Attached files
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EXCEL - IDEA: XBRL DOCUMENT - FOOT LOCKER, INC. | Financial_Report.xls |
EX-12 - FOOT LOCKER, INC. | v196049_ex12.htm |
EX-15 - FOOT LOCKER, INC. | v196049_ex15.htm |
EX-31.1 - FOOT LOCKER, INC. | v196049_ex31-1.htm |
EX-31.2 - FOOT LOCKER, INC. | v196049_ex31-2.htm |
EX-32.1 - FOOT LOCKER, INC. | v196049_ex32-1.htm |
EX-99 - FOOT LOCKER, INC. | v196049_ex99.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
______________________________________
(Mark
One)
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended: July 31, 2010
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from __________ to __________
Commission
File Number: 1-10299
______________________________________
FOOT
LOCKER, INC.
(Exact
Name of Registrant as Specified in its Charter)
______________________________________
New
York
|
13-3513936
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
112
West 34th Street,
New York, New York, 10120
(Address
of Principal Executive Offices, Zip Code)
(212-720-3700)
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes þ No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
Number of
shares of Common Stock outstanding at August 28, 2010:
155,674,989
FOOT LOCKER,
INC.
TABLE OF
CONTENTS
Page
|
|||||
Part
I.
|
Financial
Information
|
||||
|
Item
1.
|
|
Financial
Statements
|
||
Condensed
Consolidated Balance Sheets
|
3
|
||||
Condensed
Consolidated Statements of Operations
|
4
|
||||
Condensed
Consolidated Statements of Comprehensive (Loss) Income
|
5
|
||||
Condensed
Consolidated Statements of Cash Flows
|
6
|
||||
Notes
to Condensed Consolidated Financial Statements
|
7
|
||||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|||
Item
4.
|
Controls
and Procedures
|
19
|
|||
Part
II.
|
Other
Information
|
||||
Item
1.
|
Legal
Proceedings
|
19
|
|||
Item
1A.
|
Risk
Factors
|
20
|
|||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
|||
Item
6.
|
Exhibits
|
20
|
|||
Signature
|
21
|
||||
Index
to Exhibits
|
22
|
2
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares)
July 31,
|
August 1,
|
January 30,
|
||||||||||
2010
|
2009
|
2010
|
||||||||||
(Unaudited)
|
(Unaudited)
|
*
|
||||||||||
ASSETS
|
||||||||||||
Current
assets
|
||||||||||||
Cash
and cash equivalents
|
$ | 512 | $ | 402 | $ | 582 | ||||||
Short-term
investments
|
7 | 13 | 7 | |||||||||
Merchandise
inventories
|
1,219 | 1,284 | 1,037 | |||||||||
Other
current assets
|
161 | 211 | 146 | |||||||||
1,899 | 1,910 | 1,772 | ||||||||||
Property
and equipment, net
|
376 | 433 | 387 | |||||||||
Deferred
taxes
|
351 | 366 | 362 | |||||||||
Goodwill
|
144 | 145 | 145 | |||||||||
Other
intangibles and other assets
|
143 | 161 | 150 | |||||||||
$ | 2,913 | $ | 3,015 | $ | 2,816 | |||||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||||||
Current
liabilities
|
||||||||||||
Accounts
payable
|
$ | 345 | $ | 322 | $ | 215 | ||||||
Accrued
expenses and other current liabilities
|
236 | 191 | 218 | |||||||||
581 | 513 | 433 | ||||||||||
Long-term
debt
|
137 | 138 | 138 | |||||||||
Other
liabilities
|
279 | 387 | 297 | |||||||||
997 | 1,038 | 868 | ||||||||||
Shareholders’
equity
|
||||||||||||
Common
stock and paid-in capital: 161,843,666, 160,614,691 and 161,267,025
shares, respectively
|
718 | 702 | 709 | |||||||||
Retained
earnings
|
1,548 | 1,565 | 1,535 | |||||||||
Accumulated
other comprehensive loss
|
(228 | ) | (187 | ) | (193 | ) | ||||||
Less:
Treasury stock at cost: 6,184,542, 4,709,020, and 4,726,237 shares,
respectively
|
(122 | ) | (103 | ) | (103 | ) | ||||||
Total
shareholders’ equity
|
1,916 | 1,977 | 1,948 | |||||||||
$ | 2,913 | $ | 3,015 | $ | 2,816 |
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
|
*
The balance sheet at January 30, 2010 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 the Company’s Annual Report on Form 10-K for the year
ended January 30, 2010.
|
3
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
|
$ | 1,096 | $ | 1,099 | $ | 2,377 | $ | 2,315 | ||||||||
Costs
and Expenses
|
||||||||||||||||
Cost
of sales
|
791 | 819 | 1,679 | 1,679 | ||||||||||||
Selling,
general and administrative expenses
|
268 | 252 | 548 | 530 | ||||||||||||
Depreciation
and amortization
|
26 | 28 | 52 | 56 | ||||||||||||
Interest
expense, net
|
2 | 3 | 5 | 5 | ||||||||||||
Other
income
|
(1 | ) | (1 | ) | (1 | ) | (2 | ) | ||||||||
1,086 | 1,101 | 2,283 | 2,268 | |||||||||||||
Income
(loss) from continuing operations before income taxes
|
10 | (2 | ) | 94 | 47 | |||||||||||
Income
tax expense (benefit)
|
4 | (1 | ) | 34 | 17 | |||||||||||
Income
(loss) from continuing operations
|
6 | (1 | ) | 60 | 30 | |||||||||||
Income
from disposal of discontinued operations, net of tax
|
— | 1 | — | 1 | ||||||||||||
Net
income
|
$ | 6 | $ | — | $ | 60 | $ | 31 | ||||||||
Basic
earnings per share:
|
||||||||||||||||
Net
income
|
$ | 0.04 | $ | — | $ | 0.39 | $ | 0.20 | ||||||||
Weighted-average
common shares outstanding
|
156.1 | 155.9 | 156.3 | 155.6 | ||||||||||||
Diluted
earnings per share:
|
||||||||||||||||
Net
income
|
$ | 0.04 | $ | — | $ | 0.38 | $ | 0.20 | ||||||||
Weighted-average
common shares assuming dilution
|
156.9 | 155.9 | 157.1 | 155.8 |
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
4
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(in
millions)
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income
|
$ | 6 | $ | — | $ | 60 | $ | 31 | ||||||||
Other
comprehensive income (loss), net of tax
|
||||||||||||||||
Foreign
currency translation adjustments arising during the period
|
(14 | ) | 47 | (37 | ) | 62 | ||||||||||
Pension
and postretirement plan adjustments
|
2 | 1 | 4 | 2 | ||||||||||||
Change
in fair value of derivatives
|
(1 | ) | (1 | ) | (1 | ) | (2 | ) | ||||||||
Unrealized
gain on available-for-sale security
|
— | 2 | — | 2 | ||||||||||||
Comprehensive
(loss) income
|
$ | (7 | ) | $ | 49 | $ | 26 | $ | 95 |
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
5
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
millions)
Twenty-six weeks ended
|
||||||||
July 31,
|
August 1,
|
|||||||
2010
|
2009
|
|||||||
From
Operating Activities:
|
||||||||
Net
income
|
$ | 60 | $ | 31 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Income
from disposal of discontinued operations, net
|
— | (1 | ) | |||||
Depreciation
and amortization
|
52 | 56 | ||||||
Share-based
compensation expense
|
7 | 5 | ||||||
Change
in assets and liabilities:
|
||||||||
Merchandise
inventories
|
(193 | ) | (138 | ) | ||||
Accounts
payable
|
132 | 129 | ||||||
Other
accruals
|
27 | (43 | ) | |||||
Qualified
pension plan contributions
|
(2 | ) | (11 | ) | ||||
Gain
on termination of interest rate swaps
|
— | 19 | ||||||
Other,
net
|
(20 | ) | 36 | |||||
Net
cash provided by operating activities from continuing
operations
|
63 | 83 | ||||||
From
Investing Activities:
|
||||||||
Gain
from insurance recoveries
|
— | 1 | ||||||
Short-term
investment redemptions
|
— | 10 | ||||||
Capital
expenditures
|
(51 | ) | (47 | ) | ||||
Net
cash used in investing activities from continuing
operations
|
(51 | ) | (36 | ) | ||||
From
Financing Activities:
|
||||||||
Reduction
in long-term debt
|
— | (3 | ) | |||||
Issuance
of common stock
|
1 | 1 | ||||||
Dividends
paid
|
(47 | ) | (47 | ) | ||||
Treasury
stock issued under employee stock plan
|
3 | — | ||||||
Purchase
of treasury shares
|
(20 | ) | — | |||||
Net
cash used in financing activities from continuing
operations
|
(63 | ) | (49 | ) | ||||
Net
cash used in operating activities of Discontinued
Operations
|
— | (1 | ) | |||||
Effect
of exchange rate fluctuations on Cash and Cash Equivalents
|
(19 | ) | 20 | |||||
Net
change in Cash and Cash Equivalents
|
(70 | ) | 17 | |||||
Cash
and Cash Equivalents at beginning of year
|
582 | 385 | ||||||
Cash
and Cash Equivalents at end of interim period
|
$ | 512 | $ | 402 | ||||
Cash
paid during the period:
|
||||||||
Interest
|
$ | 6 | $ | 6 | ||||
Income
taxes
|
$ | 23 | $ | 10 |
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
6
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 adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the results for the interim periods
of the fiscal year ending January 29, 2011 and of the fiscal year ended January
30, 2010. Certain items included in these statements are based on management’s
estimates. Actual results may differ from those estimates. The results of
operations for any interim period are not necessarily indicative of the results
expected for the year. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements contained in the Company’s Form 10-K for the
year ended January 30, 2010, as filed with the Securities and Exchange
Commission (the “SEC”) on March 29, 2010.
Recent
Accounting Pronouncements
Recently
issued accounting pronouncements did not have, or are not believed by management
to have, a material effect on the Company’s present or future consolidated
financial statements.
2.
Goodwill and Other
Intangible Assets
The
Company reviews goodwill and intangible assets with indefinite lives for
impairment annually during the first quarter of its fiscal year or more
frequently if impairment indicators arise. The annual review of goodwill and
assets with indefinite lives during the first quarters of 2010 and 2009 did not
result in any impairment charges. The following table provides a summary of
goodwill by reportable segment. The change represents foreign
exchange fluctuations.
July 31,
|
August 1,
|
January 30,
|
||||||||
Goodwill (in millions)
|
2010
|
2009
|
2010
|
|||||||
Athletic
Stores
|
$ | 17 | $ | 18 | $ | 18 | ||||
Direct-to-Customers
|
127 | 127 | 127 | |||||||
$ | 144 | $ | 145 | $ | 145 |
The
components of finite-lived intangible assets and intangible assets not subject
to amortization are as follows:
July 31, 2010
|
August 1, 2009
|
January 30, 2010
|
||||||||||||||||||||||||||||||||||
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
||||||||||||||||||||||||||||
(in millions)
|
value
|
amort.
|
value
|
value
|
amort.
|
value
|
value
|
amort.
|
value
|
|||||||||||||||||||||||||||
Finite
life
intangible assets:
|
||||||||||||||||||||||||||||||||||||
Lease
acquisition costs
|
$ | 170 | $ | (137 | ) | $ | 33 | $ | 184 | $ | (138 | ) | $ | 46 | $ | 184 | $ | (143 | ) | $ | 41 | |||||||||||||||
Trademarks
|
21 | (7 | ) | 14 | 20 | (5 | ) | 15 | 20 | (6 | ) | 14 | ||||||||||||||||||||||||
Loyalty
program
|
1 | (1 | ) | — | 1 | (1 | ) | — | 1 | (1 | ) | — | ||||||||||||||||||||||||
Favorable
leases
|
9 | (8 | ) | 1 | 9 | (8 | ) | 1 | 9 | (8 | ) | 1 | ||||||||||||||||||||||||
CCS
customer relationships
|
21 | (7 | ) | 14 | 21 | (3 | ) | 18 | 21 | (5 | ) | 16 | ||||||||||||||||||||||||
Total
finite life intangible assets
|
222 | (160 | ) | 62 | 235 | (155 | ) | 80 | 235 | (163 | ) | 72 |
7
July 31, 2010
|
August 1, 2009
|
January 30, 2010
|
||||||||||||||||||||||||||||||||||
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
||||||||||||||||||||||||||||
(in millions)
|
value
|
amort.
|
value
|
value
|
amort.
|
value
|
value
|
amort.
|
value
|
|||||||||||||||||||||||||||
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
Republic
of Ireland trademark
|
2 | — | 2 | 2 | — | 2 | 2 | — | 2 | |||||||||||||||||||||||||||
CCS
trade-name
|
25 | — | 25 | 25 | — | 25 | 25 | — | 25 | |||||||||||||||||||||||||||
Total
indefinite life intangible assets
|
27 | — | 27 | 27 | — | 27 | 27 | — | 27 | |||||||||||||||||||||||||||
Total
other intangible assets
|
$ | 249 | $ | (160 | ) | $ | 89 | $ | 262 | $ | (155 | ) | $ | 107 | $ | 262 | $ | (163 | ) | $ | 99 |
The
weighted-average amortization period as of July 31, 2010 was 11.8 years.
Amortization expense was $4 million and $5 million for the thirteen-week periods
ended July 31, 2010 and August 1, 2009, respectively. Amortization
expense was $9 million and $10 million for the twenty-six week periods ended
July 31, 2010 and August 1, 2009, respectively. Estimated amortization expense
for finite life intangible assets is expected to approximate $9 million for the
remainder of 2010, $15 million for 2011, $13 million for 2012, $9 million for
2013, and $3 million for 2014. The change in the net value of the intangible
assets for the twenty-six week period ended July 31, 2010 reflects amortization
of $9 million and the effect of the weakening euro as compared with the U.S.
dollar of $3 million, partially offset by additions of $2 million.
3.
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 policy 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 9, Fair Value
Measurements.
Derivative
Holdings Designated as Hedges
For
derivatives to qualify as hedges at inception and throughout the hedged periods,
the Company formally documents the nature of the hedged items and the
relationships between the hedging instruments and the hedged items, as well as
its risk-management objectives, strategies for undertaking the various hedge
transactions, and the methods of assessing hedge effectiveness and hedge
ineffectiveness. In addition, for hedges of forecasted transactions, the
significant characteristics and expected terms of the forecasted transactions
must be specifically identified, and it must be probable that each forecasted
transaction will occur. If it were deemed probable that a forecasted transaction
would not occur, the hedge gain or loss would be recognized in earnings
immediately. No such gains or losses were recognized in earnings for any of the
periods presented. Derivative financial instruments qualifying for hedge
accounting must maintain a specified level of effectiveness between the hedging
instrument and the item being hedged, both at inception and throughout the
hedged period, which management evaluates periodically.
Cash Flow
Hedges
The
primary currencies to which the Company is exposed are the euro, British pound,
Canadian dollar, and Australian dollar. For option and forward foreign exchange
contracts designated as cash flow hedges of the purchase of inventory, the
effective portion of gains and losses is deferred as a component of accumulated
other comprehensive loss 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
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
from the assessment of effectiveness. At each quarter-end, the Company had not
hedged forecasted transactions for more than the next twelve months, and the
Company expects all derivative-related amounts reported in accumulated other
comprehensive loss to be reclassified to earnings within twelve months. The
notional value of the contracts outstanding at July 31, 2010 was $44 million and
these contracts extend through July 2011. Net changes in the fair value of
foreign exchange derivative financial instruments designated as cash flow hedges
of the purchase of inventory was $1 million for the thirteen and twenty-six
weeks ended July 31, 2010 and was $2 million and $3 million for the thirteen and
twenty-six weeks ended August 1, 2009, respectively.
8
Derivative
Holdings Designated as Non-Hedges
The
Company mitigates the effect of fluctuating foreign exchange rates on the
reporting of foreign currency denominated earnings by entering into a variety of
derivative instruments, including option currency contracts. The notional value
of the contracts outstanding at July 31, 2010 was $15 million and these
contracts extend through October 2010. Changes in the fair value of these
foreign currency option contracts, which are designated as non-hedges, are
recorded in earnings immediately within other income. The realized gains,
premiums paid, and changes in the fair market value recorded in the Consolidated
Statements of Operations were not significant for the thirteen and twenty-six
weeks ended July 31, 2010 and August 1, 2009.
The
Company also enters into forward foreign exchange contracts to hedge foreign
currency denominated merchandise purchases and intercompany transactions that
are not designated as hedges. The notional value of the contracts outstanding at
July 31, 2010 was $35 million and these contracts extend through January 2011.
Net changes in the fair value of foreign exchange derivative financial
instruments designated as non-hedges were substantially offset by the changes in
value of the underlying transactions, which were recorded in selling, general
and administrative expenses. The amount recorded for all of the periods
presented was not significant.
The Company enters into diesel fuel
forward and option contracts to mitigate a portion of the Company’s freight
expense due to the variability caused by fuel surcharges imposed by our
third-party freight carriers. The notional value of the contracts outstanding at
July 31, 2010 was $2 million and these contracts extend through November 2010.
Changes in the fair value of these contracts are recorded in earnings
immediately. The effect was not significant for any of the periods
presented.
In 2008,
the Company terminated the European net investment hedge by amending its
existing cross currency swap and entering simultaneously into a new cross
currency swap, thereby fixing the amount owed to the counterparty in 2015 at $24
million. During the term of the agreement, the Company remits to its
counterparty interest payments based on one-month U.S. LIBOR rates on the $24
million liability. The agreement also includes a provision that may, if
exercised, require the Company to settle this transaction in August 2010, at the
option of the Company or the counterparty. During the second quarter of 2010,
the counterparty exercised this option, thereby resulting in a reclassification
of the amount owed from non-current to current liabilities
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
|
July 31,
|
August 1,
|
January 30,
|
|||||||||||
(in millions)
|
Caption
|
2010
|
2009
|
2010
|
||||||||||
Hedging
Instruments:
|
||||||||||||||
Forward
foreign exchange contracts
|
Current
liability
|
$ | (1 | ) | $ | — | $ | — | ||||||
Total
|
$ | (1 | ) | $ | — | $ | — | |||||||
Non-Hedging
Instruments:
|
||||||||||||||
Forward
foreign exchange contracts
|
Current
assets
|
$ | — | $ | 1 | $ | 1 | |||||||
Forward
foreign exchange contracts
|
Current
liability
|
(1 | ) | (1 | ) | — | ||||||||
European
cross currency swap
|
(1)
|
(24 | ) | (24 | ) | (24 | ) | |||||||
Total
|
$ | (25 | ) | $ | (24 | ) | $ | (23 | ) |
(1) The
Company’s European cross currency swap is classified as a current liability at
July 31, 2010; for all other periods presented it was classified as a
non-current liability.
Interest
Rate Risk Management
The
Company has from time to time employed various interest rate swaps to minimize
its exposure to interest rate fluctuations. On March 20, 2009, the Company
terminated its interest rate swaps for a gain of $19 million. This gain is
amortized as part of interest expense over the remaining term of the debt using
the effective-yield method. The amount amortized during the thirteen weeks ended
July 31, 2010 and August 1, 2009 was not significant. The amount amortized
during the twenty-six weeks ended July 31, 2010 and August 1, 2009 was $1
million in each respective period.
9
Fair
Value of Financial Instruments
The carrying value and estimated fair
value of long-term debt was $137 million and $132 million, respectively, at July
31, 2010, $138 million and $120 million, respectively, at August 1, 2009 and
$138 million and $127 million, respectively, at January 30, 2010. The carrying
values of cash and cash equivalents, short-term investments and other current
receivables and payables approximate their fair value.
4.
Accumulated Other
Comprehensive Loss
Accumulated
other comprehensive loss comprised the following:
July 31,
|
August 1,
|
January 30,
|
||||||||||
(in millions)
|
2010
|
2009
|
2010
|
|||||||||
Foreign
currency translation adjustments
|
$
|
38
|
$
|
72
|
$
|
75
|
||||||
Cash
flow hedges
|
(1
|
)
|
—
|
—
|
||||||||
Unrecognized
pension cost and postretirement benefit
|
(263
|
)
|
(256
|
)
|
(266
|
)
|
||||||
Unrealized
loss on available-for-sale security
|
(2
|
)
|
(3
|
)
|
(2
|
)
|
||||||
$
|
(228
|
)
|
$
|
(187
|
)
|
$
|
(193
|
)
|
5.
Earnings Per
Share
The
Company accounts for and discloses net earnings per share using the treasury
stock method. The Company’s basic earnings per share is computed by
dividing the Company’s reported net income for the period by the
weighted-average number of common shares outstanding for the period. The
Company’s 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 diluted earnings per share calculation includes the effect of contingently
issuable share-based compensation awards with performance vesting conditions as
being outstanding at the beginning of the period in which all vesting conditions
are met.
The
Company’s basic and diluted weighted-average number of common shares outstanding
as of July 31, 2010 and August 1, 2009, were as follows:
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
(in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Weighted-average
common shares outstanding
|
156.1 | 155.9 | 156.3 | 155.6 | ||||||||||||
Effect of
Dilution:
|
||||||||||||||||
Stock
options and awards
|
0.8 | — | 0.8 | 0.2 | ||||||||||||
Weighted-average
common shares assuming dilution
|
156.9 | 155.9 | 157.1 | 155.8 |
Options
to purchase 4.8 million and 6.2 million shares of common stock were not included
in the computation for the thirteen weeks ended July 31, 2010 and August 1,
2009, respectively. Options to purchase 4.4 million and 6.5 million shares of
common stock were not included in the computation for the twenty-six weeks ended
July 31, 2010 and August 1, 2009, respectively. These options were not included
primarily because the exercise prices of the options were greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive. For the thirteen weeks and twenty-six weeks ended July 31, 2010,
contingently issuable shares of 0.5 million have not been included as the
vesting conditions have not been satisfied. Stock option and awards totaling 0.2
million shares were not included in the computation of earnings per share for
the thirteen weeks ended August 1, 2009 as the effect would have been
antidilutive due to a loss from continuing operations being reported for the
period.
10
6.
Segment
Information
The
Company has determined that its reportable segments are those that are based on
its method of internal reporting. As of July 31, 2010, the Company has two
reportable segments, Athletic Stores and Direct-to-Customers. Sales and division
results for the Company’s reportable segments for the thirteen weeks and
twenty-six weeks ended July 31, 2010 and August 1, 2009 are presented below.
Division profit reflects income from continuing operations before income taxes,
corporate expense, non-operating income and net interest expense.
Sales
Thirteen weeks ended
|
Twenty-six weeks ended
|
||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
||||||||||
(in millions)
|
2010
|
2009
|
2010
|
2009
|
|||||||||
Athletic
Stores
|
$ | 1,015 | $ | 1,018 | $ | 2,196 | $ | 2,136 | |||||
Direct-to-Customers
|
81 | 81 | 181 | 179 | |||||||||
Total
sales
|
$ | 1,096 | $ | 1,099 | $ | 2,377 | $ | 2,315 |
Operating
Results
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
(in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Athletic
Stores
|
$ | 33 | $ | 5 | $ | 134 | $ | 66 | ||||||||
Direct-to-Customers
|
3 | 5 | 13 | 13 | ||||||||||||
Division
profit
|
36 | 10 | 147 | 79 | ||||||||||||
Corporate
expense, net
|
25 | 10 | 49 | 29 | ||||||||||||
Operating
profit
|
11 | — | 98 | 50 | ||||||||||||
Other
income (1)
|
1 | 1 | 1 | 2 | ||||||||||||
Interest
expense, net
|
2 | 3 | 5 | 5 | ||||||||||||
Income
(loss) from continuing operations before income taxes
|
$ | 10 | $ | (2 | ) | $ | 94 | $ | 47 |
(1)
|
Other
income for the twenty-six weeks ended July 31, 2010 primarily represents
royalty income and realized gains associated with foreign currency option
contracts. Other income for the twenty-six weeks ended August 1, 2009
primarily represents gains from insurance proceeds, gain on the purchase
and retirement of bonds, and royalty
income.
|
7.
Pension and
Postretirement Plans
The
Company has defined benefit pension plans covering most of its North American
employees, which are funded in accordance with the provisions of the laws where
the plans are in effect. In addition to providing pension benefits, the Company
sponsors postretirement medical and life insurance plans, which are available to
most of its retired U.S. employees. These medical and life insurance plans are
contributory and are not funded.
The
following are the components of net periodic pension benefit cost and net
periodic postretirement benefit income:
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||||||||||||||||||
Thirteen weeks
|
Twenty-six weeks
|
Thirteen weeks
|
Twenty-six weeks
|
|||||||||||||||||||||||||||||
Ended
|
Ended
|
Ended
|
ended
|
|||||||||||||||||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||
Service
cost
|
$ | 3 | $ | 3 | $ | 6 | $ | 6 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Interest
cost
|
9 | 9 | 17 | 18 | — | — | — | — | ||||||||||||||||||||||||
Expected
return on plan assets
|
(10 | ) | (11 | ) | (20 | ) | (21 | ) | — | — | — | — | ||||||||||||||||||||
Amortization
of net loss (gain)
|
4 | 3 | 9 | 6 | (1 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||
Net
benefit expense (income)
|
$ | 6 | $ | 4 | $ | 12 | $ | 9 | $ | (1 | ) | $ | (1 | ) | $ | (3 | ) | $ | (3 | ) |
11
During
the twenty-six weeks ended July 31, 2010 the Company made a $2 million
contribution to its Canadian qualified plan. No further pension
contributions to its U.S. or Canadian qualified plans are required in 2010;
however, the Company currently expects to make a $30 million contribution by mid
September to its U.S. qualified plan.
8.
Share-Based
Compensation
On May
19, 2010, the Foot Locker 2007 Stock Incentive Plan was amended to increase the
number of shares of the Company’s common stock reserved for all awards to twelve
million shares.
The
Company uses a Black-Scholes option-pricing model to estimate the fair value of
share-based awards. The Black-Scholes option-pricing model incorporates various
and highly subjective assumptions, including expected term and expected
volatility. Total compensation expense related to the Company’s
share-based plans was $3.9 million and $3.0 million and $6.9 million and $5.4
million for the thirteen and twenty-six weeks ended July 31, 2010 and August 1,
2009, respectively.
Compensation expense related to the
Company’s stock option and stock purchase plans was $1.5 million and $1.0
million for the thirteen weeks ended July 31, 2010 and August 1, 2009,
respectively, and was $3.0 million and $1.7 million for the twenty-six weeks
ended July 31, 2010 and August 1, 2009, respectively. The following table shows
the Company’s assumptions used to compute the share-based compensation
expense:
Stock Option Plans
Twenty-six weeks ended
|
Stock Purchase Plan
Twenty-six weeks ended
|
|||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||
Weighted-average risk free rate of interest
|
2.34 | % | 1.76 | % | 1.03 | % | 1.91 | % | ||||
Expected
volatility
|
45 | % | 53 | % | 39 | % | 39 | % | ||||
Weighted-average
expected award life
|
5.0
years
|
4.8
years
|
1.0
year
|
1.0
year
|
||||||||
Dividend
yield
|
4.0 | % | 6.0 | % | 5.1 | % | 4.2 | % | ||||
Weighted-average
fair value
|
$ | 4.47 | $ | 2.87 | $ | 2.36 | $ | 4.74 |
The
information set forth in the following table covers options granted under the
Company’s stock option plans for the twenty-six weeks ended July 31,
2010:
(in thousands, except price per share)
|
Shares
|
Weighted-
Average
Term
|
Weighted-
Average
Exercise
Price
|
|||||||||
Options
outstanding at the beginning of the year
|
7,002 | $ | 16.88 | |||||||||
Granted
|
1,309 | 15.10 | ||||||||||
Exercised
|
(151 | ) | 11.00 | |||||||||
Expired
or cancelled
|
(105 | ) | 20.59 | |||||||||
Options
outstanding at July 31, 2010
|
8,055 | 5.47 | $ | 16.65 | ||||||||
Options
exercisable at July 31, 2010
|
5,637 | 3.87 | $ | 18.26 | ||||||||
Options
available for future grant at July 31, 2010
|
10,336 |
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) for the thirteen and twenty-six weeks ended
July 31, 2010 was $0.1 million and $0.6 million, respectively, and was not
significant for the thirteen and twenty-six weeks ended August 1, 2009. The
aggregate intrinsic value for stock options outstanding and exercisable (the
difference between the Company’s closing stock price on the last trading day of
the period and the exercise price of the options, multiplied by the number of
in-the-money stock options) as of July 31, 2010 was $8.9 million and $5.3
million, respectively. The aggregate intrinsic value for stock options
outstanding and exercisable as of August 1, 2009 was $1.7 million and $0.6
million, respectively.
The cash
received from option exercises for the thirteen and twenty-six weeks ended July
31, 2010 was $0.2 million and $1.2 million, respectively. There were no option
exercises for the thirteen weeks ended August 1, 2009. The cash received from
option exercises for the twenty-six weeks ended August 1, 2009 was $0.1 million.
The tax benefit realized from option exercises was not significant for any of
the periods presented.
12
The
following table summarizes information about stock options outstanding and
exercisable at July 31, 2010:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||||||
Range of Exercise Prices
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise Price
|
Number
Exercisable
|
Weighted-
Average
Exercise Price
|
|||||||||||||||||||||
(in thousands, except price per share)
|
||||||||||||||||||||||||||
$ | 9.51 | $ | 10.25 | 1,832 | 7.01 | $ | 10.05 | 915 | $ | 10.09 | ||||||||||||||||
$ | 10.31 | $ | 15.10 | 2,864 | 6.22 | $ | 13.45 | 1,370 | $ | 12.11 | ||||||||||||||||
$ | 15.41 | $ | 23.92 | 2,014 | 4.10 | $ | 20.66 | 2,007 | $ | 20.67 | ||||||||||||||||
$ | 24.04 | $ | 27.10 | 922 | 3.50 | $ | 25.70 | 922 | $ | 25.70 | ||||||||||||||||
$ | 28.16 | $ | 28.16 | 423 | 4.50 | $ | 28.16 | 423 | $ | 28.16 | ||||||||||||||||
$ | 9.51 | $ | 28.16 | 8,055 | 5.47 | $ | 16.65 | 5,637 | $ | 18.26 |
Changes
in the Company’s non-vested options for the twenty-six weeks ended July 31, 2010
are summarized as follows:
(in thousands, except price per share)
|
Number of
Shares
|
Weighted-
Average Grant
Date Fair Value
per Share
|
|||||
Non-vested
at January 30, 2010
|
1,918
|
$
|
11.67
|
||||
Granted
|
1,309
|
15.10
|
|||||
Vested
|
(704
|
)
|
12.45
|
||||
Expired
or cancelled
|
(105
|
)
|
20.59
|
||||
Non-vested
at July 31, 2010
|
2,418
|
12.92
|
As of
July 31, 2010, there was $5.1 million of total unrecognized compensation cost,
related to non-vested stock options, which is expected to be recognized over a
weighted-average period of 1.3 years.
Restricted
Stock and Units
Restricted
shares of the Company’s common stock and restricted stock units may be awarded
to certain officers and key employees of the Company. The Company also issues
restricted stock units to its non-employee directors. Each restricted stock unit
represents the right to receive one share of the Company’s common stock provided
that the vesting conditions are satisfied. As of July 31, 2010, 678,535
restricted stock units were outstanding. Compensation expense is recognized
using the fair market value at the date of grant and is amortized over the
vesting period, provided the recipient continues to be employed by the Company.
Generally, awards fully vest after the passage of time, typically three years.
However, restricted stock unit grants made after May 19, 2010 in connection with
the Company’s long-term incentive program vest after the passage of time and the
attainment of certain performance metrics. Restricted stock is considered
outstanding at the time of grant and the holders have voting
rights. Dividends are paid to holders of restricted stock that vest
with the passage of time; for performance-based restricted stock granted after
May 19, 2010, dividends will be accumulated and paid after the performance
criteria are met.
Restricted
shares and units activity for the twenty-six weeks ended July 31, 2010 and
August 1, 2009 is summarized as follows:
Number of Shares and Units
|
||||||||
(in thousands)
|
July 31, 2010
|
August 1, 2009
|
||||||
Outstanding
at the beginning of the year
|
1,680
|
844
|
||||||
Granted
|
651
|
615
|
||||||
Vested
|
(457
|
)
|
(39
|
)
|
||||
Cancelled
or forfeited
|
(70
|
)
|
—
|
|||||
Outstanding
at end of period
|
1,804
|
1,420
|
||||||
Aggregate
value (in millions)
|
$
|
21.1
|
$
|
21.8
|
||||
Weighted-average
remaining contractual life
|
1.90
years
|
1.42
years
|
13
The
weighted-average grant-date fair value per share was $13.75 and $9.74 for the
twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The total
value of awards for which restrictions lapsed during the twenty-six weeks ended
July 31, 2010 and August 1, 2009 was $9.5 million and $0.9 million,
respectively. As of July 31, 2010, there was $12.8 million of total unrecognized
compensation cost related to non-vested restricted awards. The Company recorded
compensation expense related to restricted stock awards, net of forfeitures, of
$3.9 million and $3.7 million for the twenty-six weeks ended July 31, 2010 and
August 1, 2009, respectively.
9.
Fair Value
Measurements
The
following tables provide a summary of the Company’s recognized assets and
liabilities that are measured at fair value on a recurring basis:
At July 31, 2010
|
At August 1, 2009
|
At January 30, 2010
|
||||||||||||||||||||||||||||||||||
(in millions)
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||||||||||
Short-term
investment
|
$ | — | $ | — | $ | 7 | $ | — | $ | — | $ | 13 | $ | — | $ | — | $ | 7 | ||||||||||||||||||
Auction
rate security
|
— | 5 | — | — | 4 | — | — | 5 | — | |||||||||||||||||||||||||||
Forward
foreign exchange contracts
|
— | — | — | — | 1 | — | — | 1 | — | |||||||||||||||||||||||||||
Total
Assets
|
$ | — | $ | 5 | $ | 7 | $ | — | $ | 5 | $ | 13 | $ | — | $ | 6 | $ | 7 | ||||||||||||||||||
Liabilities
|
||||||||||||||||||||||||||||||||||||
European
net investment hedge
|
$ | — | $ | 24 | $ | — | $ | — | $ | 24 | $ | — | $ | — | $ | 24 | $ | — | ||||||||||||||||||
Forward
foreign exchange contracts
|
— | 2 | — | — | 1 | — | — | — | — | |||||||||||||||||||||||||||
Total
Liabilities
|
$ | — | $ | 26 | $ | — | $ | — | $ | 25 | $ | — | $ | — | $ | 24 | $ | — |
The
Company’s auction rate security is classified as available-for-sale and,
accordingly, is reported at fair value. The fair value of the security is
determined by review of the underlying security at each reporting period. 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.
The
Company’s Level 3 assets represent the Company’s investment in the Reserve
International Liquidity Fund, Ltd. (the “Fund”), a money market fund classified
in short-term investments. The Company assesses the fair value of its investment
in the Fund, which includes a quarterly impairment evaluation. There were no
further redemptions for this investment during the twenty-six weeks ended July
31, 2010.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
BUSINESS
OVERVIEW
Foot
Locker, Inc., through its subsidiaries, operates in two reportable segments –
Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of
the largest athletic footwear and apparel retailers in the world, whose formats
include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports,
Footaction, and CCS.
The
Direct-to-Customers segment is multi-branded and multi-channeled. This segment
sells, through its affiliates, directly to customers through catalogs and its
Internet websites. Eastbay, one of the affiliates, is among the largest direct
marketers of athletic footwear and apparel in the United States. This
segment also operates websites aligned with the brand names of the retail store
banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footaction.com,
champssports.com, and ccs.com).
STORE
COUNT
At July
31, 2010, the Company operated 3,476 stores as compared with 3,500 and 3,615
stores at January 30, 2010 and August 1, 2009, respectively. During the
twenty-six weeks ended July 31, 2010, the Company opened 27 stores, remodeled or
relocated 94 stores and closed 51 stores.
A total
of 20 franchised stores were operating at July 31, 2010, as compared with 22
stores at January 30, 2010 and 19 stores at August 1, 2009. Revenue from the
franchised stores was not significant for the thirteen and twenty-six weeks
ended July 31, 2010 and August 1, 2009. These stores are not included in the
Company’s operating store count above.
14
SALES AND OPERATING
RESULTS
All
references to comparable-store sales for a given period relate to sales of
stores that are open at the period-end and that have been open for more than one
year. Accordingly, stores opened and closed during the period are not included.
Sales from the Direct-to-Customers segment are included in the total Company
calculation of comparable-store sales for all periods presented. Sales from
acquired businesses that include the purchase of inventory are included in the
computation of comparable-store sales after 15 months of operations.
Accordingly, effective with the first quarter of 2010, CCS sales have been
included in the computation of comparable-store sales. Division profit reflects
income from continuing operations before income taxes, corporate expense,
non-operating income and net interest expense.
The
following table summarizes results by segment:
Sales
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
(in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Athletic
Stores
|
$ | 1,015 | $ | 1,018 | $ | 2,196 | $ | 2,136 | ||||||||
Direct-to-Customers
|
81 | 81 | 181 | 179 | ||||||||||||
Total
sales
|
$ | 1,096 | $ | 1,099 | $ | 2,377 | $ | 2,315 |
Operating
Results
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
(in millions)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Athletic
Stores
|
$ | 33 | $ | 5 | $ | 134 | $ | 66 | ||||||||
Direct-to-Customers
|
3 | 5 | 13 | 13 | ||||||||||||
Division
profit
|
36 | 10 | 147 | 79 | ||||||||||||
Corporate
expense, net
|
25 | 10 | 49 | 29 | ||||||||||||
Operating
profit
|
11 | — | 98 | 50 | ||||||||||||
Other
income (1)
|
1 | 1 | 1 | 2 | ||||||||||||
Interest
expense, net
|
2 | 3 | 5 | 5 | ||||||||||||
Income
(loss) from continuing operations before income taxes
|
$ | 10 | $ | (2 | ) | $ | 94 | $ | 47 |
(1)
|
Other
income for the twenty-six weeks ended July 31, 2010 primarily represents
royalty income and realized gains associated with foreign currency option
contracts. Other income for the twenty-six weeks ended August 1, 2009
primarily represents gains from insurance proceeds, gain on the purchase
and retirement of bonds, and royalty
income.
|
Sales
decreased by $3 million, or 0.3 percent, to $1,096 million for the thirteen
weeks ended July 31, 2010, from $1,099 million for the thirteen weeks ended
August 1, 2009. For the twenty-six weeks ended July 31, 2010 sales of
$2,377 million increased 2.7 percent from sales of $2,315 million for the
twenty-six week period ended August 1, 2009. Excluding the effect of foreign
currency fluctuations, total sales for the thirteen-week and twenty-six week
periods increased 1.3 percent and 2.2 percent, respectively, as compared with
the corresponding prior-year periods. Comparable-store sales increased by 2.5
percent and 3.7 percent, for the thirteen and twenty-six weeks ended July 31,
2010, respectively.
Gross
margin, as a percentage of sales, increased to 27.8 percent for the thirteen
weeks ended July 31, 2010 as compared with 25.5 percent in the corresponding
prior-year period. Gross margin, as a percentage of sales, of 29.4 percent for
the twenty-six weeks ended July 31, 2010 increased as compared with 27.5 percent
in the corresponding prior-year period. The cost of merchandise rate for the
thirteen and twenty-six weeks ended July 31, 2010 decreased by 210 and
140 basis points, respectively, as compared with the corresponding prior-year
periods, reflecting a lower markdown rate as the Company was less promotional
during the current year, coupled with lower inventory shortages. The thirteen
weeks ended July 31, 2010 also reflected a favorable shift toward higher margin
apparel. The effect of lower vendor allowances during the current year
negatively affected gross margin by 40 and 20 basis points for the thirteen and
twenty-six weeks ended July 31, 2010, respectively, as compared with the
corresponding prior-year periods. For the thirteen and twenty-six weeks ended
July 31, 2010, the occupancy and buyers’ salary expense rate decreased by 20 and
50 basis points, respectively, as a percentage of sales, as compared with the
corresponding prior-year periods reflecting expense reductions and improved
leverage.
15
Segment
Analysis
Athletic
Stores
Athletic
Stores sales decreased by 0.3 percent and increased by 2.8 percent for the
thirteen and twenty-six weeks ended July 31, 2010, respectively, as compared
with the corresponding prior-year periods. Excluding the effect of foreign
currency fluctuations, sales from athletic stores increased 1.3 percent and 2.3 percent for the thirteen and
twenty-six weeks ended July 31, 2010, respectively, as compared with the
corresponding prior-year periods. Comparable-store sales increased by 2.6 percent and 3.9 percent for the thirteen and
twenty-six weeks ended July 31, 2010, respectively. The increase in domestic
comparable-store sales for the thirteen and twenty-six weeks ended July 31, 2010
reflect an improved in-stock position and new receipts of more compelling
assortments of athletic footwear, including expanded offerings of toning, as
well as technical and light-weight running styles. International sales increased
in Europe reflecting gains in both athletic footwear and apparel. Sales
declined in Canada, Australia and New Zealand. The decline in Australia reflects
the effect of the prior-year government stimulus program.
Athletic
Stores division profit for the thirteen weeks ended July 31, 2010 increased to
$33 million, or 3.3 percent, as a percentage of sales, from a division profit of
$5 million or 0.5 percent, as a percentage of sales, for the thirteen weeks
ended August 1, 2009. Athletic Stores division profit for the twenty-six weeks
ended July 31, 2010 increased to $134 million, or 6.1 percent, as a percentage
of sales, from a division profit of $66 million, or 3.1 percent, as a
percentage of sales, for the twenty-six weeks ended August 1, 2009. The increase
in division profit was mainly attributable to improved sales, as well as a
higher gross margin rate as the Company was less promotional during the current
year and inventories were better positioned. The Athletic Stores division profit
reflects higher incentive compensation, offset by lower operating expenses as
this segment benefited from initiatives implemented during late 2009 to reduce
overhead costs.
Direct-to-Customers
Direct-to-Customers
sales of $81 million for the thirteen weeks ended July 31, 2010 were flat as
compared with the thirteen weeks ended August 1, 2009. Direct-to-Customers sales
increased by 1.1 percent to $181 million for the twenty-six weeks ended July 31,
2010, as compared with the corresponding prior-year period of $179 million.
Internet sales increased by 2.9 percent to $71 million and by 2.6 percent to
$156 million for the thirteen and twenty-six weeks ended July 31, 2010,
respectively, as compared with the corresponding prior-year periods. This
increase was primarily a result of the strong sales performance through the
Company’s store banner websites, which benefited from improved functionality and
style.
Direct-to-Customers
division profit decreased 40 percent to $3 million, and was flat at
$13 million, for the thirteen and twenty-six weeks ended July 31, 2010, as
compared with the corresponding prior-year periods. Division profit, as a
percentage of sales, decreased to 3.7 percent and 7.2 percent for the
thirteen and twenty-six weeks ended July 31, 2010, respectively, as compared
with 6.2 percent and 7.3 percent, respectively, in the corresponding prior-year
periods. The decrease primarily reflects a lower gross margin rate as a result
of increased free shipping offers.
Corporate
Expense
Corporate
expense consists of unallocated general and administrative expenses, as well as
depreciation and amortization related to the Company’s corporate headquarters,
centrally managed departments, unallocated insurance and benefit programs,
certain foreign exchange transaction gains and losses, and other items.
Corporate expense for the thirteen weeks ended July 31, 2010 increased by
$15 million to $25 million from the corresponding prior-year period.
Corporate expense for the twenty-six weeks ended July 31, 2010 increased by $20
million to $49 million from the corresponding prior-year period. These increases
primarily reflect increased incentive compensation costs.
Selling, General and
Administrative
Selling,
general and administrative expenses (“SG&A”) of $268 million increased by
$16 million or 6.3 percent, for the thirteen weeks ended July 31, 2010 as
compared with the corresponding prior-year period. SG&A of $548 million
increased by $18 million, or 3.4 percent, for the twenty-six weeks ended July
31, 2010 as compared with the corresponding prior-year period. SG&A, as a
percentage of sales, increased to 24.5 percent for the thirteen weeks ended
July 31, 2010, as compared with 22.9 percent in the corresponding prior-year
period. SG&A, as a percentage of sales, increased to 23.1 percent for the
twenty-six weeks ended July 31, 2010, as compared with 22.9 percent in the
corresponding prior-year period. Excluding the effect of foreign currency
fluctuations, SG&A increased by $21 million and $17 million for the thirteen
and twenty-six weeks ended July 31, 2010, respectively, as compared with the
corresponding prior-year periods. This increase for the thirteen
weeks ended July 31, 2010 principally reflects increased incentive compensation
costs, partially offset by expense management efforts. The increase
for the twenty-six weeks ended July 31, 2010 reflects increased incentive
compensation costs offset by reduced store costs, primarily wages, related to
operating fewer stores and expense management efforts.
16
Depreciation and
Amortization
Depreciation
and amortization decreased by $2 million in the second quarter of 2010 to $26
million as compared with $28 million for the second quarter of 2009.
Depreciation and amortization decreased by $4 million for the twenty-six weeks
ended July 31, 2010 to $52 million as compared with $56 million for the
twenty-six weeks ended August 1, 2009. Excluding the effect of foreign currency
fluctuations, primarily related to the euro, depreciation and amortization
decreased by $1 million for the thirteen weeks ended July 31, 2010, as compared
with the corresponding prior-year period. The effect of foreign currency
fluctuations on the twenty-six weeks ended July 31, 2010 was not significant.
The decrease primarily reflects reduced depreciation and amortization associated
with store long-lived asset impairment charges recorded during the third quarter
of 2009.
Interest
Expense
Thirteen weeks ended
|
Twenty-six weeks ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
(in millions)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
||||||||
Interest
expense
|
$
|
3
|
$
|
3
|
$
|
7
|
$
|
6
|
||||||||
Interest
income
|
(1
|
)
|
—
|
(2
|
)
|
(1
|
)
|
|||||||||
Interest
expense, net
|
$
|
2
|
$
|
3
|
$
|
5
|
$
|
5
|
The
decrease in net interest expense for the thirteen weeks ended July 31, 2010 as
compared with the corresponding prior-year period reflects income earned on
higher cash and cash equivalents balances. The increase in interest expense for
the twenty-six weeks ended July 31, 2010 of $1 million is due primarily to
higher fees associated with the Company’s revolving credit
facility.
Income
Taxes
The
Company recorded tax expense of $4 million and $34 million, an effective rate of
38.8 percent and 36.1 percent, for the thirteen weeks and twenty-six weeks ended
July 31, 2010, respectively. For the thirteen weeks and twenty-six
weeks ended August 1, 2009, the Company recorded a tax benefit of $1 million and
tax expense of $17 million, an effective rate of 72.2 percent and 35.4 percent,
respectively. The effective rate for the thirteen weeks and twenty-six weeks
ended July 31, 2010 reflects a higher proportion of income earned in higher tax
jurisdictions. The income tax benefit for the thirteen weeks ended
August 1, 2009 reflects favorable settlements of tax examinations and a reduced
tax rate in a foreign jurisdiction.
The
Company expects its third quarter and full year tax rate to approximate 37
percent, excluding any potential settlements or other adjustments that may
occur. The actual rate will primarily depend on the percentage of income earned
in the United States as compared with international operations.
Net
Income
For
the thirteen weeks ended July 31, 2010, net income increased by $6 million, or
$0.04 per diluted share as compared with the thirteen weeks ended August 1,
2009. Net income for the twenty-six weeks ended July 31, 2010 was $60 million,
or $0.38 per diluted share. This compares to net income of $31 million, or $0.20
per diluted share for the twenty-six weeks ended August 1, 2009. Included in the
thirteen weeks ended August 1, 2009, is income from discontinued operations of
$1 million, as a result of a favorable state tax examination attributable to the
Company’s former Canadian businesses.
LIQUIDITY AND CAPITAL
RESOURCES
Generally,
the Company’s primary source of cash has been from operations. The Company
generally finances real estate with operating leases. The principal uses of cash
have been to finance inventory requirements, capital expenditures related to
store openings, store remodelings, information systems, and other support
facilities, retirement plan contributions, quarterly dividend payments, interest
payments, other cash requirements to support the development of its short-term
and long-term operating strategies, and to fund other working capital
requirements.
17
Management
believes its cash, cash equivalents, future cash flow from operations, and the
Company’s current revolving credit facility will be adequate to fund these
requirements. The Company’s management does not currently expect to borrow under
the revolving credit facility in 2010. The Company may, 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.
Such repurchases, if any, will depend on prevailing market conditions, liquidity
requirements, contractual restrictions, and other factors. The amounts involved
may be material. On February 16, 2010, the Company’s Board of Directors approved
an extension of the Company’s 2007 common share repurchase program for an
additional three years in the amount of $250 million.
The
Company terminated its European net investment hedge during
2008. During the second quarter of 2010, the counterparty exercised
an option within the agreement, requiring the Company to settle this $24 million
liability in August 2010. The Company’s liquidity is sufficient to meet this
obligation.
Any
materially adverse change in customer demand, fashion trends, competitive market
forces, or customer acceptance of the Company’s merchandise mix and retail
locations, uncertainties related to the effect of competitive products and
pricing, the Company’s reliance on a few key vendors for a significant portion
of its merchandise purchases and risks associated with foreign global sourcing,
economic conditions worldwide, the effects of currency fluctuations, as well as
other factors listed under the heading “Disclosure Regarding Forward-Looking
Statements,” could affect the ability of the Company to continue to fund its
needs from business operations.
Net
cash provided by operating activities from continuing operations was $63 million
and $83 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009,
respectively. These amounts reflect net income adjusted for non-cash items and
working capital changes. During the twenty-six weeks ended August 1, 2009, the
Company terminated its interest rate swaps for a gain of $19 million.
Additionally, during the twenty-six weeks ended July 31, 2010, the Company
contributed $2 million to its Canadian qualified pension plan as compared with
$11 million to its U.S. and Canadian qualified pension plans in the
corresponding prior-year period. Operating cash flows also include a normal
seasonal increase in merchandise inventory in each period
presented.
Net
cash used in investing activities from continuing operations was $51 million and
$36 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009,
respectively. Included in investing activities for the twenty-six weeks ended
August 1, 2009 is a $1 million gain from insurance recoveries. Additionally,
during the second quarter of 2009, the Company received $10 million,
representing further liquidation of the Reserve International Liquidity
Fund. Capital expenditures were $51 million for the twenty-six weeks
ended July 31, 2010 as compared with $47 million in the corresponding prior-year
period. The Company’s full year forecast for capital expenditures is $107
million, of which $74 million relates to the modernizations of existing stores
and new store openings and $33 million for the development of information
systems and other support facilities.
Net
cash used in financing activities from continuing operations was $63 million and
$49 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009,
respectively. During the twenty-six weeks ended August 1, 2009, the Company
purchased and retired $3 million of its 8.50 percent debentures payable in
2022. The Company declared and paid dividends totaling $47 million
for each of the twenty-six weeks ended July 31, 2010 and August 1, 2009. This
represents a quarterly rate of $0.15 per share. The Company received proceeds
from the issuance of common stock in connection with employee stock programs of
$4 million and $1 million for the twenty-six weeks ended July 31, 2010 and
August 1, 2009, respectively. During the twenty-six weeks ended July
31, 2010, the Company repurchased 1,375,000 shares of its common stock under the
2007 common share repurchase program for $20 million.
Recent
Accounting Pronouncements
Recently
issued accounting pronouncements did not have, or are not believed by management
to have, a material effect on the Company’s present or future consolidated
financial statements.
18
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
There
have been no significant changes to the Company’s critical accounting policies
and estimates from the information provided in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” included in the
Annual Report on Form 10-K for the fiscal year ended January 30,
2010.
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements within the meaning of the federal
securities laws. All statements, other than statements of historical facts,
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including, but not limited to, such
things as future capital expenditures, expansion, strategic plans, 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 detailed in the Company’s filings with the Securities
and Exchange Commission, including the effects of currency fluctuations,
customer demand, fashion trends, competitive market forces, uncertainties
related to the effect of competitive products and pricing, customer acceptance
of the Company’s merchandise mix and retail locations, the Company’s reliance on
a few key vendors for a majority of its merchandise purchases (including a
significant portion from one key vendor), pandemics and similar major health
concerns, unseasonable weather, further deterioration of global financial
markets, economic conditions worldwide, further deterioration of business and
economic conditions, any changes in business, political and economic conditions
due to the threat of future terrorist activities in the United States or in
other parts of the world and related U.S. military action overseas, the ability
of the Company to execute its business and strategic plans effectively with
regard to each of its business units, and risks associated with foreign global
sourcing, including political instability, changes in import regulations, and
disruptions to transportation services and distribution. Any changes in such
assumptions or factors could produce significantly different results. The
Company undertakes no obligation to update forward-looking statements, whether
as a result of new information, future events, or otherwise.
Item 4. Controls and
Procedures
During
the quarter ended July 31, 2010, 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.
Item 1. 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, and labor-and-employment-related
claims.
Certain
of the Company’s subsidiaries are defendants in a number of lawsuits filed in
state and federal courts containing various class action allegations under state
wage and hour laws, including allegations concerning classification of employees
as exempt or nonexempt, unpaid overtime, meal and rest breaks, and uniforms. In
Pereira v. Foot Locker
(United States District Court, E.D. Pennsylvania), one of the class actions,
plaintiff alleged that the Company permitted unpaid off-the-clock hours in
violation of the Fair Labor Standards Act. In September 2009, the court
conditionally certified a nationwide collective action.
Management
does not believe that the outcome of any such proceedings would have a material
adverse effect on the Company’s consolidated financial position, liquidity, or
results of operations, taken as a whole.
19
Item 1A. Risk
Factors
There
were no material changes to the risk factors disclosed in the 2009 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 July 31, 2010.
Date Purchased
|
Total
Number of
Shares
Purchased (1)
|
Average
Price Paid
per Share (1)
|
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (2)
|
Approximate
Dollar Value of
Shares that may yet
be Purchased
Under the Program
(2)
|
||||||||||||
May
2, 2010 through May 29, 2010
|
25,000 | $ | 13.85 | 25,000 | $ | 242,246,238 | ||||||||||
May
30, 2010 through July 3, 2010
|
550,000 | $ | 14.04 | 550,000 | $ | 234,523,983 | ||||||||||
July
4, 2010 through July 31, 2010
|
312,330 | $ | 13.04 | 300,000 | $ | 230,605,905 | ||||||||||
887,330 | $ | 13.68 | 875,000 |
(1)
|
These
columns also reflect shares purchased in connection with stock swaps and
shares acquired in satisfaction of the tax withholding obligation of
holders of restricted stock which vested during the
quarter.
|
(2)
|
On
February 16, 2010, the Company’s Board of Directors approved the extension
of the Company’s 2007 common share repurchase program for an additional
three years in the amount of $250
million.
|
(a)
|
Exhibits
|
The
exhibits that are in this report immediately follow the
index.
|
20
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.
FOOT
LOCKER, INC.
|
|
Date:
September 8, 2010
|
(Company)
|
/s/ Robert W.
McHugh
|
|
ROBERT
W. MCHUGH
|
|
Executive
Vice President and Chief Financial
Officer
|
21
FOOT
LOCKER, INC.
INDEX OF
EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE
WITH ITEM 601 OF REGULATION S-K
Exhibit No.
|
||
Item 601
|
|
Description
|
12
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
15
|
Accountants’
Acknowledgement.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley act of
2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
99
|
Report
of Independent Registered Public Accounting Firm.
|
|
101
|
The
following materials from Foot Locker, Inc.’s Quarterly Report on
Form 10-Q for the quarter ended July 31, 2010, formatted in XBRL
(Extensible Business Reporting Language) and furnished electronically
herewith: (i) the Condensed Consolidated Balance Sheets,
(ii) the Condensed Consolidated Statements of Operations,
(iii) the Condensed Consolidated Statements of Comprehensive (Loss)
Income, (iv) the Condensed Consolidated Statements of Cash Flows, and
(v) Notes to Condensed Consolidated Financial Statements, tagged as
blocks of text.
|
22