* The balance sheet at January 28, 2017 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017.

During the third quarter of 2017, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. As a result of this, as well as certain corporate staff reductions taken to improve corporate efficiency, the Company recorded a charge of $13 million. The charge consisted primarily of severance payments and benefit continuation costs for approximately 190 associates. The following is a reconciliation of the accrual for the quarter ended October 28,2017:

As more fully discussed in Note 14, Legal Proceedings, during the second quarter of 2017 the Company recorded a $50 million pension litigation charge.

Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a non-cash charge of $6 million to write down store fixtures and leasehold improvements related to the Runners Point and Sidestep businesses.

Hurricanes Harvey, Irma, and Maria adversely affected the Company’s third quarter of 2017 operations and resulted in the closure of approximately 450 of the Company’s retail stores for varying periods of time. As of October28, 2017, 22 of these stores remain closed in Puerto Rico. The Company expects to re-open 8 of the remaining stores during the fourth quarter of 2017 and an additional 7 stores during the early part of 2018, dependent on timing of repairs and mall openings. Currently, we do not expect to re-open the balance of the stores.

The Company recorded a $7 million charge associated with its retail stores that were damaged by the hurricanes. This charge was recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 28, 2017. The charge reflects estimated property damages and other costs of $2 million and inventory write-offs of $5 million. The Company is working with its insurance providers to determine if any of the losses can be recovered.

The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows.

~~Due~~Amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe. In addition, restricted cash reflects deposits held in insurance trusts in order to satisfy the continued underperformance of our Runners Point and Sidestep stores, management determined during the third quarter of 2016 that a triggering event had occurred and, therefore, an impairment review was conducted. This evaluation resulted in a non-cash charge of $6 millionrequirement to ~~write-down store fixtures and leasehold improvements of 116 stores. The Company quantified the amount~~collateralize part of the impairment by estimating the fair value of the assets reviewed by determining the cash flows expected from the use of the assets. If the carrying value of the assets exceeded the estimated undiscounted future cash flows, an impairment charge was recorded representing the difference between the discounted future cash flow, using the Company’s weighted-average cost of capital,self-insured workers’ compensation and the carrying value. The Company also performed an impairment review of other intangible assets related to Runners Point and Sidestep. The Company calculated the fair value using a relief from royalty concept and compared the fair value to the carrying value to determine if the asset was impaired. As a result of this review, no impairment charge of these assets was required.liability claims.

~~During the third quarter of 2015, the Company recorded a $100 million pension litigation charge. Please see Note 13,~~ ~~Legal Proceedings~~ ~~for further information.~~

Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual review of goodwill and intangible assets with indefinite lives performed during the first quarter of ~~2016~~2017 did not result in the recognition of impairment. The following table provides a summary of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations.

The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:

During the thirty-nine week period ended October, ~~29, 2016,~~28 2017, the Company recorded $$21 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 810 years. Amortization expense recorded is as follows:

Estimated future amortization expense for ~~finite life~~finite-life intangible assets is as follows:

Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:

The changes in AOCL for the thirty-nine weeks ended October ~~29, 2016~~28, 2017 were as follows:

Reclassifications from AOCL for the thirty-nine weeks ended October ~~29, 2016~~28, 2017 were as follows:

On May 19, 2016, the Company entered into a new credit agreement with its banks (“2016 Credit Agreement”) that replaced the Company’s prior credit agreement (“2011 Restated Credit Agreement”). The 2016 Credit Agreement provides for a $400 million asset-based revolving credit facility maturing on May 19, 2021. During the term of the 2016 Credit Agreement, the Company may also increase the commitments by up to $200 million, subject to customary conditions. Interest is determined, at the Company’s option, by the federal funds rate plus a margin of 0.125 percent to 0.375 percent, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 1.125 percent to 1.375 percent depending on availability under the 2016 Credit Agreement. In addition, the Company will pay a commitment fee of 0.20 percent per annum on the unused portion of the commitments.

The 2016 Credit Agreement provides for a security interest in certain of the Company’s domestic store assets, including inventory assets, accounts receivable, cash deposits, and certain insurance proceeds. The Company is not required to comply with any financial covenants unless certain events of default have occurred and are continuing, or if availability under the 2016 Credit Agreement does not exceed the greater of $40 million and 10 percent of the Loan Cap (as defined in the 2016 Credit Agreement). There are no restrictions relating to the payment of dividends and share repurchases, as long as no default or event of default has occurred and the aggregate principal amount of unused commitments under the 2016 Credit Agreement is not less than 15 percent of the lesser of the aggregate amount of the commitments and the Borrowing Base, determined as of the preceding fiscal month and on a proforma basis for the following six fiscal months.

The Company uses the credit facility to support standby letters of credit in connection with insurance programs. The amount outstanding as of October 29, 2016 was not significant. The Company’s management does not currently expect to borrow under the facility in 2016. The Company paid approximately $2 million in fees relating to the new credit facility. Deferred financing fees are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method. The unamortized balance as of October 29, 2016 was $2 million. Interest expense including facility fees, related to the revolving credit facility was $1 million for the thirty-nine weeks ended October 29, 2016 and October 31, 2015.

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a practice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 9,10, Fair Value Measurements.

For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. NoThe amount of such gains or losses that were recognized in earnings ~~for any of~~during the ~~periods presented.~~thirty-nine weeks ended October 28, 2017 was not significant and there were no such gains or losses in the corresponding prior-year period. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.

The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The most significant exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At quarter-end, substantially all of the Company’s hedged forecasted transactions were less than twelve months into the future, and the Company expects ~~all~~the derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.

The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges ofwas not significant for the ~~purchase of inventory~~thirteen weeks ended October 28, 2017 and was a $1 million gain for the thirty-nine weeks ended October 28, 2017. At October 28, 2017, a $2 million gain remained in AOCL. For the thirteen and thirty-nine weeks ended October 29, 2016, the net change in fair value was a $1 million and $4 million gain, for the thirteen and the thirty-nine weeks ended October 29, 2016, and therefore decreased AOCL. At October 29, 2016, there was a $6 million gain included in AOCL. For the thirteen weeks and thirty-nine weeks ended October 31, 2015, the net change in fair value was a gain of $2 million and $1 million, respectively. The notional value of the foreign exchange contracts ~~designed~~designated as hedges outstanding at October ~~29, 2016~~28, 2017 was ~~$105~~$138 million, and these contracts mature at various dates through January ~~2018.~~2019.

The Company enters into ~~foreign exchange forward~~certain derivative contracts that are not designated as hedges, ~~in order~~such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage ~~the~~certain costs of ~~foreign-currency denominated~~foreign currency-denominated merchandise purchases, intercompany transactions, and ~~intercompany transactions.~~the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of ~~these foreign exchange forward contracts~~derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within selling, general and administrative ~~expenses.~~ expenses or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen and thirty-nine weeks ended October 28, 2017.

The net change in fair value resulted in income of $1 million for the thirteen weeks ended October 29, 2016, and was not significant for the thirty-nine weeks ended October 29, 2016. The ~~net change in fair value resulted in expense of $3 million and $1 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively. The~~ notional value of the foreign exchange contracts not ~~designed~~designated as hedges outstanding at October ~~29, 2016~~28, 2017 was ~~$12~~$2 million, and these contracts mature ~~at various dates through December 2016.~~in November 2017.

From time to time, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. No such contracts were outstanding at October ~~29, 2016.~~28, 2017.

Additionally, the Company enters into diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented. No such contracts were outstanding at October 29, 2016.

The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:

The Company’s financial assets recorded at fair value are categorized as follows:

The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:

Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized gains or losses are determined to be other than temporary. The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.

The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and therefore are classified as Level 2 instruments.

There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.

The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:

The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2. The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.

The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing net income for the period by the weighted-average number of common shares ~~outstanding.~~outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.

Contingently issuable shares of 0.3 million have been excluded from the diluted calculation as the vesting conditions have not been satisfied as of both October 29, 2016 and October 31, 2015. These shares relate to RSU awards issued in connection with the Company’s long-term incentive program.

~~11.~~The Company adopted ASU 2016-09 during the first quarter of 2017. As a result, excess tax benefits and tax deficiencies are no longer included as assumed proceeds in the calculation of diluted shares outstanding. This change was adopted prospectively.

Contingently issuable shares of 0.4 million and 0.3 million have not been included as the vesting conditions have not been satisfied as of October 28, 2017 and October 29, 2016, respectively. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.

The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. The Company also has a defined benefit pension plan covering certain employees of the Runners Point Group.

In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.

The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which are recognized as part of SG&A expense:

During the first quarter of ~~2016,~~2017, the Company made a contribution of $25 million to the U.S. qualified ~~plan and contributed another $8 million on August 31, 2016.~~plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently ~~expects~~does not expect to ~~contribute $4 million to the Canadian qualified~~make any further pension plan contributions during ~~the fourth quarter of 2016.~~ this year.Actual contributions are dependent on several factors, including the outcome of the ongoing U.S. pension litigation. See Note ~~13,~~14, Legal Proceedings, for further information.

Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans, were as follows:

The Company uses athe Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.

During the first quarter of 2017, in connection with the adoption of ASU 2016-09, we have made the accounting policy election to discontinue estimating forfeitures and will account for forfeitures as they occur.

The following table shows the Company’s assumptions used to compute ~~the~~ share-based compensation expense for awards granted during the thirty-nine weeks ended October ~~29, 2016~~28, 2017 and October ~~31, 2015:~~29, 2016:

The information in the following table covers option activity under the Company’s stock option plans for the thirty-nine weeks ended October ~~29, 2016:~~28, 2017:

The total fair value of options vested as of October 28, 2017 and October 29, 2016 was $8 million and ~~October 31, 2015 was~~ $9 million, respectively. The cash received from option exercises for the thirteen and ~~$14~~thirty-nine weeks ended October 28, 2017 was $2 million and $12 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 29, 2016 was $10 million and $24 ~~million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 31, 2015 was $25 million and $63~~ million, respectively.

The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:

The total tax benefit realized from option exercises was $2 million and $8 million for the thirteen and thirty-nine weeks ended October 28, 2017. The total tax benefit realized from option exercises was $7 million and $17 ~~million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, and was $12 million and $37~~ million for the corresponding prior-year periods.

The aggregate intrinsic value for stock options outstanding, outstanding and exercisable, and vested and expected to vest (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:

As of October ~~29, 2016~~28, 2017 there was $8$7 million of total unrecognized compensation cost ~~net of estimated forfeitures,~~ related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of ~~1.4~~1.5 years. The following table summarizes information about stock options outstanding and exercisable at October ~~29, 2016:~~28, 2017:

Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the ~~Company, and to nonemployee directors.~~Company. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive ~~program.~~program, and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were ~~678,466~~361,137 and ~~588,308~~678,466 RSU awards outstanding as of October ~~29, 2016~~28, 2017 and October ~~31, 2015,~~29, 2016, respectively.

Generally, awards fully vest after the passage of time, typically three years. However, RSU awards made in connection with the Company’s performance-based long-term incentive program are earned after the attainment of certain performance metrics and vest after the passage of time. Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vest with the passage of time. With regard to performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid or accumulated on RSU awards. Compensation expense is recognized using the market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.

Restricted stock and RSU activity for the thirty-nine weeks ended October ~~29, 2016~~28, 2017 is summarized as follows:

The total value of awards for which restrictions lapsed during the thirty-nine weeks ended October 28, 2017 and October 29, 2016 ~~and October 31, 2015~~ was $8$14 million and ~~$10~~$8 million, respectively. As of October ~~29, 2016,~~28, 2017, there was ~~$16~~$10 million of total unrecognized compensation cost ~~net of forfeitures,~~ related to nonvested restricted awards.

Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or disposed of by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims.

The Company and the Company’s U.S. retirement plan are defendants in a class action (Osberg v. Foot Locker Inc. et ano., filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff’s claims were for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and violation of the statutory provisions governing the content of the Summary Plan Description. ~~The~~During the third quarter of 2015, the trial ~~was held in July 2015 and the~~ court ~~issued a decision in September 2015 in favor of the class on the foregoing claims. The court ordered~~ruled that the ~~Plan~~retirement plan be reformed. As a result of this development, the Company determined that it is probable a liability exists. The Company’s reasonable estimate of this liability is a range between $100 million and $200 million, with no amount within that range more probable than any other amount. Therefore, in accordance with U.S. GAAP, the Company recorded a charge of $100 million pre-tax ($61 million after-tax) induring the third quarter of 2015. ~~This~~

The Company appealed the trial court’s decision, and the judgment was stayed pending the outcome of the appeal process. During the second quarter of 2017, the Second Circuit Court of Appeals affirmed the trial court’s decision. In light of this development, the Company reassessed its estimate of the liability. The Company’s updated reasonable estimate of this liability is a range between $150 million and $260 million. The high end of the range reflects the estimated cost to reform the retirement plan in accordance with the court ruling; however, it excludes any legal fees that may be awarded to plaintiff’s counsel. No amount within that range is more probable than any other amount and therefore, in accordance with U.S. GAAP, the Company recorded a charge of $50 million pre-tax ($30 million after-tax) during the second quarter of 2017, bringing the cumulative amount accrued for this matter to $150 million. The accrual has been classified as a long-term liability. ~~The Company has appealed the court’s decision, and the judgment has been stayed pending the outcome of the appeal.~~ The Company will continue to vigorously defend itself in this ~~case.~~case and on November 8, 2017 filed a Petition for Writ of Certiorari with the U.S. Supreme Court. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company.

Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole, based upon current knowledge and taking into consideration current accruals. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered into that could adversely affect the Company’s operating results or cash flows in a particular period.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Business Overview~~

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Lady Foot Locker, Kids Foot Locker, SIX:02, Champs Sports, Footaction, Runners Point, and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites, and catalogs.

The Foot Locker brand is one of the most widely recognized names in the markets in which the Company operates, epitomizing premium quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker, and Kids Foot Locker, as well as Footlocker.com, its direct-to-customer business. Through various marketing channels, including broadcast, digital, social, print, and various sports sponsorships and events, the Company reinforces its image with a consistent message — ~~namely, that it is the destination for athletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment.~~

~~Store Count~~

At October 29, 2016, the Company operated 3,394 stores as compared with 3,383 and 3,432 stores at January 30, 2016 and October 31, 2015, respectively. A total of 71 franchised stores were operating at October 29, 2016, as compared with 64 stores at both January 30, 2016 and October 31, 2015. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.

~~Reconciliation of Non-GAAP Measures~~

The Company presents certain non-GAAP measures, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjusted diluted earnings per share. The Company presents these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business. ~~In addition, these non-GAAP measures are useful in assessing the Company’s progress in achieving its long-term financial objectives.~~ The non-GAAP financial information is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP. The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items.

~~Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively.~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29,

October 31,

October 29,

October 31,

2016

2015

2016

2015

($ in millions)
Pre-tax income:

Income before income taxes

$
227

$
117

$
723

$
592
Pre-tax amounts excluded from GAAP:

Impairment charge

6

—

6

—
Pension litigation charge

—

100

—

100
Adjusted income before income taxes (non-GAAP)

$
233

$
217

$
729

$
692

~~Reconciliation of Non-GAAP Measures – (continued)~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29,

October 31,

October 29,

October 31,

2016

2015

2016

2015

($ in millions)

After-tax income:

Net income

$
157

$
80

$
475

$
383

After-tax adjustments excluded from GAAP:

Tax benefit related to intellectual property reassessment

(10)

—

(10)

—

Impairment charge, net of income tax benefit of $1, $—, $1, $— million, respectively

5

—

5

—

Pension litigation charge, net of income tax benefit of $—, $39, $—, and $39 million, respectively

—

61

—

61

Adjusted net income (non-GAAP)

$
152

$
141

$
470

$
444

Earnings per share:

Diluted EPS

$
1.17

$
0.57

$
3.50

$
2.71

Diluted EPS amounts excluded from GAAP:

Tax benefit related to intellectual property reassessment

(0.07)

—

(0.07)

—

Impairment charge

0.03

—

0.03

—

Pension litigation charge

—

0.43

—

0.43

Adjusted diluted EPS (non-GAAP)

$
1.13

$
1.00

$
3.46

$
3.14

~~During the thirteen weeks ended October 29, 2016, the Company~~ recorded a non-cash impairment charge of $6 million ($5 million after-tax or $0.03 per share), to write down store fixtures and leasehold improvements related to our Runners Point and Sidestep stores. Additionally during the third quarter of 2016, the Company performed a scheduled reassessment of the value of intellectual property previously provided to its European business by Foot Locker in the U.S. during the fourth quarter of 2012. Driven by the success of the European business since the implementation of our tax planning strategy, the higher valuation resulted in catch-up tax deductions that reduced tax expense by $10 million, or $0.07 per share.

~~During the third quarter of 2015, the Company recorded a charge of $100 million, $61 million after-tax or $0.43 per share, related to pension litigation.~~

~~Please see Item 1. “Financial Statements,” Note 3,~~ ~~Impairment and Litigation Charges~~ ~~and Note 13,~~ ~~Legal Proceedings~~ ~~for further information on these items.~~

~~The Company estimates the tax effects of each of the non-GAAP adjustments individually by applying the applicable marginal tax rate to each of the respective items.~~

~~Foreign Currency Fluctuations~~

Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts using average foreign exchange rates for the same period of the prior year. We believe that presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business.

~~Results of Operations~~

~~Sales~~

All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations.

Sales increased by $92 million, or 5.1 percent, to $1,886 million for the thirteen weeks ended October 29, 2016, from $1,794 million for the thirteen weeks ended October 31, 2015. For the thirty-nine weeks ended October~~29,~~2016, sales of $5,653 million increased 4.6 percent from sales of $5,405 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, sales increased by 5.5 percent and 4.9 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively.

~~Comparable-store sales increased by 4.7 and 4.0 percent for the thirteen and thirty-nine weeks ended October29,2016, respectively.~~

~~Gross Margin~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29,

October 31,

October 29,

October 31,

2016

2015

2016

2015
Gross margin rate

33.9
%

33.8
%

34.0
%

33.9
%
Basis point change in the gross margin rate

10

10

Components of the change-

Merchandise margin rate improvement

10

20

Higher occupancy and buyers' compensation expense rate

—

(10)

~~The gross margin rate improved by 10 basis points for both the thirteen and thirty-nine weeks ended October29,2016.~~ ~~This reflected a~~ merchandise margin rate improvement of 10 and 20 basis points for the thirteen and thirty-nine weeks ended October 29, 2016, respectively. The change in the gross margin rate also reflected an increase in the occupancy and buyer’s compensation expense rate of 10 basis points for the thirty-nine weeks ended October 29, 2016.

The merchandise margin rate improvement for both the quarter and year-to-date periods of 2016 primarily reflected a lower markdown rate within the Athletic Stores segment, as we increased full-price selling. This improvement was partially offset by increased promotional activity within our Direct-to-Customers segment for both the current and year-to-date periods. Also pressuring the gross margin rate was the fact that certain high-profile locations were closed for remodeling for all or part of the year, which increased the occupancy expense rate since these locations were not generating sales while incurring tenancy costs.

~~Selling, General and Administrative Expenses (SG&A)~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)

SG&A

$
366

$
352

$
1,077

$
1,028

$ Change

$
14

$
49

$

% Change

4.0
%

4.8
%

SG&A as a percentage of sales

19.4
%

19.6
%

19.1
%

19.0
%

SG&A increased by $14 million and $49 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared with the corresponding prior-year periods. The effect of foreign currency fluctuations for the current quarter and year-to-date periods was not significant.

~~Comparing the SG&A rate to the prior-year periods, the rate decreased by 20 basis points for the thirteen weeks ended October 29, 2016, while it increased by 10 basis points for~~ ~~the thirty-nine weeks ended October 29, 2016.~~ The change in the SG&A rate was primarily driven by diligent expense management by our Athletic Stores segment, partially offset by an increase in marketing costs incurred by our Direct-to-Customers segment in order to drive traffic to its websites. While the higher expense rate within Direct-to-Customers segment continued during the third quarter, it was more pronounced in the first half of 2016, and therefore negatively affected the year-to-date comparison.

Additionally, corporate expense for the thirty-nine weeks ended October 29, 2016 included an increase of $3 million in costs associated with the relocation of the corporate headquarters within New York City.

~~Depreciation and Amortization~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)

Depreciation and amortization

$
40

$
38

$
118

$
109

$ Change

$
2

$
9

% Change

5.3
%

8.3
%

Depreciation and amortization increased by $2 million and $9 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared with the corresponding prior-year periods. The increase in depreciation and amortization reflected increased capital spending ~~on store projects, enhancing our digital sites, and various other technologies and infrastructure.~~

~~Impairment and Litigation Charges~~

The Company recorded an impairment charge totaling $6 million ($5 million after-tax or $0.03 per diluted share) relating to the write-down of store fixtures and leasehold improvements for 116 of our Runners Point and Sidestep stores.

~~During the third quarter of 2015, the Company recorded a $100 million pension litigation charge ($61 million after-tax or $0.43 per diluted share).~~ This charge relates to a class action in which the plaintiffs alleged that the Company failed to properly disclose the effects of the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula. In September 2015, the court ruled in favor of the plaintiffs and issued a decision ordering that the pension plan be reformed. The Company is appealing the court’s decision, and the judgment has been stayed pending the outcome of the appeal.

~~Please see Item 1. “Financial Statements,” Note 3,~~ ~~Impairment and Litigation Charges~~ ~~and Note 13,~~ ~~Legal Proceedings~~ ~~for further information on these items.~~

~~Interest Expense, Net~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)
Interest expense

$
3

$
3

$
9

$
8
Interest income

(2)

(2)

(7)

(5)
Interest expense, net

$
1

$
1

$
2

$
3

Net interest expense was unchanged for the thirteen weeks ended October 29, 2016 as compared with the corresponding prior-year period. For the thirty-nine weeks ended October 29, 2016 net interest expense decreased by $1 million compared with the corresponding prior-year period, which primarily represented increased income due to higher average interest rates on our cash investments.

~~Income Taxes~~

The Company recorded income tax provisions of $70 million and $248 million, which represented effective tax rates of 30.9 percent and 34.4 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively. For the thirteen and thirty-nine weeks ended October 31, 2015, the Company recorded income tax provisions of $37 million and $209 million, which represented effective tax rates of 31.7 percent and 35.3 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate adjusted for discrete items that occur within the periods presented.

The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. For the thirteen and thirty-nine weeks ended October 29, 2016, the changes in the tax reserves were not significant. Included in the thirteen weeks and thirty-nine weeks ended October 31, 2015 were tax benefits of $1 million and $2 million, respectively, from reserve releases due to expiration of statutes of limitation and settlements of tax examinations.

During the third quarter of 2016, the Company performed a scheduled reassessment of the value of the intellectual property provided to its European business by Foot Locker in the U.S. during the fourth quarter of 2012. Driven by the recent success of the Foot Locker business in Europe, the new, higher valuation resulted in catch-up deductions that reduced tax expense by $10 million. The higher valuation will also result in a current year benefit, of which approximately $2 million was recognized during the third quarter with an additional $1 million that will be recognized during the fourth quarter.

During the third quarter of 2015, the Company recorded a pension-related litigation charge of $100 million with a related tax benefit of $39 million. The thirty-nine weeks ended October 31, 2015 also included tax benefits totaling $1 million related to an adjustment to deductible compensation costs resulting from executive changes and a Canadian provincial tax rate change.

Excluding the reserve releases and other discrete items mentioned above, the effective tax rate for the thirteen and thirty-nine weeks ended October 29, 2016 decreased as compared with the corresponding prior-year periods, due primarily to the current year effect of the higher valuation of the intellectual property provided from Foot Locker U.S. to its European business.

The Company currently expects its fourth quarter and full-year tax rate to approximate 36 percent and 35 percent, respectively, excluding the effect of any additional nonrecurring items that may occur. The actual tax rates will depend primarily on the level and mix of income earned in the United States as compared with its international operations.

~~Net Income~~

~~For the thirteen weeks ended October 29, 2016, net income increased by $77 million, or 96.3 percent, and~~ ~~diluted earnings per share increased by 105.3 percent to $1.17 per share,~~ ~~as compared with the corresponding prior-year period~~. For the thirty-nine weeks ended October 29, 2016, net income increased by $92 million, or 24.0 percent, above the corresponding prior-year period. Diluted earnings per share increased by 29.2 percent to $3.50 per share. In addition to the growth in net income for both the quarter and year-to-date periods, the increase in diluted earnings per share was also positively affected by the Company’s continued share repurchase program.

~~Segment Information~~

The Company has determined that its reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest expense. The following table summarizes results by segment:

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)
Sales

Athletic Stores

$
1,644

$
1,571

$
4,955

$
4,755
Direct-to-Customers

242

223

698

650

$
1,886

$
1,794

$
5,653

$
5,405
Operating Results

Athletic Stores (1)

$
213

$
206

$
683

$
649
Direct-to-Customers

32

31

92

98
Division profit

245

237

775

747
Less: Pension litigation charge (2)

—

100

—

100
Less: Corporate expense

17

20

53

54
Operating profit

228

117

722

593
Other income (3)

—

1

3

2
Earnings before interest expense and income taxes

228

118

725

595
Interest expense, net

1

1

2

3
Income before income taxes

$
227

$
117

$
723

$
592


~~(1)~~	Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write-down long-lived store assets of Runners Point and Sidestep. See Item 1. “Financial Statements,” Note 3, ~~Impairment and Litigation Charges~~ ~~for further information.~~
~~(2)~~	Included in the thirteen and thirty-nine weeks ended October 31, 2015 is a pre-tax litigation charge of $100 million relating to the pension litigation matter. Please see Item 1. “Financial Statements,” Note 13, Legal Proceedings for further information.
~~(3)~~	Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts.

~~Athletic Stores~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)

Sales

$
1,644

$
1,571

$
4,955

$
4,755

$ Change

$
73

$
200

$

% Change

4.6
%

4.2
%

Division profit

$
213

$
206

$
683

$
649

Division profit margin

13.0
%

13.1
%

13.8
%

13.6
%

Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased by 5.0 percent and 4.5 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared with the corresponding prior-year period. The sales increase for both the quarter and year-to-date periods of 2016 was driven by our domestic banners, led by Champs Sports. Our international sales growth for both the quarter and the full year was led by our Canadian businesses. Foot Locker Europe’s sales increased for both the quarter and year-to-date periods, with the majority of the increase coming from the first half of the year, as the third quarter was negatively affected by reduced traffic. The Runners Point and Sidestep banners continued to experience sales declines. Both of

these banners continue to face assortment and traffic challenges. We are focused on improving these banners by better diversifying our product offerings, along with providing a more elevated in-store experience.

Comparable-store sales increased by 4.0 percent and 3.5 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively. These increases were primarily driven by our continued success in footwear. Children’s and women’s footwear sales increased across multiple banners for the current quarter and year-to-date periods, led by court classic and casual styles. The increase in men’s footwear sales was largely driven by casual styles, especially in our Champs Sports banner. Our basketball footwear business was down slightly for the quarter, but represented a positive comparable gain for the year-to-date period led, by Foot Locker Canada.

Apparel sales also experienced gains for both the quarter and year-to-date period. The strongest contributors were sales of men’s branded and private label apparel at Champs Sports. Additionally, Foot Locker Europe’s apparel sales benefited during the year-to-date period with gains in men’s branded apparel.

~~Athletic Stores division profit increased 3.4 percent and 5.2 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively,~~ ~~as compared with the corresponding prior-year period.~~ Division profit, as a percentage of sales decreased to 13.0 percent and increased to 13.8 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared to the corresponding prior-year period. During the third quarter of 2016, a $6 million impairment charge was recorded to write down the value of store fixtures and leasehold improvements for 116 Runners Point and Sidestep stores. Excluding the effect of the impairment charge, division profit increased as a percentage of sales by 20 and 30 basis points for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared to the corresponding prior-year periods. The division profit rate improvement, excluding the effect of the impairment charge, was primarily due to an improved merchandise margin rate, reflecting a lower markdown rate for both the quarter and year-to-date periods.

~~Direct-to-Customers~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)

Sales

$
242

$
223

$
698

$
650

$ Change

$
19

$
48

% Change

8.5
%

7.4
%

Division profit

$
32

$
31

$
92

$
98

Division profit margin

13.2
%

13.9
%

13.2
%

15.1
%

Comparable-sales for the Direct-to-Customers segment increased by 8.9 percent and 7.7 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively. This increase was primarily a result of the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally, which was partially offset by declines in our Eastbay, Runners Point and Sidestep ecommerce businesses.

Footwear continued to be our strongest category for both the quarter and year-to-date periods. This category was led by gains from the Jordan brand, women’s casual styles, and children’s footwear, each of which posted strong sales gains during the quarter and year-to-date periods. Eastbay’s sales decreased for the quarter and year-to-date periods, which reflected the customer’s continued shift away from performance-related product.

Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 29, 2016 increased by $1 million and decreased by $6 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, was 13.2 percent for both the thirteen and thirty-nine weeks ended October 29, 2016 as compared with 13.9 percent and 15.1 percent for the corresponding prior-year periods. The division profit rate decline for the quarter and year-to-date periods primarily related to higher marketing related costs coupled with a lower gross margin rate within our domestic ecommerce business due to higher promotional activity.

~~Corporate Expense~~

Thirteen weeks ended

Thirty-nine weeks ended

October 29, 2016

October 31, 2015

October 29, 2016

October 31, 2015

($ in millions)

Corporate expense

$
17

$
20

$
53

$
54

$ Change

$
(3)

$
(1)

Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $11 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, which increased by $2 million and $3 million for the quarter and year-to-date periods, respectively, as compared with the corresponding prior-year periods.

The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $3 million and $7 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, thus reducing corporate expense. Excluding the corporate allocation change as well as the change attributable to depreciation and amortization, corporate expense decreased by $2 million for the thirteen weeks ended October 29, 2016, and increased by $3 million for the thirty-nine weeks ended October 29, 2016. The increase for the thirty-nine weeks ended October~~29,~~2016 was primarily due to costs incurred to relocate our corporate headquarters within New York City, which was completed during the first quarter. During 2016 we incurred $4 million of relocation-related expenses, as compared with $1 million during the prior-year period.

~~Liquidity and Capital Resources~~

~~Liquidity~~

The Company’s primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been: to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; to make retirement plan contributions, quarterly dividend payments, and interest payments; and to fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of October 29, 2016, approximately $285 million remained available under the Company’s $1 billion share repurchase program.

~~As discussed further in the~~ ~~Legal Proceedings~~ ~~note under “Item 1. Financial Statements,” during the third quarter of 2015 the Company recorded a pre-tax charge of $100 million,~~ ~~($61 million after-tax).~~ In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company. The $100 million charge has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeals process can be lengthy. The pension plan is currently sufficiently funded to absorb a $100 million liability and, accordingly, we do not anticipate the need to make any pension contributions in the near term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency

fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.

~~Operating Activities~~

Thirty-nine weeks ended

October 29,

October 31,

2016

2015

($ in millions)
Net cash provided by operating activities
$
454

$
414
$ Change
$
40

The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include impairment charges, depreciation and amortization, share-based compensation expense, and share-based related tax benefits. The increase from the prior year primarily reflects the Company’s earnings strength. This was partially offset by $33 million of contributions to the U.S. qualified pension plan, which is an increase of $29 million as compared with the contribution made in the corresponding prior-year period.

~~Investing Activities~~

Thirty-nine weeks ended

October 29,

October 31,

2016

2015

($ in millions)
Net cash used in investing activities
$
193

$
174
$ Change
$
19

Capital expenditures were $20 million higher than the prior year. The increase was due, in part, to the build out of our new corporate headquarters and two flagship stores in New York City. The Company also increased spending on corporate technology projects. The Company’s full-year forecast for capital expenditures is expected to be approximately $290 million, which includes $220 million related to the remodeling or relocation of approximately 220 existing stores and opening approximately 100 new stores, as well as $70 million for the development of information systems, websites, infrastructure, and our corporate headquarters relocation within New York City. The prior year reflected a $2 million asset acquisition of 10 previously franchised Runners Point and Sidestep stores in Switzerland, of which $1 million was paid during the third quarter of 2015.

~~Financing Activities~~

Thirty-nine weeks ended

October 29,

October 31,

2016

2015

($ in millions)
Net cash used in financing activities
$
421

$
322
$ Change
$
99

During the thirty-nine weeks ended October 29, 2016, the Company repurchased 5,874,643 shares of its common stock for $352 million, as compared with 5,050,000 shares repurchased for $316 million in the corresponding prior-year period. The Company declared and paid dividends during the first three quarters of 2016 and 2015 of $111 million and $105 million, respectively. This represented quarterly rates of $0.275 and $0.25 per share for 2016 and 2015, respectively. Additionally, the Company received proceeds from the issuance of common stock in connection with employee stock programs of $28 million and $68 million for the thirty-nine weeks ended October 29, 2016 ~~and October 31, 2015, respectively.~~

~~In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $16 million and $33 million as a financing activity for~~ ~~the thirty-nine weeks ended October 29, 2016~~

and October 31, 2015, respectively. The reduction in the amount of the excess tax benefit primarily reflected a lower number of stock option exercises during the first three quarters of 2016 as compared with the prior year.

In May 2016, the Company entered into a new $400 million credit agreement and in connection with this transaction the Company paid fees of $2 million. The activity for the thirty-nine weeks ended October 31, 2015 also reflected payments made on capital lease obligations of $2 million.

~~Critical Accounting Policies and Estimates~~

There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended January 30, 2016.

~~Recent Accounting Pronouncements~~

~~Descriptions of the recently issued accounting principles are included Item 1. “Financial Statements” in Note 1,~~ ~~Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.~~

Disclosure Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the U.S. Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key suppliers for a majority of its merchandise purchases (including a significant portion from one key supplier), cybersecurity breaches, pandemics and similar major health concerns, unseasonable weather, deterioration of global financial markets, economic conditions worldwide, deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.Commission.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the ~~2015~~2016 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

Business Overview

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites and catalogs.

The Foot Locker brand is one of the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. This brand equity has aided our ability to successfully develop and increase our portfolio of complementary retail store formats, such as Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, part of our direct-to-customer business. Through various marketing channels and experiences, including social, digital, broadcast, and print media, as well as various sports sponsorships and events, we reinforce our image with a consistent message — namely, that we are the destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.

Store Count

At October 28, 2017, we operated 3,349 stores as compared with 3,363 and 3,394 stores at January 28, 2017 and October 29, 2016, respectively.

During the first quarter of 2017, the Company entered into a franchise agreement with Fox-Wizel Ltd, for franchised stores operating in Israel. There are 13 franchised stores operating in Israel as of October 28, 2017. Also, during the second quarter of 2017, the Company terminated its franchise agreement with the third party that operated stores in the Republic of Korea.

A total of 97 franchised stores were operating at October 28, 2017, as compared with 74 and 71 stores at January 28, 2017 and October 29, 2016, respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.

Reconciliation of Non-GAAP Measures

The Company presents certain non-GAAP measures, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjusted diluted earnings per share. Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates.

We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements. In addition, these non-GAAP measures are useful in assessing the Company’s progress in achieving its long-term financial objectives.

The non-GAAP financial information is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP. The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items.

Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.



	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
	($ in millions)
Pre-tax income:
Income before income taxes	$	156	$	227	$	498	$	723
Pre-tax amounts excluded from GAAP:
Reorganization costs		13		—		13		—
Pension litigation charge		—		—		50		—
Impairment charge		—		6		—		6
Adjusted income before income taxes (non-GAAP)	$	169	$	233	$	561	$	729

After-tax income:
Net income	$	102	$	157	$	333	$	475
After-tax adjustments excluded from GAAP:
Reorganization costs, net of income tax benefit of $5 million		8		—		8		—
Pension litigation charge, net of income tax benefit of $20 million		—		—		30		—
Impairment charge, net of income tax benefit of $1 million		—		5		—		5
Tax benefit related to intellectual property reassessment		—		(10)		—		(10)
Adjusted net income (non-GAAP)	$	110	$	152	$	371	$	470

Earnings per share:
Diluted EPS	$	0.81	$	1.17	$	2.55	$	3.50
Diluted EPS amounts excluded from GAAP:
Reorganization costs		0.06		—		0.06		—
Pension litigation charge		—		—		0.23		—
Impairment charge		—		0.03		—		0.03
Tax benefit related to intellectual property reassessment		—		(0.07)		—		(0.07)
Adjusted diluted EPS (non-GAAP)	$	0.87	$	1.13	$	2.84	$	3.46

During the third quarter ended October 28, 2017, the Company reduced and reorganized its division and corporate staff which resulted in a charge of $13 million, $8 million after-tax or $0.06 per share. The substantial majority of the charge is for severance and related costs.

During the second quarter ended July 29, 2017, the Company recorded a charge of $50 million, $30 million after-tax or $0.23 per share, related to pension litigation. Please see Item 1. “Financial Statements,” Note 14, Legal Proceedings for further information on this charge.

In the third quarter of 2016, the Company recorded a $6 million, $5 million after-tax or $0.03 per share, impairment charge associated with underperforming store assets of Runners Point and Sidestep. Also during the third quarter of 2016, the Company’s scheduled triennial reassessment of the value of intellectual property provided to our European business by Foot Locker in the U.S. resulted in a $10 million tax reduction.

Results of Operations

Sales

Sales decreased by $16 million, or 0.8 percent, to $1,870 million for the thirteen weeks ended October 28, 2017, from $1,886 million for the thirteen weeks ended October 29, 2016. For the thirty-nine weeks ended October 28, 2017, sales decreased by 1.4 percent to $5,572 million from sales of $5,653 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, sales decreased by 2.3 and 1.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Comparable-store sales decreased by 3.7 and 2.9 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. For both periods, this reflected a decline in our Athletic Stores segment, partially offset by an increase in our Direct-to-Customers segment.

Gross Margin


	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
Gross margin rate	31.0	%	33.9	%	31.6	%	34.0	%
Basis point change in the gross margin rate	(290)				(240)
Components of the change-
Decline in the merchandise margin rate	(200)				(140)
Higher occupancy and buyers' compensation expense rate	(90)				(100)

Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities. The gross margin rate decreased by 290 and 240 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.

The merchandise margin rate decline for both the quarter and year-to-date periods primarily reflected a higher markdown rate in both our Athletic Stores and Direct-to-Customers segments as the Company was more promotional. Additionally, our Direct-to-Customers segment was also somewhat affected by higher shipping and handling expense. The increased promotional activity was necessary to stimulate sales and ensure that inventory levels remained current and in line with the pace of sales.

The higher occupancy and buyers’ compensation expense rate for both the quarter and year-to-date periods reflected higher rent-related costs coupled with a decrease in sales. Higher occupancy costs are primarily attributed to several high-profile location leases entered into recently, partially offset by rent reductions in certain other stores.

Selling, General and Administrative Expenses (SG&A)



	Thirteen weeks ended						Thirty-nine weeks ended
	October 28,			October 29,			October 28,			October 29,
	2017			2016			2017			2016
	($ in millions)
SG&A	$	368		$	366		$	1,078		$	1,077
$ Change	$	2					$	1		$
% Change		0.5	%					0.1	%
SG&A as a percentage of sales		19.7	%		19.4	%		19.3	%		19.1	%

For the thirteen weeks ended October 28, 2017, excluding the effect of foreign currency fluctuations, SG&A expense decreased by $4 million as compared with the corresponding prior-year period. The effect of foreign currency fluctuations for the thirty-nine weeks ended October 28, 2017 was not significant. Comparing the SG&A expense rate with the prior-year periods, the rate increased by 30 and 20 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.

The higher SG&A expense rate for both the quarter and year-to-date periods, as compared with the corresponding prior-year periods, was driven by the Athletic Stores segment and was primarily related to higher store-related compensation costs and hurricane-related expenses. Wages were higher primarily due to minimum wage increases, as well as related payroll taxes and benefits. As a percentage of sales, store wages and associated costs increased due to the decline in sales as we were not able to reduce staffing levels commensurate with the rate of decline in sales. In addition, included in SG&A was $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses. These hurricane-related expenses negatively affected the SG&A expense rate for the quarter by 40 basis points. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting decreased publicity and incentive compensation expenses. Additionally, corporate expense significantly declined during the third quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.

Depreciation and Amortization



	Thirteen weeks ended					Thirty-nine weeks ended
	October 28,			October 29,		October 28,			October 29,
	2017			2016		2017			2016
	($ in millions)
Depreciation and amortization	$	44		$	40	$	127		$	118
$ Change	$	4				$	9
% Change		10.0	%				7.6	%

Depreciation and amortization increased by $4 million and $9 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in depreciation and amortization reflected ongoing capital spending on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.

Interest Expense, Net



	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
	($ in millions)
Interest expense	$	3	$	3	$	9	$	9
Interest income		(3)		(2)		(10)		(7)
Interest (income) / expense, net	$	—	$	1	$	(1)	$	2

Interest income increased by $1 million and $3 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods, while interest expense was unchanged. The increase in interest income was due to higher average interest rates earned on our cash investments.

Income Taxes

The Company recorded income tax provisions of $54 million and $165 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, which represented effective tax rates of 34.7 percent and 33.2 percent. For the thirteen and thirty-nine weeks ended October 29, 2016, the Company recorded income tax provisions of $70 million and $248 million, which represented effective tax rates of 30.9 percent and 34.4 percent, respectively.

The Company’s interim provision for income taxes is measured using an annual effective tax rate adjusted for discrete items that occur within the periods presented. The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The changes in the tax reserves were not significant for any of the periods presented.

For the thirteen weeks ended October 28, 2017, the Company recorded excess tax benefits of $2 million from stock-based compensation reflecting the change required by ASC 718 as well as a tax benefit of $5 million related to a staff reduction and reorganization charge of $13 million. Additionally, for the thirty-nine weeks ended October 28, 2017, the Company recorded a pension-related litigation charge of $50 million with a related tax benefit of $20 million. The litigation charge and the reorganization costs reduced the overall effective rate because they reduced the proportion of the Company’s worldwide income taxed in jurisdictions where the tax rates are higher.

For the thirteen and thirty-nine weeks ended October 29, 2016, due to a scheduled reassessment the Company increased the value of the intellectual property provided to its European business by Foot Locker in the U.S. The higher valuation resulted in catch-up deductions that reduced 2016’s tax expense by $10 million.

Excluding the effects of the excess tax benefits, the litigation charge, the reorganization costs, and the change in the value of the intellectual property, there was no significant change in the effective tax rate for the thirteen and thirty-nine weeks ended October 28, 2017 as compared with the corresponding prior-year periods.

The Company currently expects its full-year tax rate to approximate 34 percent excluding the effect of any nonrecurring items that may occur and the effects of potential tax reform. The actual tax rate will vary depending on the level of stock option exercise activity and the stock price at exercise. Additionally, the actual tax rate will also vary depending on the level and mix of income earned in the United States, as compared with our international operations.

Net Income

For the thirteen weeks ended October 28, 2017, net income decreased by $55 million, or 35 percent, and diluted earnings per share decreased by 31 percent to $0.81 per share, as compared with the corresponding prior-year period. For the thirty-nine weeks ended October 28, 2017, net income decreased by $142 million, or 30 percent, and diluted earnings per share decreased by 27 percent to $2.55 per share, as compared with the corresponding prior-year period.

Segment Information

We have two reportable segments, Athletic Stores and Direct-to-Customers, which are based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:



	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
Sales	($ in millions)
Athletic Stores	$	1,612	$	1,644	$	4,819	$	4,955
Direct-to-Customers		258		242		753		698
Total sales	$	1,870	$	1,886	$	5,572	$	5,653



	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
Operating Results	($ in millions)
Athletic Stores (1)	$	154	$	213	$	504	$	683
Direct-to-Customers		26		32		88		92
Division profit		180		245		592		775
Less: Pension litigation and reorganization charges (2) (3)		13		—		63		—
Less: Corporate expense		12		17		34		53
Operating profit		155		228		495		722
Other income (4)		1		—		2		3
Earnings before interest expense and income taxes		156		228		497		725
Interest (income) / expense, net		—		1		(1)		2
Income before income taxes	$	156	$	227	$	498	$	723


(1)	Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write-down long-lived store assets of Runners Point and Sidestep.
(2)	Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a charge of $50 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.
(3)	Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a $13 million pre-tax charge related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017. The substantial majority of the charge is for severance and related costs.
(4)	Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries and the changes in fair value, premiums paid, and realized gains and losses associated with foreign currency option contracts.

Athletic Stores



	Thirteen weeks ended						Thirty-nine weeks ended
	October 28,			October 29,			October 28,			October 29,
	2017			2016			2017			2016
	($ in millions)
Sales	$	1,612		$	1,644		$	4,819		$	4,955
$ Change	$	(32)					$	(136)		$
% Change		(1.9)	%					(2.7)	%
Division profit	$	154		$	213		$	504		$	683
Division profit margin		9.6	%		13.0	%		10.5	%		13.8	%

Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 3.6 percent and 2.8 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The sales decline for the current quarter and year-to-date periods, excluding the effect of foreign currency fluctuations, was across almost all store banners, with the exception of Footaction and Foot Locker Canada, which increased sales.

Comparable-store sales decreased by 5.1 percent and 4.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Foot Locker Canada generated positive comparable-store sales for the quarter and year-to-date periods, while Footaction was positive for the third quarter but not the year-to-date period. All other store banners generated negative comparable-store sales for both periods. The overall decline in comparable-store sales was due to a decrease in footwear sales for both the quarter and year-to-date periods. The footwear sales decline in the quarter was across men’s, women’s, and children’s, whereas the year-to-date decline was related primarily to declines in children’ and men’s footwear. A comparable-sales increase in men’s lifestyle running footwear for both the quarter and year-to-date periods for the majority of our store banners was not enough to compensate for the comparable-store declines in basketball and court lifestyle footwear. The decline in most other footwear categories for both the quarter and year-to-date periods was the result of insufficient product availability of certain styles and the lack of product innovation in select categories to suit our customers’ quickly-changing style preferences. Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter. The decline in women’s footwear was most significant in Foot Locker, Lady Foot Locker, and Foot Locker Europe. Sales of children’s footwear declined for the year-to-date period due primarily by declines in the basketball category.

The decline in footwear sales was partially offset by gains in apparel sales, as the majority of our store banners experienced apparel sales gains for both the thirteen and thirty-nine weeks ended October 28, 2017. Most of our banners benefited from gains in men’s branded apparel and outerwear, which was partially offset by declines in private label and licensed apparel for both the quarter and year-to-date periods. Additionally, women’s apparel performed well for our SIX:02 banner for both the quarter and year-to-date periods, although this was largely driven by increased markdowns. For the quarter and year-to-date periods, children’s apparel experienced both total and comparable-store sales increases as compared to the corresponding prior-year periods.

Athletic Stores division profit decreased by 27.7 percent and 26.2 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The decline in division profit margin for both the quarter and year-to-date periods was attributable primarily to a lower gross margin rate, coupled with a higher SG&A expense rate.

Direct-to-Customers



	Thirteen weeks ended						Thirty-nine weeks ended
	October 28,			October 29,			October 28,			October 29,
	2017			2016			2017			2016
	($ in millions)
Sales	$	258		$	242		$	753		$	698
$ Change	$	16					$	55
% Change		6.6	%					7.9	%
Division profit	$	26		$	32		$	88		$	92
Division profit margin		10.1	%		13.2	%		11.7	%		13.2	%

Comparable-sales for the Direct-to-Customers segment increased by 6.1 percent and 8.1 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in the quarter was driven primarily by Eastbay and the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. The increase for the year-to-date period was primarily related to the growth of our store-banner websites.

The footwear category continued to deliver the strongest gains during the current quarter and year-to-date periods. The footwear gains related to our domestic store-banner websites and Eastbay for both the quarter and year-to-date periods were driven by strong results in the children’s and men’s footwear categories. For the quarter, the women’s business softened primarily in the running category. Our international store-banner websites for both the quarter and year-to-date periods were primarily driven by sales from men’s and women’s lifestyle running styles.

Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 28, 2017 decreased by $6 million and $4 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, declined by 310 basis points and 150 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns in response to promotional activity in the market and, to a lesser degree, higher shipping and handling expense. Partially offsetting the gross margin decline was an expense rate improvement primarily related to lower publicity costs and incentive compensation expense in light of current performance as compared with our plan.

Corporate Expense



	Thirteen weeks ended				Thirty-nine weeks ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
	($ in millions)
Corporate expense	$	12	$	17	$	34	$	53
$ Change	$	(5)			$	(19)

Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $11 million for both the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.

The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $4 million for the thirteen and thirty-nine weeks ended October 28, 2017, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $4 million and $15 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.

Incentive compensation declined by $4 million and $11 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, reflecting the Company’s underperformance compared to its plan. Share-based compensation declined by $3 million and $6 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, which primarily represented the portion of share-based compensation that is tied to Company performance. Additionally, the decline for the thirty-nine weeks ended October 28, 2017 was due to the prior-year corporate headquarters relocation costs of $4 million. These decreases were partially offset by a $2 million litigation settlement charge recorded during the third quarter of 2017 and increased corporate support costs such as information technology and real estate management.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been: to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; to make retirement plan contributions, quarterly dividend payments, and interest payments; and to fund other cash requirements to support the development of our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of October 28, 2017, approximately $863 million remained available under the Company’s current $1.2 billion share repurchase program.

As discussed further in the Legal Proceedings note under “Item 1. Financial Statements,” during the second quarter of 2017, in connection with our pension litigation, we recorded a pre-tax charge of $50 million ($30 million after-tax or $0.23 per diluted share). The Company previously recorded a pre-tax charge of $100 million during 2015. The second quarter 2017 charge reflects the Company’s revised estimate of its exposure for the matter, bringing the total pre-tax amount accrued to $150 million. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by us. The total accrual of $150 million has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeal process may be lengthy. The pension plan is currently sufficiently funded to initially absorb a $150 million liability and, accordingly, we currently do not anticipate the need to make any pension contributions in the near term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.

Operating Activities


	Thirty-nine weeks ended
	October 28,		October 29,
	2017		2016
	($ in millions)
Net cash provided by operating activities	$	496	$	477
$ Change	$	19

The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include depreciation and amortization, and share-based compensation expense. The increase from the prior year primarily reflects working capital changes, partially offset by the decline in net income as compared with the prior year.

Investing Activities


	Thirty-nine weeks ended
	October 28,		October 29,
	2017		2016
	($ in millions)
Net cash used in investing activities	$	204	$	193
$ Change	$	11

Capital expenditures were $11 million higher than the prior year. The increase was due to increased spending on technology projects and cash payments related to the 2016 capital program. The Company’s full-year capital spending is expected to be approximately $269 million, which includes $198 million related to the remodeling or relocation of approximately 180 existing stores and the opening of approximately 90 new stores, as well as $71 million for the development of information systems, websites, and infrastructure, including supply chain initiatives.

Financing Activities


	Thirty-nine weeks ended
	October 28,		October 29,
	2017		2016
	($ in millions)
Net cash used in financing activities	$	475	$	443
$ Change	$	32

During the thirty-nine weeks ended October 28, 2017, we repurchased 9,589,660 shares of our common stock for $362 million, as compared with 5,874,643 shares repurchased for $352 million in the corresponding prior-year period.

The Company also declared and paid dividends during the first three quarters of 2017 and 2016 of $120 million and $111 million, respectively. This represented quarterly rates of $0.31 and $0.275 per share for 2017 and 2016, respectively.

Additionally, we received proceeds from the issuance of common stock in connection with employee stock programs of $17 million and $28 million for the thirty-nine weeks ended October 28, 2017 and October29,2016, respectively. Also, during the thirty-nine weeks ended October 28, 2017 and October29,2016, the Company paid $10 million and $6 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.

Included in the prior year’s financing activities were fees of $2 million paid in connection with the 2016 Credit Agreement.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

Recent Accounting Pronouncements

Descriptions of the recently issued and adopted accounting principles are included Item 1. “Financial Statements” in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.

Item 4. Controls and Procedures

~~The~~During the quarter, the Company’s management performed an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), ~~and completed an evaluation as of October 29, 2016~~ of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended October ~~29, 2016,~~28, 2017, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under Item 1. “Financial Statements.”

Item 1A. Risk Factors

There were no material changes to the risk factors disclosed in the ~~2015~~2016 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended October ~~29, 2016:~~28, 2017:

Approximate

Total Number of

Dollar Value of

Total

Average

Shares Purchased as

Shares that may

Number

Price

Part of Publicly

yet be Purchased

of Shares

Paid Per

Announced

Under the
Date Purchased

Purchased (1)

Share (1)

Program (2)

Program (2)
July 31, 2016 - August 27, 2016

2,725

$
58.33

200

$
361,072,062
August 28, 2016 - October 1, 2016

838,125

65.55

838,125

306,136,730
October 2, 2016 - October 29, 2016

311,627

68.51

311,627

284,788,341

1,152,477

$
66.33

1,149,952



					Approximate
				Total Number of	Dollar Value of
	Total	Average		Shares Purchased as	Shares that may
	Number	Price		Part of Publicly	yet be Purchased
	of Shares	Paid Per		Announced	Under the
Date Purchased	Purchased (1)	Share (1)		Program (2)	Program (2)
July 30 - Aug. 26, 2017	3,002,574	$	35.17	3,000,000	$	1,061,038,524
Aug. 27 - Sept. 30, 2017	4,788,800		35.34	4,788,760		891,816,280
Oct. 1 - Oct. 28, 2017	904,800		31.85	904,800		862,996,130
	8,696,174	$	34.92	8,693,560


(1)	These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock units and restricted stock awards which vested during the quarter, ~~as well as~~and shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares.
(2)	On February ~~17, 2015,~~14, 2017, the Board of Directors approved a 3-year, $1$1.2 billion share repurchase program extending through January ~~2018.~~2020.


Item 6. Exhibits

(a)	Exhibits
	The exhibits that are in this report immediately follow the index.

2726

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: December ~~7, 2016~~6, 2017	FOOT LOCKER, INC.


	/s/ Lauren B. Peters
	LAUREN B. PETERS
	Executive Vice President and Chief Financial Officer

2827

FOOT LOCKER, INC.

INDEX OF EXHIBITS


Exhibit No.		Description
12*		Computation of Ratio of Earnings to Fixed Charges.
15*		Accountants’ Acknowledgement.
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99*		Report of Independent Registered Public Accounting Firm.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase.
101.LAB*		XBRL Taxonomy Extension Label Linkbase.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase.

*		Filed herewith.
**		Furnished herewith.

2928


New York	13-3513936
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)


Large accelerated filer☑	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐



	October 29,		October 31,		January 30,		October 28,		October 29,		January 28,
	2016		2015		2016		2017		2016		2017
	(Unaudited)		(Unaudited)		*		(Unaudited)		(Unaudited)		*
ASSETS

Current assets
Current assets:
Cash and cash equivalents	$	865	$	878	$	1,021	$	890	$	865	$	1,046
Merchandise inventories		1,361		1,336		1,285		1,313		1,361		1,307
Other current assets		291		277		300		295		291		280
		2,517		2,491		2,606		2,498		2,517		2,633
Property and equipment, net		732		664		661		835		732		765
Deferred taxes		171		256		234		164		171		161
Goodwill		156		156		156		158		156		155
Other intangible assets, net		43		46		45		45		43		42
Other assets		75		82		73		113		75		84
	$	3,694	$	3,695	$	3,775	$	3,813	$	3,694	$	3,840

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Current liabilities:
Accounts payable	$	215	$	258	$	279	$	241	$	215	$	249
Accrued and other liabilities		327		401		420		326		327		363
Current portion of capital lease obligations		1		1		1		—		1		—
		543		660		700		567		543		612
Long-term debt and obligations under capital leases		127		130		129		126		127		127
Other liabilities		391		358		393		463		391		391
Total liabilities		1,061		1,148		1,222		1,156		1,061		1,130
Shareholders’ equity
Common stock and paid-in capital: 174,687,964; 173,333,777 and 173,397,913 shares outstanding, respectively		1,168		1,099		1,108
Shareholders’ equity:
Common stock and paid-in capital: 133,336,171; 174,687,964; and 132,616,087 shares outstanding, respectively								921		1,168		900
Retained earnings		3,546		3,058		3,182		2,467		3,546		2,254
Accumulated other comprehensive loss		(353)		(343)		(366)		(286)		(353)		(363)
Less: Treasury stock at cost: 42,326,538; 34,772,045 and 36,421,104 shares, respectively		(1,728)		(1,267)		(1,371)
Less: Treasury stock at cost: 10,730,582; 42,326,538; and 1,120,466 shares, respectively								(445)		(1,728)		(81)
Total shareholders' equity		2,633		2,547		2,553		2,657		2,633		2,710
	$	3,694	$	3,695	$	3,775	$	3,813	$	3,694	$	3,840



	Thirty-nine weeks ended				Thirty-nine weeks ended
	October 29,		October 31,		October 28,		October 29,
	2016		2015		2017		2016 *

From Operating Activities
From operating activities:
Net income	$	475	$	383	$	333	$	475
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash impairment charges		6		—		—		6
Depreciation and amortization		118		109		127		118
Share-based compensation expense		17		17		11		17
Excess tax benefits on share-based compensation		(16)		(33)
Qualified pension plan contributions		(33)		(4)		(25)		(33)
Change in assets and liabilities:
Merchandise inventories		(77)		(96)		18		(77)
Accounts payable		(66)		(39)		(13)		(66)
Accrued and other liabilities		(3)		(12)		(29)		(3)
Pension litigation accrual						50		—
Other, net		33		89		24		40
Net cash provided by operating activities		454		414		496		477

From Investing Activities
From investing activities:
Capital expenditures		(193)		(173)		(204)		(193)
Purchase of business, net of cash acquired		—		(1)
Net cash used in investing activities		(193)		(174)		(204)		(193)

From Financing Activities
From financing activities:
Purchase of treasury shares		(352)		(316)		(362)		(352)
Dividends paid on common stock		(111)		(105)		(120)		(111)
Proceeds from exercise of stock options		24		63		12		24
Treasury stock reissued under employee stock plan		4		5		5		4
Excess tax benefits on share-based compensation		16		33
Shares of common stock repurchased to satisfy tax withholding obligations						(10)		(6)
Payment of revolving credit agreement costs		(2)		—		—		(2)
Reduction in long-term debt and obligations under capital leases		—		(2)
Net cash used in financing activities		(421)		(322)		(475)		(443)

Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents		4		(7)
Net Change in Cash and Cash Equivalents		(156)		(89)
Cash and Cash Equivalents at Beginning of Period		1,021		967
Cash and Cash Equivalents at End of Period	$	865	$	878
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash						30		4
Net change in cash, cash equivalents, and restricted cash						(153)		(155)
Cash, cash equivalents, and restricted cash at beginning of period						1,073		1,048
Cash, cash equivalents, and restricted cash at end of period					$	920	$	893

Cash Paid During the Period:
Cash paid during the period:
Interest	$	6	$	5	$	6	$	6
Income taxes	$	271	$	240	$	187	$	271



	October 29,		October 31,		January 30,		October 28,		October 29,		January 28,
	2016		2015		2016		2017		2016		2017
	($ in millions)						($ in millions)
Foreign currency translation adjustments	$	(116)	$	(107)	$	(119)	$	(57)	$	(116)	$	(127)
Cash flow hedges		6		(2)		2		2		6		1
Unrecognized pension cost and postretirement benefit		(243)		(233)		(248)		(231)		(243)		(236)
Unrealized loss on available-for-sale security		—		(1)		(1)		—		—		(1)
	$	(353)	$	(343)	$	(366)	$	(286)	$	(353)	$	(363)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.


			Page
PART I.I	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 4.	Controls and Procedures	26

PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	2726
	Item 1A.	Risk Factors	2726
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2726
	Item 6.	Exhibits	2726

SIGNATURE			2827

INDEX OF EXHIBITS			2928

(1)	Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to ~~write-down~~write down long-lived store assets of Runners Point and Sidestep. See Note 3, ~~Impairment~~Litigation and ~~Litigation~~Other Charges for additional information.
(2)	Included in the ~~thirteen and~~ thirty-nine weeks ended October ~~31, 2015~~28, 2017 is a pre-tax ~~litigation~~ charge of ~~$100~~$50 million relating to a pension litigation matter described further in Note ~~13,~~ 14, Legal Proceedings.
(3)	Included in the thirteen and thirty-nine weeks ended October 28, 2017 is $13 million in pre-tax reorganization costs related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017, described more fully in Note 3, Litigation and Other Charges.
(4)	Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries, and the changes in fair value, premiums paid, and realized gains and losses associated with foreign currency option contracts.



		Severance and		Other Related
		Benefit Costs		Charges		Total
	($ in millions)
Balance at January 28, 2017	$	—	$	—	$	—
Amounts charged to expense		11		2		13
Cash payments		(2)		—		(2)
Balance at October 28, 2017	$	9	$	2	$	11



		October 28, 2017						October 29, 2016						January 28, 2017
		Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)		value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: (1)
	Lease acquisition costs	$	129	$	(117)	$	12	$	118	$	(107)	$	11	$	116	$	(105)	$	11
	Trademarks / trade names		20		(13)		7		20		(13)		7		20		(13)		7
	Favorable leases		7		(6)		1		7		(5)		2		7		(5)		2
		$	156	$	(136)	$	20	$	145	$	(125)	$	20	$	143	$	(123)	$	20
Indefinite life intangible assets: (1)
	Runners Point Group trademarks / trade names					$	25					$	23					$	22
Other intangible assets, net						$	45					$	43					$	42



		October 29, 2016						October 31, 2015						January 30, 2016
		Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)		value		amort.		Value		Value		amort.		Value		value		amort.		Value
Amortized intangible assets: (1)
	Lease acquisition costs	$	118	$	(107)	$	11	$	119	$	(109)	$	10	$	119	$	(107)	$	12
	Trademarks / trade names		20		(13)		7		21		(12)		9		20		(12)		8
	Favorable leases		7		(5)		2		7		(4)		3		7		(5)		2
		$	145	$	(125)	$	20	$	147	$	(125)	$	22	$	146	$	(124)	$	22
Indefinite life intangible assets: (1)
	Runners Point Group trademarks / trade names					$	23					$	24					$	23
Other intangible assets, net						$	43					$	46					$	45


(1)	The change in the ending balances also reflects the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar.


		($ in millions)		($ in millions)
Remainder of 2016	$	1
2017		3
Remainder of 2017			$	1
2018		3		4
2019		3		4
2020		3		3
2021		2		2
2022				2


(Mark One)



		Stock Option Plans						Stock Purchase Plan						Stock Option Plans						Stock Purchase Plan
		October 29,			October 31,			October 29,			October 31,			October 28,			October 29,			October 28,			October 29,
		2016			2015			2016			2015			2017			2016			2017			2016
Weighted-average risk free rate of interest		1.4	%		1.5	%		0.4	%		0.2	%		2.1	%		1.4	%		0.9	%		0.4	%
Expected volatility		30	%		30	%		27	%		24	%		25	%		30	%		29	%		27	%
Weighted-average expected award life (in years)		5.7			6.0			1.0			1.0			5.4			5.7			1.0			1.0
Dividend yield		1.7	%		1.6	%		1.7	%		1.7	%		1.9	%		1.7	%		2.0	%		1.7	%
Weighted-average fair value	$	15.71		$	16.07		$	14.04		$	10.20		$	14.74		$	15.71		$	10.84		$	14.04



	Foreign				Items Related		Unrealized								Items Related
	Currency				to Pension and		Loss on				Foreign Currency				to Pension and		Unrealized Loss on
	Translation		Cash Flow		Postretirement		Available-For-				Translation		Cash Flow		Postretirement		Available-For-
($ in millions)	Adjustments		Hedges		Benefits		Sale Security		Total		Adjustments		Hedges		Benefits		Sale Security		Total
Balance as of January 30, 2016	$	(119)	$	2	$	(248)	$	(1)	$	(366)
Balance as of January 28, 2017											$	(127)	$	1	$	(236)	$	(1)	$	(363)
OCI before reclassification		3		4		(1)		1		7		70		1		(1)		1		71
Reclassified from AOCL		—		—		6		—		6		—		—		6		—		6
Other comprehensive income		3		4		5		1		13		70		1		5		1		77
Balance as of October 29, 2016	$	(116)	$	6	$	(243)	$	—	$	(353)
Balance as of October 28, 2017											$	(57)	$	2	$	(231)	$	—	$	(286)



		($ in millions)
Amortization of actuarial (gain) loss:
Pension benefits- amortization of actuarial loss	$	1110
Postretirement benefits- amortization of actuarial gain		~~(2)~~(1)
Net periodic benefit cost (see Note ~~11)~~12)		9
Income tax benefit		(3)
Net of tax	$	6



	Balance Sheet	October 29,		October 31,		January 30,		Balance Sheet	October 28,		October 29,		January 28,
($ in millions)	Caption	2016		2015		2016		Caption	2017		2016		2017
Hedging Instruments:
Foreign exchange forward contracts	Current assets	$	7	$	—	$	3	Current assets	$	2	$	7	$	3
Foreign exchange forward contracts	Current liabilities	$	—	$	3	$	—	Current liabilities	$	1	$	—	$	3
Non-hedging Instruments:
Foreign exchange forward contracts	Current assets	$	1	$	2	$	—	Current assets	$	—	$	1	$	—
Foreign exchange forward contracts	Current liabilities	$	—	$	3	$	—


	Level 1 –	Quoted prices for identical instruments in active markets.


	Level 2 –	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

	Level 3 –	Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.



	As of October 29, 2016						As of October 31, 2015						As of January 30, 2016						As of October 28, 2017						As of October 29, 2016						As of January 28, 2017
	($ in millions)																		($ in millions)
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Available-for-sale securities	$	—	$	7	$	—	$	—	$	6	$	—	$	—	$	6	$	—	$	—	$	7	$	—	$	—	$	7	$	—	$	—	$	6	$	—
Foreign exchange forward contracts		—		8		—		—		—		—		—		3		—		—		2		—		—		8		—		—		3		—
Total Assets	$	—	$	15	$	—	$	—	$	6	$	—	$	—	$	9	$	—	$	—	$	9	$	—	$	—	$	15	$	—	$	—	$	9	$	—

Liabilities
Foreign exchange forward contracts		—		—		—		—		4		—		—		—		—		—		1		—		—		—		—		—		3		—
Total Liabilities	$	—	$	—	$	—	$	—	$	4	$	—	$	—	$	—	$	—	$	—	$	1	$	—	$	—	$	—	$	—	$	—	$	3	$	—



	Pension Benefits								Postretirement Benefits								Pension Benefits								Postretirement Benefits
	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	Oct. 29,		Oct. 31,		Oct. 29,		Oct. 31,		Oct. 29,		Oct. 31,		Oct. 29,		Oct. 31,		Oct. 28,		Oct. 29,		Oct. 28,		Oct. 29,		Oct. 28,		Oct. 29,		Oct. 28,		Oct. 29,
($ in millions)	2016		2015		2016		2015		2016		2015		2016		2015		2017		2016		2017		2016		2017		2016		2017		2016
Service cost	$	4	$	5	$	12	$	13	$	—	$	—	$	—	$	—	$	4	$	4	$	12	$	12	$	—	$	—	$	—	$	—
Interest cost		6		6		19		18		1		—		1		1		6		6		19		19		—		1		—		1
Expected return on plan assets		(9)		(10)		(27)		(29)		—		—		—		—		(9)		(9)		(28)		(27)		—		—		—		—
Amortization of net loss (gain)		4		3		11		10		(1)		—		(2)		(1)		3		4		10		11		—		(1)		(1)		(2)
Net benefit expense (income)	$	5	$	4	$	15	$	12	$	—	$	—	$	(1)	$	—	$	4	$	5	$	13	$	15	$	—	$	—	$	(1)	$	(1)



		Weighted-		Weighted-			Weighted-		Weighted-
	Number	Average		Average		Number	Average		Average
	of	Remaining		Exercise		of	Remaining		Exercise
	Shares	Contractual Life		Price		Shares	Contractual Life		Price
	(in thousands)	(in years)		(per share)		(in thousands)	(in years)		(per share)
Options outstanding at the beginning of the year	3,694			$	32.62	2,806			$	42.61
Granted	500				63.60	547				69.58
Exercised	(1,106)				21.44	(536)				21.38
Expired or cancelled	(52)				59.38	(19)				61.01
Options outstanding at October 29, 2016	3,036		5.9	$	41.34
Options exercisable at October 29, 2016	1,990		4.4	$	31.24
Options vested and expected to vest at October 29, 2016	3,002		5.9	$	41.11
Options available for future grant at October 29, 2016	11,968
Options outstanding at October 28, 2017						2,798		6.7	$	51.82
Options exercisable at October 28, 2017						1,729		5.4	$	42.91
Options available for future grant at October 28, 2017						10,759



	Options Outstanding				Options Exercisable
		Weighted-
		Average		Weighted-			Weighted-
		Remaining		Average			Average
	Number	Contractual		Exercise	Number		Exercise
Range of Exercise Prices	Outstanding	Life		Price	Exercisable		Price
	(in thousands, except prices per share and contractual life)
$9.85 to $15.10	603	1.9	$	12.70	603	$	12.70
$18.84 to $30.92	460	4.3		25.79	460		25.79
$34.24 to $55.02	787	5.9		40.42	645		39.13
$56.35 to $73.21	1,186	8.5		62.53	282		61.74
	3,036	5.9	$	41.34	1,990	$	31.24