UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) |
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: November 2, 2013
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 1-10299
FOOT LOCKER, INC.
(Exact Namename of Registrant as Specifiedspecified in its Charter)
New York | 13-3513936 |
| (State or | (I.R.S. Employer Identification No.) |
112 West 34th Street, New York, New York 10120
(Address of Principal Executive Offices, Zip Code)
(212) 720-3700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
þ No ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ | Accelerated filer¨ | Non-accelerated filer ¨ | Smaller reporting company¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o No þThe number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding atas of November 29, 2013: 146,739,055
FOOT LOCKER, INC.
TABLE OF CONTENTS
| Page | ||||
| PART I. | FINANCIAL INFORMATION | |||
| Financial Statements | 3 | |||
| Condensed Consolidated Balance Sheets | 3 | |||
| Condensed Consolidated Statements of Operations | 4 | |||
| Condensed Consolidated Statements of Comprehensive Income | 5 | |||
| Condensed Consolidated Statements of Cash Flows | 6 | |||
| Notes to Condensed Consolidated Financial Statements | 7 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
| Item 4. | Controls and Procedures | |||
| OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 26 | ||
| Item 1A. | Risk Factors | 27 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||
| 27 | ||||
| INDEX OF EXHIBITS | 29 | |||
| 2 |
| November 2, | October 27, | February 2, | ||||||||
| 2013 | 2012 | 2013 | ||||||||
| (Unaudited) | (Unaudited) | * | ||||||||
| ASSETS | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | 764 | $ | 804 | $ | 880 | ||||
| Short-term investments | 32 | 49 | 48 | |||||||
| Merchandise inventories | 1,316 | 1,240 | 1,167 | |||||||
| Other current assets | 208 | 202 | 268 | |||||||
| 2,320 | 2,295 | 2,363 | ||||||||
| Property and equipment, net | 589 | 462 | 490 | |||||||
| Deferred taxes | 257 | 285 | 257 | |||||||
| Goodwill | 163 | 144 | 145 | |||||||
| Other intangibles and other assets | 148 | 113 | 112 | |||||||
| $ | 3,477 | $ | 3,299 | $ | 3,367 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
| Current liabilities | ||||||||||
| Accounts payable | $ | 310 | $ | 327 | $ | 298 | ||||
| Accrued expenses and other current liabilities | 330 | 298 | 338 | |||||||
| Current portion of capital lease obligations | 3 | — | — | |||||||
| 643 | 625 | 636 | ||||||||
| Long-term debt and obligations under capital leases | 137 | 133 | 133 | |||||||
| Other liabilities | 231 | 252 | 221 | |||||||
| 1,011 | 1,010 | 990 | ||||||||
| Shareholders’ equity | ||||||||||
| Common stock and paid-in capital: 168,675,093, 166,510,340 and 166,909,151 shares, respectively | 905 | 842 | 856 | |||||||
| Retained earnings | 2,295 | 1,999 | 2,076 | |||||||
| Accumulated other comprehensive loss | (170) | (203) | (171) | |||||||
| Less: Treasury stock at cost: 22,035,758, 15,800,222 and 16,839,222 shares, respectively | (564) | (349) | (384) | |||||||
| Total shareholders’ equity | 2,466 | 2,289 | 2,377 | |||||||
| $ | 3,477 | $ | 3,299 | $ | 3,367 | |||||
| November 1, | November 2, | February 1, | ||||||||||
| 2014 | 2013 | 2014 | ||||||||||
| (Unaudited) | (Unaudited) | * | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | 916 | $ | 764 | $ | 858 | ||||||
| Short-term investments | — | 32 | 9 | |||||||||
| Merchandise inventories | 1,324 | 1,316 | 1,220 | |||||||||
| Other current assets | 244 | 208 | 263 | |||||||||
| 2,484 | 2,320 | 2,350 | ||||||||||
| Property and equipment, net | 613 | 589 | 590 | |||||||||
| Deferred taxes | 237 | 257 | 241 | |||||||||
| Goodwill | 160 | 163 | 163 | |||||||||
| Other intangible assets, net | 56 | 70 | 67 | |||||||||
| Other assets | 68 | 78 | 76 | |||||||||
| $ | 3,618 | $ | 3,477 | $ | 3,487 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable | $ | 287 | $ | 310 | $ | 263 | ||||||
| Accrued and other liabilities | 358 | 330 | 360 | |||||||||
| Current portion of capital lease obligations | 3 | 3 | 3 | |||||||||
| 648 | 643 | 626 | ||||||||||
| Long-term debt and obligations under capital leases | 132 | 137 | 136 | |||||||||
| Other liabilities | 236 | 231 | 229 | |||||||||
| Total liabilities | 1,016 | 1,011 | 991 | |||||||||
| Shareholders’ equity | ||||||||||||
| Common stock and paid-in capital: 170,469,434; 168,675,093; and 169,039,095 shares, respectively | 971 | 905 | 921 | |||||||||
| Retained earnings | 2,665 | 2,295 | 2,387 | |||||||||
| Accumulated other comprehensive loss | (221 | ) | (170 | ) | (186 | ) | ||||||
| Less: Treasury stock at cost: 27,323,176; 22,035,758; and 23,612,273 shares, respectively | (813 | ) | (564 | ) | (626 | ) | ||||||
| Total shareholders’ equity | 2,602 | 2,466 | 2,496 | |||||||||
| $ | 3,618 | $ | 3,477 | $ | 3,487 | |||||||
| See Accompanying Notes to Condensed Consolidated Financial Statements. |
| * The balance sheet at February |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Sales | $ | 1,622 | $ | 1,524 | $ | 4,714 | $ | 4,469 | |||||
| Cost of sales | 1,085 | 1,019 | 3,163 | 2,999 | |||||||||
| Selling, general and administrative expenses | 340 | 319 | 969 | 931 | |||||||||
| Depreciation and amortization | 35 | 30 | 97 | 88 | |||||||||
| Other charges | — | — | 2 | — | |||||||||
| Interest expense, net | 2 | 1 | 4 | 3 | |||||||||
| Other income | — | — | (3) | (1) | |||||||||
| 1,462 | 1,369 | 4,232 | 4,020 | ||||||||||
| Income before income taxes | 160 | 155 | 482 | 449 | |||||||||
| Income tax expense | 56 | 49 | 174 | 156 | |||||||||
| Net income | $ | 104 | $ | 106 | $ | 308 | $ | 293 | |||||
| Basic earnings per share | $ | 0.70 | $ | 0.70 | $ | 2.06 | $ | 1.93 | |||||
| Weighted-average common shares outstanding | 147.7 | 151.0 | 149.2 | 151.4 | |||||||||
| Diluted earnings per share | $ | 0.70 | $ | 0.69 | $ | 2.04 | $ | 1.90 | |||||
| Weighted-average common shares assuming dilution | 149.5 | 153.9 | 151.2 | 154.0 | |||||||||
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | ||||||||
| Cost of sales | 1,157 | 1,085 | 3,495 | 3,163 | ||||||||||||
| Selling, general and administrative expenses | 353 | 340 | 1,051 | 969 | ||||||||||||
| Depreciation and amortization | 34 | 35 | 106 | 97 | ||||||||||||
| Impairment and other charges | — | — | 3 | 2 | ||||||||||||
| Interest expense, net | 1 | 2 | 3 | 4 | ||||||||||||
| Other income | (1 | ) | — | (3 | ) | (3 | ) | |||||||||
| 1,544 | 1,462 | 4,655 | 4,232 | |||||||||||||
| Income before income taxes | 187 | 160 | 585 | 482 | ||||||||||||
| Income tax expense | 67 | 56 | 211 | 174 | ||||||||||||
| Net income | $ | 120 | $ | 104 | $ | 374 | $ | 308 | ||||||||
| Basic earnings per share | $ | 0.84 | $ | 0.70 | $ | 2.59 | $ | 2.06 | ||||||||
| Weighted-average common shares outstanding | 143.6 | 147.7 | 144.5 | 149.2 | ||||||||||||
| Diluted earnings per share | $ | 0.82 | $ | 0.70 | $ | 2.55 | $ | 2.04 | ||||||||
| Weighted-average common shares assuming dilution | 145.7 | 149.5 | 146.6 | 151.2 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||
| November 2, | October 27, | November 2, | October 27, | |||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Net income | $ | 104 | $ | 106 | $ | 308 | $ | 293 | ||||
| Other comprehensive income (loss), net of income tax | ||||||||||||
| Foreign currency translation adjustment: | ||||||||||||
| Translation adjustment arising during the period, net of income tax | 22 | 35 | (5) | (7) | ||||||||
| Cash flow hedges: | ||||||||||||
| Change in fair value of derivatives, net of income tax | (2) | 2 | (2) | 1 | ||||||||
| Available for sale securities: | ||||||||||||
| Unrealized gain | — | — | — | 1 | ||||||||
| Pension and postretirement adjustments: | ||||||||||||
| Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $1 $1, $3, and $3 million, respectively | 3 | 2 | 7 | 6 | ||||||||
| Comprehensive income | $ | 127 | $ | 145 | $ | 308 | $ | 294 | ||||
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Net income | $ | 120 | $ | 104 | $ | 374 | $ | 308 | ||||||||
| Other comprehensive income (loss), net of income tax | ||||||||||||||||
| Foreign currency translation adjustment: | ||||||||||||||||
| Translation adjustment arising during the period, net of income tax | (42 | ) | 22 | (42 | ) | (5 | ) | |||||||||
| Cash flow hedges: | ||||||||||||||||
| Change in fair value of derivatives, net of income tax | 1 | (2 | ) | 1 | (2 | ) | ||||||||||
| Pension and postretirement adjustments: | ||||||||||||||||
| Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $2, $1, $4, and $3 million, respectively | 2 | 3 | 6 | 7 | ||||||||||||
| Comprehensive income | $ | 81 | $ | 127 | $ | 339 | $ | 308 | ||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
| Thirty-nine weeks ended | ||||||||
| November 2, | October 27, | |||||||
| 2013 | 2012 | |||||||
| From Operating Activities: | ||||||||
| Net income | $ | 308 | $ | 293 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 97 | 88 | ||||||
| Share-based compensation expense | 19 | 15 | ||||||
| Qualified pension plan contributions | (2) | — | ||||||
| Excess tax benefits on share-based compensation | (7) | (8) | ||||||
| Change in assets and liabilities: | ||||||||
| Merchandise inventories | (108) | (172) | ||||||
| Accounts payable | (3) | 87 | ||||||
| Other accruals | (44) | (18) | ||||||
| Other, net | 67 | (26) | ||||||
| Net cash provided by operating activities | 327 | 259 | ||||||
| From Investing Activities: | ||||||||
| Lease termination gains | 2 | — | ||||||
| Sales and maturities of short-term investments | 38 | 7 | ||||||
| Purchases of short-term investments | (23) | (57) | ||||||
| Capital expenditures | (157) | (120) | ||||||
| Purchase of business, net of cash acquired | (81) | — | ||||||
| Net cash used in investing activities | (221) | (170) | ||||||
| From Financing Activities: | ||||||||
| Purchase of treasury shares | (167) | (94) | ||||||
| Dividends paid | (89) | (82) | ||||||
| Issuance of common stock | 19 | 35 | ||||||
| Treasury stock issued under employee stock purchase plan | 3 | 5 | ||||||
| Excess tax benefits on share-based compensation | 8 | 9 | ||||||
| Reduction in long-term debt | — | (2) | ||||||
| Net cash used in financing activities | (226) | (129) | ||||||
| Effect of exchange rate fluctuations on Cash and Cash Equivalents | 4 | (7) | ||||||
| Net change in Cash and Cash Equivalents | (116) | (47) | ||||||
| Cash and Cash Equivalents at beginning of year | 880 | 851 | ||||||
| Cash and Cash Equivalents at end of interim period | $ | 764 | $ | 804 | ||||
| Cash paid during the period: | ||||||||
| Interest | $ | 5 | $ | 6 | ||||
| Income taxes | $ | 123 | $ | 182 | ||||
| Thirty-nine weeks ended | ||||||||
| November 1, | November 2, | |||||||
| 2014 | 2013 | |||||||
| From Operating Activities: | ||||||||
| Net income | $ | 374 | $ | 308 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Non-cash impairment charges | 3 | — | ||||||
| Depreciation and amortization | 106 | 97 | ||||||
| Share-based compensation expense | 18 | 19 | ||||||
| Qualified pension plan contributions | (2 | ) | (2 | ) | ||||
| Excess tax benefits on share-based compensation | (11 | ) | (7 | ) | ||||
| Change in assets and liabilities: | ||||||||
| Merchandise inventories | (124 | ) | (108 | ) | ||||
| Accounts payable | 28 | (3 | ) | |||||
| Accrued and other liabilities | (7 | ) | (44 | ) | ||||
| Other, net | 54 | 67 | ||||||
| Net cash provided by operating activities | 439 | 327 | ||||||
| From Investing Activities: | ||||||||
| Lease termination gains | — | 2 | ||||||
| Sales and maturities of short-term investments | 9 | 38 | ||||||
| Purchases of short-term investments | — | (23 | ) | |||||
| Capital expenditures | (138 | ) | (157 | ) | ||||
| Purchase of business, net of cash acquired | — | (81 | ) | |||||
| Net cash used in investing activities | (129 | ) | (221 | ) | ||||
| From Financing Activities: | ||||||||
| Purchase of treasury shares | (174 | ) | (167 | ) | ||||
| Dividends paid | (96 | ) | (89 | ) | ||||
| Issuance of common stock | 17 | 19 | ||||||
| Treasury stock issued under employee stock purchase plan | 5 | 3 | ||||||
| Excess tax benefits on share-based compensation | 11 | 8 | ||||||
| Repayments of long-term debt and obligations under capital leases | (3 | ) | — | |||||
| Net cash used in financing activities | (240 | ) | (226 | ) | ||||
| Effect of exchange rate fluctuations on Cash and Cash Equivalents | (12 | ) | 4 | |||||
| Net change in Cash and Cash Equivalents | 58 | (116 | ) | |||||
| Cash and Cash Equivalents at beginning of year | 858 | 880 | ||||||
| Cash and Cash Equivalents at end of interim period | $ | 916 | $ | 764 | ||||
| Cash paid during the period: | ||||||||
| Interest | $ | 5 | $ | 5 | ||||
| Income taxes | $ | 200 | $ | 123 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of the management of Foot Locker, Inc. (the “Company”), the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2014January 31, 2015 and of the fiscal year ended February 2, 2013.1, 2014. 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 the Company’s Form 10-K for the year ended February 2, 2013,1, 2014, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2013.
Recent Accounting Pronouncements
In April 2014, the first quarter of 2013, the Company adoptedFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-02, (“ASU”) 2014-08,Comprehensive Income (Topic 220): Reporting Discontinued Operations and Disclosures of Amounts Reclassified outDisposals of Accumulated Other Comprehensive IncomeComponents of an Entity (“. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and when the component or group of components meets the criteria to be classified as held for sale, is disposed by sale or is disposed of by other than by sale. ASU 2013-02”). ASU 2013-02 amended existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. The provisions of this new guidance were2014-08 is effective prospectively as of thefor fiscal years, and interim reporting periods within those years, beginning of 2013. Accordingly, enhanced footnote disclosure is included in Note 5.after December 15, 2014, with earlier adoption permitted. The adoption of ASU 2013-02 had nothis guidance did not have a significant effect on our consolidated financial position, results of operations or financial position.
In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers, issued as a qualitative approach as permitted undernew Topic, Accounting Standards Update No. 2011-08, Testing GoodwillCodification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for Impairment. those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The adoption of this guidance is not expected to have a significant effect on our consolidated financial position, results of operations or cash flows.
In performingJune 2014, FASB issued ASU 2014-12,Accounting for Share-Based Payments When the assessment, we identifiedTerms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.ASU 2014-12 affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and consideredthat could be achieved after the significance of relevant key factors, events, and circumstances that affectedrequisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value and/or carrying amounts of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on our reporting units. These factors included external factors such as macroeconomic, industry and market conditions, as well as entity-specific factors, such as our actual and plannedconsolidated financial performance. Based on theposition, results of the impairment assessment performed, we concluded that it is more likely than not that the fair values of our reporting units substantially exceeded their respective carrying values and there are no reporting units at risk of impairment.
Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.Acquisition – (continued)Impairment and Other Charges
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Impairment of intangibles | $ | — | $ | — | $ | 3 | $ | — | ||||||||
| CCS store closure costs | — | — | — | 2 | ||||||||||||
| $ | — | $ | — | $ | 3 | $ | 2 | |||||||||
During the first quarter of 2014, the purchase priceCompany recorded a charge of $1 million to fully write down the tradename related to the fair value of assets acquired, based on the exchange rate in effect at the date of our acquisition of Runners Point Group. The Company has allocated the purchase price, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company. The allocation of the purchase priceCompany’s stores in the table below is preliminaryRepublic of Ireland, reflecting historical and subjectprojected underperformance. Additionally, during the second quarter of 2014, the Company announced a plan to change based onshut down its e-commerce skate business, CCS.com, and transition customers to its Eastbay brand. Accordingly, an impairment charge of $2 million was recorded to write down the finalization of the purchase price.
| Allocation | ||||
| (in millions) | as Revised | |||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | 6 | ||
| Inventory | 41 | |||
| Other current assets | 11 | |||
| Property and equipment | 24 | |||
| Other long-term assets | 1 | |||
| Tradenames | 29 | (1) | ||
| Favorable leases | 5 | |||
| Liabilities assumed: | ||||
| Accounts payable and other accruals | (27) | |||
| Income taxes and deferred taxes, net | (11) | |||
| Obligations under capital leases | (9) | |||
| Other long-term liabilities | (1) | |||
| Goodwill | 18 | |||
| Total purchase price | $ | 87 | ||
3.Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of November 2, 2013,1, 2014, the Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division profit. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense. Sales and division resultsprofit for the Company’s reportable segments for the thirteen weeks and thirty-nine weeks ended November 1, 2014 and November 2, 2013 and October 27, 2012 are presented below. Division profit reflects income before income taxes, corporate expense, net interest expense, and net non-operating income.
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| Sales | November 1, | November 2, | November 1, | November 2, | ||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Athletic Stores | $ | 1,521 | $ | 1,444 | $ | 4,646 | $ | 4,228 | ||||||||
| Direct-to-Customers | 210 | 178 | 594 | 486 | ||||||||||||
| Total sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | ||||||||
| Operating Results | ||||||||||||||||
| (in millions) | ||||||||||||||||
| Athletic Stores(1) | $ | 181 | $ | 159 | $ | 577 | $ | 486 | ||||||||
| Direct-to-Customers(2) | 25 | 20 | 67 | 53 | ||||||||||||
| Division profit | 206 | 179 | 644 | 539 | ||||||||||||
| Less: Corporate expense, net | 19 | 17 | 59 | 56 | ||||||||||||
| Operating profit | 187 | 162 | 585 | 483 | ||||||||||||
| Other income (3) | 1 | — | 3 | 3 | ||||||||||||
| Interest expense, net | 1 | 2 | 3 | 4 | ||||||||||||
| Income before income taxes | $ | 187 | $ | 160 | $ | 585 | $ | 482 | ||||||||
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| Sales | November 2, | October 27, | November 2, | October 27, | |||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Athletic Stores | $ | 1,444 | $ | 1,375 | $ | 4,228 | $ | 4,060 | |||||
| Direct-to-Customers | 178 | 149 | 486 | 409 | |||||||||
| Total sales | $ | 1,622 | $ | 1,524 | $ | 4,714 | $ | 4,469 | |||||
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| Operating Results | November 2, | October 27, | November 2, | October 27, | |||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
Athletic Stores (1) | $ | 159 | $ | 166 | $ | 486 | $ | 480 | |||||
| Direct-to-Customers | 20 | 18 | 53 | 47 | |||||||||
| Division profit | 179 | 184 | 539 | 527 | |||||||||
| Less: Corporate expense, net | 17 | 28 | 56 | 76 | |||||||||
| Operating profit | 162 | 156 | 483 | 451 | |||||||||
Other income (2) | — | — | 3 | 1 | |||||||||
| Interest expense, net | 2 | 1 | 4 | 3 | |||||||||
| Income before income taxes | $ | 160 | $ | 155 | $ | 482 | $ | 449 | |||||
(1) | Included in the Athletic Stores segment for the thirty-nine weeks ended November 1, 2014 is a $1 million tradename impairment charge related to the Company’s stores in the Republic of Ireland. Included in the Athletic Stores segment for the thirty-nine weeks ended November 2, 2013 is a |
(2) | Included in the Direct-to-Customers segment for the thirty-nine weeks ended November 1, 2014 is a $2 million impairment charge related to the CCS tradename. |
| (3) | Other income includes non-operating items, such as lease termination gains, royalty income, and the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts. |
| 8 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.4. Goodwill and Other Intangible Assets
Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual assessmentreview of goodwill and assets with indefinite lives performed during the first quartersquarter of 2013 and 20122014 did not result in impairment charges. Thecharges as the fair value of each of the reporting units substantially exceedsexceeded its carrying value. During the second quarter of 2014, in connection with the shutdown of the CCS e-commerce business, the Company recorded a non-cash impairment charge of $2 million to write down the value for both periods. of the CCS tradename. Additionally, during the first quarter of 2014, the Company recorded a non-cash impairment charge of $1 million to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland, reflecting historical and projected underperformance.
The following table provides a summary of goodwill by reportable segment.
| November 2, | October 27, | February 2, | ||||||||
| Goodwill (in millions) | 2013 | 2012 | 2013 | |||||||
| Athletic Stores | $ | 21 | $ | 17 | $ | 18 | ||||
| Direct-to-Customers | 142 | 127 | 127 | |||||||
| $ | 163 | $ | 144 | $ | 145 | |||||
| Goodwill | November 1, | November 2, | February 1, | |||||||||
| (in millions) | 2014 | 2013 | 2014 | |||||||||
| Athletic Stores | $ | 19 | $ | 21 | $ | 21 | ||||||
| Direct-to-Customers | 141 | 142 | 142 | |||||||||
| $ | 160 | $ | 163 | $ | 163 | |||||||
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
| November 2, 2013 | October 27, 2012 | February 2, 2013 | ||||||||||||||||||||||||||
| Gross | Accum. | Net | Gross | Accum. | Net | Gross | Accum. | Net | ||||||||||||||||||||
| (in millions) | value | amort. | value | value | amort. | value | value | amort. | value | |||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||||||
| Lease acquisition costs | $ | 159 | $ | (140) | $ | 19 | $ | 163 | $ | (141) | $ | 22 | $ | 158 | $ | (137) | $ | 21 | ||||||||||
| Trademarks | 21 | (10) | 11 | 21 | (9) | 12 | 21 | (9) | 12 | |||||||||||||||||||
| Favorable leases | 9 | (4) | 5 | 5 | (5) | — | 5 | (5) | — | |||||||||||||||||||
| Customer relationships | 21 | (21) | — | 21 | (17) | 4 | 21 | (18) | 3 | |||||||||||||||||||
| $ | 210 | $ | (175) | $ | 35 | $ | 210 | $ | (172) | $ | 38 | $ | 205 | $ | (169) | $ | 36 | |||||||||||
| Indefinite life intangible assets: | ||||||||||||||||||||||||||||
| Tradenames: | ||||||||||||||||||||||||||||
| Republic of Ireland | 2 | 1 | 1 | |||||||||||||||||||||||||
| CCS | 3 | 10 | 3 | |||||||||||||||||||||||||
| Runners Point Group | 30 | — | — | |||||||||||||||||||||||||
| $ | 35 | $ | 11 | $ | 4 | |||||||||||||||||||||||
| Other intangible assets, net | $ | 70 | $ | 49 | $ | 40 | ||||||||||||||||||||||
| November 1, 2014 | November 2, 2013 | February 1, 2014 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 143 | $ | (129 | ) | $ | 14 | $ | 159 | $ | (140 | ) | $ | 19 | $ | 155 | $ | (137 | ) | $ | 18 | |||||||||||||||
| Trademarks | 21 | (11 | ) | 10 | 21 | (10 | ) | 11 | 21 | (11 | ) | 10 | ||||||||||||||||||||||||
| Favorable leases | 7 | (4 | ) | 3 | 9 | (4 | ) | 5 | 8 | (3 | ) | 5 | ||||||||||||||||||||||||
| Customer relationships | 21 | (21 | ) | — | 21 | (21 | ) | — | 21 | (21 | ) | — | ||||||||||||||||||||||||
| $ | 192 | $ | (165 | ) | $ | 27 | $ | 210 | $ | (175 | ) | $ | 35 | $ | 205 | $ | (172 | ) | $ | 33 | ||||||||||||||||
| Indefinite life intangible assets: (1) | ||||||||||||||||||||||||||||||||||||
| Runners Point Group trademarks | 28 | 30 | 30 | |||||||||||||||||||||||||||||||||
| Other trademarks(2) | 1 | 5 | 4 | |||||||||||||||||||||||||||||||||
| $ | 29 | $ | 35 | $ | 34 | |||||||||||||||||||||||||||||||
| Other intangible assets, net | $ | 56 | $ | 70 | $ | 67 | ||||||||||||||||||||||||||||||
| (1) | Includes the effect of foreign currency translation related primarily to the movements of the euro in relation to the U.S. dollar. |
| (2) | The accumulated impairment charge related to other trademarks is $27 million. This includes $3 million of impairment charges recorded during the thirty-nine weeks ended November 1, 2014. |
The $11 million change in connection with the allocation of the purchase price of the Runners Point Group acquisition, the Company recognized
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.Goodwill and Other Intangible Assets -– (continued)
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Amortization expense | $ | 3 | $ | 3 | $ | 9 | $ | 10 | |||||
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Amortization expense | $ | 2 | $ | 3 | $ | 5 | $ | 9 | ||||||||
Future expected amortization expense for finite life intangible assets is estimated as follows:
| (in millions) | ||||
| Remainder of 2013 | $ | 2 | ||
| 2014 | 6 | |||
| 2015 | 5 | |||
| 2016 | 4 | |||
| 2017 | 4 | |||
| 2018 | 3 | |||
| (in millions) | ||||
| Remainder of 2014 | $ | 1 | ||
| 2015 | 4 | |||
| 2016 | 4 | |||
| 2017 | 4 | |||
| 2018 | 3 | |||
| 2019 | 3 | |||
5.Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was comprised of the following:
| November 2, | October 27, | February 2, | ||||||||
| (in millions) | 2013 | 2012 | 2013 | |||||||
| Foreign currency translation adjustments | $ | 77 | $ | 56 | $ | 82 | ||||
| Cash flow hedges | 1 | — | 3 | |||||||
| Unrecognized pension cost and postretirement benefit | (247) | (258) | (255) | |||||||
| Unrealized loss on available-for-sale security | (1) | (1) | (1) | |||||||
| $ | (170) | $ | (203) | $ | (171) | |||||
| November 1, | November 2, | February 1, | ||||||||||
| (in millions) | 2014 | 2013 | 2014 | |||||||||
| Foreign currency translation adjustments | $ | 15 | $ | 77 | $ | 57 | ||||||
| Cash flow hedges | (1 | ) | 1 | (2 | ) | |||||||
| Unrecognized pension cost and postretirement benefit | (234 | ) | (247 | ) | (240 | ) | ||||||
| Unrealized loss on available-for-sale security | (1 | ) | (1 | ) | (1 | ) | ||||||
| $ | (221 | ) | $ | (170 | ) | $ | (186 | ) | ||||
The changes in accumulated other comprehensive loss for the thirty-nine week periodweeks ended November 2, 20131, 2014 were as follows:
| (in millions) | Foreign currency translation adjustments | Cash flow hedges | Items related to pension and postretirement benefits | Unrealized loss on available-for- sale security | Total | |||||||||||||||
| Balance as of February 1, 2014 | $ | 57 | (2 | ) | (240 | ) | (1 | ) | $ | (186 | ) | |||||||||
| Other comprehensive income before reclassification | (42 | ) | 1 | — | — | (41 | ) | |||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 6 | — | 6 | |||||||||||||||
| Other comprehensive income | (42 | ) | 1 | 6 | — | (35 | ) | |||||||||||||
| Balance as of November 1, 2014 | $ | 15 | (1 | ) | (234 | ) | (1 | ) | $ | (221 | ) | |||||||||
| (in millions) | Foreign currency translation adjustments | Cash flow hedges | Items related to pension and postretirement benefits | Unrealized loss on available- for-sale security | Total | |||||||||||
| Balance as of February 2, 2013 | $ | 82 | $ | 3 | $ | (255) | $ | (1) | $ | (171) | ||||||
| Other comprehensive income (loss) before reclassification | (5) | (2) | 1 | — | (6) | |||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 7 | — | 7 | |||||||||||
| Other comprehensive income (loss) | (5) | (2) | 8 | — | 1 | |||||||||||
| Balance as of November 2, 2013 | $ | 77 | $ | 1 | $ | (247) | $ | (1) | $ | (170) | ||||||
| 10 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.Accumulated Other Comprehensive Loss-Loss – (continued)
Reclassifications from accumulated other comprehensive loss for the thirty-nine week periodweeks ended November 2, 20131, 2014 were as follows:
| (in millions) | ||||
| Amortization of actuarial (gain) loss: | ||||
| Pension benefits- amortization of actuarial loss | $ | 12 | ||
| Postretirement benefits- amortization of actuarial gain | (2) | |||
| Net periodic benefit cost (see Note 9) | 10 | |||
| Income tax expense | (3) | |||
| Net of tax | $ | 7 |
| (in millions) | ||||
| Amortization of actuarial (gain) loss: | ||||
| Pension benefits - amortization of actuarial loss | $ | 12 | ||
| Postretirement benefits - amortization of actuarial gain | (2 | ) | ||
| Net periodic benefit cost (seeNote 9) | 10 | |||
| Income tax expense | (4 | ) | ||
| Net of tax | $ | 6 | ||
6.Financial Instruments
The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policypractice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument.
Derivative Holdings Designated as Hedges
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and hedge ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. No such gains or losses were recognized in earnings for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.
The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of Accumulated Other Comprehensive Loss (“AOCL”) and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At each quarter-end, substantially all of the Company had notCompany’s hedged forecasted transactions for moreare less than the next twelve months, and the Company expects substantially all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.Financial Instruments – (continued)
The net change in the fair value of foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was not significanta $1 million loss for any ofboth the periods presented. The notional value of the contracts outstanding atthirteen and thirty-nine weeks ended November 2, 2013 was $58 million and these contracts extend through July 2014.
The notional value of the contracts outstanding at November 2, 20131, 2014 was $33$77 million, and these contracts extend through December 2013.
Derivative Holdings Designated as Non-Hedges
The Company enters into diesel fuelforeign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign currency-denominated merchandise purchases and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers.intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately.immediately within selling, general and administrative expenses. The effectnet change in fair value was not significant for anythe thirteen weeks ended November 1, 2014 and resulted in $1 million of income for the periods presented.thirty-nine weeks ended November 1, 2014. The net change in fair value was not significant for the prior-year periods. The notional value of the contracts outstanding at November 2, 20131, 2014 was $18 million and these contracts extend through December 2014.
The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are designated as non-hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were $1 million for the thirteen and thirty-nine weeks ended November 1, 2014 and were not significant.
Many of the Company’s agreements allow for a netting arrangement. The following, is presented on a gross basis, by type of contract:
| Balance Sheet | November 2, | October 27, | February 2, | |||||||||
| (in millions) | Caption | 2013 | 2012 | 2013 | ||||||||
| Hedging Instruments: | ||||||||||||
| Foreign exchange forward contracts | Current assets | $ | 1 | $ | 1 | $ | 4 | |||||
| Foreign exchange forward contracts | Current liabilities | $ | — | $ | 1 | $ | — | |||||
| Non-Hedging Instruments: | ||||||||||||
| Foreign exchange forward contracts | Current assets | $ | — | $ | — | $ | 2 | |||||
| Balance Sheet | November 1, | November 2, | February 1, | |||||||||||
| (in millions) | Caption | 2014 | 2013 | 2014 | ||||||||||
| Hedging Instruments: | ||||||||||||||
| Foreign exchange forward contracts | Current assets | $ | — | $ | 1 | $ | — | |||||||
| Foreign exchange forward contracts | Current liabilities | $ | 2 | $ | — | $ | 2 | |||||||
7.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 2 – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. |
Level 3 – | Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. |
12 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.Fair Value Measurements – (continued)
The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:
| At November 2, 2013 | At October 27, 2012 | At February 2, 2013 | ||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||
| Short-term investments | $ | — | $ | 32 | $ | — | $ | — | $ | 49 | $ | — | $ | — | $ | 48 | $ | — | ||||||||||
| Auction rate security | — | 6 | — | — | 6 | — | — | 6 | — | |||||||||||||||||||
| Foreign exchange forward contracts | — | 1 | — | — | 1 | — | — | 6 | — | |||||||||||||||||||
| Total Assets | $ | — | $ | 39 | $ | — | $ | — | $ | 56 | $ | — | $ | — | $ | 60 | $ | — | ||||||||||
| Liabilities | ||||||||||||||||||||||||||||
| Foreign exchange forward contracts | — | — | — | — | 1 | — | — | — | — | |||||||||||||||||||
| Total Liabilities | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | ||||||||||
| At November 1, 2014 | At November 2, 2013 | At February 1, 2014 | ||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||
| Short-term investments | $ | — | $ | — | $ | — | $ | — | $ | 32 | $ | — | $ | — | $ | 9 | $ | — | ||||||||||||||||||
| Auction rate security | — | 6 | — | — | 6 | — | — | 6 | — | |||||||||||||||||||||||||||
| Foreign exchange forward contracts | — | — | — | — | 1 | — | — | — | — | |||||||||||||||||||||||||||
| Total Assets | $ | — | $ | 6 | $ | — | $ | — | $ | 39 | $ | — | $ | — | $ | 15 | $ | — | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||
| Foreign exchange forward contracts | — | $ | 2 | — | — | — | — | — | 2 | — | ||||||||||||||||||||||||||
| Total Liabilities | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | ||||||||||||||||||
Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. As of November 2, 2013, the Company held $38 million of available-for-sale securities, which was comprised of $32 million ofThe Company’s short-term investments and a $6 million auction rate security, which is included in other assets.
The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.
The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.
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 2, | October 27, | February 2, | ||||||||
| (in millions) | 2013 | 2012 | 2013 | |||||||
Carrying value (1) | $ | 140 | $ | 133 | $ | 133 | ||||
Fair value (1) | $ | 157 | $ | 145 | $ | 152 | ||||
| November 1, | November 2, | February 1, | ||||||||||
| (in millions) | 2014 | 2013 | 2014 | |||||||||
| Carrying value | $ | 135 | $ | 140 | $ | 139 | ||||||
| Fair value | $ | 161 | $ | 157 | $ | 159 | ||||||
The fair value of long-term debt and obligations under capital leases is determined by using model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets and, therefore, is classified as Level 2.
The carrying values of cash and cash equivalents, short-term investments, and other current receivables and payables approximate their fair value.
| 13 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.Earnings Per Share
The Company accounts for and discloses net earnings per share using the treasury stock method. The Company’s basicBasic earnings per share is computed by dividing the Company’s reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. The Company’s restrictedRestricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.
The Company’scomputation of basic and diluted weighted-averageearnings per share is as follows:
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Weighted-average common shares outstanding | 143.6 | 147.7 | 144.5 | 149.2 | ||||||||||||
| Effect of Dilution: | ||||||||||||||||
| Stock options and awards | 2.1 | 1.8 | 2.1 | 2.0 | ||||||||||||
| Weighted-average common shares assuming dilution | 145.7 | 149.5 | 146.6 | 151.2 | ||||||||||||
The number of common shares outstandingoptions excluded from the computation was as follows:
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Weighted-average common shares outstanding | 147.7 | 151.0 | 149.2 | 151.4 | |||||||||
| Effect of Dilution: | |||||||||||||
| Stock options and awards | 1.8 | 2.9 | 2.0 | 2.6 | |||||||||
| Weighted-average common shares assuming dilution | 149.5 | 153.9 | 151.2 | 154.0 | |||||||||
FOOT LOCKER, INC.
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. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.
The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which is recognized as part of SG&A expense:
| Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||||
| Thirteen weeks | Thirty-nine weeks | Thirteen weeks | Thirty-nine weeks | ||||||||||||||||||||||
| ended | ended | ended | ended | ||||||||||||||||||||||
| November 2, | October 27, | November 2, | October 27, | November 2, | October 27, | November 2, | October 27, | ||||||||||||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||
| Service cost | $ | 4 | $ | 3 | $ | 11 | $ | 10 | $ | — | $ | — | $ | — | $ | — | |||||||||
| Interest cost | 6 | 7 | 19 | 21 | — | — | — | — | |||||||||||||||||
| Expected return on plan assets | (10) | (10) | (30) | (30) | — | — | — | — | |||||||||||||||||
| Amortization of net loss (gain) | 4 | 4 | 12 | 12 | (1) | (1) | (2) | (3) | |||||||||||||||||
| Net benefit expense (income) | $ | 4 | $ | 4 | $ | 12 | $ | 13 | $ | (1) | $ | (1) | $ | (2) | $ | (3) | |||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||
| Thirteen weeks | Thirty-nine weeks | Thirteen weeks | Thirty-nine weeks | |||||||||||||||||||||||||||||
| ended | ended | ended | ended | |||||||||||||||||||||||||||||
| November 1, | November 2, | November 1, | November 2, | November 1, | November 2, | November 1, | November 2, | |||||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
| Service cost | $ | 3 | $ | 4 | $ | 11 | $ | 11 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Interest cost | 7 | 6 | 21 | 19 | — | — | — | — | ||||||||||||||||||||||||
| Expected return on | ||||||||||||||||||||||||||||||||
| plan assets | (9 | ) | (10 | ) | (28 | ) | (30 | ) | — | — | — | — | ||||||||||||||||||||
| Amortization of net | ||||||||||||||||||||||||||||||||
| loss (gain) | 5 | 4 | 12 | 12 | (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||
| Net benefit expense (income) | $ | 6 | $ | 4 | $ | 16 | $ | 12 | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (2 | ) | ||||||||||||
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.Pension and Postretirement Plans – (continued)
During the second quarterfirst quarters of both 2014 and 2013, the Company made a $2contributions of $2 million contribution to the Canadian qualified plan. No pension contributions to the U.S. qualified plan were made during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 and October 27, 2012.2013. The Company continually evaluates the amount and timing of any future contributions. Additional contributions will depend on the plan asset performance and other factors.
10.Share-Based Compensation
Total compensation expense and the associated tax benefits recognized related to the Company’s share-based compensation plans was $6 million for the thirteen weeks ended November 2, 2013, $5 million for the thirteen weeks ended October 27, 2012, and was $19 million and $15 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively. The associated tax benefits recognized for the thirteen weeks ended November 2, 2013 and October 27, 2012 was $2 million for both periods. The associated tax benefit recognized was $6 million for the thirty-nine weeks ended November 2, 2013 and $5 million for the thirty-nine weeks ended October 27, 2012.
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Share-based compensation expense | $ | 6 | $ | 6 | $ | 18 | $ | 19 | ||||||||
| Tax benefit | $ | 1 | $ | 2 | $ | 5 | $ | 6 | ||||||||
Tax deductions in excess of the cumulative compensation cost recognized for share-based compensation arrangements were $8$11 million for the thirty-nine weeks ended November 1, 2014 and $9$8 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively, and are classified as a financing activity within the Condensed Consolidated Statements of Cash Flows.
Valuation Model and Assumptions
The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.
The following table shows the Company’s assumptions used to compute the share-based compensation expense:
| Stock Option Plans Thirty-nine weeks ended | Stock Purchase Plan Thirty-nine weeks ended | |||||||||||||||
| November 2, | October 27, | November 2, | October 27, | |||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Weighted-average risk free rate of interest | 1.02 | % | 1.50 | % | 0.17 | % | 0.22 | % | ||||||||
| Expected volatility | 42 | % | 43 | % | 40 | % | 38 | % | ||||||||
| Weighted-average expected award life | 6.0 years | 5.5 years | 1.0 year | 1.0 year | ||||||||||||
| Dividend yield | 2.3 | % | 2.3 | % | 2.3 | % | 2.5 | % | ||||||||
| Weighted-average fair value | $ | 10.98 | $ | 10.12 | $ | 5.80 | $ | 5.91 | ||||||||
| (in thousands, except price per share and weighted-average term) | Shares | Weighted- Average Term | Weighted- Average Exercise Price | ||||||
| Options outstanding at the beginning of the year | 5,907 | $ | 19.93 | ||||||
| Granted | 1,154 | 34.25 | |||||||
| Exercised | (964) | 19.12 | |||||||
| Expired or cancelled | (59) | 29.56 | |||||||
| Options outstanding at November 2, 2013 | 6,038 | 6.59 | $ | 22.70 | |||||
| Options exercisable at November 2, 2013 | 3,857 | 5.40 | $ | 18.51 | |||||
| Options available for future grant at November 2, 2013 | 3,336 | ||||||||
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| Intrinsic value of stock options (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Exercised | $ | 2 | $ | 9 | $ | 15 | $ | 24 | |||||
| Outstanding | $ | 74 | $ | 85 | |||||||||
| Outstanding and exercisable | $ | 64 | $ | 61 | |||||||||
| Options Outstanding | Options Exercisable | ||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | ||||||||||||
| (in thousands, except price per share and contractual life) | |||||||||||||||||
| $ | 9.85 | $ | 15.10 | 1,756 | 5.86 | $ | 12.60 | 1,756 | $ | 12.60 | |||||||
| $ | 15.74 | $ | 23.42 | 1,603 | 6.36 | $ | 19.71 | 1,156 | $ | 20.04 | |||||||
| $ | 23.63 | $ | 30.92 | 1,540 | 5.61 | $ | 28.77 | 937 | $ | 27.55 | |||||||
| $ | 31.79 | $ | 36.59 | 1,139 | 9.36 | $ | 34.26 | 8 | $ | 34.17 | |||||||
| $ | 9.85 | $ | 36.59 | 6,038 | 6.59 | $ | 22.70 | 3,857 | $ | 18.51 | |||||||
| (in thousands, except price per share) | Number of Shares | Weighted- Average Grant Date Fair Value per Share | |||||
| Nonvested at the beginning of the year | 2,314 | $ | 23.18 | ||||
| Granted | 1,154 | 34.25 | |||||
| Vested | (1,228) | 20.97 | |||||
| Expired or cancelled | (59) | 29.56 | |||||
| Nonvested at November 2, 2013 | 2,181 | $ | 30.11 | ||||
| Stock Option Plans Thirty-nine weeks ended | Stock Purchase Plan Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Weighted-average risk free rate of interest | 2.12 | % | 1.02 | % | 0.14 | % | 0.17 | % | ||||||||
| Expected volatility | 39 | % | 42 | % | 24 | % | 40 | % | ||||||||
| Weighted-average expected award life | 6.1 years | 6.0 years | 1.0 year | 1.0 year | ||||||||||||
| Dividend yield | 2.0 | % | 2.3 | % | 2.0 | % | 2.3 | % | ||||||||
| Weighted-average fair value | $ | 14.91 | $ | 10.98 | $ | 7.11 | $ | 5.80 | ||||||||
Compensation expense related to the Company’s stock option and stock purchase plans was $3$3 million and $9$9 million for both the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively, and was $2 million and $7 million for the thirteen and thirty-nine weeks ended October 27, 2012, respectively. As of November 2, 2013,1, 2014, there was $11$10 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.101.02 years.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
The information in the following table covers options granted under the Company’s stock option plans for the thirty-nine weeks ended November 1, 2014.
| (in thousands, except price per share and weighted- average term) | Shares | Weighted- Average Term | Weighted-Average Exercise Price | |||||||||
| Options outstanding at the beginning of the year | 5,668 | $ | 22.66 | |||||||||
| Granted | 767 | 45.11 | ||||||||||
| Exercised | (769 | ) | 21.58 | |||||||||
| Expired or cancelled | (62 | ) | 39.65 | |||||||||
| Options outstanding at November 1, 2014 | 5,604 | 6.51 | $ | 25.69 | ||||||||
| Options exercisable at November 1, 2014 | 3,798 | 5.49 | $ | 19.78 | ||||||||
| Options vested and expected to vest at November 1, 2014 | 5,567 | 6.50 | $ | 25.59 | ||||||||
| Options available for future grant at November 1, 2014 | 14,018 | |||||||||||
On May 21, 2014, the Foot Locker 2007 Stock Incentive Plan was amended to increase to 14 million shares the number of shares of the Company’s common stock reserved for all awards.
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 1, | November 2, | November 1, | November 2, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||||
| Exercised | $ | 6 | $ | 2 | $ | 21 | $ | 15 | ||||||||||
The aggregate intrinsic value for stock options outstanding and for stock options 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 1, | November 2, | |||||||
| 2014 | 2013 | |||||||
| Outstanding | $ | 170 | $ | 74 | ||||
| Outstanding and exercisable | $ | 138 | $ | 64 | ||||
| Vested and expected to vest | $ | 169 | $ | 74 | ||||
The cash received from option exercises for the thirteen and thirty-nine weeks ended November 1, 2014 was $4 million and $17 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended November 2, 2013 was $4 million and $19 million, respectively. The total tax benefit realized from option exercises for the thirteen and thirty-nine weeks ended November 1, 2014, was $2 million and $7 million respectively, and was $1 million and $5 million for the corresponding prior-year periods.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
The following table summarizes information about stock options outstanding and exercisable at November 1, 2014:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||||||||||
| (in thousands, except prices per share and contractual life) | ||||||||||||||||||||
| $9.85 to $15.10 | 1,470 | 4.87 | $ | 12.39 | 1,470 | $ | 12.39 | |||||||||||||
| $18.80 to $24.75 | 1,460 | 5.27 | $ | 20.11 | 1,460 | $ | 20.11 | |||||||||||||
| $24.76 to $34.24 | 1,906 | 7.60 | $ | 32.60 | 852 | $ | 31.64 | |||||||||||||
| $34.27 to $45.08 | 768 | 9.31 | $ | 44.62 | 16 | $ | 38.72 | |||||||||||||
| 5,604 | 6.51 | $ | 25.69 | 3,798 | $ | 19.78 | ||||||||||||||
Restricted Stock and Units
Restricted shares of the Company’s common stock and restricted stock units may be awarded to certain officers and key employees of the Company. The Company also issuesAwards made to executives outside of the United States and to nonemployee directors are made in the form of restricted stock units to its non-employee directors.units. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. AsThere were 734,295 and 997,542 restricted stock units outstanding as of November 1, 2014 and November 2, 2013, 997,542 restricted stock units were outstanding. Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.
Generally, awards fully vest after the passage of time, typically three years. However, restricted stock unit grants made in connection with the Company’s long-term incentive program vest after the attainment of certain performance metrics and 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 thatCompensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. The Company recorded compensation expense related to restricted stock awards, net of forfeitures, of $3 million for both the thirteen weeks ended November 1, 2014 and November 2, 2013, and $9 million and $10 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, there was $14 million of total unrecognized compensation cost related to nonvested restricted awards.
Restricted shareshares and unitunits activity for the thirty-nine weeks ended November 2, 2013 and October 27, 2012 is1, 2014 are summarized as follows:
| (in thousands, except price per share) | Number of Shares | Weighted-Average Grant Date Fair Value per Share | ||||||
| Nonvested at the beginning of the year | 1,369 | $ | 27.20 | |||||
| Granted | 320 | 45.24 | ||||||
| Vested | (649 | ) | 20.84 | |||||
| Expired or cancelled | (42 | ) | 24.69 | |||||
| Nonvested at November 1, 2014 | 998 | $ | 37.23 | |||||
| Aggregate value (in millions) | $ | 37 | ||||||
| Weighted-average remaining contractual life | 1.32 years | |||||||
| 17 |
| Number of Shares and Units | |||||||
| (in thousands) | November 2, 2013 | October 27, 2012 | |||||
| Outstanding at beginning of period | 1,564 | 2,068 | |||||
| Granted | 440 | 264 | |||||
| Vested | (649) | (482) | |||||
| Cancelled or forfeited | (15) | — | |||||
| Outstanding at end of period | 1,340 | 1,850 | |||||
| Aggregate value (in millions) | $ | 36 | $ | 33 | |||
| Weighted-average remaining contractual life | 1.09 years | 0.95 years | |||||
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
The weighted-average grant-date fair value per share was $34.59$45.24 and $30.75$34.59 for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, and October 27, 2012, respectively. The total value of awards for which restrictions lapsed during the thirty-nine weeks ended November 2, 20131, 2014 and October 27, 2012 was $9 million and $5 million, respectively. As of November 2, 2013 there was $13 million of total unrecognized compensation cost related to nonvested restricted awards. The Company recorded compensation expense related to restricted stock awards, net of forfeitures, of $3 million for both the thirteen weeks ended November 2, 2013 and October 27, 2012, and $10$14 million and $8$9 million, for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively.
BUSINESS OVERVIEW
Foot Locker, Inc. (the “Company”), through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers.
The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formatsdivisions that include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point, Sidestep, and Run2, which was acquired during the second quarter of 2013.
The Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites, mobile devices,sites, and catalogs. Eastbay, one of the affiliates, is among the largest direct marketers in the United States. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamservices.com, ccs.com,eastbayteamsales.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, and six02.com). Additionally, this segment includes Tredex, the direct-to-customer subsidiary of Runners Point Group, which operates the websites for runnerspoint.com, sidestep.com,sidestep-shoes.com, and sp24.com.
STORE COUNT
At November 2, 2013,1, 2014, the Company operated 3,5103,474 stores as compared with 3,3353,473 and 3,3673,510 stores at February 1, 2014 and November 2, 2013, and October 27, 2012, respectively. During the thirty-nine weeks ended November 2, 2013,1, 2014, the Company opened 77 stores, acquired 19476 stores, remodeled or relocated 271229 stores and closed 9675 stores. Store count as of November 2, 2013 includes 195 Runners Point Group stores.
A total of 7273 franchised stores were operating at November 2, 2013,1, 2014, as compared with 4273 and 4072 stores at February 1, 2014 and November 2, 2013, and October 27, 2012, respectively. Included in the most recent number of franchised stores are 27 franchised Runners Point Group stores operating in Germany and Switzerland. Royalty incomeRevenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.
SALES AND OPERATING RESULTS
All references to comparable-store sales for a given period relate to sales of stores that arewere open at the period-end and have been open for more than one year. The computation of comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effectseffect of foreign currency fluctuations.
Sales from acquired businesses that include inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, sales of Runners Point Group have been excluded fromwere included in the computation of comparable-store sales.
The following table summarizes results by segment:
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| Sales | November 2, | October 27, | November 2, | October 27, | |||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Athletic Stores | $ | 1,444 | $ | 1,375 | $ | 4,228 | $ | 4,060 | |||||
| Direct-to-Customers | 178 | 149 | 486 | 409 | |||||||||
| Total sales | $ | 1,622 | $ | 1,524 | $ | 4,714 | $ | 4,469 | |||||
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| Operating Results | November 2, | October 27, | November 2, | October 27, | |||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
Athletic Stores (1) | $ | 159 | $ | 166 | $ | 486 | $ | 480 | |||||
| Direct-to-Customers | 20 | 18 | 53 | 47 | |||||||||
| Division profit | 179 | 184 | 539 | 527 | |||||||||
Less: Corporate expense, net(2) | 17 | 28 | 56 | 76 | |||||||||
| Operating profit | 162 | 156 | 483 | 451 | |||||||||
Other income (3) | — | — | 3 | 1 | |||||||||
| Interest expense, net | 2 | 1 | 4 | 3 | |||||||||
| Income before income taxes | $ | 160 | $ | 155 | $ | 482 | $ | 449 | |||||
| (in millions) | Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| Sales | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Athletic Stores | $ | 1,521 | $ | 1,444 | $ | 4,646 | $ | 4,228 | ||||||||
| Direct-to-Customers | 210 | 178 | 594 | 486 | ||||||||||||
| Total sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | ||||||||
| Operating Results | ||||||||||||||||
| Athletic Stores(1) | $ | 181 | $ | 159 | $ | 577 | $ | 486 | ||||||||
| Direct-to-Customers(2) | 25 | 20 | 67 | 53 | ||||||||||||
| Division profit | 206 | 179 | 644 | 539 | ||||||||||||
| Less: Corporate expense, net | 19 | 17 | 59 | 56 | ||||||||||||
| Operating profit | 187 | 162 | 585 | 483 | ||||||||||||
| Other income (3) | 1 | — | 3 | 3 | ||||||||||||
| Interest expense, net | 1 | 2 | 3 | 4 | ||||||||||||
| Income before income taxes | $ | 187 | $ | 160 | $ | 585 | $ | 482 | ||||||||
| (1) | Included in the Athletic Stores segment for the thirty-nine weeks ended November 1, 2014 is a $1 million tradename impairment charge related to the Company’s stores in the Republic of Ireland. Included in the Athletic Stores segment for the thirty-nine weeks ended November 2, 2013 is a $2 million charge recorded in connection with the closure of all CCS stores. |
| (2) |
| (3) | Other income includes non-operating items, such as lease termination gains, royalty income, and the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts. |
Sales increased by $98$109 million, or 6.46.7 percent, to $1,731 million for the thirteen weeks ended November 1, 2014, from $1,622 million for the thirteen weeks ended November 2, 2013 from $1,524 million for the thirteen weeks ended October 27, 2012.2013. For the thirty-nine weeks ended November 2, 2013,1, 2014, sales of $4,714$5,240 million increased 5.511.2 percent from sales of $4,469$4,714 million for the thirty-nine week period ended October 27, 2012.
Excluding the effectseffect of foreign currency fluctuations, and sales of Runners Point Group, total sales for the thirteen weeks and thirty-nine weeksweek periods increased 1.37.7 percent and 3.210.9 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales increased by 4.16.9 percent and 3.77.1 percent for the thirteen weeks and thirty-nine weeks ended November 2, 2013,1, 2014, respectively.
GROSS MARGIN
Gross margin, as a percentage of sales, remained unchanged atincreased to 33.2 percent for the thirteen weeks ended November 1, 2014 as compared with 33.1 percent in the corresponding prior-year period driven by the occupancy and buyers compensation expense rate, which decreased by 50 basis points reflecting improved leverage of primarily fixed costs. This was partially offset by a 40 basis point increase in the cost of merchandise rate, which reflected the result of the liquidation of CCS merchandise. The liquidation of CCS merchandise negatively affected the gross margin rate by 20 basis points. Further, the merchandise margin rate continued to be negatively affected by lower initial markups driven by vendor and category mix, and lower shipping and handling margin, offset by lower markdowns.
For the thirty-nine weeks ended November 1, 2014, gross margin, as a percentage of sales, increased to 33.3 percent as compared with 32.9 percent in the corresponding prior-year period. The occupancy and buyers compensation expense rate decreased by 70 basis points and was partially offset by a 30 basis point increase in the cost of merchandise rate. The increase in the cost of merchandise rate primarily reflects the continued effect of the factors noted in the paragraph above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| SG&A | $ | 353 | $ | 340 | $ | 1,051 | $ | 969 | ||||||||
| SG&A, as a percentage of sales | 20.4 | % | 21.0 | % | 20.1 | % | 20.6 | % | ||||||||
Selling, general and administrative expenses (“SG&A”) increased by $13 million, or 3.8 percent, for the thirteen weeks ended November 1, 2014 as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 1, 2014, SG&A increased by $82 million, or 8.5 percent, as compared with the corresponding prior-year period. The SG&A increase for the thirty-nine weeks ended November 1, 2014 is primarily reflective of a full nine months of Runners Point Group expenses as compared with only four months in the prior year.
Excluding the effect of foreign currency fluctuations, SG&A increased by $17 million, or 5.0 percent, and $79 million, or 8.2 percent, for the thirteen and thirty-nine weeks ended November 2, 2013, as compared with the corresponding prior-year periods. As a percentage of sales, the cost of merchandise for the thirteen and thirty-nine weeks ended November 2, 2013 increased by 10 basis points as compared with the prior year periods, primarily reflecting a decrease in the initial markup rate. This increase was offset by an improvement of 10 basis points from leveraging occupancy and buying costs.
The SG&A rate improvements reflected continued effective expense management, including store wages, which benefited from the utilization of hiring and $84scheduling tools, as well as associate training.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased by $1 million for the thirteen weeks ended November 1, 2014 to $34 million, as compared with the corresponding prior-year period of $35 million. The decrease was primarily the result of capital accrual adjustments made during the third quarter of 2014, which reduced depreciation and amortization expense. For the thirty-nine week periodsweeks ended November 1, 2014, depreciation and amortization increased by $9 million to $106 million as compared with $97 million for the thirty-nine weeks ended November 2, 2013, respectively, related to2013. The increase in depreciation for the Runners Point Group stores. Excludingthirty-nine weeks ended November 1, 2014 reflects increased capital spending for store improvements and technology, as well as the effects of foreign currency fluctuations and salesaddition of Runners Point Group stores, sales fromfor a full period in the Athletic Stores segment decreased 0.1 percent andcurrent year as compared with a partial period in the prior year.
INTEREST EXPENSE
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Interest expense | $ | 3 | $ | 3 | $ | 8 | $ | 8 | ||||||||
| Interest income | (2 | ) | (1 | ) | (5 | ) | (4 | ) | ||||||||
| Interest expense, net | $ | 1 | $ | 2 | $ | 3 | $ | 4 | ||||||||
Interest income increased 1.9 percentby $1 million for both the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with the corresponding prior-year periods.
INCOME TAXES
The Company recorded income tax provisions of $67 million and $211 million, which represent effective tax rates of 35.8 percent and 2.5 percent for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. These increases were primarily driven by Kids Foot Locker and Foot Locker U.S., which posted strong comparable-store gains. The children’s footwear category was a key driver across multiple banners, as basketball styles performed very well. This was offset, in part, by comparable-store sales declines in Lady Foot Locker and Champs Sports, while Footaction was essentially flat. Lady Foot Locker continued to experience sales declines, as management continues to close underperforming stores and redefine the product offerings. Test locations, including SIX:02 stores, are performing better than the balance of the chain and continue to be evaluated. Various initiatives are being implemented, including the launch of the SIX:02 e-commerce website during the third quarter, in order to optimize performance before a roll-out strategy is determined. The Company is working to improve the performance of the remaining Lady Foot Locker stores and is testing additional merchandise and store layout changes in an effort to improve future performance. Champs Sports’s comparable-store sales were negatively affected, in part, by the level of store remodel projects, which resulted in store closings for the period of time during remodeling. International sales were led by Foot Locker Europe, which experienced a mid-single digit comparable-store sales increase for both the thirteen weeks and thirty-nine weeks ended November 2, 2013. These increases were primarily related to sales of men’s basketball and running styles.
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Interest expense | $ | 3 | $ | 3 | $ | 8 | $ | 8 | |||||
| Interest income | (1) | (2) | (4) | (5) | |||||||||
| Interest expense, net | $ | 2 | $ | 1 | $ | 4 | $ | 3 | |||||
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation.
Included in thethe effective tax rate for the thirteen weeks ended November 1, 2014 is a tax reserve release of approximately $1 million due to the expiration of a foreign statute of limitation. Included in the thirteen weeks ended November 2, 2013 arewere tax reserve releases of $3 million due to foreign tax audit settlements.
The effective tax rate for the thirteen weeks ended October 27, 2012 included a tax reserve release of $9 million due to a foreign tax audit settlement. The
The effective tax rate, for the thirty-nine weeks ended October 27, 2012 included a tax benefit related to a Canadian provincial tax rate change that resulted in a $1 million increase in the value of the Company’s net deferred tax assets.
The Company currently expects theits fourth quarter tax rate to approximate 37 percent and its full year tax rate to be in the range of 36 to 37approximate 36.5 percent, excluding the effect of any additional nonrecurring items that may occur. The actual tax rates will primarily depend on the level and mix of income earned in the United States as compared with its international operations.
Net IncomeNET INCOME
For the thirteen weeks ended November 2, 2013,1, 2014, net income decreasedincreased by $2$16 million, or 1.915.4 percent, to $120 million as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 2, 2013,1, 2014, net income increased by $15$66 million, or 5.121.4 percent, to $374 million as compared with the corresponding prior-year period.
RECONCILIATION OF NON-GAAP MEASURES
The Company provides non-GAAP information to assist investors with the comparison of the Company’s results period over period. The following represents the reconciliation of the non-GAAP measures:
| Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||
| November 2, | October 27, | November 2, | October 27, | ||||||||||
| (in millions) | 2013 | 2012 | 2013 | 2012 | |||||||||
| Net income, as reported | $ | 104 | $ | 106 | $ | 308 | $ | 293 | |||||
| After-tax adjustments to arrive at non-GAAP: | |||||||||||||
| Runners Point Group acquisition and integration costs | 1 | — | 4 | — | |||||||||
| CCS store closure costs | — | — | 1 | — | |||||||||
| Canadian tax rate change | — | — | — | (1) | |||||||||
| Foreign tax audit settlements | (3) | (9) | (3) | (9) | |||||||||
| Net income, non-GAAP | $ | 102 | $ | 97 | $ | 310 | $ | 283 | |||||
| Diluted EPS, as reported | $ | 0.70 | $ | 0.69 | $ | 2.04 | $ | 1.90 | |||||
| Adjustments to arrive at non-GAAP: | |||||||||||||
| Runners Point Group acquisition and integration costs costs | — | — | 0.02 | — | |||||||||
| CCS store closure costs | — | — | 0.01 | — | |||||||||
| Canadian tax rate change | — | — | — | (0.01) | |||||||||
| Foreign tax audit settlements | (0.02) | (0.06) | (0.02) | (0.06) | |||||||||
| Diluted EPS, non-GAAP | $ | 0.68 | $ | 0.63 | $ | 2.05 | $ | 1.83 | |||||
The Company has excluded the following charges and costs to arrive at its non-GAAP results:
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| (in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Net income, as reported | $ | 120 | $ | 104 | $ | 374 | $ | 308 | ||||||||
| After-tax adjustments to arrive at non-GAAP: | ||||||||||||||||
| Runners Point Group acquisition and integration costs | 1 | 1 | 2 | 4 | ||||||||||||
| Impairment of intangibles | — | — | 2 | — | ||||||||||||
| Foreign tax audit settlements | (3 | ) | (3 | ) | ||||||||||||
| CCS store closure costs | — | — | — | 1 | ||||||||||||
| Net income, non-GAAP | $ | 121 | $ | 102 | $ | 378 | $ | 310 | ||||||||
| Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Diluted EPS, as reported | $ | 0.82 | $ | 0.70 | $ | 2.55 | $ | 2.04 | ||||||||
| Adjustments to arrive at non-GAAP: | ||||||||||||||||
| Runners Point Group acquisition and integration costs | 0.01 | — | 0.01 | 0.02 | ||||||||||||
| Impairment of intangibles | — | — | 0.02 | — | ||||||||||||
| Foreign tax audit settlement | — | (0.02 | ) | — | (0.02 | ) | ||||||||||
| CCS store closure costs | — | — | — | 0.01 | ||||||||||||
| Diluted EPS, non-GAAP | $ | 0.83 | $ | 0.68 | $ | 2.58 | $ | 2.05 | ||||||||
The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal tax rate to each of the respective items.
For the thirteen and thirty-nine weeks ended November 1, 2014, the Company recorded after-tax expenses of $1 million and $2 million, respectively, for costs associated with the acquisition of Runners Point Group.
In the second quarter of 2014, the Company recorded an after-tax charge of $1 million, or $0.01 per diluted share, related to the impairment of the CCS tradename, resulting from the transition of its skate business from CCS to its Eastbay brand. During the first quarter of 2014, the Company recorded an after-tax impairment charge of $1 million to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland.
For the thirteen and thirty-nine weeks ended November 2, 2013, the Company recorded $1 million, after-tax, and $4 million, after-tax, for costs associated with the acquisition of Runners Point Group, respectively. The Company also recorded $1 million, after-tax, or $0.01 per diluted share of costs related to the CCS store closures for the thirty-nine weeks ended November 2, 2013.
During the thirteen weeks ended November 2, 2013, the Company recorded benefits of $3 million or $0.02 per diluted share, to reflect the settlement of a foreign tax audit, which resulted in a reduction in tax reserves established in prior periods.
SEGMENT ANALYSIS
Athletic Stores
Athletic Stores segment sales increased by 5.3 percent to $1,521 million for the thirteen weeks ended November 1, 2014, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased 6.4 percent for the thirteen weeks ended November 1, 2014, as compared with the corresponding prior-year period. Comparable-store sales increased by 5.8 percent.
For the thirty nine-weeks ended November 1, 2014, Athletic Stores segment sales increased by 9.9 percent to $4,646 million as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased 9.7 percent and comparable-store sales increased by 6.1 percent. The results for the year-to-date period of 2014 include incremental sales of $141 million related to the Runners Point Group stores, which were acquired in the second quarter of the prior year. As of October 2014, the sales attributable to Runners Point Group are included in the computation of comparable-store sales.
Excluding Runners Point Group which was included in comparable sales for the month of October only, all divisions within this segment experienced comparable-store sales gains for both the quarter and year-to-date periods, led by domestic Foot Locker, Kids Foot Locker, and Footaction. Champs Sports experienced a slight increase in comparable-store sales for both the quarter and year-to-date periods. This division’s results continued to be negatively affected by a decline in apparel sales and a high number of stores being closed for remodels.
Basketball, lifestyle running, and children’s footwear were strong drivers of sales increases. Sales of basketball footwear were driven by Jordan and key marquee player styles, while lifestyle running shoes from Nike and Adidas had strong results. Additionally, children’s footwear continued to perform well across multiple divisions. Apparel sales were challenging primarily in Foot Locker Europe and Champs Sports, as customers have shifted away from certain lifestyle and licensed apparel programs, which had previously driven strong results.
Lady Foot Locker experienced a comparable-store sales increase for both the thirteen and thirty-nine weeks ended November 1, 2014. The shift into more performance-oriented assortments has been resonating with customers, as both footwear and apparel grew on a comparable-sales basis. Overall sales for Lady Foot Locker for both the quarter and year-to-date periods declined, as compared with the corresponding prior-year periods, primarily reflecting a net decline of 44 stores. The Company continues to test and evaluate merchandise assortments and store layouts focused on athletically active women.
In addition, the Athletic Stores segment continues to benefit from strong banner differentiation, which has created unique store designs and product assortments which have resonated with the customer and enhanced the shopping experience.
Athletic Stores division profit for the thirteen weeks ended November 1, 2014 increased to $181 million, or 11.9 percent, as a percentage of sales, as compared with division profit of $159 million, or 11.0 percent, as a percentage of sales, for the thirteen weeks ended November 2, 2013. For the thirty-nine weeks ended November 1, 2014 division profit increased to $577 million, or 12.4 percent, as a percentage of sales, as compared with division profit of $486 million, or 11.5 percent, as a percentage of sales, for the corresponding prior-year period.
Included in the results of the Athletic Stores segment for the thirty-nine weeks ended November 1, 2014 was a $1 million impairment charge related to the tradename for our stores operating in the Republic of Ireland, reflecting historical and projected underperformance. Included in the corresponding prior-year period of 2013 was a charge of $2 million recorded in connection with the closure of all CCS stores.
Overall, the improvement for both the quarter and year-to-date periods primarily reflected higher sales and effective control over variable expenses, such as store wages.
Direct-to-Customers
Direct-to-Customers sales increased by 18.0 percent to $210 million for the thirteen weeks ended November 1, 2014, as compared with the corresponding prior-year period. Comparable sales increased by 15.5 percent. Sales at each of the U.S. store-banner websites increased significantly, increasing collectively approximately 40 percent.
For the thirty-nine weeks ended November 1, 2014, sales increased by 22.2 percent to $594 million as compared with the corresponding prior-year period. Comparable sales were 15.9 percent. Direct-to-Customers sales included $19 million of incremental sales related to the e-commerce division of Runners Point Group, as the prior-year period included only a partial year. Excluding these sales, increases were primarily the result of continued strong sales performance of the Company’s U.S. store-banner websites.
Sales for both the quarter and year-to-date periods of the current year were led by sales of basketball and lifestyle running footwear.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended November 1, 2014 increased by $5 million to $25 million and increased by $14 million to $67 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, was 11.9 percent and 11.3 percent for the thirteen and thirty-nine weeks ended November 1, 2014, respectively, as compared with 11.2 percent and 10.9 percent for the corresponding prior-year periods. Included in the results of the Direct-to-Customers segment for the thirty-nine weeks ended November 1, 2014 was a $2 million impairment charge related to the CCS tradename, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner.
Gross margin for the Direct-to-Customers segment for both the quarter and year-to-date periods was negatively affected by the liquidation of CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profit was the result of strong flow-through of sales to profits. In addition, catalog expenses were lower due to a shift in the timing of certain catalogs to the fourth quarter as compared with the prior year.
Corporate Expense
Corporate expense consists of unallocated selling, general and administrative expenses, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $3 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively, thus reducing corporate expense. Excluding this change, as compared with the corresponding prior year periods, corporate expense increased by $3 million and $6 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively.
Acquisition and integration costs related to Runners Point Group were $1 million and $2 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively. This is compared with the corresponding prior-year periods of $1 million and $4 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively.
Excluding the allocation change and costs associated with Runners Point Group, corporate expense increased primarily related to increased incentive compensation and legal costs. During the first quarter of 2014, the Company increased its legal reserves by $2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary source of liquidity has been cash flow from operations, while the principal uses of cash have been to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, share repurchases, and interest payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents and future cash flow from operations and the Company’s current revolving credit facility will be adequate to fund these requirements.
From time to time 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. SuchShare repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effecteffects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.
Operating Activities
Net cash provided by operating activities was $327$439 million and $259$327 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, and October 27, 2012, respectively. These amounts reflect net income adjusted for non-cash items, non-cash impairment charges, and seasonal working capital changes. The increase in operating cash flow is primarilyimprovement reflects the result of strong sales during the first three quarters,Company’s earnings strength and improved working capital management. Additionally,improvements, partially offset by a $77 million increase in cash paid for income taxes declined $59during the thirty-nine weeks ended November 1, 2014.
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Investing Activities
Net cash used in investing activities was $129 million to $123and $221 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013.
InvestingFinancing Activities
Net cash used in investing activitiesfinancing was $221$240 million and $170$226 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, and October 27, 2012. During the second quarterrespectively. The Company repurchased 3,547,553 shares of 2013, the Company completed its purchase of Runners Point Groupcommon stock for $81$174 million net of cash acquired. In addition, the Company spent $157 million on capital expenditures as compared with $120 million in the corresponding prior-year period, primarily reflecting the Company’s initiative to update its existing stores. The Company’s current full-year forecast for capital expenditures is $206 million, of which $165 million relates to the updates of existing stores and new store openings and $41 million for the development of information systems and infrastructure. Current year investing activities also reflects net sales and maturities of short-term investments of $15 million, as compared with net purchases of $50 million of short-term investments in the corresponding prior-year period.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
For a description of our contractual obligations and other commercial commitments as compared with $9 million in the corresponding prior-year period.of February 1, 2014, see our 2013 Annual Report on Form 10-K. During the prior-year period,thirty-nine weeks ended November 1, 2014, there were no material changes outside the Company repurchased and retired $2 millionordinary course of its 8.5 percent debentures payable in 2022.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2013 Annual Report on Form 10-K for the fiscal year ended February 2, 2013 except for the addition10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
Descriptions of the criticalrecently issued accounting policy set forth below.
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 Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor), pandemics and similar major health concerns, unseasonable weather, further deterioration of global financial markets, economic conditions worldwide, further deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.
For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors”
disclosed in theThe Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation as of November 2, 20131, 2014 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended November 2, 2013,1, 2014, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.
Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or disposed of by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims.
Certain of the Company’s subsidiaries are defendants in a number of lawsuits filed in state and federal courts containing various class action allegations under federal or state wage and hour laws, including allegations concerning unpaid overtime, meal and rest breaks, and uniforms.
The Company is a defendant in one such case in which plaintiff alleges that the Company permitted unpaid off-the-clock hours in violation of the Fair Labor Standards Act and state labor laws. The case,Pereira v. Foot Locker, was filed in the U.S. District Court for the Eastern District of Pennsylvania in 2007. In his complaint, in addition to unpaid wage and overtime allegations, plaintiff seeks compensatory and punitive damages, injunctive relief, and attorneys’ fees and costs. In 2009, the Court conditionally certified a nationwide collective action. During the course of 2010, notices were sent to approximately 81,888 current and former employees of the Company offering them the opportunity to participate in the class action, and approximately 5,027 have opted in.
The Company is a defendant in additional purported wage and hour class actions that assert claims similar to those asserted inPereira and seek similar remedies. With the exception ofHill v. Foot Locker filed in state court in Illinois,Kissinger v. Foot Locker filed in state court of California,Ghattas v. Foot Locker filed in state court of California, and Cortes v. Foot Locker filed in federal court ofin New York, andMcGlothin v. Foot Locker filed in state court in California, all of these actions were consolidated by the United States Judicial Panel on Multidistrict Litigation withPereiraunder the captionIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigation. The consolidated cases are in the discovery stages of proceedings. InHill v. Foot Locker, in May 2011, the court granted plaintiffs’ motion for certification of an opt-out class covering certain Illinois employees only. The Company's motion for leave to appeal was denied. The Company has had and may in the futurehave discussions with plaintiffs’ counsel in an attempt to determine whether it will be possibleplaintiffs have entered into a proposed settlement agreement to resolve the consolidated cases, Hill andHillCortes,. Meanwhile, the Companythat is vigorously defending these class actions. In Ghattas, thesubject to court has given final approval for a settlement of the action. Due to the inherent uncertainties of such matters, and because fact and expert discovery have not been completed, the Company is currently unable to make an estimate of the range of loss.
The Company and the Company’s U.S. retirement plan are defendants in a purported class action (Osberg v. Foot Locker, filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff asserted claims for: (a) breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA); (b) violation of the statutory provisions governing the content of the Summary Plan Description; (c) violation of the notice provision of Section 204(h) of ERISA; and (d) violation of ERISA’s age discrimination provisions. In September 2009, the court granted the Company's motion to dismiss the Section 204(h) claim and the age discrimination claim. In December 2012, the court granted the Company’s motion for summary judgment on the remaining two claims, dismissing the action. Plaintiff has appealed to the U.S. Court of Appeals for the 2ndSecond Circuit, which appeal is currently pending. Becauseissued a Summary Order on February 13, 2014 that affirmed the judgment of the inherent uncertaintiesDistrict Court in part, and vacated and remanded in part. In September 2014, the District Court certified the class and reinstated the claim alleging violation. Additionally, the District Court certified a class with respect to Plaintiff’s breach of such mattersfiduciary duty claim and also reinstated the current statusclaim alleging violation of this case, the statutory provisions governing the content of the Summary Plan Description. The district court thereafter issued a second ruling certifying a class for the Summary Plan Description Claim. The Company is currently unableseeking leave to make an estimateappeal both class certification rulings to the U.S. Court of loss or range of lossAppeals for this case.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, includingIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigation,Hill, Cortes, Kissinger, Ghattas,McGlothin,andOsberg,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.
There were no material changes to the risk factors disclosed in the 20122013 Annual Report on Form 10-K,
The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended November 2, 2013.
| Date Purchased | Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Approximate Dollar Value of Shares that may yet be Purchased Under the Program (2) | |||||||
| August 4, 2013 through August 31, 2013 | 170,000 | $ | 32.58 | 170,000 | $ | 494,461,596 | |||||
| September 1, 2013 through October 5, 2013 | 1,728,743 | $ | 33.07 | 1,728,743 | $ | 437,299,251 | |||||
| October 6, 2013 through November 2, 2013 | 129,206 | $ | 32.76 | 124,435 | $ | 433,227,849 | |||||
| 2,027,949 | $ | 33.01 | 2,023,178 | ||||||||
| Date Purchased | Total Number of Shares Purchased(1) | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | Approximate Dollar Value of Shares that may yet be Purchased Under the Program(2) | ||||||||||||
| August 3, 2014 through August 30, 2014 | 3,000 | $ | 47.99 | 3,000 | $ | 234,266,856 | ||||||||||
| August 31, 2014 through October 4, 2014 | 480,000 | $ | 56.79 | 480,000 | $ | 207,008,354 | ||||||||||
| October 5, 2014 through November 1, 2014 | 200,000 | $ | 54.51 | 200,000 | $ | 196,107,226 | ||||||||||
| 683,000 | $ | 56.08 | 683,000 | |||||||||||||
(1) | These columns |
(2) | On February 20, 2013, the Company’s Board of Directors approved a |
| Item 6. Exhibits | |
| (a) | Exhibits |
| The exhibits that are in this report immediately follow the index. | |
27 |
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.
| FOOT LOCKER, INC. | |
| Date: December | (Company) |
| /s/ Lauren B. Peters | |
| LAUREN B. PETERS | |
| Executive Vice President and Chief Financial Officer |
28 |
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. | ||
Item 601 | Description | |
| †10.1 | Amendment, dated November 6, 2014, to Employment Agreement, dated June 25, 2009, by and between Ken C. Hicks and the Company (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated November 3, 2014, filed by the Registrant with the SEC on November 7, 2014). | |
| †10.2 | Employment Agreement, dated November 6, 2014, by and between Richard A. Johnson and the Company (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K, dated November 3, 2014, filed by the Registrant with the SEC on November 7, 2014) | |
| 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. | |
| 32.1 | 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. | |
XBRL Instance Document. | ||
| 101.SCH | XBRL Taxonomy Extension Schema. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
| † | Management contract or compensatory plan or arrangement. |
| 29 |