FOOT LOCKER, INC.

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		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at May 4, 2019	113,161	$	820	(774)	$	(41)	$	2,207	$	(384)	$	2,602
Restricted stock issued	16											—
Issued under director and stock plans	23		(1)									(1)
Share-based compensation expense			6									6
Shares of common stock used to satisfy tax withholding obligations				(1)		—						—
Share repurchases				(2,900)		(120)						(120)
Reissued - Employee Stock Purchase Plan				96		6						6
Net income								60				60
Cash dividends declared on common stock ($0.38 per share)								(41)				(41)
Translation adjustment, net of tax										(6)		(6)
Change in cash flow hedges, net of tax										5		5
Pension and postretirement adjustments, net of tax										1		1
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

Balance at May 5, 2018	121,342	$	848	(4,081)	$	(176)	$	2,184	$	(313)	$	2,543
Restricted stock issued	13											—
Issued under director and stock plans	142		6									6
Share-based compensation expense			3									3
Shares of common stock used to satisfy tax withholding obligations				(1)								—
Share repurchases				(1,835)		(93)						(93)
Reissued - Employee Stock Purchase Plan				48		2						2
Net income								88				88
Cash dividends declared on common stock ($0.345 per share)								(40)				(40)
Translation adjustment, net of tax										(20)		(20)
Pension and postretirement adjustments, net of tax										(7)		(7)
Balance at August 4, 2018	121,497	$	857	(5,869)	$	(267)	$	2,232	$	(340)	$	2,482


	Additional Paid-In								Accumulated
	Capital &								Other		Total
Twenty-six weeks ended	Common Stock			Treasury Stock			Retained		Comprehensive		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at February 2, 2019	112,933		809	(711)		(37)		2,104		(370)		2,506
Restricted stock issued	88											—
Issued under director and stock plans	179		3									3
Share-based compensation expense			13									13
Shares of common stock used to satisfy tax withholding obligations				(32)		(2)						(2)
Share repurchases				(2,932)		(122)						(122)
Reissued - Employee Stock Purchase Plan				96		6						6
Net income								232				232
Cash dividends declared on common stock								(84)				(84)
Translation adjustment, net of tax										(21)		(21)
Change in cash flow hedges, net of tax										3		3
Pension and postretirement adjustments, net of tax										4		4
Cumulative effect of the adoption of Topic 842								(26)				(26)
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

Balance at February 3, 2018	121,262		842	(1,433)		(63)		2,019		(279)		2,519
Restricted stock issued	89											—
Issued under director and stock plans	146		6									6
Share-based compensation expense			9									9
Shares of common stock used to satisfy tax withholding obligations				(32)		(1)						(1)
Share repurchases				(4,452)		(205)						(205)
Reissued - Employee Stock Purchase Plan				48		2						2
Net income								253				253
Cash dividends declared on common stock								(81)				(81)
Translation adjustment, net of tax										(58)		(58)
Change in cash flow hedges, net of tax										1		1
Pension and postretirement adjustments, net of tax										(4)		(4)
Cumulative effect of the adoption of ASU 2014-09								4				4
Cumulative effect of the adoption of ASU 2016-16								37				37
Balance at August 4, 2018	121,497	$	857	(5,869)	$	(267)	$	2,232	$	(340)	$	2,482

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of ~~Significant~~Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February ~~2, 2019~~1, 2020 and of the fiscal year ended February ~~3, 2018.~~2, 2019. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended February ~~3, 2018,~~2, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on ~~March 29, 2018.~~April 2, 2019.

Other than the changes to the ~~Revenue Recognition~~Leases policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to ~~our significant accounting~~the policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February ~~3, 2018.~~2, 2019.

~~Recently Adopted~~Recent Accounting Pronouncements

In ~~May 2014, the~~ ~~Financial Accounting Standards Board (“FASB”) issued~~ ~~Accounting Standards Update (“ASU”)~~ ~~2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~. The core principle of Topic 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 during the first quarter of 2018 using the modified retrospective method. We recognized $5 million, or $4 million net of tax, as the cumulative effect of initially applying the new revenue standard as an increase to the opening balance of retained earnings.

~~In October~~February 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. The Company adopted this ASU during the first quarter of 2018 using the modified retrospective method, and as a result increased deferred income tax assets by $37 million. The Company recorded an adjustment to opening retained earnings to write off the income tax effects that had been deferred from past intercompany transactions involving non-inventory assets. The Company also recorded deferred tax assets with an offset to opening retained earnings for amounts that were not previously recognized under the previous guidance but are recognized under this ASU.

~~Other recently adopted ASUs are discussed within the applicable disclosures on the following pages.~~

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In February 2016, the~~ ~~FASB~~ ~~issued~~ ~~ASU~~2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional ~~disclosure~~disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted ~~Improvements,~~ improvements, which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted. ~~These new leasing standards are effective for fiscal years beginning after December 15, 2018, including interim periods therein.~~

The Company ~~intends to adopt~~adopted Topic 842 ~~during the first quarter of~~on February 3, 2019 (the “effective date”) using the optional transition method, ~~provided by ASU 2018-11.~~which applies Topic 842 at the beginning of the period in which it is adopted. Prior period amounts have not been adjusted in connection with the adoption of this standard. The Company ~~has historically presented~~elected the package of practical expedients under the new standard, which permits companies to not reassess lease classification, lease identification, or initial direct costs for existing or expired leases prior to the effective date. We have lease agreements with non-lease components that relate to the lease components. The Company elected the practical expedient to account for non-lease components and the lease components to which they relate, as a ~~non-GAAP measure~~single lease component for all classes of underlying assets. Also, the Company elected to ~~adjust its~~keep short-term leases with an initial term of twelve months or less off the balance ~~sheet to present~~sheet.

Upon adoption of this new standard, the Company recorded right-of-use assets and lease obligations on the Condensed Consolidated Balance Sheet for our operating leases of $3,148 million and $3,422 million, respectively, as ~~if they~~of February 3, 2019. As part of adopting the standard, previously recognized liabilities for deferred rent and lease incentives were ~~capital leases. Based upon that analysis and our current evaluation~~reclassified as a component of the standard, we estimate the adoption will result in the addition of $3.2 billion to $3.7 billion of assets and liabilities to our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows. The actual amount of additional assets and liabilities that will be recordedright-of-use assets. Additionally upon adoption, ~~will depend on~~we evaluated right-to-use assets for impairment and determined that approximately $29 million of impairment was required related to newly recognized right-of-use assets that would have been impaired in previous periods. This impairment of the ~~discount and foreign currency rates that are in effect~~right-to-use asset as of ~~the adoption date,~~February 3, 2019 was recorded, net of related income tax effects, as ~~well liabilities associated with leases that will be executed before the adoption date.~~

a $26 million reduction of beginning retained earnings. The standard did not significantly affect our Condensed Consolidated Statements of Operations, Comprehensive Income, or Cash Flows.

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

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Revenue ~~Recognition~~

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

~~In conjunction with the adoption of Topic 606 during the first quarter of 2018, we have determined that revenue~~ Revenue for merchandise that is shipped to our customers from our distribution centers and stores ~~will be~~is recognized upon shipment date.

Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and has paid for the merchandise as of the shipment date. This reflects a change in timing in how we previously recognized revenue for our direct-to-customer sales. Prior to the adoption of Topic 606, the Company recognized such revenue upon date of delivery. As a result of this change, the Company recorded $1 million, net of tax, as an increase to opening retained earnings to reflect the cumulative effect of adopting this change. We have elected to account for shippingShipping and handling is accounted for as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.

Sales disaggregated based upon sales channel is presented below.

~~Gift Cards~~


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales by Channel
Stores	$	1,521	$	1,542	$	3,279	$	3,285
Direct-to-customers		253		240		573		522
Total sales	$	1,774	$	1,782	$	3,852	$	3,807

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


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales by Geography
United States	$	1,209	$	1,220	$	2,761	$	2,721
International		565		562		1,091		1,086
Total sales	$	1,774	$	1,782	$	3,852	$	3,807

Contract Liabilities

The Company sells gift cards which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed by customers. Effective as of the first quarter of 2018 with the adoption of Topic 606, gift card breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, unless there is a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. This reflects a change in our accounting for gift card breakage from the remote method to the proportional method. As a result of adopting Topic 606, the Company recorded $4 million, or $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patterns. ~~Additionally, breakage income was previously recorded within selling, general and administrative expenses; however, with the adoption of this standard in the first quarter of 2018, this~~Breakage income is reported as part of sales. ~~This change in classification is not considered significant.~~

~~2. Revenue~~

~~Sales disaggregated based upon sales channel is presented below.~~

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)
Stores

$
1,591

$
1,612

$
4,876

$
4,819
Direct-to-customers

269

258

791

753
Total sales

$
1,860

$
1,870

$
5,667

$
5,572

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

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)
United States

$
1,297

$
1,316

$
4,018

$
3,962
International

563

554

1,649

1,610
Total sales

$
1,860

$
1,870

$
5,667

$
5,572

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Contract Liabilities~~

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


		~~($ in millions)~~
~~Balance at February 4, 2018~~	$	38
~~Redemptions~~		~~(63)~~
~~Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606~~		~~(4)~~
~~Breakage recognized~~		~~(4)~~
~~Activations~~		58
~~Foreign currency fluctuations~~		~~(1)~~
~~Balance at November 3, 2018~~	$	24


		($ in millions)
Balance at February 3, 2019	$	35
Redemptions		(47)
Breakage recognized in sales		(3)
Activations		43
Balance at August 3, 2019	$	28

~~Due to the fact that most gift cards are redeemed within 12 months, the~~The Company elected not to disclose the information about remaining performance ~~obligations.~~obligations since the amount of gift cards redeemed after 12 months is not significant.

Table of Contents

FOOT LOCKER, INC.

3.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Segment Information

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

Our operating segments are identified according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. ~~Prior to fiscal~~During 2018, the Company ~~had two reportable segments: Athletic Stores~~expanded into Asia and ~~Direct-to-Customers. Beginning in fiscal 2018,~~launched our digital channels across Singapore, Hong Kong, and Malaysia. During the first quarter of 2019, the Company ~~has~~ changed its organizational and internal reporting structure in order to ~~execute~~support an accelerated growth strategy for the region. We opened an Asian headquarters in Singapore and realigned our ~~omni-channel strategy.~~ organization into three distinct geographic regions: Europe, Middle East and Africa (“EMEA”), Asia Pacific, and North America.

In light of these changes, the Company has re-evaluated its operating ~~segments, which now reflect the combination of stores and direct-to-customer by geography.~~segments. The Company has determined that it has ~~two~~3 operating segments, North America, EMEA, and ~~International.~~Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team sales. Our ~~International~~EMEA operating segment includes the results of the following banners operating in ~~Europe, Asia, Australia, and New Zealand:~~Europe: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of Foot Locker and Kids Foot Locker and the related e-commerce businesses operating in Australia, New Zealand, and Asia. We have further aggregated these operating segments into ~~one~~1 reportable segment based upon their shared customer base and similar economic characteristics. ~~Prior-year information has been restated to reflect this change.~~

The Company evaluates performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, pension litigation ~~charge,~~charges, corporate expense, non-operating income, and net interest income.

The following table summarizes our results:

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)
Sales

$
1,860

$
1,870

$
5,667

$
5,572

Operating Results

Division profit

165

180

543

592
Less: Pension litigation and reorganization charges (1) (2)

2

13

17

63
Less: Corporate expense (3)

19

12

46

34
Income from operations

144

155

480

495
Interest income, net

(2)

—

(5)

(1)
Other income (4)

—

1

5

2
Income before income taxes

$
146

$
156

$
490

$
498


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales	$	1,774	$	1,782	$	3,852	$	3,807

Operating Results
Division profit		115		131		365		378
Less: Litigation and other charges ⁽¹⁾		14		3		15		15
Less: Corporate expense ⁽²⁾		20		16		41		27
Income from operations		81		112		309		336
Interest income, net		2		1		6		3
Other income		2		2		4		5
Income before income taxes	$	85	$	115	$	319	$	344

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)
~~(1)~~	~~Included in~~The Company recorded pre-tax charges of $1 million and $3 million for the thirteen ~~and thirty-nine~~ weeks ended ~~November~~August 3, 2019 and August 4, 2018, ~~are~~respectively, related to a pension litigation matter and related plan reformation. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company recorded pre-tax charges of $2 million and ~~$17~~$15 million, ~~respectively, relating to a pension litigation matter described further in Note 14,~~ ~~Legal Proceedings. Included~~respectively. The charges in the ~~thirty-nine weeks ended October 28, 2017 is a pre-tax charge of $50 million relating~~current periods reflect professional fees in connection with the plan reformation. The prior year charges reflected adjustments to the ~~same matter.~~
~~(2)~~	~~During the third quarter of 2017, the Company recorded a $13 million pre-tax charge as a result~~value of the ~~Company reorganizing its organizational structure, described more fully in Note 4,~~ ~~Litigation~~judgment and ~~Other Charges~~. interest that continued to accrue, as required by the provisions of the required plan reformation.

For the thirteen weeks ended August 3, 2019, the Company incurred $13 million of lease termination costs related to the closure of certain of its SIX:02 locations.

~~(3)~~

(2)

~~(4)~~

Other income includes non-operating items, such as lease termination gains, franchise royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security in conjunction with the adoption of ASU 2016-01 as of the beginning of 2018, and net benefit expense related to our pension and postretirement programs excluding the service cost component~~conjunction with the adoption of ASU 2017-07 as of the beginning of 2018.~~

4. ~~Litigation~~Cash, Cash Equivalents, and ~~Other Charges~~

~~As more fully discussed in Note 14,~~ ~~Legal Proceedings,~~ the Company recorded charges related to the pension litigation judgment of $2 million and $17 million for the thirteen and thirty-nine weeks ended November 3, 2018. For the thirty-nine weeks ended November 3, 2018, the Company recorded charges of $13 million, which represented adjustments to the estimated cost of reformation and interest. Professional fees in connection with the plan reformation were incurred totaling $2 million and $4 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively. During the thirty-nine weeks ended October 28, 2017, the Company recorded a $50 million charge related to the same matter.

During the third quarter of the prior year, the Company recorded a charge for $13 million as a result of reorganizing its organizational structure. The following is a roll forward of the liability related to that event for the thirty-nine weeks ended November 3, 2018:

Severance and

Other Related

Benefit Costs

Charges

Total

($ in millions)
Balance at February 3, 2018

$
5

$
2

$
7
Cash payments

(5)

(1)

(6)
Balance at November 3, 2018

$
—

$
1

$
1

5. Restricted Cash

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


	November 3,		October 28,		February 3,
	2018		2017		2018
	($ in millions)

							August 3,		August 4,		February 2,
							2019		2018		2019
							($ in millions)
Cash and cash equivalents	$	748	$	890	$	849	$	939	$	950	$	891
Restricted cash included in other current assets		2		1		1		5		1		59
Restricted cash included in other non-current assets		86		29		181		30		88		31
Cash, cash equivalents, and restricted cash	$	836	$	920	$	1,031	$	974	$	1,039	$	981

~~Amounts~~During 2017 in connection with the pension litigation matter, the Company deposited $150 million in a qualified settlement fund. At August 4, 2018, the amount remaining in the fund was $54 million and was classified as part of non-current assets. At February 2, 2019, the fund was classified as a current asset due to our intention to use it to contribute to the pension plan. During 2018 and in March 2019, the Company used substantially all of the fund to pay class counsel fees and to make a contribution to the pension plan.

Other amounts included in restricted cash primarily relate to ~~funds deposited in a qualified settlement fund in connection with the pension litigation, as well~~ amounts held in escrow in connection with various leasing arrangements in ~~Europe. In addition, restricted cash reflects~~Europe and deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.

The Company has elected to present book overdrafts, representing checks issued but still outstanding in excess of bank balances, as part of accounts payable.

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

6.5. 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.

~~As a result~~In light of the ~~first quarter 2018~~ change in our organizational and internal reporting structure in the first quarter of 2019, we ~~have determined that we have one reportable segment. We~~ have reassessed our reporting units ~~in light of this change~~ and have ~~deemed~~determined that the collective omni-channel banners in North America, EMEA, and ~~International to be~~Asia Pacific are the ~~two~~3 reporting units at which goodwill is tested. ~~Therefore,~~

Accordingly, goodwill was re-allocated ~~to these~~between the affected reporting units based on their relative fair values. As required, we conducted ~~our~~the annual impairment review both before and after this change. Neither review resulted in the recognition of impairment, as the fair value of each reporting unit exceeded its carrying value.

Table of Contents

FOOT LOCKER, INC.

7.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Other Intangible Assets, net

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


		August 3, 2019						August 4, 2018						February 2, 2019
	Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)	value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: ⁽¹⁾
Lease acquisition costs	$	116	$	(108)	$	8	$	125	$	(115)	$	10	$	120	$	(111)	$	9
Trademarks / trade names		20		(15)		5		20		(14)		6		20		(15)		5
Favorable leases		-		-		-		7		(6)		1		7		(6)		1
	$	136	$	(123)	$	13	$	152	$	(135)	$	17	$	147	$	(132)	$	15

Indefinite life intangible assets: ^{(1), (2)}
Runners Point Group trademarks / trade names					$	8					$	24					$	9
Other intangible assets, net					$	21					$	41					$	24

November 3, 2018

October 28, 2017

February 3, 2018

Gross

Accum.

Net

Gross

Accum.

Net

Gross

Accum.

Net
($ in millions)

value

amort.

value

value

amort.

value

value

amort.

value
Amortized intangible assets: (1)

Lease acquisition costs

$
121

$
(111)

$
10

$
129

$
(117)

$
12

$
135

$
(122)

$
13

Trademarks / trade names

20

(15)

5

20

(13)

7

20

(14)

6

Favorable leases

7

(6)

1

7

(6)

1

7

(6)

1

$
148

$
(132)

$
16

$
156

$
(136)

$
20

$
162

$
(142)

$
20
Indefinite life intangible assets: (1)

Runners Point Group trademarks / trade names

$
23

$
25

$
26
Other intangible assets, net

$
39

$
45

$
46

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

(2)	During the fourth quarter of 2018, the Company recorded a non-cash impairment charge of $15 million related to these intangibles.

The annual review of intangible assets with indefinite lives performed during the first quarter of ~~2018~~2019 did not result in the recognition of impairment. Amortization expense recorded is as ~~follows~~:follows:


	Thirteen weeks ended					Twenty-six weeks ended
($ in millions)	August 3, 2019		August 4, 2018			August 3, 2019	August 4, 2018
Amortization expense	$	1	$	1	$	2	$	2

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)
Amortization expense

$
1

$
1

$
3

$
3

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


	($ in millions)
Remainder of 2019	$	2
2020		3
2021		2
2022		2
2023		2
2024		2

($ in millions)
Remainder of 2018
$
1
2019

3
2020

3
2021

3
2022

2
2023

2

7. Leases

The Company is obligated under operating leases for almost all of its store properties. In addition, the Company leases certain warehouse distribution centers. Operating lease periods generally range from 5 to 10 years and most store leases contain rent escalation provisions. For leases beginning in 2019 and later, the Company will combine lease components (e.g. rental payments) and non-lease components (e.g. common area maintenance costs and utilities). Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these short-term leases on a straight-line basis over the lease term.

Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use.

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Since the rates implicit in the leases are not readily determinable, the Company uses its incremental borrowing rates based on the remaining lease term to determine the present value of future lease payments. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Some of the store leases contain renewal options with varying terms and conditions. The Company’s lease term includes options to extend or terminate a lease only when it is reasonably certain that it will exercise that option.

The majority of operating lease costs relate to retail stores and distribution centers and the expenses are classified within cost of sales. Operating lease costs for non-store rents are included in SG&A.

Certain leases provide for variable lease costs, which primarily include rent payments based on a percentage of store sales, common area maintenance costs, and taxes. These costs are expensed as incurred and are included within cost of sales.

The components of lease cost as of August 3, 2019 were as follows:


	Thirteen weeks ended		Twenty-six weeks ended
($ in millions)	August 3, 2019		August 3, 2019
Operating lease costs	$	165	$	331
Variable lease costs		81		165
Short-term lease costs		7		14
Net lease cost	$	253	$	510

Rent expense for the prior year comparative periods is accounted for under previous lease guidance. Rent expense for operating leases for the thirteen weeks ended August 4, 2018 amounted to $192 million and consisted of minimum and contingent rentals of $186 million and $6 million, respectively. For the twenty-six weeks ended August 4, 2018, rent expense for operating leases amounted to $377 million and consisted of minimum and contingent rentals of $365 million and $13 million, respectively, less sublease income of $1 million. Also, most of the Company’s leases require the payment of certain executory costs such as insurance, maintenance, and other costs in addition to the future minimum lease payments. These costs, including the amortization of lease rights, totaled $37 million and $74 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.

Amounts recognized in the Condensed Consolidated Balance Sheet related to operating leases as of August 3, 2019 were as follows:


	($ in millions)
Assets
Operating lease right-of-use assets	$	2,976

Liabilities
Current
Operating lease liabilities		497
Noncurrent
Operating lease liabilities		2,750
Total lease liabilities	$	3,247

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other information related to operating leases as of August 3, 2019 consisted of the following:


Weighted average remaining lease term (years)	7.3
Weighted average discount rate	5.4	%

Supplemental cash flow information related to leases for the twenty-six weeks ended August 3, 2019 was as follows:


	($ in millions)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	338
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		114

Maturities of lease liabilities as of August 3, 2019 are as follows:


	($ in millions)
Remainder of 2019	$	337
2020		637
2021		588
2022		533
2023		462
Thereafter		1,431
Total lease payments		3,988
Less: Interest		741
Total lease liabilities	$	3,247

As of February 2, 2019, the estimated future minimum non-cancellable lease commitments were as follows:


	($ in millions)
2019	$	672
2020		631
2021		583
2022		527
2023		456
Thereafter		1,408
Total operating lease commitments	$	4,277

8. Accumulated Other Comprehensive Loss

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


	August 3,		August 4,		February 2,
	2019		2018		2019
	($ in millions)
Foreign currency translation adjustments	$	(105)	$	(67)	$	(84)
Cash flow hedges		3		1		—
Unrecognized pension cost and postretirement benefit		(282)		(274)		(286)
	$	(384)	$	(340)	$	(370)

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 3,

October 28,

February 3,

2018

2017

2018

($ in millions)
Foreign currency translation adjustments
$
(90)

$
(57)

$
(9)
Cash flow hedges

1

2

—
Unrecognized pension cost and postretirement benefit

(272)

(231)

(270)

$
(361)

$
(286)

$
(279)

The changes in AOCL for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 were as follows:



					Items Related
	Foreign Currency				to Pension and
	Translation		Cash Flow		Postretirement

									Foreign				Items Related
									Currency				to Pension and
									Translation		Cash Flow		Postretirement
($ in millions)	Adjustments		Hedges		Benefits		Total		Adjustments		Hedges		Benefits		Total
Balance as of February 3, 2018	$	(9)	$	—	$	(270)	$	(279)
Balance as of February 2, 2019									$	(84)	$	—	$	(286)	$	(370)

OCI before reclassification		(81)		1		1		(79)		(21)		3		—		(18)
Amortization of pension actuarial (gain)/loss, net of tax		—		—		6		6		—		—		4		4
Pension remeasurement, net of tax		—		—		(9)		(9)
Other comprehensive income		(81)		1		(2)		(82)		(21)		3		4		(14)
Balance as of November 3, 2018	$	(90)	$	1	$	(272)	$	(361)
Balance as of August 3, 2019									$	(105)	$	3	$	(282)	$	(384)

Reclassifications from AOCL for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 were as follows:


	($ in millions)
Amortization of actuarial (gain) loss:
Pension benefits- amortization of actuarial loss	$	6
Postretirement benefits- amortization of actuarial gain		(1)
Net periodic benefit cost (see Note 11)		5
Income tax benefit		(1)
Total, net of tax	$	4



		~~($ in millions)~~
~~Amortization of actuarial (gain) loss:~~
~~Pension benefits- amortization of actuarial loss~~	$	9
~~Postretirement benefits- amortization of actuarial gain~~		~~(1)~~
~~Net periodic benefit cost (see Note 12)~~		8
~~Income tax benefit~~		~~(2)~~
~~Net of tax~~	$	6

9. ~~Income Taxes~~

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

As of February 3, 2018, the Company had not completed the determination of the accounting implications of the Tax Act on the Company’s tax accruals. However, we reasonably estimated the effects of the Tax Act and recognized a provisional net tax expense of $99 million associated with the Tax Act in the fourth quarter of 2017. During the thirteen and thirty-nine weeks ended November 3, 2018, the Company reduced its provisional calculation by $16 million and $17 million, respectively, which primarily represented revised estimates of foreign tax credits.

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Our accounting for the Tax Act is still incomplete as we have not finalized the taxation of deemed repatriation of foreign income previously deferred from U.S. income taxes and adjustments to our deferred taxes. We are continuing to analyze additional information, regulatory guidance, and developing technical interpretations to complete our accounting for these items. Our accounting will be completed during the fourth quarter as provided by SAB 118.

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

The ultimate effect of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may ~~be issued, as well as any related actions the Company may take.~~

For the thirteen and thirty-nine weeks ended November 3, 2018, the Company recorded income tax provisions of $16 million and $107 million, which represented effective tax rates of 10.8 percent and 21.8 percent, respectively. For the thirteen and thirty-nine weeks ended October 28, 2017, the Company recorded income tax provisions of $54 million and $165 million, which represented effective tax rates of 34.7 percent and 33.2 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.

~~10.~~ Fair Value Measurements

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


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

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

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


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

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

The ~~following table provides a summary~~fair values of the Company’s ~~recognized assets and liabilities that~~equity investments are ~~measured at fair value on a recurring basis:~~

As of November 3, 2018

As of October 28, 2017

As of February 3, 2018

($ in millions)

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3
Assets

Investment in equity securities

$
—

$
21

$
—

$
—

$
—

$
—

$
—

$
—

$
—
Available-for-sale security

—

6

—

—

7

—

—

7

—
Foreign exchange forward contracts

—

1

—

—

2

—

—

1

—
Total Assets

$
—

$
28

$
—

$
—

$
9

$
—

$
—

$
8

$
—
Liabilities

Foreign exchange forward contracts

—

—

—

—

1

—

—

1

—
Total Liabilities

$
—

$
—

$
—

$
—

$
1

$
—

$
—

$
1

$
—

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~As of February 3, 2018, the Company adopted ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. The Company’s equity investment, under the practicability exception, is now measured at cost adjusted for changes in observable prices minus impairment. Additionally, our security classified as available-for-sale is now recorded at fair value with gains and losses reported to other income in our Statement of Operations, whereas previously it was recorded to AOCL. The adjustment recorded to retained earnings as a result of adopting ASU 2016-01 was not significant. The fair value of the Company’s investment in equity securities is determined by using quoted prices for identical or similar instruments in markets that are not active and therefore are classified as Level 2. The fair value of the auction rate security, classified as available-for-sale, is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.

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

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	August 3, 2019						August 4, 2018						February 2, 2019
	($ in millions)
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Equity investments	$	—	$	133	$	—	$	—	$	15	$	—	$	—	$	94	$	—
Available-for-sale security		—		6		—		—		7		—		—		6		—
Foreign exchange forward contracts		—		4		—		—		2		—		—		—		—
Total Assets	$	—	$	143	$	—	$	—	$	24	$	—	$	—	$	100	$	—

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

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:


	November 3,		October 28,		February 3,
	2018		2017		2018
	($ in millions)

							August 3,		August 4,		February 2,
							2019		2018		2019
							($ in millions)
Carrying value	$	124	$	126	$	125	$	123	$	124	$	124
Fair value	$	138	$	145	$	144	$	136	$	140	$	136

The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2.

The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.

~~11.~~10. Earnings Per Share

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

Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The computation of basic and diluted earnings per share is as follows:



	Thirteen weeks ended				Thirty-nine weeks ended
	November 3,		October 28,		November 3,		October 28,
	2018		2017		2018		2017
	(in millions, except per share data)

									Thirteen weeks ended				Twenty-six weeks ended
									August 3,		August 4,		August 3,		August 4,
									2019		2018		2019		2018
									(in millions, except per share data)
Net Income	$	130	$	102	$	383	$	333	$	60	$	88	$	232	$	253


Weighted-average common shares outstanding		114.5		126.0		116.6		129.6		110.8		116.6		111.6		117.7
Dilutive effect of potential common shares		0.5		0.4		0.5		0.7		0.3		0.5		0.5		0.4
Weighted-average common shares outstanding assuming dilution		115.0		126.4		117.1		130.3		111.1		117.1		112.1		118.1


Earnings per share - basic	$	1.14	$	0.81	$	3.29	$	2.57	$	0.55	$	0.76	$	2.09	$	2.15
Earnings per share - diluted	$	1.14	$	0.81	$	3.28	$	2.55	$	0.55	$	0.75	$	2.08	$	2.14

Anti-dilutive option awards excluded from diluted calculation		2.0		2.0		1.9		1.6

Anti-dilutive share-based awards excluded from diluted calculation										2.4		2.0		1.8		1.7

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Additionally, shares of ~~1.1~~0.7 million and ~~0.4~~1.1 million as of ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017,~~August 4, 2018, respectively, have been excluded from diluted weighted-average shares as the number of shares that will be issued is contingent on the Company’s performance metrics as compared to the pre-established performance goals which have not been achieved as of ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017.~~August 4, 2018. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.

~~12.~~11. Pension and Postretirement Plans

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~~table below are the components of net periodic pension benefit cost and net periodic postretirement benefit income. ~~In conjunction with the adoption of ASU 2017-07,~~ ~~Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, service~~Service cost ~~continues to be~~is recognized as part of SG&A expense, while the remaining pension and postretirement expense components are ~~now~~ recognized as part of other income. ~~Prior periods were not reclassified as required by this ASU as the amounts were not considered significant.~~


	Pension Benefits								Postretirement Benefits
	Thirteen weeks ended				Twenty-six weeks ended					Thirteen weeks ended			Twenty-six weeks ended
		Aug. 3		Aug. 4		Aug. 3		Aug. 4		Aug. 3		Aug. 4		Aug. 3		Aug. 4
		2019		2018		2019		2018		2019		2018		2019		2018
	($ in millions)
Service cost	$	5	$	4	$	10	$	9	$	—	$	—	$	—	$	—
Interest cost		6		7		13		13		—		—		—		—
Expected return on plan assets		(9)		(9)		(18)		(19)		—		—		—		—
Amortization of net loss (gain)		3		3		6		6		(1)		(1)		(1)		(1)
Net benefit expense (income)	$	5	$	5	$	11	$	9	$	(1)	$	(1)	$	(1)	$	(1)

Pension Benefits

Postretirement Benefits

Thirteen weeks ended

Thirty-nine weeks ended

Thirteen weeks ended

Thirty-nine weeks ended

Nov. 3,

Oct. 28,

Nov. 3,

Oct. 28,

Nov. 3,

Oct. 28,

Nov. 3,

Oct. 28,
($ in millions)

2018

2017

2018

2017

2018

2017

2018

2017
Service cost

$
5

$
4

$
14

$
12

$
—

$
—

$
—

$
—
Interest cost

8

6

21

19

—

—

—

—
Expected return on plan assets

(10)

(9)

(29)

(28)

—

—

—

—
Amortization of net loss (gain)

3

3

9

10

—

—

(1)

(1)
Net benefit expense (income)

$
6

$
4

$
15

$
13

$
—

$
—

$
(1)

$
(1)

Table of Contents

FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company contributed ~~$30~~$55 million in ~~May 2018 and $98 million in September 2018~~March 2019 to ~~the~~its U.S. qualified pension plan. The Company continually evaluates the amount and timing of any future contributions.

~~In connection with the pension litigation more fully disclosed in Note 14,~~ ~~Legal Proceedings~~, the Company reformed its U.S. qualified pension plan during the second quarter of 2018, which resulted in the reclassification of the accrued liability previously recorded and the remeasurement of the liability. The Company reclassified $194 million, after the payment of class counsel fees, to the U.S. qualified pension plan liability. After this reclassification, the remeasurement resulted in an increase to the benefit obligation of $12 million, with a corresponding charge to accumulated other comprehensive loss of $9 million, net of tax. The assumptions used to determine the remeasured benefit obligation did not change from the beginning of the year with the exception of the discount rate which increased from 3.7 percent to 4.0 percent.

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~13.~~12. Share-Based Compensation

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


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
		($ in millions)
Options and shares purchased under the employee stock purchase plan	$	2	$	1	$	4	$	3
Restricted stock and restricted stock units		4		3		9		6
Total share-based compensation expense	$	6	$	4	$	13	$	9

Tax benefit recognized	$	—	$	—	$	1	$	1

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)
Options and shares purchased under the employee stock purchase plan
$
2

$
2

$
5

$
7
Restricted stock and restricted stock units

5

1

11

4
Total share-based compensation expense
$
7

$
3

$
16

$
11

Tax benefit recognized
$
1

$
1

$
2

$
3

Valuation Model and Assumptions

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

The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017:~~August 4, 2018:


		Stock Option Plans						Stock Purchase Plan
	August 3,			August 4,			August 3,			August 4,
	2019			2018			2019			2018
Weighted-average risk free rate of interest		2.2	%		2.7	%		2.3	%		1.6	%
Expected volatility		38	%		37	%		57	%		41	%
Weighted-average expected award life (in years)		5.5			5.5			1.0			1.0
Dividend yield		2.6	%		3.1	%		2.8	%		2.3	%
Weighted-average fair value	$	17.19		$	12.37		$	20.33		$	14.89

Stock Option Plans

Stock Purchase Plan

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

Weighted-average risk free rate of interest

2.7
%

2.1
%

1.8
%

0.9
%
Expected volatility

37
%

25
%

47
%

29
%
Weighted-average expected award life (in years)

5.5

5.4

1.0

1.0

Dividend yield

3.1
%

1.9
%

2.4
%

2.0
%
Weighted-average fair value
$
12.42

$
14.74

$
15.16

$
10.84

Table of Contents

The information in the following table covers option activity under the Company’s stock option plans for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018:~~2019:


			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		2,861			$	52.34
Granted		316				58.96
Exercised		(163)				27.10
Expired or cancelled		(76)				60.71
Options outstanding at August 3, 2019		2,938		6.2	$	54.23
Options exercisable at August 3, 2019		2,182		5.3	$	53.67
Options available for future grant at August 3, 2019		7,375

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

2,739

$
52.45
Granted

397

44.95
Exercised

(134)

31.47
Expired or cancelled

(96)

60.68
Options outstanding at November 3, 2018

2,906

6.3

$
52.12
Options exercisable at November 3, 2018

2,025

5.2

$
49.83
Options available for future grant at November 3, 2018

8,245

The total fair value of options vested as of ~~November~~August 3, 2019 and August 4, 2018 was $6 million and ~~October 28, 2017 was~~ $8 million, ~~for both periods.~~respectively. The cash received from option exercises ~~was $4 million~~ for the ~~thirty-nine~~thirteen and twenty-six weeks ended ~~November~~August 3, ~~2018.~~2019 was not significant. The total tax benefit realized from option exercises was not significant and $1 million for the ~~thirty-nine~~thirteen and twenty-six weeks ended ~~November~~August 3, ~~2018. There were no option exercises during the thirteen weeks ended November 3, 2018.~~2019, respectively.

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Thirteen weeks ended

Thirty-nine weeks ended

November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

($ in millions)
Exercised
$
—

$
5

$
3

$
20


	Thirteen weeks ended				Twenty-six weeks ended
	August 3, 2019		August 4, 2018		August 3, 2019		August 4, 2018
		($ in millions)
Exercised	$	—	$	3	$	5	$	3

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



	Thirty-nine weeks ended
		November 3,	October 28,
		2018	2017
	($ in millions)

					Twenty-six weeks ended
					August 3, 2019		August 4, 2018
					($ in millions)
Outstanding	$	17	$	5	$	5	$	15
Outstanding and exercisable	$	15	$	5	$	5	$	13

As of ~~November~~August 3, ~~2018~~2019 there was $5$6 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of ~~1.4~~1.6 years.

Table of Contents

The following table summarizes information about stock options outstanding and exercisable at ~~November~~August 3, ~~2018:~~2019:



	Options Outstanding				Options Exercisable
		Weighted-
		Average		Weighted-			Weighted-
		Remaining		Average			Average

								Options Outstanding				Options Exercisable
									Weighted-
									Average	Weighted-			Weighted-
									Remaining	Average			Average
Range of Exercise	Number	Contractual		Exercise	Number		Exercise	Number	Contractual	Exercise		Number	Exercise
Prices	Outstanding	Life		Price	Exercisable		Price	Outstanding	Life	Price		Exercisable	Price
	(in thousands, except prices per share and contractual life)
								(in thousands, except prices per share and contractual life)
$9.85 to $18.84	240	1.9	$	17.10	240	$	17.10	129	1.5	$	18.53	129	$	18.53
$24.75 to $34.75	395	4.2		32.16	356		31.88	376	3.5		32.09	338		31.78
$44.78 to $45.75	660	7.4		44.92	299		45.08	582	6.9		44.91	352		44.99
$46.64 to $62.11	694	5.9		60.63	661		61.19	952	6.8		60.00	619		60.96
$63.79 to $73.21	917	7.7		68.60	469		67.19
	2,906	6.3	$	52.12	2,025	$	49.83
$63.33 to $73.21								899	6.9		68.57	744		67.75
								2,938	6.2	$	54.23	2,182	$	53.67

Restricted Stock and Restricted Stock Units

Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive program and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were ~~878,319~~0 outstanding restricted stock awards as of August 3, 2019 and ~~361,137 RSU~~an insignificant number of restricted stock awards were outstanding as ~~of November 3, 2018 and October 28, 2017, respectively.~~August 4, 2018.

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

~~FOOT LOCKER, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Restricted stock and RSU activity for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 is summarized as follows:


			Weighted-Average
	Number		Remaining		Weighted-Average
	of		Contractual		Grant Date
	Shares		Life		Fair Value
		(in thousands)		(in years)		(per share)
Nonvested at beginning of year		1,022			$	47.47
Granted ⁽¹⁾		302				58.76
Vested		(88)				60.40
Performance adjustment ⁽²⁾		(34)
Expired or cancelled		(21)				53.09
Nonvested at August 3, 2019		1,181		2.0	$	49.22
Aggregate value ($ in millions)	$	58

Weighted-

Average

Weighted-

Number

Remaining

Average

of

Contractual

Grant Date

Shares

Life

Fair Value

(in thousands)

(in years)

(per share)
Nonvested at beginning of year

374

$
59.15
Granted (1)

683

47.31
Vested

(105)

64.31
Cancelled (2)

(73)

60.34
Nonvested at November 3, 2018

879

2.1

$
49.23
Aggregate value ($ in millions)
$
43

Table of Contents

(1)

~~(1)~~

~~Approximately 0.4~~Included in the units granted are approximately 0.2 million performance-based ~~RSUs were granted during the first quarter of 2018 and are included as granted in the table above.~~RSUs. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets.

(2)

~~In addition to forfeitures of restricted stock and RSUs, cancellations include~~This represents adjustments ~~that were~~ made to performance-based ~~RSUs previously granted. These adjustments~~RSU awards and reflect changes in estimates based upon the Company’s current performance against predefined financial targets.

The total value of awards for which restrictions lapsed during the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, 2019 and August 4, 2018 ~~and October 28, 2017~~ was $7$5 million and ~~$14~~$6 million, respectively. As of ~~November~~August 3, ~~2018,~~2019, there was ~~$33~~$34 million of total unrecognized compensation cost related to nonvested ~~restricted~~ awards.

~~14.~~13. 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 discontinued by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims. Additionally, the Company ~~is a defendant in a purported meal break class action in California and a purported class action in New York alleging failure to pay for all hours worked by employees. The Company~~ and certain officers of the Company are defendants in a purported securities law class action in New York. ~~Additionally, the~~The directors and certain officers of the Company are also defendants in related derivative actions.

~~For the last several years, the Company and the Company’s U.S. retirement plan have been defendants in a class action (Osberg v. Foot Locker Inc.~~ et ano., filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleged that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. In early 2018, the Company exhausted all of its legal remedies and is required to reform the pension plan consistent with the trial court’s decision and judgment. During the second quarter of 2018, the court entered its final judgment, including the ruling on the fairness of the class counsel fees. The amount accrued as of February 3, 2018 was $278 million. During the first quarter of 2018 the amount of the accrual was increased by $7 million related to a change in the estimated value of the judgment, based on additional facts as to how the reformation should be calculated. Additionally, interest of $6 million was accrued during the first and second quarters of 2018 as mandated by the provisions of the required plan reformation, bringing the total amount accrued to $291 million. In June 2018, the Company paid $97 million to class counsel representing the court-approved fees. The remaining balance of $194 million was reclassified to the pension plan obligation in connection with the reformation during the second quarter of 2018.

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

16Table of Contents

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

Disclosure Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the U.S. Securities and Exchange Commission.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the ~~2017~~2018 Annual Report on Form ~~10-K~~.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, is one of the largest athletic footwear and apparel retailers in the ~~world.~~world, operating 3,174 stores in 27 countries. The Foot Locker brand is one of the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. ~~Through~~We operate websites and mobile apps, aligned with the brand names of our store banners. Our sites offer some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com, final-score.com, and eastbayteamsales.com.

With its various marketing channels and experiences ~~including social, digital, broadcast, and print media, as well as various sports sponsorships and events, we reinforce our image with a consistent message~~ — ~~namely, that we are a destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.~~

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

~~The Company has determined that it has two operating segments,~~across North America, and International. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team sales. Our International operating segment includes the results of the following banners operating in Europe, Asia, Australia, and New ~~Zealand: Foot Locker, Runners Point, Sidestep,~~Zealand, the Company's purpose is to inspire and ~~Kids Foot Locker, including each~~empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of ~~their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base~~the sport and ~~similar economic characteristics.~~ ~~Please see Item 1. “Financial Statements,” Note 3,~~ ~~Segment Information~~ ~~for further information on this change.~~sneaker communities.

Store Count

At ~~November~~August 3, ~~2018,~~2019, we operated ~~3,266~~3,174 stores as compared with ~~3,310~~3,221 and ~~3,349~~3,276 stores at February 3,2, 2019 and August 4, 2018, ~~and October 28, 2017,~~ respectively.

Franchise Operations

A total of ~~118~~133 franchised stores were operating at ~~November~~August 3, ~~2018,~~2019, as compared with ~~112~~122 and 97117 stores at February 3,2, 2019 and August 4, 2018, ~~and October 28, 2017,~~ respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.

Reconciliation of Non-GAAP Measures

~~The~~In addition to reporting the Company's financial results in accordance with generally accepted accounting principles (“GAAP”), the Company ~~presents~~reports 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~~

Table of Contents


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales	$	1,774	$	1,782	$	3,852	$	3,807

Operating Results
Division profit		115		131		365		378
Less: Litigation and other charges ⁽¹⁾		14		3		15		15
Less: Corporate expense ⁽²⁾		20		16		41		27
Income from operations		81		112		309		336
Interest income, net		2		1		6		3
Other income ⁽³⁾		2		2		4		5
Income before income taxes	$	85	$	115	$	319	$	344

(1)

~~(1)~~

~~Included in~~The Company recorded pre-tax charges of $1 million and $3 million for the thirteen ~~and thirty-nine~~ weeks ended ~~November~~August 3, 2019 and August 4, 2018, ~~are~~respectively, related to a pension litigation matter and related plan reformation. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company recorded pre-tax charges of $2 million and ~~$17~~$15 million, ~~respectively, relating to a pension litigation matter described further in Note 14,~~ ~~Legal Proceedings. Included~~respectively. The charges in the ~~thirty-nine weeks ended October 28, 2017 is a pre-tax charge of $50 million relating~~current periods reflects professional fees in connection with the plan reformation. The prior year charges reflected adjustments to the ~~same matter.~~

~~(2)~~

~~During the third quarter of 2017, the Company recorded a $13 million pre-tax charge as a result~~value of the ~~Company reorganizing its organizational structure.~~

judgment and interest that continued to accrue, as required by the provisions of the required plan reformation.

For the thirteen weeks ended August 3, 2019, the Company incurred $13 million of lease termination costs related to the closure of certain of its SIX:02 locations.

~~(3)~~

(2)

Corporate expense consists of unallocated selling, general and administrative expenses as well as depreciation and amortizationrelated to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. ~~Depreciation and amortization included in corporate expense was $4 million and $13 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, as compared with $4 million and $11 million for the corresponding prior-year periods.~~

The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $10 million and $30 million for the thirteen and thirty-nine weeks ended ~~November 3, 2018~~ thus reducing corporate expense. Excluding the corporate allocation change as well as depreciation and amortization, corporate expense increased by $17 million and $40 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively. The increase for the thirteen and thirty-nine weeks ended November 3, 2018 was primarily due to higher corporate support costs primarily related to information technology initiatives and increased incentive compensation expense.

~~(4)~~

(3)

Other income includes non-operating items, ~~such as lease termination gains,~~ franchise royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, changes in ~~conjunction with~~ the ~~adoption~~fair value of ~~ASU 2016-01 as of the beginning of 2018,~~our equity investments, and net benefit expense related to our pension and postretirement programs excluding the service cost ~~component in conjunction with the adoption of ASU 2017-07 as of the beginning of 2018.~~

The decrease in other income for the thirteen weeks ended November 3, 2018 reflects the inclusion of net benefit expense related to our pension and postretirement programs excluding the service cost component, which was classified in SG&A expense in the prior year. The increase in other income for the thirty-nine weeks ended November 3, 2018 as compared with the corresponding prior-year period primarily reflects increased royalty income and lease termination gains.

component.

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 sales also includes our ~~direct-to-customer~~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.

The information shown below represents certain sales metrics by sales channel:


	Thirteen weeks ended						Twenty-six weeks ended
	August 3,			August 4,			August 3,			August 4,
	2019			2018			2019			2018
	($ in millions)
Stores
Sales	$	1,521		$	1,542		$	3,279		$	3,285
$ Change	$	(21)					$	(6)
% Change		(1.4)	%					(0.2)	%
% of total sales		85.7	%		86.5	%		85.1	%		86.3	%
Comparable sales change		(0.1)	%		(0.8)	%		1.5	%		(2.0)	%

Direct-to-customers
Sales	$	253		$	240		$	573		$	522
$ Change	$	13					$	51
% Change		5.4	%					9.8	%
% of total sales		14.3	%		13.5	%		14.9	%		13.7	%
Comparable sales change		6.5	%		9.3	%		10.9	%		3.8	%

Table of Contents

Sales decreased by ~~$10~~$8 million, or ~~0.5~~0.4 percent, to ~~$1,860~~$1,774 million for the thirteen weeks ended ~~November~~August 3, ~~2018,~~2019, from ~~$1,870~~$1,782 million for the thirteen weeks ended ~~October 28, 2017.~~August 4, 2018. For the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3,~~2018,~~ 2019, sales ~~were $5,667~~of $3,852 million ~~and~~ increased by ~~1.7~~1.2 percent from sales of ~~$5,572~~$3,807 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales increased by ~~0.4~~0.8 percent and ~~0.7~~2.9 percent for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, respectively.

Total comparable sales increased by ~~2.9~~0.8 percent and ~~0.1~~2.8 percent for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018, respectively,~~2019, respectively. For both the thirteen and twenty-six weeks ended August 3, 2019, our direct-to-customers channel generated positive comparable sales results as compared with the corresponding prior-year periods. The ~~main difference between~~penetration of our direct-to-customer channel increased by 80 basis points to 14.3 percent. For the ~~change in~~twenty-six weeks ended August 3, 2019, the stores channel generated positive comparable sales ~~and~~results, however the ~~total change in sales for~~stores channel had a 0.1 percent decline during the ~~thirteen weeks~~thirteen-weeks ended ~~November~~August 3, ~~2018 was the sales shift caused by the 53~~rd ~~week of 2017. This shift resulted in less of the higher-volume back-to-school selling period being included in this quarter’s results as compared with the prior year period~~.

~~The information shown below represents certain sales metrics by sales channel:~~

Thirteen weeks ended

Thirty-nine weeks ended

November 3,
October 28,
November 3,
October 28,

2018
2017
2018
2017

($ in millions)
Stores

Sales

$
1,591

$
1,612

$
4,876

$
4,819

$ Change

$
(21)

$
57

% Change

(1.3)
%

1.2
%

% of total sales

85.5
%

86.2
%

86.0
%

86.5
%
Comparable sales (decrease)

2.4
%

(5.1)
%

(0.6)
%

(4.5)
%

Direct-to-customers

Sales

$
269

$
258

$
791

$
753

$ Change

$
11

$
38

% Change

4.3
%

5.0
%

% of total sales

14.5
%

13.8
%

14.0
%

13.5
%
Comparable sales increase

5.9
%

6.1
%

4.5
%

8.1
%

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

Overall, both channels generated a comparable sales gain for the thirteen weeks ended November 3, 2018. This result was led by the growth in our direct-to-customers channel, which increased by 5.9 percent and 4.5 percent for the thirteen and thirty-nine weeks ended November 3, 2018, respectively.2019. The improvement in our direct-to-customers channel ~~reflected~~is due in part to continued positive customer ~~sentiment~~satisfaction as a result of our various e-commerce enhancements. ~~Our stores channel~~

Each of our operating segments generated a comparable sales ~~increased by 2.4 percent for~~increase during the ~~third~~second quarter and ~~declined by 0.6 percent for the~~ year-to-date ~~period.~~periods of 2019.

~~Excluding the effect of foreign currency, the increase in store sales for the thirteen weeks ended November 3, 2018 reflected primarily increased sales from our~~In North America, Foot Locker ~~stores operating~~Canada and Champs Sports led the second quarter results, with increases in ~~Europe, partially offset by~~the low double digits and mid-single digits, respectively. Foot Locker U.S. generated a ~~decline in~~low single-digits comparable sales ~~from our~~increase, while Eastbay’s sales declined high-single digits. Footaction ~~stores. Our U.S. banners~~and Kids Foot Locker continued to experience declines consistent with the first quarter. Additionally, North America’s sales were negatively affected by the ~~shift~~closure of the SIX:02 banner, as substantially all stores were closed by the end of the second quarter. The decline in Footaction’s sales primarily reflected the lack of product availability of certain key men’s footwear styles. Management is implementing various merchandising initiatives to improve Footaction’s results and will continue to monitor this banner during the third quarter and will assess, if necessary, the effect of various initiatives on the projected performance, which may include an impairment review. Kids Foot Locker’s decline was primarily related to declines in sales of apparel. The decline in Eastbay’s sales for the second quarter was primarily due to softer demand for performance-related products.

Our positive EMEA operating segment sales performance was primarily related to our Foot Locker Europe e-commerce business, with Runners Point and Sidestep’s comparable sales remaining relatively flat.

The Asia Pacific operating segment continued to increase both from the 53rd ~~week of 2017. For the thirty-nine weeks ended November 3, 2018,~~store expansion in Asia and increased sales from our ~~stores channel increased~~operations in Australia, which was primarily ~~from~~the result of growth in our ~~Foot Locker stores operating in~~e-commerce business.

The year-to-date comparable sales changes are consistent with the ~~U.S.; however, this was partially offset by declines in sales from our stores operating in Europe.~~

factors noted above.

From a product perspective for the combined channels, the increase in comparable sales ~~was across both our apparel and footwear categories. The year-to-date increase was attributable to an increase in apparel sales, partially offset by a decline in footwear sales.~~

~~The increase in the apparel category~~ for both the quarter and year-to-date periods ~~reflected~~was primarily driven by footwear. For both periods, the ~~continued success in men’s and children’s branded apparel, which was offset, in part, by declines in sales of men’s private-label apparel.~~

~~Sales of men’s and women’s footwear led the comparable sales~~ increase ~~for the thirteen weeks ended November 3, 2018. The increase in men’s footwear primarily represented gains in running styles, which~~ was partially offset by ~~the continuation of the~~a decline in apparel sales. Within the footwear category, sales of ~~basketball styles. The increase in women’s footwear primarily reflected gains in running and court styles.~~

~~The comparable sales decline in footwear for the thirty-nine weeks ended November 3, 2018 reflected decreases in~~ women’s and children’s footwear ~~sales, partially offset by gains in~~contributed the most to the increase. Court and casual footwear styles continued to resonate well with our customers. Sales of men’s footwear, particularly sales of ~~men’s footwear. The comparable sales decline in women’s footwear~~basketball styles, were negatively affected by the timing of certain product launches and declined slightly for the quarter, as compared with a low single-digit increase for the year-to-date period. Apparel sales declined for both the quarter and year-to-date period ~~primarily reflected declines in sales~~across all wearer segments.

Table of women’s running and court styles as the result of our prior-year success of certain women’s offerings with no comparable offerings during the early part of 2018. The increase in men’s footwear sales for the thirty-nine weeks ended November 3, 2018 primarily represented gains in sales of running styles, which was partially offset by declines in sales of men’s basketball styles.Contents

Gross Margin

Thirteen weeks ended

Thirty-nine weeks ended

November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017
Gross margin rate

31.6
%

31.0
%

31.6
%

31.6
%
Basis point change in the gross margin rate

60

—

Components of the change-

Increase in the merchandise margin rate

80

10

Higher occupancy and buyers' compensation expense rate

(20)

(10)


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
Gross margin rate	30.1	%	30.2	%	31.7	%	31.7	%
Basis point increase in the gross margin rate	(10)				—
Components of the change-
Merchandise margin rate decline	(20)				(40)
Lower occupancy and buyers’ compensation expense rate	10				40

Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities.

The gross margin rate ~~increased~~decreased by 6010 basis points for the thirteen weeks ended ~~November~~August 3, ~~2018~~2019 and remained ~~the same~~unchanged for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, as compared with the corresponding prior-year periods. The merchandise margin rate ~~improvement primarily~~decline reflected lower markdown rates as we increased full-price selling especially as the year progressed. The improvement for both the quarter and year-to-date periods was partially offset by a continued decline in shipping and handling revenue as a result of a higher ~~frequency~~proportion of ~~free shipping offers.~~direct-to-customer sales, which bear a higher freight cost. The occupancy and ~~buyer’s~~buyers’ compensation expense rate ~~increased~~decreased for the thirteen and twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, which was primarily the result of ~~lower~~higher sales ~~in part due to the shift that resulted from the 53~~rd ~~week of 2017, during the quarter~~ as compared with a relatively fixed rent cost.

Selling, General and Administrative Expenses (SG&A)



	Thirteen weeks ended						Thirty-nine weeks ended
	November 3,			October 28,			November 3,			October 28,
	2018			2017			2018			2017
	($ in millions)

													Thirteen weeks ended						Twenty-six weeks ended
													August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
													($ in millions)
SG&A	$	398		$	368		$	1,163		$	1,078		$	393		$	380		$	809		$	765
$ Change	$	30					$	85					$	13					$	44
% Change		8.2	%					7.9	%					3.4	%					5.8	%
SG&A as a percentage of sales		21.4	%		19.7	%		20.5	%		19.3	%		22.2	%		21.3	%		21.0	%		20.1	%

SG&A increased by ~~$30~~$13 million, or by ~~170~~90 basis points, to ~~$398~~$393 million for the thirteen weeks ended ~~November~~August 3,~~2018,~~ 2019, as compared with the corresponding prior-year period. For the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, SG&A increased by ~~$85~~$44 million, or by ~~120~~90 basis points, to ~~$1,163~~$809 million, as compared with the corresponding prior-year period. ~~The~~Excluding the effect of foreign currency fluctuations, SG&A increased by $18 million and $60 million for the ~~current quarter~~thirteen and ~~year-to-date periods was not significant.~~

twenty-six weeks ended August 3, 2019, respectively, as compared with the corresponding prior-year periods.

The higher SG&A expense rate for ~~both~~ the quarter ~~and year-to-date periods~~ reflected higher wages ~~higher incentive compensation expense,~~ and an increase in costs incurred in connection with our ongoing investment in various technology and infrastructure projects. Corporate expense (a component of SG&A) increased during the quarter, ~~and year-to-date periods,~~ also reflecting the same factors noted ~~previously. Higher incentive~~previously and higher share-based compensation ~~was recorded during the current quarter and year-to-date periods reflecting our strong performance relative to our financial targets, coupled with the fact~~ that ~~the prior year included an incentive compensation accrual reversal due to underperformance compared~~is tied to the ~~prior-year financial targets.~~Company’s performance.

~~During~~Affecting the ~~thirteen weeks ended October 28, 2017 the Company recorded hurricane-related expenses of $7 million. A~~year-to-date comparison is a benefit of $5 million that was recorded in the first quarter of 2018 relating to insurance recoveries for damaged inventory and fixed assets for losses incurred ~~last year~~ during Hurricane ~~Maria. Together, these two factors affected SG&A expense~~Maria in ~~the current year-to-date period by $12 million.~~2017.

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Depreciation and Amortization


	Thirteen weeks ended					Twenty-six weeks ended
	August 3,			August 4,		August 3,			August 4,
	2019			2018		2019			2018
	($ in millions)
Depreciation and amortization	$	46		$	44	$	90		$	89
$ Change	$	2				$	1
% Change		4.5	%				1.1	%

Depreciation and ~~Amortization~~

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)

Depreciation and amortization

$
44

$
44

$
133

$
127

$ Change

$
—

$
6

% Change

—
%

4.7
%

~~Depreciation~~amortization increased by $2 million and ~~amortization was unchanged~~$1 million for the thirteen and twenty-six weeks ended ~~November~~August 3, ~~2018~~2019, respectively, as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased by $6$3 million for both the ~~thirty-nine~~quarter and the year-to-date periods. The increase in depreciation and amortization reflects ongoing capital spending.

Division Profit


	Thirteen weeks ended						Twenty-six weeks ended
	August 3,			August 4,			August 3,			August 4,
	2019			2018			2019			2018
	($ in millions)
Division profit	$	115		$	131		$	365		$	378
Division profit margin		6.5	%		7.4	%		9.5	%		9.9	%

Division profit margin decreased by 90 and 40 basis points for the thirteen and twenty-six weeks ~~ended November~~ended August 3, ~~2018,~~2019, as compared with the corresponding prior-year periods. The ~~increase~~decrease in ~~depreciation and amortization reflected ongoing capital spending~~ ~~on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.~~

~~Division Profit~~

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)

Division profit

$
165

$
180

$
543

$
592

Division profit margin

8.9
%

9.6
%

9.6
%

10.6
%

~~Division~~division profit ~~margin decreased by 70 and 100 basis points~~ for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018, respectively, as compared with the corresponding prior-year periods. The improvement in the gross margin rate did not fully offset the~~2019 was primarily due to higher SG&A ~~expense rate and, therefore, division profit declined for both the quarter and year-to-date periods.~~expenses.

For both the thirteen and thirty-nine weeks ended November 3, 2018, Runners Point and Sidestep continued to underperform. Several initiatives are underway to improve the performance of these banners. Management will continue to monitor the results of these businesses during the fourth quarter and will assess, if necessary, the impact of various initiatives on the projected performance of these divisions, which may include an impairment review of their indefinite and long-lived assets.

Interest Income, Net



	Thirteen weeks ended				Thirty-nine weeks ended
	November 3,		October 28,		November 3,		October 28,
	2018		2017		2018		2017
	($ in millions)

									Thirteen weeks ended				Twenty-six weeks ended
									August 3,		August 4,		August 3,		August 4,
									2019		2018		2019		2018
									($ in millions)
Interest expense	$	3	$	3	$	9	$	9	$	(3)	$	(3)	$	(5)	$	(6)
Interest income		(5)		(3)		(14)		(10)		5		4		11		9
Interest income, net	$	(2)	$	—	$	(5)	$	(1)	$	2	$	1	$	6	$	3

Net interest income increased by $2$1 million and $4$3 million for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018, respectively,~~2019, as compared with the corresponding prior-year periods. Interest ~~expense was unchanged~~income for both ~~the thirteen and thirty-nine weeks ended November 3, 2018 as compared with the corresponding prior-year periods. Interest income~~periods increased primarily as a result of cash repatriation to the U.S., where we earned a higher average interest rate.

Income Taxes


	Thirteen weeks ended						Twenty-six weeks ended
	August 3,			August 4,			August 3,			August 4,
	2019			2018			2019			2018
	($ in millions)
Provision for income taxes	$	25		$	27		$	87		$	91
Effective tax rate		29.5	%		23.6	%		27.2	%		26.4	%

Thirteen weeks ended

Thirty-nine weeks ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

($ in millions)

Provision for income taxes

$
16

$
54

$
107

$
165

Effective tax rate

10.8
%

34.7
%

21.8
%

33.2
%

The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The discrete items discussed below represented the main reasons for the changes in the effective tax rate.

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The Company regularly assesses the adequacy of ~~its~~the Company’s provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The ~~effective tax rate for the thirteen and thirty-nine weeks ended November 3,~~2018 included tax benefits of $2 million and $5 million, respectively, from reserve releases and expiration of statutes of limitation on foreign income taxes and settlements of international tax examinations. The changes in the tax reserves were not significant for the ~~prior-year periods.~~thirteen and twenty-six weeks ended August 3, 2019. The effective tax rate for the thirteen weeks ended August 4, 2018 included a tax benefit of $3 million from a reserve release due to a settlement of an international tax examination.

For the thirteen weeks ended August 3, 2019, the Company recognized a tax expense of $2 million due to an adjustment to U.S. tax on foreign income attributable to tax reform.

During the ~~third quarter~~thirteen weeks ended August 3, 2019, the Company recorded charges totaling $14 million, which primarily related to the costs to terminate the SIX:02 leases, the tax benefit recorded in connection with these charges was $4 million.

For the twenty-six weeks ended August 3, 2019, the Company recognized a tax benefit of ~~fiscal~~$3 million due to an adjustment to a foreign tax credit valuation allowance.

For the twenty-six weeks ended August 4, 2018, the Company reduced its provisional net expense related to ~~the~~ mandatory deemed repatriation of foreign sourced net earnings by ~~$16 million due to arevised estimate of the foreign tax credits~~$1 million. In addition, the Company ~~expected to utilize. The Company made a revision~~reduced its income tax provision in the amount of $1 million ~~during the second quarter of 2018 for the same reason.~~ ~~Please see Item 1. “Financial Statements,” Note 9,~~ ~~Income Taxes~~ ~~for further information.~~

~~Also during the third quarter of 2018,~~ as ~~a result of substantially completing the 2017 federal tax return, we recorded a $7 million benefit related to IRS accounting method changes and timing difference adjustments.~~

During the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of Internal Revenue Code Section 987 regulations for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date ~~the Company updated its calculations~~ of ~~the effect of these regulations, which resulted in an increase to deferred~~certain tax ~~assets and a corresponding reduction in our income tax provision in the amount of $1 million.~~regulations.

During 2017, the Company adopted ASU 2016-09 requiring excess tax benefits or deficiencies from share-based compensation to be recorded as a component of the income tax provision, rather than to equity. No significant excess tax benefits were recorded during current periods. Excess tax benefits recorded during the thirteen and thirty-nine weeks ended October 28, 2017 were $2 million and $9 million, respectively.

Excluding the above-mentioned discrete items, the effective tax rate for the thirteen and thirty-nine weeks ended November 3, 2018 decreased as compared with the corresponding prior-year period, primarily due to the enactment of the Tax Act which reduced the statutory U.S. federal corporate income tax rate from 35 percent to 21 percent. This was offset, in part, by foreign taxes assessed at rates in excess of the U.S. federal rate for which no U.S. foreign tax credit is available, as well as valuation allowances for certain foreign operating loss carryforwards that the Company estimates it will not be able to utilize in future periods.

The Company currently expects its full-year tax rate to approximate 27.5 percent excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending on the level and mix of income earned in the various jurisdictions as well as the finalization of our accounting for the Tax Act. The effective tax rate may be materially affected as additional guidance is issued by the U.S. Treasury Department and Internal Revenue Service. ~~Please see Item 1. “Financial Statements,” Note 9,~~ ~~Income Taxes~~ ~~for further information.~~in which we operate.

Net Income

For the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, net income ~~increased~~decreased by $28 million, or ~~27.5~~31.8 percent, and by ~~$50~~$21 million, or ~~15.0~~8.3 percent,, respectively, as compared with the corresponding prior-year periods. Diluted earnings per share ~~increased~~decreased by ~~40.7~~26.7 percent to ~~$1.14~~$0.55 per share, and ~~increased~~ by ~~28.6~~2.8 percent to ~~$3.28~~$2.08 per share ~~for~~as compared with the thirteen and thirty-nine weeks ended November 3, 2018, respectively. The increase in diluted earnings per share for both the quarter and year-to-date periods reflected an increase in net income coupled with a reduction in the number of shares outstanding as a result of the ongoing execution of the Company’s share repurchase program.

corresponding prior-year period.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity ~~has been~~continues to be cash flow from ~~earnings,~~operations, while the principal uses of cash ~~have been~~are to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, ~~Internet~~internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of our short-term and long-term operating strategies. We also from time to time may make investments in other companies that we feel can enable us to achieve our vision of serving youth culture. We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, strategic considerations, and other factors. The amounts involved may be material.

As of ~~November~~August 3, ~~2018, approximately $445 million~~2019, $1.08 billion remained available under the Company’s current ~~$1.2 billion~~3-year share repurchase program.

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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 vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.

~~As discussed further in the~~ ~~Legal Proceedings~~ ~~note under “Item 1. Financial Statements,” during~~ the second quarter of 2018, the Company reformed its U.S. qualified pension plan, which required the remeasurement of the pension liabilities and payment to plaintiffs’ counsel of $97 million representing class counsel fees awarded in the judgment. The Company contributed a total of $128 million to its U.S. qualified pension plan during the thirty-nine weeks ended November 3, 2018 to fund a portion of this liability. Additionally, $54 million remains in the qualified settlement fund. Future contributions to the pension plan are dependent on several factors, including the performance of the plan’s assets and interest rates.

Operating Activities



	Thirty-nine weeks ended
	November 3, 2018		October 28, 2017
	($ in millions)

					Twenty-six weeks ended
					August 3,		August 4,
					2019		2018
					($ in millions)
Net cash provided by operating activities	$	422	$	496	$	328	$	427
$ Change	$	(74)			$	(99)

The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include depreciation and amortization, and share-based compensation expense.

The decrease in cash provided by operating activities, compared with the same period of last year, reflected ~~an increase~~a decrease in net income and lower net inflows associated with changes in working ~~capital, and was offset by an increase in pension-related payments. During~~capital. Also, during the ~~thirty-nine~~thirteen weeks ended ~~November 3, 2018,~~May 4, 2019, we contributed ~~$128~~$55 million to our U.S. qualified pension plan ~~as compared~~primarily representing the funds available in the qualified settlement fund established in connection with ~~$25~~our pension litigation matter, which compares with $30 million incontributed during the corresponding prior-year period. ~~Additionally, the decrease in cash provided by operating activities reflected $97 million paid during~~During the second quarter of 2018, inthe Company paid class counsel ~~fees~~$97 million in connection with the pension ~~litigation.~~litigation matter.

Investing Activities


	Thirty-nine weeks ended
	November 3, 2018		October 28, 2017
	($ in millions)

					Twenty-six weeks ended
					August 3,		August 4,
					2019		2018
					($ in millions)
Net cash used in investing activities	$	157	$	204	$	126	$	113
$ Change	$	(47)			$	13

Capital expenditures ~~declined~~decreased for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 by ~~$51~~$34 million as compared with the corresponding prior-year period. This represented ~~a decline~~an increase in spending on store projects and technology projects partially offset by ~~an increase~~a decrease related to ~~technology projects.~~logistics. The Company’s full-year capital spending is expected to be approximately ~~$208~~$250 million, which is approximately $25 million lower than the target that was established at the beginning of the year and reflects changes in the timing of certain projects. The revised forecast includes ~~$128~~$155 million related to the remodeling or relocation of approximately ~~125~~160 existing stores and the opening of approximately 4565 new stores, as well as ~~$80~~$95 million for the development of information systems, websites, and infrastructure, including supply chain initiatives.

Additionally, investing activities for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, 2019 included $45 million in minority investments. Investing outflows for the twenty-six weeks ended May 5, 2018 ~~included a $6 million investment in equity securities~~were partially offset by the receipt of insurance proceeds of $2 million for fixed assets from an insurance claim relating to Hurricane Maria.

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Financing Activities


	Thirty-nine weeks ended
	November 3, 2018		October 28, 2017
	($ in millions)

					Twenty-six weeks ended
					August 3,		August 4,
					2019		2018
					($ in millions)
Net cash used in financing activities	$	428	$	475	$	201	$	281
$ Change	$	(47)			$	(80)

During the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018,~~2019, we repurchased ~~6,688,705~~2,932,100 shares of our common stock for ~~$313~~$122 million, as compared with ~~9,589,660~~4,452,405 shares repurchased for ~~$362~~$205 million in the corresponding prior-year period. The Company also declared and paid dividends of ~~$120~~$84 million and $81 million during the first ~~three~~two quarters of 2019 and 2018, ~~and 2017.~~respectively. This represented quarterly rates of ~~$0.345~~$0.38 and ~~$0.31~~$0.345 per share for 2019 and 2018, ~~and 2017, respectively~~. respectively. Also, during the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, ~~2018~~2019 and ~~October 28,2017,~~August 4, 2018, we paid $1$2 million and ~~$10~~$1 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards. Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with employee stock programs of $6$7 million and ~~$17~~$6 million for the ~~thirty-nine~~twenty-six weeks ended ~~November~~August 3, 2019 and August 4, 2018, ~~and October 28, 2017,~~ respectively.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018.~~

2, 2019.

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.

~~Contractual Obligations and Commitments~~

The Company’s contractual cash obligations and commercial commitments at November 3, 2018 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed significantly since February 3, 2018 other than amounts related to tax reform. The Company had previously disclosed its plans to elect to pay the tax related to the mandatory deemed repatriation in annual installments over an eight year period. However, during the first quarter of 2018, the IRS issued guidance which indicated that a taxpayer may not receive a refund or credit any portion of properly applied 2017 tax payments unless the amount of payments exceeds the entire unpaid repatriation tax liability. Due to the Company’s prepayments with the IRS, the entire amount of the deemed repatriation tax has been satisfied. Of the approximately $12 million remaining payable related to tax reform, approximately, $6 million will be paid during the fourth quarter of 2018. The timing of the remaining amounts is not determinable at this time.

Item 4. Co~~ntrols~~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 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 disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

We are currently migrating our point-of-sale software to a new platform. Approximately ~~1,900~~2,400 stores have been converted to the new software platform as of ~~November~~August 3, ~~2018,~~2019, and we currently expect to complete the implementation during the second half of 2019. In connection with this implementation and resulting business process changes, we may make changes to the design and operation of our internal control over financial reporting.

Additionally, during the fourth quarter of 2018 the Company implemented a new lease accounting system in advance of the adoption of the new leasing standard that was effective the first quarter of 2019. We revised our controls in connection with this adoption and are continuing to refine business processes and make changes to the design and implementation of our internal controls as appropriate.

Table of Contents

During the quarter ended ~~November~~August 3, ~~2018,~~2019, there were no changes in the Company’s internal control over financial reporting, other than the implementation of new point-of-sale software and lease accounting system noted above, (as defined in Rules 13a-15(f) of the Exchange Act) that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Le~~gal~~Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our ~~2017~~2018 Annual Report on Form 10-K filed with the SEC on ~~March 29, 2018~~April 2, 2019 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 ~~2017~~2018 Form ~~10-K, except as described below, but these are not the only risks facing our Company.~~10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

~~The implementation of tariffs and export controls on the products that we buy may have a material adverse effect on our business.~~

A significant portion of the products that we purchase, including those purchased from domestic suppliers, as well as most of our private brand merchandise, is manufactured abroad. We may be affected by potential changes in international trade agreements or tariffs, such as new tariffs imposed on certain Chinese-made goods imported into the U.S. Furthermore, China or other countries may institute retaliatory trade measures in response to existing or future tariffs imposed by the U.S. that could have a negative effect on our business. If any of these events occur as described, we may be obligated to seek alternative suppliers for our private brand merchandise, raise prices, or make changes to our operations, any of which could have a material adverse effect on our sales and profitability, results of operations and financial condition.

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

The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended ~~November~~August 3, ~~2018:~~2019:


					Approximate
				Total Number of	Dollar Value of
	Total	Average		Shares Purchased as	Shares that may
	Number	Price		Part of Publicly	yet be Purchased
	of Shares	Paid Per		Announced	Under the
Date Purchased	Purchased ⁽¹⁾	Share ⁽¹⁾		Program ⁽²⁾	Program ⁽²⁾
May 5 to June 1, 2019	90	$	39.35	—	$	1,200,000,000
June 2 to July 6, 2019	2,900,085		41.37	2,900,000		1,080,032,419
July 7 to August 3, 2019	316		39.36	—		1,080,032,419
	2,900,491	$	41.37	2,900,000

Approximate

Total Number of

Dollar Value of

Total

Average

Shares Purchased as

Shares that may

Number

Price

Part of Publicly

yet be Purchased

of Shares

Paid Per

Announced

Under the
Date Purchased

Purchased (1)

Share (1)

Program (2)

Program (2)
Aug. 5 - Sept. 1, 2018

792,321

$
48.81

790,000

$
514,940,693
Sept. 2 - Oct. 6, 2018

847,398

48.11

845,500

474,264,720
Oct. 7 - Nov. 3, 2018

600,800

48.36

600,800

445,207,583

2,240,519

$
48.43

2,236,300

(1)
~~(1)~~	These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit awards, ~~and restricted stock units~~ which vested during the ~~quarter, and shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934.~~quarter. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares.

(2)	On February ~~14, 2017,~~20, 2019, the Board of Directors approved a new 3-year, $1.2 billion share repurchase program extending through January ~~2020.~~
		2022.

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Item 6. Exhibits


Exhibit No.		Description
~~(a)~~10.1*	~~Exhibits~~	Amendment Number Four to the Foot Locker Supplemental Executive Retirement Plan.
15*		Accountants’ Acknowledgement.
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a14(a) or 15d14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a14(a) or 15d14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99*		Report of Independent Registered Public Accounting Firm.
101.INS*		Inline XBRL Instance Document.
101.SCH*		Inline XBRL Taxonomy Extension Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase.
104*		The ~~exhibits that are~~cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2019, formatted, in ~~this report immediately follow the index.~~Inline XBRL (included in Exhibit 101)

* Filed herewith.

** Furnished herewith.

2731

Table of Contents

~~SIGN~~

~~ATURE~~

SIGNATURE

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


Date: September 11, 2019	FOOT LOCKER, INC.
~~Date: December 11, 2018~~	~~FOOT LOCKER, INC.~~


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

2832

~~FOOT LOCKER, INC.~~

~~INDEX OF EXHIBITS~~


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

*		~~Filed herewith.~~
**		~~Furnished herewith.~~


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


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 ☐Large accelerated filer þ	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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



	November 3,		October 28,		February 3,
	2018		2017		2018
	(Unaudited)		(Unaudited)		*
ASSETS

Current assets:
Cash and cash equivalents	$	748	$	890	$	849
Merchandise inventories		1,305		1,313		1,278
Other current assets		325		295		424
		2,378		2,498		2,551
Property and equipment, net		824		835		866
Deferred taxes		107		164		48
Goodwill		157		158		160
Other intangible assets, net		39		45		46
Other assets		175		113		290
	$	3,680	$	3,813	$	3,961

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	383	$	241	$	258
Accrued and other liabilities		312		326		358
		695		567		616
Long-term debt		124		126		125
Other liabilities		410		463		701
Total liabilities		1,229		1,156		1,442
Shareholders’ equity:
Common stock and paid-in capital: 121,500,846; 133,336,171; and 121,262,456 shares outstanding, respectively		864		921		842
Retained earnings		2,323		2,467		2,019
Accumulated other comprehensive loss		(361)		(286)		(279)
Less: Treasury stock at cost: 8,109,644; 10,730,582; and 1,433,433 shares, respectively		(375)		(445)		(63)
Total shareholders' equity		2,451		2,657		2,519
	$	3,680	$	3,813	$	3,961


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


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


					Page
PART I	FINANCIAL INFORMATION		~~FINANCIAL INFORMATION~~	1
		Item 1.		Financial Statements	1
				Condensed Consolidated Balance Sheets	1
				Condensed Consolidated Statements of Operations	2
				Condensed Consolidated Statements of Comprehensive Income	3
				Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	4 5
				Notes to Condensed Consolidated Financial Statements	5 6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
		~~Item 4.~~		~~Controls and Procedures~~	26
					20
	~~PART II~~Item 4.		~~OTHER INFORMATION~~ Controls and Procedures			29

PART II	~~Item 1.~~ OTHER INFORMATION		30
	~~Legal Proceedings~~ Item 1.	27 Legal Proceedings	30
		Item 1A.	Risk Factors	30
	~~Risk Factors~~ Item 2.	27
		~~Item 2.~~		Unregistered Sales of Equity Securities and Use of Proceeds	27
		~~Item 6.~~		~~Exhibits~~	27
					30
	~~SIGNATURE~~Item 6.		28
Exhibits					31

~~INDEX OF EXHIBITS~~SIGNATURE			32	29



		Severance and		Other Related
		Benefit Costs		Charges		Total
	($ in millions)
Balance at February 3, 2018	$	5	$	2	$	7
Cash payments		(5)		(1)		(6)
Balance at November 3, 2018	$	—	$	1	$	1



		November 3, 2018						October 28, 2017						February 3, 2018
		Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)		value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: (1)
	Lease acquisition costs	$	121	$	(111)	$	10	$	129	$	(117)	$	12	$	135	$	(122)	$	13
	Trademarks / trade names		20		(15)		5		20		(13)		7		20		(14)		6
	Favorable leases		7		(6)		1		7		(6)		1		7		(6)		1
		$	148	$	(132)	$	16	$	156	$	(136)	$	20	$	162	$	(142)	$	20
Indefinite life intangible assets: (1)
	Runners Point Group trademarks / trade names					$	23					$	25					$	26
Other intangible assets, net						$	39					$	45					$	46



	As of November 3, 2018						As of October 28, 2017						As of February 3, 2018
	($ in millions)
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Investment in equity securities	$	—	$	21	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Available-for-sale security		—		6		—		—		7		—		—		7		—
Foreign exchange forward contracts		—		1		—		—		2		—		—		1		—
Total Assets	$	—	$	28	$	—	$	—	$	9	$	—	$	—	$	8	$	—
Liabilities
Foreign exchange forward contracts		—		—		—		—		1		—		—		1		—
Total Liabilities	$	—	$	—	$	—	$	—	$	1	$	—	$	—	$	1	$	—



	Pension Benefits								Postretirement Benefits
	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	Nov. 3,		Oct. 28,		Nov. 3,		Oct. 28,		Nov. 3,		Oct. 28,		Nov. 3,		Oct. 28,
($ in millions)	2018		2017		2018		2017		2018		2017		2018		2017
Service cost	$	5	$	4	$	14	$	12	$	—	$	—	$	—	$	—
Interest cost		8		6		21		19		—		—		—		—
Expected return on plan assets		(10)		(9)		(29)		(28)		—		—		—		—
Amortization of net loss (gain)		3		3		9		10		—		—		(1)		(1)
Net benefit expense (income)	$	6	$	4	$	15	$	13	$	—	$	—	$	(1)	$	(1)



		Stock Option Plans						Stock Purchase Plan
		November 3,			October 28,			November 3,			October 28,
		2018			2017			2018			2017
Weighted-average risk free rate of interest		2.7	%		2.1	%		1.8	%		0.9	%
Expected volatility		37	%		25	%		47	%		29	%
Weighted-average expected award life (in years)		5.5			5.4			1.0			1.0
Dividend yield		3.1	%		1.9	%		2.4	%		2.0	%
Weighted-average fair value	$	12.42		$	14.74		$	15.16		$	10.84



					Approximate
				Total Number of	Dollar Value of
	Total	Average		Shares Purchased as	Shares that may
	Number	Price		Part of Publicly	yet be Purchased
	of Shares	Paid Per		Announced	Under the
Date Purchased	Purchased (1)	Share (1)		Program (2)	Program (2)
Aug. 5 - Sept. 1, 2018	792,321	$	48.81	790,000	$	514,940,693
Sept. 2 - Oct. 6, 2018	847,398		48.11	845,500		474,264,720
Oct. 7 - Nov. 3, 2018	600,800		48.36	600,800		445,207,583
	2,240,519	$	48.43	2,236,300


~~(Mark One)~~☑