Foot Locker, Inc. (NYSE:FL) Q3 2023 Earnings Call Transcript November 29, 2023
Foot Locker, Inc. beats earnings expectations. Reported EPS is $0.3, expectations were $0.23.
Operator: Good morning, and welcome to Foot Locker's Third Quarter 2023 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. Management undertakes no obligation to update these forward-looking statements which are based on many assumptions and factors, including the effects of global, economic, and market conditions, currency fluctuations, customer preferences, and other risks and uncertainties described more fully in the company's press releases and reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q.
Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements. Please note this conference is being recorded. I would now like to turn the call over to Mr. Robert Higginbotham, Senior Vice President, FP&A, Investor Relations, and Treasurer. Mr. Higginbotham, you may begin.
Robert Higginbotham: Thank you, operator. Welcome everyone to Foot Locker Inc.'s third quarter earnings call. Today's call will reference certain non-GAAP measures, a reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. Note, we have a slide presentation posted on our Investor Relations website with information that will be referenced during the call. Today, we will begin our prepared remarks with Mary Dillon, President and Chief Executive Officer; Frank Bracken, Executive Vice President and Chief Commercial Officer will then give more detail on our operating results across our banners and geographies. Then Mike Baughn, Executive Vice President and Chief Financial Officer will review our quarterly results in more detail and provide color on our fourth quarter and updated 2023 guidance. Following our prepared remarks Mary, Frank, and Mike will respond to your questions. With that, I'll now turn it over to Mary.
Mary Dillon: Thank you, Rob. Good morning, everyone and thank you for joining us today for a discussion of our third quarter financial results, our outlook for the holiday season and an update on the advances our team continues to make on our Lace Up initiatives. While the operating environment remains uncertain momentum behind the Lace Up plan is beginning to unlock wins as our team executes in a customer and brand partner focused collaborative and agile manner. It's been over a year since I joined Foot Locker, and while we recognize that we have work ahead of us, I'm encouraged by the progress we've been making in this reset year. I continue to be confident that we're executing the right strategies as we simplify and focus our business and invest in the capabilities that will enable Foot Locker to be the best omnichannel retailer at the intersection of sneakers and sneaker culture, as we say on our new brand platform, the heart of sneakers.
In the third quarter, comps declined 8% including a 3 point comp headwind from the repositioning of our Champs Sports banner. We delivered earnings per share ahead of our expectations at $0.30. Trends in the quarter accelerated from our first half run rate driven by a strong back-to-school and our Kids Foot Locker banner. We also delivered sequential improvement in our conversion rates across stores and our digital channel outperformed our expectations, including a positive trend in October. Importantly, we continue to exercise disciplined expense management and made further progress in executing our cost savings plan. Based on the results we've generated year-to-date combined with our outlook for the fourth quarter, we are narrowing our bottom line guidance to $1.30 to $1.40 for the full year as we balance early successes in our Lace Up initiatives with the uncertainty we're seeing in the external environment and our internal inventory goals.
As we enter the fourth quarter, our teams have stayed agile as we learn from and build upon recent progress. We know we're vying for wallet share with a value-conscious consumer this holiday season. While our customers remain discerning with their discretionary dollars and we expect that will continue through the season, we're also seeing them respond to newness at key moments. Quarter-to-date, we've been pleased with the trends as consumers respond to our full-price holiday assortment in addition to our compelling deals. As a team, we continue to make strides as our customer-facing and support teams are well-synced and executing at an elevated level into the holiday season. Over the Thanksgiving week period, we saw solid traffic levels and conversion gains in our stores and online.
While customers responded to our competitive offers, we also saw nice gains in ticket and basket size, as our customer is willing to pay full price when the product is new, compelling, and trend right. While we are encouraged by our building momentum, we acknowledge that much of the holiday season is still ahead of us and we factored in our quarter-to-date performance into our fourth quarter plans. While there is still uncertainty in the macro backdrop, we're encouraged by the building momentum against our strategic initiatives, as I'll discuss in more detail in a few moments. To summarize, however, we name a few key wins including solid strides in our digital performance including improving conversion levels and double-digit gains in new customer acquisition.
Increases in already (ph) high brand awareness levels suggesting our top-of-funnel marketing and brand building efforts are resonating. Stabilizing conversion trends in stores as product flows resonate and our in-store execution improves. Strides in Champs Sports with banner comps actually outperforming our original plans from the start of the year. And finally, early positive readout of our loyalty pilot launch in Canada. All-in looking ahead, we know that by continuing to lean into our Lace Up plan, we're on the right path towards longer-term shareholder value creation. Now before we dig into our Lace Up progress, I want to take a moment to talk specifically about our basketball business. Sneaker culture has long been influenced by sports and specifically basketball and that's why we are so excited about our recent agreement with the NBA for Foot Locker to serve as an official league marketing partner here in the U.S. Foot Locker in the NBA have a nearly 25-year history of working together and we're thrilled to be building on that in the years to come with this new partnership.
This season, you'll see Foot Locker and the NBA collaborate around exciting content, on court virtual signage featuring our iconic striper logo and activations around marquee events such as the NBA All-Star Game. We'll also be focused on social engagement and we're excited about reaching the NBA's 84 million followers on Instagram along with other platforms with our brand-building and commerce driving content. We'll focus on creating collaborative content highlighting our basketball products and point of view. The NBA will connected directly into our loyalty FLX program and will provide additional benefits and access to our customers in new and exciting ways. Our kick-off to announce a partnership featured a special basketball activation event in Times Square that featured over 50 members of our striper hype crew.
In early November, we also rolled out our new global brand platform, The Heart of Sneakers which is uniting our vision around the Foot Locker brand. This was a global launch with all our regions going live simultaneously and the response has been amazing. To date, we've earned over 1 billion media and influencer impressions since the campaign's launch. Our first campaign with the platform as our holiday campaign called Hype for the Holidays, which includes the star-studded roster of NBA All-Stars. We know that when we win basketball, it is good for us and importantly, it's good for our brand partners. We've been thrilled by the support they're showing in response to our basketball initiatives. Another key example of our basketball focus is the rollout of our new Home Court experience at our Foot Locker banner.
This is a unique multi-branded basketball experience with elevated merchandising, storytelling, and experiences. While still early days, and only a handful of our top basketball doors, early response by our customers has been very positive and we're continuing to invest in the concept. We will have more to report on in basketball in future quarters, but I hope you're taking away from my comments today, how much all of us here at Foot Locker are looking forward to further enhancing our customers' experiences and strengthening our already dominant basketball leadership in the months and years ahead. I'd like to now provide more details on the progress we're making within our Lace Up plan and the early wins we're achieving, both in stores and online.
As you know, there are four strategic pillars to Lace Up. So let me walk you through the momentum we're building in each of them. Our first is to expand sneaker culture by serving more sneaker occasions, providing more choice, and driving greater distinction. A key part of servicing our customers is making sure we're strong partners to all the brands we work with. This means collaborating with them on multi-year growth plans in consumer-facing marketing ideas, while also investing to mutually grow our businesses. Within Nike, we're seeing strong partnership between our teams as we build growth plans around our key pillars, basketball, kids, and sneaker culture. As I noted earlier, we believe the future of basketball is bright for Foot Locker and we're encouraged that the culture of basketball also continues to connect with consumers through models like the Air Force 1, Air Jordan 1, and Nike Dunk.
Retro sell-throughs remained solid in the third quarter, albeit with lower units compared to last year. We're also celebrating key moments with Nike, including the 25th Anniversary launch of the Nike Tuned Air franchise, one of our key exclusives with Nike and a core anchor in sneaker culture especially across EMEA where there is a rich heritage with this franchise. With Adidas, we continue to build momentum with their Terrace and Skate franchises, including the Samba, Gazelle, and Campus. Together with our exclusive Anthony Edwards basketball shoe launch this December, we have some powerful holiday moments ahead with Adidas. And as we think about strengthening our position in basketball, we were pleased with the recent launch of the Puma LaMelo 3 and we're also excited about Puma's renewed collaboration with Rihanna, which we'll be launching in stores and online tomorrow.
New Balance continued its strong run as we once again achieved well over 100% year-over-year sales increase in the third quarter with multiple franchises performing well across men's, women's, and kids. We continue to see door expansion opportunities in New Balance as we build on the share gains we've seen in this exciting brand. Within performance running, we continue to push ahead with our growth plans on On and HOKA. On is now in 420 doors ahead of our earlier plans for 350 doors this year as together, we accelerated expansion plans to meet the strong consumer response to their unique and innovative product. With HOKA, we've added 50 doors since last quarter, bringing our total door count to 150 ahead of holidays. We remain bullish on our partnership with these exciting newer brands and we are planning for even more door count expansion across these two brands next year.
At the same time, we also continue to achieve strong gains with brands like ASICS and Brooks in performance running. And we're seeing gains from brands such as Crocs and UGG on the more lifestyle side, as our customers are looking to us to offer brands that fit their whole lifestyle needs. Helping to drive distinction for Foot Locker, our exclusives penetration in the quarter was 15% similar to last year led by key franchises such as Nike's Tuned Air and Puma's LaMelo Ball. Finally, in our quest to meet our customers' desire for multiple brands across multiple occasions, the diversity of our brand mix outside of our top brand Nike increased to 36% of sales from 32% last year, making good progress towards our goal of over 40% by 2026. Our second imperative, power of the portfolio is about transforming our real estate footprint through new formats and shifting off-mall, while also simplifying our portfolio of banners and creating clear lanes for each of them.
On real estate transformation, we opened or converted 13 new Foot Locker Community and Power Stores across the globe in the third quarter, giving us a 198 stores in these newer formats. We continue to see comp trends in these locations outperform the remainder of the fleet with higher levels of traffic, conversion, and ticket. We also see a double-digit e-commerce halo in the markets around these locations. All-in, our new formats now represent approximately 13% of our global square footage, up from 10% last year and making progress against our 2026 target of 20%. Additionally, we're making strides with our overall shift to more off-mall exposure, penetration reached 36% of North American square footage up 3 points from a year ago and making progress towards our goal of 50% by 2026.
As to WSS, our off-mall banner, that is a leading retailer focused on athletic footwear for the Latino family, this year, we're on track to open 26 net new locations with four new locations in the third quarter and five year-to-date in the Miami, Florida market. Lastly, as part of our real estate transformation, we closed 14 underperforming stores during the quarter. Within simplifying and creating distinct lanes, during the quarter we announced the closure of our three U.S. Atmos stores and its website, which will be wound down in January. And as we think about the Lace Up framework of simplifying and investing to grow, this applies to Atmos as we focus its growth in its core market. At Champs, we continue to make headway with our repositioning work.
While comps declined by approximately 20% in the third quarter, the banner is actually tracking better than we originally expected at the beginning of the year, including a meaningful improvement in the October exit rate compared to the first-half trend. The team is getting even sharper with Champs' positioning towards the active athlete including positive early results from store refreshment in the third quarter that's planned for an accelerated rollout into year-end. With a more distinct store experience and an even sharper viewpoint on its assortment buys into the spring, we remain optimistic about the Champs Sports' potential in the marketplace. Our third pillar is deepening our relationship with our customers, which is focused on building brand equity reaching a broader set of customers and enhancing our loyalty program and overall CRM capabilities.
On building brand equity, we are better articulating and celebrating our brand proposition via our brand-building, storytelling, and marketing. In fact, we've seen gains in our unaided brand awareness, showing that our top-of-the-funnel marketing and brand-building efforts are resonating and driving greater mindshare with consumers. I noted earlier, the launch of our global brand platform and our Height for the Holidays campaign, which was named one of the best campaigns for holidays this year by Adweek. In the campaign, you'll see globally shared content featuring our stripers as hype crew dedicated to boosting up every day sneaker lovers, with the help of some very high-profile NBA athletes such as Kevin Durant, Anthony Edwards, LaMelo Ball, and Steph Curry along with international recording artist Enisa.
The campaign kicked off to tremendous success. As I noted earlier, we've seen over 1 billion impressions since our campaign launch. We are already seeing brand perception lift against key attributes such as trend, style, and service since the media launch. This work we're doing around greater top-of-funnel marketing including incremental marketing investment is driving consideration and customer acquisition at strong incremental returns. Case in point, once again, our online customer acquisition grew strong double-digits in the third quarter in North America and helped fuel our digital outperformance in the quarter. On loyalty, 23% of our sales in the third quarter were through our current loyalty program, compared to 22% last year. We're excited to launch our FLX cash test pilot in Canada in September and we've been pleased with the early results.
Encouragingly, we've seen a rise in active members, higher average order values versus non-loyalty, and a significant number of FLX cash redemptions by first-time users suggesting broader appeal as we refocused it to offer benefits beyond primarily launch access. As we learned from our pilot here in 2023, we're making progress in our plans to roll it out to the remainder of North America in 2024 and globally in 2025. And our final pillar is to be best-in-class omni which means improving our digital presence as well as better integrating our channels with each other. Our digital penetration in the quarter increased to 17%, up 150 basis points year-over-year. When excluding East Bay, which we closed late last year. For the second consecutive quarter, combined digital comps were positive in our Foot Locker and Kids Foot Locker banners in North America, and given our improved digital execution, especially in mobile and traction with new customers company-wide we saw an accelerating nicely positive comp for all of global e-commerce in the month of October.
Our focus on site experience enhancements continues to generate significant wins, adding up to nearly $80 million of projected incremental annual sales with reduced friction points and improved experiences and features. Moving forward, we will continue to upgrade our site experience with improvements to our product listing and detail pages through elevated content, merchandising, and badging. Our plans for 2024 include the rollout of a new Foot Locker app with a new design intended to enable smoother, cleaner shopping experiences. We are focused on improving the product launch experience driving greater connectivity with the stores and greater loyalty integration. This work in combination with our marketing efforts gives us increasing confidence in our ability to achieve 25% e-commerce penetration over time.
Switching to stores, when you think about Foot Locker our stripers are essential to the overall customer experience. They are product and service experts who create a positive in-store experience with our NPS in stores already above 90. We want to maintain and even increase their passion and impact, which is why we keep them engaged in learning and ensure they have the tools they need to serve our customers. In the third quarter, we were pleased to launch a collection of new training and tools for our stripers across the globe specifically focused on driving advanced on-the-selling (ph) behaviors with the mantra of Always On, Never No. While fully launched later in the quarter we're beginning to see improved engagement and conversion in the stores.
We also finished the rollout of our upgraded handhelds to all North American stores. The technology gives our stripers improved visibility on inventory access to product information and the ability to checkout customers and improved in-store conversion. To sum up, while the retail environment remains dynamic, our teams are focused on staying nimble, particularly through this important holiday season. Even as we focus on supporting our topline and closely managing our inventory through the near term, we're continuing to go after the big future opportunities we see for our business. I'm confident, we are evolving Foot Locker to truly be all things sneakers and to be a competitive omni-channel retailer that can drive sustainable and profitable long-term growth and shareholder value.
Now, let me hand it over to Frank to provide more detail on our performance by banner.
Frank Bracken: Thank you, Mary, and good morning, everyone. Now let me comment on our third quarter performance, by category, footwear comped down high-single digits, while apparel fell mid-teens and accessories comped positive low-single digits. Starting with basketball, we are seeing continued strength in court classics and retro styles from Nike and Jordan. This includes Jordan Retro, AJ1, Air Force 1 and Dunk, which provided a meaningful connection to the culture of basketball for our men's, women's and kids consumer during the back-to-school season. Our signature basketball business also started to rebound in the third quarter. Puma's Melo ball 2 led our signature business in Q3 and was flanked by strong performance from the Nike JA 1 , LeBron in Jordan's Tatum 1.
Switching gears to the running category. New Balance continues to drive impressive growth across all banners and geographies. Importantly, this growth is fueled by multiple footwear franchises and is registering across our men's, women's and kids consumer. We were pleased to once again gain market share with the New Balance brand in Q3 and fully expect that trend to continue into the holiday season. We also remain excited about our consumers continued response to the HOKA brand and On Running. We continue to see these brands bring new customers into sneaker culture, while our banners help bring younger, more multi-cultural consumers to their brands. We expanded our door base with both brands (ph) in Q3 ahead of the holiday season, enabling access to more consumers.
And we are excited to partner with HOKA as they became the presenting sponsor of our 44th Annual Foot Locker Cross Country Championships. Thousands of elite high-school runners have been treated to footwear and apparel kits from HOKA, and we partnered to create on-site activations in content creation to fuel our social channels. Meanwhile, challenges remain within some lifestyle running platforms. It was in these areas that we remain promotional and working through inventory levels to get clean by the end of this year. While we still have work to do, I was encouraged by our results in the first weeks of November and especially during a strong Black Friday week. From a lifestyle standpoint, UGG played a meaningful role in our business this back-to-school, especially for our female consumers.
With a compelling assortment and must-have styles such as the Tasman, UGG quickly became one of our top footwear vendors for the quarter. Their strong brand connection to the fashion forward consumer gives us confidence that this trend will continue through the holiday season. Moving to apparel. We continue to see the consumer reacting positively to key items like Nike Tech Fleece and Nike Club Fleece. In our private-label brands, Locker in CSG also delivered strong sales productivity. However, the consumer has many options when it comes to apparel. And we will continue to be appropriately promotional this holiday season as we work through inventory and adjust our assortment strategies for 2024. As we look ahead to this holiday season, we are enthusiastic about a number of premium footwear opportunities we are seeing resonate with our consumers, including the scaling of Nike and Jordan signature basketball models at holiday and the excitement around our new NBA marketing partnership and the storytelling platform that it brings.
The December launch of the Jordan Retro 11 gratitude, the exclusive launch of Anthony Edwards signature basketball shoe with Adidas, the AE1, enhanced brand presentation, inventory levels and marketing with the New Balance brand, Rihanna's newest collaboration with Puma, the Fenty Creeper Phatty launching tomorrow, both online and in-stores, increased supply of trend-right Adidas models like Samba, Gazelle and Campus, seasonally relevant concepts and classics from UGG, and the continued momentum that we are experiencing and running through the HOKA and On brands. By channel, comparable sales in our stores decreased 8.5%. Traffic remained down year-on year and we continue to see some pressure on average ticket. Encouragingly, our conversion levels, while still down year-on year, saw a steady sequential improvement each month of the quarter as customers responded to our promotional efforts as well as our flow of premium must-have items.
Digital comps fell by 5.6%. However, excluding East Bay, the digital-only banner we wound down last year, digital comps were up 0.4%, including positive digital comps in October as our top of funnel marketing and efforts to improve conversion show gains. We're also pleased that our Foot Locker North-America and Kids Foot Locker banners once again saw combined positive digital comps in the quarter. By Banner and geography, in North America overall comps declined by 9.5%, including a 3.8% negative impact from the Champs sports repositioning efforts in the region. At Foot Locker North America, comps tell by 4.9%, driven by ongoing consumer and product headwinds in lifestyle running and apparel, offsetting strength in the culture of basketball and running innovation.
Encouragingly, our power in community stores continue to outcome the balance of chain in Q3, reinforcing our confidence in those new concepts. Kids Foot Locker comps were up 5%, led by a strong back-to-school in August in both stores and online. With a compelling assortment and strong back-to-school marketing, our KFL banner clearly connected with the huge consumer and their parents the season as well as the teen girl. With best-in-class partnerships with Nike, Jordan, New Balance and UGG, KFL is well-positioned to finish the year strong as we enter the holidays. At Champs sports, comps were down 20% as we prefer the Foot Locker banner for key launches and constrained supply of Nike, Inc. products during the reset. We were pleased to see comps at Champs sports improve from first half trends, especially into the month of October.
In fact, as Mary noted, the banner comped ahead of our internal plans last quarter. Each season, the Champs team continues to sharpen its positioning as the home of sports style, where they view sport inspired apparel, sneaker essentials and performance to serve the needs of the sport Inspired consumer. Looking ahead to the holiday quarter, we're encouraged by the early reads from recent capital light store refresh activity and are accelerating that work later in the fourth quarter. In fact, by year end, we expect over 240 of the Champs sports locations will be refreshed. We are also slightly adjusting our store closure plans for 2024. We will still close approximately 85 doors by the end-of-the year. However, we will push about 30 store closures into Q1 and Q2 next year so that we can continue to liquidate inventory and also spread some of the operational burden of those store closures over a slightly longer time period.
Moving to WSS. The banner saw comps down 9.4% in Q3 as the macro environment continues to weigh on that lower income consumer where WSS over indexes. During the quarter, we opened three new doors, bringing our total to 129 and are on track to open 26 net new stores for the year, or growth of approximately 20%. We're still roughly two-thirds of stores in California. We continue to see regional growth opportunities for WSS overtime. This holiday, the WSS team launched an integrated marketing campaign themed More Joy For Everyone. This is the first-ever integrated WSS campaign to include online to offline content in connection points, including several connected TV and digital spots during key customer moments. While the short-term remains challenged due to macroeconomics, we remain confident in RWS banner which is squarely positioned against the fastest growing consumer segment in America.
Turning to Europe. Overall comps were down 4.2%. As the macro-environment remains challenging across many parts of Europe, the team is focused on improving the in-store experience, conversion levels and inventory management. The European team is also focused on reigniting the Foot Locker brand in key markets. And like here in the U.S., we are seeing traction with our global brand campaign, our holiday assortments, as well as the store refreshes that we've completed thus far. In Asia-Pacific, comps were down slightly at a negative 0.5%. The Foot Locker banner saw comps down 1.2%, owing to the promotional marketplace dynamics and lower consumer confidence, especially in Australia. And finally, at Atmos comps were up 0.8% as the business continues to connect with sneaker enthusiast and delivers compelling innovation and brand stories from our partners.
Finally, we hope you saw this morning's announcement about our expansion into India in 2024. We're thrilled to be bringing our multi-brand sneaker experience to India's rapidly growing consumer class. With the help of our new partners, Metro Brands Limited and Nykaa Fashion, this new partnership will enable the renowned Foot Locker brand and striper to further expand sneaker culture, one of our core Lace Up strategies in a capital efficient manner, while also generating incremental licensing royalties. So in summary, while the environment remains dynamic, our teams continue to balance the delivery of must-have full price premium assortment this holiday, alongside strong omnichannel marketing programs, while at the same time remaining extremely vigilant about our inventory and gross margin management.
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. Now turning to third quarter results. Starting with revenue, our total sales fell by 8.6% on a comp decline of 8%, which was better than both our first half trend and our prior annual outlook of comps down 9% to 10%. As noted previously, the repositioning of Champs Sports represented a 3 point comp headwind within the quarter. By month, August comps were down high-single digits, September also was down high-single digits and October declines moderated to down mid-single digits. While traffic and conversion remain headwinds, year-over-year in the third quarter we saw steady improvements in our conversion. This was especially true in September and October as customers responded to our promotional efforts and importantly as our efforts to drive greater digital and in-store conversion took hold.
While we saw our launch business be less of a headwind in the third quarter versus the second quarter trend, we also saw some stabilization in our base business as customers responded to our fresh fall receipts in addition to our compelling promotions. Moving down the income statement, gross margin for the quarter declined 470 basis points to 27.3%. Merchandise margins fell by 370 basis points, with the majority of the decline, driven by higher promotions to move through inventory and to reach our price sensitive shopper. We also continue to see elevated shrink levels. Outside of merchandise margin, occupancy costs deleveraged by 100 basis points on the sales decline. Approximately $5 million of gross margin savings from our cost optimization programs helped to offset a portion of the pressure from promos, shrink, and occupancy deleverage.
For the third quarter, our SG&A rate came in at 22.5% representing deleverage of 100 basis points with savings from the cost optimization program of approximately $25 million more than offset by deleverage on the sales decline inflation and investments in frontline wage and technology. Collectively, our cost optimization program generated total savings of approximately $30 million in the third quarter and we still expect to capture approximately 40% of the total $350 million targeted savings within this year. Finally, non-GAAP earnings came in at $0.30, above our initial expectations as improving conversion levels, especially on digital drove a better-than-expected comp decline in addition to our cost savings measures. Moving on to our outlook for the full year and the fourth quarter, given the trends we're seeing in November, we are narrowing our full year non-GAAP EPS to a range of $1.30 to $1.40 from $1.30 to $1.50 previously.
Our outlook now embeds in $0.11 EPS contribution in the fourth quarter from the 53rd week, down from $0.15 previously as we've refined our view and finalized our commercial planning assumptions around the extra week. With the extra week, adding approximately a 1 percentage point lift to sales, total sales for the 53rd week year are expected to fall by 8% to 8.5%. Overall, our store count will be down approximately 7% in 2023 with square footage down approximately 2% as we convert more stores to larger formats. Within the fourth quarter, our outlook embeds non-GAAP earnings per share in the range of $0.26 to $0.36. Our outlook assumes a comp of down 7% to down 9%, note the lower end continues to contemplate macro risks this holiday season and the upper end continues to reflect ongoing positive response to our holiday assortments and the wins we're seeing from our strategic initiatives.
On gross margin, we expect declines of approximately 290 basis points to 310 basis points towards the range of 27.0% to 27.2%. On expenses, we expect deleverage of approximately 40 basis points to 70 basis points toward a range of 22.7% to 23.0% on the sales declines. Finally, our CapEx outlook for the year is now $275 million, down from $290 million previously due to the timing of real estate projects. Turning to the balance sheet. We ended the quarter with $187 million of cash and total debt of $449 million. At quarter end, our inventories were 10.5% above last year, down slightly from the 11% level at the start of the quarter. It's important to note that our inventory balance includes an approximate 6 point impact from the strategic pull forward of inventory to ensure smooth product flows ahead of the holiday season.
We are reaffirming our expectation to end the year with inventory flat to slightly down versus last year. In terms of shareholder distributions within the quarter, we paid $38 million in dividends and did not repurchase any stock. As we announced last quarter, our Board made the decision to pause dividends beyond the third quarter's payment to ensure financial flexibility in support of our strategic projects. We still expect to update investors around our longer-term capital allocation goals and financial targets when we report fourth quarter results early next year. And with that, operator, please open the call for questions.
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