This business showed more strength in footwear than apparel. Footwear increases were led by higher sales of women''s running, court and styles. Lady Foot Locker also generated high sales of private label apparel. Kids Foot Locker continued to report solid increase and basketball and cross-training categories.

Footlocker.com, the firm’s direct customer business generated a mid single digit sales increase while maintaining profit margin.

The third quarter sales decline at footlocker.com reflects a reduction in the third party business given a cancellation of a contract earlier this year. The firm expects loss of this business to continue negatively to impact the fourth quarter sales results in this division.

Footlocker.com generated a double-digit increase through its Internet channel and a double-digit decline through its catalog operation, a continuation of a trend that is transpired over the past few years. Through the first nine months of this year, 71% of the sales were processed through the Internet.

The third quarter gross margin rate decreased 100 basis points from last year, reflecting both decline in merchandise margin rate and a higher occupancy expense rate.

The reduction reflected an increased activity in the U.S. stores. Total markdowns as well as mark down rates at each of the Canadian, European and Asia-Pacific divisions were favorable to that of the third quarter of last year and in line with the plan.

The third quarter Tennessee rate increased by 30 basis points, with the rate flat in the U.S. and a 90 basis point increase in international stores. While the actual Tennessee costs were in line with the firm’s plan, the rate exceeded the plan due to the same store sales decline in Europe.

Increased utility costs have also continued to make a significant impact on the gross margin rate. Year-to-date, the firm has completed almost 600 real estate negotiations related to new or existing stores. The firm expects that its annualized occupancy costs on these projects will contribute towards achieving a longer term goal of ROE reducing the occupancy rate by 150 basis points. The firm’s progress towards achieving this longer term objective has temporarily stalled due to the softness of the same store sales results in Europe.

The third quarter SG&A expenses increased $4 million or less than 2% versus last year.

As a percent of sales, SG&A expenses were flat with last year''s rate of 19.9%. The increase in SG&A expenses reflect $2 million due to the adoption of FAS 123R related to stock compensation expense and $2 million related to foreign exchange. The total SG&A expenses for the third quarter were favorable to the firm’s plan and helped to offset some of the shortfall in the firm’s gross margin.

- The interest expense declined by $1 million due to lower debt levels, and a higher average interest rate on invested cash.
- Other income of $8 million included $2 million related to bond repurchase, $3 million of insurance collections from last year''s hurricanes, and a $3 million lease termination gain.
- During the quarter, income tax rate was in line with last year''s rate of 36%.
- The firm’s financial position remains strong with cash in short-term investments totaling $263 million. The company’s cash position is near the low point of the year, reflecting the seasonality of the business.
- This year, the firm repaid $50 million of its term loan and contributed $68 million to its pension funds which are currently near a fully funded status.

During the third quarter, the firm repurchased $38 million of its 8 1/2 bonds due in 2022 at a $2 million discount to face value.

This discount was recorded as a gain and included in other income and P&L statement for the quarter. Including these purchases, $134 million of this $200 million original issue remains outstanding.

Foot Locker’s board recently increased its dividend by 39% by an annualized amount of 50 cents per share.

With pension funds nearly fully funded, additional cash is available to return to the shareholders.

The merchandise intrip at the end of the third quarter was 5% higher than at this time last year while accounts payable balance declined $6 million from last year.

At the end of the third quarter, the accounts payable to inventory ratio was 24% primarily reflecting a timing difference. By year end, the firm expects this ratio to be more in line with historical ratio of 28% to 32%.

In the Middle East, the Alshaya Group, a well established franchisee opened its Foot Locker last month in Dubai.

The firm continues to be encouraged by the initial results and still expect 75 stores to be opened in this market over the next several years. Over time, the firm plans to explore additional partnership opportunities in other areas of the world, where it does not have the local expertise and resources to guarantee success.

The firm very focused on pursuing new opportunities for the company and is opening athletic hat stores.