| 5. Other Intangible Assets, net – (continued)
| | | October 31, 2015 | | | November 1, 2014 | | | January 31, 2015 | | | ($ in millions) | | Gross value | | | Accum. amort. | | | Net Value | | | Gross value | | | Accum. amort. | | | Net Value | | | Gross value | | | Accum. amort. | | | Net Value | | | Indefinite life intangible assets:(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Runners Point Group trademarks | | | | | | | | | | | 24 | | | | | | | | | | | | 28 | | | | | | | | | | | | 25 | | | Other trademarks | | | | | | | | | | | — | | | | | | | | | | | | 1 | | | | | | | | | | | | — | | | | | | | | | | | | | $ | 24 | | | | | | | | | | | $ | 29 | | | | | | | | | | | $ | 25 | | | Other intangible assets, net | | | | | | | | | | $ | 46 | | | | | | | | | | | $ | 56 | | | | | | | | | | | $ | 49 | |
(1) | | The change in the ending balances also reflects the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar. | (2) | | During 2014, the Company exited the CCS e-commerce business; as such, the fully amortized customer relationship intangible of $21 million was removed from the amounts presented above for all periods. |
For the thirty-nine weekthirteen-week period ended October 31, 2015,April 30, 2016, activity included amortization of $3 million and a $1 million decreaseincrease related to foreign currency exchange fluctuations. This was partially offset byfluctuations and $1 million of lease acquisition additions primarily related to our European businesses, which are being amortized over a weighted-average life of 810 years. This was partially offset by amortization of $1 million. | | | | | | | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | | | | | October 31, | | November 1, | | October 31, | | November 1, | | | Thirteen weeks ended | | ($ in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | April 30, 2016 | | May 2, 2015 | | Amortization expense | | $ | 1 | | | $ | 2 | | | $ | 3 | | | $ | 5 | | | $ | 1 | | $ | 1 |
Estimated future amortization expense for finite life intangible assets is as follows: | | | ($ in millions) | | | Remainder of 2015 | | $ | 1 | | | 2016 | | | 4 | | | 2017 | | | 3 | | | 2018 | | | 3 | | | 2019 | | | 3 | | | 2020 | | | 3 | |
6.
| | | | | ($ in millions) | Remainder of 2016 | $ | 3 | 2017 | | 4 | 2018 | | 3 | 2019 | | 3 | 2020 | | 3 | 2021 | | 2 |
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised the following: | | | | | | | | | | | | | | | | | | | | October 31, | | November 1, | | January 31, | | April 30, | | May 2, | | January 30, | | | | 2015 | | | 2014 | | | 2015 | | 2016 | | 2015 | | 2016 | | | | ($ in millions) | | ($ in millions) | | Foreign currency translation adjustments | | $ | (107 | ) | | $ | 15 | | | $ | (75 | ) | $ | (75) | | $ | (74) | | $ | (119) | | Cash flow hedges | | | (2 | ) | | | (1 | ) | | | (3 | ) | | 2 | | | (4) | | | 2 | | Unrecognized pension cost and postretirement benefit | | | (233 | ) | | | (234 | ) | | | (240 | ) | | (249) | | | (239) | | | (248) | | Unrealized loss on available-for-sale security | | | (1 | ) | | | (1 | ) | | | (1 | ) | | (1) | | | (1) | | | (1) | | | | $ | (343 | ) | | $ | (221 | ) | | $ | (319 | ) | $ | (323) | | $ | (318) | | $ | (366) |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Accumulated Other Comprehensive Loss – (continued)
The changes in AOCL for the thirty-ninethirteen weeks ended October 31, 2015April 30, 2016 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 January 31, 2015 | | $ | (75 | ) | | | (3 | ) | | | (240 | ) | | | (1 | ) | | $ | (319 | ) | | OCI before reclassification | | | (32 | ) | | | 1 | | | | 1 | | | | — | | | | (30 | ) | | Reclassified from AOCL | | | — | | | | — | | | | 6 | | | | — | | | | 6 | | | Other comprehensive income/(loss) | | | (32 | ) | | | 1 | | | | 7 | | | | — | | | | (24 | ) | | Balance as of October 31, 2015 | | $ | (107 | ) | | | (2 | ) | | | (233 | ) | | | (1 | ) | | $ | (343 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign | | | | Items Related | | Unrealized | | | | | | Currency | | | | to Pension and | | Loss on | | | | | | Translation | | Cash Flow | | Postretirement | | Available-For- | | | | ($ in millions) | | Adjustments | | Hedges | | Benefits | | Sale Security | | Total | Balance as of January 30, 2016 | | $ | (119) | | $ | 2 | | $ | (248) | | $ | (1) | | $ | (366) | OCI before reclassification | | | 44 | | | — | | | (3) | | | — | | | 41 | Reclassified from AOCI | | | — | | | — | | | 2 | | | — | | | 2 | Other comprehensive income/ (loss) | | | 44 | | | — | | | (1) | | | — | | | 43 | Balance as of April 30, 2016 | | $ | (75) | | $ | 2 | | $ | (249) | | $ | (1) | | $ | (323) |
Reclassifications from AOCL for the thirty-ninethirteen weeks ended October 31, 2015April 30, 2016 were as follows: | | | ($ in millions) | | | Amortization of actuarial (gain) loss: | | | | | | Pension benefits - amortization of actuarial loss | | $ | 10 | | | Postretirement benefits - amortization of actuarial gain | | | (1 | ) | | Net periodic benefit cost (seeNote 10) | | | 9 | | | Income tax benefit | | | (3 | ) | | Net of tax | | $ | 6 | |
| | | | | | | | ($ in millions) | Amortization of actuarial (gain) loss: | | | Pension benefits- amortization of actuarial loss | $ | 4 | Postretirement benefits- amortization of actuarial gain | | (1) | Net periodic benefit cost (see Note 9) | | 3 | Income tax benefit | | (1) | Net of tax | $ | 2 |
7.
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 8,7, Fair Value Measurements.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 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.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Financial Instruments – (continued)
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. 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 a gain of $2 million and $1 millionnot significant for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016, and therefore decreased AOCL.AOCL remained unchanged. At October 31, 2015,April 30, 2016, there was a $2 million lossgain included in AOCL. For both the thirteen and thirty-nine weeks ended November 1, 2014,May 2, 2015, the net change resulted in a loss of $1 million. The notional value of the foreign exchange contracts designed as hedges outstanding at October 31, 2015April 30, 2016 was $93$97 million, and these contracts mature at various dates through JanuaryJuly 2017.
Derivative Holdings Not Designated as Hedges The Company enters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign-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 resulted in expense of $3 million and $1 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively.April 30, 2016. The net change in fair value was not significantresulted in income of $1 million for the thirteen weeks ended November 1, 2014 and resulted in $1 million of income for the thirty-nine weeks ended November 1, 2014.May 2, 2015. The notional value of the foreign exchange contracts not designed as hedges outstanding at October 31, 2015April 30, 2016 was $15$12 million, and these contracts mature at various dates through December 2015.October 2016.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the thirteen and thirty-nine weeks ended October 31, 2015. The realized gain was $1 million for the thirteen weeks and thirty-nine weeks ended November 1, 2014.periods presented. No such contracts were outstanding at October 31, 2015.April 30, 2016. 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 diesel fuel forward contracts outstanding was not significant at October 31, 2015 was $1 millionApril 30, 2016 and these contracts mature at various dates throughin May 2016. Fair Value of Derivative Contracts
The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract: | | | Balance Sheet | | October 31, | | | November 1, | | | January 31, | | | ($ in millions) | | Caption | | 2015 | | | 2014 | | | 2015 | | | Hedging Instruments: | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | Current liabilities | | $ | 3 | | | $ | 2 | | | $ | 4 | | | Non-Hedging Instruments: | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | Current assets | | $ | 2 | | | $ | — | | | $ | — | | | Foreign exchange forward contracts | | Current liabilities | | $ | 3 | | | $ | — | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | April 30, | | May 2, | | January 30, | ($ in millions) | | Caption | | 2016 | | 2015 | | 2016 | Hedging Instruments: | | | | | | | | | | | | Foreign exchange forward contracts | | Current assets | | $ | 3 | | $ | — | | $ | 3 | Foreign exchange forward contracts | | Current liabilities | | $ | — | | $ | 5 | | $ | — | Foreign exchange forward contracts | | Non-current liabilities | | $ | 1 | | | — | | | — |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
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. |
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 October 31, 2015 | | | At November 1, 2014 | | | At January 31, 2015 | | | As of April 30, 2016 | | As of May 2, 2015 | | As of January 30, 2016 | | | | ($ in millions) | | | ($ in millions) | | | | Level 1 | | | Level 2 | | | Level 3 | | | Level 1 | | | Level 2 | | | Level 3 | | | Level 1 | | | Level 2 | | | Level 3 | | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Auction rate security | | | — | | | | 6 | | | | — | | | | — | | | | 6 | | | | — | | | | — | | | | 6 | | | | — | | | Available-for-sale securities | | | $ | — | | $ | 6 | | $ | — | | $ | — | | $ | 6 | | $ | — | | $ | — | | $ | 6 | | $ | — | Foreign exchange forward contracts | | | | — | | | 2 | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | Total Assets | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | $ | 8 | | $ | — | | $ | — | | $ | 6 | | $ | — | | $ | — | | $ | 9 | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | | — | | | | 4 | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | 5 | | | | — | | | | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | Total Liabilities | | $ | — | | | $ | 4 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 5 | | | $ | — | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 5 | | $ | — | | $ | — | | $ | — | | $ | — |
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument. The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and, therefore, are classified as Level 2 instruments. There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented. The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows: | | | October 31, | | | November 1, | | | January 31, | | | | | 2015 | | | 2014 | | | 2015 | | | | | ($ in millions) | | | Carrying value | | $ | 131 | | | $ | 135 | | | $ | 134 | | | Fair value | | $ | 157 | | | $ | 161 | | | $ | 163 | |
| | | | | | | | | | | | April 30, | | May 2, | | January 30, | | | 2016 | | 2015 | | 2016 | | | ($ in millions) | Carrying value | | $ | 129 | | $ | 133 | | $ | 130 | Fair value | | $ | 149 | | $ | 158 | | $ | 156 |
The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and, therefore, are classified as Level 2. The carrying values of cash and cash equivalents and other current receivables and payables approximate their fair value.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.8. 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.outstanding. 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 | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Weighted-average common shares outstanding | | | 139.3 | | | | 143.6 | | | | 139.6 | | | | 144.5 | | | Effect of Dilution: | | | | | | | | | | | | | | | | | | Stock options and awards | | | 1.6 | | | | 2.1 | | | | 1.8 | | | | 2.1 | | | Weighted-average common shares assuming dilution | | | 140.9 | | | | 145.7 | | | | 141.4 | | | | 146.6 | |
| | | | | | | | | | | | | | | Thirteen weeks ended | | | April 30, | | May 2, | | | 2016 | | 2015 | | | (in millions, except per share data) | Net Income | | $ | 191 | | $ | 184 | Weighted-average common shares outstanding | | | 136.5 | | | 140.1 | Basic earnings per share | | $ | 1.40 | | $ | 1.31 | Weighted-average common shares outstanding | | | 136.5 | | | 140.1 | Dilutive effect of potential common shares | | | 1.3 | | | 2.0 | Weighted-average common shares outstanding assuming dilution | | | 137.8 | | | 142.1 | Diluted earnings per share | | $ | 1.39 | | $ | 1.29 |
The number
Options to purchase 0.2 million and 0.4 million shares of options excluded fromcommon stock were not included in the computation was not significant for the thirteen weeks ended October 31,April 30, 2016 and May 2, 2015, and was 0.6 million for the thirty-nine weeks ended October 31, 2015. The number of options excluded from the computation was not significant for the thirteen and thirty-nine weeks ended November 1, 2014.respectively. These options were not included because the effect would have been antidilutive. Contingently issuable shares of 0.3 million and 0.4 million have not been included as the vesting conditions have not been satisfied as of October 31, 2015April 30, 2016 and November 1, 2014, respectively.May 2, 2015.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10.
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 individualsemployees of the Runners Point Group. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded. The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which 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 | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | ($ in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | Service cost | | $ | 5 | | | $ | 3 | | | $ | 13 | | | $ | 11 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | Interest cost | | | 6 | | | | 7 | | | | 18 | | | | 21 | | | | — | | | | — | | | | 1 | | | | — | | | Expected return on plan assets | | | (10 | ) | | | (9 | ) | | | (29 | ) | | | (28 | ) | | | — | | | | — | | | | — | | | | — | | | Amortization of net loss (gain) | | | 3 | | | | 5 | | | | 10 | | | | 12 | | | | — | | | | (1 | ) | | | (1 | ) | | | (2 | ) | | Net benefit expense (income) | | $ | 4 | | | $ | 6 | | | $ | 12 | | | $ | 16 | | | $ | — | | | $ | (1 | ) | | $ | — | | | $ | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | Postretirement Benefits | | | Thirteen weeks ended | | | Thirteen weeks ended | | | April 30, | | May 2, | | | April 30, | | May 2, | ($ in millions) | | 2016 | | 2015 | | | 2016 | | 2015 | Service cost | | $ | 4 | | $ | 4 | | | $ | — | | $ | — | Interest cost | | | 6 | | | 6 | | | | — | | | — | Expected return on plan assets | | | (9) | | | (9) | | | | — | | | — | Amortization of net loss (gain) | | | 4 | | | 3 | | | | (1) | | | — | Net benefit expense (income) | | $ | 5 | | $ | 4 | | | $ | (1) | | $ | — |
On August 14, 2015,February 24, 2016, the Company made a contribution of $4$25 million to the U.S. qualified plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to make any further pension plan contributions during the current year. Actual contributions are dependent on several factors, including the outcome of the ongoing pension litigation. See Note 12,11, Legal Proceedings, for further information.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.10. Share-Based Compensation
Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans were as follows: | | | | | | | | | | | | | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | Thirteen weeks ended | | | | October 31, | | November 1, | | October 31, | | November 1, | | April 30, | | May 2, | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | 2016 | | 2015 | | | | ($ in millions) | | ($ in millions) | | Options and shares purchased under the employee stock purchase plan | | $ | 3 | | | $ | 3 | | | $ | 9 | | | $ | 9 | | $ | 3 | | $ | 3 | | Restricted stock and restricted stock units | | | 3 | | | | 3 | | | | 8 | | | | 9 | | | 2 | | | 3 | | Total share-based compensation expense | | $ | 6 | | | $ | 6 | | | $ | 17 | | | $ | 18 | | $ | 5 | | $ | 6 | | | | | | | | | | | | | | | | | | | | | | | | | Tax benefit recognized | | $ | 3 | | | $ | 1 | | | $ | 6 | | | $ | 5 | | $ | 1 | | $ | 2 | | Excess income tax benefit from settled equity-classified share-based awards reported as a cash flow from financing activities | | | | | | | | | | $ | 33 | | | $ | 11 | | $ | 6 | | $ | 14 |
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 | | | Stock Purchase Plan | | | Stock Option Plans | | Stock Purchase Plan | | | | | October 31, | | November 1, | | October 31, | | November 1, | | | April 30, | | May 2, | | | April 30, | | May 2, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | 2015 | | 2016 | | 2015 | | | Weighted-average risk free rate of interest | | | 1.52 | % | | | 2.12 | % | | | 0.22 | % | | | 0.14 | % | | 1.4 | % | | 1.5 | % | | 0.3 | % | | 0.1 | % | | Expected volatility | | | 30 | % | | | 39 | % | | | 24 | % | | | 24 | % | | 30 | % | | 30 | % | | 25 | % | | 23 | % | | Weighted-average expected award life | | | 6.0 years | | | | 6.1 years | | | | 1.0 year | | | | 1.0 year | | | Weighted-average expected award life (in years) | | | 5.7 | | 6.0 | | 1.0 | | 1.0 | | | Dividend yield | | | 1.61 | % | | | 2.0 | % | | | 1.7 | % | | | 2.0 | % | | 1.7 | % | | 1.6 | % | | 1.6 | % | | 1.8 | % | | Weighted-average fair value | | $ | 16.07 | | | $ | 14.91 | | | $ | 10.20 | | | $ | 7.11 | | $ | 15.78 | | $ | 16.01 | | $ | 11.12 | | $ | 8.03 | |
The information in the following table covers options granted under the Company’s stock option plans for the thirty-ninethirteen weeks ended October 31, 2015:April 30, 2016: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted- | | Weighted- | | | | | Number | | Average | | Average | | | | | of | | Remaining | | Exercise | | | | Shares | | | Weighted-
Average Term | | | Weighted-Average Exercise Price | | | | Shares | | Contractual Life | | Price | | | | (in thousands, except price per share and weighted-average term) | | | | (in thousands) | | (in years) | | (per share) | | Options outstanding at the beginning of the year | | | 5,569 | | | | | | | $ | 25.89 | | | | 3,694 | | | | | $ | 32.62 | | Granted | | | 694 | | | | | | | | 62.29 | | | | 465 | | | | | | 63.79 | | Exercised | | | (2,447 | ) | | | | | | | 25.64 | | | | (324) | | | | | | 22.16 | | Expired or cancelled | | | (55 | ) | | | | | | | 48.68 | | | | (18) | | | | | | 52.96 | | Options outstanding at October 31, 2015 | | | 3,761 | | | | 6.3 | | | $ | 32.44 | | | | Options exercisable at October 31, 2015 | | | 2,531 | | | | 5.1 | | | $ | 22.13 | | | | Options vested and expected to vest at October 31, 2015 | | | 3,720 | | | | 6.3 | | | $ | 32.17 | | | | Options available for future grant at October 31, 2015 | | | 13,037 | | | | | | | | | | | Options outstanding at April 30, 2016 | | | | 3,817 | | | 5.9 | | $ | 37.21 | Options exercisable at April 30, 2016 | | | | 2,713 | | | 4.6 | | $ | 27.86 | Options vested and expected to vest at April 30, 2016 | | | | 3,767 | | | 5.9 | | $ | 36.89 | Options available for future grant at April 30, 2016 | | | | 12,050 | | | | | | |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation – (continued)
The total fair value of options vested as of April 30, 2016 and May 2, 2015 was $8 million and $11 million, respectively. The cash received from option exercises for the thirteen weeks ended April 30, 2016 and May 2, 2015 was $7 million and $23 million, respectively. The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below: | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Exercised | | $ | 31 | | | $ | 6 | | | $ | 96 | | | $ | 21 | |
| | | | | | | | | | | | | Thirteen weeks ended | | April 30, | | May 2, | | 2016 | | 2015 | | ($ in millions) | Exercised | $ | 14 | | $ | 36 |
The total tax benefit realized from option exercises was $5 million and $14 million for the thirteen weeks ended April 30, 2016 and May 2, 2015, respectively.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The aggregate intrinsic value for stock options outstanding, outstanding and for stock options exercisable, and vested and expected to vest (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below: | | | | | | | | | | | | | | | Thirty-nine weeks ended | | Thirteen weeks ended | | | | October 31, | | November 1, | | April 30, | | May 2, | | | | 2015 | | | 2014 | | 2016 | | 2015 | | | | ($ in millions) | | ($ in millions) | | Outstanding | | $ | 133 | | | $ | 170 | | $ | 94 | | $ | 153 | | Outstanding and exercisable | | $ | 116 | | | $ | 138 | | $ | 91 | | $ | 137 | | Vested and expected to vest | | $ | 133 | | | $ | 169 | | $ | 94 | | $ | 153 |
As of October 31, 2015April 30, 2016 there was $9$12 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.51.7 years. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 31, 2015 was $25 million and $63 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended November 1, 2014 was $4 million and $17 million, respectively. The total tax benefit realized from option exercises was $12 million and $37 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, and was $2 million and $7 million for the corresponding prior-year periods.
The following table summarizes information about stock options outstanding and exercisable at October 31, 2015:April 30, 2016: | | | 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 $18.80 | | | 870 | | | | 3.9 | | | $ | 13.28 | | | | 870 | | | $ | 13.28 | | | $18.84 to $24.75 | | | 899 | | | | 4.8 | | | $ | 19.81 | | | | 899 | | | $ | 19.81 | | | $30.92 to $36.59 | | | 790 | | | | 6.7 | | | $ | 32.84 | | | | 616 | | | $ | 32.44 | | | $45.08 to $73.21 | | | 1,202 | | | | 8.9 | | | $ | 55.47 | | | | 146 | | | $ | 45.70 | | | | | | 3,761 | | | | 6.3 | | | $ | 32.44 | | | | 2,531 | | | $ | 22.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | | | | Weighted- | | | | | | | | | | | | | Average | | | Weighted- | | | | | Weighted- | | | | | Remaining | | | Average | | | | | Average | | | Number | | Contractual | | | Exercise | | Number | | | Exercise | Range of Exercise Prices | | Outstanding | | Life | | | Price | | Exercisable | | | Price | | | (in thousands, except prices per share and contractual life) | $9.85 to $15.10 | | 746 | | 2.4 | | $ | 12.95 | | 746 | | $ | 12.95 | $18.80 to $30.92 | | 996 | | 3.7 | | | 22.73 | | 996 | | | 22.73 | $34.12 to $56.35 | | 954 | | 7.1 | | | 41.08 | | 745 | | | 39.26 | $62.02 to $73.21 | | 1,121 | | 9.2 | | | 62.92 | | 226 | | | 62.11 | | | 3,817 | | 5.9 | | $ | 37.21 | | 2,713 | | $ | 27.86 |
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. RSU awards generally are made to executives outside of the United StatesCompany, and to nonemployee directors. Additionally, RSU awards are made in connection with the Company’s long-term incentive program. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were 588,308660,797 and 734,295594,910 RSU awards outstanding as of October 31,April 30, 2016 and May 2, 2015, and November 1, 2014, respectively.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation – (continued)
Generally, awards fully vest after the passage of time, typically three years. However, RSU 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. With regard to performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid or accumulated on RSU awards. Compensation expense is recognized using the 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.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Restricted stock and RSU activity for the thirty-ninethirteen weeks ended October 31, 2015April 30, 2016 is summarized as follows: | | | | | | | | | | | | Weighted- | | | | | | | | Average | | | | | | Number | | Remaining | | Weighted-Average | | | of | | Contractual | | Grant Date | | | Shares | | Life | | Fair Value | | | (in thousands) | | (in years) | | | (per share) | Nonvested at beginning of year | | 803 | | | | $ | 45.19 | Granted | | 339 | | | | | 64.24 | Vested | | (193) | | | | | 35.36 | Expired or cancelled | | (122) | | | | | 38.87 | Nonvested at April 30, 2016 | | 827 | | 1.7 | | $ | 56.23 | Aggregate value ($ in millions) | $ | 47 | | | | | |
| | | Number of Shares | | | Weighted-Average
Grant Date Fair
Value per Share | | | | | (in thousands, except price per share) | | | Nonvested at the beginning of the year | | | 1,038 | | | $ | 37.96 | | | Granted | | | 154 | | | | 63.72 | | | Vested | | | (312 | ) | | | 32.33 | | | Expired or cancelled | | | (68 | ) | | | 37.97 | | | Nonvested at October 31, 2015 | | | 812 | | | $ | 45.02 | | | Aggregate value ($ in millions) | | $ | 37 | | | | | | | Weighted-average remaining contractual life (in years) | | | 1.1 years | | | | | |
The weighted grant-date fair value per share was $63.72 and $45.24 for the thirty-nine weeks ended October 31, 2015 and November 1, 2014, respectively . The total value of awards for which restrictions lapsed for the thirty-ninethirteen weeks ended October 31,April 30, 2016 and May 2, 2015 and November 1, 2014 was $10$7 million and $14$9 million, respectively. As of October 31, 2015,April 30, 2016, there was $12$20 million of total unrecognized compensation cost net of forfeitures related to nonvested restricted awards.
12.11. 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. The Company and the Company’s U.S. retirement plan are defendants in a class action (Osberg v. Foot Locker Inc.et ano., filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff’s claims were for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and violation of the statutory provisions governing the content of the Summary Plan Description. The trial was held in July 2015 and the court issued a decision in September 2015 in favor of the class on the foregoing claims. The court ordered that the Plan be reformed. The Company is appealing the court’s decision, and the judgment has been stayed pending the outcome of the appeal. As a result of this development, the Company has determined that it is probable a liability exists. The Company’s reasonable estimate of this liability is a range between $100 million and $200 million, with no amount within that range more probable than any other amount. Therefore, in accordance with U.S. GAAP, the Company recorded a charge of $100 million pre-tax ($61 million after-tax) in the third quarter of 2015. This amount has been classified as a long-term liability. The Company will continue to vigorously defend itself in this case. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Legal Proceedings – (continued)
Certain of the Company’s subsidiaries were 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 asserted claims similar to those asserted inPereira and sought similar remedies. With the exception ofHillv. 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 withPereira under 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 that was approved by the court during the second quarter of 2015. Additionally, during the third quarter of 2015, the Company and plaintiffs inCortesand Kissinger entered into settlement agreements that have also been approved by the respective courts.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, includingOsberg, as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole, based upon current knowledge and taking into consideration current accruals. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered into that could adversely affect the Company’s operating results or cash flows in a particular period.
FOOT LOCKER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Subsequent Event On May 19, 2016, the Company entered into a new credit agreement with its banks (“New Credit Agreement”) that replaces the Company’s existing credit agreement. The New Credit Agreement provides for a $400 million asset-based revolving credit facility maturing on May 19, 2021. Additionally, during the term of the New Credit Agreement, the Company may increase the commitments by up to $200 million, subject to customary conditions. Interest is determined, at the Company’s option, by the federal funds rate plus a margin of 0.125 percent to 0.375 percent or the LIBOR rate plus a margin of 1.125 percent to 1.375 percent depending on availability under the New Credit Agreement. In addition, the Company will pay a commitment fee of 0.20 percent per annum on the unused portion of the commitments. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Business Overview Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Lady Foot Locker, SIX:02, Kids Foot Locker, Champs Sports, Footaction, Runners Point, and Sidestep. The Direct-to-Customers segment is multi-brandedincludes Footlocker.com, Inc. and multi-channeled. This segment sells, through itsother affiliates, directlyincluding Eastbay, Inc., and our international ecommerce businesses, which sell to customers through itstheir Internet and mobile sites and catalogs. Eastbay, The Foot Locker brand is one of the affiliates, is among the largest direct marketersmost widely recognized names in the United States. The Direct-to-Customers segmentmarkets in which the Company operates, epitomizing premium quality for the websites for eastbay.com, final-score.com, eastbayteamsales.com,active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker, and Kids Foot Locker, as well as websites alignedFootlocker.com, its direct-to-customer business. Through various marketing channels, including broadcast, digital, social, print, and various sports sponsorships and events, the Company reinforces its image with a consistent message — namely, that it is the brand namesdestination for athletically inspired shoes and apparel with a wide selection of its store banners (footlocker.com, footlocker.ca, footlocker.eu, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, runnerspoint.com, and sidestep-shoes.com). Additionally, this segment includes sp24.com,merchandise in a clearance website for our European e-commerce business.full-service environment. Store Count At October 31, 2015,April 30, 2016, the Company operated 3,4323,396 stores as compared with 3,4233,383 and 3,4743,419 stores at January 31,30, 2016 and May 2, 2015, and November 1, 2014, respectively. A total of 64 franchised stores were operating at October 31, 2015,April 30, 2016, as compared with 7864 and 7382 stores at January 31,30, 2016 and May 2, 2015, and November 1, 2014, respectively. During the third quarter of 2015, the Company completed an acquisition from Futura Sport AG of 10 Runners Point and Sidestep stores, which were previously franchise stores. 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 All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of 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 increased by $63$71 million, or 3.63.7 percent, to $1,794$1,987 million for the thirteen weeks ended October 31, 2015,April 30, 2016, from $1,731$1,916 million for the thirteen weeks ended November 1, 2014. ForMay 2, 2015. Comparable-store sales increased by 2.9 percent for the thirty-ninethirteen weeks ended October 31, 2015, sales of $5,405 million increased 3.1 percent from sales of $5,240 millionApril 30, 2016.
Gross Margin | | | | | | | | | Thirteen weeks ended | | | April 30, | | May 2, | | | 2016 | | 2015 | Gross margin rate | | 35.0 | % | | 35.0 | % | Basis point change in the gross margin rate | | — | | | | | Components of the change- | | | | | | | Merchandise margin rate improvement | | 20 | | | | | Higher occupancy and buyers' compensation expense rate | | (20) | | | | |
The gross margin rate remained unchanged for the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales for both the thirteen and thirty-nine week periods increased 8.9 percentweeks ended April 30, 2016 as compared with the corresponding prior-year periods. Comparable-store sales increased by 8.7 percent for both the thirteen and thirty-nine weeks ended October 31, 2015.
Gross Margin
| | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | Gross margin rate | | | 33.8 | % | | | 33.2 | % | | | 33.9 | % | | | 33.3 | % | | Basis point increase in the gross margin rate | | | 60 | | | | | | | | 60 | | | | | | | Components of the increase- | | | | | | | | | | | | | | | | | | Merchandise margin rate improvement | | | 50 | | | | | | | | 30 | | | | | | | Lower occupancy and buyers’ compensation expense rate | | | 10 | | | | | | | | 30 | | | | | |
The grossperiod. This reflected a merchandise margin rate improved by 60improvement of 30 basis points, for bothprimarily due to a lower markdown rate as we increased full-price selling during the thirteencurrent period. This improvement was partially offset by an increase in shipping and thirty-nine weeks ended October 31, 2015. Excludinghandling costs, which reduced the effect of foreign currency fluctuations,merchandise margin rate by 10 basis points. Occupancy and buyer’s compensation expense increased at a rate higher than the increase in sales and reduced the gross margin rate improved by 80 and 7020 basis points for the thirteen and thirty-nine weeks ended October 31, 2015, respectively. The improvement in the gross margin rate for both the thirteen and thirty-nine weeks ended October 31, 2015 was primarily the result of a higher merchandise margin rate, which primarily reflected a lower markdown rate. In addition, the prior year merchandise margin rate was negatively affected by the liquidation of CCS merchandise. Further, the occupancy and buyers compensation expense rate decreased 10 and 30 basis points for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, which was the result of leveraging the fixed rent and salary elements within our cost of sales.points.
Selling, General and Administrative Expenses (SG&A)
| | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | SG&A | | $ | 352 | | | $ | 353 | | | $ | 1,028 | | | $ | 1,051 | | | $ Change | | $ | (1 | ) | | | | | | $ | (23 | ) | | | | | | % Change | | | (0.3 | )% | | | | | | | (2.2 | )% | | | | | | SG&A as a percentage of sales | | | 19.6 | % | | | 20.4 | % | | | 19.0 | % | | | 20.1 | % |
| | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | | April 30, 2016 | | May 2, 2015 | | | | ($ in millions) | SG&A | | $ | 361 | | $ | 345 | | $ Change | | $ | 16 | | | | | % Change | | | 4.6 | % | | | | SG&A as a percentage of sales | | | 18.2 | % | | 18.0 | % |
SG&A decreasedincreased by $1 million and $23$16 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016 as compared with the corresponding prior-year periods. Excluding theperiod. The effect of foreign currency fluctuations for this period was not significant. The SG&A expenserate increased by $18 million and $43 million and represented an improvement of 70 and 9020 basis points as a percentage of sales, for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, as compared with the corresponding prior-year periods. The SG&A rate improvements reflected continued disciplined expense management.prior year, reflecting higher corporate expenses related to the relocation of the corporate headquarters within New York City. Relocation costs totaled $4 million.
Depreciation and Amortization | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Depreciation and Amortization | | $ | 38 | | | $ | 34 | | | $ | 109 | | | $ | 106 | | | $ Change | | $ | 4 | | | | | | | $ | 3 | | | | | | | % Change | | | 11.8 | % | | | | | | | 2.8 | % | | | | |
| | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | | April 30, 2016 | | May 2, 2015 | | | | ($ in millions) | Depreciation and amortization | | $ | 39 | | $ | 35 | | $ Change | | $ | 4 | | | | | % Change | | | 11.4 | % | | | |
Depreciation and amortization increased by $4 million and $3 million for the thirteen weeks and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016 as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased by $6 million and $10 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, as compared with the corresponding prior-year periods. On a constant currency basis, theThe increase in depreciation and amortization reflected increased capital spending.
Pension Litigation Charge
During the third quarter of 2015, the Company recorded a $100 million pension litigation charge ($61 million after-tax or $0.43 per diluted share). This charge relates to a class action in which the plaintiffs alleged that the Company failed to properly disclose the effects of the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula. In September 2015, the court ruled in favor of the plaintiffsspending on store remodels, enhancing our digital sites, and issued a decision ordering that the pension plan be reformed. The Company is appealing the court’s decision, and the judgment has been stayed pending the outcome of the appeal. The Company’s reasonable estimate of this liability is a range between $100 million and $200 million, with no amount within that range more probable than any other amount. Therefore, in accordance with U.S. GAAP, the Company recorded a charge of $100 million pre-tax. Please see Item 1. “Financial Statements,” Note 12,Legal Proceedings for further information.
Interest Expense, Netvarious technologies.
| | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Interest expense | | $ | 3 | | | $ | 3 | | | $ | 8 | | | $ | 8 | | | Interest income | | | (2 | ) | | | (2 | ) | | | (5 | ) | | | (5 | ) | | Interest expense, net | | $ | 1 | | | $ | 1 | | | $ | 3 | | | $ | 3 | |
Interest Expense, Net | | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | | April 30, 2016 | | May 2, 2015 | | | | ($ in millions) | Interest expense | | $ | 3 | | $ | 3 | | Interest income | | | (3) | | | (2) | | Interest expense, net | | $ | — | | $ | 1 | |
Interest
Net interest expense and interest income were unchangeddecreased by $1 million for the thirteen weeks ended April 30, 2016 as compared with the prior year.corresponding prior-year period, reflecting increased income due to a combination of higher cash balances and slightly higher average interest rates. Income Taxes TheFor the thirteen weeks ended April 30, 2016, the Company recorded an income tax provisionsprovision of $37 million and $209$107 million, which represented an effective tax ratesrate of 31.736.0 percent, and 35.3 percent forcompared to the thirteen and thirty-nine weeks ended October 31, 2015, respectively. For the thirteen and thirty-nine weeks ended November 1, 2014, the Company recordedprior-year income tax provisionsprovision of $67 million and $211$106 million, which represented an effective tax ratesrate of 35.8 percent and 36.1 percent, respectively.36.5 percent. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.
The Company regularly assesses the adequacy of itsthe Company’s 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. IncludedThe changes in boththe tax reserves for the thirteen weeks ended October 31,April 30, 2016 and May 2, 2015 and November 1, 2014 are tax benefits of $1 million from reserve releases due to expiration of statutes of limitation. Included in both the thirty-nine weeks ended October 31, 2015 and November 1, 2014 are tax benefits of $2 million from reserve releases due to settlements of tax examinations and lapse of statutes of limitation.
During the third quarter of 2015, the Company recorded a pension-related litigation charge of $100 million with a related tax benefit of $39 million. This litigation charge reduced the overall effective rate because it reduced the proportion of the Company’s worldwide income taxed in the United States, where the tax rates are the highest. Additionally, the thirty-nine weeks ended October 31, 2015 includes tax benefits totaling $1 million related to an adjustment to deductible compensation costs due to executive changes and a Canadian provincial tax rate change.were not significant.
Excluding the impact of the litigation charge, reserve releases, and other discrete items, theThe effective tax rate for the thirteen and thirty-nine weeks ended October 31, 2015 was essentially unchangedApril 30, 2016 decreased as compared with the corresponding prior-year periods.period, due primarily to a higher proportion of income earned in lower tax jurisdictions.
The Company currently expects its fourth quarter and full-year tax rate to approximate 36be approximately 36.1 percent, excluding the effect of any additional nonrecurring items that may occur. The actual tax ratesoccur and will depend primarily on the level and mix of income earned in the United States as compared with its international operations. Net Income For the thirteen weeks ended October 31, 2015,April 30, 2016, net income decreasedincreased by $40$7 million, to $80 millionor 3.8 percent as compared with the corresponding prior-year period. For the thirty-nine weeks ended October 31, 2015, net income Diluted earnings per share increased by $9 million7.8 percent to $383 million as compared with the corresponding prior-year period. These changes include the pension litigation charge. Excluding the pension litigation charge and other non-GAAP adjustments, net income increased by $20 million or 16.5 percent and $66 million or 17.5 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, as compared with the corresponding prior-year periods.$1.39 per share. Reconciliation of Non-GAAP Measures
The following tables present certain Non-GAAP measures. The Company believes this non-GAAP information is a useful measure to investors because it provides for a more direct comparison of the results. The non-GAAP financial information is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP.
The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items. Presented below are GAAP and non-GAAP results for the thirteen and thirty-nine weeks ended October 31, 2015 and November 1, 2014, respectively.
| | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Net income, as reported | | $ | 80 | | | $ | 120 | | | $ | 383 | | | $ | 374 | | | After-tax adjustments to arrive at non-GAAP: | | | | | | | | | | | | | | | | | | Pension litigation charge | | | 61 | | | | — | | | | 61 | | | | — | | | Runners Point Group integration costs | | | — | | | | 1 | | | | — | | | | 2 | | | Impairment of intangibles | | | — | | | | — | | | | — | | | | 2 | | | Net income, non-GAAP | | $ | 141 | | | $ | 121 | | | $ | 444 | | | $ | 378 | | | Diluted EPS, as reported | | $ | 0.57 | | | $ | 0.82 | | | $ | 2.71 | | | $ | 2.55 | | | After-tax adjustments to arrive at non-GAAP: | | | | | | | | | | | | | | | | | | Pension litigation charge | | | 0.43 | | | | — | | | | 0.43 | | | | — | | | Runners Point Group integration costs | | | — | | | | 0.01 | | | | — | | | | 0.01 | | | Impairment of intangibles | | | — | | | | — | | | | — | | | | 0.02 | | | Diluted EPS, non-GAAP | | $ | 1.00 | | | $ | 0.83 | | | $ | 3.14 | | | $ | 2.58 | |
As discussed more fully above and in the notes to the financial statements, during the third quarter of 2015 the Company recorded a charge of $100 million, $61 million after-tax or $0.43 per share, related to pension litigation.
The non-GAAP items in the prior year include integration costs and impairment charges. For the thirteen and thirty-nine weeks ended November 1, 2014, the Company recorded after-tax expenses of $1 million and $2 million, respectively, for costs associated with the integration of Runners Point Group. During the first quarter of 2014, the Company recorded an after-tax impairment charge of $1 million, or $0.01 per diluted share, 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 $0.01 per diluted share, related to the impairment of the CCS tradename, resulting from the transition of its skate business from CCS to its Eastbay brand.
Accordingly, the Company excluded the above items to arrive at its non-GAAP results.
Segment Information The Company has determined that its reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest expense. The following table summarizes results by segment: | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | Thirteen weeks ended | | | | | October 31, | | November 1, | | October 31, | | November 1, | | | April 30, | | May 2, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | 2015 | | | | | ($ in millions) | | | ($ in millions) | | Sales | | | | | | | | | | | | | | | | | | | | | | | Athletic Stores | | $ | 1,571 | | | $ | 1,521 | | | $ | 4,755 | | | $ | 4,646 | | | $ | 1,735 | | $ | 1,681 | | | Direct-to-Customers | | | 223 | | | | 210 | | | | 650 | | | | 594 | | | 252 | | | 235 | | | | | $ | 1,794 | | | $ | 1,731 | | | $ | 5,405 | | | $ | 5,240 | | | $ | 1,987 | | $ | 1,916 | | | Operating Results | | | | | | | | | | | | | | | | | | | | | | | | Athletic Stores(1) | | $ | 206 | | | $ | 181 | | | $ | 649 | | | $ | 577 | | | | Direct-to-Customers(2) | | | 31 | | | | 25 | | | | 98 | | | | 67 | | | Athletic Stores | | | $ | 277 | | $ | 267 | | Direct-to-Customers | | | 38 | | | 40 | | | Division profit | | | 237 | | | | 206 | | | | 747 | | | | 644 | | | 315 | | | 307 | | | Less: Litigation charge(3) | | | 100 | | | | — | | | | 100 | | | | — | | | | Corporate expense, net | | | 20 | | | | 19 | | | | 54 | | | | 59 | | | Less: Corporate expense | | | 19 | | | 17 | | | Operating profit | | | 117 | | | | 187 | | | | 593 | | | | 585 | | | 296 | | | 290 | | | Other income (4) | | | 1 | | | | 1 | | | | 2 | | | | 3 | | | | Earnings before interest expense and income | | | 118 | | | | 188 | | | | 595 | | | | 588 | | | Other income (1) | | | 2 | | | 1 | | Earnings before interest expense and income taxes | | | 298 | | | 291 | | | Interest expense, net | | | 1 | | | | 1 | | | | 3 | | | | 3 | | | — | | | 1 | | | Income before income taxes | | $ | 117 | | | $ | 187 | | | $ | 592 | | | $ | 585 | | | $ | 298 | | $ | 290 | |
(1)
| Included in the thirty-nine weeks ended November 1, 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 the thirty-nine weeks ended November 1, 2014 is a $2 million non-cash impairment charge related to the CCS tradename.
| | | (3)
| Included in the thirteen and thirty-nine weeks ended October 31, 2015 is a pre-tax litigation charge of $100 million relating to the pension litigation matter. Please see Item 1. “Financial Statements,” Note 12,Legal Proceedings for further information.
| (1) | | (4) | Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts. |
Athletic Stores
| | | | | | | | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | | | | | | October 31, | | November 1, | | | October 31, | | November 1, | | | Thirteen weeks ended | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | April 30, 2016 | | May 2, 2015 | | | | | ($ in millions) | | | ($ in millions) | | Sales | | $ | 1,571 | | | $ | 1,521 | | | $ | 4,755 | | | $ | 4,646 | | | $ | 1,735 | | $ | 1,681 | | | $ Change | | $ | 50 | | | | | | | $ | 109 | | | | | | | $ | 54 | | $ | | | | % Change | | | 3.3 | % | | | | | | | 2.3 | % | | | | | | | 3.2 | % | | | | | Division profit | | $ | 206 | | | $ | 181 | | | $ | 649 | | | $ | 577 | | | $ | 277 | | $ | 267 | | | Division profit margin | | | 13.1 | % | | | 11.9 | % | | | 13.6 | % | | | 12.4 | % | | 16.0 | % | | 15.9 | % |
Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased by 9.1 percent and 8.63.4 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016 as compared with the corresponding prior-year periods.period. Comparable-store sales increased by 8.0 percent and 7.72.2 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, whichApril 30, 2016. Our comparable-store sales growth was led by our international divisions and was largely driven by the performance of Foot Locker Europe.Europe and Foot Locker Canada. The footwear sales growth for Foot Locker Europe posted double-digit comparable-store gains in all major categories and in almost all countries. Lifestylewas driven by lifestyle running basketball, and classic court styles continued to be the main drivers of the increase instyles. Children’s footwear sales while both brandedalso performed well. Foot Locker Canada experienced strong footwear sales largely driven by men’s basketball styles, which benefited from the excitement and private-label apparel performed well.elevated product offerings surrounding the NBA All-Star Game held in Toronto, Ontario. These increases were partially offset by comparable-store declines for Runners Point and Sidestep comparable-store sales declinedas they continued to face assortment and traffic challenges. Our focus for both the quarterthese banners is to improve and year-to-date periods, due to the continued segmentation process and the overreliance on a few key running styles. Our segmentation process includes better definingdiversify our product offerings for each of these banners and executing upon our multi-banner strategy in the European market. We are broadening the assortment in the Runners Point stores beyond performance running to includealong with providing a more lifestyle running products, while the Sidestep stores are being shifted to lifestyle and casual footwear.elevated in-store experience. Management believes that this segmentation process,these initiatives, along with initiativesmarketing campaigns targeted to provide more diversified product assortments,improve traffic to the stores, will position thesethe banners for future growth. Management will monitor the results of this business during the fourth quarter and will assess, if necessary, the impact of various initiatives on the projected performance of this division, which may include an impairment review.
Domestically, all formats generated comparable-store sales gains for the quarter, and year-to-date periods, with the exception of Footaction, which generated a slightly negative result for the quarter. Foot Locker and Kids Foot LockerChamps Sports led the overall domestic comparable-store sales increases.increase, which was driven by footwear. Champs Sports benefited from strong sales from lifestyle running and casual styles. Lifestyle running and basketball (led by Jordan and key marquee player styles) continue to beclassic court styles were the strongestprimary drivers of footwear sales foracross the domestic banners, both in men’s and women’s footwear. This was partially offset by declines in men’s basketball, particularly certain marquee player shoes. The decline in sales of basketball styles was the quarter and year-to-date periods. Sales also benefited from the continued expansion of various shop-in-shop partnerships with our key vendors. Court classics and boots also contributed to the comparable-store sales increase during the third quarter.primary factor for Footaction’s comparable-store decrease. While Lady Foot Locker/SIX:02’s overall sales experienced a slight decline for the quarter and a modest increase for the year-to-date period. Footaction is in the early stages of remodeling its store fleet, which has resulted in comparable-store sales being negatively affecteddecreased during the quarter, as a few large stores were closed during this time for remodels. Lady Foot Locker/SIX:02the combined banners produced a positive comparable-store sales gain forresult. The overall sales decline resulted from the sixth consecutive quarter, with a comparable-store gain for both the quarter and year-to-date periods. Champs Sports also generated a comparable-store sales gain for the quarter and year-to-date periods, with increased footwear salesclosure of 38 Lady Foot Locker stores partially offset by declinesthe opening of 11 SIX:02 stores. The comparable-store gain was primarily attributed to footwear sales growth, as women’s lifestyle, running, and court styles performed well. The gain in apparel and accessories. Thefootwear was partially offset by a decline in Champs Sports’sales of branded apparel. We are continuing to work with our vendors to refine our assortment of women’s apparel sales primarily reflects the continuation of the customer’s shift away from licensed apparel.to include more athletically-inspired lifestyle assortments. Athletic Stores division profit increased by 13.8 percent and 12.53.7 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016, as compared with the corresponding prior-year periods.period. Division profit, as a percentage of sales was 13.1 percent and 13.6increased to 16.0 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively. This represents a 120 basis point improvement for both the thirteen and thirty-nine week periods ended October 31, 2015,April 30, 2016 as compared with 15.9 percent for the corresponding prior-year periods. These increases primarily reflect improved sales,period. The division profit margin as of April 30, 2016 reflected an improved grossmerchandise margin rate driven primarily by improved merchandise margin, and continued diligent expense management. Included in the resultsa lower markdown rate. Direct-to-Customers | | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | | April 30, 2016 | | May 2, 2015 | | | | ($ in millions) | Sales | | $ | 252 | | $ | 235 | | $ Change | | $ | 17 | | | | | % Change | | | 7.2 | % | | | | Division profit | | $ | 38 | | $ | 40 | | Division profit margin | | | 15.1 | % | | 17.0 | % |
Comparable-sales for the thirty-nine weeks ended November 1, 2014 is a $1 million impairment charge to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland.
Direct-to-Customers
| | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | | | October 31, | | | November 1, | | | October 31, | | | November 1, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | | ($ in millions) | | | Sales | | $ | 223 | | | $ | 210 | | | $ | 650 | | | $ | 594 | | | $ Change | | $ | 13 | | | | | | | $ | 56 | | | | | | | % Change | | | 6.2 | % | | | | | | | 9.4 | % | | | | | | Division profit | | $ | 31 | | | $ | 25 | | | $ | 98 | | | $ | 67 | | | Division profit margin | | | 13.9 | % | | | 11.9 | % | | | 15.1 | % | | | 11.3 | % |
Excluding the effect of foreign currency fluctuations, Direct-to-Customers segment sales increased by 7.6 percent and 11.07.3 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April30, 2016. This increase was fueled by the continued growth of ecommerce associated with our store-banner websites, both domestically and internationally. Partially offsetting this increase were declines in our Eastbay and Runners Point businesses, coupled with lower shipping and handling revenue as compared with the corresponding prior-year period. Comparable sales increased by 13.4 percent and 16.8 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively.our customers continue to prefer free shipping offers.
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. Our U.S. store-banner website sales increased significantly, with collective gains of nearly 30 percent and 40 percent for the quarter and year-to-date periods, respectively, reflecting the continued success and expansion of the connectivity of store banners to the e-commerce sites. Footwear continues to be our strongest category and was led by basketball,Jordan, women’s casual styles, and training styles,children’s footwear, each of which all posted strong comparable salescomparable-sales gains during the quarter and year-to-date periods. These increases were partially offset byquarter. Eastbay’s sales decreased for the 2014 closurethirteen weeks ended April 30, 2016 reflecting a decline in sales of the CCS direct business.performance-related product.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 31, 2015 increasedApril 30, 2016 decreased by $6$2 million and $31 million, respectively, as compared with the corresponding prior-year periods.period. Division profit, as a percentage of sales, was 13.9 percent and 15.1 percent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively,April 30, 2016, as compared with 11.9 percent and 11.317.0 percent for the corresponding prior-year periods. The increaseperiod. This decline was driven by a lower gross margin rate primarily reflected strong flow-throughas a result of sales to profit, resulting from improved gross margins due to more full-price sellinglower shipping and diligent expense management. Included in the prior-year results was a $2 million tradename impairment charge related to the CCS e-commerce business, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner. Division profit in the prior-year periods was also negatively affected by the CCS business results.handling revenue.
Corporate Expense | | | | | | | | | | | | | | | | | Thirteen weeks ended | | | Thirty-nine weeks ended | | | Thirteen weeks ended | | | | | October 31, | | November 1, | | | October 31, | | | November 1, | | | April 30, | | May 2, | | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | 2015 | | | | | ($ in millions) | | | ($ in millions) | | Corporate expense | | $ | 20 | | | $ | 19 | | | $ | 54 | | | $ | 59 | | | $ | 19 | | $ | 17 | | | $ Change | | $ | 1 | | | | | | | $ | (5 | ) | | | | | | $ | 2 | | | | |
Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $3 million for both the thirteen weeks ended October 31, 2015April 30, 2016 and November 1, 2014, and was $8 million and $9 million for the thirty-nine weeks ended October 31, 2015 and November 1, 2014, respectively. May 2, 2015. 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-nine weeks ended October 31, 2015, respectively,April 30, 2016, thus reducing corporate expense. Excluding the corporate allocation change as well as depreciation and amortization, corporate expense, as compared with the corresponding prior-year periods, increased by $2$4 million for the thirteen weeks ended October 31, 2015 and decreased by $1 million for the thirty-nine weeks ended October 31, 2015. April 30, 2016. The $2$4 million increase in corporate expense for the thirteen weeks ended October 31, 2015April 30, 2016 was primarily related to an increase in legal accruals coupled with costs incurred in connection with the spring 2016 relocation of our corporate headquarters within New York City. The $1 million decrease in corporate expense forThis relocation was completed during the thirty-nine weeks ended October 31, 2015 was primarily related to prior-year costs incurred for the integration of Runners Point Group of $2 million. This was partially offset by $1 million of current year costs relating to the corporate headquarters relocation.first quarter. Liquidity and Capital Resources
Liquidity
The Company’s primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been to:been: to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; to make retirement plan contributions, quarterly dividend payments, and interest payments; and to fund other cash requirements to support the development of 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. The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of October 31, 2015,April 30, 2016, approximately $740$549 million remained available under the Company’s current $1 billion share repurchase program. As discussed further in theLegal Proceedingsnote under “Item 1. Financial Statements,” during the third quarter of 2015 the Company recorded a pre-tax charge of $100 million ($($61 million after-tax) in the third quarter of 2015. . In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company. The $100 million charge has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeals process can be lengthy. Additionally, the timing and the amount of any future contributions to theThe pension plan is dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets. The pension plan iscurrently sufficiently funded to absorb a $100 million liability and, accordingly, we do not anticipate the need to make any pension contributions in the near term.term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets. Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.
Operating Activities
| | | | | | | | | | | | | | | Thirty-nine weeks ended | | Thirteen weeks ended | | | | October 31, | | | November 1, | | April 30, | | May 2, | | | | 2015 | | | 2014 | | 2016 | | 2015 | | | | ($ in millions) | | ($ in millions) | | Net cash provided by operating activities | | $ | 414 | | | $ | 439 | | $ | 212 | | $ | 213 | | $ Change | | $ | (25 | ) | | | | | $ | (1) | | | |
The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, share-based compensation expense, and share-based related tax benefits. The decrease from the prior year primarily reflects working capital changes and an increase in cash paid for income taxesa $25 million contribution to the U.S. qualified pension plan made during the thirty-nine weeks ended October 31, 2015. The increasefirst quarter of cash paid for taxes of $41 million reflected higher amounts paid due to2016. No contribution was made in the Company’s earnings growth.prior-year period. Investing Activities
| | | | | | | | | | | | | | | Thirty-nine weeks ended | | Thirteen weeks ended | | | | October 31, | | | November 1, | | April 30, | | May 2, | | | | 2015 | | | 2014 | | 2016 | | 2015 | | | | ($ in millions) | | ($ in millions) | | Net cash used in investing activities | | $ | 174 | | | $ | 129 | | $ | 65 | | $ | 60 | | $ Change | | $ | 45 | | | | | | $ | 5 | | | |
Capital expenditures represented a $35$5 million increase from the prior year, which reflected a higher number of store projects in progress for the current year, as well as increased spending on corporate technology projects. The Company’s full yearfull-year forecast for capital expenditures is $228$292 million, which includes $174$216 million related to the remodeling or relocation of existing stores and approximately 110100 new store openings, as well as $54$76 million for the development of information systems, websites, infrastructure, and our corporate headquarters relocation within New York City. During the third quarter of 2015, the Company completed an asset acquisition for $2 million involving 10 Runners Point and Sidestep stores in Switzerland, of which $1 million will be paid during the fourth quarter. The prior year included $9 million from the sales and maturities of short-term investments. Financing Activities
| | | | | | | | | | | | | | | Thirty-nine weeks ended | | Thirteen weeks ended | | | | October 31, | | | November 1, | | April 30, | | May 2, | | | | 2015 | | | 2014 | | 2016 | | 2015 | | | | ($ in millions) | | ($ in millions) | | Net cash used in financing activities | | $ | 322 | | | $ | 240 | | $ | 112 | | $ | 127 | | $ Change | | $ | 82 | | | | | | $ | (15) | | | |
During the thirty-ninethirteen weeks ended October 31, 2015,April 30, 2016, the Company repurchased 5,050,0001,371,174 shares of its common stock for $316$88 million, as compared with 3,547,5532,300,000 shares repurchased for $174$129 million in the corresponding prior-year period. The Company declared and paid dividends during the first three quartersquarter of 2016 and 2015 and 2014 of $105$37 million and $96$35 million, respectively. This represents quarterly rates of $0.25$0.275 and $0.22$0.25 per share for 2016 and 2015, and 2014, respectively.respectively. Additionally, the Company received proceeds from the issuance of common stock in connection with employee stock programs of $68$7 million and $22$23 million for the thirty-ninethirteen weeks ended October 31,April 30, 2016 and May 2, 2015, and November 1, 2014, respectively. In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $33$6 million and $11$14 million as a financing activity for the thirty-ninethirteen weeks ended October 31,April 30, 2016 and May 2, 2015, and November 1, 2014, respectively. The increaseddecreased excess tax benefit primarily reflected a higherlower number of stock option exercises during the first three quartersquarter of 20152016 as compared with the corresponding prior-year period. The activity for the thirty-nine weeks ended October 31, 2015 and November 1, 2014 also reflects payments made on capital lease obligations of $2 million and $3 million, respectively.
Critical Accounting Policies and Estimates There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2015.30, 2016. Recent Accounting Pronouncements Descriptions of the recently issued accounting principles are included Item 1. “Financial Statements” in Note 1,Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.
Disclosure Regarding Forward-Looking Statements This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key suppliers for a majority of its merchandise purchases (including a significant portion from one key supplier), cybersecurity breaches, 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 20142015 Annual Report on Form 10-K.10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
Item 4. ControlsControls 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 October 31, 2015April 30, 2016 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 October 31, 2015,April 30, 2016, 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. PART II - OTHER INFORMATION Item 1. LegalLegal Proceedings
Information regarding the Company’s legal proceedings is contained in theLegal Proceedings note under Item 1. “Financial Statements.” Item 1A. Risk Factors
There were no material changes to the risk factors disclosed in the 20142015 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 October 31, 2015:April 30, 2016: | 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 2, 2015 through August 29, 2015 | | | 100,340 | | | $ | 70.04 | | | | 100,340 | | | $ | 843,894,883 | | | August 30, 2015 through October 3, 2015 | | | 698,910 | | | $ | 72.21 | | | | 698,910 | | | $ | 793,426,324 | | | October 4, 2015 through October 31, 2015 | | | 760,750 | | | $ | 69.85 | | | | 760,750 | | | $ | 740,284,926 | | | | | | 1,560,000 | | | $ | 70.92 | | | | 1,560,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Approximate | | | | | | | | Total Number of | | Dollar Value of | | | Total | | Average | | Shares Purchased as | | Shares that may | | | Number | | Price | | Part of Publicly | | yet be Purchased | | | of Shares | | Paid Per | | Announced | | Under the | Date Purchased | | Purchased (1) | | Share (1) | | Program (2) | | Program (2) | Jan. 31, 2016 - Feb. 27, 2016 | | 578,831 | | $ | 65.53 | | 576,674 | | $ | 599,067,681 | Feb. 28, 2016 - Mar. 2, 2016 | | 682,336 | | | 63.81 | | 600,000 | | | 560,891,566 | Mar. 3, 2016 - Apr. 30, 2016 | | 194,500 | | | 61.08 | | 194,500 | | | 549,011,610 | | | 1,455,667 | | | 64.13 | | 1,371,174 | | | |
(1) | | (1) | These columns also reflect shares acquired in open market purchases.satisfaction of the tax withholding obligations of holders of restricted stock awards and units which vested during the quarter, as well as shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares. | (2) | On February 17, 2015, the Board of Directors approved a new 3-year, $1 billion share repurchase program extending through January 2018. |
| | Item 6. Exhibits | | (a) | Exhibits | | The exhibits that are in this report immediately follow the index. |
SIGNSIGNATUREATURE 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: December 9, 2015June 8, 2016 | FOOT LOCKER, INC. | | | | | /s/ Lauren B. Peters | | LAUREN B. PETERS | | Executive Vice President and Chief Financial Officer |
FOOT LOCKER, INC. INDEX OFOF EXHIBITS Number | | Description | Exhibit No. | | Description | 12*10.1† | | Form of Restricted Stock Unit Award Agreement for RSU portion of long-term incentive compensation awards (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated March 23, 2016 filed on March 29, 2016). | 10.2† | | Form of Restricted Stock Unit Award Agreement for long-term incentive RSU awards (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K dated March 23, 2016 filed on March 29, 2016). | 10.3† | | Long-Term Incentive Compensation Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K dated March 23, 2016 filed on March 29, 2016). | 10.4 | | Credit Agreement, dated as of May 19, 2016, among Foot Locker, Inc., a New York corporation, the guarantors party thereto, the lenders party thereto and Wells Fargo, National Association, as agent, letter of credit issuer and swing line lender (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated May 19, 2016 filed on May 19, 2016). | 12* | | Computation of Ratio of Earnings to Fixed Charges. | 15* | | Accountants’ Acknowledgement. | 15*31.1* | | Accountants’ Acknowledgement. | | | | 31.1* | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 31.2* | | | 31.2* | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 32** | | | 32** | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 99* | | | 99* | | Report of Independent Registered Public Accounting Firm. | 101.INS* | | | 101.INS* | | XBRL Instance Document. | 101.SCH* | | | 101.SCH* | | XBRL Taxonomy Extension Schema. | 101.CAL* | | | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase. | 101.DEF* | | | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase. | 101.LAB* | | | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase. | 101.PRE* | | | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase. | | | | *† | | Filed herewith.Management contract or compensatory plan or arrangement. | * | | Filed herewith. | ** | | Furnished herewith. |
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