FL-2017 Q3 10-Q Filing Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________



FORM 10-Q





 

(Mark One)

 







 

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



For the quarterly period ended: October 28, 2017



OR





 

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



For the transition period from __________ to __________



Commission File Number: 1-10299

______________________________________



Picture 1

(Exact name of registrant as specified in its charter)

______________________________________





 

New York

13-3513936

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)



330 West 34th Street, New York, New York 10001

(Address of principal executive offices, Zip Code)

(212-720-3700)

(Registrant’s telephone number, including area code)





 

 

 

 



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company 

 

Emerging growth company 

 

 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No   

   

Number of shares of Common Stock outstanding as of November 24,  2017: 121,205,589





 

 


 

FOOT LOCKER, INC.

TABLE OF CONTENTS





 

 

 

 

 



 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION  

 



 

Item 1.

 

Financial Statements

 



 

 

 

Condensed Consolidated Balance Sheets 



 

 

 

Condensed Consolidated Statements of Operations 



 

 

 

Condensed Consolidated Statements of Comprehensive Income



 

 

 

Condensed Consolidated Statements of Cash Flows 



 

 

 

Notes to Condensed Consolidated Financial Statements 



 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

17 



 

Item 4.

 

Controls and Procedures 

26 



 

 

 

 

 

PART II

 

OTHER INFORMATION 

 



 

Item 1. 

 

Legal Proceedings 

26 



 

Item 1A.

 

Risk Factors 

26 



 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds 

26 



 

Item 6. 

 

Exhibits 

26 



 

 

 

 

 

SIGNATURE

 

27 



 

 

 

 

 

INDEX OF EXHIBITS

 

28 









 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except shares)









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



October 28,

 

October 29,

 

January 28,



2017

 

2016

 

2017



(Unaudited)

 

(Unaudited)

 

*

ASSETS

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

890 

 

$

865 

 

$

1,046 

Merchandise inventories

 

1,313 

 

 

1,361 

 

 

1,307 

Other current assets

 

295 

 

 

291 

 

 

280 



 

2,498 

 

 

2,517 

 

 

2,633 

Property and equipment, net

 

835 

 

 

732 

 

 

765 

Deferred taxes

 

164 

 

 

171 

 

 

161 

Goodwill

 

158 

 

 

156 

 

 

155 

Other intangible assets, net

 

45 

 

 

43 

 

 

42 

Other assets

 

113 

 

 

75 

 

 

84 



$

3,813 

 

$

3,694 

 

$

3,840 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

241 

 

$

215 

 

$

249 

Accrued and other liabilities

 

326 

 

 

327 

 

 

363 

Current portion of capital lease obligations

 

 —

 

 

 

 

 —



 

567 

 

 

543 

 

 

612 

Long-term debt and obligations under capital leases

 

126 

 

 

127 

 

 

127 

Other liabilities

 

463 

 

 

391 

 

 

391 

Total liabilities

 

1,156 

 

 

1,061 

 

 

1,130 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital: 133,336,171;  174,687,964; and 132,616,087 shares outstanding, respectively

 

921 

 

 

1,168 

 

 

900 

Retained earnings

 

2,467 

 

 

3,546 

 

 

2,254 

Accumulated other comprehensive loss

 

(286)

 

 

(353)

 

 

(363)

Less: Treasury stock at cost: 10,730,582;  42,326,538; and 1,120,466 shares, respectively

 

(445)

 

 

(1,728)

 

 

(81)

Total shareholders' equity

 

2,657 

 

 

2,633 

 

 

2,710 



$

3,813 

 

$

3,694 

 

$

3,840 









See Accompanying Notes to Condensed Consolidated Financial Statements.



* The balance sheet at January 28, 2017 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017.



 

1


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Sales 

 

$

1,870 

 

$

1,886 

 

$

5,572 

 

$

5,653 



 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,290 

 

 

1,246 

 

 

3,809 

 

 

3,730 

Selling, general and administrative expenses

 

 

368 

 

 

366 

 

 

1,078 

 

 

1,077 

Depreciation and amortization

 

 

44 

 

 

40 

 

 

127 

 

 

118 

Litigation and other charges

 

 

13 

 

 

 

 

63 

 

 

Income from operations

 

 

155 

 

 

228 

 

 

495 

 

 

722 



 

 

 

 

 

 

 

 

 

 

 

 

Interest (income) / expense, net

 

 

 —

 

 

 

 

(1)

 

 

Other income

 

 

(1)

 

 

 —

 

 

(2)

 

 

(3)

Income before income taxes

 

 

156 

 

 

227 

 

 

498 

 

 

723 

Income tax expense

 

 

54 

 

 

70 

 

 

165 

 

 

248 

Net income 

 

$

102 

 

$

157 

 

$

333 

 

$

475 



 

 

 

 

 

 

 

 

 

 

 

 

  Basic earnings per share

 

$

0.81 

 

$

1.18 

 

$

2.57 

 

$

3.53 

  Weighted-average shares outstanding

 

 

126.0 

 

 

132.9 

 

 

129.6 

 

 

134.6 



 

 

 

 

 

 

 

 

 

 

 

 

  Diluted earnings per share

 

$

0.81 

 

$

1.17 

 

$

2.55 

 

$

3.50 

  Weighted-average shares outstanding, assuming dilution

 

 

126.4 

 

 

134.0 

 

 

130.3 

 

 

135.7 





See Accompanying Notes to Condensed Consolidated Financial Statements.









 

 



 

2


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)

 

   





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Net income

 

$

102 

 

$

157 

 

$

333 

 

$

475 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment: 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment arising during the period, net of income tax

 

 

(4)

 

 

(14)

 

 

70 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges: 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of income tax

 

 

 —

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

 —

 

 

 —

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement adjustments: 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1,  $1,  $3 and $3 million, respectively, and foreign currency fluctuations

 

 

 

 

 

 

 

 

Comprehensive income

 

$

100 

 

$

147 

 

$

410 

 

$

488 





See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

   

3


 

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)

 





 

 

 

 

 



 

 

 

 

 



Thirty-nine weeks ended



October 28,

 

October 29,



2017

 

2016 *



 

 

 

 

 

From operating activities:

 

 

 

 

 

   Net income

$

333 

 

$

475 

   Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

      Non-cash impairment charges

 

 —

 

 

      Depreciation and amortization

 

127 

 

 

118 

      Share-based compensation expense

 

11 

 

 

17 

      Qualified pension plan contributions

 

(25)

 

 

(33)

      Change in assets and liabilities:

 

 

 

 

 

         Merchandise inventories

 

18 

 

 

(77)

         Accounts payable

 

(13)

 

 

(66)

         Accrued and other liabilities

 

(29)

 

 

(3)

         Pension litigation accrual

 

50 

 

 

 —

         Other, net

 

24 

 

 

40 

Net cash provided by operating activities

 

496 

 

 

477 



 

 

 

 

 

From investing activities:

 

 

 

 

 

   Capital expenditures

 

(204)

 

 

(193)

Net cash used in investing activities

 

(204)

 

 

(193)



 

 

 

 

 

From financing activities:

 

 

 

 

 

   Purchase of treasury shares

 

(362)

 

 

(352)

   Dividends paid on common stock

 

(120)

 

 

(111)

   Proceeds from exercise of stock options

 

12 

 

 

24 

   Treasury stock reissued under employee stock plan

 

 

 

   Shares of common stock repurchased to satisfy tax withholding obligations

 

(10)

 

 

(6)

   Payment of revolving credit agreement costs

 

 —

 

 

(2)

Net cash used in financing activities

 

(475)

 

 

(443)



 

 

 

 

 

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

 

30 

 

 

Net change in cash, cash equivalents, and restricted cash

 

(153)

 

 

(155)

Cash, cash equivalents, and restricted cash at beginning of period

 

1,073 

 

 

1,048 

Cash, cash equivalents, and restricted cash at end of period

$

920 

 

$

893 



 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

   Interest

$

 

$

   Income taxes

$

187 

 

$

271 



See Accompanying Notes to Condensed Consolidated Financial Statements.



* Amounts for the thirty-nine weeks ended October 29, 2016 have been revised from previously reported amounts to reflect the adoption of new accounting standards in the first quarter of 2017. For additional information, see the Recently Adopted Accounting Pronouncements note.



 

4


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies



Basis of Presentation



The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 3, 2018 and of the fiscal year ended January 28, 2017. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended January 28, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2017.



Recent Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company expects a change in the timing of recognizing gift card breakage, sales relating to shipping and handling for undelivered orders, and a change in timing for the recognition of expenses related to direct-response advertising costs. In addition, we expect a balance sheet reclassification from inventory to other current assets relating to our right to recover products for our sales returns, as well as a change to the accounting for our unredeemed rewards for our loyalty program as a reduction to sales instead of recording the charge to cost of goods sold. Although we are in the process of finalizing the quantification of the effects on the areas discussed above, we currently do not expect the adoption will significantly affect our consolidated statements of operations, financial position or cash flows. The Company expects to adopt the provisions of this standard using the modified retrospective method, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption.



In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize a lease liability and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods therein, and requires a modified retrospective adoption, with earlier adoption permitted. The Company does not expect to adopt this ASU until required and is evaluating the effect of this guidance. The Company has historically presented a non-GAAP measure to adjust its balance sheet to present operating leases as if they were capital leases. Based upon that analysis and preliminary evaluation of the standard, we estimate the adoption will result in the addition of $3 billion to $4 billion of assets and liabilities to our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows.



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective and will be adopted by the Company for annual reporting periods beginning after December 15, 2017, including interim periods therein. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. Based on deferred tax amounts related to applicable past intercompany transactions and the foreign exchange rates as of October 28, 2017, we expect the adoption will result in an increase in deferred income tax assets of approximately $40 million to $45 million.



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

5

 


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Adopted Accounting Pronouncements



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures, and classifications of the tax related items in the statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of 2017. Amendments relating to accounting for excess tax benefits and deficiencies have been adopted prospectively. For the thirteen and thirty-nine weeks ended October 28, 2017, the Company recorded excess tax benefits related to share-based compensation awards of $2 million and $9 million, respectively, to the income statement, within the income tax provision, whereas such benefits were previously recognized in equity. Also, in the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefits. This ASU also requires that we present excess tax benefits or deficiencies as operating activities in our condensed consolidated statement of cash flow. As a result of adopting this change retrospectively, we reclassified excess tax benefits of $16 million which were previously classified as cash flows from financing activities to operating activities for the thirty-nine weeks ended October 29, 2016. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $6 million, previously classified as cash flows from operating activities, were reclassified to financing activities for the thirty-nine weeks ended October 29, 2016. The Company has made a policy election of recording forfeitures as they occur instead of estimating forfeitures using a modified retrospective approach. The cumulative effect of this change was not significant.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU is effective for annual reporting periods beginning after December 15, 2017 including interim periods therein. The Company has adopted this ASU as of the first quarter of 2017. Accordingly, we restated our cash and cash equivalents balances in the condensed consolidated statements of cash flows to include restricted cash of $28 million as of October 29, 2016 and $27 million as of both January 30, 2016, and January 28, 2017. Please see Note 5, Restricted Cash, for a reconciliation of cash and cash equivalents as presented on our condensed consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows. 



2. Segment Information



The Company has determined that 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, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Sales

 

($ in millions)

Athletic Stores

 

$

1,612 

 

$

1,644 

 

$

4,819 

 

$

4,955 

Direct-to-Customers

 

 

258 

 

 

242 

 

 

753 

 

 

698 

Total sales

 

$

1,870 

 

$

1,886 

 

$

5,572 

 

$

5,653 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

Athletic Stores (1)

 

$

154 

 

$

213 

 

$

504 

 

$

683 

Direct-to-Customers

 

 

26 

 

 

32 

 

 

88 

 

 

92 

Division profit

 

 

180 

 

 

245 

 

 

592 

 

 

775 

Less: Pension litigation and reorganization charges (2), (3)

 

 

13 

 

 

 —

 

 

63 

 

 

 —

Less: Corporate expense

 

 

12 

 

 

17 

 

 

34 

 

 

53 

Operating profit

 

 

155 

 

 

228 

 

 

495 

 

 

722 

Interest (income) / expense, net

 

 

 —

 

 

 

 

(1)

 

 

Other income (4)

 

 

 

 

 —

 

 

 

 

Income before income taxes

 

$

156 

 

$

227 

 

$

498 

 

$

723 











 

6


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write down long-lived store assets of Runners Point and Sidestep. See Note 3, Litigation and Other Charges for additional information.

(2)

Included in the thirty-nine weeks ended October 28, 2017 is a pre-tax charge of $50 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.

(3)

Included in the thirteen and thirty-nine weeks ended October 28, 2017 is $13 million in pre-tax reorganization costs related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017, described more fully in Note 3, Litigation and Other Charges.

(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 and losses associated with foreign currency option contracts.





3. Litigation and Other Charges







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

($ in millions)

Pension litigation charge

 

$

 —

 

$

 —

 

$

50 

 

$

 —

Reorganization costs

 

 

13 

 

 

 —

 

 

13 

 

 

 —

Impairment of long-lived assets

 

 

 —

 

 

 

 

 —

 

 

Total litigation and other charges

 

$

13 

 

$

 

$

63 

 

$



During the third quarter of 2017, the Company reorganized its organizational structure by adjusting certain divisional responsibilities between our various businesses. As a result of this, as well as certain corporate staff reductions taken to improve corporate efficiency, the Company recorded a charge of $13 million. The charge consisted primarily of severance payments and benefit continuation costs for approximately 190 associates. The following is a reconciliation of the accrual for the quarter ended October 28, 2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Severance and

 

 

Other Related

 

 

 



 

 

Benefit Costs

 

 

Charges

 

 

Total



 

($ in millions)

Balance at January 28, 2017

 

$

 —

 

$

 —

 

$

 —

Amounts charged to expense

 

 

11 

 

 

 

 

13 

Cash payments

 

 

(2)

 

 

 —

 

 

(2)

Balance at October 28, 2017

 

$

 

$

 

$

11 



As more fully discussed in Note 14, Legal Proceedings, during the second quarter of 2017 the Company recorded a $50 million pension litigation charge.



Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a non-cash charge of $6 million to write down store fixtures and leasehold improvements related to the Runners Point and Sidestep businesses.



4. Hurricane-Related Costs



Hurricanes Harvey, Irma, and Maria adversely affected the Company’s third quarter of 2017 operations and resulted in the closure of approximately 450 of the Company’s retail stores for varying periods of time. As of October 28, 2017, 22 of these stores remain closed in Puerto Rico. The Company expects to re-open 8 of the remaining stores during the fourth quarter of 2017 and an additional 7 stores during the early part of 2018, dependent on timing of repairs and mall openings. Currently, we do not expect to re-open the balance of the stores.



The Company recorded a $7 million charge associated with its retail stores that were damaged by the hurricanes. This charge was recorded as a component of selling, general and administrative expenses in the Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 28, 2017. The charge reflects estimated property damages and other costs of $2 million and inventory write-offs of $5 million. The Company is working with its insurance providers to determine if any of the losses can be recovered.



7


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5. Restricted Cash



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



 

 

 

 

 

 

 

 

 



 

October 28,

 

October 29,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Cash and cash equivalents

 

$

890 

 

$

865 

 

$

1,046 

Restricted cash included in other current assets

 

 

 

 

 —

 

 

 —

Restricted cash included in other non-current assets

 

 

29 

 

 

28 

 

 

27 

Cash, cash equivalents, and restricted cash

 

$

920 

 

$

893 

 

$

1,073 



Amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe. In addition, restricted cash reflects deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.



6. Goodwill



Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual review of goodwill and intangible assets with indefinite lives performed during the first quarter of 2017 did not result in the recognition of impairment. The following table provides a summary of goodwill by reportable segment. The change in the balance represents foreign currency exchange fluctuations. 













 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

October 28,

 

October 29,

 

January 28,



    

2017

    

2016

    

2017



 

($ in millions)

Athletic Stores

 

$

18 

 

$

17 

 

$

16 

Direct-to-Customers

 

 

140 

 

 

139 

 

 

139 

Total goodwill

 

$

158 

 

$

156 

 

$

155 







7. Other Intangible Assets, net



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

October 28, 2017

 

October 29, 2016

 

January 28, 2017



 

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

 

Gross

 

Accum.

 

Net

($ in millions)

 

value

 

amort.

 

value

 

value

 

amort.

 

value

 

value

 

amort.

 

value

Amortized intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Lease acquisition costs

 

 $

129 

 

 $

(117)

 

 $

12 

 

$

118 

 

$

(107)

 

$

11 

 

 $

116 

 

$

(105)

 

$

11 



Trademarks / trade names

 

 

20 

 

 

(13)

 

 

 

 

20 

 

 

(13)

 

 

 

 

20 

 

 

(13)

 

 



Favorable leases

 

 

 

 

(6)

 

 

 

 

 

 

(5)

 

 

 

 

 

 

(5)

 

 



 

 

 $

156 

 

 $

(136)

 

 $

20 

 

$

145 

 

$

(125)

 

$

20 

 

 $

143 

 

$

(123)

 

20 

Indefinite life intangible assets: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Runners Point Group trademarks / trade names

 

 

 

 

 

 

 

 $

25 

 

 

 

 

 

 

 

 $

23 

 

 

 

 

 

 

 

 $

22 

Other intangible assets, net

 

 

 

 

 

 

 

 $

45 

 

 

 

 

 

 

 

$

43 

 

 

 

 

 

 

 

 $

42 







 

(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.

8


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the thirty-nine week period ended October, 28 2017, the Company recorded $2 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years.  Amortization expense recorded is as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

($ in millions)

 

 

October 28, 2017

 

 

October 29, 2016

     

October 28, 2017

 

October 29, 2016

Amortization expense

 

$

 

$

 

$

 

$



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



 

 

  

 

($ in millions)

Remainder of 2017

$

2018

 

2019

 

2020

 

2021

 

2022

 



8. Accumulated Other Comprehensive Loss



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



October 28,

 

October 29,

 

January 28,



2017

 

2016

 

2017



($ in millions)

Foreign currency translation adjustments

 $

(57)

 

$

(116)

 

$

(127)

Cash flow hedges

 

 

 

 

 

Unrecognized pension cost and postretirement benefit

 

(231)

 

 

(243)

 

 

(236)

Unrealized loss on available-for-sale security

 

 —

 

 

 —

 

 

(1)



 $

(286)

 

$

(353)

 

$

(363)



The changes in AOCL for the thirty-nine weeks ended October 28, 2017 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Items Related

 

 

 

 

 



 

Foreign Currency

 

 

 

to Pension and

 

Unrealized Loss on

 

 

 



 

Translation

 

Cash Flow

 

Postretirement

 

Available-For-

 

 

 

($ in millions)

 

Adjustments

 

Hedges

 

Benefits

 

Sale Security

 

Total

Balance as of January 28, 2017

 

$

(127)

 

$

 

$

(236)

 

$

(1)

 

$

(363)

OCI before reclassification

 

 

70 

 

 

 

 

(1)

 

 

 

 

71 

Reclassified from AOCL

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Other comprehensive income

 

 

70 

 

 

 

 

 

 

 

 

77 

Balance as of October 28, 2017

 

$

(57)

 

$

 

$

(231)

 

$

 —

 

$

(286)



Reclassifications from AOCL for the thirty-nine weeks ended October 28, 2017 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 (see Note 12)

 

Income tax benefit

 

(3)

Net of tax

 $





9


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Financial Instruments



The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a practice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 10, Fair Value Measurements.



Derivative Holdings Designated as Hedges



For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. The amount of such gains or losses that were recognized in earnings during the thirty-nine weeks ended October 28, 2017 was not significant and there were no such gains or losses in the corresponding prior-year period. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.



The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The most significant exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At quarter-end, substantially all of the Company’s hedged forecasted transactions were less than twelve months into the future, and the Company expects the derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.



The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges was not significant for the thirteen weeks ended October 28, 2017 and was a $1 million gain for the thirty-nine weeks ended October 28, 2017. At October 28, 2017, a $2 million gain remained in AOCL. For the thirteen and thirty-nine weeks ended October 29, 2016, the net change in fair value was a $1 million and $4 million gain, respectively. The notional value of the foreign exchange contracts designated as hedges outstanding at October 28, 2017 was $138 million, and these contracts mature at various dates through January 2019.  



Derivative Holdings Not Designated as Hedges



The Company enters into certain derivative contracts that are not designated as hedges, such as foreign exchange forward contracts and currency option contracts. These derivative contracts are used to manage certain costs of foreign currency-denominated merchandise purchases, intercompany transactions, and the effect of fluctuating foreign exchange rates on the reporting of foreign currency-denominated earnings. Changes in the fair value of derivative holdings not designated as hedges, as well as realized gains and premiums paid, are recorded in earnings immediately within selling, general and administrative expenses or other income, depending on the type of transaction. The net change in fair value was not significant for the thirteen and thirty-nine weeks ended October 28, 2017.

10


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The net change in fair value resulted in income of $1 million for the thirteen weeks ended October 29, 2016, and was not significant for the thirty-nine weeks ended October 29, 2016. The notional value of the foreign exchange contracts not designated as hedges outstanding at October 28, 2017 was $2 million, and these contracts mature in November 2017.



From time to time, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. No such contracts were outstanding at October 28, 2017. 



Fair Value of Derivative Contracts 



The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Balance Sheet

 

October 28,

 

October 29,

 

January 28,

($ in millions)

 

Caption

 

2017

 

2016

 

2017

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 

$

 

$

Foreign exchange forward contracts

 

Current liabilities

 

$

 

$

 —

 

$

Non-hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Current assets

 

$

 —

 

$

 

$

 —





10. Fair Value Measurements



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





 

 

 

Level 1 –

Quoted prices for identical instruments in active markets.







 

 

 

Level 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:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of October 28, 2017

 

As of October 29, 2016

 

As of January 28, 2017



 

($ in millions)



   

Level 1

 

Level 2

   

Level 3

   

Level 1

 

Level 2

   

Level 3

 

Level 1

 

Level 2

   

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 $

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 

$

 —

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

Total Assets

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

15 

 

$

 —

 

$

 —

 

$

 

$

 —

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

Total Liabilities

 

$

 —

 

$

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 

$

 —





11


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized gains or losses are determined to be other than temporary. 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 28,

 

October 29,

 

January 28,



 

2017

 

2016

 

2017



 

($ in millions)

Carrying value

 

$

126 

 

$

128 

 

$

127 

Fair value

 

$

145 

 

$

150 

 

$

148 



The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2. The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.



11. Earnings Per Share 

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

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

(in millions, except per share data)

Net Income

 

$

102 

 

$

157 

 

$

333 

 

$

475 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

126.0 

 

 

132.9 

 

 

129.6 

 

 

134.6 

Dilutive effect of potential common shares

 

 

0.4 

 

 

1.1 

 

 

0.7 

 

 

1.1 

Weighted-average common shares outstanding assuming dilution

 

 

126.4 

 

 

134.0 

 

 

130.3 

 

 

135.7 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.81 

 

$

1.18 

 

$

2.57 

 

$

3.53 

Earnings per share - diluted

 

$

0.81 

 

$

1.17 

 

$

2.55 

 

$

3.50 



 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive share-based awards excluded from diluted calculation

 

 

2.0 

 

 

0.5 

 

 

1.6 

 

 

0.4 



12


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company adopted ASU 2016-09 during the first quarter of 2017. As a result, excess tax benefits and tax deficiencies are no longer included as assumed proceeds in the calculation of diluted shares outstanding. This change was adopted prospectively.



Contingently issuable shares of 0.4 million and 0.3 million have not been included as the vesting conditions have not been satisfied as of October 28, 2017 and October 29, 2016, respectively. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.



12. Pension and Postretirement Plans



The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. The Company also has a defined benefit pension plan covering certain employees of the Runners Point Group.



In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.



The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which are recognized as part of SG&A expense:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

Postretirement Benefits



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

Oct. 28,

 

Oct. 29,

 

Oct. 28,

 

Oct. 29,

 

Oct. 28,

 

Oct. 29,

 

Oct. 28,

 

Oct. 29,

($ in millions)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Service cost

 

$

 

$

 

$

12 

 

$

12 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Interest cost

 

 

 

 

 

 

19 

 

 

19 

 

 

 —

 

 

 

 

 —

 

 

Expected return on plan assets

 

 

(9)

 

 

(9)

 

 

(28)

 

 

(27)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Amortization of net loss (gain)

 

 

 

 

 

 

10 

 

 

11 

 

 

 —

 

 

(1)

 

 

(1)

 

 

(2)

Net benefit expense (income)

 

$

 

$

 

$

13 

 

$

15 

 

$

 —

 

$

 —

 

$

(1)

 

$

(1)



During the first quarter of 2017, the Company made a contribution of $25 million to the U.S. qualified plan. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to make any further pension plan contributions during this year. Actual contributions are dependent on several factors, including the outcome of the ongoing U.S. pension litigation. See Note 14, Legal Proceedings, for further information. 



13. 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



October 28,

 

October 29,

 

October 28,

 

October 29,



2017

 

2016

 

2017

 

2016



($ in millions)

Options and shares purchased under the employee stock purchase plan

$

 

$

 

$

 

$

Restricted stock and restricted stock units

 

 

 

 

 

 

 

Total share-based compensation expense 

$

 

$

 

$

11 

 

$

17 



 

 

 

 

 

 

 

 

 

 

 

Tax benefit recognized

$

 

$

 

$

 

$





13


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Valuation Model and Assumptions



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



During the first quarter of 2017, in connection with the adoption of ASU 2016-09, we have made the accounting policy election to discontinue estimating forfeitures and will account for forfeitures as they occur.



The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the thirty-nine weeks ended October 28, 2017 and October 29, 2016:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Stock Option Plans

 

 

Stock Purchase Plan

 



 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 



 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted-average risk free rate of interest

 

2.1 

%

 

1.4 

%

 

0.9 

%

 

0.4 

%

Expected volatility

 

25 

%

 

30 

%

 

29 

%

 

27 

%

Weighted-average expected award life (in years)

 

5.4 

 

 

5.7 

 

 

1.0 

 

 

1.0 

 

Dividend yield

 

1.9 

%

 

1.7 

%

 

2.0 

%

 

1.7 

%

Weighted-average fair value

$

14.74 

 

$

15.71 

 

$

10.84 

 

$

14.04 

 



The information in the following table covers option activity under the Company’s stock option plans for the thirty-nine weeks ended October 28, 2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

   

 

 

Weighted-

 

Weighted-



 

 

Number

 

Average

 

Average



 

 

of

 

Remaining

 

Exercise



 

 

Shares

 

Contractual Life

 

Price



 

 

(in thousands)

 

(in years)

 

(per share)

Options outstanding at the beginning of the year

 

 

2,806 

 

 

 

 

$

42.61 

Granted

 

 

547 

 

 

 

 

 

69.58 

Exercised

 

 

(536)

 

 

 

 

 

21.38 

Expired or cancelled

 

 

(19)

 

 

 

 

 

61.01 

Options outstanding at October 28, 2017

 

 

2,798 

 

 

6.7 

 

$

51.82 

Options exercisable at October 28, 2017

 

 

1,729 

 

 

5.4 

 

$

42.91 

Options available for future grant at October 28, 2017

 

 

10,759 

 

 

 

 

 

 



The total fair value of options vested as of October 28, 2017 and October 29, 2016 was $8 million and $9 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 28, 2017 was $2 million and $12 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 29, 2016 was $10 million and $24 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 28,

 

October 29,

 

October 28,

 

October 29,



2017

 

2016

 

2017

 

2016



($ in millions)

Exercised

$

 

$

19 

 

$

20 

 

$

45 



The total tax benefit realized from option exercises was $2 million and $8 million for the thirteen and thirty-nine weeks ended October 28, 2017. The total tax benefit realized from option exercises was $7 million and $17 million for the corresponding prior-year periods.

14


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The aggregate intrinsic value for stock options outstanding, outstanding and 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



October 28,

 

October 29,



2017

 

2016



($ in millions)

Outstanding

$

 

$

78 

Outstanding and exercisable

$

 

$

71 

Vested and expected to vest

$

 

$

78 



As of October 28, 2017 there was $7 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.5 years. The following table summarizes information about stock options outstanding and exercisable at October 28, 2017:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Options Outstanding

 

Options Exercisable



 

 

   

Weighted-

   

 

 

 

 

 

   

 



 

 

 

Average

 

 

Weighted-

 

 

 

 

Weighted-



 

 

 

Remaining

 

 

Average

 

 

 

 

Average

Range of Exercise

 

Number

 

Contractual

 

 

Exercise

 

Number

 

 

Exercise

Prices

 

Outstanding

 

Life

 

 

Price

 

Exercisable

 

 

Price



 

(in thousands, except prices per share and contractual life)

$9.85 to $24.75

 

344 

 

2.7 

 

$

16.77 

 

344 

 

$

16.77 

$30.92 to $45.75

 

787 

 

5.5 

 

 

38.33 

 

747 

 

 

38.50 

$48.55 to $62.11

 

704 

 

6.9 

 

 

61.05 

 

472 

 

 

61.35 

$63.79 to $73.21

 

963 

 

8.8 

 

 

68.60 

 

166 

 

 

64.35 



 

2,798 

 

6.7 

 

$

51.82 

 

1,729 

 

$

42.91 



Restricted Stock and Restricted Stock Units



Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive program, and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were 361,137 and 678,466 RSU awards outstanding as of October 28, 2017 and October 29, 2016, respectively.



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



15


 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted stock and RSU activity for the thirty-nine weeks ended October 28, 2017 is summarized as follows:





 

 

 

 

 

 

 



 

 

 

Weighted-

 

 

 



   

 

 

Average

 

Weighted-



 

Number

 

Remaining

 

Average



 

of

 

Contractual

 

Grant Date



 

Shares

 

Life

 

Fair Value



 

(in thousands)

 

(in years)

 

 

(per share)

Nonvested at beginning of year

 

798 

 

 

 

$

56.91 

Granted

 

328 

 

 

 

 

63.72 

Vested

 

(286)

 

 

 

 

49.55 

Expired or cancelled

 

(447)

 

 

 

 

64.74 

Nonvested at October 28, 2017

 

393 

 

1.5 

 

$

59.07 

Aggregate value ($ in millions)

 $

23 

 

 

 

 

 



The total value of awards for which restrictions lapsed during the thirty-nine weeks ended October 28, 2017 and October 29, 2016 was $14 million and $8 million, respectively. As of October 28, 2017, there was $10 million of total unrecognized compensation cost related to nonvested restricted awards.



14. 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. During the third quarter of 2015, the trial court ruled that the retirement plan be reformed. As a  result of this development, the Company recorded a charge of $100 million pre-tax ($61 million after-tax) during the third quarter of 2015.  



The Company appealed the trial court’s decision, and the judgment was stayed pending the outcome of the appeal process. During the second quarter of 2017, the Second Circuit Court of Appeals affirmed the trial court’s decision. In light of this development, the Company reassessed its estimate of the liability. The Company’s updated reasonable estimate of this liability is a range between $150 million and $260 million. The high end of the range reflects the estimated cost to reform the retirement plan in accordance with the court ruling; however, it excludes any legal fees that may be awarded to plaintiff’s counsel. No amount within that range is more probable than any other amount and therefore, in accordance with U.S. GAAP, the Company recorded a charge of $50 million pre-tax ($30 million after-tax) during the second quarter of 2017, bringing the cumulative amount accrued for this matter to $150 million. The accrual has been classified as a long-term liability. The Company will continue to vigorously defend itself in this case and on November 8, 2017 filed a Petition for Writ of Certiorari with the U.S. Supreme Court. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company.



Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, as described above, would have a material adverse effect on the Company’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.



 

16


 

 

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



Disclosure Regarding Forward-Looking Statements



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



These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the 2016 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.



Business Overview



Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites and catalogs.



The Foot Locker brand is one of the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. This brand equity has aided our ability to successfully develop and increase our portfolio of complementary retail store formats, such as Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, part of our direct-to-customer business. Through various marketing channels and experiences, including social, digital, broadcast, and print media, as well as various sports sponsorships and events, we reinforce our image with a consistent message namely, that we are the destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.



Store Count



At October 28, 2017,  we operated 3,349 stores as compared with 3,363 and 3,394 stores at January 28, 2017 and October 29, 2016, respectively.



During the first quarter of 2017, the Company entered into a franchise agreement with Fox-Wizel Ltd, for franchised stores operating in Israel. There are 13 franchised stores operating in Israel as of October 28, 2017. Also, during the second quarter of 2017, the Company terminated its franchise agreement with the third party that operated stores in the Republic of Korea.



A total of 97 franchised stores were operating at October 28, 2017, as compared with 74 and 71 stores at January 28, 2017 and October 29, 2016, respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.



Reconciliation of Non-GAAP Measures



The Company presents certain non-GAAP measures, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjusted diluted earnings per share. Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates.



17

 


 

 

We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements. In addition, these non-GAAP measures are useful in assessing the Company’s progress in achieving its long-term financial objectives.



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 is a reconciliation of GAAP and non-GAAP results for the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively. 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

($ in millions)

Pre-tax income:

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

156 

 

$

227 

 

$

498 

 

$

723 

Pre-tax amounts excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

Reorganization costs

 

 

13 

 

 

 —

 

 

13 

 

 

 —

Pension litigation charge

 

 

 —

 

 

 —

 

 

50 

 

 

 —

Impairment charge

 

 

 —

 

 

 

 

 —

 

 

Adjusted income before income taxes (non-GAAP)

 

$

169 

 

$

233 

 

$

561 

 

$

729 



 

 

 

 

 

 

 

 

 

 

 

 

After-tax income:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

102 

 

$

157 

 

$

333 

 

$

475 

After-tax adjustments excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

Reorganization costs, net of income tax benefit    of $5 million

 

 

 

 

 —

 

 

 

 

 —

Pension litigation charge, net of income tax benefit of $20 million

 

 

 —

 

 

 —

 

 

30 

 

 

 —

Impairment charge, net of income tax benefit of $1 million

 

 

 —

 

 

 

 

 —

 

 

Tax benefit related to intellectual property reassessment

 

 

 —

 

 

(10)

 

 

 —

 

 

(10)

Adjusted net income (non-GAAP)

 

$

110 

 

$

152 

 

$

371 

 

$

470 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

0.81 

 

$

1.17 

 

$

2.55 

 

$

3.50 

Diluted EPS amounts excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

 

 

Reorganization costs

 

 

0.06 

 

 

 —

 

 

0.06 

 

 

 —

Pension litigation charge

 

 

 —

 

 

 —

 

 

0.23 

 

 

 —

Impairment charge

 

 

 —

 

 

0.03 

 

 

 —

 

 

0.03 

Tax benefit related to intellectual property reassessment

 

 

 —

 

 

(0.07)

 

 

 —

 

 

(0.07)

Adjusted diluted EPS (non-GAAP)

 

$

0.87 

 

$

1.13 

 

$

2.84 

 

$

3.46 



During the third quarter ended October 28, 2017, the Company reduced and reorganized its division and corporate staff which resulted in a charge of $13 million, $8 million after-tax or $0.06 per share. The substantial majority of the charge is for severance and related costs.



During the second quarter ended July 29, 2017, the Company recorded a charge of $50 million, $30 million after-tax or $0.23 per share, related to pension litigation. Please see Item 1. “Financial Statements,” Note 14, Legal Proceedings for further information on this charge.

18


 

 

In the third quarter of 2016, the Company recorded a $6 million, $5 million after-tax or $0.03 per share, impairment charge associated with underperforming store assets of Runners Point and Sidestep. Also during the third quarter of 2016, the Company’s scheduled triennial reassessment of the value of intellectual property provided to our European business by Foot Locker in the U.S. resulted in a $10 million tax reduction.



Results of Operations



Sales



All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable-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 decreased by $16 million, or 0.8 percent, to $1,870 million for the thirteen weeks ended October 28, 2017, from $1,886 million for the thirteen weeks ended October 29, 2016. For the thirty-nine weeks ended October 28, 2017, sales decreased by 1.4 percent to $5,572 million from sales of $5,653 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, sales decreased by 2.3 and 1.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Comparable-store sales decreased by 3.7 and 2.9 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.  For both periods, this reflected a decline in our Athletic Stores segment, partially offset by an increase in our Direct-to-Customers segment.



Gross Margin





 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,

  

 

2017

 

2016

 

2017

 

2016

Gross margin rate

 

31.0 

%

 

33.9 

%

 

31.6 

%

 

34.0 

%

Basis point change in the gross margin rate

 

(290)

 

 

 

 

 

(240)

 

 

 

 

Components of the change-

 

 

 

 

 

 

 

 

 

 

 

 

Decline in the merchandise margin rate

 

(200)

 

 

 

 

 

(140)

 

 

 

 

Higher occupancy and buyers' compensation expense rate

 

(90)

 

 

 

 

 

(100)

 

 

 

 



Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities. The gross margin rate decreased by 290 and 240 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.



The merchandise margin rate decline for both the quarter and year-to-date periods primarily reflected a higher markdown rate in both our Athletic Stores and Direct-to-Customers segments as the Company was more promotional. Additionally, our Direct-to-Customers segment was also somewhat affected by higher shipping and handling expense. The increased promotional activity was necessary to stimulate sales and ensure that inventory levels remained current and in line with the pace of sales.



The higher occupancy and buyers’ compensation expense rate for both the quarter and year-to-date periods reflected higher rent-related costs coupled with a decrease in sales. Higher occupancy costs are primarily attributed to several high-profile location leases entered into recently, partially offset by rent reductions in certain other stores.



Selling, General and Administrative Expenses (SG&A)





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 



 

October 28,

 

October 29,

 

October 28,

 

October 29,

 



 

2017

 

2016

 

2017

 

2016

 



 

($ in millions)

 

SG&A

 

$

368 

 

$

366 

 

$

1,078 

 

$

1,077 

 

$ Change

 

$

 

 

 

 

$

 

$

 

 

% Change

 

 

0.5 

%

 

 

 

 

0.1 

%

 

 

 

SG&A as a percentage of sales

 

 

19.7 

%

 

19.4 

%

 

19.3 

%

 

19.1 

%



19


 

 

For the thirteen weeks ended October 28, 2017, excluding the effect of foreign currency fluctuations, SG&A expense decreased by $4 million as compared with the corresponding prior-year period. The effect of foreign currency fluctuations for the thirty-nine weeks ended October 28, 2017 was not significant. Comparing the SG&A expense rate with the prior-year periods, the rate increased by 30 and 20 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.  



The higher SG&A expense rate for both the quarter and year-to-date periods, as compared with the corresponding prior-year periods, was driven by the Athletic Stores segment and was primarily related to higher store-related compensation costs and hurricane-related expenses. Wages were higher primarily due to minimum wage increases, as well as related payroll taxes and benefits. As a percentage of sales, store wages and associated costs increased due to the decline in sales as we were not able to reduce staffing levels commensurate with the rate of decline in sales. In addition, included in SG&A was $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses. These hurricane-related expenses negatively affected the SG&A expense rate for the quarter by 40 basis points. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting decreased publicity and incentive compensation expenses. Additionally, corporate expense significantly declined during the third quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.



Depreciation and Amortization





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 



 

October 28,

 

October 29,

 

October 28,

 

October 29,

 



 

2017

 

2016

 

2017

 

2016

 



 

($ in millions)

 

Depreciation and amortization

 

$

44 

 

$

40 

 

$

127 

 

$

118 

 

$ Change

 

$

 

 

 

 

$

 

 

 

 

% Change

 

 

10.0 

%

 

 

 

 

7.6 

%

 

 

 



Depreciation and amortization increased by $4 million and $9 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in depreciation and amortization reflected ongoing capital spending on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.



Interest Expense, Net





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016



 

($ in millions)

Interest expense 

 

$

 

$

 

$

 

$

Interest income 

 

 

(3)

 

 

(2)

 

 

(10)

 

 

(7)

Interest (income) / expense, net 

 

$

 —

 

$

 

$

(1)

 

$



Interest income increased by $1 million and $3 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods, while interest expense was unchanged. The increase in interest income was due to higher average interest rates earned on our cash investments.



Income Taxes 



The Company recorded income tax provisions of $54 million and $165 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, which represented effective tax rates of 34.7 percent and 33.2 percent. For the thirteen and thirty-nine weeks ended October 29, 2016, the Company recorded income tax provisions of $70 million and $248 million, which represented effective tax rates of 30.9 percent and 34.4 percent, respectively. 

20


 

 

The Company’s interim provision for income taxes is measured using an annual effective tax rate adjusted for discrete items that occur within the periods presented. The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The changes in the tax reserves were not significant for any of the periods presented.



For the thirteen weeks ended October 28, 2017, the Company recorded excess tax benefits of $2 million from stock-based compensation reflecting the change required by ASC 718 as well as a tax benefit of $5 million related to a staff reduction and reorganization charge of $13 million. Additionally, for the thirty-nine weeks ended October 28, 2017, the Company recorded a pension-related litigation charge of $50 million with a related tax benefit of $20 million. The litigation charge and the reorganization costs reduced the overall effective rate because they reduced the proportion of the Company’s worldwide income taxed in jurisdictions where the tax rates are higher.



For the thirteen and thirty-nine weeks ended October 29, 2016, due to a scheduled reassessment the Company increased the value of the intellectual property provided to its European business by Foot Locker in the U.S. The higher valuation resulted in catch-up deductions that reduced 2016’s tax expense by $10 million.



Excluding the effects of the excess tax benefits, the litigation charge, the reorganization costs, and the change in the value of the intellectual property, there was no significant change in the effective tax rate for the thirteen and thirty-nine weeks ended October 28, 2017 as compared with the corresponding prior-year periods.



The Company currently expects its full-year tax rate to approximate 34 percent excluding the effect of any nonrecurring items that may occur and the effects of potential tax reform. The actual tax rate will vary depending on the level of stock option exercise activity and the stock price at exercise. Additionally, the actual tax rate will also vary depending on the level and mix of income earned in the United States, as compared with our international operations.



Net Income



For the thirteen weeks ended October 28, 2017, net income decreased by $55 million, or 35 percent, and diluted earnings per share decreased by 31 percent to $0.81 per share, as compared with the corresponding prior-year period. For the thirty-nine weeks ended October 28, 2017, net income decreased by $142 million, or 30 percent, and diluted earnings per share decreased by 27 percent to $2.55 per share, as compared with the corresponding prior-year period.



Segment Information



We have two reportable segments, Athletic Stores and Direct-to-Customers, which are based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Sales 

 

($ in millions)

Athletic Stores 

 

$

1,612 

 

$

1,644 

 

$

4,819 

 

$

4,955 

Direct-to-Customers 

 

 

258 

 

 

242 

 

 

753 

 

 

698 

Total sales

 

$

1,870 

 

$

1,886 

 

$

5,572 

 

$

5,653 



21


 

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended



 

October 28,

 

October 29,

 

October 28,

 

October 29,



 

2017

 

2016

 

2017

 

2016

Operating Results 

 

($ in millions)

Athletic Stores (1)

 

$

154 

 

$

213 

 

$

504 

 

$

683 

Direct-to-Customers

 

 

26 

 

 

32 

 

 

88 

 

 

92 

Division profit 

 

 

180 

 

 

245 

 

 

592 

 

 

775 

Less: Pension litigation and reorganization charges (2) (3)

 

 

13 

 

 

 —

 

 

63 

 

 

 —

Less: Corporate expense 

 

 

12 

 

 

17 

 

 

34 

 

 

53 

Operating profit 

 

 

155 

 

 

228 

 

 

495 

 

 

722 

Other income (4)

 

 

 

 

 —

 

 

 

 

Earnings before interest expense and income taxes

 

 

156 

 

 

228 

 

 

497 

 

 

725 

Interest (income) / expense, net 

 

 

 —

 

 

 

 

(1)

 

 

Income before income taxes 

 

$

156 

 

$

227 

 

$

498 

 

$

723 





 

(1)

Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write-down long-lived store assets of Runners Point and Sidestep.

(2)

Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a charge of $50 million relating to a pension litigation matter described further in Note 14, Legal Proceedings.  

(3)

Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a $13 million pre-tax charge related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017. The substantial majority of the charge is for severance and related costs.

(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 and losses associated with foreign currency option contracts.



Athletic Stores





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 



 

October 28,

 

October 29,

 

October 28,

 

October 29,

 



 

2017

 

2016

 

2017

 

2016

 



 

($ in millions)

 

Sales

 

$

1,612 

 

$

1,644 

 

$

4,819 

 

$

4,955 

 

$ Change

 

$

(32)

 

 

 

 

$

(136)

 

$

 

 

% Change

 

 

(1.9)

%

 

 

 

 

(2.7)

%

 

 

 

Division profit

 

$

154 

 

$

213 

 

$

504 

 

$

683 

 

Division profit margin

 

 

9.6 

%

 

13.0 

%

 

10.5 

%

 

13.8 

%



Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 3.6 percent and 2.8 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The sales decline for the current quarter and year-to-date periods, excluding the effect of foreign currency fluctuations, was across almost all store banners, with the exception of Footaction and Foot Locker Canada, which increased sales.



Comparable-store sales decreased by 5.1 percent and 4.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively. Foot Locker Canada generated positive comparable-store sales for the quarter and year-to-date periods, while Footaction was positive for the third quarter but not the year-to-date period.  All other store banners generated negative comparable-store sales for both periods. The overall decline in comparable-store sales was due to a decrease in footwear sales for both the quarter and year-to-date periods. The footwear sales decline in the quarter was across men’s, women’s, and children’s, whereas the year-to-date decline was related primarily to declines in children’ and men’s footwear. A comparable-sales increase in men’s lifestyle running footwear for both the quarter and year-to-date periods for the majority of our store banners was not enough to compensate for the comparable-store declines in basketball and court lifestyle footwear. The decline in most other footwear categories for both the quarter and year-to-date periods was the result of insufficient product availability of certain styles and the lack of product innovation in select categories to suit our customers quickly-changing style preferences. Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter. The decline in women’s footwear was most significant in Foot Locker, Lady Foot Locker, and Foot Locker Europe.  Sales of children’s footwear declined for the year-to-date period due primarily by declines in the basketball category. 

22


 

 

The decline in footwear sales was partially offset by gains in apparel sales, as the majority of our store banners experienced apparel sales gains for both the thirteen and thirty-nine weeks ended October 28, 2017. Most of our banners benefited from gains in men’s branded apparel and outerwear, which was partially offset by declines in private label and licensed apparel for both the quarter and year-to-date periods. Additionally, women’s apparel performed well for our SIX:02 banner for both the quarter and year-to-date periods, although this was largely driven by increased markdowns. For the quarter and year-to-date periods, children’s apparel experienced both total and comparable-store sales increases as compared to the corresponding prior-year periods.



Athletic Stores division profit decreased by 27.7 percent and 26.2 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The decline in division profit margin for both the quarter and year-to-date periods was attributable primarily to a lower gross margin rate, coupled with a higher SG&A expense rate. 



Direct-to-Customers



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 



 

October 28,

 

October 29,

 

October 28,

 

October 29,

 



 

2017

 

2016

 

2017

 

2016

 



 

($ in millions)

 

Sales

 

$

258 

 

$

242 

 

$

753 

 

$

698 

 

$ Change

 

$

16 

 

 

 

 

$

55 

 

 

 

 

% Change

 

 

6.6 

%

 

 

 

 

7.9 

%

 

 

 

Division profit

 

$

26 

 

$

32 

 

$

88 

 

$

92 

 

Division profit margin

 

 

10.1 

%

 

13.2 

%

 

11.7 

%

 

13.2 

%



Comparable-sales for the Direct-to-Customers segment increased by 6.1 percent and 8.1 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in the quarter was driven primarily by Eastbay and the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. The increase for the year-to-date period was primarily related to the growth of our store-banner websites.



The footwear category continued to deliver the strongest gains during the current quarter and year-to-date periods. The footwear gains related to our domestic store-banner websites and Eastbay for both the quarter and year-to-date periods were driven by strong results in the children’s and men’s footwear categories.  For the quarter, the women’s business softened primarily in the running category. Our international store-banner websites for both the quarter and year-to-date periods were primarily driven by sales from men’s and women’s lifestyle running styles.



Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 28, 2017 decreased by $6 million and $4 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, declined by 310 basis points and 150 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns in response to promotional activity in the market and, to a lesser degree, higher shipping and handling expense. Partially offsetting the gross margin decline was an expense rate improvement primarily related to lower publicity costs and incentive compensation expense in light of current performance as compared with our plan.



Corporate Expense





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen weeks ended

 

Thirty-nine weeks ended

 



 

October 28,

 

October 29,

 

October 28,

 

October 29,

 



 

2017

 

2016

 

2017

 

2016

 



 

($ in millions)

 

Corporate expense

 

$

12 

 

$

17 

 

$

34 

 

$

53 

 

$ Change

 

$

(5)

 

 

 

 

$

(19)

 

 

 

 



23


 

 

Corporate expense consists of unallocated SG&A, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $4 million and $11 million for both the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.



The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $4 million for the thirteen and thirty-nine weeks ended October 28, 2017, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $4 million and $15 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.



Incentive compensation declined by $4 million and $11 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, reflecting the Company’s underperformance compared to its plan. Share-based compensation declined by $3 million and $6 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, which primarily represented the portion of share-based compensation that is tied to Company performance. Additionally, the decline for the thirty-nine weeks ended October 28, 2017 was due to the prior-year corporate headquarters relocation costs of $4 million. These decreases were partially offset by a $2 million litigation settlement charge recorded during the third quarter of 2017 and increased corporate support costs such as information technology and real estate management.



Liquidity and Capital Resources



Liquidity



Our primary source of liquidity has been cash flow from earnings, while the principal uses of cash have 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 our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.



The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of October 28, 2017, approximately $863 million remained available under the Company’s current $1.2 billion share repurchase program.



As discussed further in the Legal Proceedings note under “Item 1. Financial Statements,” during the second quarter of 2017, in connection with our pension litigation, we recorded a pre-tax charge of $50 million ($30 million after-tax or $0.23 per diluted share). The Company previously recorded a pre-tax charge of $100 million during 2015. The second quarter 2017 charge reflects the Company’s revised estimate of its exposure for the matter, bringing the total pre-tax amount accrued to $150 million. 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 us. The total accrual of $150 million has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeal process may be lengthy. The pension plan is currently sufficiently funded to initially absorb a $150 million liability and, accordingly, we currently do not anticipate the need to make any pension contributions in the near term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.



Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.



24


 

 

Operating Activities





 

 

 

 

 



Thirty-nine weeks ended



October 28,

 

October 29,



2017

 

2016



($ in millions)

Net cash provided by operating activities

$

496 

 

$

477 

$ Change

$

19 

 

 

 



The amount provided by operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include depreciation and amortization, and share-based compensation expense. The increase from the prior year primarily reflects working capital changes, partially offset by the decline in net income as compared with the prior year.



Investing Activities



 

 

 

 

 



Thirty-nine weeks ended



October 28,

 

October 29,



2017

 

2016



($ in millions)

Net cash used in investing activities

$

204 

 

$

193 

$ Change

$

11 

 

 

 



Capital expenditures were $11 million higher than the prior year. The increase was due to increased spending on technology projects and cash payments related to the 2016 capital program. The Company’s full-year capital spending is expected to be approximately $269 million, which includes $198 million related to the remodeling or relocation of approximately 180 existing stores and the opening of approximately 90 new stores, as well as $71 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. 



Financing Activities



 

 

 

 

 



Thirty-nine weeks ended



October 28,

 

October 29,



2017

 

2016



($ in millions)

Net cash used in financing activities

$

475 

 

$

443 

$ Change

$

32 

 

 

 



During the thirty-nine weeks ended October 28, 2017, we repurchased 9,589,660 shares of our common stock for $362 million, as compared with 5,874,643 shares repurchased for $352 million in the corresponding prior-year period.



The Company also declared and paid dividends during the first three quarters of 2017 and 2016 of $120 million and $111 million, respectively. This represented quarterly rates of $0.31 and $0.275 per share for 2017 and 2016, respectively.  



Additionally, we received proceeds from the issuance of common stock in connection with employee stock programs of $17 million and $28 million for the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively. Also, during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, the Company paid $10 million and $6 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.



Included in the prior year’s financing activities were fees of $2 million paid in connection with the 2016 Credit Agreement.



Critical Accounting Policies and Estimates



There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended January 28, 2017.



25


 

 

Recent Accounting Pronouncements



Descriptions of the recently issued and adopted accounting principles are included Item 1. “Financial Statements” in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.



Item 4. Controls and Procedures



During the quarter, the Company’s management performed an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.



During the quarter ended October 28, 2017, 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. Legal Proceedings



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



Item 1A. Risk Factors



There were no material changes to the risk factors disclosed in the 2016 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 28, 2017:  





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

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)

July 30 - Aug. 26, 2017

 

3,002,574 

 

$

35.17 

 

3,000,000 

 

$

1,061,038,524 

Aug. 27 - Sept. 30, 2017

 

4,788,800 

 

 

35.34 

 

4,788,760 

 

 

891,816,280 

Oct. 1 - Oct. 28, 2017

 

904,800 

 

 

31.85 

 

904,800 

 

 

862,996,130 



 

8,696,174 

 

$

34.92 

 

8,693,560 

 

 

 







 

(1)

These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock units and restricted stock awards which vested during the quarter, and 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 14, 2017, the Board of Directors approved a 3-year, $1.2 billion share repurchase program extending through January 2020.







 

Item 6. Exhibits



     (a)    

Exhibits

 

The exhibits that are in this report immediately follow the index.



26


 

 



SIGNATURE



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







 

Date: December 6, 2017

FOOT LOCKER, INC.



 



 

 

/s/ Lauren B. Peters 



LAUREN B. PETERS

 

Executive Vice President and Chief Financial Officer 



         





27


 

 

FOOT LOCKER, INC.

INDEX OF  EXHIBITS

















 

 

Exhibit No.

 

Description

12*

 

Computation of Ratio of Earnings to Fixed Charges.

15*

 

Accountants’ Acknowledgement.

31.1*

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99*

 

Report of Independent Registered Public Accounting Firm.

101.INS*

 

XBRL Instance Document.

101.SCH*

 

XBRL Taxonomy Extension Schema.

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase.

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase.

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase.



 

 

*

 

Filed herewith.

**

 

Furnished herewith.





28