UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)


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

For the quarterly period ended: ~~July 29, 2017~~May 5, 2018


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

For the transition period from __________ to __________

Commission File Number: 1-10299

(Exact name of registrant as specified in its charter)


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

330 West 34th Street, New York, New York 10001

(Address of principal executive offices, Zip Code)

(212-720-3700)

(Registrant’s telephone number, including area code)



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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Number of shares of Common Stock outstanding as of ~~September 5, 2017: 123,997,568~~June 1, 2018: 116,909,047

FOOT LOCKER, INC.

TABLE OF CONTENTS


			Page
PART 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	16
	Item 4.	Controls and Procedures	2423

PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 6.	Exhibits	24

SIGNATURE			25

INDEX OF EXHIBITS			26

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except shares)



	July 29,		July 30,		January 28,		May 5,		April 29,		February 3,
	2017		2016		2017		2018		2017		2018
	(Unaudited)		(Unaudited)		*		(Unaudited)		(Unaudited)		*
ASSETS

Current assets:
Cash and cash equivalents	$	1,043	$	945	$	1,046	$	1,029	$	1,049	$	849
Merchandise inventories		1,290		1,339		1,307		1,210		1,279		1,278
Other current assets		311		301		280		301		294		424
		2,644		2,585		2,633		2,540		2,622		2,551
Property and equipment, net		821		726		765		843		792		866
Deferred taxes		167		174		161		104		162		48
Goodwill		158		156		155		158		156		160
Other intangible assets, net		45		44		42		43		43		46
Other assets		111		77		84		275		102		290
	$	3,946	$	3,762	$	3,840	$	3,963	$	3,877	$	3,961

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	162	$	348	$	249	$	344	$	208	$	258
Accrued and other liabilities		308		326		363		309		327		358
Current portion of capital lease obligations		—		1		—
		470		675		612		653		535		616
Long-term debt and obligations under capital leases		126		128		127
Long-term debt								125		127		125
Other liabilities		456		381		391		642		393		701
Total liabilities		1,052		1,184		1,130		1,420		1,055		1,442
Shareholders’ equity:
Common stock and paid-in capital: 133,134,411; 174,250,091; and 132,616,087 shares outstanding, respectively		916		1,147		900
Common stock and paid-in capital: 121,341,925; 133,088,450; and 121,262,456 shares outstanding, respectively								848		914		842
Retained earnings		2,403		3,426		2,254		2,184		2,393		2,019
Accumulated other comprehensive loss		(284)		(343)		(363)		(313)		(357)		(279)
Less: Treasury stock at cost: 2,034,408; 41,174,061; and 1,120,466 shares, respectively		(141)		(1,652)		(81)
Less: Treasury stock at cost: 4,080,653; 1,791,789; and 1,433,433 shares, respectively								(176)		(128)		(63)
Total shareholders' equity		2,894		2,578		2,710		2,543		2,822		2,519
	$	3,946	$	3,762	$	3,840	$	3,963	$	3,877	$	3,961

* The balance sheet at February 3, 2018 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 February 3, 2018.

* 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.

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)



	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended
	July 29,		July 30,		July 29,		July 30,		May 5,		April 29,
	2017		2016		2017		2016		2018		2017

Sales	$	1,701	$	1,780	$	3,702	$	3,767	$	2,025	$	2,001

Cost of sales		1,198		1,193		2,519		2,484		1,359		1,321
Selling, general and administrative expenses		339		350		710		711		385		371
Depreciation and amortization		42		39		83		78		45		41
Litigation and other charges										12		—
Income from operations		122		198		390		494		224		268

Litigation charge		50		—		50		—
Interest (income) / expense, net		(1)		1		(1)		1
Interest income, net										(2)		—
Other income		—		(1)		(1)		(3)		(3)		(1)
Income before income taxes		73		198		342		496		229		269
Income tax expense		22		71		111		178		64		89
Net income	$	51	$	127	$	231	$	318	$	165	$	180

Basic earnings per share	$	0.39	$	0.94	$	1.76	$	2.35	$	1.39	$	1.37
Weighted-average shares outstanding		131.3		134.4		131.3		135.4		118.7		131.4

Diluted earnings per share	$	0.39	$	0.94	$	1.74	$	2.33	$	1.38	$	1.36
Weighted-average shares outstanding, assuming dilution		132.0		135.5		132.3		136.6		119.1		132.6

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)



	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended
	July 29,		July 30,		July 29,		July 30,		May 5,		April 29,
	2017		2016		2017		2016		2018		2017
Net income	$	51	$	127	$	231	$	318	$	165	$	180

Other comprehensive income, net of income tax:

Foreign currency translation adjustment:
Translation adjustment arising during the period, net of income tax		70		(27)		74		17
Translation adjustment arising during the period, net of income tax benefit of $(5) and $(1) million, respectively										(38)		4

Cash flow hedges:
Change in fair value of derivatives, net of income tax		2		3		1		3		1		(1)

Available for sale securities:
Unrealized gain on available for sale securities		1		1		1		1

Pension and postretirement adjustments:
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1, $1, $2 and $2 million, respectively, and foreign currency fluctuations		—		3		3		2
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1 and $1 million, respectively, and foreign currency fluctuations										3		3
Comprehensive income	$	124	$	107	$	310	$	341	$	131	$	186

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)



	Twenty-six weeks ended				Thirteen weeks ended
	July 29,		July 30,		May 5,		April 29,
	2017		2016 *		2018		2017

From operating activities:
Net income	$	231	$	318	$	165	$	180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		83		78		45		41
Share-based compensation expense		8		11		5		5
Qualified pension plan contributions		(25)		(25)		—		(25)
Change in assets and liabilities:
Merchandise inventories		41		(50)		53		31
Accounts payable		(93)		67		90		(41)
Accrued and other liabilities		(38)		(13)		(6)		(26)
Pension litigation accrual		50		—		12		—
Other, net		(6)		(1)		51		(6)
Net cash provided by operating activities		251		385		415		159

From investing activities:
Capital expenditures		(150)		(131)		(64)		(75)
Insurance proceeds related to loss on property and equipment						1		—
Net cash used in investing activities		(150)		(131)		(63)		(75)

From financing activities:
Purchase of treasury shares		(59)		(276)		(112)		(38)
Dividends paid on common stock		(82)		(74)		(41)		(41)
Proceeds from exercise of stock options		10		14		—		9
Treasury stock reissued under employee stock plan		5		4
Shares of common stock repurchased to satisfy tax withholding obligations		(9)		(6)		(1)		(9)
Payment of revolving credit agreement costs		—		(2)
Net cash used in financing activities		(135)		(340)		(154)		(79)

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash		34		10		(18)		(1)
Net change in cash, cash equivalents, and restricted cash		—		(76)		180		4
Cash, cash equivalents, and restricted cash at beginning of period		1,073		1,048		1,031		1,073
Cash, cash equivalents, and restricted cash at end of period	$	1,073	$	972	$	1,211	$	1,077

Cash paid during the period:
Interest	$	6	$	5	$	—	$	—
Income taxes	$	155	$	216	$	61	$	122

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February ~~3, 2018~~2, 2019 and of the fiscal year ended ~~January 28, 2017.~~February 3, 2018. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended ~~January 28, 2017,~~February 3, 2018, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March ~~23, 2017.~~29, 2018.

~~Recent~~Other than the changes to the Revenue Recognition policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to our significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February 3, 2018.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ~~this amendment~~Topic 606 is ~~that an entity should~~to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ~~ASU~~ 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or ~~as a cumulative-effect adjustment as of the date of adoption~~.The Company ~~does not expect to adopt these ASUs until required, and has not yet selected~~adopted ASU 2014-09 during the ~~transition~~first quarter of 2018 using the modified retrospective method. ~~Based on an evaluation~~We recognized $5 million, or $4 million net of tax, as the ~~standard as a whole, the Company has identified gift card breakage, direct-response advertising, and principal versus agent considerations as areas which will most likely be affected by~~cumulative effect of initially applying the new revenue standard as an increase to the opening balance of retained earnings.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740):Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition ~~guidance. We~~of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this ASU during the first quarter of 2018 using the modified retrospective method, and as a result increased deferred income tax assets by $37 million. The Company has written off the income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. The Company also recorded deferred tax assets with an offset to opening retained earnings for amounts that were not previously recognized under the previous guidance but are inrecognized under this ASU.

Other recently adopted ASUs are discussed within the ~~process of finalizing the analysis of our revenue streams and quantifying the effects~~applicable disclosures on the ~~areas discussed above, and we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows.~~following pages.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods therein, and requires a modified retrospective adoption, with earlier adoption permitted. The Company does not expect to adopt this ASU until required and is evaluating the effect of this guidance. The Company has historically presented a non-GAAP measure to adjust its balance sheet to present operating leases as if they were capital leases. Based upon that analysis and preliminary evaluation of the standard, we estimate the adoption will result in the addition of $3 billion to $4 billion of assets and liabilities to our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows.

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~Income Taxes (Topic 740):Intra-Entity Transfers of Assets Other Than Inventory~~. ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted. The Company does not expect to adopt this ASU until required. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. While we could initiate additional relevant transactions prior to this ASU’s adoption date, based on deferred tax amounts related to applicable past intercompany transactions and the foreign exchange rates as of July 29, 2017, we expect the adoption will result in an increase in deferred income tax assets of approximately $40 million to $45 million.

Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Recently Adopted Accounting Pronouncements~~Revenue Recognition

Store revenue is recognized at the point of sale and includes merchandise, net of returns, and excludes taxes. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid.

In ~~March 2016,~~conjunction with the ~~FASB issued ASU 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting.~~ ~~ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures, and classifications~~adoption of ~~the tax related items in the statement of cash flows. The Company adopted ASU 2016-09~~Topic 606 during the first quarter of ~~2017. Amendments relating~~2018, we have determined that revenue for merchandise that is shipped to ~~accounting~~our customers from our distribution centers and stores will be recognized upon shipment date. Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and paid for ~~excess tax benefits and deficiencies have been adopted prospectively. For~~ the ~~twenty-six weeks ended July 29,2017,~~merchandise as of the shipment date. This reflects a change in timing in how we previously recognized revenue for our direct-to-customer sales. Prior to the adoption of Topic 606, the Company ~~recorded excess tax benefits related to share-based compensation awards~~recognized such revenue upon date of $7 million to the income statement, within the income tax provision, whereas such benefits were previously recognized in equity. Excess tax benefits recorded for the thirteen weeks ended July 29, 2017 were not significant. Also, in the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefits. This ASU also requires that we present excess tax benefits or deficiencies as operating activities in our condensed consolidated statement of cash flow.delivery. As a result of ~~adopting~~ this change, ~~retrospectively, we reclassified excess~~the Company recorded $1 million, net of tax, ~~benefits of $10 million which were previously classified~~ as ~~cash flows from financing activities~~an increase to ~~operating activities for~~opening retained earnings to reflect the twenty-six weeks ended July 30, 2016. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $6 million, previously classified as cash flows from operating activities, were reclassified to financing activities for the twenty-six weeks ended July 30, 2016. The Company has made a policy election of recording forfeitures as they occur instead of estimating forfeitures using a modified retrospective approach. The cumulative effect of adopting this ~~change was not significant.~~change. We have elected to account for shipping and handling as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.

Gift Cards

~~In November 2016, the FASB issued ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash.~~ ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods therein, with early adoption permitted. The Company ~~has adopted this ASU~~sells to its customers gift cards, which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed. Effective as of the first quarter of ~~2017.~~ 2018 with the adoption of Topic 606, gift card breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, unless there is a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. This reflects a change in our accounting for gift card breakage from the remote method to the proportional method. As a result of adopting Topic 606, the Company recorded $4 million, or $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patterns~~Accordingly, we restated our cash~~. Additionally, breakage income was previously recorded within selling, general and ~~cash equivalents balances~~administrative expenses, however this amount is currently reported within sales as required by the standard. This change in classification is not considered significant.

2. Revenue

Sales disaggregated based upon sales channel is presented below.


	Thirteen weeks ended
	May 5,		April 29,
	2018		2017
	($ in millions)
Stores	$	1,743	$	1,722
Direct-to-customers		282		279
Total sales	$	2,025	$	2,001

Sales disaggregated based upon geographic area is presented in the ~~condensed consolidated statements~~below table. Sales are attributable to the country in which the sales transaction is fulfilled.


		Thirteen weeks ended
		May 5,		April 29,
		2018		2017
		($ in millions)
United States	$	1,501	$	1,500
International		524		501
Total sales	$	2,025	$	2,001

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contract Liabilities

The table below presents the activity of ~~cash flows~~our gift card liability balance:


		($ in millions)
Balance at February 4, 2018	$	38
Redemptions		(24)
Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606		(4)
Breakage recognized		(2)
Activations		20
Balance at May 5, 2018	$	28

Due to ~~include restricted cash of $27million as of July 30, 2016, January 30, 2016, and January 28, 2017. Please see Note 3,~~ ~~Restricted Cash, for a reconciliation of cash and cash equivalents as presented on our condensed consolidated balance sheets~~the fact that most gift cards are redeemed within 12 months, the Company elected not to ~~cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows~~.disclose information about remaining performance obligations.

23. Segment Information

The Company has ~~determined that its reportable~~integrated all available shopping channels including stores, websites, and catalogs. Store sales are primarily fulfilled from the store’s inventory, but may also be shipped from any of our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are primarily shipped to our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and stores depending on the availability of particular items.

Our operating segments are ~~those that~~identified according to how our business activities are ~~based on its method of internal reporting. The~~managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, the Company ~~has~~had two reportable ~~segments,~~segments: Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. In light of these changes, the Company has re-evaluated its operating segments, which now reflect the combination of stores and direct-to-customer by geography. The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, SIX:02, Foot Locker Canada, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of Foot Locker Europe, Runners Point, Sidestep, Foot Locker Asia Pacific, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Prior-year information has been restated to reflect this change.

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 ~~(income) / expense.~~income. The following table summarizes our results:

Thirteen weeks ended

Twenty-six weeks ended

July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016
Sales

($ in millions)
Athletic Stores

$
1,485

$
1,576

$
3,207

$
3,311
Direct-to-Customers

216

204

495

456
Total sales

$
1,701

$
1,780

$
3,702

$
3,767
Operating Results

Athletic Stores

$
109

$
193

$
350

$
470
Direct-to-Customers

20

22

62

60
Division profit

129

215

412

530
Less: Pension litigation charge (1)

50

—

50

—
Less: Corporate expense

7

17

22

36
Operating profit

72

198

340

494
Interest (income) / expense, net

(1)

1

(1)

1
Other income (2)

—

1

1

3
Income before income taxes

$
73

$
198

$
342

$
496


~~(1)~~	~~Included in the thirteen and twenty-six weeks ended July 29, 2017 is a pre-tax litigation charge of $50 million relating to a pension litigation matter described further in Note 12,~~ ~~Legal Proceedings~~.
~~(2)~~	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.



	Thirteen weeks ended
	May 5,		April 29,
	2018		2017
	($ in millions)
Sales	$	2,025	$	2,001

Operating Results
Division profit		247		283
Less: Pension litigation (1)		12		—
Less: Corporate expense (2)		11		15
Income from operations		224		268
Interest income, net		(2)		—
Other income (3)		3		1
Income before income taxes	$	229	$	269

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1)	Included in the thirteen weeks ended May 5, 2018 is a pre-tax charge of $12 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.
(2)	Corporate expense consists of unallocated selling general and administrative expenses as well as depreciation and amortizationrelated to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.
(3)	Other income includes non-operating items, such as lease termination gains, royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component.

4. Litigation and Other Charges

As more fully discussed in Note 14, Legal Proceedings, during the first quarter of 2018 the Company recorded a $12 million charge related to the pension litigation. This charge comprised $11 million related to the estimated cost of the reformation and $1 million in professional fees incurred in connection with the plan reformation.

During the third quarter of the prior year, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. The following is a reconciliation of the accrual recorded in connection with that event for the quarter ended May 5, 2018:



		Severance and		Other Related
		Benefit Costs		Charges		Total
	($ in millions)
Balance at February 3, 2018	$	5	$	2	$	7
Amounts charged to expense		—		—		—
Cash payments		(2)		—		(2)
Balance at May 5, 2018	$	3	$	2	$	5

5. Restricted Cash

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.


	July 29,		July 30,		January 28,		May 5,		April 29,		February 3,
	2017		2016		2017		2018		2017		2018
	($ in millions)						($ in millions)
Cash and cash equivalents	$	1,043	$	945	$	1,046	$	1,029	$	1,049	$	849
Restricted cash included in other current assets		1		—		—		1		1		1
Restricted cash included in other non-current assets		29		27		27		181		27		181
Cash, cash equivalents, and restricted cash	$	1,073	$	972	$	1,073	$	1,211	$	1,077	$	1,031

Amounts included in restricted cash primarily relate to funds deposited to a qualified settlement fund in connection with the pension litigation and 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 requirement to collateralize part of the self-insured workers’ compensation and liability claims.

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~~

As a result of ~~goodwill and intangible assets with indefinite lives performed during~~ the first quarter change in our organizational and internal reporting structure, we have determined that we have one reportable segment. We have reassessed our reporting units in light of ~~2017 did not result~~this change and have deemed the collective omni-channel banners in North America and International to be the two reporting units at which goodwill is tested. Therefore, goodwill was re-allocated to these reporting units based on their relative fair values. As required, we conducted our annual impairment review both before and after this change. Neither review resulted in the recognition of ~~impairment. The following table provides a summary~~impairment, as the fair value of ~~goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations.~~each reporting unit exceeded its carrying value.

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



		July 29, 2017						July 30, 2016						January 28, 2017							May 5, 2018						April 29, 2017						February 3, 2018
		Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net			Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)	($ in millions)	value		amort.		Value		Value		amort.		Value		value		amort.		Value		($ in millions)	value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: (1)	Amortized intangible assets: (1)																			Amortized intangible assets: (1)
	Lease acquisition costs	$	128	$	(115)	$	13	$	120	$	(108)	$	12	$	116	$	(105)	$	11	Lease acquisition costs	$	128	$	(117)	$	11	$	118	$	(107)	$	11	$	135	$	(122)	$	13
	Trademarks / trade names		20		(13)		7		20		(13)		7		20		(13)		7	Trademarks / trade names		20		(14)		6		20		(13)		7		20		(14)		6
	Favorable leases		7		(6)		1		7		(5)		2		7		(5)		2	Favorable leases		7		(6)		1		7		(5)		2		7		(6)		1
		$	155	$	(134)	$	21	$	147	$	(126)	$	21	$	143	$	(123)	$	20		$	155	$	(137)	$	18	$	145	$	(125)	$	20	$	162	$	(142)	$	20
Indefinite life intangible assets: (1)	Indefinite life intangible assets: (1)																			Indefinite life intangible assets: (1)
	Runners Point Group trademarks / trade names					$	24					$	23					$	22	Runners Point Group trademarks / trade names					$	25					$	23					$	26
Other intangible assets, net	Other intangible assets, net					$	45					$	44					$	42	Other intangible assets, net					$	43					$	43					$	46

The annual review of intangible assets with indefinite lives performed during the first quarter of 2018 did not result in the recognition of impairment.

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

~~During the twenty-six week period ended~~ ~~July 29, 2017, the Company recorded $1~~ million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years. Amortization expense recorded is as follows:

~~Estimated future amortization expense for 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 ~~twenty-six~~thirteen weeks ended ~~July 29, 2017~~May 5, 2018 were as follows:

Reclassifications from AOCL for the ~~twenty-six~~thirteen weeks ended ~~July 29, 2017~~May 5, 2018 were as follows:

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”). This update provides guidance on income tax accounting implications under Public Law 115-97, informally known as the Tax Cuts and Jobs Act (the "Tax Act"), which was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. SAB 118 addressed the application of GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of the fourth quarter of 2017, the Company had not completed the determination of the accounting implications of the Tax Act on the Company’s tax accruals. However, we reasonably estimated the effects of the Tax Act and recognized a provisional net tax expense of $99 million associated with the Tax Act in the fourth quarter of 2017.

For the thirteen weeks ended May 5, 2018, our accounting for the Tax Act is still incomplete. We have not made any measurement-period adjustments related to these items during the first quarter of fiscal 2018 because we have not finalized the following items: the earnings and profits of the relevant subsidiaries, deemed repatriation of deferred foreign income, and prior-year deferred tax activity. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the one-year time period provided by SAB 118. Any adjustment to these amounts during the measurement period will be recorded in income tax expense in the period in which the analysis is complete.

~~7. Financial Instruments~~The Company continues to evaluate the provisions of the Tax Act, including the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income (“FDII”) provisions. The Company has made an accounting policy election to treat GILTI taxes as a current period expense.

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 resultultimate effect of the ~~use of derivative instruments, the Company is exposed~~Tax Act may differ from these provisional amounts, possibly materially, due to, ~~the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk,~~among other things, additional analysis, changes in interpretations and assumptions the Company has a ~~practice~~made, additional regulatory guidance that may ~~of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The~~be issued, as well as any related actions the Company ~~monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 8,~~ ~~Fair Value Measurements~~.may take.

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. The amount of such gains or losses that were recognized in earnings during the twenty-six weeks ended July 29, 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 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 was a $2 million gain for~~ the thirteen weeks ended July 29, 2017 and a $1 million gain for the twenty-six weeks ended July 29, 2017. At July 29, 2017, a $2 million gain remained in AOCL. For both the thirteen and twenty-six weeks ended July 30, 2016, the net change in fair value was a $3 million gain. The notional value of the foreign exchange contracts designed as hedges outstanding at July 29, 2017 was $125 million, and these contracts mature at various dates through August 2018.

The Company enters into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of 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 or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen and twenty-six weeks ended July 29, 2017. The net change in fair value was not significant for the thirteen weeks ended July 30, 2016 and resulted in expense of $1 million for the twenty-six weeks ended July~~30,2016. The notional value of the foreign exchange contracts not designed as hedges outstanding at July29,2017 was $2 million, and these contracts mature in August 2017.~~

~~From time to time,~~May 5, 2018, the Company ~~mitigates~~recorded an income tax provision of $64 million, which represented an effective tax rate of 27.9 percent, compared with the ~~effect~~prior-year income tax provision of ~~fluctuating foreign exchange rates on the reporting~~$89 million, which represented an effective tax rate 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 immediately33.0 percent. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur 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 July29,2017.~~

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:



	As of July 29, 2017						As of July 30, 2016						As of January 28, 2017						As of May 5, 2018						As of April 29, 2017						As of February 3, 2018
	($ 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	$	—	$	—	$	7	$	—	$	—	$	6	$	—
Available-for-sale security																			$	—	$	6	$	—	$	—	$	6	$	—	$	—	$	7	$	—
Foreign exchange forward contracts		—		3		—		—		6		—		—		3		—		—		1		—		—		—		—		—		1		—
Total Assets	$	—	$	10	$	—	$	—	$	13	$	—	$	—	$	9	$	—	$	—	$	7	$	—	$	—	$	6	$	—	$	—	$	8	$	—
Liabilities
Foreign exchange forward contracts		—		1		—		—		—		—		—		3		—		—		1		—		—		2		—		—		1		—
Total Liabilities	$	—	$	1	$	—	$	—	$	—	$	—	$	—	$	3	$	—	$	—	$	1	$	—	$	—	$	2	$	—	$	—	$	1	$	—

~~Securities~~In conjunction with the first quarter 2018 adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, our security classified as available-for-sale ~~are~~is now recorded at fair value with ~~unrealized~~ gains and losses reported ~~net~~to other income in our Statement of ~~tax, in other comprehensive income, unless unrealized gains or losses are determined~~Operations, whereas previously it was recorded to ~~be other than temporary.~~ AOCL. The adjustment recorded to retained earnings as a result of adopting ASU 2016-01 was not significant. 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 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.

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~~Additionally, shares of 1.1 million and 0.4 million as of May 5, 2018 and ~~0.3 million~~April 29, 2017, respectively, have been excluded from diluted weighted-average shares as the number of shares that will be issued is contingent on the Company’s performance metrics as compared to the pre-established performance goals which have not been ~~included as the vesting conditions have not been satisfied~~achieved as of ~~July~~May 5, 2018 and April 29, ~~2017 and July 30, 2016, respectively.~~2017. 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~~income. In conjunction with the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, service cost continues to be recognized as part of SG&A ~~expense:~~

expense, while the remaining pension and postretirement expense components are now recognized as part of other income. Prior periods were not reclassified as required by this ASU as the amounts were not considered significant.



	Pension Benefits								Postretirement Benefits								Pension Benefits				Postretirement Benefits
	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Thirteen weeks ended
	July 29,		July 30,		July 29,		July 30,		July 29,		July 30,		July 29,		July 30,		May 5,		April 29,		May 5,		April 29,
($ in millions)	2017		2016		2017		2016		2017		2016		2017		2016		2018		2017		2018		2017
Service cost	$	4	$	4	$	8	$	8	$	—	$	—	$	—	$	—	$	5	$	4	$	—	$	—
Interest cost		7		7		13		13		—		—		—		—		6		6		—		—
Expected return on plan assets		(10)		(9)		(19)		(18)		—		—		—		—		(10)		(9)		—		—
Amortization of net loss (gain)		4		3		7		7		(1)		—		(1)		(1)		3		3		—		—
Net benefit expense (income)	$	5	$	5	$	9	$	10	$	(1)	$	—	$	(1)	$	(1)	$	4	$	4	$	—	$	—

~~During the first quarter of 2017, the Company made a contribution of $25 million to the U.S. qualified plan.~~ The Company continually evaluates the amount and timing of any future contributions. ~~The Company currently does not expect to make any further pension plan contributions during this year.~~ Actual contributions are dependent on several ~~factors, including~~factors; however, the ~~outcome of~~Company expects to make contributions totaling $128 million during 2018 in connection with the ~~ongoing~~anticipated U.S. pension ~~litigation.~~ plan reformation. The Company contributed approximately $30 million in late May 2018 and currently expects the remaining balance to be contributed on or before September 15, 2018. See Note ~~12,~~14, Legal Proceedings, for further ~~information.~~information about this matter.

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 the 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 share-based compensation expense for awards granted during the ~~twenty-six~~thirteen weeks ended ~~July~~May 5, 2018 and April 29, ~~2017 and July 30, 2016:~~2017:

The information in the following table covers option activity under the Company’s stock option plans for the ~~twenty-six~~thirteen weeks ended ~~July 29, 2017:~~May 5, 2018:

The total fair value of options vested as of ~~July~~May 5, 2018 and April 29, 2017 ~~and July 30, 2016~~ was $7$8 million and $8$7 million, respectively. The cash received from option exercises and the related tax benefit for the thirteen ~~and twenty-six~~ weeks ended ~~July29,2017~~May 5, 2018 was ~~$1 million and $10 million, respectively. The cash received from option exercises for the thirteen and twenty-six weeks ended July 30, 2016 was $7 million and $14 million, respectively.~~not significant.

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 not significant for the thirteen weeks ended July 29, 2017, and was $6 million for the twenty-six weeks ended July 29, 2017. The total tax benefit realized from option exercises was $5 million and $10 million for the corresponding prior-year periods.

The aggregate intrinsic value for stock options outstanding, and 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 ~~July 29, 2017~~May 5, 2018 there was $9$8 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of ~~1.6~~1.7 years.

The following table summarizes information about stock options outstanding and exercisable at ~~July 29, 2017:~~May 5, 2018:



	Options Outstanding				Options Exercisable			Options Outstanding				Options Exercisable
		Weighted-							Weighted-
		Average		Weighted-			Weighted-		Average		Weighted-			Weighted-
		Remaining		Average			Average		Remaining		Average			Average
Range of Exercise	Number	Contractual		Exercise	Number		Exercise	Number	Contractual		Exercise	Number		Exercise
Prices	Outstanding	Life		Price	Exercisable		Price	Outstanding	Life		Price	Exercisable		Price
	(in thousands, except prices per share and contractual life)							(in thousands, except prices per share and contractual life)
$9.85 to $24.75	546	2.2	$	14.33	546	$	14.33
$30.92 to $45.75	748	5.6		38.52	746		38.50
$55.02 to $62.11	697	7.1		61.25	476		61.36
$9.85 to $18.84								267	2.3	$	16.39	267	$	16.39
$24.75 to $34.75								457	4.3		32.33	419		32.10
$44.78 to $45.75								708	7.9		44.93	339		45.08
$46.64 to $62.11								699	6.4		61.00	674		61.35
$63.79 to $73.21	966	9.1		68.59	158		64.02	960	8.3		68.60	475		67.12
	2,957	6.4	$	49.24	1,926	$	39.40	3,091	6.7	$	51.58	2,174	$	48.91

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. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive 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 ~~668,120~~874,458 and ~~671,690~~669,542 RSU awards outstanding as of ~~July~~May 5, 2018 and April 29, 2017, ~~and July 30, 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 ~~twenty-six~~thirteen weeks ended ~~July 29, 2017~~May 5, 2018 is summarized as follows:

The total value of awards for which restrictions lapsed during the ~~twenty-six~~thirteen weeks ended ~~July~~May 5, 2018 and April 29, 2017 ~~and July 30, 2016~~ was ~~$14~~$5 million and $8$13 million, respectively. As of ~~July 29, 2017,~~May 5, 2018, there was ~~$12~~$33 million of total unrecognized compensation cost 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~~discontinued by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims. Additionally, the Company is a defendant in a purported Fair Credit Reporting Act class action in California, a purported meal break class action in California, and a purported class action in New York alleging failure to pay for all hours worked by employees. The Company and certain officers of the Company are defendants in a purported securities law class action in New York. Additionally, the directors and certain officers of the Company are defendants in a related derivative action.

For the last several years, the Company and the Company’s U.S. retirement plan ~~are~~have been 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~~alleged 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. During the third quarter of 2015, the trial court ruled that the retirement plan be reformed. ~~As result of this development, the Company recorded a charge of $100 million pre-tax ($61 million after-tax).~~

~~The~~In early 2018, the Company ~~appealed~~exhausted all of its legal remedies and is required to reform the pension plan consistent with the trial court’s decision and judgment. The amount accrued as of February 3, 2018 was $278 million. During the first quarter of 2018, the estimated value of the judgment was ~~stayed pending~~increased by $11 million, of which $7 million related to a change in the ~~outcome~~estimated value of the ~~appeal process. During~~judgment, based on additional facts as to how the reformation should be calculated, and $4 million related to the interest that continues to accrue as required by the provisions of the required plan reformation. We have been, and will continue, working with plaintiffs’ counsel and the court on the specific steps needed to implement the judgment, which we expect to occur during our second ~~quarter of 2017,~~quarter. Until the ~~Second Circuit Court of Appeals affirmed the trial court’s decision. In light of this development,~~court enters its final order the Company ~~reassessed its estimate~~cannot complete the reformation of the ~~liability. The Company’s updated reasonable estimate of this liability is a range between $150 million and $260 million. The high end~~plan as the actual terms of the ~~range reflects~~reformation must be approved by the ~~estimated cost to reform~~court. The court will be ruling on the ~~retirement plan in accordance with~~fairness of the ~~court ruling; however, it excludes any legal~~class counsel fees ~~that may~~and how those costs will be ~~awarded to plaintiff’s counsel. No~~shared by the class members. We believe the 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 amountwe have accrued for this matter ~~to $150 million. The accrual has been classified as a long-term liability. The Company will continue to vigorously defend itself~~is appropriate in ~~this case. In~~ light of the ~~uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount~~facts as we currently ~~accrued by the Company.~~understand them.

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~~unpredictable. Judgments could be rendered or settlements ~~entered into~~made 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

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.

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 ~~2016~~2017 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.

world. 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, 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~~a destination for ~~athletically inspired~~premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.

We identify our operating segments according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, we had two reportable segments, Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. This change resulted in the combination of our stores and direct-to-customer financial results.

The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, SIX:02, Foot Locker Canada, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of Foot Locker Europe, Runners Point, Sidestep, Foot Locker Asia Pacific, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Please see Item 1. “Financial Statements,” Note 3, Segment Information for further information on this change.

Store Count

At ~~July 29, 2017,~~May 5, 2018, we operated ~~3,359~~3,284 stores as compared with ~~3,363~~3,310 and ~~3,401~~3,354 stores at ~~January 28,~~February 3, 2018 and April 29, 2017, ~~and July 30, 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 7 franchised stores operating in Israel as of July~~29, 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 82116 franchised stores were operating at ~~July 29, 2017,~~May 5, 2018, as compared with 74112 and 6977 stores at ~~January 28,~~February 3, 2018 and April 29, 2017, ~~and July 30, 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 twenty-six~~ weeks ended ~~July~~May 5, 2018 and April 29, 2017, ~~and July 30, 2016,~~ respectively.



	Thirteen weeks ended				Twenty-six weeks ended
	July 29,		July 30,		July 29,		July 30,		Thirteen weeks ended
	2017		2016		2017		2016		May 5, 2018		April 29, 2017
	($ in millions)								($ in millions)
Pre-tax income:
Income before income taxes	$	73	$	198	$	342	$	496	$	229	$	269
Pre-tax amounts excluded from GAAP:
Pension litigation charge		50		—		50		—		12		—
Adjusted income before income taxes (non-GAAP)	$	123	$	198	$	392	$	496	$	241	$	269

After-tax income:
Net income	$	51	$	127	$	231	$	318	$	165	$	180
After-tax adjustments excluded from GAAP:
Pension litigation charge, net of income tax benefit of $20 million		30		—		30		—
Pension litigation charge, net of income tax benefit of $3 million										9		—
Adjusted net income (non-GAAP)	$	81	$	127	$	261	$	318	$	174	$	180

Earnings per share:
Diluted EPS	$	0.39	$	0.94	$	1.74	$	2.33	$	1.38	$	1.36
Diluted EPS amounts excluded from GAAP:
Pension litigation charge		0.23		—		0.23		—		0.07		—
Adjusted diluted EPS (non-GAAP)	$	0.62	$	0.94	$	1.97	$	2.33	$	1.45	$	1.36

During the ~~second~~first quarter ended ~~July 29, 2017,~~May 5, 2018, the Company recorded a charge of ~~$50~~$12 million, ~~$30~~$9 million after-tax or ~~$0.23~~$0.07 per share, related to pension litigation. Please see Item 1. “Financial Statements,” Note ~~12,~~14, Legal Proceedings for further information on this ~~item.~~charge.

Results of Operations

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, corporate expense, non-operating income, and net interest income.

The following table summarizes our results:



	Thirteen weeks ended
	May 5,		April 29,
	2018		2017
	($ in millions)
Sales	$	2,025	$	2,001

Operating Results
Division profit		247		283
Less: Pension litigation (1)		12		—
Less: Corporate expense (2)		11		15
Income from operations		224		268
Interest income, net		(2)		—
Other income (3)		3		1
Income before income taxes	$	229	$	269


(1)	Included in the thirteen weeks ended May 5, 2018 is a pre-tax charge of $12 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.
(2)	Corporate expense consists of unallocated selling general and administrative expenses as well as depreciation and amortizationrelated 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 $3 million for the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $10 million for the thirteen weeks ended May 5, 2018 thus reducing corporate expense. Excluding the corporate allocation change as well as depreciation and amortization, corporate expense increased by $5 million for the thirteen weeks ended May 5, 2018. The increase for the thirteen weeks ended May 5, 2018 was primarily due to increased corporate support costs primarily related to information technology.
(3)	Other income includes non-operating items, such as lease termination gains, royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component. The increase in other income for the thirteen weeks ended May 5, 2018 as compared with the corresponding prior-year period primarily reflects increased royalty income and lease termination gains.

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.~~our direct-to-customer channel. 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 ~~decreased~~increased by ~~$79~~$24 million, or ~~4.4~~1.2 percent, to ~~$1,701~~$2,025 million for the thirteen weeks ended ~~July 29, 2017,~~May5,2018, from ~~$1,780~~$2,001 million for the thirteen weeks ended ~~July 30, 2016. For the twenty-six weeks ended July~~April 29, ~~2017, sales of $3,702 million decreased 1.7 percent from sales of $3,767 million in the corresponding prior-year period.~~2017. Excluding the effect of foreign currency fluctuations, total sales decreased by ~~4.3 and 1.1~~1.5 percent for the thirteen ~~and twenty-six~~ weeks ended ~~July 29, 2017, respectively. Comparable-store~~May 5, 2018. Total comparable-store sales decreased by ~~6.0 and 2.6~~2.8 percent ~~for the~~ thirteen ~~and twenty-six~~ weeks ended ~~July 29, 2017, respectively. This reflected a decline in our Athletic Stores segment, partially offset~~May 5, 2018. The information shown below represents certain sales metrics by ~~an increase in our Direct-to-Customers segment.~~

sales channel:

1718


	Thirteen weeks ended
	May 5,			April 29,
	2018			2017
	($ in millions)
Stores
Sales	$	1,743		$	1,722
$ Change	$	21
% Change		1.2	%
% of total sales		86.1	%		86.1	%
Comparable sales (decrease)		(3.1)	%		(1.2)	%

Direct-to-customers
Sales	$	282		$	279
$ Change	$	3
% Change		1.1	%
% of total sales		13.9	%		13.9	%
Comparable sales (decrease) / increase		(0.5)	%		12.1	%

Effective with the first quarter of 2018, the Company discloses one reportable segment and accordingly the following discussion describes the changes in sales by banner on an omni-channel basis, meaning that each banner’s results are inclusive of their store and e-commerce activity.

Excluding the effect of foreign currency, sales declined for the thirteen weeks ended May 5, 2018 and was primarily related to declines in our Foot Locker Europe, Champs Sports, Runners Point, Sidestep, and Footaction banners. The sales decline for these banners primarily reflected a decrease in footwear sales, which was partially offset by gains in apparel for most of these banners. Our European businesses were negatively affected by the decline in popularity of certain casual footwear styles. Foot Locker and Kids Foot Locker both experienced an increase in sales, which was primarily driven by the apparel category in addition to gains in the children’s footwear category. Our e-commerce business in Europe experienced a decline, while our U.S. e-commerce business was relatively flat with the prior year on a comparable basis.

The footwear category experienced a decline during the quarter and was primarily caused by a decline in men’s basketball, which was offset, in part, by an increase in certain running styles. The comparable-store sales decline in women’s footwear primarily reflected decreases in women’s running and court styles reflecting the prior-year success of certain offerings with no such comparable offerings in the current year.

The overall comparable-store increase in apparel was produced by the majority of our banners, as this category performed very well during the quarter. The gains primarily reflected comparable-store sales increases in men’s and children’s branded apparel, partially offset by a decline in men’s private label apparel.

Gross Margin


	Thirteen weeks ended				Twenty-six weeks ended
	July 29,		July 30,		July 29,		July 30,		Thirteen weeks ended
	2017		2016		2017		2016		May 5, 2018		April 29, 2017
Gross margin rate	29.6	%	33.0	%	32.0	%	34.1	%	32.9	%	34.0	%
Basis point change in the gross margin rate	(340)				(210)				(110)
Components of the change-
Decline in the merchandise margin rate	(200)				(120)
Decrease in the merchandise margin rate									(60)
Higher occupancy and buyers' compensation expense rate	(140)				(90)				(50)

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 ~~340 and 210~~110 basis points for the thirteen ~~and twenty-six~~ weeks ended ~~July29, 2017, respectively.~~

May 5, 2018. The merchandise margin rate decline for ~~both~~ the quarter ~~and year-to-date periods~~ primarily reflected a higher markdown ~~rate~~rates, as the Company was more promotional in ~~both our Athletic Stores and Direct-to-Customers segments as we were more promotional. The increased promotional activity was necessary~~order to ~~stimulate sales and ensure that~~proactively manage inventory levels ~~remained current~~at optimal levels. Additionally, although to a lesser degree, a decline in our shipping and ~~in line with~~handling revenue also negatively affected the ~~pace of sales.~~

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

~~The effect of foreign currency fluctuations~~SG&A increased by $14 million, or by 50 basis points, to $385 million for the thirteen weeks ended ~~July 29, 2017 was not significant. For~~May 5,2018, as compared with the ~~twenty-six weeks ended July 29, 2017, excluding~~prior year. Excluding the effect of foreign currency fluctuations, the SG&A expense rate increased by ~~$5 million~~20 basis points for the thirteen weeks ended May 5, 2018, as compared with the corresponding prior-year period.~~Comparing~~

The increase in the SG&A expense rate ~~to the prior-year periods, the rate increased by 20 and 30 basis points for the thirteen and twenty-six weeks ended July 29, 2017, respectively~~.

~~The~~reflected higher ~~SG&A expense rate for both the quarter and year-to-date periods,~~wages, as compared with the corresponding prior-year ~~periods,~~period, as wages increased at a higher rate than sales. Additionally, we incurred higher costs in connection with our ongoing investment in various technology and infrastructure projects, coupled with an accrual for a legal matter. This was driven by the Athletic Stores segment and was primarily related to higher store-related compensation costs. Wages were higher mainly due to minimum wage increases, as well as related payroll taxes and benefits. As a percentage of sales, store wages and related 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. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting increased marketing efforts in order to drive traffic to its websites,partially offset by ~~a decline in incentive compensation accruals due~~insurance recoveries received for damaged inventory and fixed assets relating to ~~the underperformance relative to planned results. Additionally, corporate expense significantly declined~~losses incurred last year during ~~the second quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.~~Hurricane Maria.

Depreciation and amortization increased by ~~$3 million and $5~~$4 million for the thirteen ~~and twenty-six~~ weeks ended ~~July 29, 2017, respectively,~~May 5, 2018, as compared with the corresponding prior-year ~~periods.~~period. The increase in depreciation and amortization reflected ~~increased~~ongoing capital spending on store projects, enhancing our digital ~~sites,~~capabilities, and various other technologies and infrastructure.

Division profit decreased by 12.7 percent for the thirteen weeks ended May 5, 2018 as compared with the corresponding prior-year period. The decline in division profit reflected both a lower gross margin rate coupled with the deleverage in the SG&A expense rate. Both factors contributed equally to the decline in division profit.

Interest income increased by $2 million for ~~both~~ the thirteen ~~and twenty-six~~ weeks ended ~~July 29, 2017,~~May 5, 2018, as compared with the corresponding prior-year ~~periods, due to~~period, while interest expense was unchanged. The increase in interest income primarily represented higher average interest rates ~~earned~~ on our cash investments.

The Company recorded income tax provisions of $22 million and $111 million, which represented effective tax rates of 30.9 percent and 32.6 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively. For the thirteen ~~and twenty-six~~ weeks ended ~~July 30, 2016,~~May 5, 2018, the Company recorded an income tax ~~provisions~~provision of ~~$71 million and $178~~$64 million, which represented an effective tax rate of ~~35.9~~27.9 percent, ~~for both periods.~~compared with the prior-year income tax provision of $89 million, which represented an effective tax rate of 33.0 percent. 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 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.

The Company adopted ASU 2016-09 during the first quarter of 2017 requiring excess tax benefits or deficiencies from share-based compensation to be recorded as a component of the income tax provision, rather than to equity. The excess tax benefits recorded inDuring the thirteen weeks ended ~~July 29, 2017 were not significant. For the twenty-six weeks ended July 29, 2017, the excess tax benefits recognized were $7 million.~~

~~For the thirteen and twenty-six weeks ended July~~April 29, 2017 the Company ~~recorded a pension-related litigation charge~~recognized excess tax benefits of ~~$50~~$7 million ~~with a~~from share-based compensation, while the amount related ~~tax benefit of $20 million. This litigation charge reduced~~to the ~~overall effective rate because it reduced the proportion of the Company’s worldwide income taxed in the United States, where the tax rates are the highest.~~thirteen weeks ended May 5, 2018 was not significant.

Excluding the above-mentioned excess tax benefits, ~~and the impact of the litigation charge,~~ the effective tax rate for the thirteen ~~and twenty-six~~ weeks ended ~~July 29, 2017~~May 5, 2018 decreased as compared with the corresponding prior-year ~~periods~~period, primarily due to ~~a higher proportion~~the enactment of the Tax Act which reduced the statutory U.S. federal corporate income ~~earned~~tax rate from 35 percent to 21 percent. This was offset, in ~~international jurisdictions with lower~~part, by foreign taxes assessed at rates in excess of the U.S. federal rate for which no U.S. foreign tax ~~rates.~~credit is available, as well as valuation allowances for certain foreign operating loss carryforwards that the Company estimates it will not be able to utilize in future periods.

The Company currently expects its full-year tax rate to approximate 3427.5 percent excluding the effect of any nonrecurring items that may occur. 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.~~various jurisdictions. Please see Item 1. “Financial Statements,” Note 9, Income Taxes for further information.

For the thirteen weeks ended ~~July 29, 2017,~~May 5, 2018, net income decreased by ~~$76~~$15 million, or 608.3 percent, and diluted earnings per share ~~decreased~~increased by 591.5 percent to ~~$0.39~~$1.38 per share, as compared with the corresponding prior-year period. For the twenty-six weeks ended July 29, 2017, net income decreased by $87 million, or 27 percent, and diluted earnings per share decreased by 25 percent to $1.74 per share, as compared with the corresponding prior-year period.

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, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:

Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 5.5 percent and 2.5 percent for the thirteen and twenty-six weeks ended July 29, 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 of our store banners with the exception of our Foot Locker Canada and SIX:02 businesses, which increased sales.

~~Comparable-store sales decreased by 7.5 percent and 4.2 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods.~~ The overall decline in comparable-store sales was largely due to a decrease in footwear sales for both the quarter and year-to-date periods. Men’s, women’s and children’s footwear all experienced comparable-store sales declines, with children’s footwear experiencing the largest decline. Accordingly, Kids Foot Locker was the banner most negatively affected. The 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, especially the Jordan brand, and court lifestyle footwear. Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter and year-to-date periods. The decline in most of our 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 customer’s quickly changing style preferences.

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 twenty-six weeks ended July 29, 2017. Most of our banners benefited from gains in men’s branded and outerwear apparel, 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. Children’s apparel experienced a comparable-store sales decline for the current quarter, while total sales increased during the period due to an increase in net store openings. For the year-to-date period children’s apparel, both total and comparable-store sales increased as compared to the corresponding prior-year period.

~~Athletic Stores division profit decreased by 43.5 percent and 25.5 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively,~~ ~~as compared with the corresponding prior-year periods.~~ ~~The decline in division profit 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.~~

Comparable-sales for the Direct-to-Customers segment increased by 5.4 percent and 9.1 percent for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. This reflected our continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. Additionally, Eastbay experienced gains during the current quarter and year-to-date periods.

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 for both the quarter and year-to-date periods were driven by strong results in women’s casual styles, children’s footwear and lifestyle running. These gains were partially offset by declines in women’s running, football, and training. The Jordan brand experienced declines during the current quarter, but performed well for the year-to-date period. The footwear gains related to our international store-banner websites for both the quarter and year-to-date periods were primarily driven by men’s and women’s lifestyle running styles.

Direct-to-Customers division profit for the thirteen weeks ended July 29, 2017 decreased by $2 million, as compared with the corresponding prior-year period, and increased by $2 million for the year-to-date period. Division profit, as a percentage of sales, declined 150 basis points and 70 basis points for the thirteen and twenty-six weeks ended July 29, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns due to additional promotional activity 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 incentive compensation expense in light of current performance as compared with our plan.

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 $7 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively, which remained unchanged ~~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 $1 million and $3 million for the thirteen and twenty-six weeks ended July 29, 2017, ~~respectively,~~ thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $9 million and $11 million for the thirteen and twenty-six weeks ended July 29, 2017, respectively.

The decrease for the thirteen weeks and twenty-six weeks ended July 29, 2017 was primarily due to a decrease in incentive compensation and share-based compensation expense of $10 million as compared with the corresponding prior-year periods, reflecting the Company’s underperformance compared to its plan. This decline was partially offset by increased corporate support costs such as information technology and real estate management. Additionally, the decline for the twenty-six weeks ended July 29, 2017 was due to the prior-year corporate headquarters relocation costs of $4 million.

Our primary source of liquidity has been cash flow from earnings, while the principal uses of cash have ~~been: to~~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 ~~July 29, 2017, just under $1.2 billion~~May 5, 2018, approximately $646 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~~first quarter of ~~2017, in connection with our pension litigation,~~2018, we recorded a pre-tax charge of ~~$50~~$12 million ($30 9million after-tax or ~~$0.23~~$0.07 per diluted share)in connection with the pension litigation. The ~~Company previously recorded a pre-tax charge~~accrued amount as of ~~$100~~May 5, 2018 was $289 million ~~during 2015. This period’s 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~~and 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~~liability. The accrual will continue to increase with interest until paid, as required by the provisions of the required plan reformation. The Company expects to make contributions totaling $128 million to the ~~uncertainty involved with the resolution~~pension plan during 2018 to fund a portion of this litigation. 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.liability. The timing and the amount of actual contributions to the pension plan are dependent on when the court approves the reformation, 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.

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 ~~decrease~~increase from the prior year primarily reflects working capital changes and a decrease of $61 million in cash paid for income taxes during the thirteen weeks ended May 5, 2018. In the prior year, we contributed $25 million to our U.S. qualified pension plan. No such contribution was made during the thirteen weeks ended May 5, 2018. The overall increase was partially offset by the decline in net income as compared with the prior year.

Capital expenditures ~~were $19~~declined by $11 million ~~higher than~~compared with the ~~prior year. The increase was due to increased~~corresponding prior-year period. This represented a decline in spending on ~~corporate technology~~store projects ~~and cash payments~~partially offset by an increase related to ~~the 2016 capital program.~~technology projects. The Company’s full-year capital spending is expected to be approximately ~~$274~~$229 million, which includes ~~$204~~$124 million related to the remodeling or relocation of approximately ~~190~~110 existing stores and the opening of approximately 9040 new stores, as well as ~~$70~~$105 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. Additionally, during the thirteen weeks ending May 5, 2018, we finalized our insurance claim relating to Hurricane Maria and recorded a gain of $5 million. We received $1 million of insurance proceeds for fixed assets and we will receive an additional $4 million during the second quarter, of which $1 million will be classified as an investing activity.

During the ~~twenty-six~~thirteen weeks ended ~~July 29, 2017,~~May 5, 2018, we repurchased ~~896,100~~2,616,805 shares of our common stock for ~~$59~~$112 million, as compared with ~~4,724,691~~546,100 shares repurchased for ~~$276~~$38 million in the corresponding prior-year period. The Company also declared and paid dividends of $41 million during the first ~~two quarters~~quarter of ~~2017~~2018 and ~~2016 of $82 million and $74 million, respectively.~~2017. This represented quarterly rates of ~~$0.31~~$0.345 and ~~$0.275~~$0.31 per share for ~~2017~~2018 and ~~2016,~~2017, respectively. Additionally, wethe amount received for proceeds from ~~the issuance of~~ common stock in connection with employee stock ~~programs of $10 million~~was not significant for the thirteen weeks ended May 5, 2018, and ~~$14~~ was $9 million for the ~~twenty-six weeks ended July 29, 2017~~corresponding prior-year period. ~~and July 30, 2016, respectively.~~ Also, during the ~~twenty-six~~thirteen weeks ended ~~July~~May 5, 2018 and April 29, 2017, ~~and July 30, 2016,~~ the Company paid $9$1 million and $6$9 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.The activity for the twenty-six weeks ended July 29, 2017 also reflected an increase of $1 million relating to treasury stock reissued under the employee stock purchase plan. Included in financing activities for the prior year were fees of $2 million paid in connection with the new credit agreement.

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.~~February 3, 2018.

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.

The Company’s contractual cash obligations and commercial commitments at May 5, 2018 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed significantly since February 3, 2018 other than amounts related to tax reform. The Company plans to elect to pay the tax related to the mandatory deemed repatriation (“toll charge”) in annual installments over an eight year period. During the first quarter of 2018, the IRS issued a Q&A which indicated that a taxpayer may not receive a refund, or credit any portion of properly applied 2017 tax payments, unless the amount of payments exceeds the entire unpaid toll charge. Due to the Company’s prepayments with the IRS, the entire amount of the toll charge has been satisfied. Approximately $10 million related to tax reform remains payable, however the timing of payment is not determinable at this time.

~~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 July 29, 2017~~ 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.

We are currently migrating our point-of-sale software to a new platform. Approximately 500 stores have been converted to the new software platform as May 5, 2018, and we expect to complete the implementation primarily in this fiscal year. In connection with this implementation and resulting business process changes, we may make changes to the design and operation to our internal control over financial reporting.

During the quarter ended ~~July 29, 2017,~~May 5, 2018, there were no changes in the Company’s internal control over financial reporting, other than the implementation of new point-of-sale software noted above, (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.

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

There were no material changes to the risk factors disclosed in the ~~2016~~2017 Annual Report on Form 10-K.

The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended ~~July 29, 2017:~~ May 5, 2018:

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)
April 30 - May 27, 2017

200,155

$
59.76

200,000

$
1,175,348,788
May 28 - July 1, 2017

152,254

58.90

150,000

1,166,512,859
July 2 - July 29, 2017

—

—

—

1,166,512,859

352,409

$
59.39

350,000



					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)
February 4 - March 3, 2018	14,200	$	44.74	14,200	$	757,828,494
March 4 - April 7, 2018	2,232,984		43.10	2,202,605		662,907,107
April 8 - May 5, 2018	400,036		42.18	400,000		646,034,376
	2,647,220	$	42.97	2,616,805

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.


		($ in millions)
Remainder of 2018	$	3
2019		4
2020		3
2021		2
2022		2
2023		2


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



		($ in millions)
Amortization of actuarial (gain) loss:
Pension benefits- amortization of actuarial loss	$	73
Postretirement benefits- amortization of actuarial gain		~~(1)~~ —
Net periodic benefit cost (see Note ~~10)~~12)		63
Income tax benefit		~~(2)~~(1)
Net of tax	$	42


	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.



		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	2,806			$	42.61	2,739			$	52.45
Granted	497				72.75	379				44.79
Exercised	(334)				28.14	(4)				11.66
Expired or cancelled	(12)				59.55	(23)				50.19
Options outstanding at July 29, 2017	2,957		6.4	$	49.24
Options exercisable at July 29, 2017	1,926		5.1	$	39.40
Options available for future grant at July 29, 2017	10,997
Options outstanding at May 5, 2018						3,091		6.7	$	51.58
Options exercisable at May 5, 2018						2,174		5.6	$	48.91
Options available for future grant at May 5, 2018						8,271


(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.



					Items Related										Items Related
	Foreign Currency				to Pension and		Unrealized Loss on				Foreign Currency				to Pension and
	Translation		Cash Flow		Postretirement		Available-For-				Translation		Cash Flow		Postretirement
($ in millions)	Adjustments		Hedges		Benefits		Sale Security		Total		Adjustments		Hedges		Benefits		Total
Balance as of January 28, 2017	$	(127)	$	1	$	(236)	$	(1)	$	(363)
Balance as of February 3, 2018											$	(9)	$	—	$	(270)	$	(279)
OCI before reclassification		74		1		(1)		1		75		(38)		1		1		(36)
Reclassified from AOCL		—		—		4		—		4		—		—		2		2
Other comprehensive income		74		1		3		1		79		(38)		1		3		(34)
Balance as of July 29, 2017	$	(53)	$	2	$	(233)	$	—	$	(284)
Balance as of May 5, 2018											$	(47)	$	1	$	(267)	$	(313)



	Balance Sheet	July 29,		July 30,		January 28,
($ in millions)	Caption	2017		2016		2017
Hedging Instruments:
Foreign exchange forward contracts	Current assets	$	3	$	6	$	3
Foreign exchange forward contracts	Current liabilities	$	1	$	—	$	3


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



		Stock Option Plans						Stock Purchase Plan						Stock Option Plans						Stock Purchase Plan
		July 29,			July 30,			July 29,			July 30,			May 5,			April 29,			May 5,			April 29,
		2017			2016			2017			2016			2018			2017			2018			2017
Weighted-average risk free rate of interest		2.1	%		1.4	%		0.8	%		0.4	%		2.7	%		2.1	%		1.2	%		0.7	%
Expected volatility		25	%		30	%		29	%		26	%		37	%		25	%		30	%		29	%
Weighted-average expected award life (in years)		5.3			5.7			1.0			1.0			5.5			5.3			1.0			1.0
Dividend yield		1.7	%		1.7	%		2.0	%		1.7	%		3.1	%		1.7	%		2.1	%		2.0	%
Weighted-average fair value	$	15.56		$	15.68		$	10.61		$	15.19		$	12.35		$	15.58		$	16.49		$	10.33


(1)	Approximately 0.4 million performance-based RSUs were granted during the first quarter of 2018 and are included as granted in the table above. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets.
(2)	Adjustments were made to performance-based RSUs previously granted and are included as cancelled in the table above. These adjustments reflect changes in estimates based upon the Company’s current performance against predefined financial targets.


Item 6. Exhibits

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


Date: ~~September~~June 6, ~~2017~~2018	FOOT LOCKER, INC.


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


Exhibit No.		Description
10.1†		Foot Locker Executive Incentive Cash Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated March 28, 2018 filed on April 3, 2018).
10.2†		Form of Accelerate Future Growth Award Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated April 12, 2018 filed on April 18, 2018).
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.

†		Management contract or compensatory plan or arrangement.
*		Filed herewith.
**		Furnished herewith.