UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
FORM 10-Q(Mark One)
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| QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: October 28, 2017April 29, 2023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIESEXCHANGE 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 |
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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)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 | FL | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 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 ☐ | |
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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 May 26, 2023: 93,923,900
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FOOT LOCKER, INC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “continues,” “feels,” “forecasts,” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” Statements may be forward looking even in the absence of these particular words.
Examples of forward-looking statements include, but are not limited to, statements regarding our financial position, business strategy, and other plans and objectives for our future operations, and generation of free cash flow. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. The forward-looking statements contained herein are largely based on our expectations for the future, which reflect certain estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions, operating trends, and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. As such, management’s assumptions about future events may prove to be inaccurate.
We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events, changes in circumstances, or otherwise. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. Management cautions you that the forward-looking statements contained herein are not guarantees of future performance, and we cannot assure you that such statements will be realized or that the events and circumstances they describe will occur. Factors that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements herein include, but are not limited to, a change in the relationship with any of our key suppliers, including access to premium products, volume discounts, cooperative advertising, markdown allowances, or the ability to cancel orders and return merchandise; our ability to fund our planned capital investments; a recession, volatility in the financial markets, and other global economic factors; our ability to access the credit markets at competitive terms; difficulties in appropriately allocating capital and resources among our strategic opportunities; our ability to realize the expected benefits from acquisitions; business opportunities and expansion; investments; expenses; dividends; share repurchases; cash management; liquidity; cash flow from operations; borrowing capacity under our credit facility; repatriation of cash to the United States; supply chain issues; labor shortages and wage pressures; expectations regarding increased wages; inflation; consumer spending levels; the effect of governmental assistance programs; expectations regarding increasing global taxes; the effect of increased government regulation, compliance, and changes in law; the effect of the adverse outcome of any material litigation against us or judicial decisions that affect us or our industry generally; the effects of weather; climate change; ESG risks; increased competition; geopolitical events; the financial effect of accounting regulations and critical accounting policies; credit risk relating to the risk of loss as a result of non-performance by our counterparties; and any other factors set forth in the section entitled “Risk Factors” of our most recent Annual Report on Form 10-K.
All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this filing. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.
Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission for a discussion of certain risks relating to our business and any investment in our securities. Given these risks and uncertainties, you should not rely on forward-looking statements as predictions of actual results. Any or all of the forward-looking statements contained in this report, or any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 29, | April 30, | January 28, | |||||||||
($ in millions, except share amounts) | 2023 | 2022 | 2023* | |||||||||
ASSETS | ||||||||||||
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Current assets: | ||||||||||||
Cash and cash equivalents | $ | 313 | $ | 551 | $ | 536 | ||||||
Merchandise inventories | 1,758 | 1,401 | 1,643 | |||||||||
Other current assets | 326 | 281 | 342 | |||||||||
| 2,397 | 2,233 | 2,521 | |||||||||
Property and equipment, net | 901 | 899 | 920 | |||||||||
Operating lease right-of-use assets | 2,331 | 2,566 | 2,443 | |||||||||
Deferred taxes | 94 | 79 | 90 | |||||||||
Goodwill | 781 | 783 | 785 | |||||||||
Other intangible assets, net | 421 | 441 | 426 | |||||||||
Minority investments | 629 | 759 | 630 | |||||||||
Other assets | 89 | 118 | 92 | |||||||||
| $ | 7,643 | $ | 7,878 | $ | 7,907 | ||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
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Current liabilities: | | |||||||||||
Accounts payable | $ | 474 | $ | 565 | $ | 492 | ||||||
Accrued and other liabilities | 447 | 428 | 568 | |||||||||
Current portion of debt and obligations under finance leases | 6 | 6 | 6 | |||||||||
Current portion of lease obligations | 533 | 557 | 544 | |||||||||
| 1,460 | 1,556 | 1,610 | |||||||||
Long-term debt and obligations under finance leases | 445 | 450 | 446 | |||||||||
Long-term lease obligations | 2,132 | 2,323 | 2,230 | |||||||||
Other liabilities | 323 | 334 | 328 | |||||||||
Total liabilities | 4,360 | 4,663 | 4,614 | |||||||||
Commitments and contingencies | | | | |||||||||
Shareholders’ equity: | | | | |||||||||
Common stock and paid-in capital: 94,175,714; 99,233,112; and 93,396,901 shares issued, respectively | 766 | 779 | 760 | |||||||||
Retained earnings | 2,923 | 2,995 | 2,925 | |||||||||
Accumulated other comprehensive loss | (396 | ) | (384 | ) | (392 | ) | ||||||
Less: Treasury stock at cost: 260,870; 4,731,931; and 1,489 shares, respectively | (10 | ) | (178 | ) | — | |||||||
Noncontrolling interest | — | 3 | — | |||||||||
Total shareholders' equity | 3,283 | 3,215 | 3,293 | |||||||||
| $ | 7,643 | $ | 7,878 | $ | 7,907 |
* | The balance sheet at January 28, 2023 has been derived from the previously reported audited consolidated 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, 2023. |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except shares)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| October 28, |
| October 29, |
| January 28, | |||
| 2017 |
| 2016 |
| 2017 | |||
| (Unaudited) |
| (Unaudited) |
| * | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 890 |
| $ | 865 |
| $ | 1,046 |
Merchandise inventories |
| 1,313 |
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| 1,361 |
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| 1,307 |
Other current assets |
| 295 |
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| 291 |
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| 280 |
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| 2,498 |
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| 2,517 |
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| 2,633 |
Property and equipment, net |
| 835 |
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| 732 |
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| 765 |
Deferred taxes |
| 164 |
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| 171 |
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| 161 |
Goodwill |
| 158 |
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| 156 |
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| 155 |
Other intangible assets, net |
| 45 |
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| 43 |
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| 42 |
Other assets |
| 113 |
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| 75 |
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| 84 |
| $ | 3,813 |
| $ | 3,694 |
| $ | 3,840 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 241 |
| $ | 215 |
| $ | 249 |
Accrued and other liabilities |
| 326 |
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| 327 |
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| 363 |
Current portion of capital lease obligations |
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| 1 |
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| 567 |
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| 543 |
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| 612 |
Long-term debt and obligations under capital leases |
| 126 |
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| 127 |
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| 127 |
Other liabilities |
| 463 |
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| 391 |
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| 391 |
Total liabilities |
| 1,156 |
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| 1,061 |
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| 1,130 |
Shareholders’ equity: |
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Common stock and paid-in capital: 133,336,171; 174,687,964; and 132,616,087 shares outstanding, respectively |
| 921 |
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| 1,168 |
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| 900 |
Retained earnings |
| 2,467 |
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| 3,546 |
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| 2,254 |
Accumulated other comprehensive loss |
| (286) |
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| (353) |
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| (363) |
Less: Treasury stock at cost: 10,730,582; 42,326,538; and 1,120,466 shares, respectively |
| (445) |
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| (1,728) |
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| (81) |
Total shareholders' equity |
| 2,657 |
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| 2,633 |
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| 2,710 |
| $ | 3,813 |
| $ | 3,694 |
| $ | 3,840 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions, except per share amounts) | 2023 | 2022 | ||||||
Sales | $ | 1,927 | $ | 2,175 | ||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | 1,931 | 2,178 | ||||||
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Cost of sales | 1,349 | 1,435 | ||||||
Selling, general and administrative expenses | 431 | 463 | ||||||
Depreciation and amortization | 51 | 54 | ||||||
Impairment and other | 39 | 6 | ||||||
Income from operations | 61 | 220 | ||||||
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Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net | (3 | ) | (25 | ) | ||||
Income before income taxes | 57 | 190 | ||||||
Income tax expense | 21 | 58 | ||||||
Net income | 36 | 132 | ||||||
Net loss attributable to noncontrolling interests | — | 1 | ||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
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Basic earnings per share | $ | 0.39 | $ | 1.38 | ||||
Weighted-average shares outstanding | 93.7 | 96.1 | ||||||
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Diluted earnings per share | $ | 0.38 | $ | 1.37 | ||||
Weighted-average shares outstanding, assuming dilution | 95.1 | 97.2 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
* The balance sheet at January 28, 2017 has been derived
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
Other comprehensive income (loss), net of income tax | ||||||||
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Foreign currency translation adjustment: | ||||||||
Translation adjustment arising during the period, net of income tax (benefit)/expense of $- and $(1), respectively | (7 | ) | (44 | ) | ||||
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Hedges contracts: | ||||||||
Change in fair value of derivatives, net of income tax benefit of $-, and $-, respectively | 1 | 1 | ||||||
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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 and $1, respectively | 2 | 2 | ||||||
Comprehensive income | $ | 32 | $ | 92 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Additional Paid-In | | | | Accumulated | | | |||||||||||||||||||||||||
| Capital & | | | | Other | | Total | |||||||||||||||||||||||||
Thirteen weeks ended | Common Stock | Treasury Stock | Retained | Comprehensive | Noncontrolling | Shareholders' | ||||||||||||||||||||||||||
(shares in thousands, $ in millions) | Shares | Amount | Shares | Amount | Earnings | Loss | interests | Equity | ||||||||||||||||||||||||
Balance at January 28, 2023 | 93,397 | $ | 760 | (1 | ) | $ | — | $ | 2,925 | $ | (392 | ) | $ | — | $ | 3,293 | ||||||||||||||||
Restricted stock issued | 628 | — | ||||||||||||||||||||||||||||||
Issued under director and stock plans | 151 | 4 | 4 | |||||||||||||||||||||||||||||
Share-based compensation expense | 2 | 2 | ||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | (260 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||||
Net income | 36 | 36 | ||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.40 per share) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||
Translation adjustment, net of tax | (7 | ) | (7 | ) | ||||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | 1 | 1 | ||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 2 | 2 | ||||||||||||||||||||||||||||||
Balance at April 29, 2023 | 94,176 | $ | 766 | (261 | ) | $ | (10 | ) | $ | 2,923 | $ | (396 | ) | $ | — | $ | 3,283 |
| Additional Paid-In | | | | Accumulated | | | |||||||||||||||||||||||||
| Capital & | | | | Other | | Total | |||||||||||||||||||||||||
Thirteen weeks ended | Common Stock | Treasury Stock | Retained | Comprehensive | Noncontrolling | Shareholders' | ||||||||||||||||||||||||||
(shares in thousands, $ in millions) | Shares | Amount | Shares | Amount | Earnings | Loss | interests | Equity | ||||||||||||||||||||||||
Balance at January 29, 2022 | 99,071 | $ | 770 | (2,050 | ) | $ | (88 | ) | $ | 2,900 | $ | (343 | ) | $ | 4 | $ | 3,243 | |||||||||||||||
Restricted stock issued | 88 | — | ||||||||||||||||||||||||||||||
Issued under director and stock plans | 74 | 2 | 2 | |||||||||||||||||||||||||||||
Share-based compensation expense | 7 | 7 | ||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | (32 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||
Share repurchases | (2,650 | ) | (89 | ) | (89 | ) | ||||||||||||||||||||||||||
Net income | 133 | (1 | ) | 132 | ||||||||||||||||||||||||||||
Cash dividends on common stock ($0.40 per share) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||
Translation adjustment, net of tax | (44 | ) | (44 | ) | ||||||||||||||||||||||||||||
Change in hedges, net of tax | 1 | 1 | ||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 2 | 2 | ||||||||||||||||||||||||||||||
Balance at April 30, 2022 | 99,233 | $ | 779 | (4,732 | ) | $ | (178 | ) | $ | 2,995 | $ | (384 | ) | $ | 3 | $ | 3,215 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
From operating activities: | ||||||||
Net income | $ | 36 | $ | 132 | ||||
Adjustments to reconcile net income to net cash from operating activities: | | | ||||||
Non-cash impairment and other | 18 | 3 | ||||||
Fair value adjustments to minority investments | — | 25 | ||||||
Depreciation and amortization | 51 | 54 | ||||||
Deferred income taxes | (4 | ) | 3 | |||||
Share-based compensation expense | 2 | 7 | ||||||
Change in assets and liabilities: | | |||||||
Merchandise inventories | (117 | ) | (150 | ) | ||||
Accounts payable | (16 | ) | (25 | ) | ||||
Accrued and other liabilities | (87 | ) | (80 | ) | ||||
Other, net | (1 | ) | 10 | |||||
Net cash used in operating activities | (118 | ) | (21 | ) | ||||
From investing activities: | ||||||||
Capital expenditures | (59 | ) | (95 | ) | ||||
Purchase of business, net of cash acquired | — | (7 | ) | |||||
Minority investments | — | (3 | ) | |||||
Net cash used in investing activities | (59 | ) | (105 | ) | ||||
From financing activities: | ||||||||
Dividends paid on common stock | (38 | ) | (38 | ) | ||||
Purchase of treasury shares | — | (89 | ) | |||||
Payment of obligations under finance leases | (2 | ) | (2 | ) | ||||
Shares of common stock repurchased to satisfy tax withholding obligations | (10 | ) | (1 | ) | ||||
Proceeds from exercise of stock options | 4 | 2 | ||||||
Net cash used in financing activities | (46 | ) | (128 | ) | ||||
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash | — | (1 | ) | |||||
Net change in cash, cash equivalents, and restricted cash | (223 | ) | (255 | ) | ||||
Cash, cash equivalents, and restricted cash at beginning of year | 582 | 850 | ||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 359 | $ | 595 | ||||
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Supplemental information: | ||||||||
Interest paid | $ | 8 | $ | 8 | ||||
Income taxes paid | 23 | 18 | ||||||
Cash paid for amounts included in measurement of operating lease liabilities | 170 | 174 | ||||||
Cash paid for amounts included in measurement of finance lease liabilities | 2 | 2 | ||||||
Right-of-use assets obtained in exchange for operating lease obligations | 34 | 138 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
Foot Locker, Inc., together with its consolidated subsidiaries (“Foot Locker,” “Company,” “we,” “our,” and “us”), is a leading footwear and apparel retailer. We have integrated all available shopping channels including stores, websites, apps, and social channels. Store sales are primarily fulfilled from the previously reported audited financial statementsstore’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 that date,the original store. Direct-to-customer orders are generally shipped to our customers through our distribution centers but does may also be shipped from any store or a combination of our distribution centers and stores depending on availability of particular items. We operate in North America, Europe, and Asia Pacific, representing our operating segments. We aggregate these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Basis of Presentation
The accompanying interim Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotesnotes required by U.S. generally accepted accounting principlesGAAP 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.
1
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
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| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||
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| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Sales |
| $ | 1,870 |
| $ | 1,886 |
| $ | 5,572 |
| $ | 5,653 |
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Cost of sales |
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| 1,290 |
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| 1,246 |
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| 3,809 |
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| 3,730 |
Selling, general and administrative expenses |
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| 368 |
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| 366 |
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| 1,078 |
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| 1,077 |
Depreciation and amortization |
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| 44 |
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| 40 |
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| 127 |
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| 118 |
Litigation and other charges |
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| 13 |
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| 6 |
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| 63 |
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| 6 |
Income from operations |
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| 155 |
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| 228 |
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| 495 |
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| 722 |
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Interest (income) / expense, net |
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| — |
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| 1 |
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| 2 |
Other income |
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| — |
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| (3) |
Income before income taxes |
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| 156 |
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| 227 |
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| 498 |
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| 723 |
Income tax expense |
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| 54 |
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| 70 |
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| 165 |
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| 248 |
Net income |
| $ | 102 |
| $ | 157 |
| $ | 333 |
| $ | 475 |
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Basic earnings per share |
| $ | 0.81 |
| $ | 1.18 |
| $ | 2.57 |
| $ | 3.53 |
Weighted-average shares outstanding |
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| 126.0 |
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| 132.9 |
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| 129.6 |
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| 134.6 |
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Diluted earnings per share |
| $ | 0.81 |
| $ | 1.17 |
| $ | 2.55 |
| $ | 3.50 |
Weighted-average shares outstanding, assuming dilution |
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| 126.4 |
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| 134.0 |
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| 130.3 |
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| 135.7 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in millions)
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|
|
| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||
|
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income |
| $ | 102 |
| $ | 157 |
| $ | 333 |
| $ | 475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of income tax: |
|
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|
|
|
|
|
|
|
|
|
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|
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|
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|
Foreign currency translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment arising during the period, net of income tax |
|
| (4) |
|
| (14) |
|
| 70 |
|
| 3 |
|
|
|
|
|
|
|
|
|
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|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of income tax |
|
| — |
|
| 1 |
|
| 1 |
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available for sale securities |
|
| — |
|
| — |
|
| 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, $3 and $3 million, respectively, and foreign currency fluctuations |
|
| 2 |
|
| 3 |
|
| 5 |
|
| 5 |
Comprehensive income |
| $ | 100 |
| $ | 147 |
| $ | 410 |
| $ | 488 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
| Thirty-nine weeks ended | ||||
| October 28, |
| October 29, | ||
| 2017 |
| 2016 * | ||
|
|
|
|
|
|
From operating activities: |
|
|
|
|
|
Net income | $ | 333 |
| $ | 475 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Non-cash impairment charges |
| — |
|
| 6 |
Depreciation and amortization |
| 127 |
|
| 118 |
Share-based compensation expense |
| 11 |
|
| 17 |
Qualified pension plan contributions |
| (25) |
|
| (33) |
Change in assets and liabilities: |
|
|
|
|
|
Merchandise inventories |
| 18 |
|
| (77) |
Accounts payable |
| (13) |
|
| (66) |
Accrued and other liabilities |
| (29) |
|
| (3) |
Pension litigation accrual |
| 50 |
|
| — |
Other, net |
| 24 |
|
| 40 |
Net cash provided by operating activities |
| 496 |
|
| 477 |
|
|
|
|
|
|
From investing activities: |
|
|
|
|
|
Capital expenditures |
| (204) |
|
| (193) |
Net cash used in investing activities |
| (204) |
|
| (193) |
|
|
|
|
|
|
From financing activities: |
|
|
|
|
|
Purchase of treasury shares |
| (362) |
|
| (352) |
Dividends paid on common stock |
| (120) |
|
| (111) |
Proceeds from exercise of stock options |
| 12 |
|
| 24 |
Treasury stock reissued under employee stock plan |
| 5 |
|
| 4 |
Shares of common stock repurchased to satisfy tax withholding obligations |
| (10) |
|
| (6) |
Payment of revolving credit agreement costs |
| — |
|
| (2) |
Net cash used in financing activities |
| (475) |
|
| (443) |
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
| 30 |
|
| 4 |
Net change in cash, cash equivalents, and restricted cash |
| (153) |
|
| (155) |
Cash, cash equivalents, and restricted cash at beginning of period |
| 1,073 |
|
| 1,048 |
Cash, cash equivalents, and restricted cash at end of period | $ | 920 |
| $ | 893 |
|
|
|
|
|
|
Cash paid during the period: |
|
|
|
|
|
Interest | $ | 6 |
| $ | 6 |
Income taxes | $ | 187 |
| $ | 271 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
|
4
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 adjustments (consisting of normal recurring adjustmentsaccruals) considered necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 3, 2018 and of the fiscal year ended January 28, 2017. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates.have been included. The results of operations for any interim period are not necessarily indicative of the results expected for the year. Additionally, the results of operations for the period ended April 29, 2023 are not necessarily indicative of the results to be expected for the full fiscal year due to the continued uncertainty of general economic conditions that may affect us for the remainder of the year. Fiscal year 2023 will include the 53-week period that ends on February 3, 2024.
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”)our 2022 Form 10-K for10-K. Certain reclassifications have been made to prior period financial statements to conform to the year ended January 28, 2017,current period presentation. In 2023, we separately present licensing revenue as filed witha component of total revenue in the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2017.Condensed Consolidated Statements of Operations, as previously licensing revenue was presented within other income / (expense), net.
There were no significant changes to the policies disclosed in Note 1,Summary of Significant Accounting Policies of our 2022 Form 10-K.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The core principle of this amendment is that an entity should 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 expects a change in the timing of recognizing gift card breakage, sales relating to shipping and handling for undelivered orders, and a change in timing for the recognition of expenses related to direct-response advertising costs. In addition, we expect a balance sheet reclassification from inventory to other current assets relating to our right to recover products for our sales returns, as well as a change to the accounting for our unredeemed rewards for our loyalty program as a reduction to sales instead of recording the charge to cost of goods sold. Although we are in the process of finalizing the quantification of the effects on the areas discussed above, we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows. The Company expects to adopt the provisions of this standard using the modified retrospective method, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption.
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 and will be adopted by the Company for annual reporting periods beginning after December 15, 2017, including interim periods therein. 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. Based on deferred tax amounts related to applicable past intercompany transactions and the foreign exchange rates as of October 28, 2017, we expect the adoption will result in an increase in deferred income tax assets of approximately $40 million to $45 million.
Other recentlyRecently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’sour present or future consolidated financial statements.
52. Revenue
The table below presents sales disaggregated by sales channel, as well as licensing revenue earned from our various franchised arrangements. Sales are attributable to the channel in which the sales transaction is initiated.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Sales by Channel | ||||||||
Stores | $ | 1,613 | $ | 1,776 | ||||
Direct-to-customers | 314 | 399 | ||||||
Total sales | 1,927 | 2,175 | ||||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | $ | 1,931 | $ | 2,178 |
FOOT LOCKER, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements2. Revenue (continued)
In March 2016,Revenue is attributed to the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifiescountry in which the accounting for share-based payment transactions, including tax consequences, forfeitures,transaction is fulfilled, and classifications of the tax related itemsrevenue by geographic area is presented in the statement of cash flows. The Company adopted ASU 2016-09 duringfollowing table.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Revenue by Geography | ||||||||
United States | $ | 1,287 | $ | 1,544 | ||||
International | 644 | 634 | ||||||
Total revenue | $ | 1,931 | $ | 2,178 |
Sales by banner and operating segment are presented in the first quarter of 2017. Amendments relating to accounting for excess tax benefits and deficienciesfollowing table.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Foot Locker | $ | 744 | $ | 807 | ||||
Champs Sports | 328 | 454 | ||||||
Kids Foot Locker | 167 | 180 | ||||||
WSS | 150 | 138 | ||||||
Other (1) | — | 53 | ||||||
North America | 1,389 | 1,632 | ||||||
Foot Locker | 379 | 377 | ||||||
Sidestep | 14 | 24 | ||||||
EMEA | 393 | 401 | ||||||
Foot Locker | 98 | 93 | ||||||
atmos | 47 | 49 | ||||||
Asia Pacific | 145 | 142 | ||||||
Total sales | $ | 1,927 | $ | 2,175 |
(1) | Other includes sales from banners that we no longer operate and primarily represented Eastbay in the prior-year period. |
Contract Liabilities
We sell gift cards, which do not have been adopted prospectively. Forexpiration dates. Revenue from gift card sales is recorded when the thirteen and thirty-nine weeks ended October 28,2017, the Company recorded excess tax benefits related to share-based compensation awards of $2 million and $9 million, respectively,gift cards are redeemed by customers. Breakage income is recognized as revenue in proportion to the income statement, withinpattern of rights exercised by the income tax provision, whereas such benefits were previously recognized in equity. Also, incustomer. The table below presents the diluted net earnings per share calculation, when applyingactivity of our gift card liability balance.
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Gift card liability at beginning of year | $ | 36 | $ | 46 | ||||
Redemptions | (61 | ) | (65 | ) | ||||
Breakage recognized in sales | (4 | ) | (4 | ) | ||||
Activations | 56 | 60 | ||||||
Gift card liability | $ | 27 | $ | 37 |
We elected not to disclose the treasury stock method for shares that could be repurchased, the assumed proceeds no longer includeinformation about remaining performance obligations since 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 statementgift cards redeemed after 12 months is not significant.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Segment Information
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. The Company has adopted this ASU as of the first quarter of 2017. Accordingly, we restated our cash and cash equivalents balances in the condensed consolidated statements of cash flows to include restricted cash of $28 million as of October29,2016 and $27 million as of both January 30, 2016, and January 28, 2017. Please see Note 5, Restricted Cash, for a reconciliation of cash and cash equivalents as presented on our condensed consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows.
2. Segment Information
The Company has determined that itsFoot Locker operates one reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division results.segment. Division profit reflects income before income taxes, pension litigation charge, reorganization charge,impairment and other, corporate expense, non-operatingother income / (expense), net, and net interest (income) / expense.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Division profit | $ | 104 | $ | 263 | ||||
Less: Impairment and other (1) | 39 | 6 | ||||||
Less: Corporate expense (2) | 4 | 37 | ||||||
Income from operations | 61 | 220 | ||||||
Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net (3) | (3 | ) | (25 | ) | ||||
Income before income taxes | $ | 57 | $ | 190 |
(1) | See Note 4,Impairment and Other Charges for further detail. |
(2) | Corporate expense consists of unallocated selling, general and administrative expenses, as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. |
(3) | See Note 5,Other Income / (Expense), net. |
|
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|
|
|
| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||
|
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Sales |
| ($ in millions) | ||||||||||
Athletic Stores |
| $ | 1,612 |
| $ | 1,644 |
| $ | 4,819 |
| $ | 4,955 |
Direct-to-Customers |
|
| 258 |
|
| 242 |
|
| 753 |
|
| 698 |
Total sales |
| $ | 1,870 |
| $ | 1,886 |
| $ | 5,572 |
| $ | 5,653 |
Operating Results |
|
|
|
|
|
|
|
|
|
|
|
|
Athletic Stores (1) |
| $ | 154 |
| $ | 213 |
| $ | 504 |
| $ | 683 |
Direct-to-Customers |
|
| 26 |
|
| 32 |
|
| 88 |
|
| 92 |
Division profit |
|
| 180 |
|
| 245 |
|
| 592 |
|
| 775 |
Less: Pension litigation and reorganization charges (2), (3) |
|
| 13 |
|
| — |
|
| 63 |
|
| — |
Less: Corporate expense |
|
| 12 |
|
| 17 |
|
| 34 |
|
| 53 |
Operating profit |
|
| 155 |
|
| 228 |
|
| 495 |
|
| 722 |
Interest (income) / expense, net |
|
| — |
|
| 1 |
|
| (1) |
|
| 2 |
Other income (4) |
|
| 1 |
|
| — |
|
| 2 |
|
| 3 |
Income before income taxes |
| $ | 156 |
| $ | 227 |
| $ | 498 |
| $ | 723 |
4. Impairment and Other
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Transformation consulting | $ | 19 | $ | — | ||||
Impairment of long-lived assets and right-of-use assets | 18 | 3 | ||||||
Reorganization costs | 2 | — | ||||||
Acquisition and integration costs | — | 2 | ||||||
Other | — | 1 | ||||||
Total impairment and other | $ | 39 | $ | 6 |
For the thirteen weeks ended April 29, 2023, we incurred $19 million of transformation consulting expense. We recorded impairment charges of $18 million, primarily accelerated tenancy charges on right-of-use assets for the closures of the Sidestep banner and certain Foot Locker Asia stores. Additionally, we recorded reorganization costs of $2 million related to the announced closure of a North American distribution center and costs associated with the closure of the Sidestep banner and certain Foot Locker Asia stores.
6
FOOT LOCKER, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Other Income / (Expense), net
|
|
|
|
|
|
|
|
| Thirteen weeks ended | |||||||
April 29, | April 30, | |||||||
($ in millions) | 2023 | 2022 | ||||||
Pension and postretirement net benefit expense, excluding service cost | $ | (2 | ) | $ | — | |||
Share of losses related to minority investments | (1 | ) | — | |||||
Minority investment in Retailors, Ltd. | — | (25 | ) | |||||
Total other income / (expense), net | $ | (3 | ) | $ | (25 | ) |
3. Litigation6. Cash, Cash Equivalents, and Other Charges
|
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|
| Thirteen weeks ended |
| Thirty-nine weeks ended | |||||||||
|
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| ($ in millions) | ||||||||||
Pension litigation charge |
| $ | — |
| $ | — |
| $ | 50 |
| $ | — |
Reorganization costs |
|
| 13 |
|
| — |
|
| 13 |
|
| — |
Impairment of long-lived assets |
|
| — |
|
| 6 |
|
| — |
|
| 6 |
Total litigation and other charges |
| $ | 13 |
| $ | 6 |
| $ | 63 |
| $ | 6 |
During the third quarter of 2017, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. As a result of this, as well as certain corporate staff reductions taken to improve corporate efficiency, the Company recorded a charge of $13 million. The charge consisted primarily of severance payments and benefit continuation costs for approximately 190 associates. The following is a reconciliation of the accrual for the quarter ended October 28,2017:
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| Severance and |
|
| Other Related |
|
|
|
|
|
| Benefit Costs |
|
| Charges |
|
| Total |
|
| ($ in millions) | |||||||
Balance at January 28, 2017 |
| $ | — |
| $ | — |
| $ | — |
Amounts charged to expense |
|
| 11 |
|
| 2 |
|
| 13 |
Cash payments |
|
| (2) |
|
| — |
|
| (2) |
Balance at October 28, 2017 |
| $ | 9 |
| $ | 2 |
| $ | 11 |
As more fully discussed in Note 14, Legal Proceedings, during the second quarter of 2017 the Company recorded a $50 million pension litigation charge.
Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a non-cash charge of $6 million to write down store fixtures and leasehold improvements related to the Runners Point and Sidestep businesses.
4. Hurricane-Related Costs
Hurricanes Harvey, Irma, and Maria adversely affected the Company’s third quarter of 2017 operations and resulted in the closure of approximately 450 of the Company’s retail stores for varying periods of time. As of October28, 2017, 22 of these stores remain closed in Puerto Rico. The Company expects to re-open 8 of the remaining stores during the fourth quarter of 2017 and an additional 7 stores during the early part of 2018, dependent on timing of repairs and mall openings. Currently, we do not expect to re-open the balance of the stores.Restricted Cash
The Company recorded a $7 million charge associated with its retail stores that were damaged by the hurricanes. This charge was recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 28, 2017. The charge reflects estimated property damages and other costs of $2 million and inventory write-offs of $5 million. The Company is working with its insurance providers to determine if any of the losses can be recovered.
7
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Restricted Cash
The following table below provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets,Condensed Consolidated Balance Sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statementsCondensed Consolidated Statements of cash flows.Cash Flows.
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|
|
| October 28, |
| October 29, |
| January 28, | |||
|
| 2017 |
| 2016 |
| 2017 | |||
|
| ($ in millions) | |||||||
Cash and cash equivalents |
| $ | 890 |
| $ | 865 |
| $ | 1,046 |
Restricted cash included in other current assets |
|
| 1 |
|
| — |
|
| — |
Restricted cash included in other non-current assets |
|
| 29 |
|
| 28 |
|
| 27 |
Cash, cash equivalents, and restricted cash |
| $ | 920 |
| $ | 893 |
| $ | 1,073 |
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Cash and cash equivalents | $ | 313 | $ | 551 | ||||
Restricted cash included in other current assets | 13 | 8 | ||||||
Restricted cash included in other non-current assets | 33 | 36 | ||||||
Cash, cash equivalents, and restricted cash | $ | 359 | $ | 595 |
Amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe. In addition, restricted cash reflectsEurope and deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.
6. Goodwill
Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual review of goodwill and intangible assets with indefinite lives performed during the first quarter of 2017 did not result in the recognition of impairment. The following table provides a summary of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations.
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|
| October 28, |
| October 29, |
| January 28, | |||
|
| 2017 |
| 2016 |
| 2017 | |||
|
| ($ in millions) | |||||||
Athletic Stores |
| $ | 18 |
| $ | 17 |
| $ | 16 |
Direct-to-Customers |
|
| 140 |
|
| 139 |
|
| 139 |
Total goodwill |
| $ | 158 |
| $ | 156 |
| $ | 155 |
7. Other Intangible Assets, net
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
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| October 28, 2017 |
| October 29, 2016 |
| January 28, 2017 | |||||||||||||||||||||
|
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| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net |
| Gross |
| Accum. |
| Net | |||||||||
($ in millions) |
| value |
| amort. |
| value |
| value |
| amort. |
| value |
| value |
| amort. |
| value | ||||||||||
Amortized intangible assets: (1) |
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|
|
|
|
|
|
|
| |
| Lease acquisition costs |
| $ | 129 |
| $ | (117) |
| $ | 12 |
| $ | 118 |
| $ | (107) |
| $ | 11 |
| $ | 116 |
| $ | (105) |
| $ | 11 |
| Trademarks / trade names |
|
| 20 |
|
| (13) |
|
| 7 |
|
| 20 |
|
| (13) |
|
| 7 |
|
| 20 |
|
| (13) |
|
| 7 |
| Favorable leases |
|
| 7 |
|
| (6) |
|
| 1 |
|
| 7 |
|
| (5) |
|
| 2 |
|
| 7 |
|
| (5) |
|
| 2 |
|
|
| $ | 156 |
| $ | (136) |
| $ | 20 |
| $ | 145 |
| $ | (125) |
| $ | 20 |
| $ | 143 |
| $ | (123) |
| $ | 20 |
Indefinite life intangible assets: (1) |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
| |
| Runners Point Group trademarks / trade names |
|
|
|
|
|
|
| $ | 25 |
|
|
|
|
|
|
| $ | 23 |
|
|
|
|
|
|
| $ | 22 |
Other intangible assets, net |
|
|
|
|
|
|
| $ | 45 |
|
|
|
|
|
|
| $ | 43 |
|
|
|
|
|
|
| $ | 42 |
|
|
8
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the thirty-nine week period ended October, 28 2017, the Company recorded $2 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years. Amortization expense recorded is as follows:
|
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|
|
| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||
($ in millions) |
|
| October 28, 2017 |
|
| October 29, 2016 |
| October 28, 2017 |
| October 29, 2016 | ||
Amortization expense |
| $ | 1 |
| $ | 1 |
| $ | 3 |
| $ | 3 |
Estimated future amortization expense for finite-life intangible assets is as follows:
|
|
|
|
| ($ in millions) |
Remainder of 2017 | $ | 1 |
2018 |
| 4 |
2019 |
| 4 |
2020 |
| 3 |
2021 |
| 2 |
2022 |
| 2 |
8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:
|
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| ||||||||||||||
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| |||||||||||||
| October 28, |
| October 29, |
| January 28, | |||||||||||||||
| 2017 |
| 2016 |
| 2017 | |||||||||||||||
| ($ in millions) | |||||||||||||||||||
| April 29, | April 30, | January 28, | |||||||||||||||||
($ in millions) | 2023 | 2022 | 2023 | |||||||||||||||||
Foreign currency translation adjustments | $ | (57) |
| $ | (116) |
| $ | (127) | $ | (155 | ) | $ | (151 | ) | $ | (148 | ) | |||
Cash flow hedges |
| 2 |
|
| 6 |
|
| 1 | ||||||||||||
Hedge contracts | (2 | ) | 1 | (3 | ) | |||||||||||||||
Unrecognized pension cost and postretirement benefit |
| (231) |
|
| (243) |
|
| (236) | (239 | ) | (234 | ) | (241 | ) | ||||||
Unrealized loss on available-for-sale security |
| — |
|
| — |
|
| (1) | ||||||||||||
| $ | (286) |
| $ | (353) |
| $ | (363) | ||||||||||||
| $ | (396 | ) | $ | (384 | ) | $ | (392 | ) |
The changes in AOCL for the thirty-ninethirteen weeks ended October 28, 2017April 29, 2023 were as follows:
| Foreign | | Items Related | | ||||||||||||
| Currency | | to Pension and | | ||||||||||||
| Translation | Hedge | Postretirement | | ||||||||||||
($ in millions) | Adjustments | Contracts | Benefits | Total | ||||||||||||
Balance as of January 28, 2023 | $ | (148 | ) | (3 | ) | $ | (241 | ) | $ | (392 | ) | |||||
| | | | | ||||||||||||
OCI before reclassification | (7 | ) | 3 | — | (4 | ) | ||||||||||
Reclassification of hedges, net of tax | — | (2 | ) | — | (2 | ) | ||||||||||
Amortization of pension actuarial loss, net of tax | — | — | 2 | 2 | ||||||||||||
Other comprehensive income | (7 | ) | 1 | 2 | (4 | ) | ||||||||||
Balance as of April 29, 2023 | $ | (155 | ) | $ | (2 | ) | $ | (239 | ) | $ | (396 | ) |
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| Items Related |
|
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|
| ||||
|
| Foreign Currency |
|
|
| to Pension and |
| Unrealized Loss on |
|
|
| ||||
|
| Translation |
| Cash Flow |
| Postretirement |
| Available-For- |
|
|
| ||||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Sale Security |
| Total | |||||
Balance as of January 28, 2017 |
| $ | (127) |
| $ | 1 |
| $ | (236) |
| $ | (1) |
| $ | (363) |
OCI before reclassification |
|
| 70 |
|
| 1 |
|
| (1) |
|
| 1 |
|
| 71 |
Reclassified from AOCL |
|
| — |
|
| — |
|
| 6 |
|
| — |
|
| 6 |
Other comprehensive income |
|
| 70 |
|
| 1 |
|
| 5 |
|
| 1 |
|
| 77 |
Balance as of October 28, 2017 |
| $ | (57) |
| $ | 2 |
| $ | (231) |
| $ | — |
| $ | (286) |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Accumulated Other Comprehensive Loss (continued)
Reclassifications from AOCL for the thirty-ninethirteen weeks ended October 28, 2017April 29, 2023 were as follows:
($ in millions) | | |||
Reclassification of hedge loss: | ||||
Cross-currency swap | $ | (2 | ) | |
Income tax | — | |||
Reclassification of hedges, net of tax | $ | (2 | ) | |
| | |||
Amortization of actuarial loss: | | |||
Pension benefits | $ | 3 | ||
Income tax benefit | (1 | ) | ||
Amortization of actuarial loss, net of tax | $ | 2 | ||
Total, net of tax | $ | — |
| ||
| ||
|
| |
| ||
| ||
| ||
|
|
8. Fair Value Measurements
9
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Financial Instruments
The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a practice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 10, Fair Value Measurements.
Derivative Holdings Designated as Hedges
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 thirty-nine weeks ended October 28, 2017 was not significant and there were no such gains or losses in the corresponding prior-year period. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.
The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The most significant exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At quarter-end, substantially all of the Company’s hedged forecasted transactions were less than twelve months into the future, and the Company expects 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 not significant for the thirteen weeks ended October 28, 2017 and was a $1 million gain for the thirty-nine weeks ended October 28, 2017. At October 28, 2017, a $2 million gain remained in AOCL. For the thirteen and thirty-nine weeks ended October 29, 2016, the net change in fair value was a $1 million and $4 million gain, respectively. The notional value of the foreign exchange contracts designated as hedges outstanding at October 28, 2017 was $138 million, and these contracts mature at various dates through January 2019.
Derivative Holdings Not Designated as Hedges
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 thirty-nine weeks ended October 28, 2017.
10
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The net change in fair value resulted in income of $1 million for the thirteen weeks ended October 29, 2016, and was not significant for the thirty-nine weeks ended October 29, 2016. The notional value of the foreign exchange contracts not designated as hedges outstanding at October 28, 2017 was $2 million, and these contracts mature in November 2017.
From time to time, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. No such contracts were outstanding at October 28, 2017.
Fair Value of Derivative Contracts
The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:
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|
|
| Balance Sheet |
| October 28, |
| October 29, |
| January 28, | |||
($ in millions) |
| Caption |
| 2017 |
| 2016 |
| 2017 | |||
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
| Current assets |
| $ | 2 |
| $ | 7 |
| $ | 3 |
Foreign exchange forward contracts |
| Current liabilities |
| $ | 1 |
| $ | — |
| $ | 3 |
Non-hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
| Current assets |
| $ | — |
| $ | 1 |
| $ | — |
10. Fair Value Measurements
The Company’sOur 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:
|
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|
|
| As of October 28, 2017 |
| As of October 29, 2016 |
| As of January 28, 2017 | |||||||||||||||||||||
|
| ($ in millions) | |||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | |||||||||
Assets |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
Foreign exchange forward contracts |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 8 |
|
| — |
|
| — |
|
| 3 |
|
| — |
Total Assets |
| $ | — |
| $ | 9 |
| $ | — |
| $ | — |
| $ | 15 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | — |
Liabilities |
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3 |
|
| — |
Total Liabilities |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 3 |
| $ | — |
11
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Securities classified as available-for-sale are recorded at fair value, with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized gains or losses are determined to be other than temporary. Theusing a three-level fair value ofhierarchy that prioritizes 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.inputs used to measure fair value.
The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models requireAssets and Liabilities Measured at Fair Value on a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and therefore are classified as Level 2 instruments.Recurring Basis
($ in millions) | As of April 29, 2023 | As of April 30, 2022 | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Minority investment in common stock | $ | — | $ | — | $ | — | $ | 120 | $ | — | $ | — | ||||||||||||
Available-for-sale security | — | 6 | — | — | 6 | — | ||||||||||||||||||
Foreign exchange forward contracts | — | — | — | — | 2 | — | ||||||||||||||||||
Total assets | $ | — | $ | 6 | $ | — | $ | 120 | $ | 8 | $ | — | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | 35 | ||||||||||||
Foreign exchange forward contracts | — | 1 | — | — | — | — | ||||||||||||||||||
Total liabilities | $ | — | $ | 1 | $ | 4 | $ | — | $ | — | $ | 35 |
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:Long-Term Debt
|
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|
|
|
|
|
| October 28, |
| October 29, |
| January 28, | |||
|
| 2017 |
| 2016 |
| 2017 | |||
|
| ($ in millions) | |||||||
Carrying value |
| $ | 126 |
| $ | 128 |
| $ | 127 |
Fair value |
| $ | 145 |
| $ | 150 |
| $ | 148 |
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 value and estimated fair value of long-term debt were as follows:
($ in millions) | April 29, 2023 | April 30, 2022 | ||||||
Carrying value (1) | $ | 395 | $ | 394 | ||||
Fair value | $ | 339 | $ | 332 |
(1) | The carrying value of debt as of April 29, 2023 and April 30, 2022 included $5 million and $6 million of issuer’s discount and costs, respectively. |
The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.
11.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share
The Company accounts
We account for and discloses earnings per share (“EPS”) using the treasury stock method. Basic earnings per shareEPS 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 shareEPS computation plus dilutive common stock equivalents.
The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on EPS. The computation of basic and diluted earnings per shareEPS is as follows:
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| ||||||||
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| ||||||||
| Thirteen weeks ended |
| Thirty-nine weeks ended | |||||||||||||||||
|
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||||
|
| (in millions, except per share data) | ||||||||||||||||||
Net Income |
| $ | 102 |
| $ | 157 |
| $ | 333 |
| $ | 475 | ||||||||
|
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| ||||||||
| Thirteen weeks ended | |||||||||||||||||||
| April 29, | April 30, | ||||||||||||||||||
(in millions, except per share data) | 2023 | 2022 | ||||||||||||||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||||||||||||||
Weighted-average common shares outstanding |
|
| 126.0 |
|
| 132.9 |
|
| 129.6 |
|
| 134.6 | 93.7 | 96.1 | ||||||
Dilutive effect of potential common shares |
|
| 0.4 |
|
| 1.1 |
|
| 0.7 |
|
| 1.1 | 1.4 | 1.1 | ||||||
Weighted-average common shares outstanding assuming dilution |
|
| 126.4 |
|
| 134.0 |
|
| 130.3 |
|
| 135.7 | 95.1 | 97.2 | ||||||
|
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|
|
| ||||||||
| | | ||||||||||||||||||
Earnings per share - basic |
| $ | 0.81 |
| $ | 1.18 |
| $ | 2.57 |
| $ | 3.53 | $ | 0.39 | $ | 1.38 | ||||
Earnings per share - diluted |
| $ | 0.81 |
| $ | 1.17 |
| $ | 2.55 |
| $ | 3.50 | $ | 0.38 | $ | 1.37 | ||||
|
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| ||||||||
| | | ||||||||||||||||||
Anti-dilutive share-based awards excluded from diluted calculation |
|
| 2.0 |
|
| 0.5 |
|
| 1.6 |
|
| 0.4 | 2.3 | 2.5 |
12
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted ASU 2016-09 during the first quarter of 2017. As a result, excess tax benefits and tax deficiencies are no longer included as assumed proceeds in the calculation of diluted shares outstanding. This change was adopted prospectively.
Contingently issuable shares of 0.4 million and 0.3 million have not been included as the vesting conditions have not been satisfied as of October 28, 2017 and October 29, 2016, respectively. These shares relate to restrictedPerformance stock units issued in connection with the Company’srelated to our long-term incentive program.
12. Pension programs of 0.9 million been excluded from diluted weighted-average shares for each of the periods ended April 29, 2023 and Postretirement PlansApril 30, 2022. The issuance of these shares is contingent on our performance metrics as compared to the pre-established performance goals, which have not been achieved.
10. Pension
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 expense are presented in the table below. Service cost and net periodic postretirement benefit income, whichis recognized as part of SG&A expense, while the other components are recognized as part of SG&A expense:Other income / (expense), net.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Service cost | $ | 1 | $ | 4 | ||||
Interest cost | 6 | 5 | ||||||
Expected return on plan assets | (7 | ) | (8 | ) | ||||
Amortization of net loss | 3 | 2 | ||||||
Net benefit expense | $ | 3 | $ | 3 |
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| Pension Benefits |
| Postretirement Benefits | ||||||||||||||||||||
|
| Thirteen weeks ended |
| Thirty-nine weeks ended |
| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||||||||||
|
| Oct. 28, |
| Oct. 29, |
| Oct. 28, |
| Oct. 29, |
| Oct. 28, |
| Oct. 29, |
| Oct. 28, |
| Oct. 29, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Service cost |
| $ | 4 |
| $ | 4 |
| $ | 12 |
| $ | 12 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Interest cost |
|
| 6 |
|
| 6 |
|
| 19 |
|
| 19 |
|
| — |
|
| 1 |
|
| — |
|
| 1 |
Expected return on plan assets |
|
| (9) |
|
| (9) |
|
| (28) |
|
| (27) |
|
| — |
|
| — |
|
| — |
|
| — |
Amortization of net loss (gain) |
|
| 3 |
|
| 4 |
|
| 10 |
|
| 11 |
|
| — |
|
| (1) |
|
| (1) |
|
| (2) |
Net benefit expense (income) |
| $ | 4 |
| $ | 5 |
| $ | 13 |
| $ | 15 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | (1) |
During the first quarter of 2017, the Company made a contribution of $25 million to the U.S. qualified plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to make any further pension plan contributions during this year.Actual contributions are dependent on several factors, including the outcome of the ongoing U.S. pension litigation. See Note 14, Legal Proceedings, for further information.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13.11. Share-Based Compensation
Total compensation expense, included in SG&A, and the associated tax benefits recognized related to the Company’sour share-based compensation plans, were as follows:
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| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||||||||||
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||||
| ($ in millions) | ||||||||||||||||||
Options and shares purchased under the employee stock purchase plan | $ | 2 |
| $ | 3 |
| $ | 7 |
| $ | 8 | ||||||||
Restricted stock and restricted stock units |
| 1 |
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| 3 |
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| 4 |
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| 9 | ||||||||
| Thirteen weeks ended | ||||||||||||||||||
| April 29, | April 30, | |||||||||||||||||
($ in millions) | 2023 | 2022 | |||||||||||||||||
Options and employee stock purchase plan | $ | 1 | $ | 1 | |||||||||||||||
Restricted stock units and performance stock units | 1 | 6 | |||||||||||||||||
Total share-based compensation expense | $ | 3 |
| $ | 6 |
| $ | 11 |
| $ | 17 | $ | 2 | $ | 7 | ||||
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Tax benefit recognized | $ | 1 |
| $ | 2 |
| $ | 3 |
| $ | 5 | $ | — | $ | 1 |
13
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Valuation Model and Assumptions
The Company usesWe use the Black-Scholes option-pricing model to estimate the fair value of share-based awards.options and the stock purchase plan. 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 below shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the thirty-ninethirteen weeks ended October 28, 2017 April 29, 2023 and October 29, 2016:April 30, 2022.
| Stock Option Plans | Stock Purchase Plan | ||||||||||||||
| April 29, | April 30, | April 29, | April 30, | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
Weighted-average risk free rate of interest | 3.5 | % | 2.3 | % | 2.2 | % | 0.1 | % | ||||||||
Expected volatility | 49 | % | 50 | % | 40 | % | 40 | % | ||||||||
Weighted-average expected award life (in years) | 5.4 | 5.5 | 1.0 | 1.0 | ||||||||||||
Dividend yield | 3.6 | % | 3.9 | % | 3.7 | % | 1.8 | % | ||||||||
Weighted-average fair value | $ | 14.09 | $ | 10.42 | $ | 7.16 | $ | 29.46 |
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| Stock Option Plans |
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| Stock Purchase Plan |
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| October 28, |
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| October 29, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Weighted-average risk free rate of interest |
| 2.1 | % |
| 1.4 | % |
| 0.9 | % |
| 0.4 | % |
Expected volatility |
| 25 | % |
| 30 | % |
| 29 | % |
| 27 | % |
Weighted-average expected award life (in years) |
| 5.4 |
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| 5.7 |
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| 1.0 |
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| 1.0 |
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Dividend yield |
| 1.9 | % |
| 1.7 | % |
| 2.0 | % |
| 1.7 | % |
Weighted-average fair value | $ | 14.74 |
| $ | 15.71 |
| $ | 10.84 |
| $ | 14.04 |
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The information in the following table covers optionbelow provides activity under the Company’sour stock option plans for the thirty-ninethirteen weeks ended October 28, 2017:April 29, 2023.
| | Weighted- | Weighted- | |||||||||
| Number | Average | Average | |||||||||
| of | Remaining | Exercise | |||||||||
| Shares | Contractual Life | Price | |||||||||
| (in thousands) | (in years) | (per share) | |||||||||
Options outstanding at the beginning of the year | 3,256 | | $ | 47.85 | ||||||||
Granted | 294 | | 39.08 | |||||||||
Exercised | (151 | ) | | 24.60 | ||||||||
Expired or cancelled | (148 | ) | | 36.71 | ||||||||
Options outstanding at April 29, 2023 | 3,251 | 3.8 | $ | 48.64 | ||||||||
Options exercisable at April 29, 2023 | 2,783 | 2.9 | $ | 50.48 | ||||||||
Shares available for future grant at April 29, 2023 under the 2007 Stock Incentive Plan | 888 | | | |||||||||
Shares available for future grant at April 29, 2023 under the employment inducement award plan (1) | 409 | | |
(1) | On August 24, 2022, the Company granted options and other awards to its new President and Chief Executive Officer, Mary N. Dillon. These awards were granted outside of the 2007 Stock Incentive Plan as employment inducement awards and do not require shareholder approval under the rules of the New York Stock Exchange or otherwise. Shares available for future grant under this plan are reserved for the sole purpose to issue shares pursuant to her employment inducement awards. |
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| Number |
| Average |
| Average | ||
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| of |
| Remaining |
| Exercise | ||
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| Shares |
| Contractual Life |
| Price | ||
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| (in thousands) |
| (in years) |
| (per share) | ||
Options outstanding at the beginning of the year |
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| 2,806 |
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| $ | 42.61 |
Granted |
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| 547 |
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| 69.58 |
Exercised |
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| (536) |
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| 21.38 |
Expired or cancelled |
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| (19) |
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| 61.01 |
Options outstanding at October 28, 2017 |
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| 2,798 |
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| 6.7 |
| $ | 51.82 |
Options exercisable at October 28, 2017 |
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| 1,729 |
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| 5.4 |
| $ | 42.91 |
Options available for future grant at October 28, 2017 |
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| 10,759 |
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation (continued)
The total fair value of options vested as of October 28, 2017thirteen weeks ended April 29, 2023 and October 29, 2016April 30, 2022 was $8$4 million and $9 million, respectively.for both periods. The cash received from option exercises forduring the thirteen and thirty-nine weeks ended October 28, 2017April 29, 2023 was $2$4 million, and $12 million, respectively.the related tax benefits realized from option exercises were not significant. The cash received from option exercises forduring the thirteen and thirty-nine weeks ended October 29, 2016April 30, 2022 was $10$2 million, and $24 million, respectively.the related tax benefits realized from option exercises were not significant.
The total intrinsic value of options exercised (the difference between the market price of the Company’sour common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:
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| Thirteen weeks ended |
| Thirty-nine weeks ended | ||||||||
| October 28, |
| October 29, |
| October 28, |
| October 29, | ||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
| ($ in millions) | ||||||||||
Exercised | $ | 5 |
| $ | 19 |
| $ | 20 |
| $ | 45 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Exercised | $ | 3 | $ | — |
The total tax benefit realized from option exercises was $2 million and $8 million for the thirteen and thirty-nine weeks ended October 28, 2017. The total tax benefit realized from option exercises was $7 million and $17 million for the corresponding prior-year periods.
14
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The aggregate intrinsic value for stock options outstanding, and outstanding and exercisable and vested and expected to vest (the difference between the Company’sour closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:
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| October 28, |
| October 29, | ||
| 2017 |
| 2016 | ||
| ($ in millions) | ||||
Outstanding | $ | 5 |
| $ | 78 |
Outstanding and exercisable | $ | 5 |
| $ | 71 |
Vested and expected to vest | $ | 5 |
| $ | 78 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Outstanding | $ | 15 | $ | 6 | ||||
Outstanding and exercisable | $ | 13 | $ | 4 |
As of October 28, 2017April 29, 2023, there was $7$5 million of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a remaining weighted-average period of 1.51.8 years.
The following table below summarizes information about stock options outstanding and exercisable at October 28, 2017:April 29, 2023
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| Options Outstanding |
| Options Exercisable | ||||||||
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Range of Exercise |
| Number |
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| Exercise |
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Prices |
| Outstanding |
| Life |
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| Price |
| Exercisable |
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| (in thousands, except prices per share and contractual life) | ||||||||||
$9.85 to $24.75 |
| 344 |
| 2.7 |
| $ | 16.77 |
| 344 |
| $ | 16.77 |
$30.92 to $45.75 |
| 787 |
| 5.5 |
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| 38.33 |
| 747 |
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| 38.50 |
$48.55 to $62.11 |
| 704 |
| 6.9 |
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| 61.05 |
| 472 |
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| 61.35 |
$63.79 to $73.21 |
| 963 |
| 8.8 |
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| 68.60 |
| 166 |
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| 64.35 |
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| 2,798 |
| 6.7 |
| $ | 51.82 |
| 1,729 |
| $ | 42.91 |
| Options Outstanding | Options Exercisable | ||||||||||||||||||
| | Weighted- | | | | |||||||||||||||
| | Average | Weighted- | | Weighted- | |||||||||||||||
| | Remaining | Average | | Average | |||||||||||||||
Range of Exercise | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| (in thousands, except prices per share and contractual life) | |||||||||||||||||||
$21.60 - $36.51 | 855 | 5.2 | $ | 25.40 | 708 | $ | 23.82 | |||||||||||||
$38.94 - $48.98 | 743 | 5.2 | 42.58 | 439 | 45.00 | |||||||||||||||
$53.61 - $58.94 | 482 | 3.3 | 56.73 | 465 | 56.84 | |||||||||||||||
$62.02 - $72.83 | 1,171 | 2.1 | 66.14 | 1,171 | 66.14 | |||||||||||||||
| 3,251 | 3.8 | $ | 48.64 | 2,783 | $ | 50.48 |
Restricted Stock and
Restricted Stock Units and Performance Stock Units
Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may beare awarded to certain officers, and key employees of the Company.Company, and nonemployee directors. Additionally, RSU awardsperformance stock units (“PSU”) are madeawarded to officers and certain key employees in connection with the Company’sour long-term incentive program,program. Each RSU and to nonemployee directors. Each RSUPSU represents the right to receive one share of the Company’sour common stock provided that the applicable performance and vesting conditions are satisfied. There were 361,137PSU awards granted in 2022 and 678,466 RSU2023 also include a performance objective based on our relative total shareholder return over the performance period to a pre-determined peer group, assuming the reinvestment of dividends. The fair value of these awards outstandingis determined using a Monte Carlo simulation as of October 28, 2017the date of the grant and October 29, 2016, respectively.share-based compensation expense will not be adjusted should the target awards vary from actual awards.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation (continued)
Generally, RSU awards fully vest after the passage of time, typically three years. However, RSU years for employees and one year for nonemployee directors, provided there is continued service with the Company until the vesting date, subject to the terms of the award. PSU awards madeare earned only after the attainment of performance goals in connection with the Company’s performance-based long-term incentive program are earned after the attainment of certainrelevant performance metricsperiod 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.an additional one-year period. No dividends are paid or accumulated on any RSU or PSU 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.period.
15
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted stockRSU and RSUPSU activity for the thirty-ninethirteen weeks ended October 28, 2017April 29, 2023 is summarized as follows:
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| Number |
| Remaining |
| Average | |||||||||||||
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| of |
| Contractual |
| Grant Date | |||||||||||||
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| Shares |
| Life |
| Fair Value | |||||||||||||
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| (in thousands) |
| (in years) |
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| (per share) | ||||||||||||
| Number | Remaining | Average | ||||||||||||||||
| of | Contractual | Grant Date | ||||||||||||||||
| Shares | Life | Fair Value | ||||||||||||||||
| (in thousands) | (in years) | (per share) | ||||||||||||||||
Nonvested at beginning of year |
| 798 |
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| $ | 56.91 | 1,992 | | $ | 37.58 | ||||||||
Granted |
| 328 |
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| 63.72 | 741 | | 39.69 | |||||||||
Vested |
| (286) |
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| 49.55 | (628 | ) | | 34.12 | ||||||||
Expired or cancelled |
| (447) |
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| 64.74 | ||||||||||||
Nonvested at October 28, 2017 |
| 393 |
| 1.5 |
| $ | 59.07 | ||||||||||||
Performance adjustment (1) | (600 | ) | | ||||||||||||||||
Forfeited | (99 | ) | | 39.79 | |||||||||||||||
Nonvested at April 29, 2023 | 1,406 | 1.8 | $ | 40.80 | |||||||||||||||
| | | | ||||||||||||||||
Aggregate value ($ in millions) | $ | 23 |
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| $ | 57 | |
(1) | This represents adjustments made to PSUs reflecting changes in estimates based upon our current performance against predefined financial targets. |
The total value of RSU and PSU awards for which restrictions lapsedthat vested during the thirty-ninethirteen weeks ended October 28, 2017 April 29, 2023 and October 29, 2016April 30, 2022 was $14$21 million and $8$5 million, respectively. As of October 28, 2017,April 29, 2023, there was $10$35 million of total unrecognized compensation cost related to nonvested restricted awards.
14.12. Legal Proceedings
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 ofdiscontinued 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 two purported class actions alleging wage/hour and wage statement violations in California.
The Company and the Company’s U.S. retirement plan are defendants in a class action (Osberg v. Foot Locker Inc. et ano., filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff’s claims were for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and violation of the statutory provisions governing the content of the Summary Plan Description. During the third quarter of 2015, the trial court ruled that the retirement plan be reformed. As a result of this development, the Company recorded a charge of $100 million pre-tax ($61 million after-tax) during the third quarter of 2015.
The Company appealed the trial court’s decision, and the judgment was stayed pending the outcome of the appeal process. During the second quarter of 2017, the Second Circuit Court of Appeals affirmed the trial court’s decision. In light of this development, the Company reassessed its estimate of the liability. The Company’s updated reasonable estimate of this liability is a range between $150 million and $260 million. The high end of the range reflects the estimated cost to reform the retirement plan in accordance with the court ruling; however, it excludes any legal fees that may be awarded to plaintiff’s counsel. No amount within that range is more probable than any other amount and therefore, in accordance with U.S. GAAP, the Company recorded a charge of $50 million pre-tax ($30 million after-tax) during the second quarter of 2017, bringing the cumulative amount accrued for this matter to $150 million. The accrual has been classified as a long-term liability. The Company will continue to vigorously defend itself in this case and on November 8, 2017 filed a Petition for Writ of Certiorari with the U.S. Supreme Court. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will We do not differ from the amount currently accrued by the Company.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, as described above, would have a material adverse effect on the Company’sour 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 judgmentsunpredictable. Judgments could be rendered or settlements entered intomade that could adversely affect the Company’s operating results or cash flows in a particular period.
16
Item2. Management’sManagement’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 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 athletica leading footwear and apparel retailersretailer that unlocks the "inner sneakerhead" in all of us. We have a strong history of sneaker authority that sparks discovery and ignites the world, with formats that includepower of sneaker culture through our portfolio of brands, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep,WSS, 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.atmos.
The Foot Locker brand is one ofEnsuring that our customers can engage with us in the most widely recognized namesconvenient manner for them whether in our stores, on our website, or on our mobile application, is a high priority for us. We use our omni-channel capabilities to bridge the markets in which we operate, epitomizing premium quality for the active lifestyle customer. This brand equity has aided our ability to successfully developdigital world and increase our portfolio of complementary retail store formats, such as Lady Foot Lockerphysical stores, including order-in-store, buy online and Kids Foot Locker,pickup-in-store, and buy online and ship-from-store, as well as Footlocker.com, parte-commerce. We operate websites and mobile apps aligned with the brand names of our direct-to-customer business. Through various marketing channelsstore banners. These sites offer some of the largest online product selections and experiences, including social, digital, broadcast,provide a seamless link between e-commerce and print media, as well as various sports sponsorships and events, we reinforce our image with a consistent message — namely, that we are the destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.physical stores.
Store Count
At October 28, 2017,April 29, 2023, we operated 3,3492,692 stores as compared with 3,3632,714 and 3,3942,815 stores at January 28, 20172023 and October 29, 2016,April 30, 2022, respectively.
During the first quarter of 2017, the Company entered into a franchise agreement with Fox-Wizel Ltd, for franchised stores operating in Israel. There are 13 franchised stores operating in Israel as of October 28, 2017. Also, during the second quarter of 2017, the Company terminated its franchise agreement with the third party that operated stores in the Republic of Korea.Franchise Operations
A total of 97163 franchised stores were operating at October 28, 2017,April 29, 2023, as compared with 74159 and 71148 stores at January 28, 20172023 and October 29, 2016, respectively. Revenue fromApril 30, 2022, respectively, operating in the franchised stores was not significant for any of the periods presented.Middle East and Asia. These stores are not included in the operating store count above.
Results of Operations
We evaluate performance based on several factors, primarily the banner’s financial results, referred to as division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expenses, non-operating income, and net interest expense.
The table below summarizes our results for the period.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Sales | $ | 1,927 | $ | 2,175 | ||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | 1,931 | 2,178 | ||||||
| | | ||||||
Operating Results | | | ||||||
Division profit | 104 | 263 | ||||||
Less: Impairment and other (1) | 39 | 6 | ||||||
Less: Corporate expense (2) | 4 | 37 | ||||||
Income from operations | 61 | 220 | ||||||
Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net (3) | (3 | ) | (25 | ) | ||||
Income before income taxes | $ | 57 | $ | 190 |
(1) | See the Impairment and Other Charges section for further information. |
(2) | Corporate expense consists of unallocated selling, general and administrative expenses 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. |
(3) | Other income / (expense), net includes non-operating items, changes in fair value of minority interests measured at fair value or using the fair value measurement alternative, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investments, and net benefit expense related to our pension and postretirement programs excluding the service cost component. See the Other income / (expense), net section for further information. |
Reconciliation of Non-GAAP Measures
The Company presentsIn addition to reporting our financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), we report certain financial results that differ from what is reported under GAAP. We have presented certain financial measures identified as 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
We present certain amounts as excluding the following discussions, whereeffects of foreign currency fluctuations, which are also considered non-GAAP measures. 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.
17
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 businessesbusiness that are not related to currency movements.
These non-GAAP measures are presented because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core business or affect comparability. In addition, these non-GAAP measures are useful in assessing the Company’sour progress in achieving itsour long-term financial objectives. We estimate the tax effect of all non-GAAP adjustments by applying a marginal tax rate to each item. The income tax items represent the discrete amount that affected the period.
The non-GAAP financial information is provided in addition, to, and not as an alternative, to the Company’sour reported results prepared in accordance with GAAP. The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items.
Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.non-GAAP.
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| Thirteen weeks ended |
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| October 28, |
| October 29, |
| October 28, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Pre-tax income: |
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Income before income taxes |
| $ | 156 |
| $ | 227 |
| $ | 498 |
| $ | 723 |
Pre-tax amounts excluded from GAAP: |
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Reorganization costs |
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| 13 |
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| — |
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| 13 |
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| — |
Pension litigation charge |
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| — |
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| — |
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| 50 |
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| — |
Impairment charge |
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| — |
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| 6 |
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| — |
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| 6 |
Adjusted income before income taxes (non-GAAP) |
| $ | 169 |
| $ | 233 |
| $ | 561 |
| $ | 729 |
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After-tax income: |
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Net income |
| $ | 102 |
| $ | 157 |
| $ | 333 |
| $ | 475 |
After-tax adjustments excluded from GAAP: |
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Reorganization costs, net of income tax benefit of $5 million |
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| 8 |
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| — |
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| 8 |
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| — |
Pension litigation charge, net of income tax benefit of $20 million |
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| — |
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| 30 |
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Impairment charge, net of income tax benefit of $1 million |
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| — |
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| 5 |
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| — |
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| 5 |
Tax benefit related to intellectual property reassessment |
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| — |
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| (10) |
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| — |
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| (10) |
Adjusted net income (non-GAAP) |
| $ | 110 |
| $ | 152 |
| $ | 371 |
| $ | 470 |
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Earnings per share: |
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Diluted EPS |
| $ | 0.81 |
| $ | 1.17 |
| $ | 2.55 |
| $ | 3.50 |
Diluted EPS amounts excluded from GAAP: |
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Reorganization costs |
|
| 0.06 |
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| — |
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| 0.06 |
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| — |
Pension litigation charge |
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| — |
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| — |
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| 0.23 |
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| — |
Impairment charge |
|
| — |
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| 0.03 |
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| — |
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| 0.03 |
Tax benefit related to intellectual property reassessment |
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| — |
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| (0.07) |
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| — |
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| (0.07) |
Adjusted diluted EPS (non-GAAP) |
| $ | 0.87 |
| $ | 1.13 |
| $ | 2.84 |
| $ | 3.46 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions, except per share amounts) | 2023 | 2022 | ||||||
Pre-tax income: | ||||||||
Income before income taxes | $ | 57 | $ | 190 | ||||
Pre-tax amounts excluded from GAAP: | | |||||||
Impairment and other | 39 | 6 | ||||||
Other income / expense, net | 1 | 24 | ||||||
Adjusted income before income taxes (non-GAAP) | $ | 97 | $ | 220 | ||||
| | | ||||||
After-tax income: | ||||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
After-tax adjustments excluded from GAAP: | | |||||||
Impairment and other, net of income tax benefit of $6, and $2 million, respectively | 33 | 4 | ||||||
Other income / expense, net of income tax benefit/(expense) of $-, and $6 million, respectively | 1 | 18 | ||||||
Tax reserves benefit | (4 | ) | — | |||||
Adjusted net income (non-GAAP) | $ | 66 | $ | 155 | ||||
| | | ||||||
Earnings per share: | | |||||||
Diluted earnings per share | $ | 0.38 | $ | 1.37 | ||||
Diluted EPS amounts excluded from GAAP: | | | ||||||
Impairment and other | 0.36 | 0.05 | ||||||
Other income / expense, net | — | 0.18 | ||||||
Tax reserves benefit | (0.04 | ) | — | |||||
Adjusted diluted earnings per share (non-GAAP) | $ | 0.70 | $ | 1.60 |
During the third quarterthirteen weeks ended October 28, 2017,April 29, 2023, we recorded pre-tax charges of $39 million and $6 million, respectively, classified as Impairment and Other. See the Company reducedImpairment and reorganized its division and corporate staff which resulted in a chargeOther Charges section for further information.
The adjustments made to other income / (expense), net reflected gains or $0.06 per share. The substantial majority oflosses associated with our minority investments. See the charge isOther Income / (Expense), net section for severance and related costs.further information.
During the second quarterthirteen weeks ended JulyApril 29, 2017, the Company2023, we recorded a charge of $50$4 million $30 million after-tax or $0.23 per share,benefit related to pension litigation. Please see Item 1. “Financial Statements,” Note 14, Legal Proceedings for further information on this charge.
an income tax reserves release from a statute of limitations expiration.
18
In the third quarter of 2016, the Company recorded a $6 million, $5 million after-tax or $0.03 per share, impairment charge associated with underperforming store assets of Runners PointSegment Reporting and Sidestep. Also during the third quarter of 2016, the Company’s scheduled triennial reassessment of the value of intellectual property provided to our European business by Foot Locker in the U.S. resulted in a $10 million tax reduction.
Results of Operations
SalesWe have determined that we have three operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Champs Sports, Kids Foot Locker, and WSS, including each of their related e-commerce businesses. Our EMEA operating segment includes the results of the following banners operating in Europe: Foot Locker, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of the Foot Locker banner and its related e-commerce business operating in Australia, New Zealand, and Asia, as well as atmos, which operates primarily in Asia. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
As reported in our Annual Report on Form 10-K, we announced the closure of the Sidestep banner and the wind down of our stores operating in Hong Kong and Macau. We currently expect to wind down the majority of operations by the end of the second quarter. Additionally during the second quarter, we will be transitioning our Singapore and Malaysian business to a licensed store model.
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-storecomparable sales also includes the sales of the Direct-to-Customers segment.our direct-to-customers 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 by $16 million, or 0.8 percent, to $1,870 million forfrom acquired businesses that include inventory are included in the computation of comparable-store sales after the 15th month of operations. Accordingly, WSS comparable-store sales are included in the first quarter of 2023, while sales from the atmos banner only include two months in the computation of comparable-store sales.
For the thirteen weeks ended October 28, 2017, from $1,886 million for the thirteen weeks ended OctoberApril 29, 2016. For the thirty-nine weeks ended October 28, 2017,2023, total sales decreased by 1.4 percent$248 million, or 11.4%, to $5,572$1,927 million, from sales of $5,653 million inas compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales decreased by 2.3 and 1.5 percent$217 million, or 10.0%, for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Comparable-storeApril 29, 2023. The information shown below represents certain sales decreasedmetrics by 3.7sales channel.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Store sales | $ | 1,613 | $ | 1,776 | ||||
$ Change | $ | (163 | ) | | ||||
% Change | (9.2 | )% | | |||||
% of total sales | 83.7 | % | 81.7 | % | ||||
Comparable sales (decrease) / increase | (7.4 | )% | 7.9 | % | ||||
Direct-to-customers sales | $ | 314 | $ | 399 | ||||
$ Change | $ | (85 | ) | | ||||
% Change | (21.3 | )% | | |||||
% of total sales | 16.3 | % | 18.3 | % | ||||
Comparable sales decrease | (16.8 | )% | (29.0 | )% | ||||
Total sales | $ | 1,927 | $ | 2,175 | ||||
$ Change | $ | (248 | ) | |||||
% Change | (11.4 | )% | ||||||
Comparable sales decrease | (9.1 | )% | (1.9 | )% |
The information shown below represents certain combined stores and 2.9 percentdirect-to-customers sales metrics for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. ForApril 29, 2023 as compared with the corresponding prior-year period.
| Thirteen weeks ended | |||||||
Constant Currencies | Comparable Sales | |||||||
Foot Locker | (7.2 | )% | (5.5 | )% | ||||
Champs Sports | (27.3 | )% | (24.6 | )% | ||||
Kids Foot Locker | (7.2 | )% | (7.7 | )% | ||||
WSS | 8.7 | % | (3.4 | )% | ||||
Other | n.m. | n.m. | ||||||
North America | (14.5 | )% | (12.8 | )% | ||||
Foot Locker | 3.7 | % | 2.1 | % | ||||
Sidestep | (41.7 | )% | (37.8 | )% | ||||
EMEA | 1.0 | % | (0.1 | )% | ||||
Foot Locker | 12.9 | % | 11.2 | % | ||||
atmos | 6.1 | % | 2.7 | % | ||||
Asia Pacific | 10.6 | % | 8.9 | % | ||||
Total Foot Locker, Inc. | (10.0 | )% | (9.1 | )% |
Comparable sales decreased both periods, this reflected a decline in our Athletic Stores segment, partially offset by an increasestores and in our Direct-to-Customers segment.direct-to-customer channels this quarter due to changing vendor mix, coupled with macroeconomic headwinds, including inflation and lower income tax refunds in the United States. In addition, North America sales were negatively affected by the closure of Eastbay business, which ceased operating in late 2022. Eastbay's sales primarily represent the other category in the above table, and excluding those sales the decline would have been 11.6% on a constant currency basis. Additionally, we are repositioning the Champs Sports banner to serve the active athlete, which is resulting in expected comparable sales declines due to the transition. Within EMEA, sales for the Foot Locker banners increased, led by our operations in Italy, Spain, and France as tourism has increased as compared with last year. Within Asia Pacific, sales for the Foot Locker banner increased across many of the regions that we operate, led by Australia, New Zealand, and South Korea. As previously announced, we are in the process of closing our operations in Hong Kong and Macau and converting our business in Singapore and Malaysia to a licensing arrangement. Our sales from our atmos banner increased by 2.7% on a comparable basis, this banner was affected negatively by the lack of certain key styles from Adidas that were available in the marketplace last year.
Gross MarginFrom a product perspective for the combined channels, the sales decline in the quarter was across all categories of footwear, apparel and accessories.
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| October 29, |
| October 28, |
| October 29, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Gross margin rate |
| 31.0 | % |
| 33.9 | % |
| 31.6 | % |
| 34.0 | % |
Basis point change in the gross margin rate |
| (290) |
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| (240) |
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Components of the change- |
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Decline in the merchandise margin rate |
| (200) |
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| (140) |
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Higher occupancy and buyers' compensation expense rate |
| (90) |
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| (100) |
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Gross Margin
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
| 2023 | 2022 | ||||||
Gross margin rate | 30.0 | % | 34.0 | % | ||||
Basis point decrease in the gross margin rate | (400 | ) | | |||||
Components of the change: | | |||||||
Merchandise margin rate decline | (250 | ) | | |||||
Occupancy and buyers’ compensation expense rate | (150 | ) | |
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 (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities.
The gross margin rate decreased by 290 and 240 basis pointsto 30.0% for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.
TheApril 29, 2023, as compared with the corresponding prior-year period, reflecting a 250-basis point decrease in the merchandise margin rate, and a 150-basis point deleverage in the occupancy and buyers' compensation rate. The decline for bothin merchandise margin rate reflected higher markdowns versus last year, higher costs of merchandise and increased shrink. The deleverage in the quarteroccupancy and year-to-date periodsbuyers' compensation rate was primarily reflected a higher markdown rate in both our Athletic Stores and Direct-to-Customers segments asrelated to the Company was more promotional. Additionally, our Direct-to-Customers segment was also somewhat affected by higher shipping and handling expense. The increased promotional activity was necessary to stimulate sales and ensure that inventory levels remained current and in linefixed nature of these costs coupled with the pace ofdecline in sales.
The higher occupancy and buyers’ compensation expense rate for both the quarter and year-to-date periods reflected higher rent-related costs coupled with a decrease in sales. Higher occupancy costs are primarily attributed to several high-profile location leases entered into recently, partially offset by rent reductions in certain other stores.
Selling, General and Administrative Expenses (SG&A)
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| Thirteen weeks ended | ||||||||||||||||||||
| April 29, | April 30, | |||||||||||||||||||
($ in millions) | 2023 | 2022 | |||||||||||||||||||
SG&A |
| $ | 368 |
| $ | 366 |
| $ | 1,078 |
| $ | 1,077 |
| $ | 431 | $ | 463 | ||||
$ Change |
| $ | 2 |
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|
| $ | 1 |
| $ |
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| $ | (32 | ) | | |||||
% Change |
| 0.5 | % |
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| 0.1 | % |
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| (6.9 | )% | | |||||||
SG&A as a percentage of sales |
| 19.7 | % |
| 19.4 | % |
| 19.3 | % |
| 19.1 | % | 22.4 | % | 21.3 | % |
19
For the thirteen weeks ended October 28, 2017,SG&A decreased by $32 million, or $25 million excluding the effect of foreign currency fluctuations, SG&A expense decreased by $4 millionfor the thirteen weeks ended April 29, 2023, as compared with the corresponding prior-year period. The effectAs a percentage of foreign currency fluctuations for the thirty-nine weeks ended October 28, 2017 was not significant. Comparing thesales, SG&A expense rate with the prior-year periods, the rate increased by 30 and 20110 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. April 29, 2023, driven primarily by deleverage from the decline in sales, coupled with pressures from inflation and investments in store wages. Partially offsetting these increases was lower incentive compensation due to the Company's underperformance relative to targets and savings from our cost optimization program.
The higher SG&ADepreciation and Amortization
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Depreciation and amortization | $ | 51 | $ | 54 | ||||
$ Change | $ | (3 | ) | | ||||
% Change | (5.6 | )% | |
Depreciation and amortization expense ratedecreased by $3 million for both the quarter and year-to-date periods,thirteen weeks ended April 29, 2023, as compared with the corresponding prior-year periods, was driven byperiod. Excluding the Athletic Stores segment and was primarily related to higher store-related compensation costs and hurricane-related expenses. Wages were higher primarily due to minimum wage increases, as well as related payroll taxes and benefits. As a percentageeffect of sales, store wages and associated costs increased due to the decline in sales as we were not able to reduce staffing levels commensurate with the rate of decline in sales. In addition, included in SG&A was $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses. These hurricane-related expenses negatively affected the SG&A expense rate for the quarter by 40 basis points. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting decreased publicity and incentive compensation expenses. Additionally, corporate expense significantly declined during the third quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.
Depreciation and Amortization
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| October 29, |
| October 28, |
| October 29, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| ($ in millions) |
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Depreciation and amortization |
| $ | 44 |
| $ | 40 |
| $ | 127 |
| $ | 118 |
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$ Change |
| $ | 4 |
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| $ | 9 |
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% Change |
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| 10.0 | % |
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| 7.6 | % |
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Depreciationforeign currency fluctuations, depreciation and amortization increaseddecreased by $4 million and $9$2 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively,April 29, 2023, primarily related to operating fewer stores and the effect from impairments recorded in the prior year.
Impairment and Other Charges
During the first quarter of 2023, we incurred $19 million of transformation consulting expense, $18 million of impairment charges related to accelerated tenancy charges on right-of-use assets for the closures of the Sidestep banner and certain Foot Locker Asia stores, and $2 million of reorganization costs related to the closure of a North American Distribution center and costs associated with the closure of the Sidestep banner and certain Foot Locker Asia stores. In the corresponding prior-year period, we recorded impairment charges of $3 million related to long-lived assets and right-of-use assets as well as accelerated tenancy charges, $2 million of acquisition and integration costs related to WSS and atmos acquisitions, and $1 million of other expenses.
Corporate Expense
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Corporate expense | $ | 4 | $ | 37 | ||||
$ Change | $ | (33 | ) | |
Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.
Corporate expense decreased by $33 million for the thirteen weeks ended April 29, 2023, as compared with the corresponding prior-year periods. Theperiod. Depreciation and amortization included in corporate expense was $9 million for each of the thirteen weeks ended April 29, 2023 and April 30, 2022. Corporate expense decreased primarily due to an increase in depreciationthe allocation of corporate expense to the banners in 2023 and amortization reflectedlower incentive compensation, partially offset by our ongoing capital spending on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.investments in information technology.
Operating Results
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Division profit | $ | 104 | $ | 263 | ||||
Division profit margin | 5.4 | % | 12.1 | % |
Division profit margin as a percentage of sales decreased to 5.4% for the thirteen weeks ended April 29, 2023, with both sales channels experiencing declines in sales and gross margin and deleveraging expenses.
Interest Expense, Net
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| Thirteen weeks ended | |||||||||||||||||||
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($ in millions) | 2023 | 2022 | ||||||||||||||||||
Interest expense |
| $ | 3 |
| $ | 3 |
| $ | 9 |
| $ | 9 | $ | (5 | ) | $ | (6 | ) | ||
Interest income |
| (3) |
| (2) |
| (10) |
| (7) | 4 | 1 | ||||||||||
Interest (income) / expense, net |
| $ | — |
| $ | 1 |
| $ | (1) |
| $ | 2 | ||||||||
Interest (expense) income, net | $ | (1 | ) | $ | (5 | ) |
Interest income increased byWe recorded $1 million and $3of net interest expense for the thirteen weeks ended April 29, 2023, as compared with net interest expense of $5 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods, while interestperiod. Interest expense was unchanged. Thedecreased primarily due to an increase in interest income was due to higher average interest rates earned on our cash investments.and cash equivalents related to higher interest rates and income from our cross-currency swap.
Other Income Taxes/ (Expense), Net
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Other income / (expense), net | $ | (3 | ) | $ | (25 | ) |
This caption includes non-operating items, including changes in fair value of minority investments measured at fair value or using the fair value measurement alternative, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investments, and net benefit / (expense) related to our pension and postretirement programs excluding the service cost component.
The Company recordedthirteen weeks ended April 29, 2023 reflected expense of $2 million related to our pension and postretirement programs, and a $1 million loss on our equity method investments. Other income tax provisions of $54 million and $165 million/ (expense) for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, whichcorresponding prior-year period primarily represented effective tax ratesa decrease in the fair value of 34.7 percent and 33.2 percent. For the thirteen and thirty-nine weeks ended October 29, 2016, the Company recorded income tax provisionsour former investment in Retailors, Ltd. resulting in a non-cash loss of $70 million and $248 million, which represented effective tax rates of 30.9 percent and 34.4 percent, respectively.$25 million.
20
The Company’sIncome Taxes
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Provision for income taxes | $ | 21 | $ | 58 | ||||
Effective tax rate | 36.3 | % | 30.3 | % |
Our current year interim provision for income taxes iswas measured using an estimated annual effective tax rate, which represented a blend of federal, state, and foreign taxes and included the effect of certain nondeductible items as well as changes in our mix of domestic and foreign earnings or losses, adjusted for discrete items that occuroccurred within the periods presented. The Company
We regularly assessesassess the adequacy of itsour provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Companywe 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.
ForDuring the thirteen weeks ended October 28, 2017, the Company recorded excess tax benefits of $2 million from stock-based compensation reflecting the change required by ASC 718 as well as a tax benefit of $5 million related to a staff reduction and reorganization charge of $13 million. Additionally, for the thirty-nine weeks ended October 28, 2017, the CompanyApril 29, 2023, we recorded a pension-related litigation charge$4 million reserve release from a statute of $50 million with a related tax benefit of $20 million. The litigation chargelimitations expiration on our foreign income taxes. Excluding this item, and the reorganization costs reduced the overall effective rate because they reduced the proportion of the Company’s worldwide income taxed in jurisdictions where the tax rates are higher.
For the thirteen and thirty-nine weeks ended October 29, 2016,other insignificant reserve releases due to a scheduled reassessment the Company increased the valuesettlements of the intellectual property provided to its European business by Foot Locker in the U.S. The higher valuation resulted in catch-up deductions that reduced 2016’sinternational tax expense by $10 million.
Excluding the effects of the excess tax benefits, the litigation charge, the reorganization costs, and the change in the value of the intellectual property, there was no significant change inexaminations, the effective tax rate for the thirteen and thirty-nine weeks ended October 28, 2017current year period increased, as compared with the corresponding prior-year periods.
The Company currently expects its full-year tax rate to approximate 34 percent excluding the effect of any nonrecurring items that may occur and the effects of potential tax reform. The actual tax rate will vary depending on the level of stock option exercise activity and the stock price at exercise. Additionally, the actual tax rate will also vary depending on the level and mix of income earned in the United States, as compared with our international operations.
Net Income
For the thirteen weeks ended October 28, 2017, net income decreased by $55 million, or 35 percent, and diluted earnings per share decreased by 31 percent to $0.81 per share, as compared with the corresponding prior-year period. For the thirty-nine weeks ended October 28, 2017, net income decreased by $142 million, or 30 percent, and diluted earnings per share decreased by 27 percent to $2.55 per share, as compared with the corresponding prior-year period.
Segment Information
We have two reportable segments, Athletic Stores and Direct-to-Customers, which are based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:
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| October 29, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Sales |
| ($ in millions) | ||||||||||
Athletic Stores |
| $ | 1,612 |
| $ | 1,644 |
| $ | 4,819 |
| $ | 4,955 |
Direct-to-Customers |
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| 258 |
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| 242 |
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| 753 |
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| 698 |
Total sales |
| $ | 1,870 |
| $ | 1,886 |
| $ | 5,572 |
| $ | 5,653 |
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| October 29, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Operating Results |
| ($ in millions) | ||||||||||
Athletic Stores (1) |
| $ | 154 |
| $ | 213 |
| $ | 504 |
| $ | 683 |
Direct-to-Customers |
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| 26 |
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| 32 |
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| 88 |
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| 92 |
Division profit |
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| 180 |
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| 245 |
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| 592 |
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| 775 |
Less: Pension litigation and reorganization charges (2) (3) |
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| 13 |
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| — |
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| 63 |
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| — |
Less: Corporate expense |
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| 12 |
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| 17 |
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| 34 |
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| 53 |
Operating profit |
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| 155 |
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| 228 |
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| 495 |
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| 722 |
Other income (4) |
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| 1 |
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| — |
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| 2 |
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| 3 |
Earnings before interest expense and income taxes |
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| 156 |
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| 228 |
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| 497 |
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| 725 |
Interest (income) / expense, net |
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| — |
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| 1 |
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| (1) |
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| 2 |
Income before income taxes |
| $ | 156 |
| $ | 227 |
| $ | 498 |
| $ | 723 |
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Athletic Stores
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| October 29, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| ($ in millions) |
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Sales |
| $ | 1,612 |
| $ | 1,644 |
| $ | 4,819 |
| $ | 4,955 |
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$ Change |
| $ | (32) |
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| $ | (136) |
| $ |
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% Change |
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| (1.9) | % |
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| (2.7) | % |
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Division profit |
| $ | 154 |
| $ | 213 |
| $ | 504 |
| $ | 683 |
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Division profit margin |
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| 9.6 | % |
| 13.0 | % |
| 10.5 | % |
| 13.8 | % |
Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 3.6 percent and 2.8 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The sales decline for the current quarter and year-to-date periods, excluding the effect of foreign currency fluctuations, was across almost all store banners, with the exception of Footaction and Foot Locker Canada, which increased sales.
Comparable-store sales decreased by 5.1 percent and 4.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Foot Locker Canada generated positive comparable-store sales for the quarter and year-to-date periods, while Footaction was positive for the third quarter but not the year-to-date period. All other store banners generated negative comparable-store sales for both periods. The overall decline in comparable-store sales was due to a decrease in footwear sales for both the quarter and year-to-date periods. The footwear sales decline in the quarter was across men’s, women’s, and children’s, whereas the year-to-date decline was related primarily to declines in children’ and men’s footwear. A comparable-sales increase in men’s lifestyle running footwear for both the quarter and year-to-date periods for the majority of our store banners was not enough to compensate for the comparable-store declines in basketball and court lifestyle footwear. The decline in most other footwear categories for both the quarter and year-to-date periods was the result of insufficient product availability of certain styles and the lack of product innovation in select categories to suit our customers’ quickly-changing style preferences. Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter. The decline in women’s footwear was most significant in Foot Locker, Lady Foot Locker, and Foot Locker Europe. Sales of children’s footwear declined for the year-to-date period, due primarily by declines in the basketball category.
22
The decline in footwear sales was partially offset by gains in apparel sales, as the majority of our store banners experienced apparel sales gains for both the thirteen and thirty-nine weeks ended October 28, 2017. Most of our banners benefited from gains in men’s branded apparel and outerwear, which was partially offset by declines in private label and licensed apparel for both the quarter and year-to-date periods. Additionally, women’s apparel performed well for our SIX:02 banner for both the quarter and year-to-date periods, although this was largely driven by increased markdowns. For the quarter and year-to-date periods, children’s apparel experienced both total and comparable-store sales increases as compared to the corresponding prior-year periods.
Athletic Stores division profit decreased by 27.7 percent and 26.2 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The decline in division profit margin for both the quarter and year-to-date periods was attributable primarily to a lower gross margin rate, coupled with a higher SG&A expense rate.
Direct-to-Customers
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| October 28, |
| October 29, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| ($ in millions) |
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Sales |
| $ | 258 |
| $ | 242 |
| $ | 753 |
| $ | 698 |
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$ Change |
| $ | 16 |
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| $ | 55 |
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% Change |
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| 6.6 | % |
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| 7.9 | % |
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Division profit |
| $ | 26 |
| $ | 32 |
| $ | 88 |
| $ | 92 |
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Division profit margin |
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| 10.1 | % |
| 13.2 | % |
| 11.7 | % |
| 13.2 | % |
Comparable-sales for the Direct-to-Customers segment increased by 6.1 percent and 8.1 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in the quarter was driven primarily by Eastbay and the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. The increase for the year-to-date period was primarily related to the growth of our store-banner websites.
The footwear category continued to deliver the strongest gains during the current quarter and year-to-date periods. The footwear gains related to our domestic store-banner websites and Eastbay for both the quarter and year-to-date periods were driven by strong results in the children’s and men’s footwear categories. For the quarter, the women’s business softened primarily in the running category. Our international store-banner websites for both the quarter and year-to-date periods were primarily driven by sales from men’s and women’s lifestyle running styles.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 28, 2017 decreased by $6 million and $4 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, declined by 310 basis points and 150 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns in response to promotional activity in the market and, to a lesser degree, higher shipping and handling expense. Partially offsetting the gross margin decline was an expense rate improvement primarily related to lower publicity costs and incentive compensation expense in light of current performance as compared with our plan.
Corporate Expense
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| October 28, |
| October 29, |
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| 2016 |
| 2017 |
| 2016 |
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Corporate expense |
| $ | 12 |
| $ | 17 |
| $ | 34 |
| $ | 53 |
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$ Change |
| $ | (5) |
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| $ | (19) |
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23
Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $11 million for both the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $4 million for the thirteen and thirty-nine weeks ended October 28, 2017, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $4 million and $15 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.
Incentive compensation declined by $4 million and $11 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, reflecting the Company’s underperformance compared to its plan. Share-based compensation declined by $3 million and $6 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, which primarily represented the portion of share-based compensation that is tied to Company performance. Additionally, the decline for the thirty-nine weeks ended October 28, 2017 was due to the prior-year corporate headquarters relocation costsdecline in income before tax and a change in geographic mix of $4 million. These decreases were partially offset by a $2 million litigation settlement charge recorded during the third quarter of 2017 and increased corporate support costs such as information technology and real estate management.earnings.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity has been cash flow from earnings,operations, while the principal uses of cash have been:been to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internetinternet 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. strategies, including strategic investments.
We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations, and amounts available under our credit agreement 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, strategic considerations, and other factors. The amounts involved may be material. As of October 28, 2017,April 29, 2023, approximately $863$1,103 million remained available under the Company’sour current $1.2 billion share repurchase program.
As discussed further inOur full-year capital spending is expected to be $275 million. The forecast includes $210 million related to the Legal Proceedings note under “Item 1. Financial Statements,” duringremodeling or relocation of approximately 170 existing stores and the second quarteropening of 2017, in connection with our pension litigation,approximately 90 new stores, including 25 WSS stores. Additionally, we recorded a pre-tax charge of $50expect to spend $65 million($30 million after-tax or $0.23 per diluted share). The Company previously recorded a pre-tax charge of $100 million during 2015. The second quarter 2017 charge reflects the Company’s revised estimate of its exposure for the matter, bringing the total pre-tax amount accrueddevelopment of information systems, websites, and infrastructure, including supply chain initiatives. We also expect to $150 million. In light of the uncertainties involvedspend an additional $30 million in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by us. The total accrual of $150 million has been classified as a long-term liability duesoftware-as-a-service contracts related to the uncertainty involved with the resolution of this litigation, as the appeal process may be lengthy. The pension plan is currently sufficiently funded to initially absorb a $150 million liability and, accordingly, we currently do not anticipate the need to make any pension contributions in the near term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.our technology initiatives.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix, and retail locations and websites, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendorssuppliers for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the headingheadings “Disclosure Regarding Forward-Looking Statements,” and “Risk Factors” could affect our ability to continue to fund our needs from business operations.
24
Operating Activities
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| Thirty-nine weeks ended | ||||
| October 28, |
| October 29, | ||
| 2017 |
| 2016 | ||
| ($ in millions) | ||||
Net cash provided by operating activities | $ | 496 |
| $ | 477 |
$ Change | $ | 19 |
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The amount provided by operatingOperating Activities
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in operating activities | $ | (118 | ) | $ | (21 | ) | ||
$ Change | $ | (97 | ) | |
Operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include impairment charges, other charges, fair value adjustments to minority investments, depreciation and amortization, deferred income taxes, and share-based compensation expense.
The increasedecrease in cash from the prior year primarily reflects working capital changes,operating activities reflected lower net income, partially offset by the decline in net incometiming of merchandise purchases and payments of accounts payable and accrued and other liabilities, as compared with the priorsame period last year. The prior-year merchandise purchases were affected by the supply chain disruptions that occurred in the preceding year.
Investing Activities
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| Thirty-nine weeks ended | ||||
| October 28, |
| October 29, | ||
| 2017 |
| 2016 | ||
| ($ in millions) | ||||
Net cash used in investing activities | $ | 204 |
| $ | 193 |
$ Change | $ | 11 |
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| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in investing activities | $ | (59 | ) | $ | (105 | ) | ||
$ Change | $ | 46 | |
CapitalThe change in investing activities primarily reflected lower capital expenditures were $11 million higher thanin the prior year. The increase was due to increased spending on technologycurrent year, as compared with the prior-year period, as several large projects and cash payments related to 2021 were paid in the 2016 capital program. The Company’s full-year capital spending is expected to be approximately $269 million, which includes $198 million related to the remodeling or relocationfirst quarter of approximately 180 existing stores and the opening of approximately 90 new stores, as well as $71 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. 2022.
For the thirteen weeks ended April 29, 2023, capital expenditures decreased by $36 million to $59 million, as compared with the corresponding prior-year period.
Financing Activities
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| Thirty-nine weeks ended | ||||
| October 28, |
| October 29, | ||
| 2017 |
| 2016 | ||
| ($ in millions) | ||||
Net cash used in financing activities | $ | 475 |
| $ | 443 |
$ Change | $ | 32 |
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| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in financing activities | $ | (46 | ) | $ | (128 | ) | ||
$ Change | $ | 82 | |
Cash used in financing activities was primarily related to our return to shareholders initiatives as follows:
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Share repurchases | $ | — | $ | (89 | ) | |||
Dividends paid on common stock | (38 | ) | (38 | ) | ||||
Total returned to shareholders | $ | (38 | ) | $ | (127 | ) |
During the thirty-ninethirteen weeks ended October 28, 2017,April 29, 2023, we repurchased 9,589,660did not repurchase any shares ofunder our common stock for $362 million, as compared with 5,874,643 shares repurchased for $352 millionshare repurchase program, whereas in the corresponding prior-year period.
The Company alsoprior year we spent $89 million to repurchase shares. We declared and paid $38 million in dividends during the first three quartersrepresenting a quarterly rate of 2017 and 2016 of $120 million and $111 million, respectively. This represented quarterly rates of $0.31 and $0.275$0.40 per share for 2017in both 2023 and 2016, respectively.
Additionally, we received proceeds from the issuance of common stock in connection with employee stock programs of $17 million and $28 million for the thirty-nine weeks ended October 28, 2017 and October29,2016, respectively. Also, during the thirty-nine weeks ended October 28, 2017 and October29,2016, the Company2022. We paid $10 million and $6$1 million during the first quarters of 2023 and 2022, respectively, to satisfy tax withholding obligations relatingrelated to the vesting of share-based equity awards.
Included in the prior year’s financing activities were fees of $2 million paid in connection with the 2016 Credit Agreement.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included inwithin the Annual Report on2022 Form 10-K for the fiscal year ended January 28, 2017.10‑K.
Recent Accounting Pronouncements
Descriptions of the recently issued and adopted accounting principles are included in Item 1. “Financial Statements” in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our primary risk exposures or management of market risks from the information provided in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk within the 2022 Form 10-K.
Item4. ControlsControls and Procedures
Evaluation of Disclosure Controls and Procedures
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 Interim Chief Financial Officer (“CFO”), 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 disclosureThe term "disclosure controls and procedures" means controls and other procedures were effectiveof a company that are designed to ensure that information relating to the Company that is required to be disclosed by a company in the reports that we fileit files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECSEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the CEOits principal executive and CFO,principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
DuringBased on that evaluation, our CEO and CFO concluded that as of April 29, 2023, our disclosure controls and procedures were not effective due to the un-remediated material weaknesses in internal control over financial reporting related to certain ineffective general information technology controls over logical access and change management at our WSS business, which was previously disclosed in the Company's Annual Report on Form 10-K for the year ended January 28, 2023. For additional information, please refer to Part II - Item 9A. of the Company's Annual Report on Form 10-K for the year ended January 28, 2023.
Remediation
Management is in the process of implementing measures designed to ensure that the control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) designing and implementing controls related to deprovisioning, privileged access, and user access reviews, (ii) developing an enhanced risk assessment process to evaluate logical access, and (iii) improving the existing training program associated with control design and implementation. We believe that these actions will remediate the material weaknesses. Management began to implement certain of these remedial steps during the first quarter ended October 28, 2017,of 2023. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of 2023.
Changes in Internal Control Over Financial Reporting
Other than the ongoing remediation efforts described above, there were no changes in the Company’sour internal control over financial reporting (as defined in Rules 13a-15(f) ofand 15d-15(f) under the Exchange Act), during the quarter ended April 29, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Because of its inherent limitations, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under Item 1. “Financial Statements.”Statements” in Part I.
There were no material changesIn addition to the riskother information discussed in this report, the factors discloseddescribed in the 2016Part I, Item 1A. “Risk Factors” in our 2022 Annual Report on Form 10-K filed with the SEC on March 27, 2023 should be considered as they could materially affect our business, financial condition, or future results.
There have not been any significant changes with respect to the risks described in our 2022 Form 10-K.
Item2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table below provides information with respect to shares of the Company’s common stock that the Company repurchased duringfor the thirteen weeks ended October 28, 2017: April 29, 2023.
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| Approximate | |
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| Total Number of |
| Dollar Value of | |
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| Total |
| Average |
| Shares Purchased as |
| Shares that may | ||
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| Number |
| Price |
| Part of Publicly |
| yet be Purchased | ||
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| of Shares |
| Paid Per |
| Announced |
| Under the | ||
Date Purchased |
| Purchased (1) |
| Share (1) |
| Program (2) |
| Program (2) | ||
July 30 - Aug. 26, 2017 |
| 3,002,574 |
| $ | 35.17 |
| 3,000,000 |
| $ | 1,061,038,524 |
Aug. 27 - Sept. 30, 2017 |
| 4,788,800 |
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| 35.34 |
| 4,788,760 |
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| 891,816,280 |
Oct. 1 - Oct. 28, 2017 |
| 904,800 |
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| 31.85 |
| 904,800 |
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| 862,996,130 |
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| 8,696,174 |
| $ | 34.92 |
| 8,693,560 |
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| | | 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 | Program | ||||||||||||
January 29 to February 25, 2023 | — | $ | — | — | $ | 1,103,814,042 | ||||||||||
February 26 to April 1, 2023 | 239,806 | 37.99 | — | 1,103,814,042 | ||||||||||||
April 2 to April 29, 2023 | 19,575 | 39.85 | — | 1,103,814,042 | ||||||||||||
| 259,381 | $ | 38.13 | — |
(1) | These columns | |
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
On February 14, 2017, the Board of Directors approved a 3-year, $1.2 billion share repurchase program extending through January 2020.
† Management contract or compensatory plan or arrangement
* Filed herewith
** Furnished herewith
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | FOOT LOCKER, INC. |
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27
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