanks, Dick. We continue to see many opportunities to elevate the business on our way to reaching our long-term goals. As you mentioned in the press release this morning, we are planning yet again for a mid single digit comparable sales gain and a double digit percentage EPS increase in 2017. These plans are based on a comparable 52-week year. This year includes a 53rd week, which we expect will add about $0.12 per share to our fourth quarter and full year 2017 results. While we are optimistic about the full year, the quarterly cadence is not likely to be as even as we produced in 2016

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And our first question comes from the line of Paul Trussell with Deutsche Bank Research. Please proceed with your question.

[Paul Trussell:]

Hey, good morning.

[Richard A. Johnson:]

Good morning, Paul.

[Paul Trussell:]

Another great quarter. Congratulations.

[Lauren B. Peters:]

Thank you.

[Richard A. Johnson:]

Thank you.

[Paul Trussell:]

Just wanted to kind of dig into your guidance for mid single digits comps for this upcoming year despite what seems to be a tough start for broader retail this month. What's in the pipeline that gets you excited? And what is the consumer kind of telling you where they are moving towards from a category or a type of product standpoint?

[Richard A. Johnson:]

Well, Paul, I think that the consumer is moving towards cool, right? I mean, that's what our – really drives sneaker culture and them finding the coolest sneaker at the right time is what's important. We don't believe that fundamentally, the consumer's appetite has changed at all for products. So the guidance around mid single digit comps, we know that the tax checks are going to flow and we know that our consumer likes to buy new sneakers when they get their tax refunds. So as important as the running category was in 2016, we continue to see that category being important. We see some life in basketball. There's been some sparks that certainly we saw down in New Orleans at the All-Star Game. We expect that to continue to improve throughout 2017. Casual has sort of the life of its own and the consumer moves from silhouette to silhouette depending on their need on any given day. And then I see continued strength in apparel. So our families of business, from men's, women's, and Kids continue to have opportunity across various categories. So the confidence and our consumer still having a huge passion around sneakers is still there.

[Paul Trussell:]

That's very helpful. And then just around ASP, certainly that was up again. How do you view that to contribute in 2017?

[Richard A. Johnson:]

We expect ASP growth to continue to have some upside, Paul. We've talked about it many times that our ASP model is pretty complex. There's a shift from one silhouette to another in footwear. There's a shift amongst preschool, infant and grade school. There's more expensive apparel that's being sold rather than less expensive. So we see that there is upside in our ASP certainly in 2017.

[Lauren B. Peters:]

Right. And even in the classic styles, that customer knows to come to us for unique iterations and that preference they've got tends to help support these ASPs and the growth of.

[Paul Trussell:]

Great. And then very quick, last question just, Lauren, anything we should keep in mind from a cadence standpoint, whether it's via comps or timing of certain expenses flowing through?

[Lauren B. Peters:]

Yeah. Well, I don't know what more I would add on the top-line to what Dick has already described. We continue to believe that there's opportunity in margin, as we work on allocation, et cetera. And on SG&A, as we evidenced throughout 2016, we carefully control that, but as far as unique, I mean the only thing that's unique was our first quarter office relo that pops to mind, yeah, from a non-GAAP perspective.

[Paul Trussell:]

Great. Thanks for the help. Best of luck to you.

[Richard A. Johnson:]

Thanks, Paul.

[Operator:]

And our next question comes from the line of Matt McClintock with Barclays. Please proceed with your question.

[Marjorie Lopez Marinez:]

Hi. This is Marjorie Lopez on for Matt McClintock. Thank you for taking our question. Just wanted to ask a little bit more about your remodeling program, and to understand if you're going to make any changes in 2017. And also, in terms of the improvements you've made in the two New York locations for SIX

[Richard A. Johnson:]

Well, in terms of remodels, we've talked about an ongoing program. Lauren detailed the capital expense plans for 2017. So we'll continue certainly to upgrade the fleet. And we manage a big portfolio of stores and with our real estate and store development team continue to identify the right opportunities to upgrade those stores from a remodel perspective. So that program will continue. And we certainly have had some great learnings with SIX

[Marjorie Lopez Marinez:]

Great. Thank you. And just as a quick follow-up, I wanted to get a little bit more color on the Kids Foot Locker performance. I know you mentioned differing timeline and not sufficient sizes for popular styles in Kids. How should we think about this going forward? And just in terms of looking at it from a historical perspective, was this worse than in the past? Thank you.

[Richard A. Johnson:]

Well, Kids Foot Locker did underperform its past track record, and I think certainly the fourth quarter was in (39

[Marjorie Lopez Marinez:]

Okay.

[Lauren B. Peters:]

And that customer is really technically wired and are digitally savvy and they know as much about this product as their big brother. So they want it at the same time.

[Marjorie Lopez Marinez:]

Got it. Thank you for that.

[Richard A. Johnson:]

Okay, Kathy?

[Operator:]

And our next question comes from the line of Robby Ohmes with Bank of America Merrill Lynch. Please proceed with your question.

[Robert F. Ohmes:]

Hey good morning, guys. Great quarter in a very tough fourth quarter for most.

[Richard A. Johnson:]

Thank you.

[Robert F. Ohmes:]

Dick, two topics I was hoping you could maybe help us with. One, I know it's hard to quantify, but can you give us a sense of where, when you look at the casual style percent of your business or mix of your business, where are we versus historical standards and maybe a sense of how far and how long can casual keep leading the way? I think even in basketball, you mentioned Superstars as one of the drivers, so even basketball sounds like it's leaning very casual. And then the other topic, it sounds like, and, again, I may be wrong in this, but it sounds like the trends in Europe are very different than the U.S. in what's driving the business. And also, you called out traffic. It sounds like it might mostly be Germany, but can you also just sort of give us some color on what's going on in Europe versus the U.S.? And is it deviating more than usual in terms of what are driving those two regions? Thanks.

[Richard A. Johnson:]

Sure. Thanks, Robby. First, from a casual perspective, I think it's important to remember that virtually the vast majority of our shoes are sold from a casual hook-up to what I'm wearing today sort of mindset for our consumer. So again, Superstars in basketball, Huaraches in running, all of those sneakers are viewed – we put them in categories, but just the same way that our customer doesn't think in channels, they don't really think in categories. So wherever the heat is brought by our tremendous vendor partners, the consumer is going to move there. Whether they decide to play basketball in a basketball shoe or they decide to hang out on the street with their friends, they're the ones that ultimately make the determination. So, I don't want to get into sort of the crystal-balling of how each category will respond. I have a huge amount of faith in our vendor partners and our merchant teams to move the dollars where the customer is and is going to be. So, again, I don't worry about casual versus basketball versus running. I'm sure that there are models out there that want to understand how each of those levers move, but our kid is really concerned about the coolness of the sneaker, not the category that it comes from. And I think the trends in Europe, just to get to your second question Robby, the trends in Europe have always been a bit different. Running was far more important to Europe from a category and coolness perspective than it is in the U.S. The team over there is trying to help the consumer understand how cool some basketball silhouettes are. The vendor mix is a little bit different, still the same group of vendors but the percentages are different continent-to-continent. So I don't see that there's been any acceleration or significant change in the trends. And I think it's just that the trends get a little more accentuated because the running silhouette is the coolest silhouette that's out there right now for most consumers. Traffic, certainly Lauren called out the traffic in Germany as being down. We saw traffic in some other countries impacted by some of the macro events that have happened across Europe, but the consumer is still shopping. They certainly still want sneakers. As Lauren pointed out, the Foot Locker Europe comped up for the fourth quarter after being down a little bit in the third quarter. So again, good response from the consumer in Europe.

[Robert F. Ohmes:]

Great. Thank you very much.

[Richard A. Johnson:]

You bet, Robby.

[Operator:]

And our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

[Matthew Robert Boss:]

Thanks. And great quarter, guys.

[Richard A. Johnson:]

Thanks, Matt.

[Matthew Robert Boss:]

So on the gross margin, can you just help rank the merchandise margin drivers this year? And just, Dick, what do you see as the appropriate level for the business on gross margin from 34% today? Do you still continue to see opportunity?

[Richard A. Johnson:]

We continue to believe that there's leverage. I'm not going to rank them for you, Matt. You know, we...

[Lauren B. Peters:]

We worked on all the levers.

[Richard A. Johnson:]

Exactly. And they don't necessarily move at the same pace. So, Lauren mentioned rolling out the second phase of our merchandise allocation system, the order-planning piece. And we've talked about that over the past quarters that it's a learning system and the allocation piece continues to learn, and our team continues to learn with it, to work with it. And now we'll feed that information into the order planning end of it, which again should help us order the right quantities and then the allocation piece helps us get those quantities in the right stores at the right times, so don't have to take as many markdowns or ship as many products store-to-store. So we continue to work with our vendor partners to drive great, exciting product. As the product excitement continues to grow, we operate at the premium end of the spectrum and try to manage the markdowns. Certainly we – it's not that we don't have markdowns in the store, but we try to manage them. So each of the levers gets worked on and the teams are very aggressive to continue to get some leverage in the margin line.

[Lauren B. Peters:]

So we've continued to see improvement made in the footwear margins, and in the fourth quarter especially improvement came out of apparel. So as that growth initiative gains traction and we can continue to improve on those apparel margins, that further supports our overall merchandise margins.

[Matthew Robert Boss:]

Got it. And then just on the SG&A front, so really nice leverage in the fourth quarter on the mid single digit comp. Lauren, can you just elaborate a little bit on some of the headwinds offsetting your ability to leverage more this year if you were to hit a similar mid single digit comp.

[Lauren B. Peters:]

Yeah. So the bigger components within SG&A being selling wages and then our marketing publicity. On the selling wage front, a bit of the headwind is in the U.S. We've got changes in minimum wage and health care costs, but as you've seen us do, we're very, very careful about managing the hours to make sure that we've got the hours where we've got peak traffic and that helps us manage through that. So we remain focused on having very competitive pay for our sales associates where – have a commission structure that works nicely in ensuring that as your wages change, you're also driving the top-line to help manage the rate, but it's a dynamic that we have to very closely manage.

[Matthew Robert Boss:]

Great. Best of luck.

[Richard A. Johnson:]

Thanks, Matt. Okay, Kathy?

[Operator:]

And our next question comes from the line of Sam Poser with Susquehanna Financial Group. Please proceed with your question.

[Sam Poser:]

Good morning, everybody. Thank you for taking my question. Couple of things; number one, can you talk about what your thoughts are on border adjustment and on all this new tax policy going on? You've got to be paying close attention to that.

[Richard A. Johnson:]

Yeah. Sam, this is one place that I don't know that there's a game plan, right. So the shift is going to be a little bit hard to read. The February started with a weak difference in President's Day and the All-Star Game shift. The start of Easter is a couple of weeks later, the Easter season. So there's a lot of moving parts, probably the biggest of which is the PATH Act that required certain EITC and child care credits...

[Sam Poser:]

Dick, I was asking about the border adjustments, not about the (49

[Richard A. Johnson:]

I'm sorry. I'm sorry. I misunderstood. I thought you meant the income tax.

[Sam Poser:]

No.

[Richard A. Johnson:]

So, no. Sam, I think it's too early to speculate about a border adjustment tax. Certainly we know that there aren't very many sneakers made in the U.S. at this point. So obviously depending on whatever the administration ultimately ends up putting in place, we'll have to react. And we'll work with our vendor partners to understand. I think the implications and the impact to our core consumer of a border adjustment tax is it's fairly significant. So, it's...

[Lauren B. Peters:]

Across many categories of spending for them, not just our product.

[Richard A. Johnson:]

That's right.

[Sam Poser:]

And then secondly, can you talk to – on the week 53 this year and then the take-out next year, Lauren, can you give us some idea of – you said it's $0.12, but can you give us the dollar amount for that week on how you're modeling it for how much that week is worth from a dollar amount and then how much we'll have to take out next year? And could you give us any thought as to how to think about 2018, because you're going to have week one next year up against week two this year on a comp basis. It's very dizzying, more next year than this year.

[Richard A. Johnson:]

Yeah. Welcome to our world.

[Lauren B. Peters:]

Is it dizzying for you? $0.12, that's what our current model is on the bottom-line and tied to that. Our last 53rd week was 2012. So if you went back to that, you'd get some more color around top-line, bottom line, et cetera but we recognize as we work through the math, that we're a bit more productive than we were in 2012 and so we've factored that into the thinking.

[Richard A. Johnson:]

We haven't started looking at the quarters of 2018 and how they're going to compare to 2017 yet. That's an exercise for the future.

[Sam Poser:]

I was more – not about specific guidance but just to let people understand how the weeks match up because you guys generally give a comp by week guidance and then there's a variance off of the revenue because the fiscal month doesn't match up with the comp, looking into 2018.

[Lauren B. Peters:]

We don't give that kind of guidance.

[Richard A. Johnson:]

We don't give out comp week guidance. Again, I think Lauren's point is right. If you go back and look at 2012, you'll have a better understanding of the pattern, but that's the level of detail we're going to provide.

[Sam Poser:]

All right. Well, thanks very much and continued success.

[Richard A. Johnson:]

Thanks, Sam.

[Operator:]

And our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.

[Camilo Lyon:]

Good morning, everyone. Great job on the quarter.

[Richard A. Johnson:]

Thanks, Camilo.

[Camilo Lyon:]

I wanted just to get a little bit more clarity on what your thinking is around these tax refund delays. And if you consider them, Dick and Lauren, as loss sales or sales that will be recovered in the later weeks when those refunds do flow? And if you can give any sort of detail or guidance on how these delays are impacting the Q1 comps, just so that we have our models appropriately tuned into what's actually happening here? That'd be great.

[Richard A. Johnson:]

Yeah. Camilo, we're not going to go back to giving quarter-to-date comps. We stopped that a few quarters ago and we'll stay in that position. The guidance that Lauren gave for the full year is pretty clear; the mid single digit comp and double digit bottom-line that we believe that we'll achieve. The challenge will be this game plan that we don't have for the shift in tax returns that I started to explain to Sam, but was answering the wrong question. So, the year has some shifts in it, right? The year, or the week shift of the All-Star Game, the week shift of Presidents' Day, the start of Easter being later, so Mardi Gras and Carnival all shifting and then the PATH Act that required this delay in some of the tax returns. So certainly, there have been buying opportunities that have passed when our consumer didn't have cash in their hands, but we firmly believe that the consumer still has a huge desire for the products that we have in our store. We have a huge belief that our vendors continue to bring heat in our category to our stores and websites. So, we're confident that the sales will start to flow when the tax checks start to flow.

[Camilo Lyon:]

And is there an expectation that those sales will be recovered once those flows actually start coming through, or are they just past and will be lost and therefore you're kind of saddled with releases that were launched during that period that no one was able to buy? Just trying to understand really the dynamics that have happened and maybe there's some historical context you can reflect on?

[Richard A. Johnson:]

Well, there is no historical context, unfortunately. We've had minor delays in tax checks being issued, but never sort of this glut that built and built. So...

[Lauren B. Peters:]

But we're not selling lettuce that has a really short shelf life, right? So as the cash flow improves, we know we've got really cool product that the customer will find in our store.

[Camilo Lyon:]

Okay. Great. Then, if we could just shift gears a little bit towards a comment you made, Dick, about basketball seeing some life and that you would expect it to improve throughout the year. Could you just describe what you think will drive that improvement? Is it more just that it's easier comparisons or that you're actually seeing some product that's coming down the pipeline that is exciting that you think will reinvigorate the category?

[Richard A. Johnson:]

Well, it's combination of both. We know that certainly end of 2015 and throughout 2016, basketball had some challenges, especially in the signature basketball category. And we need to sort of confine the remarks to signature basketball, because as we talked about on basketball business, in totality, when you throw in the Retro, some of the Casual things was up for the quarter and the year. So, we've seen some sparks that our team was down in New Orleans over All-Star week. And, again, there were people lined up for basketball and basketball-related products that seemed to be indicating that when the right product is there with the right story, the right asset, there's still excitement around the category. So, as we look through 2017, we certainly see some things changing from all of the key vendors from a basketball perspective. So, we've said all along when the excitement and the price value relationship is there for our customer, they will gravitate to whatever the coolest at the time. And I envision or I see certainly some basketball product that I think will continue to excite our consumer.

[Camilo Lyon:]

Okay, great. And then my last question, it's pretty remarkable that you're continuing to experience positive traffic when I don't think anyone else is, certainly in the mall. Could you just remind us what it is that you're doing or what it is that you have, relative to even your competitors, that allows you to continue to generate positive traffic growth in the U.S.?

[Richard A. Johnson:]

Well, I give our team a ton of credit. I mean, they do a great job on the social media and through the digital arm to drive excitement for products that are being found in our store. I give our store associates a tremendous amount of credit, because they want to engage when the customers come in. We're focused on creating consistent, authentic and memorable experiences for our consumers, so that the striper, the person in Footaction, the guy or gal in blue at Champs, they're the resident experts. The stylists – the style associates that we've got in our SIX

[Lauren B. Peters:]

So, our customers know. They got to come into our brands to check it out, because we're going to have the coolest stuff, and that shows up in that traffic number.

[Camilo Lyon:]

Perfect. So, just one final one on the Q1. Could you just tell us what's the largest month within the quarter? Just trying to understand the weightings of February, March and April.

[Richard A. Johnson:]

Well, historically, February would be, but with the Easter shift, I mean, this year's a little bit of a different dynamic. But historically, February would be the largest month of the quarter.

[Camilo Lyon:]

Okay. Thanks very much, guys. Good luck with the year.

[Richard A. Johnson:]

Thank you, Camilo.

[Lauren B. Peters:]

Thank you.

[Richard A. Johnson:]

Okay, Kathy?

[Operator:]

And our next question comes from the line of Christopher Svezia with Wedbush Securities. Please proceed with your question.

[Christopher Svezia:]

Good morning, everyone. Congrats on the quarter as well.

[Richard A. Johnson:]

Thank you.

[Christopher Svezia:]

I guess, just, I want to go back to this first quarter for a second. I think last year, we had somewhat of a similar slightly maybe less delay with regard to tax refunds. I think, Lauren, you called out that you expected double-digit earnings growth for the year and mid-single digit comp. However, Q1 will be hard, I think, to do that, in part maybe due to the timing of tax refund. Is that a fair characterization, maybe as we think about Q1 relative to your annual guidance for the year, just given how Q1 is starting?

[Lauren B. Peters:]

There is a difference in the tax shift of a year ago and the delay this year. They're just different orders of magnitude.

[Richard A. Johnson:]

And if you go to the IRS, the February 10 data, they were 60% behind distributing checks. The data that's out there from February 17 has caught up a bit, but they're still significantly behind in the distribution of checks. And the distribution of checks doesn't necessarily correlate to when the money is available in accounts, et cetera. So, again, there is not a historical reference that we can use that has shifted this amount of tax money this much. So, again, as Lauren said, and I said in my prepared remarks, the first quarter is going to be a bit more challenging, but we're highly confident that we can deliver double-digit bottom line growth and mid-single digit comps for the year.

[Lauren B. Peters:]

For the year.

[Christopher Svezia:]

For the year? But that's when the...

[Lauren B. Peters:]

It points back to the customers' appetite for the product hasn't changed. This is a cash flow for them with the tax refund delay.

[Christopher Svezia:]

Okay. So, just to be clear, so, every quarter you expect mid-single digit comp and double-digit earnings growth, does it apply...?

[Richard A. Johnson:]

I don't think that's what we said. We expect to deliver double-digit EPS growth...

[Christopher Svezia:]

For the year.

[Richard A. Johnson:]

...and mid-single...

[Lauren B. Peters:]

And mid-single digits for the year.

[Christopher Svezia:]

Year, but not necessarily for the first quarter. That's all I'm just trying to...

[Richard A. Johnson:]

We haven't given quarter-by-quarter guidance.

[Lauren B. Peters:]

We didn't give quarter guidance. We've got this first quarter that we're dealing with.

[Christopher Svezia:]

Okay. With regard to the gross margin and SG&A guidance that you gave flat on gross margins, up in SG&A, flattish in terms of sales, that excludes the extra week, Lauren, correct?

[Richard A. Johnson:]

Yeah.

[Lauren B. Peters:]

Yes. It does not include the 53rd week.

[Christopher Svezia:]

Okay. All right. And then finally, just on apparel, I guess, great to see the performance. Lifestyle apparel seems to be working. You're doing a nice job on the brand and private label side. If that were to continue to comp at the rate that it's comping, do you believe you'll start to cross-over footwear relative to merchandise margins, potentially in 2017? In other words, any update on where we are on that?

[Lauren B. Peters:]

Well, we would describe it as the chase on gross margin rate is back on between footwear and apparel. We have, over the years, continued to make progress on footwear margins. That was true in 2016. But, we had good improvement in the productivity of those apparel margins in 2016. So the chase is back on, if you will. We think, long-term, the finish apparel margins can be meaningfully ahead of footwear margins. And again, it's about lowering overall markdown rates on that apparel.

[Christopher Svezia:]

Okay. Got it. All right. That's all I had. Thank you, and all the best to you.

[Richard A. Johnson:]

Thanks, Chris.

[John A. Maurer:]

Kathy, we have time for one more question.

[Operator:]

Thank you. And our next question comes from the line of Tom Nikic with Wells Fargo Securities. Please proceed with your question.

[Tom Nikic:]

Hi. Good morning, everyone. Thanks for squeezing me in. Just a quick one on the gross margin line, I guess, on a 5% comp, there was a little bit of occupancy deleverage, which kind of seems like a bit of a high hurdle to get over. I was just kind of wondering for going forward, how we should think about the leverage point on occupancy. Thanks very much.

[Lauren B. Peters:]

Yeah. So, part of this dynamic is that we have these high-profile locations that we've gone into and they come with higher rent. Also, as you're building those out, you get some dark rent, if you will, and that we're building out the store if it's not open for sales yet, so we're paying rent. And that's part of the pressure. But as you get further into those doors being opened, the return on them improves and the leverage point would improve. For 2017, we are, with this leverage that it needs a solid mid-single digit to lever that occupancy. But future periods that should start to improve again.

[Tom Nikic:]

All right. Thanks very much. Best of luck this year.

[Lauren B. Peters:]

Thank you.

[Richard A. Johnson:]

Thanks, Tom.

[John A. Maurer:]

Okay. That concludes the call for today. Thank you for your questions. I'll be back at my desk shortly. If we didn't get to your question, I can answer at any follow-ups that you may have. Please join us on our next earnings call, which we anticipate will take place at 9 AM on Friday, May 19, following the release of our first quarter results earlier that morning. Thanks again, and goodbye.

[Operator:]

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect.