UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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: NovemberAugust 1, 20142015
OR
¨ | 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 name of Registrantregistrant as specified in its charter)
New York | 13-3513936 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
112 West 34th Street, New York, New York 10120
(Address of Principal Executive Offices)principal executive offices, Zip Code)
(212) 720-3700(212-720-3700)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant
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” 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 þ
The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding as of November 28, 2014 was 142,086,468
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ |
Number of shares of Common Stock outstanding as of August 28, 2015: 139,381,505 |
FOOT LOCKER, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except shares)
November 1, | November 2, | February 1, | August 1, | August 2, | January 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2015 | 2014 | 2015 | |||||||||||||||||||
(Unaudited) | (Unaudited) | * | (Unaudited) | (Unaudited) | * | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 916 | $ | 764 | $ | 858 | $ | 970 | $ | 957 | $ | 967 | ||||||||||||
Short-term investments | — | 32 | 9 | |||||||||||||||||||||
Merchandise inventories | 1,324 | 1,316 | 1,220 | 1,317 | 1,335 | 1,250 | ||||||||||||||||||
Other current assets | 244 | 208 | 263 | 268 | 260 | 239 | ||||||||||||||||||
2,484 | 2,320 | 2,350 | 2,555 | 2,552 | 2,456 | |||||||||||||||||||
Property and equipment, net | 613 | 589 | 590 | 644 | 604 | 620 | ||||||||||||||||||
Deferred taxes | 237 | 257 | 241 | 222 | 247 | 221 | ||||||||||||||||||
Goodwill | 160 | 163 | 163 | 156 | 162 | 157 | ||||||||||||||||||
Other intangible assets, net | 56 | 70 | 67 | 46 | 61 | 49 | ||||||||||||||||||
Other assets | 68 | 78 | 76 | 81 | 72 | 74 | ||||||||||||||||||
$ | 3,618 | $ | 3,477 | $ | 3,487 | $ | 3,704 | $ | 3,698 | $ | 3,577 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 287 | $ | 310 | $ | 263 | $ | 359 | $ | 392 | $ | 301 | ||||||||||||
Accrued and other liabilities | 358 | 330 | 360 | 380 | 356 | 393 | ||||||||||||||||||
Current portion of capital lease obligations | 3 | 3 | 3 | 2 | 3 | 2 | ||||||||||||||||||
648 | 643 | 626 | 741 | 751 | 696 | |||||||||||||||||||
Long-term debt and obligations under capital leases | 132 | 137 | 136 | 130 | 134 | 132 | ||||||||||||||||||
Other liabilities | 236 | 231 | 229 | 254 | 231 | 253 | ||||||||||||||||||
Total liabilities | 1,016 | 1,011 | 991 | 1,125 | 1,116 | 1,081 | ||||||||||||||||||
Shareholders’ equity | ||||||||||||||||||||||||
Common stock and paid-in capital: 170,469,434; 168,675,093; and 169,039,095 shares, respectively | 971 | 905 | 921 | |||||||||||||||||||||
Common stock and paid-in capital: 172,536,861; 170,311,573 and 170,529,401 shares, respectively | 1,060 | 961 | 979 | |||||||||||||||||||||
Retained earnings | 2,665 | 2,295 | 2,387 | 3,013 | 2,577 | 2,780 | ||||||||||||||||||
Accumulated other comprehensive loss | (221 | ) | (170 | ) | (186 | ) | (338 | ) | (182 | ) | (319 | ) | ||||||||||||
Less: Treasury stock at cost: 27,323,176; 22,035,758; and 23,612,273 shares, respectively | (813 | ) | (564 | ) | (626 | ) | ||||||||||||||||||
Less: Treasury stock at cost: 33,207,045; 26,640,176 and 29,665,213 shares, respectively | (1,156 | ) | (774 | ) | (944 | ) | ||||||||||||||||||
Total shareholders’ equity | 2,602 | 2,466 | 2,496 | 2,579 | 2,582 | 2,496 | ||||||||||||||||||
$ | 3,618 | $ | 3,477 | $ | 3,487 | $ | 3,704 | $ | 3,698 | $ | 3,577 |
See Accompanying Notes to Condensed Consolidated Financial Statements. |
* The balance sheet at |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except per share amounts)
Thirteen weeks ended | Thirty-nine weeks ended | Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||||||||||||||||
November 1, | November 2, | November 1, | November 2, | August 1, | August 2, | August 1, | August 2, | |||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||
Sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | $ | 1,695 | $ | 1,641 | $ | 3,611 | $ | 3,509 | ||||||||||||||||
Cost of sales | 1,157 | 1,085 | 3,495 | 3,163 | 1,142 | 1,116 | 2,388 | 2,338 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 353 | 340 | 1,051 | 969 | 331 | 343 | 676 | 698 | ||||||||||||||||||||||||
Depreciation and amortization | 34 | 35 | 106 | 97 | 36 | 36 | 71 | 72 | ||||||||||||||||||||||||
Impairment and other charges | — | — | 3 | 2 | ||||||||||||||||||||||||||||
Impairment charge | — | 2 | — | 3 | ||||||||||||||||||||||||||||
Interest expense, net | 1 | 2 | 3 | 4 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||||
Other income | (1 | ) | — | (3 | ) | (3 | ) | |||||||||||||||||||||||||
Other income, net | — | (1 | ) | (1 | ) | (2 | ) | |||||||||||||||||||||||||
1,544 | 1,462 | 4,655 | 4,232 | 1,510 | 1,497 | 3,136 | 3,111 | |||||||||||||||||||||||||
Income before income taxes | 187 | 160 | 585 | 482 | 185 | 144 | 475 | 398 | ||||||||||||||||||||||||
Income tax expense | 67 | 56 | 211 | 174 | 66 | 52 | 172 | 144 | ||||||||||||||||||||||||
Net income | $ | 120 | $ | 104 | $ | 374 | $ | 308 | $ | 119 | $ | 92 | $ | 303 | $ | 254 | ||||||||||||||||
Basic earnings per share | $ | 0.84 | $ | 0.70 | $ | 2.59 | $ | 2.06 | ||||||||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.85 | $ | 0.63 | $ | 2.17 | 1.75 | |||||||||||||||||||||||||
Weighted-average common shares outstanding | 143.6 | 147.7 | 144.5 | 149.2 | 139.6 | 144.5 | 139.8 | 145.0 | ||||||||||||||||||||||||
Diluted earnings per share | $ | 0.82 | $ | 0.70 | $ | 2.55 | $ | 2.04 | ||||||||||||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||||||||||
Net income | $ | 0.84 | $ | 0.63 | $ | 2.14 | $ | 1.73 | ||||||||||||||||||||||||
Weighted-average common shares assuming dilution | 145.7 | 149.5 | 146.6 | 151.2 | 141.3 | 146.4 | 141.7 | 147.0 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in millions)
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 |
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income | $ | 119 | $ | 92 | $ | 303 | $ | 254 | ||||||||
Other comprehensive income (loss), net of income tax | ||||||||||||||||
Foreign currency translation adjustment: | ||||||||||||||||
Translation adjustment arising during the period, net of income tax | (23 | ) | (19 | ) | (22 | ) | — | |||||||||
Cash flow hedges: | ||||||||||||||||
Change in fair value of derivatives, net of income tax | — | (1 | ) | (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, $2, and $2 million, respectively | 3 | 2 | 4 | 4 | ||||||||||||
Comprehensive income | $ | 99 | $ | 74 | $ | 284 | $ | 258 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Thirty-nine weeks ended | Twenty-six weeks ended | |||||||||||||||
November 1, | November 2, | August 1, | August 2, | |||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
From Operating Activities: | ||||||||||||||||
Net income | $ | 374 | $ | 308 | $ | 303 | $ | 254 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Non-cash impairment charges | 3 | — | ||||||||||||||
Non-cash impairment charge | — | 3 | ||||||||||||||
Depreciation and amortization | 106 | 97 | 71 | 72 | ||||||||||||
Share-based compensation expense | 18 | 19 | 11 | 12 | ||||||||||||
Qualified pension plan contributions | (2 | ) | (2 | ) | — | (2 | ) | |||||||||
Excess tax benefits on share-based compensation | (11 | ) | (7 | ) | (24 | ) | (9 | ) | ||||||||
Change in assets and liabilities: | ||||||||||||||||
Merchandise inventories | (124 | ) | (108 | ) | (75 | ) | (115 | ) | ||||||||
Accounts payable | 28 | (3 | ) | 61 | 130 | |||||||||||
Accrued and other liabilities | (7 | ) | (44 | ) | (16 | ) | 4 | |||||||||
Other, net | 54 | 67 | 3 | 13 | ||||||||||||
Net cash provided by operating activities | 439 | 327 | 334 | 362 | ||||||||||||
From Investing Activities: | ||||||||||||||||
Lease termination gains | — | 2 | ||||||||||||||
Capital expenditures | (116 | ) | (93 | ) | ||||||||||||
Sales and maturities of short-term investments | 9 | 38 | — | 9 | ||||||||||||
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 | ) | (116 | ) | (84 | ) | ||||||||
From Financing Activities: | ||||||||||||||||
Purchase of treasury shares | (174 | ) | (167 | ) | (205 | ) | (136 | ) | ||||||||
Dividends paid | (96 | ) | (89 | ) | ||||||||||||
Dividends paid on common stock | (70 | ) | (64 | ) | ||||||||||||
Issuance of common stock | 17 | 19 | 38 | 13 | ||||||||||||
Treasury stock issued under employee stock purchase plan | 5 | 3 | 5 | 5 | ||||||||||||
Excess tax benefits on share-based compensation | 11 | 8 | 24 | 9 | ||||||||||||
Repayments of long-term debt and obligations under capital leases | (3 | ) | — | |||||||||||||
Repayments of obligations under capital leases | (1 | ) | (2 | ) | ||||||||||||
Net cash used in financing activities | (240 | ) | (226 | ) | (209 | ) | (175 | ) | ||||||||
Effect of exchange rate fluctuations on Cash and Cash Equivalents | (12 | ) | 4 | (6 | ) | (4 | ) | |||||||||
Net change in Cash and Cash Equivalents | 58 | (116 | ) | 3 | 99 | |||||||||||
Cash and Cash Equivalents at beginning of year | 858 | 880 | 967 | 858 | ||||||||||||
Cash and Cash Equivalents at end of interim period | $ | 916 | $ | 764 | $ | 970 | $ | 957 | ||||||||
Cash paid during the period: | ||||||||||||||||
Interest | $ | 5 | $ | 5 | $ | 5 | $ | 5 | ||||||||
Income taxes | $ | 200 | $ | 123 | $ | 178 | $ | 155 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of 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 January 31, 201530, 2016 and of the fiscal year ended February 1, 2014.January 31, 2015. 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’sFoot Locker, Inc.’s (the “Company”) Form 10-K for the year ended February 1, 2014,January 31, 2015, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2014.30, 2015.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components 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 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014, with earlier adoption permitted. The adoption of this guidance did not have a significant effect on our consolidated financial position, results of operations or cash flows.
In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification 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 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 June 2014, FASB issued ASU 2014-12,Accounting for Share-Based Payments When the Terms 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 that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value 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 consolidated financial position, results of operations or cash flows.
Other recentlyRecently 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.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 Company recorded a charge of $1 million to fully write down the tradename related to the Company’s stores in the Republic of Ireland, reflecting historical and projected underperformance. Additionally, during the second quarter of 2014, the Company announced a plan to shut down its e-commerce skate business, CCS.com, and transition customers to its Eastbay brand. Accordingly, an impairment charge of $2 million was recorded to write down the value of the CCS tradename. The liquidation was substantially completed during the third quarter ended November 1, 2014. This closure does not meet the definition of a discontinued operation as it is not considered a strategic shift that will have a major effect on operations.
3.Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of November 1, 2014, theThe Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division profit.results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense. Sales and division profit for the Company’s reportable segments for the thirteen weeks and thirty-nine weeks ended November 1, 2014 and November 2, 2013 are presented below.
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||||||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||
Thirteen weeks ended | Thirty-nine weeks ended | ($ in millions) | ||||||||||||||||||||||||||||||
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 | $ | 1,503 | $ | 1,468 | $ | 3,184 | $ | 3,125 | ||||||||||||||||
Direct-to-Customers | 210 | 178 | 594 | 486 | 192 | 173 | 427 | 384 | ||||||||||||||||||||||||
Total sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | $ | 1,695 | $ | 1,641 | $ | 3,611 | $ | 3,509 | ||||||||||||||||
Operating Results | ||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Athletic Stores(1) | $ | 181 | $ | 159 | $ | 577 | $ | 486 | $ | 176 | $ | 149 | $ | 443 | $ | 396 | ||||||||||||||||
Direct-to-Customers(2) | 25 | 20 | 67 | 53 | 27 | 14 | 67 | 42 | ||||||||||||||||||||||||
Division profit | 206 | 179 | 644 | 539 | 203 | 163 | 510 | 438 | ||||||||||||||||||||||||
Less: Corporate expense, net | 19 | 17 | 59 | 56 | 17 | 19 | 34 | 40 | ||||||||||||||||||||||||
Operating profit | 187 | 162 | 585 | 483 | 186 | 144 | 476 | 398 | ||||||||||||||||||||||||
Other income (3) | 1 | — | 3 | 3 | — | 1 | 1 | 2 | ||||||||||||||||||||||||
Interest expense, net | 1 | 2 | 3 | 4 | 1 | 1 | 2 | 2 | ||||||||||||||||||||||||
Income before income taxes | $ | 187 | $ | 160 | $ | 585 | $ | 482 | $ | 185 | $ | 144 | $ | 475 | $ | 398 |
(1) | Included in the |
(2) | Included in both the |
(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. |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.3. 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 review of goodwill and intangible assets with indefinite lives performed during the first quarter of 20142015 did not result in impairment charges as the fair valuerecognition of each of the reporting units substantially exceeded 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 of the CCS tradename. Additionally, during the first quarter of 2014, the Company recorded a non-cash impairment charge of $1 million to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland, reflecting historical and projected underperformance.impairment.
5
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Goodwill – (continued)
The following table provides a summary of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations.
Goodwill | November 1, | November 2, | February 1, | |||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||||||||||||||
August 1, | August 2, | January 31, | ||||||||||||||||||||||
2015 | 2014 | 2015 | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Athletic Stores | $ | 19 | $ | 21 | $ | 21 | $ | 17 | $ | 20 | $ | 17 | ||||||||||||
Direct-to-Customers | 141 | 142 | 142 | 139 | 142 | 140 | ||||||||||||||||||
$ | 160 | $ | 163 | $ | 163 | $ | 156 | $ | 162 | $ | 157 |
4. Other Intangible Assets, net
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
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 |
August 1, 2015 | August 2, 2014 | January 31, 2015 | ||||||||||||||||||||||||||||||||||
($ in millions) | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort. | Net Value | |||||||||||||||||||||||||||
Amortized intangible assets:(1), (2) | ||||||||||||||||||||||||||||||||||||
Lease acquisition costs | $ | 121 | $ | (111 | ) | $ | 10 | $ | 152 | $ | (136 | ) | $ | 16 | $ | 128 | $ | (116 | ) | $ | 12 | |||||||||||||||
Trademarks | 21 | (12 | ) | 9 | 21 | (11 | ) | 10 | 21 | (12 | ) | 9 | ||||||||||||||||||||||||
Favorable leases | 7 | (4 | ) | 3 | 8 | (4 | ) | 4 | 7 | (4 | ) | 3 | ||||||||||||||||||||||||
$ | 149 | $ | (127 | ) | $ | 22 | $ | 181 | $ | (151 | ) | $ | 30 | $ | 156 | $ | (132 | ) | $ | 24 | ||||||||||||||||
Indefinite life intangible assets:(1) | ||||||||||||||||||||||||||||||||||||
Runners Point Group trademarks | 24 | 30 | 25 | |||||||||||||||||||||||||||||||||
Other trademarks | — | 1 | — | |||||||||||||||||||||||||||||||||
$ | 24 | $ | 31 | $ | 25 | |||||||||||||||||||||||||||||||
Other intangible assets, net | $ | 46 | $ | 61 | $ | 49 |
(1) |
(2) |
The $11 million change in goodwill and other intangible assets forFor the thirty-ninetwenty-six week period ended NovemberAugust 1, 2014,2015, activity included $5amortization of $2 million of amortization expense, $3 million related to the impairment charges noted above, and a $4$1 million decrease related to foreign currency exchange fluctuations. This was offset by $1 million of lease acquisition additions related to Foot Locker Europe, which are being amortized over a weighted-average
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Amortization expense | $ | 1 | $ | 1 | $ | 2 | $ | 3 |
Estimated future amortization expense for finite life of 9 years.intangible assets is as follows:
($ in millions) | ||||
Remainder of 2015 | $ | 2 | ||
2016 | 4 | |||
2017 | 3 | |||
2018 | 3 | |||
2019 | 3 | |||
2020 | 2 |
6
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.Goodwill and Other Intangible Assets – (continued)
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 2014 | $ | 1 | ||
2015 | 4 | |||
2016 | 4 | |||
2017 | 4 | |||
2018 | 3 | |||
2019 | 3 |
5.Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was(“AOCL”), net of tax, is comprised of the following:
November 1, | November 2, | February 1, | August 1, | August 2, | January 31, | |||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||||||||||||||
2015 | 2014 | 2015 | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Foreign currency translation adjustments | $ | 15 | $ | 77 | $ | 57 | $ | (97 | ) | $ | 57 | $ | (75 | ) | ||||||||||
Cash flow hedges | (1 | ) | 1 | (2 | ) | (4 | ) | (2 | ) | (3 | ) | |||||||||||||
Unrecognized pension cost and postretirement benefit | (234 | ) | (247 | ) | (240 | ) | (236 | ) | (236 | ) | (240 | ) | ||||||||||||
Unrealized loss on available-for-sale security | (1 | ) | (1 | ) | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
$ | (221 | ) | $ | (170 | ) | $ | (186 | ) | $ | (338 | ) | $ | (182 | ) | $ | (319 | ) |
The changes in accumulated other comprehensive lossAOCL for the thirty-ninetwenty-six weeks ended NovemberAugust 1, 20142015 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 January 31, 2015 | $ | (75 | ) | (3 | ) | (240 | ) | (1 | ) | $ | (319 | ) | ||||||||
OCI before reclassification | (22 | ) | (1 | ) | — | — | (23 | ) | ||||||||||||
Reclassified from AOCL | — | — | 4 | — | 4 | |||||||||||||||
Other comprehensive income/(loss) | (22 | ) | (1 | ) | 4 | — | (19 | ) | ||||||||||||
Balance as of August 1, 2015 | $ | (97 | ) | (4 | ) | (236 | ) | (1 | ) | $ | (338 | ) |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.Accumulated Other Comprehensive Loss – (continued)
Reclassifications from accumulated other comprehensive lossAOCL for the thirty-ninetwenty-six weeks ended NovemberAugust 1, 20142015 were as follows:
(in millions) | ||||||||
($ in millions) | ||||||||
Amortization of actuarial (gain) loss: | ||||||||
Pension benefits - amortization of actuarial loss | $ | 12 | $ | 7 | ||||
Postretirement benefits - amortization of actuarial gain | (2 | ) | (1 | ) | ||||
Net periodic benefit cost (seeNote 9) | 10 | 6 | ||||||
Income tax expense | (4 | ) | ||||||
Income tax benefit | (2 | ) | ||||||
Net of tax | $ | 6 | $ | 4 |
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 practice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 7,Fair Value Measurements.
Derivative Holdings Designated as Hedges
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately.
7
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Financial Instruments – (continued)
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 the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of Accumulated Other Comprehensive Loss (“AOCL”)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’s hedged forecasted transactions are less than 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 the foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was not significant for the thirteen weeks ended August 1, 2015 and was a $1 million loss for both the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014. The net change2015, and therefore increased AOCL. At August 1, 2015, there was a $4 million loss included in fair value was not significant for the prior-year periods.
AOCL. The notional value of the contracts outstanding at NovemberAugust 1, 20142015 was $77$82 million, and these contracts extend through JanuaryJuly 2016.
Derivative Holdings Not Designated as Non-HedgesHedges
The Company enters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign currency-denominatedforeign-currency denominated merchandise purchases and intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately within selling, general and administrative expenses. The net change in fair value was not significantresulted in income of $1 million and $2 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively. For the thirteen weeks ended November 1,August 2, 2014, andthe net change in fair value resulted in $1 million of income for the thirty-nine weeks ended November 1, 2014. The net change in fair valueand was not significant for the prior-year periods.twenty-six weeks ended August 2, 2014. The notional value of the contracts outstanding at NovemberAugust 1, 20142015 was $18$105 million and these contracts extend through December 2014.November 2015.
The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as non-hedges,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 for any of the prior-year periods.periods presented. No such contracts were outstanding at August 1, 2015.
Additionally, the Company enters into diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented. The notional value of the contractcontracts outstanding at NovemberAugust 1, 20142015 was $31$2 million and this contract extendsthese contracts extend through January 2015.May 2016.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Financial Instruments – (continued)
Fair Value of Derivative Contracts
The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract, represents the fair value of the Company’s derivative contracts:contract:
Balance Sheet | November 1, | November 2, | February 1, | Balance Sheet | August 1, | August 2, | January 31, | |||||||||||||||||||||
(in millions) | Caption | 2014 | 2013 | 2014 | ||||||||||||||||||||||||
($ in millions) | Caption | 2015 | 2014 | 2015 | ||||||||||||||||||||||||
Hedging Instruments: | ||||||||||||||||||||||||||||
Foreign exchange forward contracts | Current assets | $ | — | $ | 1 | $ | — | Current liabilities | $ | 5 | $ | 3 | $ | 4 | ||||||||||||||
Non-Hedging Instruments: | ||||||||||||||||||||||||||||
Foreign exchange forward contracts | Current liabilities | $ | 2 | $ | — | $ | 2 | Current assets | $ | 1 | $ | — | $ | — | ||||||||||||||
Foreign exchange forward contracts | Current liabilities | $ | — | $ | — | $ | 1 |
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. |
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 1, 2014 | At November 2, 2013 | At February 1, 2014 | At August 1, 2015 | At August 2, 2014 | At January 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
($ 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 | — | — | 6 | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts | — | — | — | — | 1 | — | — | — | — | — | 1 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | — | $ | 6 | $ | — | $ | — | $ | 39 | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | 7 | $ | — | $ | — | 6 | $ | — | $ | — | $ | 6 | $ | — | |||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts | — | $ | 2 | — | — | — | — | — | 2 | — | — | 5 | — | — | 3 | — | — | 5 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | 5 | $ | — | $ | — | $ | 3 | $ | — | $ | — | $ | 5 | $ | — |
Available-for-sale securitiesSecurities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. The Company’s short-term investments matured during the second quarter of 2014. In the prior periods presented, these investments represented corporate bonds with maturity dates within one year from the purchase date. These securities were valued using model-derived valuations in which all significant inputs or significant value-drivers were observable in active markets and, therefore, were classified as Level 2 instruments.
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.volatility and, therefore, are classified as Level 2 instruments.
There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.
9
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Fair Value Measurements- (continued)
The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:
November 1, | November 2, | February 1, | August 1, | August 2, | January 31, | |||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||||||||||||||
2015 | 2014 | 2015 | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Carrying value | $ | 135 | $ | 140 | $ | 139 | $ | 132 | $ | 137 | $ | 134 | ||||||||||||
Fair value | $ | 161 | $ | 157 | $ | 159 | $ | 157 | $ | 163 | $ | 163 |
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-driversvalue drivers are observable in active markets and, therefore, isare 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.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.Earnings Per Share
The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.
The computation of basic and diluted earnings 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 |
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Weighted-average common shares outstanding | 139.6 | 144.5 | 139.8 | 145.0 | ||||||||||||
Effect of Dilution: | ||||||||||||||||
Stock options and awards | 1.7 | 1.9 | 1.9 | 2.0 | ||||||||||||
Weighted-average common shares assuming dilution | 141.3 | 146.4 | 141.7 | 147.0 |
The number of options excluded from the computation was not significant for the thirteen and thirty-nine weeks ended November 1, 2014. Options to purchase 1.10.7 million and 0.90.8 million shares of common stock were not included in the computation for the thirteen and thirty-nine weeks ended NovemberAugust 1, 2015 and August 2, 2013,2014, respectively. Options to purchase 0.6 million and 0.5 million shares of common stock were not included in the computation for the twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively. These options were not included because the effect would have been antidilutive. Contingently issuable shares of 0.4 million have not been included as the vesting conditions have not been satisfied as of both NovemberAugust 1, 20142015 and NovemberAugust 2, 2013.2014.
9.Pension and Postretirement Plans
The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition, the Company has a defined benefit pension plan covering certain individuals of the Runners Point Group.
In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.
10
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Pension and Postretirement Plans- (continued)
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 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.
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||
Thirteen weeks | Twenty-six weeks | Thirteen weeks | Twenty-six weeks | |||||||||||||||||||||||||||||
ended | ended | ended | ended | |||||||||||||||||||||||||||||
August 1, | August 2, | August 1, | August 2, | August 1, | August 2, | August 1, | August 2, | |||||||||||||||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||||||
Service cost | $ | 4 | $ | 4 | $ | 8 | $ | 8 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Interest cost | 6 | 7 | 12 | 14 | 1 | — | 1 | — | ||||||||||||||||||||||||
Expected return on plan assets | (10 | ) | (9 | ) | (19 | ) | (19 | ) | — | — | — | — | ||||||||||||||||||||
Amortization of net loss (gain) | 4 | 3 | 7 | 7 | (1 | ) | — | (1 | ) | (1 | ) | |||||||||||||||||||||
Net benefit expense (income) | $ | 4 | $ | 5 | $ | 8 | $ | 10 | $ | — | $ | — | $ | — | $ | (1 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.Pension and Postretirement Plans – (continued)
During the first quarters of both 2014 and 2013, the CompanyNo contributions were made contributions of $2 million to the Canadian qualified plan. No pension contributions to the U.S. qualified plan were madeplans during the thirty-ninethirteen and twenty-six weeks ended NovemberAugust 1, 2014 and November 2, 2013.2015. The Company continually evaluates the amount and timing of any future contributions. AdditionalDuring the third quarter of 2015, the Company contributed $4 million to the U.S. qualified plan. The Company currently does not expect any further pension plan contributions will depend onduring the plan asset performance and other factors.current year.
10.Share-Based Compensation
Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans iswere as follows:
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 $11 million for the thirty-nine weeks ended November 1, 2014 and $8 million for the thirty-nine weeks ended November 2, 2013 and are classified as a financing activity within the Condensed Consolidated Statements of Cash Flows.
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Options and shares purchased under the employee stock purchase plan | $ | 3 | $ | 3 | $ | 6 | $ | 6 | ||||||||
Restricted stock and restricted stock units | 2 | 3 | 5 | 6 | ||||||||||||
Total share-based compensation expense | $ | 5 | $ | 6 | $ | 11 | $ | 12 | ||||||||
Tax benefit recognized | $ | 1 | $ | 2 | $ | 3 | $ | 4 | ||||||||
Excess income tax benefit from settled equity-classified share-based awards reported as a cash flow from financing activities | $ | 24 | $ | 9 |
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 | Stock Option Plans | Stock Purchase Plan | |||||||||||||||||||||||||||||
November 1, | November 2, | November 1, | November 2, | August 1, | August 2, | August 1, | August 2, | |||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||
Weighted-average risk free rate of interest | 2.12 | % | 1.02 | % | 0.14 | % | 0.17 | % | 1.51 | % | 2.11 | % | 0.19 | % | 0.15 | % | ||||||||||||||||
Expected volatility | 39 | % | 42 | % | 24 | % | 40 | % | 30 | % | 39 | % | 24 | % | 24 | % | ||||||||||||||||
Weighted-average expected award life | 6.1 years | 6.0 years | 1.0 year | 1.0 year | 6.0 years | 6.1 years | 1.0 year | 1.0 year | ||||||||||||||||||||||||
Dividend yield | 2.0 | % | 2.3 | % | 2.0 | % | 2.3 | % | 1.6 | % | 2.0 | % | 1.7 | % | 2.2 | % | ||||||||||||||||
Weighted-average fair value | $ | 14.91 | $ | 10.98 | $ | 7.11 | $ | 5.80 | $ | 16.01 | $ | 14.88 | $ | 9.53 | $ | 6.60 |
Compensation expense related to the Company’s stock option and stock purchase plans was $3 million and $9 million for both the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, there was $10 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.02 years.11
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-ninetwenty-six weeks ended NovemberAugust 1, 2014.2015:
(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.
Shares | Weighted- Average Term | Weighted-Average Price | ||||||||||
(in thousands, except price per share and weighted-average) term) | ||||||||||||
Options outstanding at the beginning of the year | 5,569 | $ | 25.89 | |||||||||
Granted | 682 | 62.11 | ||||||||||
Exercised | (1,672 | ) | 22.49 | |||||||||
Expired or cancelled | (51 | ) | 48.20 | |||||||||
Options outstanding at August 1, 2015 | 4,528 | 6.6 | $ | 32.35 | ||||||||
Options exercisable at August 1, 2015 | 3,305 | 5.7 | $ | 24.54 | ||||||||
Options vested and expected to vest at August 1, 2015 | 4,479 | 6.6 | $ | 32.09 | ||||||||
Options available for future grant at August 1, 2015 | 13,104 |
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 |
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Exercised | $ | 29 | $ | 4 | $ | 65 | $ | 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:
Twenty-six weeks ended | ||||||||||||||||
Thirty-nine weeks ended | August 1, | August 2, | ||||||||||||||
November 1, | November 2, | 2015 | 2014 | |||||||||||||
2014 | 2013 | ($ in millions) | ||||||||||||||
Outstanding | $ | 170 | $ | 74 | $ | 173 | $ | 130 | ||||||||
Outstanding and exercisable | $ | 138 | $ | 64 | $ | 152 | $ | 112 | ||||||||
Vested and expected to vest | $ | 169 | $ | 74 | $ | 172 | $ | 130 |
As of August 1, 2015, there was $11 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.6 years.
The cash received from option exercises for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 20142015 was $4$15 million and $17$38 million, respectively. The cash received from option exercises for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 was $4$3 million and $19$13 million, respectively. The total tax benefit realized from option exercises was $11 million and $25 million for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014, was $2 million and $7 million2015, respectively, and was $1 million and $5 million for the corresponding prior-year periods.
12
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 NovemberAugust 1, 2014:2015:
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 |
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Remaining Contractual Life | Weighted- Exercise Price | Number Exercisable | Weighted-Average Exercise Price | |||||||||||||||||
(in thousands, except prices per share and contractual life) | ||||||||||||||||||||||
$ 9.85 to $18.80 | 872 | 4.1 | $ | 13.28 | 872 | $ | 13.28 | |||||||||||||||
$ 18.84 to $24.75 | 1,054 | 5.1 | $ | 19.68 | 1,054 | $ | 19.68 | |||||||||||||||
$ 30.92 to $36.59 | 1,249 | 7.0 | $ | 32.79 | 1,075 | $ | 32.56 | |||||||||||||||
$ 45.08 to $62.11 | 1,353 | 9.1 | $ | 54.10 | 304 | $ | 45.38 | |||||||||||||||
4,528 | 6.6 | $ | 32.35 | 3,305 | $ | 24.54 |
Restricted Stock and Restricted Stock Units
Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. AwardsRSU awards are made to executives outside of the United States and to nonemployee directorsdirectors. Additionally, RSU awards are made in connection with the form of restricted stock units.Company’s long-term incentive program. Each restricted stock unitRSU represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. There were 734,295581,713 and 997,542 restricted stock units742,514 RSU awards outstanding as of NovemberAugust 1, 20142015 and NovemberAugust 2, 2013,2014, respectively.
Generally, awards fully vest after the passage of time, typically three years. However, restricted stock unit grantsRSU awards made in connection with the Company’s long-term incentive program vest after the attainment of both 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 that vest with the passage of time; for performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid on restricted stock units.RSU awards.
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. 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 sharesshare and unitsRSU activity for the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014 are2015 is summarized as follows:
(in thousands, except price per share) | Number of Shares | Weighted-Average Grant Date Fair Value per Share | ||||||||||||||
Number of Shares | Weighted-Average Grant Date Fair Value per Share | |||||||||||||||
(in thousands, except price per share) | ||||||||||||||||
Nonvested at the beginning of the year | 1,369 | $ | 27.20 | 1,038 | $ | 37.96 | ||||||||||
Granted | 320 | 45.24 | 126 | 61.61 | ||||||||||||
Vested | (649 | ) | 20.84 | (312 | ) | 32.33 | ||||||||||
Expired or cancelled | (42 | ) | 24.69 | (63 | ) | 38.10 | ||||||||||
Nonvested at November 1, 2014 | 998 | $ | 37.23 | |||||||||||||
Aggregate value (in millions) | $ | 37 | ||||||||||||||
Weighted-average remaining contractual life | 1.32 years | |||||||||||||||
Nonvested at August 1, 2015 | 789 | $ | 43.95 | |||||||||||||
Aggregate value ($ in millions) | $ | 35 | ||||||||||||||
Weighted-average remaining contractual life (in years) | 1.3 years |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
The weighted-averageweighted grant-date fair value per share was $45.24$61.61 and $34.59$45.24 for the thirty-ninetwenty-six weeks ended NovemberAugust 1, 20142015 and NovemberAugust 2, 2013,2014, respectively. The total value of awards for which restrictions lapsed for both the twenty-six weeks ended August 1, 2015 and August 2, 2014 was $10 million and $14 million, respectively. As of August 1, 2015, there was $13 million of total unrecognized compensation cost net of forfeitures related to nonvested restricted awards.
13
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Legal Proceedings
Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or disposed 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. InPereira v. Foot Locker, filed in the U.S. District Court for the Eastern District of Pennsylvania, the plaintiff alleged that the Company permitted unpaid off-the-clock hours in violation of the Fair Labor Standards Act and state labor laws and sought compensatory and punitive damages, injunctive relief, and attorneys’ fees and costs. Additional purported wage and hour class actions were filed against the Company 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 in California, andCortes v. Foot Locker filed in federal court in New York, 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 Company and plaintiffs entered into a settlement agreement resolvingHill and the consolidated cases, which was approved by the court during the thirty-nine weeks ended November 1, 2014second quarter of 2015.
The Company and November 2, 2013the Company’s U.S. retirement plan are defendants in a 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’s current claims are for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and violation of the statutory provisions governing the content of the Summary Plan Description. The trial was $14 millionheld in July 2015, and $9 million, respectively.the court has not yet delivered a decision.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, including Cortes, Kissinger,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. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered into that could adversely affect the Company’s operating results or cash flows in a particular period.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEWBusiness 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 divisionsformats that include Foot Locker, Lady Foot Locker, SIX:02, 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.Sidestep.
The Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites,and mobile 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, eastbayteamsales.com, as well as websites aligned with the brand names of its store banners (footlocker.com, footlocker.ca, footlocker.eu, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, runnerspoint.com, and six02.com)sidestep-shoes.com). Additionally, this segment includes the direct-to-customer subsidiary of Runners Point Group, which operates the websitessp24.com, a clearance website for runnerspoint.com, sidestep-shoes.com, and sp24.com.our European e-commerce business.
STORE COUNTStore Count
At NovemberAugust 1, 2014,2015, the Company operated 3,4743,419 stores as compared with 3,4733,423 and 3,5103,460 stores at February 1,January 31, 2015 and August 2, 2014, and November 2, 2013, respectively. During the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, the Company opened 7658 stores, remodeled or relocated 229120 stores, and closed 7562 stores.
A total of 7375 franchised stores were operating at NovemberAugust 1, 2014,2015, as compared with 7378 and 7274 stores at February 1,January 31, 2015 and August 2, 2014, and November 2, 2013, respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.
SALES AND OPERATING RESULTSSales
All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and havehad 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 effect 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 were included in the computation of comparable-store sales beginning October 2014.
The following table summarizes results by segment:
(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 |
Sales increased by $109$54 million, or 6.73.3 percent, to $1,731$1,695 million for the thirteen weeks ended NovemberAugust 1, 2014,2015, from $1,622$1,641 million for the thirteen weeks ended NovemberAugust 2, 2013.2014. For the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, sales of $5,240$3,611 million increased 11.22.9 percent from sales of $4,714$3,509 million for the thirty-ninetwenty-six week period ended NovemberAugust 2, 2013. Excluding Runners Point Group, which was acquired during the second quarter of 2013, total sales for the year-to-date period increased 7.8 percent.2014.
Excluding the effect of foreign currency fluctuations, total sales for the thirteen and thirty-ninetwenty-six week periods increased 7.79.9 percent and 10.98.9 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales increased by 6.99.6 percent and 7.18.7 percent for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, respectively.
15
GROSS MARGINGross Margin
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gross margin rate | 32.6 | % | 32.0 | % | 33.9 | % | 33.4 | % | ||||||||
Basis point increase in the gross margin rate | 60 | 50 | ||||||||||||||
Components of the increase- | ||||||||||||||||
Lower occupancy and buyers’ compensation expense rate | 40 | 40 | ||||||||||||||
Merchandise margin rate improvement | 20 | 10 |
The gross margin rate improved by 60 and 50 basis points for the thirteen and twenty six weeks ended August 1, 2015, respectively. The improvement in the gross margin rate was primarily the result of leveraging the fixed rent and salary elements within our cost of sales. A higher merchandise margin rate also contributed to the gross margin rate improvement, and reflected an overall lower markdown rate partially offset by a lower initial markup rate driven by vendor and category mix.
Selling, General and Administrative Expenses (SG&A)
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
SG&A | $ | 331 | $ | 343 | $ | 676 | $ | 698 | ||||||||
$ Change | $ | (12 | ) | $ | (22 | ) | ||||||||||
% Change | (3.5 | )% | (3.2 | )% | ||||||||||||
SG&A as a percentage of sales | 19.5 | % | 20.9 | % | 18.7 | % | 19.9 | % |
SG&A decreased by $12 million and $22 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, SG&A expense increased by $9 million and $25 million and represented an improvement of 140 and 100 basis points, as a rate of sales, for the thirteen and twenty-six weeks ended August 1, 2015, respectively, as compared with the corresponding prior-year periods. The SG&A rate improvements reflected continued disciplined expense management.
Gross margin, as a percentage of sales, increased to 33.2 percentDepreciation and Amortization
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Depreciation and Amortization | $ | 36 | $ | 36 | $ | 71 | $ | 72 | ||||||||
% change | — | % | (1.4 | )% |
Depreciation and amortization remained unchanged for the thirteen weeks ended NovemberAugust 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, 20142015, as compared with the corresponding prior-year period. For the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014, SG&A increased by $822015, depreciation and amortization decreased $1 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&Adepreciation and amortization increased by $17$3 million or 5.0 percent, and $79$4 million or 8.2 percent, for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, respectively, as compared with the corresponding prior-year periods. On a constant currency basis, the increase in depreciation and amortization reflected increased capital spending.
The SG&A rate improvements reflected continued effective expense management, including store wages, which benefited from the utilization of hiring and scheduling tools, as well as associate training.16
Interest Expense, Net
DEPRECIATION AND AMORTIZATION
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Interest expense | $ | 2 | $ | 2 | $ | 5 | $ | 5 | ||||||||
Interest income | (1 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||
Interest expense, net | $ | 1 | $ | 1 | $ | 2 | $ | 2 |
DepreciationInterest expense and amortization expenses decreased by $1 million for the thirteen weeks ended November 1, 2014 to $34 million,interest income were unchanged 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 weeks 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. The increase in depreciation for the thirty-nine weeks ended November 1, 2014 reflects increased capital spending for store improvements and technology, as well as the addition of Runners Point Group for a full period in the current year as compared with a partial period in the prior year.
INTEREST EXPENSEIncome Taxes
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 by $1 million for both the thirteen and thirty-nine weeks ended November 1, 2014 reflecting income earned on higher cash and cash equivalent balances.
INCOME TAXES
The Company recorded income tax provisions of $67$66 million and $211$172 million, which representrepresented effective tax rates of 35.8 percent and 36.136.2 percent for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, respectively. For the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, the Company recorded income tax provisions of $56$52 million and $174$144 million, which represented effective tax rates of 35.036.3 percent and 36.136.2 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.
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 both the effective tax rate for the thirteentwenty-six weeks ended NovemberAugust 1, 2015 and August 2, 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 were tax reserve releases of $3 million due to foreign tax audit settlements.
The thirty-nine weeks ended November 1, 2014 includesare tax benefits of $2$1 million from reserve releases due to settlements of federal, state, and foreign tax examinations and lapses of foreign statutes of limitation, as compared withexaminations.
For the reserve releases of $5 million offset by state tax expense of $1 million as a result of an audit recognized in the corresponding prior-year period. Additionally, for the thirty-ninethirteen weeks ended November 2, 2013, in connection with the purchase of Runners Point Group,August 1, 2015, the Company recorded a discrete itemitems of approximately $1 million representing non-deductible acquisition costs.tax benefits related to an adjustment to deductible compensation costs due to executive changes and a Canadian provincial tax rate change.
The effective tax rate, excluding the reserve releases and other discrete items, for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014 decreased2015 increased as compared with the corresponding prior-year periods primarily due primarily to the effecta higher proportion of full implementation of international tax planning strategies.income earned in higher-tax jurisdictions.
The Company currently expects its fourththird quarter and full year tax rate to approximate 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 NovemberAugust 1, 2014,2015, net income increased by $16$27 million, or 15.429.3 percent, to $120$119 million as compared with the corresponding prior-year period. For the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, net income increased by $66$49 million, or 21.419.3 percent, to $374$303 million as compared with the corresponding prior-year period. The improved performance, on a constant currency basis, represents a 24.833.7 percent and 19.632.5 percent flow-through of increased sales to pre-tax income, for the thirteen and thirty-ninetwenty-six week periods ended NovemberAugust 1, 2014, respectively,2015, reflecting leveraging of fixed costs and controlling operating expenses.
RECONCILIATION OF NON-GAAP MEASURESReconciliation 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 non-GAAP financial measure is provided in addition to, and not as an alternativeNo adjustments have been made to the Company’s reported results prepared in accordance with GAAP. Presented below are GAAP and non-GAAP results for2015 results. During the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively.
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 effectfirst quarter 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 andcharges totaling $2 million, respectively,after tax, or $0.01 per diluted share, for costs associated with the acquisitionintegration of Runners Point Group.
InGroup and an impairment charge to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland. Additionally, during the second quarter of 2014, the Company recorded an after-tax charge of $1 million, or $0.01 per diluted share, related to the impairment of the CCS tradename, resulting from the transition of its skate business from CCS to its Eastbay brand. During the first quarter of 2014,
Accordingly, the Company recordedexcluded these costs to arrive at its non-GAAP results. The non-GAAP financial measure is provided in addition to, and not as an after-taxalternative to, the Company’s reported results prepared in accordance with GAAP. The Company believes this non-GAAP information is a useful measure to investors because it provides for a more direct comparison of the results. Presented below are GAAP and non-GAAP results for the thirteen and twenty-six weeks ended August 1, 2015 and August 2, 2014, respectively.
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Net income, as reported | $ | 119 | $ | 92 | $ | 303 | $ | 254 | ||||||||
After-tax adjustments to arrive at non-GAAP: | ||||||||||||||||
Runners Point Group integration costs | — | — | — | 1 | ||||||||||||
Impairment of intangibles | — | 1 | — | 2 | ||||||||||||
Net income, non-GAAP | $ | 119 | $ | 93 | $ | 303 | $ | 257 | ||||||||
Diluted EPS, as reported | $ | 0.84 | $ | 0.63 | $ | 2.14 | $ | 1.73 | ||||||||
After-tax adjustments to arrive at non-GAAP: | ||||||||||||||||
Runners Point Group integration costs | — | — | — | — | ||||||||||||
Impairment of intangibles | — | 0.01 | — | 0.02 | ||||||||||||
Diluted EPS, non-GAAP | $ | 0.84 | $ | 0.64 | $ | 2.14 | $ | 1.75 |
Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense. The following table summarizes results by segment:
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Sales | ||||||||||||||||
Athletic Stores | $ | 1,503 | $ | 1,468 | $ | 3,184 | $ | 3,125 | ||||||||
Direct-to-Customers | 192 | 173 | 427 | 384 | ||||||||||||
$ | 1,695 | $ | 1,641 | $ | 3,611 | $ | 3,509 | |||||||||
Operating Results | ||||||||||||||||
Athletic Stores(1) | $ | 176 | $ | 149 | $ | 443 | 396 | |||||||||
Direct-to-Customers(2) | 27 | 14 | 67 | $ | 42 | |||||||||||
Division profit | 203 | 163 | 510 | 438 | ||||||||||||
Less: Corporate expense | 17 | 19 | 34 | 40 | ||||||||||||
Operating profit | 186 | 144 | 476 | 398 | ||||||||||||
Other income (3) | — | 1 | 1 | 2 | ||||||||||||
Earnings before interest expense and income taxes | 186 | 145 | 477 | 400 | ||||||||||||
Interest expense, net | 1 | 1 | 2 | 2 | ||||||||||||
Income before income taxes | $ | 185 | $ | 144 | $ | 475 | $ | 398 |
(1) | Included in the twenty-six weeks ended August 2, 2014 is 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. |
(2) | Included in both the thirteen and twenty-six weeks ended August 2, 2014 is a $2 million impairment charge related to the CCS tradename. |
(3) | Other income includes non-operating items, such as lease termination gains, royalty income, and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts. |
18
Athletic Stores
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Sales | $ | 1,503 | $ | 1,468 | $ | 3,184 | $ | 3,125 | ||||||||
$ Change | $ | 35 | $ | 59 | ||||||||||||
% Change | 2.4 | % | 1.9 | % | ||||||||||||
Division profit | $ | 176 | $ | 149 | $ | 443 | $ | 396 | ||||||||
Division profit margin | 11.7 | % | 10.1 | % | 13.9 | % | 12.7 | % |
Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased by 9.6 percent and 8.4 percent for the thirteen and twenty-six weeks ended August 1, 2015, respectively, as compared with the corresponding prior-year periods. Comparable-store sales increased by 8.6 percent and 7.5 percent for the thirteen and twenty-six weeks ended August 1, 2015, respectively.
Our international divisions, particularly Foot Locker Europe, led the increase in comparable-store sales for both the quarter and year-to-date periods. All major countries for Foot Locker Europe experienced comparable-sales gains for both the quarter and year-to-date periods. These increases were primarily related to sales of men’s basketball and lifestyle running shoes.
While the overall results of Runners Point continue to be accretive to our results, their comparable-store sales are running below the average pace of our other banners operating in Europe, due in part to the segmentation process that is underway. The segmentation process includes defining product offerings for each of these banners and executing upon our multi-banner strategy in this market. The Runners Point stores are being shifted towards performance and lifestyle running footwear, while Sidestep is shifting to lifestyle and casual footwear. While sales at Runners Point and Sidestep have been negatively affected in the short term, we believe that as customers become familiar with our product offerings, these actions will position each of the banners operating in Germany for future growth.
Domestically, comparable-store sales for both the quarter and year-to-date periods also increased. The increase was led by Foot Locker, Footaction, and Kids Foot Locker. Running and basketball were the strongest drivers of footwear sales. The key marquee players shoes and Jordan styles continue to drive the increases in basketball footwear. Sales also benefited from the continued expansion of various shop-in-shop partnerships with our key vendors. Lady Foot Locker/SIX:02 generated a comparable-store sales gain for its fifth consecutive quarter, with a positive gain for both quarter and year-to-date periods. Lady Foot Locker/SIX:02’s overall sales for the quarter were essentially flat, while the year-to-date period reflected a sales decline due to net store closures, as compared with the corresponding prior-year periods. The focus on serving the female customer’s fitness-driven lifestyle has resonated with customers, as both footwear and apparel increased on a comparable-store basis. Champs Sports generated a gain in comparable-store sales for the quarter with increased footwear sales partially offset by declines in apparel and accessories. For the year-to-date period, Champs Sports experienced a modest comparable-store sales decline, primarily attributable to the decrease in apparel sales due to a fashion shift away from licensed products.
Athletic Stores division profit increased by 18.1 percent and 11.9 percent for the thirteen and twenty-six weeks ended August 1, 2015, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, was 11.7 percent for the thirteen weeks ended August 1, 2015, representing a 160 basis point improvement as compared with the corresponding prior-year period. For the twenty-six weeks ended August 1, 2015, the improvement was 120 basis points as compared with the corresponding prior-year period. These increases primarily reflect improved sales, an improved gross margin rate driven by improved leverage of fixed occupancy expenses, and diligent expense management. Included in the results of the Athletic Stores segment for the twenty-six weeks ended August 2, 2014 is a $1 million impairment charge 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 $0.01 per diluted share of costs related to the CCS store closures for the thirty-nine weeks ended November 2, 2013.19
Direct-to-Customers
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Sales | $ | 192 | $ | 173 | $ | 427 | $ | 384 | ||||||||
$ Change | $ | 19 | $ | 43 | ||||||||||||
% Change | 11.0 | % | 11.2 | % | ||||||||||||
Division profit | $ | 27 | $ | 14 | $ | 67 | $ | 42 | ||||||||
Division profit margin | 14.1 | % | 8.1 | % | 15.7 | % | 10.9 | % |
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 StoresDirect-to-Customers segment sales increased 6.4by 12.5 percent and 12.9 percent for the thirteen and twenty-six weeks ended NovemberAugust 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, 2014,2015, respectively, as compared with the corresponding prior-year period. Comparable sales increased by 15.5 percent. Sales at each of18.8 percent and 18.6 percent for the U.S. store-banner websites increased significantly, increasing collectively approximately 40 percent.
For the thirty-ninethirteen and twenty-six weeks ended NovemberAugust 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,2015, respectively. These increases were primarily the result of continued strong sales performance of the Company’s domestic store-banner websites, coupled with growth from the international e-commerce businesses, particularly in Europe. Sales at each of the U.S. store-banner websites.
Saleswebsites increased significantly for both the quarter and year-to-date periods, increasing collectively over 40 percent, reflecting the continued success and expansion of the current yearconnectivity of store banners to the e-commerce sites. Footwear and apparel categories were led by basketball, casual, and training styles, which all posted strong comparable sales gains during the period. These increases were partially offset by the 2014 closure of basketball and lifestyle running footwear.the CCS direct business.
Direct-to-Customers division profit for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 20142015 increased by $5$13 million to $25$27 million and increased by $14$25 million to $67 million, respectively, as compared with the corresponding prior-year periods.period. Division profit, as a percentage of sales, was 11.914.1 percent and 11.315.7 percent for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, respectively, as compared with 11.28.1 percent and 10.9 percent for the corresponding prior-year periods.period. The increase primarily reflected strong flow-through of sales to profit, resulting from improved gross margins due to more full-price selling and diligent expense management. Included in the prior-year results of the Direct-to-Customers segment for the thirty-nine weeks ended November 1, 2014 was a $2 million tradename impairment charge related to the CCS tradename,e-commerce business, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner.
Gross margin for Division profit in the Direct-to-Customers segment for both the quarter and year-to-date periodsprior period was also negatively affected by the liquidation of CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profit was the result of strong flow-through of sales to profits. In addition, catalog expenses were lower due to a shift in the timing of certain catalogs to the fourth quarter as compared with the prior year.business results.
Corporate Expense
Thirteen weeks ended | Twenty-six weeks ended | |||||||||||||||
August 1, | August 2, | August 1, | August 2, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in millions) | ||||||||||||||||
Corporate expense | $ | 17 | $ | 19 | $ | 34 | $ | 40 | ||||||||
$ Change | $ | (2 | ) | $ | (6 | ) |
Corporate expense consists of unallocated selling, general and administrative expenses,SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $3 million and $6 million for the thirteen and twenty-six weeks ended August 1, 2015, respectively, which was unchanged from the prior-year amounts.
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$2 million for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014,2015, respectively, thus reducing corporate expense. Excluding this change, as compared with the corresponding prior yearprior-year periods, corporate expense increaseddecreased 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-ninetwenty-six weeks ended November 2, 2013,August 1, 2015, respectively.
Excluding the allocation change and costs associated with Runners Point Group, The $4 million decrease in corporate expense increasedfor the twenty-six weeks ended August 1, 2015 was primarily related to increased incentive compensation anda $2 million charge to increase legal costs. Duringreserves recorded in the first quarter of 2014, and prior-year costs related to the Company increased its legal reserves by $2integration of Runners Point Group of $1 million.
LIQUIDITY AND CAPITAL RESOURCES20
Liquidity and Capital Resources
Liquidity
The Company’s primary source of liquidity has been cash flow from operations,earnings, 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 will be adequate to fund these requirements.
FromThe Company may also from time to time the Company may alsorepurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of NovemberAugust 1, 2014,2015, approximately $196$851 million remained onavailable under the Company’s $600 millioncurrent $1 billion share repurchase program.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.
Operating Activities
Twenty-six weeks ended | ||||||||
August 2, | August 2, | |||||||
2015 | 2014 | |||||||
($ in millions) | ||||||||
Net cash provided by operating activities | $ | 334 | $ | 362 | ||||
$ Change | $ | (28 | ) |
Net cash
The amount provided by operating activities was $439 million and $327 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. These amounts reflectreflects net income adjusted for non-cash items non-cash impairment charges, and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, share-based compensation expense, and share-based related tax benefits. The improvementdecrease from the prior year reflects the Company’s earnings strength and working capital improvements, partially offset by a $77 millionchanges and an increase in cash paid for income taxes during the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014.2015. The increase of cash paid for taxes of $23 million reflected higher amounts paid due to the Company’s earnings growth.
Investing Activities
Twenty-six weeks ended | ||||||||
August 1, | August 2, | |||||||
2015 | 2014 | |||||||
($ in millions) | ||||||||
Net cash used in investing activities | $ | 116 | $ | 84 | ||||
$ Change | $ | 32 |
Net cash used in investing activities was $129Capital expenditures represented a $23 million and $221 million forincrease from the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. The currentprior year, reflects $138 million in capital expenditures partially offset by $9 million for the maturitieswhich reflected a higher number of short-term investments. Capital expendituresstore projects in the current year, were $19 million lower as compared with the corresponding prior-year period, representing a shift in the timing ofwell as increased spending on corporate technology projects. The Company’s full year forecast for capital expenditures is $207$233 million, which includes $172 million related to the remodeling or relocation of existing stores and approximately 88100 new store openings, as well as $35$61 million for the development of information systems, websites, infrastructure, and infrastructure.our headquarters relocation. The increased full-year forecast from the amount previously disclosed primarily reflects the upcoming relocation of the corporate headquarters within New York City. The prior year included $81$9 million forfrom the purchasesales and maturities of Runners Point Group, net of cash acquired.short-term investments.
Financing Activities
Twenty-six weeks ended | ||||||||
August 1, | August 2, | |||||||
2015 | 2014 | |||||||
($ in millions) | ||||||||
Net cash used in financing activities | $ | 209 | $ | 175 | ||||
$ Change | $ | 34 |
Net cash used in financing was $240 million and $226 million forDuring the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2014 and November 2, 2013, respectively. The2015, the Company repurchased 3,547,5533,490,000 shares of its common stock for $174 million during the thirty-nine weeks ended November 1, 2014, this represents an increase of $7$205 million, as compared towith 2,864,533 shares repurchased for $136 million in the corresponding prior-year period. During the first three quarters of 2014 and 2013, theThe Company declared and paid dividends during the first two quarters of $962015 and 2014 of $70 million and $89$64 million, respectively. These representThis represents quarterly rates of $0.22$0.25 and $0.20$0.22 per share for 20142015 and 2013,2014, respectively. Additionally, the Company received proceeds of $22 million from the issuance of common stock in connection with employee stock programs of $43 million and $18 million for both the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2015 and August 2, 2014, and November 2, 2013.respectively. In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $11$24 million and $8$9 million as a financing activity for the thirty-ninetwenty-six weeks ended NovemberAugust 1, 2015 and August 2, 2014, respectively. The increased excess tax benefit primarily reflected a higher number of stock option exercises during the first half of 2015. The activity for the twenty-six weeks ended August 1, 2015 and NovemberAugust 2, 2013,2014 also reflects payments made on capital lease obligations of $1 million and $2 million, respectively.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
For a description of our contractual obligationsCritical Accounting Policies and other commercial commitments as of February 1, 2014, see our 2013 Annual Report on Form 10-K. During the thirty-nine weeks ended November 1, 2014, there were no material changes outside the ordinary course of business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATESEstimates
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.10-K for the fiscal year ended January 31, 2015.
RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting Pronouncements
Descriptions of the recentlyRecently issued accounting principles, if any, andpronouncements did not, or are not believed by management to, have a material effect on the accounting principles adopted by the Company during the thirty-nine weeks ended November 1, 2014 are included in Note 1 to the Condensed Consolidated Financial Statements.Company’s present or future consolidated financial statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTSDisclosure 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 vendorssuppliers for a majority of its merchandise purchases (including a significant portion from one key vendor)supplier), pandemics and similar major health concerns, unseasonable weather, deterioration of global financial markets, economic conditions worldwide, deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.
For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the 20132014 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
Item 4. Controls and Procedures
The Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation as of NovemberAugust 1, 20142015 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 NovemberAugust 1, 2014,2015, 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 againstInformation regarding 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. TheseCompany’s legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims.is contained in theLegal Proceedings note under “Item 1. Financial Statements.”
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,Cortes v. Foot Locker filed in federal court in 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.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 and plaintiffs have entered into a proposed settlement agreement to resolve the consolidated cases, Hill andCortes,that is subject to court approval.
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 appealed to the U.S. Court of Appeals for the Second Circuit, which issued a Summary Order on February 13, 2014 that affirmed the judgment of the District 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 fiduciary duty claim and also reinstated the claim alleging violation of 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 seeking leave to appeal both class certification rulings to the U.S. Court of Appeals for the Second Circuit.
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, McGlothin,and Osberg,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. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered that could adversely affect the Company’s operating results or cash flows in a particular period.
There were no material changes to the risk factors disclosed in the 20132014 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended NovemberAugust 1, 2014.2015:
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 |
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) | ||||||||||||
May 3, 2015 through May 30, 2015 | 445,105 | $ | 61.89 | 445,105 | $ | 899,835,824 | ||||||||||
May 31, 2015 through July 4, 2015 | 480,230 | $ | 63.55 | 475,895 | $ | 869,588,500 | ||||||||||
July 5, 2015 through August 1, 2015 | 274,964 | $ | 69.38 | 269,000 | $ | 850,922,919 | ||||||||||
1,200,299 | $ | 64.27 | 1,190,000 |
(1) | These columns reflect shares acquired in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested during the quarter, shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of |
(2) | On February |
Item 6. Exhibits | |
(a) | Exhibits |
The exhibits that are in this report immediately follow the index. |
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 9, 2015 | FOOT LOCKER, INC. |
/s/ Lauren B. Peters | |
LAUREN B. PETERS | |
Executive Vice President and Chief Financial Officer |
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Description | ||||
10.1†* | Senior Executive Employment Agreement, dated August 10, 2015, by and between Pawan Verma and the Company. | |||
Computation of Ratio of Earnings to Fixed Charges. | ||||
Accountants’ Acknowledgement. | ||||
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. | ||||
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. | ||||
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as | ||||
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. | |||
* | Filed herewith. | |||
** | Furnished herewith. |
25