UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
(Mark One) | |||
| |||
☒ |
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended February | |||
OR | |||
| |||
☐ |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | ||
For the transition period from | |||
Commission File No. 1-10299 | |||
| |||
(Exact name of registrant as specified in its charter) |
|
| |
New York | 13-3513936 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
330 West 34th Street, New York, New York | 10001 | |
|
| |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) (212) 720-3700
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.01 | FL | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒⌧No ☐◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐◻No☒⌧
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 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 Act). Yes ☐No☒
The number of shares of the | 104,191,210 | |
The aggregate market value of voting stock held by non-affiliates of the |
| $3,051,665,857* |
|
|
* For purposes of this calculation only (a) all directors plus six executive officers and owners of five percent or more of the registrant are deemed to be affiliates of the registrant and (b) shares deemed to be “held” by such persons include only outstanding shares of the registrant’s voting stock with respect to which such persons had, on such date, voting or investment power.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’sregistrant’s definitive Proxy Statement (the “Proxy Statement”) to be filed in connection with the Annual Meeting of Shareholders to be held on May 23, 2018:20, 2020: Parts III and IV.
FOOT LOCKER, INC.
TABLE OF CONTENTS
| | | |||
| | | | ||
| 1 | ||||
| |||||
| |||||
| |||||
| |||||
| |||||
| |||||
| |||||
3 | |||||
| | 12 | |||
| 12 | ||||
| 13 | ||||
| 13 | ||||
| 13 | ||||
| | | | ||
| | | |||
| | | | ||
| 14 | ||||
| 16 | ||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |||
| 34 | ||||
| 34 | ||||
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||
| |||||
| 76 | ||||
| | 76 | |||
| 78 | ||||
| | | | ||
| | | |||
| | | | ||
| 78 | ||||
| 78 | ||||
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 78 | |||
| Certain Relationships and Related Transactions, and Director Independence | 78 | |||
| |||||
78 | |||||
| | | | ||
| | | |||
| | | | ||
| |||||
79 | |||||
| 79 | ||||
| | ||||
80 | |||||
| | ||||
84 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “continues,” “feels,” “forecasts,” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” These statements include statements relating to trends in or expectations relating to the expected effects of our initiatives, strategies and plans, as well as trends in or expectations regarding our financial results and long-term growth model and drivers, tax rates, business opportunities and expansion, strategic acquisitions or investments, expenses, dividends, share repurchases, and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, investments, borrowing capacity and use of proceeds, repatriation of cash to the U.S., and the effect of the outbreak of a novel strain of the coronavirus (COVID-19) on our financial results. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this Annual Report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties, many of which are unforeseeable and beyond our control, such as the developing situation, and uncertainty caused, related to the COVID-19 pandemic. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.
Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report or any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
General
General
Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailerretailer. Foot Locker, Inc. leads the celebration of athletically inspired shoessneaker and apparel.youth culture around the globe through a portfolio of brands including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep. As of February 3, 2018, the Company1, 2020, we operated 3,3103,129 primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in 27 countries across the United States, Canada, Europe, Australia, New Zealand, and New Zealand. Asia. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of the global sneaker community.
Foot Locker, Inc. uses its omni-channel capabilities to bridge the digital world and physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners (including footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu (and related e-commerce sites in the various European countries that we operate) footlocker.com.au, runnerspoint.com, sidestep-shoes.com, footlocker.hk, footlocker.sg, and footlocker.my). These sites offer some of the largest online product selections and provide a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com, final-score.com, and eastbayteamsales.com.
Foot Locker, Inc. and its subsidiaries hereafter are referred to as the “Registrant,” “Company,” “we,” “our,” or “us.” Information regardingFoot Locker, Inc. has its corporate headquarters in New York. The service marks, trade names, and trademarks appearing in this report (except for Nike, Jordan, adidas, and Puma) are owned by Foot Locker, Inc. or its subsidiaries.
Store and Operations Profile
| | | | | | | | | | | | | | |
| | | | | | | | | | | | Square Footage | ||
| | February 3, | | | | | | February 1, | | Relocations/ | | (in thousands) | ||
|
| 2019 |
| Opened |
| Closed |
| 2020 |
| Remodels |
| Selling |
| Gross |
Foot Locker U.S. |
| 886 |
| 10 | | 29 |
| 867 |
| 37 |
| 2,403 |
| 4,191 |
Foot Locker Europe |
| 642 |
| 14 | | 20 |
| 636 |
| 46 |
| 1,016 |
| 2,181 |
Foot Locker Canada |
| 107 |
| — | | 2 |
| 105 |
| 12 |
| 263 |
| 432 |
Foot Locker Pacific |
| 94 |
| 1 | | 4 |
| 91 |
| 7 |
| 148 |
| 240 |
Foot Locker Asia | | 5 | | 9 | | — | | 14 | | — |
| 42 |
| 76 |
Kids Foot Locker |
| 428 |
| 12 | | 9 |
| 431 |
| 11 |
| 740 |
| 1,278 |
Lady Foot Locker |
| 57 |
| — | | 11 |
| 46 |
| — |
| 66 |
| 110 |
Champs Sports |
| 535 |
| 8 | | 7 |
| 536 |
| 26 |
| 1,930 |
| 2,999 |
Footaction |
| 250 |
| 3 | | 8 |
| 245 |
| 7 |
| 777 |
| 1,317 |
Runners Point |
| 107 |
| 1 | | 27 |
| 81 |
| 2 |
| 105 |
| 185 |
Sidestep |
| 80 |
| 9 | | 12 |
| 77 |
| — |
| 75 |
| 137 |
SIX:02 |
| 30 |
| — | | 30 |
| — |
| — |
| — |
| — |
Total |
| 3,221 |
| 67 |
| 159 |
| 3,129 |
| 148 |
| 7,565 |
| 13,146 |
The following is a brief description of each of our banners:
Foot Locker — Foot Locker is a leading global youth culture brand that connects the businesssneaker obsessed consumer with the most innovative and culturally relevant sneakers and apparel. Across all our consumer touchpoints, FootLocker enables consumers to fulfill their desire to be part of sneaker and youth culture. We curate special product assortments and marketing content that supports our premium position – from leading global brands such as Nike, Jordan, adidas, and Puma, as well as new and emerging brands in the athletic and lifestyle space. We connect emotionally with our consumers through a combination of global brand events and highly targeted and personalized experiences in local markets including our community-based “power” stores, which provides pinnacle retail experiences that delivers connected customer interactions through service, experience, product, and a sense of community. Foot Locker’s 1,713 stores are located in 27 countries including 867 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 105 in Canada, 636 in Europe, a combined 91 in Australia and New Zealand, and 14 in Asia. Our domestic stores have an average of 2,800 selling square feet and our international stores have an average of 1,700 selling square feet.
2019 Form 10-K Page 1
Kids Foot Locker — Kids Foot Locker offers the largest selection of premium brand-name athletic footwear, apparel, and accessories for children. Kids Foot Locker enables youth of all ages to participate in sneaker culture and helps their parents shop in a curated environment with only the best assortment in stores and online. Of our 431 stores, 376 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 37 in Europe, 16 in Canada, 1 in Australia, and 1 in New Zealand. These stores have an average of 1,700 selling square feet.
Lady Foot Locker — Lady Foot Locker is a U.S. retailer of athletic footwear, apparel, and accessories dedicated to sneaker-obsessed young women. Our stores provide premium sneakers and apparel, carefully selected to reflect the latest styles. Lady Foot Locker operates 46 stores that are located in the United States and Puerto Rico. These stores have an average of 1,400 selling square feet.
Champs Sports — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. With a focus on the lifestyle expression of sport, Champs Sports’ product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to offer the best head-to-toe fashion stories representing the most powerful athletic brands, sports teams, and athletes in North America. Of our 536 stores, 503 are located in the United States, Puerto Rico, and the U.S. Virgin Islands and 33 in Canada. The Champs Sports stores have an average of 3,600 selling square feet.
Footaction — Footaction is a North American athletic footwear and apparel retailer that offers the freshest, best edited selection of athletic lifestyle brands and looks. This banner is uniquely positioned at the intersection of sport and style, with a focus on authentic, premium product. Of our 245 stores, 240 are located in the United States and Puerto Rico and 5 are in Canada. The Footaction stores have an average of 3,200 selling square feet.
Runners Point — Runners Point specializes in running footwear, apparel, and equipment for both performance and lifestyle purposes. This banner offers athletically inspired premium products and personalized service. Runners Point also caters to local running communities providing technical products, training tips and access to local running and group events, while also serving their lifestyle running needs. Our 81 stores are located in Germany, Austria, and Switzerland. Runners Point stores have an average of 1,300 selling square feet.
Sidestep — Sidestep is a predominantly athletic fashion footwear banner. Our 77 stores are located in Germany, Austria, Netherlands, and Switzerland. Sidestep caters to a more discerning, fashion forward consumer. Sidestep stores have an average of 1,000 selling square feet.
We closed the SIX:02 banner during 2019 and we will focus on providing our female customer an engaging retail experience through our other banners.
Eastbay
Eastbay is a sporting goods direct marketer operating in the United States, providing high school and other athletes with a complete sports solution including athletic footwear, apparel, equipment, and team licensed merchandise for a broad range of sports. With over 100 sales professionals, Eastbay Team Sales connects directly with thousands of high school coaches and athletic directors in the Unites States in offering the best performance product and premium level of service.
Franchise Operations
We have franchised Foot Locker stores located within the Middle East, as well as franchised stores in Germany under the Runners Point banner. A total of 139 franchised stores were operating as of February 1, 2020, 9 in Germany and 130 in the Middle East, of which 52 are in Israel.
Employees
The Company and its consolidated subsidiaries had 15,589 full-time and 35,410 part-time employees as of February 1, 2020. The Company considers employee relations to be satisfactory.
Competition
The athletic footwear and apparel industry is highly competitive. We compete primarily with athletic footwear specialty stores, sporting goods stores, department stores, traditional shoe stores, mass merchandisers, and online retailers.
2019 Form 10-K Page 2
Merchandise Purchases
Financial information concerning merchandise purchases is contained under the “Business Overview”“Liquidity” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations” and under the “Business Risk” section in the Financial Instruments and Risk Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
Available Information
The Company maintains a corporate website on the Internet at www.footlocker-inc.com. The Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”), including its annual reportsreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through this website as soon as reasonably practicable after they are filed with or furnished to the SEC by clickingSEC. Our Corporate Social Responsibility disclosure is available to investors on our investor relations tab of our corporate website under the “SEC Filings” link.heading “Responsibility.” The Corporate Governance section of the Company’s corporate website contains the Company’s Corporate Governance Guidelines, Committee Charters, and the Company’s Code of Business Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request tothe Company’s Corporate Secretary at 330 West 34th Street, New York, N.Y. 10001.
Information Regarding Business Segments and Geographic Areas
The financial information concerning business segments, divisions, and geographic areas is contained under the “Business Overview” and “Segment Information” sections in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information regarding sales, operating results, and identifiable assets of the Company by business segment and by geographic area is contained under the Segment Information note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
The service marks, trade names, and trademarks appearing in this report (except for Nike, Jordan, adidas, and Puma) are owned by Foot Locker, Inc. or its subsidiaries.
Employees
The Company and its consolidated subsidiaries had 15,141 full-time and 34,068 part-time employees as of February 3, 2018. The Company considers employee relations to be satisfactory.
Competition
Financial information concerning competition is contained under the “Business Risk” section in the Financial Instruments and Risk Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
Merchandise Purchases
Financial information concerning merchandise purchases is contained under the “Liquidity” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under the “Business Risk” section in the Financial Instruments and Risk Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
Item 1A. Risk Factors
Risks Related to Our Business and Industry
The statements contained in this Annual Report on Form 10-K (“Annual Report”) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
1
Please also see “Disclosure Regarding Forward-Looking Statements.” Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.
Our inability to implement our long-range strategic plan may adversely affect our future results.
Our ability to successfully implement and execute our long-range strategic plan is dependent on many factors. Our strategies may require significant capital investment and management attention. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store designs, competition, product differentiation, the ability to attract and retain qualified personnel, and our ability to successfully implement technological initiatives. If we cannot successfully execute our strategic growth initiatives or if the long-range plan does not adequately address the challenges or opportunities we face, our financial condition and results of operations may be adversely affected. Additionally, failure to meet shareholder expectations, particularly with respect to sales, operating margins, and earnings per share, would likely result in volatility in the market value of our stock.
The retail athletic footwear and apparel business is highly competitive.
Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores, department stores, traditional shoe stores, mass merchandisers, and Internetonline retailers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are selection of merchandise, customer experience, reputation, store location, advertising, and price. We cannot assure that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors, and entry of new competitors or expansion of existing competitors into our markets, could have a material adverse effect on our business, financial condition, and results of operations.
Although we sell an increasing proportion of our merchandise via the Internet,online, a significantly faster shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internetonline could have a material adverse effect on our business results. In addition, all of our significant suppliers operate retail stores and distribute products directly through the Internetinternet and others may follow. Should this continue to occur or accelerate, and if our customers decide to purchase directly from our suppliers, it could have a material adverse effect on our business, financial condition, and results of operations.
A change in the relationship with any of our key suppliers or the unavailability of key products at competitive prices could affect our financial health.
Our business is dependent to a significant degree upon our ability to obtain premium product and the ability to purchase brand-name merchandise at competitive prices from a limited number of suppliers. In addition, we have negotiated volume discounts, cooperative advertising, and markdown allowances with our suppliers, as well as the ability to cancel orders and return excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future.
2019 Form 10-K Page 3
We purchased approximately 91 percent of our merchandise in 2019 from our top five suppliers and we expect to continue to obtain a significant percentage of our athletic product from these suppliers in future periods. Approximately 71 percent of all merchandise purchased in 2019 was purchased from one supplier — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike. Individually they purchased between 43 to 77 percent of their merchandise from Nike during the year. Merchandise that is high profile and in high demand is allocated by our suppliers based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our suppliers will continue to allocate sufficient amounts to us in the future. Our inability to obtain merchandise in a timely manner from major suppliers as a result of business decisions by our suppliers, or any disruption in the supply chain, could have a material adverse effect on our business, financial condition, and results of operations. Because of the high proportion of purchases from Nike, any adverse development in Nike’s reputation, financial condition or results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations.
The industry in which we operate is dependent upon fashion trends, customer preferences, product innovations, and other fashion-related factors.
The athletic footwear and apparel industry, especially at the premium end of the price spectrum, in which we operate, is subject to changing fashion trends and customer preferences. In addition, retailers in the athletic industry rely on their suppliers to maintain innovation in the products they develop. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from suppliers. A substantial portion of our highest margin sales are to young males (ages 12–25), many of whom we believe purchase athletic footwear and athletic apparel as a fashion statement and are frequent purchasers. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends that would make athletic footwear or athletic apparel less attractive to our customers could have a material adverse effect on our business, financial condition, and results of operations.
If we do not successfully manage our inventory levels, our operating results will be adversely affected.
We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order most of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.
2
A change in the relationship with any of our key suppliers or the unavailability of key products at competitive prices could affect our financial health.
Our business is dependent to a significant degree upon our ability to obtain exclusive product and the ability to purchase brand-name merchandise at competitive prices from a limited number of suppliers. In addition, we have negotiated volume discounts, cooperative advertising, and markdown allowances with our suppliers, as well as the ability to cancel orders and return excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future.
We purchased approximately 93 percent of our merchandise in 2017 from our top five suppliers and we expect to continue to obtain a significant percentage of our athletic product from these suppliers in future periods. Approximately 67 percent of all merchandise purchased in 2017 was purchased from one supplier — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike: they individually purchased 44 to 73 percent of their merchandise from Nike during the year. Merchandise that is high profile and in high demand is allocated by our suppliers based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our suppliers will continue to allocate sufficient amounts of such merchandise to us in the future. Our inability to obtain merchandise in a timely manner from major suppliers as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition and results of operations. Becauseoperations for 2020 will be adversely affected by the COVID-19 pandemic.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. On March 18, 2020, in response to intensifying efforts to contain the spread of COVID-19, we temporarily closed our stores across all of our brands in North America, EMEA, and Malaysia – that includes Foot Locker, Lady Foot Locker, Kids Foot Locker, Footaction, Champs Sports, Runners Point, and Sidestep. On March 25, 2020, we closed our stores in New Zealand. The rest of the high proportionCompany’s locations in the Asia Pacific region, which include Hong Kong, Singapore, and Australia, will remain open subject to direction from local and national governments. We continue to monitor the outbreak of purchases from Nike, any adverse development in Nike’s reputation, financial condition or resultsCOVID-19 and other closures may be required to help ensure the health and safety of operations orour associates and our customers. We are also continuing to communicate with our suppliers regarding the inabilityflow of Nike to developproduct and manufacture products that appeal to our target customers could also have an adverse effectpotential temporary effects on our supply chain. Given the dynamic nature of these circumstances, the duration of business disruption, and reduced customer traffic, the related financial condition, and results of operations. Weaffect cannot be certain that we will be ablereasonably estimated at this time but are expected to acquire merchandise at competitive prices or on competitive terms in the future. These risks could have a material adverse effect onmaterially affect our business financial condition,for the first quarter and full year of 2020. The extent to which COVID-19 affects our results, or those of operations.our suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions and related costs to contain or treat it, among others.
2019 Form 10-K Page 4
We are affected by mall traffic and our ability to secure suitable store locations.
Many of our stores, especially in North America, are located primarily in enclosed regional and neighborhood malls. Our sales are affected, in part, by the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing or continued decline of anchor department stores and/or specialty stores, and a decline in the popularity of mall shopping among our target customers.
Further, any terrorist act, natural disaster, public health issue, such as COVID-19, flu or other pandemics, or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in such locations, could have a material adverse effect on our business.
To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls, as well as high-traffic urban retail areas and high streets. We cannot be certain that desirable locations will continue to be available at favorable rates. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by economic conditions, as well as the closure of certain mall anchor tenants.tenants, and changes in customer shopping preferences, such as online shopping. Further, some malls have closed, and others may close in the future. While we seek to obtain suitable locations off-mall there is no guarantee that we will be able to secure such locations.
Several large landlords dominate the ownership of prime malls and because of our dependence upon these landlords for a substantial number of our locations, any significant erosion of their financial condition or our relationships with these landlordsthem could negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.
Our future growth may depend on our ability to expand operations in international markets.
Our future growth will depend, in part, on our ability to expand our business in additional international markets. As we expand into new international markets, we may have only limited experience in operating our business in such markets. In other instances, we may have to rely on the efforts and abilities of foreign business partners in such markets. In addition, business practices in these new international markets may be unlike those in the other markets we serve, and we may face increased exposure to certain risks. Our future growth may be materially adversely affected if we are unsuccessful in our international expansion efforts.
We may experience fluctuations in, and cyclicality of, our comparable-store sales results.
Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, product innovation, promotional events, the highly competitive retail sales environment, economic conditions, timing of income tax refunds, changes in our merchandise mix, calendar shifts of holiday periods, declines in foot traffic, supply chain disruptions, and weather conditions.
Many of our products represent discretionary purchases. Accordingly, customer demand for these products could decline in an economic downturn or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.
The effects of natural disasters, terrorism, acts of war, acts of violence, and public health issues may adversely affect our business.
Natural disasters, including earthquakes, hurricanes, floods, and tornadoes may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Any act of violence, including active shooter situations and terrorist activities, that are targeted at or threatened against shopping malls, our stores, offices or distribution centers, could result in restricted access to our stores and/or store closures in the short-term and, in the long-term, may cause our customers and employees to avoid visiting our stores.
Public health issues, such as COVID-19, flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or result in significantly lower traffic to or closure of our stores, or customer demand.
32019 Form 10-K Page 5
Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster.
Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products. We may be required to suspend operations in some or all of our locations and incur significant costs to remediate concerns which could have a material adverse effect on our business, financial condition, and results of operations.
Technology, Data Security, and Privacy Risks
We are subject to technology risks including failures, security breaches, and cybersecurity risks that could harm our business, damage our reputation, and increase our costs in an effort to protect against these risks.
Information technology is a critical part of our business operations. We depend on information systems to process transactions, make operational decisions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center or data leakage of confidential information, either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, or other causes.
We invest in security technology to protect the data stored by us, including our data and business processes, against the risk of data security breaches and cyber-attacks. Our data security management program includes enforcement of standard data protection policies such as Payment Card Industry compliance. Additionally, we evaluate our major technology suppliers and any outsourced services through accepted security assessment measures. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness.
While we believe that our security technology and processes follow appropriate practices in the prevention of security breaches and the mitigation of cybersecurity risks, given the ever-increasing abilities of those intent on breaching cybersecurity measures and given the necessity of our reliance on the security procedures of third-party vendors, the total security effort at any point in time may not be completely effective. Any security breaches and cyber incidents could adversely affect our business. Failure of our systems, either internally or at our third-party providers, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and negative consequences to us, our employees, and those with whom we do business. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information by us could also severely damage our reputation, expose us to the risks of litigation and liability, increase operating costs associated with remediation, and harm our business. While we carry insurance that would mitigate the losses, insurance may be insufficient to compensate us fully for potentially significant losses.
Risks associated with digital operations.
Our digital operations are subject to numerous risks, including risks related to the failure of the computer systems that operate our websites, mobile sites, and apps and their related support systems, computer viruses, cybersecurity risks, telecommunications failures, denial of service attacks, bot attacks, and similar disruptions. Also, we will require additional capital in the future to sustain or grow our digital commerce business. Risks related to digital commerce include those associated with credit card fraud, the need to keep pace with rapid technological change, governmental regulation, and legal uncertainties with respect to internet regulatory compliance. If any of these risks materialize, it could have a material adverse effect on our business.
Privacy and data security concerns and regulation could result in additional costs and liabilities.
The protection of customer, employee, and Company data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers appear increasingly to have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation or breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position, and cash flows.
2019 Form 10-K Page 6
The European Union (“E.U.”) adopted a comprehensive General Data Privacy Regulation (the “GDPR”), which became effective in May 2018. GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection, and the ability of persons whose data is stored to correct or delete data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4 percent of worldwide revenue.
In addition, the State of California adopted the California Consumer Protection Act of 2018 ("CCPA"), which became effective January 1, 2020. The CCPA requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. It remains unclear how the CCPA will be interpreted and the extent of its effect on our business. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business.
GDPR, CCPA and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. The laws and regulations relating to privacy and data security are evolving, can be subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.
The technology enablement of omni-channel in our business is complex and involves the development of a new digital platform and a new order management system designed to enhance the complete customer experience.
We continue to invest in initiatives designed to deliver a high-quality, coordinated shopping experience online, in stores, and on mobile devices, which requires substantial investment in technology, information systems, and employee training, as well as significant management time and resources. Our omni-channel retailing efforts include the integration and implementation of new technology, software, and processes to be able to fulfill orders from any point within our system of stores and distribution centers, which is extremely complex and may not meet customer expectations for timely and accurate deliveries. These efforts involve substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our omni-channel initiatives.
If our omni-channel initiatives are not successful, or we do not realize the return on our omni-channel investments that we anticipate, our financial performance and future growth could be materially adversely affected.
Operational and Supply Chain Risks
Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.
We operate multiple distribution centers worldwide to support our businesses. In addition to the distribution centers that we operate, we have third-party arrangements to support our operations in the United States, Canada, England, Australia, and New Zealand. If complications arise with any facility or if any facility is severely damaged or destroyed, our other distribution centers may be unable to support the resulting additional distribution demands. We also may be affected by disruptions in the global transportation network caused by events including delays caused by the COVID-19 pandemic, port strikes, weather conditions, work stoppages, or other labor unrest. These factors may adversely affect our ability to deliver inventory on a timely basis. We depend upon third-party carriers for shipment of merchandise. Any interruption in service by these carriers for any reason could cause disruptions in our business, a loss of sales and profits, and other material adverse effects.
Manufacturer compliance with our social compliance program requirements.
We require our independent manufacturers to comply with our policies and procedures, which cover many areas including labor, health and safety, and environmental standards. We monitor compliance with our policies and procedures using internal resources, as well as third-party monitoring firms. Although we monitor their compliance with these policies and procedures, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our policies and procedures or local laws in the country of manufacture could disrupt the shipment of merchandise to us, force us to locate alternate manufacturing sources, reduce demand for our merchandise, or damage our reputation.
2019 Form 10-K Page 7
Our reliance on key management.
Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management teams. Our executive and senior management teams have substantial experience and expertise in our business and have made significant contributions to our success. Our future performance depends to a significant extent both upon the continued services of our current executive and senior management teams, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. While we believe that we have adequate succession planning and executive development programs, competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain and attract qualified executives.
Risks associated with attracting and retaining store and field associates.
Our success depends, in part, upon our ability to attract, develop, and retain a sufficient number of qualified store and field associates. The turnover rate in the retail industry is generally high. If we are unable to attract and retain quality associates, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, and overtime regulations.
Investment Risks
If our long-lived tangible assets and operating lease right-of-use assets, or goodwill become impaired, we may need to record significant non-cash impairment charges.
We review our long-lived tangible assets and operating lease right-of-use assets, and goodwill when events indicate that the carrying value of such assets may be impaired. Goodwill is reviewed for impairment if impairment indicators arise and, at a minimum, annually. Goodwill is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a reporting unit level, or a two-step impairment test, if necessary. The determination of impairment charges is significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our long-range strategic plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by factors such as our future operating results, future store profitability, and future economic conditions, all of which are difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, including our operating lease right-of-use assets, and goodwill and could result in future impairment charges, which would adversely affect our results of operations.
We do not have the ability to exert control over our minority investments, and therefore, we are dependent on others in order to realize their potential benefits.
We currently hold $142 million of non-controlling minority investments in various entities and we may make additional strategic minority investments in the future. Such minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, and compliance risks associated with the investments. Other investors in these entities may have business goals and interests that are not aligned with ours or may exercise their rights in a manner in which we do not approve. These circumstances could lead to delayed decisions or disputes and litigation with those other investors, all of which could have a material adverse impact on our reputation, business, financial condition, and results of operations.
If our investees seek additional financing to fund their growth strategies, these financing transactions may result in further dilution of our ownership stakes and these transactions may occur at lower valuations than the investment transactions through which we acquired such interests, which could significantly decrease the fair values of our investments in those entities. Additionally, if our investees are unable to obtain any financing, those entities could need to significantly reduce their spending in order to fund their operations or result in their insolvency. These actions likely would result in reduced growth forecasts, which also could significantly decrease the fair values of our investments in those entities.
2019 Form 10-K Page 8
Regulatory, Global, Legal, and Other External Risks
Economic or political conditions in other countries, including fluctuations in foreign currency exchange rates and tax rates may adversely affect our operations.
A significant portion of our sales and operating income for 20172019 was attributable to our operations in Europe, Canada, Australia, and New Zealand.outside of the United States. As a result, our business is subject to the risks associated with doing business outside of the United States such as local customer product preferences, political unrest, disruptions or delays in shipments, changes in economic conditions in countries in which we operate, foreign currency fluctuations, real estate costs, and labor and employment practices in non-U.S. jurisdictions that may differ significantly from those that prevail in the United States. In addition, because our suppliers manufacture a substantial amount of our products in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, labor, and other conditions in the countries from which our suppliers obtain their product.
Fluctuations in the value of the euro and the British Pound may affect the value of our European earnings when translated into U.S. dollars. Similarly, our earnings in Canada, Australia, and New Zealandother jurisdictions may be affected by the value of currencies when translated into U.S. dollars.
Except for our business in the United Kingdom (the “U.K”“U.K.”), our international subsidiaries conduct most of their business in their local currency. Inventory purchases for our U.K. business are denominated in euros, which could result in foreign currency transaction gains or losses.
Our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties and changes in tax legislation or regulation could have a material adverse effect on our results of operations and financial condition.
Significant developments stemming from the U.K.’s decision to withdrawwithdrawal from the European UnionE.U. could have a material adverse effect on the Company.
TheIn January 2020, the U.K. has voted in favor of leavingand E.U. entered into a withdrawal agreement pursuant to which the European Union (“U.K. formally withdrew from the E.U.”), and such withdrawal (commonly on January 31, 2020, which is commonly referred to as “Brexit”) is“Brexit.” Following such withdrawal, the U.K. entered into a transition period scheduled to takeend on December 31, 2020. During the transition period, the U.K. will remain subject to E.U. law and maintain access to the E.U. single market and to the global trade deals negotiated by the E.U. on behalf of its members. There remains substantial uncertainty surrounding the ultimate effect over the next two years. This decision has created politicalof Brexit and economic uncertainty, particularlyany associated transition period.
We have significant operations in both the U.K. and the E.U., and this uncertainty may last for several years. The pending withdrawalwe are highly dependent on the free flow of labor and its possible future consequences have caused and may continuegoods in those regions. In response to cause significant volatilityBrexit, in global financial markets, including in global currency and debt markets. This volatilityFebruary 2020 we engaged with a third-party logistics provider within England to mitigate supply chain risks. Uncertainty surrounding Brexit could cause a slowdown in economic activity in the U.K., Europe or globally, which could adversely affect the Company'sour operating results and growth prospects. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate, and thoseincluding data protection regulation. Compliance with any new laws and regulations may be cumbersome, difficult or costlycostly.
The ultimate effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets, either during the transition period or more permanently. These outcomes could disrupt the markets we serve and the tax jurisdictions in terms of compliance. Any of thesewhich we operate and create uncertainty and challenges (particularly in the near term) with respect to trading relationships between our U.K. subsidiary and other E.U. nations. These possible effects of Brexit, among others, could adversely affect our business, results of operations, and financial condition.
Imposition of tariffs and export controls on the products we buy may have a material adverse effect on our business.
A significant portion of the products that we purchase, including the portion purchased from domestic suppliers, as well as most of our private brand merchandise, is manufactured abroad. We may be affected by potential changes in international trade agreements or tariffs, such as new tariffs imposed on certain Chinese-made goods imported into the U.S. Furthermore, China or other countries may institute retaliatory trade measures in response to existing or future tariffs imposed by the U.S. that could have a negative effect on our business. If any of these events occur as described, we may be obligated to seek alternative suppliers for our private brand merchandise, raise prices, or make changes to our operations, any of which could have a material adverse effect on our sales and profitability, results of operations and financial condition.
2019 Form 10-K Page 9
Macroeconomic developments may adversely affect our business.business.
Our performance is subject to global economic conditions and the related effects on consumer spending levels. Continued uncertainty about global economic conditions, including the COVID-19 pandemic, poses a risk as consumers and businesses may postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset values, which could have a material negative effect on demand for our products.
As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home values. These and other economic factors could adversely affect demand for our products, which could adversely affect our financial condition and operating results.
Instability in the financial markets may adversely affect our business.
Instability in the global financial markets could reduce availability of credit to our business. Although we currently have a revolving credit agreement in place until May 19, 2021, tightening of credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness, or obtain funding through the issuance of the Company’s securities. Other than insignificant amounts used for standby letters
In 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of credit,2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we do not have any borrowings underwill need to renegotiate our credit facility.
4
This could have an adverse effect on our financing costs. We rely on a few key suppliers for a majority of our merchandise purchases (including a significant portion from one key supplier). The inability of these key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver merchandise to us. Our inability to obtain merchandise in a timely manner from major suppliers could have a material adverse effect on our business, financial condition, and results of operations.
Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition.
At February 3, 2018,1, 2020, our cash and cash equivalents totaled $849$907 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of February 3, 2018, $669 million of our cash and cash equivalents were held in foreign jurisdictions, almost half of which was held in U.S. dollars. We regularly monitor our counterparty credit risk and mitigate our exposure by making short-term investments only in highly-rated institutions and by limiting the amount we invest in any one institution. We continually monitor the creditworthiness of our counterparties. At February 3, 2018,1, 2020, all of the investments were in investment grade institutions. Despite an investment grade rating, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues.
Our U.S. pension plan trust holds assets totaling $639$664 million at February 3, 2018.1, 2020. The fair values of these assets held in the trust are compared to the plan’s projected benefit obligation to determine the pension funding liability. We attempt to mitigate funding risk through asset diversification, and we regularly monitor investment risk of our portfolio through quarterly investment portfolio reviews and periodic asset and liability studies. Despite these measures, it is possible that the value of our portfolio may decline in the future due to any number of factors, including general market conditions and credit issues. Such declines could affect the funded status of our pension plan and future funding requirements.
If our long-lived assets, goodwill or other intangible assets become impaired, we may need to record significant non-cash impairment charges.
We review our long-lived assets, goodwill and other intangible assets when events indicate that the carrying value of such assets may be impaired. Goodwill and other indefinite lived intangible assets are reviewed for impairment if impairment indicators arise and, at a minimum, annually. As of February 3, 2018, we had $160 million of goodwill; this asset is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a reporting unit level, or a two-step impairment test, if necessary. The determination of impairment charges is significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our long-range strategic plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by factors such as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, goodwill, and other intangible assets and could result in future impairment charges, which would adversely affect our results of operations.
Our financial results may be adversely affected by tax rates or exposure to additional tax liabilities.
We are a U.S.-basedU.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our provision for income taxes is based on a jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. Our effective tax rate could be adversely affected by a number of factors, including shifts in the mix of pretax results by tax jurisdiction, changes in tax laws or related interpretations in the jurisdictions in which we operate, and tax assessments and related interest and penalties resulting from income tax audits.
2019 Form 10-K Page 10
Changes in tax laws and interpretations may affect our earnings negatively.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law. The Tax Act includes a number of changes in existing tax law affecting businesses including, among other things, a reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, disallowance of certain deductions that had previously been allowed, limitations on interest deductions, alteration of the expensing of capital expenditures, adoption of a territorial tax system, assessment of a repatriation tax or “toll-charge” on undistributed earnings and profits of U.S.-owned foreign corporations, and introduction of certain anti-base erosion provisions.
5
In the fourth quarter of 2017, we recognized a provisional net tax expense of $99 million associated with the Tax Act; however, the ultimate effect on our financial condition and results of operations in 2018 and future years remains uncertain and may differ materially from our expectations due to the issuance of technical guidance regarding elements of the Tax Act and changes in interpretations and assumptions we have made with respect to the Tax Act. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. As such, there may be material adverse effects resulting from the Tax Act that we have not yet identified.
The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business.
Natural disasters, including earthquakes, hurricanes, floods, and tornadoes may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.
Manufacturer compliance with our social compliance program requirements.
We require our independent manufacturers to comply with our policies and procedures, which cover many areas including labor, health and safety, and environmental standards. We monitor compliance with our policies and procedures using internal resources, as well as third-party monitoring firms. Although we monitor their compliance with these policies and procedures, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our policies and procedures or local laws in the country of manufacture could disrupt the shipment of merchandise to us, force us to locate alternate manufacturing sources, reduce demand for our merchandise, or damage our reputation.
Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.
We operate multiple distribution centers worldwide to support our businesses. In addition to the distribution centers that we operate, we have third-party arrangements to support our operations in the United States, Canada, Australia, and New Zealand. If complications arise with any facility or if any facility is severely damaged or destroyed, our other distribution centers may be unable to support the resulting additional distribution demands. We also may be affected by disruptions in the global transportation network such as port strikes, weather conditions, work stoppages or other labor unrest. These factors may adversely affect our ability to deliver inventory on a timely basis. We depend upon third-party carriers for shipment of merchandise; any interruption in service by these carriers for any reason could cause disruptions in our business, a loss of sales and profits, and other material adverse effects.
We are subject to technology risks including failures, security breaches, and cybersecurity risks which could harm our business, damage our reputation, and increase our costs in an effort to protect against such risks.
Information technology is a critically important part of our business operations. We depend on information systems to process transactions, make operational decisions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center or data leakage of confidential information, either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, or other causes.
6
We invest in security technology to protect the data stored by us, including our data and business processes, against the risk of data security breaches and cyber-attacks. Our data security management program includes enforcement of standard data protection policies such as Payment Card Industry compliance. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification measures. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness.
While we believe that our security technology and processes follow leading practices in the prevention of security breaches and the mitigation of cybersecurity risks, given the ever-increasing abilities of those intent on breaching cybersecurity measures and given the necessity of our reliance on the security procedures of third-party vendors, the total security effort at any point in time may not be completely effective. Any such security breaches and cyber incidents could adversely affect our business. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and negative consequences to us, our employees, and those with whom we do business. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information by us could also severely damage our reputation, expose us to the risks of litigation and liability, increase operating costs associated with remediation, and harm our business. While we carry insurance that would mitigate the losses, such insurance may be insufficient to compensate us for potentially significant losses.
Risks associated with digital operations.
Our digital operations are subject to numerous risks, including risks related to the failure of the computer systems that operate our websites and mobile sites and their related support systems, computer viruses, cybersecurity risks, telecommunications failures, denial of service attacks, and similar disruptions. Also, we will require additional capital in the future to sustain or grow our digital commerce business. Risks related to digital commerce include those associated with credit card fraud, the need to keep pace with rapid technological change, governmental regulation, and legal uncertainties with respect to Internet regulatory compliance. If any of these risks materialize, it could have a material adverse effect on our business.
Privacy and data security concerns and regulation could result in additional costs and liabilities.
The protection of customer, employee, and Company data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation or breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position and cash flows. Additionally, the E.U. adopted a comprehensive General Data Privacy Regulation (the “GDPR”), which will become fully effective in May 2018. The GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4 percent of worldwide revenue. The GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
The technology enablement of omni-channel in our business is complex and involves the development of a new digital platform and a new order management system in order to enhance the complete customer experience.
We continue to invest in initiatives designed to deliver a high-quality, coordinated shopping experience online, in-stores, and on mobile devices, which requires substantial investment in technology, information systems, and employee training, as well as significant management time and resources.Our omni-channel retailing efforts include the integration and implementation of new technology, software, and processes to be able to fulfill orders from any point within our system of stores and distribution centers, which is extremely complex and may not meet customer expectations for timely and accurate deliveries. These efforts involve substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our omni-channel initiatives.
7
If our omni-channel initiatives are not successful, or we do not realize the return on our omni-channel investments that we anticipate, our financial performance and future growth could be materially adversely affected.
Our reliance on key management.
Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management teams. Our executive and senior management teams have substantial experience and expertise in our business and have made significant contributions to our success. Our future performance depends to a significant extent both upon the continued services of our current executive and senior management teams, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. While we feel that we have adequate succession planning and executive development programs, competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain and attract qualified executives.
Risks associated with attracting and retaining store and field associates.
Our success depends, in part, upon our ability to attract, develop, and retain a sufficient number of qualified store and field associates. The turnover rate in the retail industry is generally high. If we are unable to attract and retain quality associates, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, overtime regulations, and changing demographics.
Changes in employment laws or regulation could harm our performance.
Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime and sick pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act, (“ACA”), unemployment tax rates, workers’ compensation rates, European works council requirements, and union organization. A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime and sick pay, paid leaves of absence, and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. At this time, there is uncertainty concerning whether the ACA will be repealed or what requirements will be included in a new law, if enacted. Complying with any new legislation and/or reversing changes implemented under the ACAexisting law could be time-intensive and expensive and may affect our business.
Legislative or regulatory initiatives related to global warming/climate change concerns may negatively affect our business.
There has beenGreenhouse gases may have an increasing focus and significant debateadverse effect on global climate change, including increased attention from regulatory agenciestemperatures, weather patterns, and legislative bodies. This increased focus may lead to new initiatives directed at regulating an as-yet unspecified arraythe frequency and severity of environmental matters. Legislative, regulatory, or other efforts to combatextreme weather and natural disasters. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could make it difficult or impossible for us to deliver products to our customers, create delays and inefficiencies in our supply chain. Following an interruption to our business, we could require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. Concern over climate change may result in new or additional legal, legislative, and regulatory requirements to reduce or mitigate the effects of climate change on the environment, which could result in future tax, transportation, and utility increases, which could adversely affect our business. There is also increased focus, including by investors, customers, and other stakeholders on these and other sustainability matters, including the use of plastic, energy, waste, and worker safety.
Increasing scrutiny and changing expectations from investors and our customers with respect to our Corporate Social Responsibility (“CSR”) may impose additional costs on us or expose us to new or additional risks.
Our reputation could be damaged if we do not (or are perceived not to) act responsibly with respect to sustainability matters, which could adversely affect our business, results of operations, cash flows, and financial condition. Increasing attention to CSR matters may affect our business and some institutional investors may be discouraged from investing in taxesus.
Companies across all industries are facing increasing scrutiny from stakeholders related to their CSR practices. Investor advocacy groups, certain institutional investors, investment funds, and other influential investors are also increasingly focused on CSR practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of the industry, investors’ increased focus and activism related to CSR and similar matters may hinder access to capital, as investors may decide to reallocate capital or to not commit capital as a result of their assessment of a company’s CSR practices. Companies which do not adapt to or comply with investor or stakeholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for CSR issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such a company could be materially and adversely affected.
In addition, the importance of CSR scoring evaluations is becoming more broadly accepted by shareholders. Certain organizations that provide corporate governance and other corporate risk information to shareholders have developed scores and ratings to evaluate companies based upon CSR metrics. Many shareholders focus on positive CSR business practices and scores when making investments and may consider a company’s score as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with companies to require improved CSR disclosure or performance. We may face reputational damage in the event our CSR procedures or standards do not meet the standards set by various constituencies. A low score could result in a negative perception of us, or exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. In addition, the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are currently unablecompliance to predict the potential effects that any such future environmental initiativesreceive high CSR scores may have on our business.be considerable.
2019 Form 10-K Page 11
We may be adversely affected by regulatory and litigation developments.
We are exposed to the risk that federal or state legislation may negatively affect our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs, such asincluding health insurance, paid leave programs, or other changes in workplace regulation could increase our cost of doing business or otherwise adversely affect our operations. Additionally, we are regularly involved in various litigation, matters, including commercial, tort, intellectual property, customer, employment, wage and hour, data privacy, anti-corruption, and other claims, including purported class actions, which arise inaction lawsuits. The cost of defending against these types of claims against us or the ordinary courseultimate resolution of such claims, whether by settlement or adverse court decision, may harm our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.
8
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, which is broader in scope than the FCPA, generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business.
Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents. Our continued expansion outside the United States, including in developing countries, could increase the risk of FCPA violations in the future. Violations of these laws, or allegations of such violations, could result inhave a material adverse effect on our results of operations or financial condition.
Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, market confidence in our reported financial information, and the price of our common stock.
We continue to document, test, and monitor our internal controlscontrol over financial reporting in order to satisfy all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; however,2002. However, we cannot be assured that our disclosure controls and procedures and our internal controlscontrol over financial reporting will prove to be completely adequate in the future. Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, market confidence in our reported financial information, and the price of our common stock.
We may face risks associated with shareholder activism.
Publicly traded companies are subject to campaigns by shareholders advocating corporate actions related to matters such as corporate governance, operational practices, and strategic direction. We may become subject in the future to such shareholder activity and demands. Such activities could interfere with our ability to execute our business plans, be costly and time-consuming, disrupt our operations, and divert the attention of management, any of which could have an adverse effect on our business or stock price.
International intellectual property protection can be uncertain and costly.
Uncertainty in intellectual property protection can result from conducting business outside the United States, particularly in jurisdictions that do not have comparable levels of protection for our assets such as intellectual property, copyrights, and trademarks. Continuing to operate in such foreign jurisdictions where the ability to enforce intellectual property rights is limited increases our exposure to risk.
Item 1B. Unresolved Staff Comments
None
None.
TheOur properties of the Company and its consolidated subsidiaries consist of land, leased stores, administrative facilities, and distribution centers. Gross square footage and total selling area for the Athletic Stores segmentour store locations at the end of 20172019 were approximately 13.3013.15 and 7.717.57 million square feet, respectively. These properties, which are primarily leased, are located in the United States and its territories, Canada, various European countries, Asia, Australia, and New Zealand.
We currently operate fivesix distribution centers, of which two are owned and threefour are leased, occupying an aggregate of 2.93.2 million square feet. Three of these distribution centers are located in the United States, one in Canada, one in Germany, and one in the Netherlands. The location in Germany serves as the central warehouse distribution center for the Runners Point and Sidestep stores and their direct-to-customer business. We also own a cross-dock and manufacturing facility, and operate a leased warehouse in the United States, both of which support our Team Edition apparel business. The lease for our leased distribution center in Germany expires during
2019 and the Company is currently negotiating a lease extension for this facility.Form 10-K Page 12
We believe that all leases of properties that are material to our operations may be renewed, or that alternative properties are available, on terms not materially less favorable to us than existing leases.
Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
Item 4. Mine Safety Disclosures
Not applicable.
9
Item 4A. Information about our Executive Officers of the Registrant
The following table provides information with respect to all persons serving as executive officers as of March 29, 2018,27, 2020, including business experience for the last five years.
| | |
Chairman, President and Chief Executive Officer | Richard A. Johnson | |
Executive Vice President and Chief Executive Officer — North America | Stephen D. Jacobs | |
Executive Vice President and Chief Executive Officer — | Lewis P. Kimble | |
Executive Vice President and Chief Financial Officer | Lauren B. Peters | |
Executive Vice President and Chief Executive Officer — EMEA | Vijay Talwar | |
Executive Vice President and Chief Information and Customer Connectivity Officer | Pawan Verma | |
Senior Vice President and Chief Accounting Officer | Giovanna Cipriano | |
Senior Vice President, General Counsel and Secretary | Sheilagh M. Clarke | |
Senior Vice President — Global Supply Chain | Todd Greener | |
Senior Vice President, Chief Strategy and Development Officer | W. Scott Martin | |
Senior Vice President and Chief Human Resources Officer |
| Elizabeth S. Norberg |
|
| |
|
| |
|
| |
Vice President, Treasurer | John A. Maurer |
Richard A. Johnson, age 60, 62, has served as Chairman of the Board since May 2016 and President and Chief Executive Officer since December 2014. Mr. Johnson previously served as Executive Vice President and Chief Operating Officer from May 2012 through November 2014. He served as Executive Vice President and Group President from July 2011 to May 2012; President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from January 2010 to July 2011; President and Chief Executive Officer of Foot Locker Europe from August 2007 to January 2010; and President and Chief Executive Officer of Footlocker.com/Eastbay from April 2003 to August 2007.
Stephen D. Jacobs, age 55,57, has served as Executive Vice President and Chief Executive Officer-NorthOfficer — North America since February 2016. He previously served as Executive Vice President and Chief Executive Officer Foot Locker North America from December 2014 through February 2016 and President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from July 2011 to November 2014.2016.
Lewis P. Kimble, age59, 61,has served as Executive Vice President and Chief Executive Officer-InternationalOfficer — Asia Pacific since February 2016.2019. Mr. Kimble previously served as Executive Vice President and Chief Executive Officer — International from February 2016 to February 2019 and President and Chief Executive Officer of Foot Locker Europe from February 2010 to February 2016.
Lauren B. Peters, age 56,58, has served as Executive Vice President and Chief Financial Officer since July 2011.
Vijay Talwar, age 48, has served as Executive Vice President and Chief Executive Officer — EMEA since February2019. Mr. Talwar previously served as President — Digital from March 2018 to February 2019 and President — Digital/Footlocker.com/Eastbay from September 2016 to March 2018. Mr. Talwar served as President, Gifts and Special Occasions at Sears Holdings Corporation from 2014 to September 2016.
Pawan Verma, age 41,43, has served as Executive Vice President, Chief Information and Customer Connectivity Officer since October 2017 and as Senior Vice President and Chief Information Officer from August 2015 to September 2017. From February 2013 to July 2015, Mr. Verma served in various technology leadership roles at Target Corporation ranging fromwithin enterprise architecture, e-commerce, mobile, and digital, with his most recent role at Target as Vice President -— Digital Technology and API Platforms.
Paulette R. Alviti, age 47, has served as Senior Vice President and Chief Human Resources Officer since June 2013. From March 2010 to May 2013, Ms. Alviti served in various roles at PepsiCo, Inc., with her most recent role as Senior Vice President and Chief Human Resources Asia, Middle East, Africa.
Giovanna Cipriano, age 48,50, has served as Senior Vice President and Chief Accounting Officer since May 2009.
Sheilagh M. Clarke, age 58,60, has served as Senior Vice President, General Counsel and Secretary since June 2014. She previously served as Vice President, Associate General Counsel and Assistant Secretary from May 2007 to May 2014.
W. Scott Martin,
2019 Form 10-K Page 13
Todd Greener, age 50,49, has served as Senior Vice President -— Global Supply Chain since October 2018. Mr. Greener previously served as Senior Vice President — Supply Chain at Advance Auto Parts from March 2015 to October 2018 and General Manager — Appliance Distribution Operations at General Electric Company from September 2012 to February 2015.
W. Scott Martin, age 52, has served as Senior Vice President, Chief Strategy and Development Officer since March 27, 2019. Previously he served as Senior Vice President — Strategy and Store Development sincefrom October 2017 to March 26, 2019 and as Senior Vice President — Real Estate from June 2016 to September 2017. Mr. Martin previously served as Vice President, Store Development – Asia Pacific with Gap Inc. from June 2014 to June 2016. Prior
Elizabeth S. Norberg, age 53, has served as Senior Vice President and Chief Human Resources Officer since September 2018. Ms. Norberg previously served as Executive Vice President, Chief Human Resources Officer at Loews Hotels & Co. (a subsidiary of Loews Corporation) from August 2017 to that role, he served in various rolesSeptember 2018, Executive Vice President, Chief Human Resources Officer at Starbucks Coffee Company: Director, Strategy Development, China, Asia PacificRed Lion Hotels Corporation from June 2016 to August 2017, and Emerging Brands (July 2013Vice President and Chief of Human Resources Operations, Health System at Northwell Health from January 2015 to July 2014); Director, Global Store Development (June 2007 to July 2013).June 2016.
John A. Maurer, age 58,60, has served as Vice President, Treasurer since September 2006. In addition to this role, he also served as the Vice President of InvestorsInvestor Relations from February 2011 through March 2018.
There are no family relationships among the executive officers or directors of the Company.
PART II
Item 5. | ||
Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Foot Locker, Inc. common stock (ticker symbol “FL”) is listed on The New York Stock Exchange as well as on the Börse Stuttgart stock exchange in Germany. As of February 3, 2018, the Company1, 2020, we had 13,24412,223 shareholders of record owning 119,829,023104,187,310 common shares.
The following table provides the intra-day high and low sales prices for the Company’s common stock for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||||||||
|
|
| High |
|
| Low |
|
| High |
|
| Low |
1st Quarter |
| $ | 77.86 |
| $ | 65.88 |
| $ | 69.65 |
| $ | 58.17 |
2nd Quarter |
|
| 77.71 |
|
| 44.59 |
|
| 62.45 |
|
| 50.90 |
3rd Quarter |
|
| 51.29 |
|
| 29.89 |
|
| 69.61 |
|
| 56.80 |
4th Quarter |
|
| 53.17 |
|
| 28.42 |
|
| 79.43 |
|
| 65.39 |
During each of the quarters of 2017,2019, the Company declared a dividend of $0.31$0.38 per share. The Board of Directors reviews the dividend policy and rate, taking into consideration the overall financial and strategic outlook for our earnings, liquidity, and cash flow. On February 20, 2018,19, 2020, the Board of Directors declared a quarterly dividend of $0.345$0.40 per share to be paid on May 4, 2018.1, 2020. This dividend represents an 11a 5 percent increase over the previous quarterly per share amount.
The following table is a summary of our fourth quarter share repurchases:
| | | | | | | | | | |
| | | | | | | 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) | ||
November 3 to November 30, 2019 |
| 50,301 | | $ | 41.94 |
| 50,000 | | $ | 899,873,959 |
December 1 to January 4, 2020 |
| 831,423 | |
| 39.28 |
| 831,423 | |
| 867,215,222 |
January 5 to February 1, 2020 |
| — | |
| — |
| — | |
| 867,215,222 |
|
| 881,724 | | $ | 39.43 |
| 881,423 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) | |||
Oct. 29 - Nov. 25, 2017 |
| 1,500,000 |
| $ | 30.96 |
| 1,500,000 |
| $ | 816,552,335 |
Nov. 26 - Dec. 30, 2017 |
| 1,333,433 |
|
| 43.87 |
| 1,323,930 |
|
| 758,463,867 |
Dec. 31 - Feb. 3, 2018 |
| — |
|
| — |
| — |
|
| 758,463,867 |
|
| 2,833,433 |
| $ | 37.04 |
| 2,823,930 |
|
|
|
(1) | ||
| These columns also reflect shares acquired in satisfaction of the tax withholding obligation of holders of 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 |
2019 Form 10-K Page 14
11
Performance Graph
The graph below compares the cumulative five-year total return to shareholders (common stock price appreciation plus dividends, on a reinvested basis) on Foot Locker, Inc.’sour common stock relative to the total returns of the S&P 400 Specialty Retailing Index and the Russell Midcap Index.
Indexed Share Price Performance
| | | | | | | | | | | | | | | | | | |
|
| 1/31/2015 |
| 1/30/2016 |
| 1/28/2017 |
| 2/3/2018 |
| 2/2/2019 |
| 2/1/2020 | ||||||
Foot Locker, Inc. | | $ | 100.00 | | $ | 128.91 | | $ | 132.00 | | $ | 96.46 | | $ | 112.86 | | $ | 80.45 |
S&P 400 Specialty Retailing Index | | $ | 100.00 | | $ | 84.71 | | $ | 82.38 | | $ | 80.29 | | $ | 81.15 | | $ | 82.25 |
Russell Midcap Index | | $ | 100.00 | | $ | 92.61 | | $ | 115.98 | | $ | 135.74 | | $ | 135.18 | | $ | 157.30 |
We previously used the S&P 500 Specialty Retailing Index and the S&P 500 Index, however, due to the reduction in size of our market capitalization it was determined that the Russell Midcap Index and S&P 400 Specialty Retailing Index are more appropriate benchmarks as the median market capitalization is the closest to the Company’s. The following graph compares the cumulative five-year total return to shareholders on our common stock relative to the total returns of the S&P 500 Specialty Retailing Index and the S&P 500 Index. It is our intention to use the Russell Midcap Index and the S&P 400 Specialty Retailing Index for future performance graphs.
Indexed Share Price Performance
| | | | | | | | | | | | | | | | | | |
|
| 1/31/2015 |
| 1/30/2016 |
| 1/28/2017 |
| 2/3/2018 |
| 2/2/2019 |
| 2/1/2020 | ||||||
Foot Locker, Inc. | | $ | 100.00 | | $ | 128.91 | | $ | 132.00 | | $ | 96.46 | | $ | 112.86 | | $ | 80.45 |
S&P 500 Specialty Retailing Index | | $ | 100.00 | | $ | 108.31 | | $ | 116.52 | | $ | 143.45 | | $ | 148.64 | | $ | 182.44 |
S&P 500 Index | | $ | 100.00 | | $ | 99.33 | | $ | 120.04 | | $ | 147.44 | | $ | 147.35 | | $ | 179.10 |
The following Performance Graph and relatedabove information shallshould not be deemed “soliciting material” or deemed to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
2019 Form 10-K Page 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2/2/2013 |
| 2/1/2014 |
| 1/31/2015 |
| 1/30/2016 |
| 1/28/2017 |
| 2/3/2018 | ||||||
Foot Locker, Inc. |
| $ | 100.00 |
| $ | 114.24 |
| $ | 160.33 |
| $ | 206.69 |
| $ | 211.63 |
| $ | 154.65 |
S&P 500 Index |
| $ | 100.00 |
| $ | 120.29 |
| $ | 137.39 |
| $ | 136.47 |
| $ | 164.93 |
| $ | 202.57 |
S&P 500 Specialty Retailing Index |
| $ | 100.00 |
| $ | 118.15 |
| $ | 157.66 |
| $ | 170.76 |
| $ | 183.70 |
| $ | 226.17 |
12
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other information contained elsewhere in this report.
| | | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 (1) |
| 2016 |
| 2015 | |
| | (in millions, except per share amounts) | |||||||||
Summary of Operations |
| |
|
|
|
|
|
|
|
|
|
Sales | | $ | 8,005 |
| 7,939 |
| 7,782 |
| 7,766 |
| 7,412 |
Gross margin | |
| 2,543 |
| 2,528 |
| 2,456 |
| 2,636 |
| 2,505 |
Selling, general and administrative expenses | |
| 1,650 |
| 1,614 |
| 1,501 |
| 1,472 |
| 1,415 |
Depreciation and amortization | |
| 179 |
| 178 |
| 173 |
| 158 |
| 148 |
Impairment and other charges | |
| 65 |
| 37 |
| 211 |
| 6 |
| 105 |
Interest income / (expense), net | |
| 11 |
| 9 |
| 2 |
| (2) |
| (4) |
Other income, net | |
| 12 |
| 5 |
| 5 |
| 6 |
| 4 |
Net income | |
| 491 |
| 541 |
| 284 |
| 664 |
| 541 |
Per Common Share Data | |
| |
| |
|
|
|
|
|
|
Basic earnings | | | 4.52 |
| 4.68 |
| 2.23 |
| 4.95 |
| 3.89 |
Diluted earnings | | | 4.50 |
| 4.66 |
| 2.22 |
| 4.91 |
| 3.84 |
Common stock dividends declared per share | |
| 1.52 |
| 1.38 |
| 1.24 |
| 1.10 |
| 1.00 |
Weighted-average Common Shares Outstanding | |
| |
| |
|
|
|
|
|
|
Basic earnings | |
| 108.7 |
| 115.6 |
| 127.2 |
| 134.0 |
| 139.1 |
Diluted earnings | |
| 109.1 |
| 116.1 |
| 127.9 |
| 135.1 |
| 140.8 |
Financial Condition | |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | | $ | 907 |
| 891 |
| 849 |
| 1,046 |
| 1,021 |
Merchandise inventories | |
| 1,208 |
| 1,269 |
| 1,278 |
| 1,307 |
| 1,285 |
Property and equipment, net | |
| 824 |
| 836 |
| 866 |
| 765 |
| 661 |
Total assets | |
| 6,589 |
| 3,820 |
| 3,961 |
| 3,840 |
| 3,775 |
Long-term debt and obligations under capital leases | |
| 122 |
| 124 |
| 125 |
| 127 |
| 130 |
Total shareholders’ equity | |
| 2,473 |
| 2,506 |
| 2,519 |
| 2,710 |
| 2,553 |
Financial Ratios | |
|
|
|
|
|
|
|
|
|
|
Sales per average gross square foot (2) | | $ | 510 |
| 504 |
| 495 |
| 515 |
| 504 |
SG&A as a percentage of sales | |
| 20.6 | % | 20.3 | | 19.3 |
| 19.0 |
| 19.1 |
Net income margin | |
| 6.1 | % | 6.8 | | 3.6 |
| 8.6 |
| 7.3 |
Adjusted net income margin (3) | |
| 6.7 | % | 6.9 | | 6.6 |
| 8.4 |
| 8.2 |
Earnings before interest and taxes (EBIT) (3) | | $ | 661 | | 704 | | 576 |
| 1,006 |
| 841 |
EBIT margin (3) | |
| 8.3 | % | 8.9 | | 7.4 |
| 13.0 |
| 11.3 |
Adjusted EBIT (3) | | $ | 722 | | 741 | | 762 |
| 1,012 |
| 946 |
Adjusted EBIT margin (3) | |
| 9.0 | % | 9.3 | | 9.9 |
| 13.0 |
| 12.8 |
Return on assets (ROA) | |
| 9.4 | % | 13.9 | | 7.3 |
| 17.4 |
| 14.7 |
Return on invested capital (ROIC) (3) | |
| 12.5 | % | 12.0 | | 11.0 |
| 15.1 |
| 15.8 |
Net debt capitalization percent (3), (4) | |
| 49.4 | % | 51.7 | | 54.4 |
| 48.5 |
| 47.4 |
Current ratio | |
| 2.0 |
| 3.3 |
| 4.1 |
| 4.3 |
| 3.7 |
Other Data | |
|
|
|
|
|
|
|
|
|
|
Capital expenditures | | $ | 187 |
| 187 |
| 274 |
| 266 |
| 228 |
Number of stores at year end | |
| 3,129 |
| 3,221 |
| 3,310 |
| 3,363 |
| 3,383 |
Total selling square footage at year end (in millions) | |
| 7.57 |
| 7.63 |
| 7.71 |
| 7.63 |
| 7.58 |
Total gross square footage at year end (in millions) | |
| 13.15 |
| 13.24 |
| 13.30 |
| 13.12 |
| 12.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 (1) |
| 2016 |
| 2015 |
| 2014 |
| 2013 | |
Summary of Operations | (in millions, except per share amounts) | ||||||||||
Sales | $ | 7,782 |
| 7,766 |
| 7,412 |
| 7,151 |
| 6,505 | |
Gross margin |
| 2,456 |
| 2,636 |
| 2,505 |
| 2,374 |
| 2,133 | |
Selling, general and administrative expenses |
| 1,501 |
| 1,472 |
| 1,415 |
| 1,426 |
| 1,334 | |
Depreciation and amortization |
| 173 |
| 158 |
| 148 |
| 139 |
| 133 | |
Litigation and other charges |
| 211 |
| 6 |
| 105 |
| 4 |
| 2 | |
Interest (income) / expense, net |
| (2) |
| 2 |
| 4 |
| 5 |
| 5 | |
Other income |
| (5) |
| (6) |
| (4) |
| (9) |
| (4) | |
Net income |
| 284 |
| 664 |
| 541 |
| 520 |
| 429 | |
Per Common Share Data |
|
|
|
|
|
|
|
|
|
| |
Basic earnings |
| 2.23 |
| 4.95 |
| 3.89 |
| 3.61 |
| 2.89 | |
Diluted earnings |
| 2.22 |
| 4.91 |
| 3.84 |
| 3.56 |
| 2.85 | |
Common stock dividends declared per share |
| 1.24 |
| 1.10 |
| 1.00 |
| 0.88 |
| 0.80 | |
Weighted-average Common Shares Outstanding |
|
|
|
|
|
|
|
|
|
| |
Basic earnings |
| 127.2 |
| 134.0 |
| 139.1 |
| 143.9 |
| 148.4 | |
Diluted earnings |
| 127.9 |
| 135.1 |
| 140.8 |
| 146.0 |
| 150.5 | |
Financial Condition |
|
|
|
|
|
|
|
|
|
| |
Cash, cash equivalents, and short-term investments | $ | 849 |
| 1,046 |
| 1,021 |
| 967 |
| 867 | |
Merchandise inventories |
| 1,278 |
| 1,307 |
| 1,285 |
| 1,250 |
| 1,220 | |
Property and equipment, net |
| 866 |
| 765 |
| 661 |
| 620 |
| 590 | |
Total assets |
| 3,961 |
| 3,840 |
| 3,775 |
| 3,577 |
| 3,487 | |
Long-term debt and obligations under capital leases |
| 125 |
| 127 |
| 130 |
| 134 |
| 139 | |
Total shareholders’ equity |
| 2,519 |
| 2,710 |
| 2,553 |
| 2,496 |
| 2,496 | |
Financial Ratios |
|
|
|
|
|
|
|
|
|
| |
Sales per average gross square foot (2) | $ | 495 |
| 515 |
| 504 |
| 490 |
| 460 | |
SG&A as a percentage of sales |
| 19.3 | % | 19.0 |
| 19.1 |
| 19.9 |
| 20.5 | |
Net income margin |
| 3.6 | % | 8.6 |
| 7.3 |
| 7.3 |
| 6.6 | |
Adjusted net income margin (3) |
| 6.6 | % | 8.4 |
| 8.2 |
| 7.3 |
| 6.6 | |
Earnings before interest and taxes (EBIT) (3) | $ | 576 |
| 1,006 |
| 841 |
| 814 |
| 668 | |
EBIT margin (3) |
| 7.4 | % | 13.0 |
| 11.3 |
| 11.4 |
| 10.3 | |
Adjusted EBIT (3) | $ | 762 |
| 1,012 |
| 946 |
| 816 |
| 676 | |
Adjusted EBIT margin (3) |
| 9.9 | % | 13.0 |
| 12.8 |
| 11.4 |
| 10.4 | |
Return on assets (ROA) |
| 7.3 | % | 17.4 |
| 14.7 |
| 14.7 |
| 12.5 | |
Return on invested capital (ROIC) (3) |
| 11.0 | % | 15.1 |
| 15.8 |
| 15.0 |
| 14.1 | |
Net debt capitalization percent (3), (4) |
| 54.4 | % | 48.5 |
| 47.4 |
| 43.4 |
| 42.5 | |
Current ratio |
| 4.1 |
| 4.3 |
| 3.7 |
| 3.5 |
| 3.8 | |
Other Data |
|
|
|
|
|
|
|
|
|
| |
Capital expenditures | $ | 274 |
| 266 |
| 228 |
| 190 |
| 206 | |
Number of stores at year end |
| 3,310 |
| 3,363 |
| 3,383 |
| 3,423 |
| 3,473 | |
Total selling square footage at year end (in millions) |
| 7.71 |
| 7.63 |
| 7.58 |
| 7.48 |
| 7.47 | |
Total gross square footage at year end (in millions) |
| 13.30 |
| 13.12 |
| 12.92 |
| 12.73 |
| 12.71 |
(1) | |
| 2017 |
(2) | Calculated as |
(3) | These represent non-GAAP measures, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information and calculation. |
(4) | Representstotal debt and obligations under |
2019 Form 10-K Page 16
13
Item 7. 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 meaningsection of the federal securities laws. Other than statementsAnnual Report on Form 10-K generally discusses 2019 and 2018 detail and year-over-year comparisons between 2019 and 2018. For a comparison of historical facts, all statements which address activities, events, or developments thatour results for 2018 to our results of 2017 and other financial information related to 2017, refer to our Annual Report on Form 10-K for the Company anticipates will or may occuryear ended February 2, 2019 filed with the SEC on April 2, 2019.
Business Overview
Foot Locker, Inc. leads the celebration of sneaker and youth culture around the globe through a portfolio of brands including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep. As of February 1, 2020, we operated 3,129 primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in 27 countries across the United States, Canada, Europe, Australia, New Zealand, and Asia. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of the global sneaker community.
Foot Locker, Inc. uses its omni-channel capabilities to bridge the digital world and physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners (including footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu (and related e-commerce sites 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 businessvarious European countries that we operate) footlocker.com.au, runnerspoint.com, sidestep-shoes.com, footlocker.hk, footlocker.sg, and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements.footlocker.my). 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” in Part I, Item 1A. 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 onesites offer some of the largest athletic footwearonline product selections and apparel retailersprovide a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com, final-score.com, and eastbayteamsales.com.
Segment Reporting
Our operating segments are identified according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. During 2018, we expanded into Asia and launched our digital channels across Singapore, Hong Kong, and Malaysia. During the first quarter of 2019, we changed our organizational and internal reporting structure to support an accelerated growth strategy for the region. We opened an Asian headquarters in Singapore and realigned our organization into three distinct geographic regions: North America, Europe, Middle East and Africa (“EMEA”), and Asia Pacific.
Accordingly, in the world, with formatsfirst quarter of 2019, we re-evaluated our operating segments. We determined that includewe have three operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, and Footaction, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team sales. Our EMEA operating segment includes the results of the following banners operating in Europe: Foot Locker, Runners Point, Sidestep, and SIX:02. The Direct-to-CustomersKids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international e-commerce businesses, which sell to customers through their Internet and mobile sites and catalogs.
The Foot Locker brand is onethe results 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 operating in Australia, New Zealand, and Asia as well as Footlocker.com, partthe related e-commerce businesses operating in Australia and Asia. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Recent Events and Trends
COVID-19 is having a significant effect on overall economic conditions in the various geographic areas in which we have operations. Our top priority is to protect our associates and their families, our customers, and our operations. We are taking all precautionary measures as directed by health authorities and local and national governments. On March 18, 2020, in response to intensifying efforts to contain the spread of COVID-19, we temporarily closed our stores across all of our direct-to-customer business. Through various marketing channelsbrands in North America, EMEA, and experiences, including social, digital, broadcast,Malaysia. On March 25, 2020, we temporarily closed our stores in New Zealand. The rest of our locations in the Asia Pacific region, which include Hong Kong, Singapore, and print media,Australia, will remain open subject to direction from local and national governments. We continue to monitor the outbreak of COVID-19 and other closures, or closures for a longer period of time, may be required to help ensure the health and safety of our associates and our customers. COVID-19 has and may continue to have an effect on ports and trade, as well as various sports sponsorshipsglobal travel. We have set up a special management committee and events, we reinforce our image with a consistent message — namely, that we are the destination for premium athletically-inspired shoescommittee is taking the necessary precautionary measures to protect the health and apparel with a wide selection of merchandise in a full-service environment.
Store Profile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Square Footage | |
| January 28, |
|
| February 3, | Relocations/ | (in thousands) | |
| 2017 | Opened | Closed | 2018 | Remodels | Selling | Gross |
Foot Locker U.S. | 948 | 4 | 42 | 910 | 44 | 2,430 | 4,225 |
Foot Locker Europe | 622 | 24 | 10 | 636 | 47 | 957 | 2,071 |
Foot Locker Canada | 119 | 1 | 9 | 111 | 6 | 264 | 431 |
Foot Locker Asia Pacific | 95 | 5 | 2 | 98 | 9 | 140 | 230 |
Kids Foot Locker | 411 | 39 | 14 | 436 | 25 | 747 | 1,285 |
Lady Foot Locker | 124 | — | 39 | 85 | — | 115 | 195 |
Champs Sports | 545 | 4 | 8 | 541 | 23 | 1,934 | 2,994 |
Footaction | 261 | 13 | 14 | 260 | 21 | 829 | 1,374 |
Runners Point | 122 | 1 | 5 | 118 | — | 150 | 258 |
Sidestep | 86 | — | 3 | 83 | 8 | 76 | 131 |
SIX:02 | 30 | 3 | 1 | 32 | — | 65 | 109 |
Total | 3,363 | 94 | 147 | 3,310 | 183 | 7,707 | 13,303 |
14
Athletic Stores
We operated 3,310 stores in the Athletic Stores segment as of the end of 2017. The following is a brief description of the Athletic Stores segment’s operating businesses:
Foot Locker — Foot Locker is a leading global youth culture brand that connects the sneaker obsessed consumer with the most innovative and culturally relevant sneakers and apparel. Across allsafety of our consumer touchpoints (stores, websites, mobile apps, social media), Foot Locker enables consumers to fulfill their desire to be part of sneaker and youth culture. We curate special product assortments and marketing content that supports our premium position – from leading global brands such as Nike, Jordan, adidas, and Puma,associates as well as new and emerging brands infollowing the athletic and lifestyle space. We connect emotionally with our consumers through a combinationguidance provided by local health authorities. Given the dynamic nature of global brand events and highly targeted and personalized experiences in local markets. Foot Locker’s 1,755 stores are located in 24 countries including 910 inthese circumstances, the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 111 in Canada, 636 in Europe, and a combined 98 in Australia and New Zealand. Our domestic stores have an average of 2,700 selling square feet and our international stores have an average of 1,600 selling square feet.
Kids Foot Locker — Kids Foot Locker offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Our stores, websites and social media channels feature products, content and experiences geared toward youth sneaker culture. Of our 436 stores, 375 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 40 in Europe, 19 in Canada, and a combined 2 in Australia and New Zealand. These stores have an average of 1,700 selling square feet.
Lady Foot Locker — Lady Foot Locker is a U.S. retailer of athletic footwear, apparel, and accessories dedicated to sneaker-obsessed young women. Our stores provide premium sneakers and apparel, carefully selected to reflect the latest styles. Lady Foot Locker operates 85 stores that are located in the United States and Puerto Rico. These stores have an average of 1,400 selling square feet.
Champs Sports — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. With a focus on the lifestyle expression of sport, Champs Sports’ product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to offer the best head-to-toe fashion stories representing the most powerful athletic brands, sports teams, and athletes in North America. Of our 541 stores, 512 are located throughout the United States, Puerto Rico, and the U.S. Virgin Islands and 29 in Canada. The Champs Sports stores have an average of 3,600 selling square feet.
Footaction — Footaction is a North American athletic footwear and apparel retailer that offers the freshest, best edited selection of athletic lifestyle brands and looks. This banner is uniquely positioned at the intersection of sport and style, with a focus on authentic, premium product. The primary consumer is a style-obsessed, confident, influential young male who is always dressed to impress. Of our 260 stores, 258 are located throughout the United States and Puerto Rico and 2 are in Canada. The Footaction stores have an average of 3,200 selling square feet.
Runners Point— Runners Point specializes in running footwear, apparel, and equipment for both performance and lifestyle purposes. This banner offers athletically inspired premium products and personalized service. Runners Point also caters to local running communities providing technical products, training tips and access to local running and group events, while also serving their lifestyle running needs. Our 118 stores are located in Germany, Austria, and Switzerland. Runners Point stores have an average of 1,300 selling square feet.
Sidestep— Sidestep is a predominantly athletic fashion footwear banner. Our 83 stores are located in Germany, Austria, the Netherlands, and Switzerland. Sidestep caters to a more discerning, fashion forward consumer. Sidestep stores have an average of 900 selling square feet.
SIX:02 — SIX:02 is for women who want to look and feel great both at the gym and in everyday life. This banner provides stylish casual and fitness looks for women on the go. SIX:02 is unique in the market place because of the ability to feature both footwear and apparel assortments across many brands – from traditional athletic brands, such as Nike, adidas and Puma – to new up-and-coming brands. Whether she is working out, going out or just hanging out, SIX:02 has an expansive selection of apparel, footwear, and accessories to choose from. SIX:02 operates 32 stores in the United States and have an average of 2,000 selling square feet.
15
Direct-to-Customers
Our Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, and eastbayteamsales.com. Additionally, this segment includes the websites, both desktop and mobile, aligned with the brand names of our store banners (footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, footlocker.au, runnerspoint.com, and sidestep-shoes.com). These sites offer some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between e-commerce and physical stores.
Eastbay— Eastbay is among the largest direct marketers in the United States, providing serious high school and other athletes with a complete sports solution including athletic footwear, apparel, equipment, and team licensed merchandise for a broad range of sports.
Franchise Operations
The Company operates franchised Foot Locker stores located within the Middle East, as well as franchised stores in Germany under the Runners Point banner. In addition, we entered into a franchise agreement during 2017 with Fox-Wizel Ltd for franchised stores operating in Israel. Also during 2017, we terminated our franchise agreement with the third party that operated stores in the Republic of Korea.
A total of 112 franchised stores were operating at February 3, 2018, 14 were operating in Germany and 98 were operating in the Middle East, of which 25 are in Israel.
U.S. Tax Reform
On December 22, 2017, the United States enacted tax reform legislation (“Tax Act”) that included a broad rangeduration of business tax provisions, including but not limited to a reduction indisruption, and reduced customer traffic, the U.S. corporate income tax rate from 35 percent to 21 percent as well as provisions that limit or eliminate various deductions or credits. The legislation also results in certain U.S. allocated expenses (e.g. interest and general administrative expenses) to be taxed and imposes a new tax on U.S. cross-border payments. Furthermore, the legislation includes a one-time transition tax on accumulated foreign earnings and profits.
In response to the enactment of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 which provides guidance to address the complexity in accounting for this new legislation. When the initial accounting for items under the new legislation is incomplete, the guidance allows us to recognize provisional amounts when reasonable estimates can be made or to continue to apply the prior tax law if a reasonable estimaterelated financial affect cannot be made. The SEC has provided upreasonably estimated at this time but are expected to a one-year window for companies to finalize the accountingmaterially affect our business for the effectfirst quarter and full year of this new legislation and we anticipate finalizing our accounting during 2018. While our accounting for the new U.S. tax legislation is not complete, we have made reasonable estimates for some provisions and recognized a $99 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings and a change in our permanent reinvestment assertion. The remeasurement of our deferred tax assets and liabilities was not significant. The 2017 charge for these provisions reflects our best estimate based on information currently available and our current interpretation of the Tax Act.2020.
The Tax Act includes a provision effective in 2018, to tax global intangible low-taxed income ("GILTI") of the Company’s foreign subsidiaries. Under generally accepted accounting principles (“GAAP”), we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. Due to the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act and the application of GAAP and we have not yet elected an accounting policy.
As of the date of this2019 Form 10-K we are continuing to evaluate the accounting for this legislation. We continue to assemble and analyze all the information required to prepare and analyze these effects and await additional guidance from the U.S. Treasury Department, the IRS or other standard-setting bodies. Additionally, we continue to analyze other information. Accordingly, we may record additional provisional amounts or adjustments to provisional amounts. Any subsequent adjustments will be recorded to tax expense in the quarter when the analysis is complete. See Critical Accounting Policies within this item and NotePage 17Income Taxes in “Item 8. Consolidated Financial Statements and Supplementary Data” for further details on U.S. tax reform.
16
Reconciliation of Non-GAAP Measures
In addition to reporting the Company’sour financial results in accordance with GAAP, the Company reportsgenerally accepted accounting principles (“GAAP”), we report certain financial results that differ from what is reported under GAAP. In the following tables, we have presented certain financial measures and ratios identified as non-GAAP such as sales excluding 53rd week, Earnings Before Interest and Taxes (“EBIT”), adjusted EBIT, adjusted EBIT margin, adjusted income before income taxes, adjusted net income, adjusted net income margin, adjusted diluted earnings per share, Return on Invested Capital (“ROIC”), free cash flow, and net debt capitalization. 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 or which affect comparability. In addition, these non-GAAP measures are useful in assessing our progress in achieving our long-term financial objectives.
Additionally, we present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. 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. 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.
Fiscal year 2017 representsrepresented the fifty-three weeks ended February 3, 2018. Accordingly, certain non-GAAP results have also been adjusted to exclude the effects of the 53rd week to assist in comparability.
We estimate the tax effect of the non-GAAP adjustments by applying a marginal rate to each of the respective items. The income tax items represent the discrete amount that affected the period.
The non-GAAP financial information is provided in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Presented below is a reconciliation of GAAP and non-GAAP results discussed throughout this Annual Report on Form 10-K. Please see the non-GAAP reconciliations for free cash flow and net debt capitalization in the “Liquidity and Capital Resources” section.
Reconciliation:
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
| | ($ in millions) |
| |||||||
Sales | | $ | 8,005 | | $ | 7,939 | | $ | 7,782 | |
53rd week | |
| — | |
| — | |
| 95 | |
Sales excluding 53rd week (non-GAAP) | | $ | 8,005 | | $ | 7,939 | | $ | 7,687 | |
| | | | | | | | | | |
Pre-tax income: | |
|
| |
|
| |
|
| |
Income before income taxes | | $ | 672 | | $ | 713 | | $ | 578 | |
Pre-tax adjustments excluded from GAAP: | |
|
| |
|
| |
|
| |
Impairment and other charges (1) | |
| 65 | |
| 37 | |
| 211 | |
Other income, net (2) | | | (4) | | | — | | | — | |
53rd week | |
| — | |
| — | |
| (25) | |
Adjusted income before income taxes (non-GAAP) | | $ | 733 | | $ | 750 | | $ | 764 | |
| | | | | | | | | | |
Calculation of Earnings Before Interest and Taxes (EBIT): | |
|
| |
|
| |
|
| |
Income before income taxes | | $ | 672 | | $ | 713 | | $ | 578 | |
Interest income, net | |
| 11 | |
| 9 | |
| 2 | |
EBIT | | $ | 661 | | $ | 704 | | $ | 576 | |
| | | | | | | | | | |
Adjusted income before income taxes | | $ | 733 | | $ | 750 | | $ | 764 | |
Interest income, net | |
| 11 | |
| 9 | |
| 2 | |
Adjusted EBIT (non-GAAP) | | $ | 722 | | $ | 741 | | $ | 762 | |
| | | | | | | | | | |
EBIT margin % | |
| 8.3 | % |
| 8.9 | % |
| 7.4 | % |
Adjusted EBIT margin % | |
| 9.0 | % |
| 9.3 | % |
| 9.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
| ($ in millions) |
| ||||||||
Sales |
| $ | 7,782 |
| $ | 7,766 |
| $ | 7,412 |
|
53rd week |
|
| 95 |
|
| — |
|
| — |
|
Sales excluding 53rd week (non-GAAP) |
| $ | 7,687 |
| $ | 7,766 |
| $ | 7,412 |
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income: |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 578 |
| $ | 1,004 |
| $ | 837 |
|
Pre-tax adjustments excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
Litigation and other charges (1) |
|
| 211 |
|
| 6 |
|
| 105 |
|
53rd week |
|
| (25) |
|
| — |
|
| — |
|
Adjusted income before income taxes (non-GAAP) |
| $ | 764 |
| $ | 1,010 |
| $ | 942 |
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Earnings Before Interest and Taxes (EBIT): |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 578 |
| $ | 1,004 |
| $ | 837 |
|
Interest (income) / expense, net |
|
| (2) |
|
| 2 |
|
| 4 |
|
EBIT |
| $ | 576 |
| $ | 1,006 |
| $ | 841 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income before income taxes |
| $ | 764 |
| $ | 1,010 |
| $ | 942 |
|
Interest (income) / expense, net |
|
| (2) |
|
| 2 |
|
| 4 |
|
Adjusted EBIT |
| $ | 762 |
| $ | 1,012 |
| $ | 946 |
|
|
|
|
|
|
|
|
|
|
|
|
EBIT margin % |
|
| 7.4 | % |
| 13.0 | % |
| 11.3 | % |
Adjusted EBIT margin % |
|
| 9.9 | % |
| 13.0 | % |
| 12.8 | % |
2019 Form 10-K Page 18
2019 Form 10-K Page 19
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
After-tax income: |
| |
|
| |
|
| |
| |
Net income | | $ | 491 | | $ | 541 | | $ | 284 | |
After-tax adjustments excluded from GAAP: | |
|
| |
|
| |
|
| |
Impairment and other charges, net of income tax benefit of $16, $6, and $78 million, respectively (1) | |
| 49 | |
| 31 | |
| 133 | |
Other income, net (2) | | | (4) | | | — | | | — | |
U.S. tax reform (3) | |
| 2 | |
| (28) | |
| 99 | |
Tax expense (benefit) related to tax law rate changes (4) | | | (2) | | | 4 | | | 2 | |
Tax benefit related to enacted change in foreign branch currency regulations (5) | |
| — | |
| (1) | |
| — | |
Income tax valuation allowances (6) | |
| 2 | |
| — | |
| 8 | |
53rd week, net of income tax expense of $9 million | |
| — | |
| — | |
| (16) | |
Adjusted net income (non-GAAP) | | $ | 538 | | $ | 547 | | $ | 510 | |
| | | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
| |
Diluted EPS | | $ | 4.50 | | $ | 4.66 | | $ | 2.22 | |
Diluted EPS amounts excluded from GAAP: | |
|
| |
|
| |
|
| |
Impairment and other charges (1) | |
| 0.44 | |
| 0.27 | |
| 1.02 | |
Other income, net (2) | | | (0.04) | | | — | | | — | |
U.S. tax reform (3) | |
| 0.02 | |
| (0.25) | |
| 0.78 | |
Tax expense (benefit) related to tax law rate changes (4) | | | (0.02) | | | 0.04 | | | 0.02 | |
Tax benefit related to enacted change in foreign branch currency regulations (5) | |
| — | |
| (0.01) | |
| — | |
Income tax valuation allowances (6) | |
| 0.03 | |
| — | |
| 0.07 | |
53rd week | |
| — | |
| — | |
| (0.12) | |
Adjusted diluted EPS (non-GAAP) | | $ | 4.93 | | $ | 4.71 | | $ | 3.99 | |
| | | | | | | | | | |
Net income margin % | |
| 6.1 | % |
| 6.8 | % |
| 3.6 | % |
Adjusted net income margin % | |
| 6.7 | % |
| 6.9 | % |
| 6.6 | % |
Notes on Non-GAAP Adjustments:
(1) | ||||||||||
17
|
| 2017 |
| 2016 |
| 2015 |
| |||
| ($ in millions, except per share amounts) |
| ||||||||
After-tax income: |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 284 |
| $ | 664 |
| $ | 541 |
|
After-tax adjustments excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
Litigation and other charges, net of income tax benefit of $78, $1, and $40 million, respectively (1) |
|
| 133 |
|
| 5 |
|
| 65 |
|
U.S. tax reform (2) |
|
| 99 |
|
| — |
|
| — |
|
Income tax valuation allowances (3) |
|
| 8 |
|
| — |
|
| — |
|
Tax expense related to French tax rate change (4) |
|
| 2 |
|
| 2 |
|
| — |
|
Tax benefit related to enacted change in foreign branch currency regulations (5) |
|
| — |
|
| (9) |
|
| — |
|
Tax benefit related to intellectual property reassessment (6) |
|
| — |
|
| (10) |
|
| — |
|
53rd week, net of income tax expense of $9 million |
|
| (16) |
|
| — |
|
| — |
|
Adjusted net income (non-GAAP) |
| $ | 510 |
| $ | 652 |
| $ | 606 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
| $ | 2.22 |
| $ | 4.91 |
| $ | 3.84 |
|
Diluted EPS amounts excluded from GAAP: |
|
|
|
|
|
|
|
|
|
|
Litigation and other charges (1) |
|
| 1.02 |
|
| 0.03 |
|
| 0.45 |
|
U.S. tax reform (2) |
|
| 0.78 |
|
| — |
|
| — |
|
Income tax valuation allowances (3) |
|
| 0.07 |
|
| — |
|
| — |
|
Tax expense related to French tax rate change (4) |
|
| 0.02 |
|
| 0.02 |
|
| — |
|
Tax benefit related to enacted change in foreign branch currency regulations (5) |
|
| — |
|
| (0.07) |
|
| — |
|
Tax benefit related to intellectual property reassessment (6) |
|
| — |
|
| (0.07) |
|
| — |
|
53rd week |
|
| (0.12) |
|
| — |
|
| — |
|
Adjusted diluted EPS (non-GAAP) |
| $ | 3.99 |
| $ | 4.82 |
| $ | 4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income margin % |
|
| 3.6 | % |
| 8.6 | % |
| 7.3 | % |
Adjusted net income margin % |
|
| 6.6 | % |
| 8.4 | % |
| 8.2 | % |
|
|
(2) | Other income, net represented a gain recorded in connection with acquisition of a Canadian distribution center lease and related assets. The tax expense related to this transaction was largely offset by the release of a valuation allowance. |
(3) | On December 22, 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions. |
|
|
|
|
(5) |
|
|
|
(6) | Valuation allowances were established against deferred tax assets associated with certain foreign tax losses. |
2019 Form 10-K Page 20
18
Return on Invested Capital
ROIC is presented below and represents a non-GAAP measure. We believe itROIC is a meaningful measure because it quantifies how efficiently we generated operating income relative to the capital we have invested in the business. In order to calculate ROIC, we adjust our results to reflect our operating leases as if they qualified for capital lease treatment. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the presentation of these leases as if they were capital leases is appropriate. Accordingly, the asset base and net income amounts are adjusted to reflect this in the calculation of ROIC. ROIC, subject to certain adjustments, is also used as a measure in executive long-term incentive compensation.
The closest U.S. GAAP measure to ROIC is Return on Assets (“ROA”) and is also representedpresented below. ROA is calculated as net income in the fiscal year divided by the two-year average of total assets. ROA decreased to 7.39.4 percent as compared to 17.4 percent in the prior year, with the decline primarily due to litigation and other charges recorded during 2017, as well as a provisional charge of $99 million relating to tax reform as discussed earlier in this section.
Our ROIC decreased to 11.0 percent in 2017, as compared to 15.113.9 percent in the prior year. AverageThis decrease primarily reflected the adoption of the new lease standard,which resulted in the recognition of right-of-use assets in the current year. Excluding the effect of the addition of right-of-use assets, ROA would have declined by 80 basis points.
Prior to the adoption of the new lease standard, we adjusted our results to reflect our operating leases as if they qualified for capital lease treatment or as if the property were purchased. This prior year presentation does not reflect the requirements of the new lease standard. With the adoption of this standard, leases are now recorded on the Consolidated Balance Sheet, and therefore, certain adjustments are no longer required. Our ROIC increased to 12.5 percent in 2019, as compared to 12.0 percent as calculated in the prior year. The overall increase in ROIC reflected a decrease in average invested capital increased compared with the prior year and earnings declined, which resulted in the overall decrease in ROIC. Average invested capital increased as a result of the effect of opening larger stores, as well as signing certain high-profile leases with longer lease terms. The earnings decline is more fully discussed on the following pages.higher adjusted return after taxes.
| | | | | | | | | |
|
| 2019 |
| | 2018 |
| | 2017 |
|
ROA (1) |
| 9.4 | % | | 13.9 | % | | 7.3 | % |
ROIC % |
| 12.5 | % | | 12.0 | % | | 11.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | ||||
ROA (1) |
|
| 7.3 | % |
| 17.4 | % |
| 14.7 | % |
ROIC % |
|
| 11.0 | % |
| 15.1 | % |
| 15.8 | % |
(1) | |
| Represents net income of |
Calculation of ROIC:
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
| | ($ in millions) |
| |||||||
Adjusted EBIT | | $ | 722 | | $ | 741 | | $ | 762 | |
+ Rent expense (1) | |
| — | |
| 750 | |
| 735 | |
- Estimated depreciation on capitalized operating leases (1) | |
| — | |
| (603) | |
| (593) | |
+ Interest component of straight-line rent expense (2) | | | 173 | | | — | | | — | |
Adjusted net operating profit | |
| 895 | |
| 888 | |
| 904 | |
- Adjusted income tax expense (3) | |
| (236) | |
| (241) | |
| (304) | |
= Adjusted return after taxes | | $ | 659 | | $ | 647 | | $ | 600 | |
Average total assets (4) | | $ | 3,755 | | $ | 3,891 | | $ | 3,901 | |
- Average cash and cash equivalents | |
| (899) | |
| (870) | |
| (948) | |
- Average non-interest bearing current liabilities | |
| (720) | |
| (690) | |
| (614) | |
- Average merchandise inventories | |
| (1,239) | |
| (1,274) | |
| (1,293) | |
+ Average estimated asset base of capitalized operating leases (1) | |
| — | |
| 2,989 | |
| 2,978 | |
+ Average right-of-use assets (5) | |
| 3,024 | |
| — | |
| — | |
+ 13‑month average merchandise inventories | |
| 1,361 | |
| 1,337 | |
| 1,413 | |
= Average invested capital | | $ | 5,282 | | $ | 5,383 | | $ | 5,437 | |
ROIC % | |
| 12.5 | % |
| 12.0 | % |
| 11.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
| ($ in millions) |
| |||||||
Adjusted EBIT |
| $ | 762 |
| $ | 1,012 |
| $ | 946 |
|
+ Rent expense |
|
| 735 |
|
| 690 |
|
| 640 |
|
- Estimated depreciation on capitalized operating leases (1) |
|
| (593) |
|
| (552) |
|
| (498) |
|
Adjusted net operating profit |
|
| 904 |
|
| 1,150 |
|
| 1,088 |
|
- Adjusted income tax expense (2) |
|
| (304) |
|
| (409) |
|
| (391) |
|
= Adjusted return after taxes (3) |
| $ | 600 |
| $ | 741 |
| $ | 697 |
|
Average total assets |
| $ | 3,901 |
| $ | 3,808 |
| $ | 3,676 |
|
- Average cash and cash equivalents |
|
| (948) |
|
| (1,034) |
|
| (994) |
|
- Average non-interest bearing current liabilities |
|
| (614) |
|
| (656) |
|
| (697) |
|
- Average merchandise inventories |
|
| (1,293) |
|
| (1,296) |
|
| (1,268) |
|
+ Average estimated asset base of capitalized operating leases (1) |
|
| 2,978 |
|
| 2,687 |
|
| 2,346 |
|
+ 13-month average merchandise inventories |
|
| 1,413 |
|
| 1,388 |
|
| 1,337 |
|
= Average invested capital |
| $ | 5,437 |
| $ | 4,897 |
| $ | 4,400 |
|
ROIC % |
|
| 11.0 | % |
| 15.1 | % |
| 15.8 | % |
(1) | |
|
|
(2) | Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense. Operating lease interest is |
| The adjusted income tax expense represents the marginal tax rate applied to adjusted net operating profit for each of the periods presented. |
|
|
(4) | For 2019, the amount represents the average total assets for 2019 and 2018, excluding the 2019 right-of-use assets of $2,899 million for comparability to prior periods. |
(5) | For 2019, the amount represents the average of the right-of-use assets as of February 1, 2020 and February 3, 2019 (the date of the adoption of the new lease standard) of $2,899 million and $3,148 million, respectively. |
2019 Form 10-K Page 21
19
Overview of Consolidated Results
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | (in millions, except per share data) | |||||||
Sales | | $ | 8,005 | | $ | 7,939 | | $ | 7,782 |
Sales per average square foot | | | 510 | | | 504 | | | 495 |
Gross margin | |
| 2,543 | |
| 2,528 | |
| 2,456 |
Selling, general and administrative expenses | |
| 1,650 | |
| 1,614 | |
| 1,501 |
Depreciation and amortization | |
| 179 | |
| 178 | |
| 173 |
| | | | | | | | | |
Operating Results | | | | | | | | | |
Division profit | | $ | 738 | | | 789 | | | 810 |
Less: Other charges | | | 15 | | | 18 | | | 191 |
Less: Corporate expense | | | 74 | | | 72 | | | 48 |
Income from operations | | | 649 | | | 699 | | | 571 |
Interest income, net | | | 11 | | | 9 | | | 2 |
Other income, net | | | 12 | | | 5 | | | 5 |
Income before income taxes | | $ | 672 | | | 713 | | | 578 |
| | | | | | | | | |
Net income | | $ | 491 | | $ | 541 | | $ | 284 |
Diluted earnings per share | | $ | 4.50 | | $ | 4.66 | | $ | 2.22 |
| | | | | | | | | |
The following represents our long-term objectives and our progress towards meeting those objectives. Non-GAAP results are presented for all the periods. Please see “Reconciliation of Non-GAAP Measures” earlier in this section for further information relating to non-GAAP measures, including why we believe they are useful and how they are calculated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term |
|
|
|
|
|
|
|
|
|
| |
|
| Objectives |
| 2017 |
| 2016 |
| 2015 |
| ||||
Sales ($ in millions) |
| $ | 10,000 |
| $ | 7,782 |
| $ | 7,766 |
| $ | 7,412 |
|
Sales per gross square foot |
| $ | 600 |
| $ | 495 |
| $ | 515 |
| $ | 504 |
|
Adjusted net income margin % |
|
| 8.5 | % |
| 6.6 | % |
| 8.4 | % |
| 8.2 | % |
Adjusted EBIT margin % |
|
| 12.5 | % |
| 9.9 | % |
| 13.0 | % |
| 12.8 | % |
ROIC % |
|
| 17.0 | % |
| 11.0 | % |
| 15.1 | % |
| 15.8 | % |
Highlights of our 20172019 financial performance include:
|
|
|
|
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
Sales increase |
| 0.8 | % | 2.0 | % | 0.2 | % |
Comparable-store sales increase / (decrease) |
| 2.2 | % | 2.7 | % | (3.1) | % |
● | Footwear sales represented |
● | Our stores and direct-to-customer sales channels experienced overall comparable-sales gains of |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Sales increase |
|
| 0.2 | % |
| 4.8 | % |
| 3.6 | % |
Comparable-store sales (decrease) / increase |
|
| (3.1) | % |
| 4.3 | % |
| 8.5 | % |
|
|
● | Sales per square foot increased by 1.2 percent to $510 reflecting the productivity of |
● | Sales of our direct-to-customers channel increased by 4.9 percent to |
| Gross margin, as a percentage of sales, |
| SG&A expenses were |
|
|
| Net income was |
| Net income margin decreased to |
2019 Form 10-K Page 22
Highlights of our financial position for the period ended February 3, 20181, 2020 include:
| We ended the year in a strong financial position. At year end, we had |
| Net cash provided by operating activities was |
| Cash capital expenditures during |
| We made minority investments of $50 million during 2019. These investments are part of our broader strategic initiatives aimed at strengthening and diversifying our role within the sneaker community. Additionally, we expect that these strategic investments allow us to better adapt to the dynamically evolving consumer and retail landscape by strengthening our capabilities, providing diversification, and gaining greater insights into youth culture. Due to the early stage of these investments, it is expected that some will not be successful. In the fourth quarter, we recorded charges totaling $11 million to reflect insolvency for one of our investments and reduced valuation for another investment, both investments were made during 2018. |
● | During |
20Sales
Summary of Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| (in millions, except per share data) | |||||||
Sales | $ | 7,782 |
| $ | 7,766 |
| $ | 7,412 |
Gross margin |
| 2,456 |
|
| 2,636 |
|
| 2,505 |
Selling, general and administrative expenses |
| 1,501 |
|
| 1,472 |
|
| 1,415 |
Depreciation and amortization |
| 173 |
|
| 158 |
|
| 148 |
Interest (income) / expense, net |
| (2) |
|
| 2 |
|
| 4 |
Net income | $ | 284 |
| $ | 664 |
| $ | 541 |
Diluted earnings per share | $ | 2.22 |
| $ | 4.91 |
| $ | 3.84 |
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.direct-to-customers sales. 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. Comparable-store sales for 2017 does not include the sales from the 53rd week.
The information shown below represents certain sales metrics by sales channel:
| | | | | | | | | | |
| | 2019 |
| 2018 |
| 2017 | | |||
Stores | | ($ in millions) | | |||||||
Sales | | $ | 6,720 | | $ | 6,714 | | $ | 6,673 | |
$ Change | | $ | 6 | | $ | 41 | | | (71) | |
% Change | | | 0.1 | % | | 0.6 | % | | (1.1) | % |
% of total sales | | | 83.9 | % | | 84.6 | % | | 85.7 | % |
Comparable sales increase (decrease) | | | 1.6 | % | | 1.1 | % | | (4.7) | % |
| | | | | | | | | | |
Direct-to-customers | | | | | | | | | | |
Sales | | $ | 1,285 | | $ | 1,225 | | $ | 1,109 | |
$ Change | | $ | 60 | | $ | 116 | | | 87 | |
% Change | | | 4.9 | % | | 10.5 | % | | 8.5 | % |
% of total sales | | | 16.1 | % | | 15.4 | % | | 14.3 | % |
Comparable sales increase | | | 5.6 | % | | 12.3 | % | | 6.9 | % |
The following discussion describes the changes in sales by banner on an omni-channel basis, meaning that each banner’s results are inclusive of its store and e-commerce activity, unless noted otherwise.
Sales of $7,782 million in 2017In 2019, sales increased by 0.20.8 percent to $8,005 million from sales of $7,766$7,939 million in 2016. Results from 2017 include the effect of the 53rd week, which represented sales of $95 million.2018. Excluding the effect of foreign currency fluctuations, sales declined 0.5decreased by 2.0 percent as compared with 2016. 2018.
Comparable-store sales declined 3.1increased by 2.2 percent during 20172019, as compared with 2016. Salesthe corresponding prior-year period. Both of $7,766 million in 2016our sales channels generated positive results as compared with the prior year. The overall comparable sales growth was led by our direct-to-customers channel, which increased by 4.8 percent from sales of $7,412 million in 2015, this represented a comparable-store sales increase of 4.3 percent. Excluding the effect of foreign currency fluctuations, sales increased 5.25.6 percent as compared with 2015. the prior year. Each of our operating segments generated improved comparable sales, with North America and EMEA increasing by approximately 2 percent, while our smallest operating segment, Asia Pacific, generated comparable sales growth of low double digits.
2019 Form 10-K Page 23
In North America, Foot Locker Canada led the results, with a comparable-sales increase in the high-single digits, followed by Champs Sports and Foot Locker U.S. which generated mid-single digit and low-single digit increases, respectively. These increases were partially offset by declines in sales of our Eastbay and Footaction banners, as well as a modest decline in Kids Foot Locker. The decline in Eastbay’s sales was primarily due to softer demand for performance-related products. Footaction’s sales were negatively affected by the lack of product availability of certain key men’s footwear styles. Due to the continued underperformance of Footaction, management conducted an impairment evaluation, see additional discussion under the caption, Division Profit. North America’s sales were also negatively affected by the closure of the SIX:02 banner, as all stores were closed by the end of the third quarter. Kids Foot Locker’s sales were negatively affected by the decline of certain apparel styles. Our EMEA operating segment sales increased low single-digits primarily related to the growth in our e-commerce business for Foot Locker Europe and Sidestep. Asia Pacific generated a low double-digit increase, with e-commerce in Australia continuing to grow as customers enjoy our new payment methods and improved product offerings.
From a product perspective, footwear sales increased 4 percent on a comparable sales basis, with increases across all wearer segments and was led by sales of women’s and children’s footwear. During the year, we closed our SIX:02 banner to focus on our women’s business through our other banners and the increase in sales of women’s footwear demonstrates the success of our elevated women’s presentation in all our banners. The men’s footwear business experienced growth from sales of classic basketball styles and a modest increase in running styles. Apparel sales decreased across all wearer segments. Within men’s, our branded apparel sales, which represented the largest portion of our apparel sales, improved and was offset by declines in sales of private-label and licensed apparel. The declines represented a concerted effort to focus our assortment on more premium offerings.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Gross margin rate |
| 31.6 | % |
| 33.9 | % |
| 33.8 | % |
Basis point (decrease) / increase in the gross margin rate |
| (230) |
|
| 10 |
|
|
|
|
Components of the change- |
|
|
|
|
|
|
|
|
|
Merchandise margin rate (decline) / improvement |
| (160) |
|
| 20 |
|
|
|
|
Higher occupancy and buyers' compensation expense rate |
| (70) |
|
| (10) |
|
|
|
|
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
Gross margin rate |
| 31.8 | % | 31.8 | % | 31.6 | % |
Basis point increase in the gross margin rate |
| — |
| 20 |
| (230) | |
Components of the change- |
| |
|
|
|
| |
Merchandise margin rate improvement / (decline) |
| (30) |
| 30 |
| (160) | |
Lower / (higher) occupancy and buyers’ compensation expense rate |
| 30 |
| (10) |
| (70) | |
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 (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities.
TheOverall, the gross margin rate decreased to 31.6 percent in 2017 as compared to 33.9 percent inremained consistent with the prior year. The decline inyear at 31.8 percent. Within this, the merchandise margin rate declined reflecting, in 2017 primarily reflectspart, higher freight costs due to a higher markdown rate in bothpenetration of sales from our Athletic Stores and Direct-to-Customer segments. The higher markdowns were the result ofdirect-to-customer channel as well as lower gross margin related to our apparel business due to a more promotional environment and were necessary to ensure merchandise inventory remained current and in line with the sales trend. Although to a lesser degree, a decline in our shipping and handling revenue also negatively affected the merchandise margin for the Direct-to-Customer segment. The decline in the gross margin rate also reflects an increase in the occupancy and buyers’ compensation rate as compared to 2016. Rent-related costs continued to increase while our sales were relatively flat. The increase in rent-related costs was primarily driven by recently entering into leases for high-profile locations.
Gross margin in 2016 improved 10 basis points to 33.9 percent as compared with 2015. The improvement was driven by a lower markdown rate, primarily in our Athletic Stores segment, due to an increase in full-priced selling. This improvement was partially offset by increased promotional activity within our Direct-to-Customers segment.marketplace. The change in the gross margin rate also reflected an increaseimprovement in the occupancy and buyers’ compensation rate comparedof 30 basis points due to 2015. This pressured our gross margin rate as certain high-profile locations were closed for remodeling for all or part of 2016, which increased the occupancy expense rate since these locations were not generating sales while incurring tenancy costs. and continued focus on rent reductions.
21
Selling, General and Administrative Expenses (SG&A)
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||
| ($ in millions) | ||||||||||||||||||
| | | | | | | | | | ||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| ||||||||||||
| | ($ in millions) |
| ||||||||||||||||
SG&A | $ | 1,501 |
| $ | 1,472 |
| $ | 1,415 |
| | $ | 1,650 | | $ | 1,614 | | $ | 1,501 | |
$ Change | $ | 29 |
| $ | 57 |
|
|
|
| | $ | 36 | | $ | 113 | |
| 29 | |
% Change |
| 2.0 | % |
| 4.0 | % |
|
|
| |
| 2.2 | % |
| 7.5 | % |
| 2.0 | |
SG&A as a percentage of sales |
| 19.3 | % |
| 19.0 | % |
| 19.1 | % | |
| 20.6 | % |
| 20.3 | % |
| 19.3 | % |
SG&A increased by $29$36 million and 2.0or 2.2 percent in 2017,2019, as compared with the prior year. As a percentage of sales, the SG&A rate increased by 30 basis points as compared with 2016.2018. The overall increase represented an increase in costs incurred in connection with our ongoing investment in various technology and infrastructure projects, partially offset by lower incentive compensation expense of $18 million. Excluding the effect of foreign currency fluctuations, SG&A increased by $16$57 million and 3.5 percent as compared towith the prior year. The 53rd week contributed $16 million of additional expenses, however as a percent of sales the SG&A rate remained unchanged at 19.3 percent.
2019 Form 10-K Page 24
The rise in the SG&A expense rate during 2017 primarily relates to the Athletic Stores segment, partially offset by a decline in the Direct-to-Customers segment’s SG&A rate. The Athletic Stores segment reflected an increase in store-related compensation costs as a result of increased minimum wage levels. Additionally, we incurred higher expenses related to wages, such as payroll taxes and benefits. These increases in the SG&A expense rate were partially offset by declines in incentive compensation and marketing related costs.
SG&A increased by $57 million in 2016 as compared with 2015. As a percentage of sales, the SG&A rate in 2016 decreased by 10 basis points as compared with 2015, which reflected diligent expense management specifically in store wages by our Athletic Stores segment and was partially offset by increased marketing costs incurred by our Direct-to-Customers segment in order to drive traffic to its websites.
Depreciation and Amortization
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
| | ($ in millions) |
| |||||||
Depreciation and amortization | | $ | 179 | | $ | 178 | | $ | 173 | |
$ Change | | $ | 1 | | $ | 5 | |
| 15 | |
% Change | |
| 0.6 | % |
| 2.9 | % |
| 9.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
| ($ in millions) | ||||||||
Depreciation and amortization | $ | 173 |
| $ | 158 |
| $ | 148 |
|
$ Change | $ | 15 |
| $ | 10 |
|
|
|
|
% Change |
| 9.5 | % |
| 6.8 | % |
|
|
|
Depreciation and amortization increased $15by $1 million in 20172019 as compared with 2016. Excluding the2018. The effect of foreign currency fluctuations on depreciation and amortization increased $13for the current year was not significant.
Division Profit
Division profit was $738 million or 9.2 percent, as compareda percentage of sales. This compares with the prior$789 million, or 9.9 percent, for last year. The increases in both 2017 and 2016 reflect a rise in capital spending on store improvements, the enhancementDivision profit for 2019 included non-cash impairment charges of our digital sites, and various other technologies and infrastructure. The increase in 2016 as compared with 2015 also reflected capital spending on our relocated corporate headquarters.
Litigation and Other Charges
Litigation and other charges recorded totaled $211$37 million $6 million, and $105 million for 2017, 2016, and 2015, respectively.
Related to our pension litigation, we recorded charges totaling $178 million during 2017. We previously recorded a $100 million pension litigation charge during 2015. These charges relate to a class action in which the plaintiffs alleged that the Company failed to properly disclose the effects of the 1996 conversion of the U.S. retirement plan to a defined benefit plan with a cash balance formula. In February 2018, the Company’s Petition for Writ of Certiorari with the U.S. Supreme Court was denied. Accordingly, the Company must reform the pension plan consistent with the trial court’s order. The Company has estimated that the cost of plan reformation is $278 million as of February 3, 2018 based upon our current understanding of the court order. This amount will increase with interest until paid, as required by the provisions of the required plan reformation. The Company is currently formulating the actions and steps necessary to reform the plan.
During 2017, we reduced and reorganized our division and corporate staff which resulted in a charge of $13 million. The substantial majority of the charge was for severance and related costs.
22
Impairment charges recorded during 2017 totaled $20 million. The charges related to the write-down of store fixtures, leasehold, and leasehold improvementsright-of-use assets related to Footaction, certain other underperforming stores, and a vacant store that had been previously subleased. Also during the current year, we recorded $13 million of lease termination costs related to the closure our SIX:02 stores. In 2018, impairment charges were $19 million and related to SIX:02, Runners Point, and Sidestep stores. Sidestep. Excluding the effect of the impairment charges and lease termination costs from both years, our division profit decreased by 40 basis points. Both sales channels generated improved results, however gross margin declined in our direct-to-customers channel due to higher freight costs. Operating expenses grew at a faster rate than sales thereby reducing division profit.
Other Charges
During 2016 and 2015,2019 we alsorecorded charges totaling $15 million. During the fourth quarter we recorded non-cash impairment charges totaling $6of $11 million related to the write-down of two minority investments. Additionally, we incurred $4 million related to the pension matter. See Note 3, Impairment and Other Charges for additional information.
Corporate Expense
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Corporate expense | | $ | 74 | | $ | 72 | | $ | 48 |
$ Change | | $ | 2 | | $ | 24 | |
| (22) |
Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our 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 $19 million, $18 million, and $4$16 million respectively, relatingin 2019, 2018, and 2017, respectively.
The allocation of corporate expense to the write down of store fixtures and leasehold improvements foroperating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $32 million in 2019, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense increased by $34 million as compared with 2018. This increase was primarily due to technology spending related to our Runners Point and Sidestep stores. Also during 2015,various technology initiatives. Additionally, we recorded a non-cash impairment charge totaling $1 million to fully write down the value of an e-commerce trade name.incurred additional professional fees partially offset by lower incentive compensation expense.
Interest Income, net
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | | |||
| | ($ in millions) |
| |||||||
Interest expense | | $ | (10) | | $ | (11) | | $ | (12) | |
Interest income | |
| 21 | |
| 20 | |
| 14 | |
Interest income, net | | $ | 11 | | $ | 9 | | $ | 2 | |
Weighted-average interest rate (excluding fees) | |
| 6.9 | % |
| 7.0 | % |
| 7.3 | % |
Interest (Income) / Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
| ($ in millions) | ||||||||
Interest expense | $ | 12 |
| $ | 11 |
| $ | 11 |
|
Interest income |
| (14) |
|
| (9) |
|
| (7) |
|
Interest (income) / expense, net | $ | (2) |
| $ | 2 |
| $ | 4 |
|
Weighted-average interest rate (excluding fees) |
| 7.3 | % |
| 7.2 | % |
| 7.2 | % |
The changes during 2017 and 20162019 primarily relate to the amounts earned as interest income. Interest income increased by $5$2 million in 20172019 as compared with 2016, and increased $2 million in 2016 as compared with 2015.2018. The increase for both periods primarily represented increased income due to higher average interest rates on our cash investments. We did not have any short-term borrowings, other than small amounts related to capital leases, for any of the periods presented.
2019 Form 10-K Page 25
Other Income, net
| | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | |||
| | ($ in millions) |
| |||||||
Other income, net | | $ | 12 | | $ | 5 | | $ | 5 | |
$ Change | | $ | 7 | | $ | — | | $ | (1) | |
% Change | |
| 140.0 | % |
| — | % |
| (16.7) | % |
Other income, net includes non-operating items, including franchise royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investment, and net benefit expense related to our pension and postretirement programs excluding the service cost component.
Other income, net for the year ended February 1, 2020 primarily represented $8 million of royalty income; a $4 million gain associated with the acquisition of a Canadian distribution center lease and related assets from the partial exchange of a note that had been previously written down to zero; a $2 million gain related to the sale of a building; and a $1 million gain on our available-for-sale security; partially offset by a $2 million of net benefit expense relating to our pension and post retirement programs; and a $1 million loss related to our equity method investment.
Income Taxes
Our effective tax rate for 20172019 was 50.827.0 percent, as compared with 33.924.1 percent in 2016.2018. The increase was primarily attributabledue to discrete events, including the effects of the U.S. tax reform, which was enacted on December 22, 2017, informally known as the Tax Act. WeCuts and Jobs Act (the “Tax Act”).
In connection with the finalization of our accounting for the Tax Act, in 2019 we recorded a provisionalcharge for $2 million representing an adjustment to U.S. tax on foreign income and in 2018 we recorded a $28 million benefit. See also Note 17, Income Taxes, under “Item 8. Consolidated Financial Statements and Supplementary Data” for more information.
During the fourth quarters of $992019 and 2018, we recorded a tax benefit of $2 million for the mandatory deemed repatriation of historical foreign sourced net earnings and related items. The tax effect of the remeasurement of our deferred tax assets and liabilities was not significant. Also contributing to the increased rate wasa tax expense of $8$4 million, relatedrespectively, in connection with tax law changes in the Netherlands.
In 2019, we established a valuation allowance of $2 million to the establishment of certain valuation allowances againstoffset the deferred tax assets associated with Runners Point, Sidestep, and their respective e-commerce businesses. In both 2017 and 2016 we recordedbenefit of certain foreign tax expense of $2 million for two separate tax rate reductions in France. Partially offsetting these increases were $9 million in excess tax benefits reflecting the change required by ASC 718 adopted during 2017.losses.
We regularly assess the adequacy of provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, reserves for unrecognized tax benefits may be adjusted due to 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 limitations. The changes in the tax reserves were not significant in 2019. The effective tax rate for both 2017 and 2016,2018 includes reserve releases totaling $1$5 million due to audit settlements and lapses of statutes of limitations.
In the fourth quarter of 2016, the U.S. Treasury issued regulations under Internal Revenue Code Section 987, which required us to change our method for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. This change resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $9 million. Also during 2016, we performed a scheduled reassessment of the value of the intellectual property provided to our European business by Foot Locker in the U.S. during the fourth quarter of 2012. The new, higher valuation resulted in catch-up deductions that reduced tax expense by $10 million.
Excluding the provisional repatriation and relatedabove-mentioned discrete items, the establishment of valuation allowances, the effects of excess tax benefits, the effect of the charges recorded during 2017, the IP valuation catch-up deductions in 2016, and the effect of Section 987 Regulations on 2016, the effective tax rate for 2017 decreased as compared with 2016, primarily due to the partial year benefit of the federal income tax rate reduction as well as mix of income.
The effective tax rate for 2016 was 33.9 percent, as compared with 35.4 percent in 2015. Excluding the reserve releases, the effects of the IP valuation catch-up deductions, the French rate change, the effect of Section 987 Regulations, and the pension litigation charge in 2015, the effective tax rate for 2016 decreased2019 increased slightly as compared with 2015, primarily2018, due to the mix of income as well as current year tax benefit related to the higher IP valuation.earned in various jurisdictions.
23
Segment Information
As of February 3, 2018, we had two reportable segments, Athletic Stores and Direct-to-Customers, which were based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation and reorganization charges, corporate expense, non-operating income, and net interest (income) / expense. Effective as of the beginning of fiscal year 2018, the Company will report one reportable segment based upon the change in our method of internal reporting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Sales |
| ($ in millions) | |||||||
Athletic Stores |
| $ | 6,673 |
| $ | 6,744 |
| $ | 6,468 |
Direct-to-Customers |
|
| 1,109 |
|
| 1,022 |
|
| 944 |
|
| $ | 7,782 |
| $ | 7,766 |
| $ | 7,412 |
Operating Results |
|
|
|
|
|
|
|
|
|
Athletic Stores |
| $ | 675 |
| $ | 927 |
| $ | 872 |
Direct-to-Customers |
|
| 135 |
|
| 143 |
|
| 142 |
Division profit |
|
| 810 |
|
| 1,070 |
|
| 1,014 |
Less: Pension litigation and reorganization charges |
|
| 191 |
|
| — |
|
| 100 |
Less: Corporate expense |
|
| 48 |
|
| 70 |
|
| 77 |
Operating profit |
|
| 571 |
|
| 1,000 |
|
| 837 |
Other income |
|
| 5 |
|
| 6 |
|
| 4 |
Earnings before interest expense and income taxes |
|
| 576 |
|
| 1,006 |
|
| 841 |
Interest (income) / expense, net |
|
| (2) |
|
| 2 |
|
| 4 |
Income before income taxes |
| $ | 578 |
| $ | 1,004 |
| $ | 837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletic Stores |
| 2017 |
| 2016 |
| 2015 |
| |||
|
| ($ in millions) |
| |||||||
Sales |
| $ | 6,673 |
| $ | 6,744 |
| $ | 6,468 |
|
$ Change |
| $ | (71) |
| $ | 276 |
|
|
|
|
% Change |
|
| (1.1) | % |
| 4.3 | % |
|
|
|
Division profit |
| $ | 675 |
| $ | 927 |
| $ | 872 |
|
Division profit margin |
|
| 10.1 | % |
| 13.7 | % |
| 13.5 | % |
2017 compared with 2016
Excluding the effect of foreign currency fluctuations, sales from our Athletic Stores segment decreased by 1.9 percent. The sales decline during 2017, excluding the effect of foreign currency fluctuations, was across almost all of our store banners. The Company experienced declines in sales of footwear and accessories, partially offset by a gain in apparel sales.
Comparable-store sales decreased by 4.7 percent during 2017, as compared with the corresponding prior-year period. The overall decline in comparable-store sales was primarily driven by a decrease in footwear sales. The decline in footwear sales reflected a lack of depth and variety of innovative new product at the premium end of the athletic footwear market to suit our customers’ quickly-changing style preferences. Children’s and women’s footwear sales were the major contributors to the comparable-store declines in footwear, although men’s footwear also experienced a modest comparable-store decline. Women’s court styles primarily contributed to the comparable-store decline in women’s footwear, particularly in Foot Locker, Lady Foot Locker, and Foot Locker Europe. The comparable store-sales decrease in children’s footwear mostly reflected declines in the basketball category. All of our store banners, with the exception of Foot Locker Canada, experienced declines in men’s footwear. Gains in men’s lifestyle running shoes were not enough to compensate for the comparable-store sales declines in basketball and court lifestyle footwear, again due to insufficient product depth.
The comparable-store sales increase in apparel as compared to the prior year was across almost all of our store banners, with gains experienced across all genders. The gain in men’s apparel sales was driven by strong results in branded outerwear partially offset by declines in sales of private label and licensed apparel.
24
Included in our 2017 division profit was a non-cash impairment charge of $20 million related to the write-down of primarily store fixtures and leasehold improvements. SIX:02 recorded a charge of $16 million and our Runners Point and Sidestep stores recorded a charge of $4 million. The effect of the impairment charges decreased the division profit rate by 30 basis points. Most of the remaining decline in the division profit rate was related to a decrease in the merchandise margin rate reflecting higher markdowns coupled with an increase in the SG&A rate. The division profit decline was most pronounced in our European business. The 53rd week did not have a significant effect on the overall division profit rate.
2016 compared with 2015
Excluding the effect of foreign currency fluctuations, sales from our Athletic Stores segment increased by 4.7percent. Of the total increase, 69 percent was generated by our domestic businesses, with almost all banners contributing to the growth. Champs Sports produced the best domestic performance, while internationally the increase was driven by our Foot Locker Europe operations. Partially offsetting these increases were declines in our Lady Foot Locker and our Runners Point and Sidestep banners. The Lady Foot Locker sales decline primarily represented the effect of store closures. The Runners Point and Sidestep banners continued to experience sales declines during 2016 as a result of assortment and traffic challenges. During 2016, we continued our focus on improving these banners by better diversifying and refining our product offerings, along with providing a more elevated in-store experience. During 2015 and 2016, we began broadening the assortment in the Runners Point stores beyond performance running to include more lifestyle running products, while the Sidestep stores shifted to lifestyle and casual footwear.
Comparable-store sales increased by 3.6 percent as compared with 2015. Footwear sales continued to be the primary contributor to our sales growth during 2016 and reflected strong gains across men’s, children’s, and women’s footwear categories. Our children’s footwear business had a very successful year, experiencing comparable-store gains across almost all of our store banners, led by sales from Champs Sports and Kids Foot Locker. During 2016, we opened 45 new Kids Foot Locker stores, 16 of which are in Europe or Canada. The addition of these stores reflected our expectation that the momentum of our children’s business would continue. Within footwear, lifestyle running was the strongest category, while our basketball business slightly declined for the year.
Our apparel sales also generated positive results during 2016. This category was led primarily by gains in branded and private-label apparel sales at Champs Sports. Foot Locker Europe’s apparel sales also increased during 2016 and was driven by sales of men’s branded apparel.
Division profit, as a percentage of sales, increased 20 basis points as compared with 2015. During 2016, a $6million non-cash impairment charge was recorded to write down the value of store fixtures and leasehold improvements for 116 Runners Point and Sidestep stores. Excluding the effect of the impairment charge, division profit, as a percentage of sales, increased 30 basis points as compared with 2015. The division profit rate improvement reflected an improved merchandise margin rate due to a lower markdown rate coupled with diligent expense management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Customers |
| 2017 |
| 2016 |
| 2015 |
| |||
|
| ($ in millions) |
| |||||||
Sales |
| $ | 1,109 |
| $ | 1,022 |
| $ | 944 |
|
$ Change |
| $ | 87 |
| $ | 78 |
|
|
|
|
% Change |
|
| 8.5 | % |
| 8.3 | % |
|
|
|
Division profit |
| $ | 135 |
| $ | 143 |
| $ | 142 |
|
Division profit margin |
|
| 12.2 | % |
| 14.0 | % |
| 15.0 | % |
2017 compared with 2016
Comparable-sales for the Direct-to-Customers segment increased 6.9 percent as compared with the prior year. The comparable-sales gain primarily reflected growth in our domestic and international store-banner e-commerce businesses coupled with an increase in our Eastbay business. Internationally, we continued to expand the geographies that we serve in 2017, including most notably launching our e-commerce business in Australia.
25
The footwear category, across men’s, women’s and children’s, was the main driver for the overall comparable-sales gains experienced for this segment. Combined, apparel and accessories sales increased modestly. The men’s and women’s lifestyle running category and men’s basketball styles primarily drove the increase in footwear sales. Additionally, the children’s footwear category contributed to the overall increase.
Direct-to-Customers division profit, as a percent of sales, declined 180 basis points as compared with the prior year. Although sales increased during the year, the gross margin rate declined as a result of increased markdowns due to a more promotional sales environment, including additional free shipping offers that reduced our shipping and handling revenue and thereby deteriorated our gross margin. The gross margin rate decline was partially offset by an expense rate improvement relating to lower marketing costs and incentive compensation.
2016 compared with 2015
Comparable-sales for the Direct-to-Customers segment increased 8.8 percent as compared with 2015. Our domestic and international store-banner websites continued to represent the majority of the overall growth in sales, which was partially offset by declines in the Eastbay, Runners Point, and Sidestep e-commerce businesses. The overall increase in sales was led by our footwear category. Consistent with our Athletic Stores segment, footwear sales increased in men’s, women’s, and children’s. The positive sales increase in men’s footwear was primarily driven by strong gains by the Jordan brand. The increase in women’s footwear was driven by casual styles.
Direct-to-Customers division profit, as a percent of sales, declined 100 basis points as compared with 2015. The decline in the division profit rate reflected increased spending in marketing-related costs, which was incurred in order to drive traffic to our websites. Also contributing to the decline in the division profit rate was a decrease in the gross margin rate as a result of greater promotional activity by our domestic e-commerce business, especially Eastbay.
Corporate Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
|
| ($ in millions) | |||||||
Corporate expense |
| $ | 48 |
| $ | 70 |
| $ | 77 |
$ Change |
| $ | (22) |
| $ | (7) |
|
|
|
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. Depreciation and amortization included in corporate expense was $16 million, $14 million, and $11 million in 2017, 2016, and 2015, respectively.
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $4 million in 2017, thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $18 million as compared to 2016. This was primarily due to a $13 million decline in incentive compensation, which reflects the Company’s underperformance relative to its plan. Share-based compensation declined by $7 million and is also primarily related to the portion of share-based compensation that is tied directly to the Company’s performance. Additionally, the decline in corporate expense also reflects a decrease of $4 million relating to the prior-year corporate headquarters relocation costs. These decreases were partially offset by a $2 million litigation charge, increased corporate support costs, such as information technology and real estate management, and increased depreciation and amortization expense. The effect of the 53rd week on corporate expense was not significant.
Corporate expense decreased by $7 million in 2016 as compared with 2015. The annual adjustment of the allocation of corporate expense to the operating divisions reduced corporate expense by $9 million. This was partially offset by an increase of $3 million in depreciation and amortization included in corporate expense. During 2016, we also incurred $4 million of expenses related to our corporate headquarters relocation within New York City, as compared with $3 million spent during 2015. The remaining change primarily reflected lower incentive compensation expense in 2016.
26
Liquidity and Capital Resources
Liquidity
Liquidity
Our primary source of liquidity has been cash flow from earnings,operations, while the principal uses of cash have been:been to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internetinternet 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, and amounts available under our credit agreement will be adequate to fund these requirements.
As of February 3, 2018,On March 19, 2020, in order to increase our cash position and help preserve our financial flexibility, we had $849have drawn $330 million of cash and cash equivalents,our credit facility. This is a precautionary measure in light of which $669 million was held in foreign jurisdictions. After accounting for the deemed repatriation tax required by the Tax Act, our offshore cash can be repatriated without significant additional U.S. income tax cost. In connection with the Tax Act, the Company recorded a $99 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings and related items. The tax for the mandatory deemed repatriation is payable over an 8 year period beginning with 2017, 8 percent is payable for years 1 to 5, 15 percent in year 6, 20 percent in year 7, and 25 percentcurrent uncertainty in the final year.global markets resulting from the COVID-19 pandemic.
2019 Form 10-K Page 26
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. Such 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 February 3, 2018,1, 2020, approximately $758$867 million remained available under our current $1.2 billion share repurchase program.
On February 20, 2018,19, 2020, the Board of Directors declared a quarterly dividend of $0.345$0.40 per share to be paid on May 4, 2018,2, 2020, representing an 11a 5 percent increase over the previous quarterly per share amount.
As discussed further in the Legal Proceedings note under “Item 8. Financial Statements and Supplementary Data,” during 2017, in connection with our pension litigation, we recorded pre-tax charges of $178 million. The accrued amount as of February 3, 2018 was $278 million and is classified as a long-term liability. The Company has exhausted all legal remedies and will reform the pension plan. The Company will be working with the plaintiffs’ counsel and the court on the specific steps needed to implement the trial court’s judgment. During the fourth quarter of 2017, we deposited $150 million into a qualified settlement fund, classified as restricted cash. This settlement fund will be used for future pension contributions and plaintiffs’ legal costs related to the pension plan reformation. Also, the Company expects to make a $128 million contribution to the pension plan during 2018. The timing and the amount of actual 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 suppliers for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, uncertainties caused by COVID-19, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our liquidity needs from business operations.
Maintaining access to merchandise that we consider appropriate for our business may be subject to the policies and practices of our key suppliers. Therefore, we believe that it is critical to continue to maintain satisfactory relationships with these key suppliers. In 2017 and 2016, weWe purchased approximately 9391 percent and 9190 percent respectively, of our merchandise from our top five suppliers in 2019 and 2018, respectively, and expect to continue to obtain a significant percentage of our athletic product from these suppliers in future periods. Approximately 6771 percent in 2017 and 6866 percent in 2016 was purchased from one supplier, — Nike, Inc., in 2019 and 2018, respectively.
Planned capital expenditures in 20182020 are $229$271 million, andwith additional lease acquisition costs related to our operations in Europe of $4 million. However, due to the current events related to COVID-19, we are $1 million. Capital expenditures reflect $124currently reevaluating our total capital spending plans. Included in the planned amount is $148 million dedicated to elevating our customers’ in-store experience through continued relocation and remodels in major cities and key markets. It also includes the remodeling andor expansion of over 100approximately 125 existing stores, as well as the planned opening of approximately 4065 new stores, primarily related toincluding the continued expansion of Foot Locker in Europeour community-based “power” store format, which provides a pinnacle retail experience that delivers connected customer interactions through service, experience, product, and our entry into Asia in a limited numbersense of locations.
27
Plannedcommunity. Capital spending for 2018our expansion in Asia is also included. The capital plan for 2020 also includes $105$123 million for digital and other investments, including additional enhancements to our mobile and web platforms, the global roll-out of our new point-of-sale software, expanding data analytics capabilities, and supply chain initiatives. We have the ability to revise and reschedule much of the anticipated capital expenditure program should our financial position require it.
Operating Activities
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Net cash provided by operating activities | | $ | 696 | | $ | 781 | | $ | 813 |
$ Change | | $ | (85) | | $ | (32) | | $ | (31) |
The amount provided by operating activities reflects income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, non-cash gains, depreciation and amortization, deferred income taxes, and share-based compensation expense.
The decline in cash provided by operating activities in 2019 compared with the prior year reflected a decrease to net income and lower inflows associated with changes in working capital. During 2019, we contributed $55 million to our U.S. qualified pension plan, as compared with $128 million in 2018. The amounts and timing of pension contributions are dependent on several factors, including asset performance.
Cash paid for income taxes was $201 million, $184 million, and $237 million for 2019, 2018, and 2017, respectively.
2019 Form 10-K Page 27
Investing Activities
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Net cash used in investing activities | | $ | 235 | | $ | 274 | | $ | 289 |
$ Change | | $ | (39) | | $ | (15) | | $ | 23 |
Capital expenditures in 2019 of $187 million was consistent with the prior year. During 2019, we completed the remodeling or relocation of 148 existing stores and opened 67 new stores.
Investing activities for 2019 included $50 million related to various minority investments as compared with $89 million in 2018. Also included in 2019 is $2 million related to the sale of a building. Investing activities for 2018 included $2 million received in insurance proceeds for fixed assets from an insurance claim relating to Hurricane Maria.
Financing Activities
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Net cash used in financing activities | | $ | 493 | | $ | 527 | | $ | 616 |
$ Change | | $ | (34) | | $ | (89) | | $ | 60 |
Cash used in financing activities consisted primarily of our return to shareholders initiatives, including our share repurchase program and cash dividend payments, as follows:
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Share repurchases | | $ | 335 | | $ | 375 | | $ | 467 |
Dividends paid on common stock | |
| 164 | |
| 158 | |
| 157 |
Total returned to shareholders | | $ | 499 | | $ | 533 | | $ | 624 |
During 2019, we repurchased 8,374,523 shares of our common stock under our share repurchase programs. Additionally, we declared and paid dividends representing a quarterly rate of $0.38 per share in 2019. During 2019, we paid $2 million to satisfy tax withholding obligations relating to the vesting of share-based equity awards. Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with the employee stock programs of $8 million for 2019.
Free Cash Flow (non-GAAP measure)
In addition to net cash provided by operating activities, we use free cash flow as a useful measure of performance and as an indication of our financial strength and our ability to generate cash. We define free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). We believe the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from underlying operations in a manner similar to the method used by management. Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures.
The following table presents a reconciliation of net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| |||||||||
| 2017 |
| 2016 |
| 2015 | ||||||||||||
| ($ in millions) | ||||||||||||||||
| | | | | | | | ||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||
| | ($ in millions) | |||||||||||||||
Net cash provided by operating activities | $ | 813 |
| $ | 844 |
| $ | 791 | | $ | 696 | | $ | 781 | | $ | 813 |
Capital expenditures |
| (274) |
|
| (266) |
|
| (228) | |
| (187) | |
| (187) | |
| (274) |
Free cash flow | $ | 539 |
| $ | 578 |
| $ | 563 | | $ | 509 | | $ | 594 | | $ | 539 |
Operating Activities
2019 Form 10-K Page 28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| ($ in millions) | |||||||
Net cash provided by operating activities | $ | 813 |
| $ | 844 |
| $ | 791 |
$ Change | $ | (31) |
| $ | 53 |
|
|
|
The amount provided by operating activities reflects income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, deferred income taxes, share-based compensation expense and related tax benefits. The decline in 2017 primarily reflects the decrease in net income partially offset by working capital improvements.
During 2017, we contributed $25 million to our U.S. qualified pension plan. We contributed $33 million to our U.S. qualified pension plan and $3 million to our Canadian qualified pension plan in 2016. During 2015, we contributed $4 million to the U.S. qualified pension plan. The amounts and timing of pension contributions are dependent on several factors, including asset performance. Cash paid for income taxes was $237 million, $341 million, and $283 million for 2017, 2016, and 2015, respectively.
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| ($ in millions) | |||||||
Net cash used in investing activities | $ | 289 |
| $ | 266 |
| $ | 230 |
$ Change | $ | 23 |
| $ | 36 |
|
|
|
Capital expenditures in 2017 were $274 million, an increase of $8 million as compared with the prior year. The increase was due to increased spending on technology projects and cash payments related to the prior year capital program. During 2017, we completed the remodeling or relocation of 183 existing stores and opened 94 new stores. As of the end of fiscal 2017, approximately 40 percent of our Foot Locker, Champs Sports, and Footaction stores have been remodeled to their respective new store formats. Capital expenditures in 2016 were $266 million, primarily related to the remodeling or relocation of 218 existing stores, and the build-out of 96 new stores. The increase in 2016 as compared with 2015 primarily related to our corporate headquarters build out and two new flagship stores.
28
The Company invested $15 million in a privately-held company during 2017, which was accounted for as a cost method investment.
During the third quarter of 2015, we completed an asset acquisition for $2 million involving 10 previously franchised Runners Point and Sidestep stores in Switzerland.
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| ($ in millions) | |||||||
Net cash used in financing activities | $ | 616 |
| $ | 556 |
| $ | 500 |
$ Change | $ | 60 |
| $ | 56 |
|
|
|
Cash used in financing activities consisted primarily of our return to shareholders initiatives, including our share repurchase program and cash dividend payments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| ($ in millions) | |||||||
Share repurchases | $ | 467 |
| $ | 432 |
| $ | 419 |
Dividends paid on common stock |
| 157 |
|
| 147 |
|
| 139 |
Total returned to shareholders | $ | 624 |
| $ | 579 |
| $ | 558 |
During 2017, 2016, and 2015, we repurchased 12,413,590 shares, 6,984,643 shares, and 6,693,100 shares of our common stock under our share repurchase programs, respectively. Additionally, the Company declared and paid dividends representing a quarterly rate of $0.31, $0.275, and $0.25 per share in 2017, 2016, and 2015, respectively. During 2017, 2016 and 2015, we paid $10 million, $7 million and $9 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards. Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with the employee stock programs of $18 million, $33 million, and $69 million for 2017, 2016, and 2015, respectively.
During 2016, we paid fees of $2 million in connection with the credit agreement, see below for further details. During 2016 and 2015, we made payments relating to capital lease obligations of $1 million and $2 million, respectively. These obligations were recorded in connection with the acquisition of the Runners Point Group.
Capital Structure
On May 19, 2016, we entered into a credit agreement with our banks (“2016 Credit Agreement”). The 2016 Credit Agreement provides for a $400 million asset-based revolving credit facility maturing on May 19, 2021. During the term of the 2016 Credit Agreement, we may also increase the commitments by up to $200 million, subject to customary conditions. Interest is determined, at our option, by the federal funds rate plus a margin of 0.125 percent to 0.375 percent, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 1.125 percent to 1.375 percent depending on availability under the 2016 Credit Agreement. In addition, we are paying a commitment fee of 0.20 percent per annum on the unused portion of the commitments.
The 2016 Credit Agreement provides for a security interest in certain of our domestic store assets, including inventory assets, accounts receivable, cash deposits, and certain insurance proceeds. We are not required to comply with any financial covenants unless certain events of default have occurred and are continuing, or if availability under the 2016 Credit Agreement does not exceed the greater of $40 million and 10 percent of the Loan Cap (as defined in the 2016 Credit Agreement). There are no restrictions relating to the payment of dividends and share repurchases as long as no default or event of default has occurred and the aggregate principal amount of unused commitments under the 2016 Credit Agreement is not less than 15 percent of the lesser of the aggregate amount of the commitments and the Borrowing Base, determined as of the preceding fiscal month and on a proforma basis for the following six fiscal months. We do not currently expect to borrow under the facility in 2018, other than amounts used to support standby letters of credit.
Credit Rating
As of March 29, 2018,27, 2020, our corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BB+ and Ba1, respectively. In addition, Moody’s Investors Service has rated our senior unsecured notes Ba2.
29
Debt Capitalization and Equity (non-GAAP Measure)
ForHistorically for purposes of calculating debt to total capitalization, we includeincluded the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases isand therefore it was considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 2.5 percent to 14.5 percent, which represent our incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believebelieved that the inclusion of the present value of operating leases in total debt iswas useful to our investors, credit constituencies, and rating agencies. In 2019, we adopted the new lease accounting standard which requires leases to be recorded on the balance sheet.
| | | | | | | |
|
| 2019 |
| 2018 |
| ||
| | ($ in millions) |
| ||||
Long-term debt | | $ | 122 | | $ | 124 | |
Operating lease liability | |
| 3,196 | |
| — | |
Present value of operating leases (1) | |
| — | |
| 3,447 | |
Total debt including the present value of operating leases | |
| 3,318 | |
| 3,571 | |
Less: | |
|
| |
|
| |
Cash and cash equivalents | |
| 907 | |
| 891 | |
Total net debt including the present value of operating leases | |
| 2,411 | |
| 2,680 | |
Shareholders’ equity | |
| 2,473 | |
| 2,506 | |
Total capitalization | | $ | 4,884 | | $ | 5,186 | |
Total net debt capitalization percent | |
| — | % |
| — | % |
Total net debt capitalization percent including the present value of operating leases | |
| 49.4 | % |
| 51.7 | % |
(1) | The determination of the capitalized operating leases prior to the adoption of the new lease accounting standard was calculated on a lease-by-lease basis and represented the best estimate of the lease liability using various discount rates ranging from 1.7 percent to 14.5 percent. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
| ($ in millions) | |||||
Long-term debt and obligations under capital leases | $ | 125 |
| $ | 127 |
|
Present value of operating leases |
| 3,729 |
|
| 3,469 |
|
Total debt including the present value of operating leases |
| 3,854 |
|
| 3,596 |
|
Less: |
|
|
|
|
|
|
Cash and cash equivalents |
| 849 |
|
| 1,046 |
|
Total net debt including the present value of operating leases |
| 3,005 |
|
| 2,550 |
|
Shareholders’ equity |
| 2,519 |
|
| 2,710 |
|
Total capitalization | $ | 5,524 |
| $ | 5,260 |
|
Total net debt capitalization percent |
| — | % |
| — | % |
Total net debt capitalization percent including the present value of operating leases |
| 54.4 | % |
| 48.5 | % |
Including the present value of operating leases, net debt capitalization percent increased 590decreased by 230 basis points in 2017,2019, primarily reflecting the effect of new high-profile leasesshorter average lease terms, additional stores that are operating on a month-to-month basis, additional stores paying variable rents, and ongoing lease renewals coupled with foreign exchange fluctuations. Also contributing to the net capitalization increase during 2017 was a $197 million decline in our cash and cash equivalents, which primarily reflected the $150 million deposit to a qualified settlement fund in connection with the pension litigation matter.
2019 Form 10-K Page 29
Contractual Obligations and Commitments
The following tables represent the scheduled maturities of the Company’sour contractual cash obligations and other commercial commitments at February 3, 2018:1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
| Payments Due by Fiscal Period | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | | | | Payments Due by Fiscal Period | |||||||||||||||||||||||||
Contractual Cash |
|
|
|
|
|
|
|
|
|
|
|
| 2023 and | | | | | | | | | | | | | | 2025 and | |||
Obligations |
| Total |
| 2018 |
| 2019-2020 |
| 2021-2022 |
| Beyond |
| Total |
| 2020 |
| 2021-2022 |
| 2023-2024 |
| Beyond | ||||||||||
|
| ($ in millions) | ||||||||||||||||||||||||||||
| | ($ in millions) | ||||||||||||||||||||||||||||
Long-term debt (1) |
| $ | 162 |
| $ | 11 |
| $ | 22 |
| $ | 129 |
| $ | — | | $ | 140 | | $ | 11 | | $ | 129 | | $ | — | | $ | — |
Operating leases (2) |
| 4,680 |
|
| 678 |
|
| 1,231 |
|
| 1,050 |
|
| 1,721 | |
| 3,889 | |
| 673 | |
| 1,185 | |
| 902 | |
| 1,129 | |
Other long-term liabilities (3) |
| 217 |
|
| 145 |
|
| 14 |
|
| 20 |
|
| 38 | |
| 10 | |
| 7 | |
| — | |
| 3 | |
| — | |
Total contractual cash obligations |
| $ | 5,059 |
| $ | 834 |
| $ | 1,267 |
| $ | 1,199 |
| $ | 1,759 | | $ | 4,039 | | $ | 691 | | $ | 1,314 | | $ | 905 | | $ | 1,129 |
(1) | |||||||||||||||
| The amounts presented above represent the contractual maturities of our long-term debt, including interest; however, it excludes the unamortized gain of the interest rate swap of |
(2) | The amounts presented represent the future minimum lease payments under non-cancellable operating leases. Amounts do not include $35 million of minimum future payments for leases which have not yet commenced. In addition to minimum rent, certain of our leases require the payment of additional costs for insurance, maintenance, percentage rent, and other costs. These |
(3) | Other liabilities in the Consolidated Balance Sheet at February | ||||||||||||||
| | | | | | | | | | | | | | | |
| | | | | Payments Due by Fiscal Period | ||||||||||
Other Commercial | | | | | | | | | | | | | | 2025 and | |
Commitments |
| Total |
| 2020 |
| 2021-2022 |
| 2023-2024 |
| Beyond | |||||
| | ($ in millions) | |||||||||||||
Purchase commitments (1) | | $ | 2,598 | | $ | 2,598 | | $ | — | | $ | — | | $ | — |
Other (2) | |
| 369 | |
| 143 | |
| 205 | |
| 21 | |
| — |
Total other commercial commitments | | $ | 2,967 | | $ | 2,741 | | $ | 205 | | $ | 21 | | $ | — |
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Fiscal Period | ||||||||||
Other Commercial |
|
|
|
|
|
|
|
|
|
|
|
| 2023 and | ||
Commitments |
| Total |
| 2018 |
| 2019-2020 |
| 2021-2022 |
| Beyond | |||||
|
| ($ in millions) | |||||||||||||
Purchase commitments (1) |
| $ | 2,130 |
| $ | 2,130 |
| $ | — |
| $ | — |
| $ | — |
Other (2) |
|
| 44 |
|
| 21 |
|
| 22 |
|
| 1 |
|
| — |
Total other commercial commitments |
| $ | 2,174 |
| $ | 2,151 |
| $ | 22 |
| $ | 1 |
| $ | — |
(1) | |
| Represents open purchase orders, as well as other commitments for merchandise purchases, at February |
(2) | Represents payments required by non-merchandise purchase agreements. |
Off-Balance Sheet Arrangements
The majority of our contractual obligations relate to operating leases for our stores. Future scheduled lease payments under non-cancellable operating leases as of February 3, 2018 are described in the table under Contractual Obligations and Commitments on the preceding page and with additional information in the Leases note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
We have not entered into any transactions with unconsolidated entities that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity. Also, our financial policies prohibit the use of derivatives for which there is no underlying exposure.
In connection with the sale of various businesses and assets, we may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, we believe that the resolution of such contingencies will not significantly affect our consolidated financial position, liquidity, or results of operations. We also operate certain stores for which lease agreements are in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that leases will be executed.
Critical Accounting Policies
Our responsibility for integrity and objectivity in the preparation and presentation of the financial statements requires diligent application of appropriate accounting policies. Generally, our accounting policies and methods are those specifically required by U.S. generally accepted accounting principles.GAAP. Included in the Summary of Significant Accounting Policies note in “Item 8. Consolidated Financial Statements and Supplementary Data” is a summary of the most significant accounting policies. In some cases, we are required to calculate amounts based on estimates for matters that are inherently uncertain. We believe the following to be the most critical of those accounting policies that necessitate subjective judgments.
2019 Form 10-K Page 30
Merchandise Inventories and Cost of Sales
Merchandise inventories for the Athletic Stores segmentour stores are valued at the lower of cost or market using the retail inventory method (“RIM”). The RIM is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail method,RIM, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis.
The RIM is a system of averages that requires estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts. Judgment is required for these estimates and assumptions, as well as to differentiate between promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost or market. Reserves are established based on current selling prices when the inventory has not been marked down to market. The failure to take permanent markdowns on a timely basis may result in an overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes many factors, including the current retail environment, inventory levels, and the age of the item. We believe this method and its related assumptions, which have been consistently applied, to be reasonable.
Leases
31We determine if an arrangement is a lease at inception. Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use. Our lease term includes options to extend or terminate a lease only when it is reasonably certain that we will exercise that option.
As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rates based on the remaining lease term to determine the present value of future lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Our incremental borrowing rate is calculated as the weighted average risk-free (sovereign) rate plus a spread to reflect our current unsecured credit rating plus the fees to borrow under our existing credit facility. The weighted average risk-free (sovereign) rates were based on the Treasury BVAL rates curve in Bloomberg. In the regions that we have stores, rates were developed for 3, 5, 7, 10, and 15 years. The weighting given to each region was determined by the number of stores in each region.
The spread to reflect our current credit rating represented the spread between U.S. Treasury rates and Bloomberg’s USD BVAL curve for non-financial companies with the Company’s credit rating. The fees to borrow represent the facility fees paid on the Company’s revolving credit facility, which is 20 basis points.
Impairment of Long-Lived Tangible Assets and GoodwillRight-of-Use Assets
| |
| We perform an impairment review when circumstances indicate that the carrying value of long-lived tangible assets and right-of-use assets may not be |
| |
During |
2019 Form 10-K Page 31
Recoverability of Goodwill
| |
| We review goodwill for impairment annually during the first quarter of |
| |
In performing the qualitative assessment, we consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in our stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed using a two-step test. | |
| The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step, |
| In |
|
32
Legal Contingencies
We are exposed to various legal proceedings and claims arising in the ordinary course of business. We record a liability when a loss is probable and the amount of loss can be reasonably estimated. The accrual is recorded based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and disclose the estimated range. In 2017, we recorded pre-tax charges of $178 million related to the pension plan litigation. We previously recorded a pre-tax charge of $100 million related to this matter in 2015.
There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. We believe the accruals recorded within the consolidated financial statements properly reflect loss exposures that are both probable and reasonably estimable. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
Pension and Postretirement Liabilities
We review all assumptions used to determine our obligations for pension and postretirement liabilities annually with our independent actuaries, taking into consideration existing and future economic conditions and our intentions with regard to the plans. The assumptions used are:
Long-Term Rate of Return | The expected rate of return on plan assets is the long-term rate of return expected to be earned on the plans’ assets and is recognized as a component of pension expense. The rate is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce the variability of future contributions. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy. The weighted-average long-term rate of return used to determine | |
| | |
| | A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased |
| ||
| |
2019 Form 10-K Page 32
Discount Rate | | An assumed discount rate is used to measure the present value of future cash flow obligations of the plans and the interest cost component of pension expense and postretirement income. The cash flows are then discounted to their present value and an overall discount rate is determined. The discount rate The weighted-average discount rates used to determine the |
| | Changing the weighted-average discount rate by 50 basis points would have changed the accumulated benefit obligation of the pension plans at February |
|
33
| | |
Trend Rate | | We maintain two postretirement medical plans, one covering certain executive officers and key employees (“SERP Medical Plan”), and the other covering all other associates. With respect to the SERP Medical Plan, a With respect to the postretirement medical plan covering all other associates, there is limited risk to us for increases in health care costs since, beginning in 2001, new retirees have assumed the full expected costs and then-existing retirees have assumed all increases in such costs. |
| | |
Mortality Assumptions |
| The mortality For the SERP Medical Plan, the mortality assumption used to value the |
Income Taxes
In accordance with U.S. GAAP, deferredDeferred tax assets are recognized for tax credit and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We are required to estimate taxable income for future years by taxing jurisdiction and to use our judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. Estimates of taxable income are based upon our long-range strategic plans.
A one percent change in the overall statutory tax rate for 20172019 would have resulted in a change of $1$3 million to the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense depending on whether the tax rate change was a decrease or an increase.
We have operations in multiple taxing jurisdictions, and we are subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require us to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.
2019 Form 10-K Page 33
The Tax Act significantly changes how the U.S. taxes corporations. It requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the law and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Department of the Treasury, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the law will be applied or otherwise administered that is different from our interpretation underlying our income tax accruals. As we complete our analysis of the Tax Act, collect data and prepare the necessary calculations, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially affect our provision for income taxes in the period in which the adjustments are made.
Excluding the effect of any nonrecurring items that may occur, we expect the 20182020 effective tax rate to approximatebe in the range of 27.5 to 28 percent. The actual tax rate will vary if the level of stock option exercise activity and the stock price at the vesting or exercise date differs from our expectations. Additionally, the tax rate will also depend on the level and mix of income earned in the United States, as compared with our international operations.
Recent Accounting Pronouncements
Descriptions of the recently issued accounting principles, and the accounting principles adopted by us during the year ended February 3, 20181, 2020 are included in the Summary of Significant Accounting Policies note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding foreign exchange risk management is included in the Financial Instruments and Risk Management note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
Item 8. Consolidated Financial Statements and Supplementary Data
The following Consolidated Financial Statements of the Company are included as part of this Report:
| Consolidated Statements of Operations for the fiscal years ended: |
| February 1, 2020 |
● | February 2, 2019 |
● | February 3, 2018 |
|
|
|
|
| Consolidated Statements of Comprehensive Income for the fiscal years ended: |
| February 1, 2020 |
● | February 2, 2019 |
● | February 3, 2018 |
|
|
|
|
| Consolidated Balance Sheets as of: |
| February |
|
|
| Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended: |
| February 1, 2020 |
● | February 2, 2019 |
● | February 3, 2018 |
|
|
|
|
| Consolidated Statements of Cash Flows for the fiscal years ended: |
| February 1, 2020 |
● | February 2, 2019 |
● | February 3, 2018 |
|
|
|
|
2019 Form 10-K Page 34
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders of
Foot Locker, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries (the “Company”)Company) as of February 3, 20181, 2020 and January 28, 2017,February 2, 2019, the related consolidated statements of operations, comprehensive income, stockholders’changes in shareholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended February 3, 20181, 2020 and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 20181, 2020 and January 28, 2017,February 2, 2019, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended February 3, 2018,1, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 3, 2018,1, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”,Commission, and our report dated March 29, 201827, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases effective February 3, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
2019 Form 10-K Page 35
Impairment of long-lived tangible assets and right-of-use assets
As discussed in Notes 1 and 3 to the consolidated financial statements, the long-lived tangible assets and the right-of-use assets of the Company as of February 1, 2020 were $824 million and $2,899 million, respectively. The Company performs an impairment review when circumstances indicate that the carrying amount of the long-lived tangible assets and right-of-use assets may not be recoverable. Under the Company’s policy in determining whether an impairment indicator exists, a triggering event comprises measurable operating performance criteria and qualitative measures at the lowest level for which identifiable cash flows are largely independent of cash flows for other assets and liabilities, which is at the store level. The Company also evaluates for triggering events at the banner level. If a triggering event is identified, the Company compares the carrying amount of the asset group with the estimated future cash flows expected to result from the use of the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset group with its estimated fair value. The estimation of fair value of the asset group is measured by discounting expected future cash flows using a risk adjusted discount rate and current market-based information for right-of-use assets. During the year ended February 1, 2020, the Company’s impairment review resulted in impairment charges of $37 million related to its Footaction banner, other identified underperforming stores, and a vacant store.
We identified the evaluation of the impairment of store-level long-lived tangible assets and right-of-use assets, which included the identification of triggering events, estimation of undiscounted future cash flows, and the estimation of the fair value of the asset group, as a critical audit matter. The identification of triggering events included quantitative and qualitative considerations that involved a high degree of auditor judgment to evaluate. Specifically, qualitative considerations of the business environment, including banner specific product mix, and whether these considerations would impact the future operating performance of the banner were challenging to test as minor changes to those assumptions could have a significant effect on the Company’s impairment assessment. The estimation of undiscounted future cash flows of the stores within the Footaction banner and the other identified underperforming stores within other banners involved a high degree of auditor judgment to evaluate. Specifically, the undiscounted future cash flows included estimation of store specific operating measures. The estimation of the fair value of the asset group, when necessary, involved a high degree of auditor judgment to evaluate. Specifically, the determination of fair value of a right of use asset includes use of market-based comparatives that were challenging to test as minor changes to those assumptions could have a significant effect on the determination of the fair value of the asset group, which impacted the measurement and allocation of the impairment loss within the asset group.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s long-lived tangible asset and right-of-use asset impairment assessment process, including controls related to the identification of triggering events, the estimation of undiscounted future cash flows attributed to specific asset groups and the evaluation of market comparatives used to estimate the fair value of the right-of-use assets. We compared the Company’s historical estimates of future cash flows to actual results to assess the Company’s ability to accurately forecast. In addition, we involved a valuation professional with specialized skills and knowledge, who assisted in:
● | evaluating the Company’s valuation methodologies used to determine the fair value of the right-of-use assets; and, |
● | assessing the significant assumptions used to determine the fair value of the right-of-use assets, including market comparables. |
2019 Form 10-K Page 36
Adoption of Accounting Standards Codification Topic 842, Leases
As discussed in Notes 1 and 15 to the consolidated financial statements, the Company adopted ASC Topic 842, Leases, on February 3, 2019. ASC Topic 842 requires, among other things, that a lessee recognize a right-of-use asset and lease liability for all operating leases with a lease term greater than 12 months. As part of the adoption, the Company recorded right-of-use assets and lease obligations of $3,148 million and $3,422 million, respectively. Additionally, upon adoption, the Company evaluated certain right-of-use assets for impairment and determined that approximately $29 million of impairment was required related to newly recognized right-of-use assets that would have been impaired in previous periods. The Company recorded an impairment of certain right-of-use-assets as of February 3, 2019, net of related income tax effects, as a $26 million reduction of beginning retained earnings.
We identified the adoption of ASC Topic 842, specifically the evaluation of the discount rates used to discount the unpaid lease payments to present value, known as the incremental borrowing rate, and the assessment of the initial carrying amount of the right-of-use assets associated with previously impaired stores for impairment, as a critical audit matter. The evaluation of the incremental borrowing rates and the related methodology adopted by the Company involved a high degree of auditor judgment due to the subjectivity of determining the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Additionally, the assessment of the initial fair value of the right-of-use assets of previously impaired stores involved a high degree of auditor judgment due to the subjectivity of estimating the fair value of the right-of-use assets using current market-based information.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s adoption of ASC Topic 842, including controls related to the determination of inputs to the incremental borrowing rate based on the adopted methodology and the market comparatives used to estimate the fair value of the right-of-use assets. We involved a valuation professional with specialized skills and knowledge, who assisted in:
● | evaluating the Company’s methodologies used to estimate the incremental borrowing rate and the fair value of the right-of-use assets; |
● | independently developing a range of discount rates using market-based information for comparable entities and comparing the Company’s incremental borrowing rates to this range of discount rates; and, |
● | assessing the significant assumptions used to estimate the fair value of the right-of-use assets, including market comparables. |
/s/ KPMG LLP
We have served as the Company’s auditor since 1995.
New York, New York
March 29, 2018 27, 2020
2019 Form 10-K Page 37
36
FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
|
| (in millions, except per share amounts) | |||||||
Sales | | $ | 8,005 | | $ | 7,939 | | $ | 7,782 |
| | | | | | | | | |
Cost of sales | |
| 5,462 | |
| 5,411 | |
| 5,326 |
Selling, general and administrative expenses | |
| 1,650 | |
| 1,614 | |
| 1,501 |
Depreciation and amortization | |
| 179 | |
| 178 | |
| 173 |
Impairment and other charges | |
| 65 | |
| 37 | |
| 211 |
Income from operations | |
| 649 | |
| 699 | |
| 571 |
| | | | | | | | | |
Interest income, net | |
| 11 | |
| 9 | |
| 2 |
Other income, net | |
| 12 | |
| 5 | |
| 5 |
Income before income taxes | |
| 672 | |
| 713 | |
| 578 |
Income tax expense | |
| 181 | |
| 172 | |
| 294 |
Net income | | $ | 491 | | $ | 541 | | $ | 284 |
| | | | | | | | | |
Basic earnings per share | | $ | 4.52 | | $ | 4.68 | | $ | 2.23 |
Weighted-average shares outstanding | |
| 108.7 | |
| 115.6 | |
| 127.2 |
| | | | | | | | | |
Diluted earnings per share | | $ | 4.50 | | $ | 4.66 | | $ | 2.22 |
Weighted-average shares outstanding, assuming dilution | |
| 109.1 | |
| 116.1 | |
| 127.9 |
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
|
| (in millions, except per share amounts) | |||||||
Sales |
| $ | 7,782 |
| $ | 7,766 |
| $ | 7,412 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 5,326 |
|
| 5,130 |
|
| 4,907 |
Selling, general and administrative expenses |
|
| 1,501 |
|
| 1,472 |
|
| 1,415 |
Depreciation and amortization |
|
| 173 |
|
| 158 |
|
| 148 |
Litigation and other charges |
|
| 211 |
|
| 6 |
|
| 105 |
Income from operations |
|
| 571 |
|
| 1,000 |
|
| 837 |
|
|
|
|
|
|
|
|
|
|
Interest (income) / expense, net |
|
| (2) |
|
| 2 |
|
| 4 |
Other income |
|
| (5) |
|
| (6) |
|
| (4) |
Income before income taxes |
|
| 578 |
|
| 1,004 |
|
| 837 |
Income tax expense |
|
| 294 |
|
| 340 |
|
| 296 |
Net income |
| $ | 284 |
| $ | 664 |
| $ | 541 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
| $ | 2.23 |
| $ | 4.95 |
| $ | 3.89 |
Weighted-average shares outstanding |
|
| 127.2 |
|
| 134.0 |
|
| 139.1 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
| $ | 2.22 |
| $ | 4.91 |
| $ | 3.84 |
Weighted-average shares outstanding, assuming dilution |
|
| 127.9 |
|
| 135.1 |
|
| 140.8 |
See Accompanying Notes to Consolidated Financial Statements.
2019 Form 10-K Page 38
37
FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
|
| ($ in millions) | |||||||
Net income | | $ | 491 | | $ | 541 | | $ | 284 |
Other comprehensive income, net of income tax | |
|
| |
|
| |
|
|
| | | | | | | | | |
Foreign currency translation adjustment: | |
|
| |
|
| |
|
|
Translation adjustment arising during the period, net of income tax (benefit) of $(1), $(9), and $18 million, respectively | |
| (20) | |
| (75) | |
| 114 |
| | | | | | | | | |
Reclassification due to the adoption of ASU 2018-02 | | | — | | | — | | | 4 |
| | | | | | | | | |
Cash flow hedges: | |
|
| |
|
| |
|
|
Change in fair value of derivatives, net of income tax benefit of $1, $-, and $- million, respectively | |
| (3) | |
| — | |
| (1) |
| | | | | | | | | |
Available for sale security: | | | | | | | | | |
Unrealized gain on available-for-sale security | | | — | | | — | | | 1 |
| | | | | | | | | |
Pension and postretirement adjustments: | |
|
| |
|
| |
|
|
Net actuarial gain (loss) on foreign currency fluctuations arising during the year, net of income tax (benefit) expense of $(3), $(8), and $2 million, respectively. | | | (9) | | | (24) | | | 4 |
| | | | | | | | | |
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $3, $3, and $4 million, respectively | |
| 8 | |
| 8 | |
| 7 |
| | | | | | | | | |
Reclassification due to the adoption of ASU 2018-02 | | | | | | — | | | (45) |
Comprehensive income | | $ | 467 | | $ | 450 | | $ | 368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
|
| ($ in millions) | |||||||
Net income |
| $ | 284 |
| $ | 664 |
| $ | 541 |
Other comprehensive income, net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment: |
|
|
|
|
|
|
|
|
|
Translation adjustment arising during the period, net of income tax expense (benefit) of $18, $1 and $(2) million, respectively |
|
| 114 |
|
| (8) |
|
| (44) |
Reclassification due to the adoption of ASU 2018-02 |
|
| 4 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of income tax |
|
| (1) |
|
| (1) |
|
| 5 |
|
|
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
| 1 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
Pension and postretirement adjustments: |
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) and foreign currency fluctuations arising during the year, net of income tax expense (benefit) of $2, $4 and $(10) million, respectively |
|
| 4 |
|
| 4 |
|
| (16) |
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $4, $4 and $5 million, respectively |
|
| 7 |
|
| 8 |
|
| 8 |
Reclassification due to the adoption of ASU 2018-02 |
|
| (45) |
|
| — |
|
| — |
Comprehensive income |
| $ | 368 |
| $ | 667 |
| $ | 494 |
See Accompanying Notes to Consolidated Financial Statements.
2019 Form 10-K Page 39
38
FOOT LOCKER, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | | | | | |
|
| February 1, |
| February 2, | ||
|
| ($ in millions) | ||||
ASSETS |
| |
|
| |
|
| | | | | | |
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 907 | | $ | 891 |
Merchandise inventories | |
| 1,208 | |
| 1,269 |
Other current assets | |
| 271 | |
| 358 |
| |
| 2,386 | |
| 2,518 |
Property and equipment, net | |
| 824 | |
| 836 |
Operating lease right-of-use assets | | | 2,899 | | | — |
Deferred taxes | |
| 81 | |
| 87 |
Goodwill | |
| 156 | |
| 157 |
Other intangible assets, net | |
| 20 | |
| 24 |
Other assets | |
| 223 | |
| 198 |
| | $ | 6,589 | | $ | 3,820 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
|
| |
|
|
| | | | | | |
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 333 | | $ | 387 |
Accrued and other liabilities | |
| 343 | |
| 377 |
Current portion of lease obligations | | | 518 | | | — |
| |
| 1,194 | |
| 764 |
Long-term debt | |
| 122 | |
| 124 |
Long-term lease obligations | | | 2,678 | | | — |
Other liabilities | |
| 122 | |
| 426 |
Total liabilities | |
| 4,116 | |
| 1,314 |
Shareholders’ equity | |
| 2,473 | |
| 2,506 |
| | $ | 6,589 | | $ | 3,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| ($ in millions) | ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 849 |
| $ | 1,046 |
Merchandise inventories |
|
| 1,278 |
|
| 1,307 |
Other current assets |
|
| 424 |
|
| 280 |
|
|
| 2,551 |
|
| 2,633 |
Property and equipment, net |
|
| 866 |
|
| 765 |
Deferred taxes |
|
| 48 |
|
| 161 |
Goodwill |
|
| 160 |
|
| 155 |
Other intangible assets, net |
|
| 46 |
|
| 42 |
Other assets |
|
| 290 |
|
| 84 |
|
| $ | 3,961 |
| $ | 3,840 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 258 |
| $ | 249 |
Accrued and other liabilities |
|
| 358 |
|
| 363 |
|
|
| 616 |
|
| 612 |
Long-term debt |
|
| 125 |
|
| 127 |
Other liabilities |
|
| 701 |
|
| 391 |
Total liabilities |
|
| 1,442 |
|
| 1,130 |
Shareholders’ equity |
|
| 2,519 |
|
| 2,710 |
|
| $ | 3,961 |
| $ | 3,840 |
See Accompanying Notes to Consolidated Financial Statements.
2019 Form 10-K Page 40
39
FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | |
|
| Additional Paid-In |
| |
| | |
| | |
| Accumulated |
| | | ||||
| | Capital & | | | | | | | | | | Other | | Total | |||||
| | Common Stock | | Treasury Stock | | Retained | | Comprehensive | | Shareholders' | |||||||||
(shares in thousands, amounts in millions) | | Shares | | Amount | | Shares | | Amount | | Earnings | | Loss | | Equity | |||||
Balance at January 28, 2017 |
| 132,616 | | $ | 900 |
| (1,120) | | $ | (81) | | $ | 2,254 | | $ | (363) | | $ | 2,710 |
Restricted stock issued |
| 169 | | | — | | — | | | — | | | | | | | | | — |
Issued under director and stock plans |
| 608 | | | 11 | | — | | | — | | | | | | | | | 11 |
Share-based compensation expense |
| — | | | 15 | | — | | | — | | | | | | | | | 15 |
Shares of common stock used to satisfy tax withholding obligations |
| — | | | — | | (140) | | | (10) | | | | | | | | | (10) |
Share repurchases |
| — | | | — | | (12,414) | | | (467) | | | | | | | | | (467) |
Reissued - Employee Stock Repurchase Plan ("ESPP") |
| — | | | — | | 110 | | | 8 | | | | | | | | | 8 |
Retirement of treasury stock |
| (12,131) | | | (84) | | 12,131 | | | 487 | | | (403) | | | | | | — |
Net income |
| | | | | | | | | | | | 284 | | | | | | 284 |
Cash dividends declared on common stock ($1.24 per share) |
| | | | | | | | | | | | (157) | | | | | | (157) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | 114 | | | 114 |
Change in cash flow hedges, net of tax |
| | | | | | | | | | | | | | | (1) | | | (1) |
Pension and postretirement adjustments, net of tax |
| | | | | | | | | | | | | | | 11 | | | 11 |
Unrealized gain on available-for-sale security | | | | | | | | | | | | | | | | 1 | | | 1 |
Reclassification due to the adoption of ASU 2018-02 | | | | | | | | | | | | | 41 | | | (41) | | | — |
Balance at February 3, 2018 |
| 121,262 | | $ | 842 |
| (1,433) | | $ | (63) | | $ | 2,019 | | $ | (279) | | $ | 2,519 |
Restricted stock issued |
| 93 | | | — | | — | | | — | | | | | | | | | — |
Issued under director and stock plans |
| 175 | | | 6 | | — | | | — | | | | | | | | | 6 |
Share-based compensation expense |
| — | | | 22 | | — | | | — | | | | | | | | | 22 |
Shares of common stock used to satisfy tax withholding obligations |
| — | | | — | | (36) | | | (1) | | | | | | | | | (1) |
Share repurchases |
| — | | | — | | (7,887) | | | (375) | | | | | | | | | (375) |
Reissued - ESPP |
| — | | | — | | 48 | | | 2 | | | | | | | | | 2 |
Retirement of treasury stock |
| (8,597) | | | (61) | | 8,597 | | | 400 | | | (339) | | | | | | — |
Net income |
| | | | | | | | | | | | 541 | | | | | | 541 |
Cash dividends declared on common stock ($1.38 per share) |
| | | | | | | | | | | | (158) | | | | | | (158) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (75) | | | (75) |
Pension and postretirement adjustments, net of tax |
| | | | | | | | | | | | | | | (16) | | | (16) |
Cumulative effect of the adoption of ASU 2014-09 | | | | | | | | | | | | | 4 | | | | | | 4 |
Cumulative effect of the adoption of ASU 2016-16 | | | | | | | | | | | | | 37 | | | | | | 37 |
Balance at February 2, 2019 |
| 112,933 | | $ | 809 |
| (711) | | $ | (37) | | $ | 2,104 | | $ | (370) | | $ | 2,506 |
Restricted stock issued |
| 89 | | | — | | — | | | — | | | | | | | | | — |
Issued under director and stock plans |
| 187 | | | 3 | | — | | | — | | | | | | | | | 3 |
Share-based compensation expense |
| — | | | 18 | | — | | | — | | | | | | | | | 18 |
Shares of common stock used to satisfy tax withholding obligations |
| — | | | — | | (32) | | | (2) | | | | | | | | | (2) |
Share repurchases |
| — | | | — | | (8,375) | | | (335) | | | | | | | | | (335) |
Reissued - ESPP |
| — | | | — | | 97 | | | 6 | | | | | | | | | 6 |
Retirement of treasury stock |
| (9,021) | | | (66) | | 9,021 | | | 368 | | | (302) | | | | | | — |
Net income |
| | | | | | | | | | | | 491 | | | | | | 491 |
Cash dividends declared on common stock ($1.52 per share) |
| | | | | | | | | | | | (164) | | | | | | (164) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (20) | | | (20) |
Change in cash flow hedges, net of tax | | | | | | | | | | | | | | | | (3) | | | (3) |
Pension and postretirement adjustments, net of tax | | | | | | | | | | | | | | | | (1) | | | (1) |
Cumulative effect of the adoption of Topic 842 | | | | | | | | | | | | | (26) | | | | | | (26) |
Balance at February 1, 2020 |
| 104,188 | | $ | 764 |
| — | | $ | — | | $ | 2,103 | | $ | (394) | | $ | 2,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional Paid-In |
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||
| Capital & |
|
|
|
|
|
|
|
|
| Other |
| Total | ||||||
| Common Stock |
| Treasury Stock |
| Retained |
| Comprehensive |
| Shareholders' | ||||||||||
(shares in thousands, amounts in millions) | Shares |
| Amount |
| Shares |
| Amount |
| Earnings |
| Loss |
| Equity | ||||||
Balance at January 31, 2015 |
| 170,529 |
| $ | 979 |
| (29,665) |
| $ | (944) |
| $ | 2,780 |
| $ | (319) |
| $ | 2,496 |
Restricted stock issued |
| 299 |
|
| — |
| — |
|
| — |
|
|
|
|
|
|
|
| — |
Issued under director and stock plans |
| 2,570 |
|
| 70 |
| — |
|
| — |
|
|
|
|
|
|
|
| 70 |
Share-based compensation expense |
| — |
|
| 22 |
| — |
|
| — |
|
|
|
|
|
|
|
| 22 |
Excess tax benefits from equity awards |
| — |
|
| 35 |
|
|
|
|
|
|
|
|
|
|
|
|
| 35 |
Forfeitures of restricted stock |
| — |
|
| 2 |
| (45) |
|
| (2) |
|
|
|
|
|
|
|
| — |
Shares of common stock used to satisfy tax withholding obligations |
| — |
|
| — |
| (142) |
|
| (9) |
|
|
|
|
|
|
|
| (9) |
Share repurchases |
| — |
|
| — |
| (6,693) |
|
| (419) |
|
|
|
|
|
|
|
| (419) |
Reissued - employee stock purchase plan ("ESPP") |
| — |
|
| — |
| 124 |
|
| 3 |
|
|
|
|
|
|
|
| 3 |
Net income |
|
|
|
|
|
|
|
|
|
|
|
| 541 |
|
|
|
|
| 541 |
Cash dividends declared on common stock ($1.00 per share) |
|
|
|
|
|
|
|
|
|
|
|
| (139) |
|
|
|
|
| (139) |
Translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (44) |
|
| (44) |
Change in cash flow hedges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5 |
|
| 5 |
Pension and postretirement adjustments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8) |
|
| (8) |
Balance at January 30, 2016 |
| 173,398 |
| $ | 1,108 |
| (36,421) |
| $ | (1,371) |
| $ | 3,182 |
| $ | (366) |
| $ | 2,553 |
Restricted stock issued |
| 203 |
|
| — |
| — |
|
| — |
|
|
|
|
|
|
|
| — |
Issued under director and stock plans |
| 1,342 |
|
| 32 |
| — |
|
| — |
|
|
|
|
|
|
|
| 32 |
Share-based compensation expense |
| — |
|
| 22 |
| — |
|
| — |
|
|
|
|
|
|
|
| 22 |
Excess tax benefits from equity awards |
| — |
|
| 20 |
|
|
|
|
|
|
|
|
|
|
|
|
| 20 |
Forfeitures of restricted stock |
| — |
|
| 1 |
| (20) |
|
| (1) |
|
|
|
|
|
|
|
| — |
Shares of common stock used to satisfy tax withholding obligations |
| — |
|
| — |
| (102) |
|
| (7) |
|
|
|
|
|
|
|
| (7) |
Share repurchases |
| — |
|
| — |
| (6,985) |
|
| (432) |
|
|
|
|
|
|
|
| (432) |
Reissued - ESPP |
| — |
|
| — |
| 81 |
|
| 2 |
|
|
|
|
|
|
|
| 2 |
Retirement of treasury stock |
| (42,327) |
|
| (283) |
| 42,327 |
|
| 1,728 |
|
| (1,445) |
|
|
|
|
| — |
Net income |
|
|
|
|
|
|
|
|
|
|
|
| 664 |
|
|
|
|
| 664 |
Cash dividends declared on common stock ($1.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
| (147) |
|
|
|
|
| (147) |
Translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8) |
|
| (8) |
Change in cash flow hedges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
| (1) |
Pension and postretirement adjustments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12 |
|
| 12 |
Balance at January 28, 2017 |
| 132,616 |
| $ | 900 |
| (1,120) |
| $ | (81) |
| $ | 2,254 |
| $ | (363) |
| $ | 2,710 |
Restricted stock issued |
| 169 |
|
| — |
| — |
|
| — |
|
|
|
|
|
|
|
| — |
Issued under director and stock plans |
| 608 |
|
| 11 |
| — |
|
| — |
|
|
|
|
|
|
|
| 11 |
Share-based compensation expense |
| — |
|
| 15 |
| — |
|
| — |
|
|
|
|
|
|
|
| 15 |
Shares of common stock used to satisfy tax withholding obligations |
| — |
|
| — |
| (140) |
|
| (10) |
|
|
|
|
|
|
|
| (10) |
Share repurchases |
| — |
|
| — |
| (12,414) |
|
| (467) |
|
|
|
|
|
|
|
| (467) |
Reissued - ESPP |
| — |
|
| — |
| 110 |
|
| 8 |
|
|
|
|
|
|
|
| 8 |
Retirement of treasury stock |
| (12,131) |
|
| (84) |
| 12,131 |
|
| 487 |
|
| (403) |
|
|
|
|
| — |
Net income |
|
|
|
|
|
|
|
|
|
|
|
| 284 |
|
|
|
|
| 284 |
Cash dividends declared on common stock ($1.24 per share) |
|
|
|
|
|
|
|
|
|
|
|
| (157) |
|
|
|
|
| (157) |
Translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 114 |
|
| 114 |
Change in cash flow hedges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
| (1) |
Pension and postretirement adjustments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
| 11 |
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
|
| 1 |
Reclassification due to the adoption of ASU 2018-02 |
|
|
|
|
|
|
|
|
|
|
|
| 41 |
|
| (41) |
|
| — |
Balance at February 3, 2018 |
| 121,262 |
| $ | 842 |
| (1,433) |
| $ | (63) |
| $ | 2,019 |
| $ | (279) |
| $ | 2,519 |
See Accompanying Notes to Consolidated Financial Statements.Statements.
2019 Form 10-K Page 41
40
FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
|
| ($ in millions) | |||||||
From operating activities: |
| |
|
| |
|
| |
|
Net income | | $ | 491 | | $ | 541 | | $ | 284 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
| |
|
|
Non-cash impairment charges | |
| 48 | |
| 19 | |
| 20 |
Non-cash gain | | | (4) | | | — | | | — |
Depreciation and amortization | |
| 179 | |
| 178 | |
| 173 |
Deferred income taxes | |
| 5 | |
| 9 | |
| 105 |
Share-based compensation expense | |
| 18 | |
| 22 | |
| 15 |
Qualified pension plan contributions | |
| (55) | |
| (128) | |
| (25) |
Change in assets and liabilities: | |
| | |
|
| |
|
|
Merchandise inventories | |
| 51 | |
| (16) | |
| 69 |
Accounts payable | |
| (51) | |
| 135 | |
| — |
Accrued and other liabilities | |
| (40) | |
| 39 | |
| (30) |
Pension litigation accrual | |
| — | |
| 13 | |
| 178 |
Class counsel fees paid in connection with pension litigation | | | — | | | (97) | | | — |
Other, net | |
| 54 | |
| 66 | |
| 24 |
Net cash provided by operating activities | |
| 696 | |
| 781 | |
| 813 |
| | | | | | | | | |
From investing activities: | |
|
| |
|
| |
|
|
Capital expenditures | |
| (187) | |
| (187) | |
| (274) |
Minority investments | |
| (50) | |
| (89) | |
| (15) |
Proceeds from sale of property | | | 2 | | | — | | | — |
Insurance proceeds related to loss on property and equipment | |
| — | |
| 2 | |
| — |
Net cash used in investing activities | |
| (235) | |
| (274) | |
| (289) |
| | | | | | | | | |
From financing activities: | |
|
| |
|
| |
|
|
Purchase of treasury shares | |
| (335) | |
| (375) | |
| (467) |
Dividends paid on common stock | |
| (164) | |
| (158) | |
| (157) |
Proceeds from exercise of stock options | |
| 5 | |
| 5 | |
| 13 |
Treasury stock reissued under employee stock plan | |
| 3 | |
| 2 | |
| 5 |
Shares of common stock repurchased to satisfy tax withholding obligations | |
| (2) | |
| (1) | |
| (10) |
Net cash used in financing activities | |
| (493) | |
| (527) | |
| (616) |
| | | | | | | | | |
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash | |
| (7) | |
| (30) | |
| 50 |
Net change in cash, cash equivalents, and restricted cash | |
| (39) | |
| (50) | |
| (42) |
Cash, cash equivalents, and restricted cash at beginning of year | |
| 981 | |
| 1,031 | |
| 1,073 |
Cash, cash equivalents, and restricted cash at end of period | | $ | 942 | | $ | 981 | | $ | 1,031 |
| | | | | | | | | |
Cash paid during the year: | |
|
| |
|
| |
|
|
Interest | | $ | 11 | | $ | 11 | ��� | $ | 11 |
Income taxes | | $ | 201 | | $ | 184 | | $ | 237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 * |
| 2015 * | |||
|
| ($ in millions) | |||||||
From operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
| $ | 284 |
| $ | 664 |
| $ | 541 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Non-cash impairment charges |
|
| 20 |
|
| 6 |
|
| 5 |
Depreciation and amortization |
|
| 173 |
|
| 158 |
|
| 148 |
Deferred income taxes |
|
| 105 |
|
| (1) |
|
| (6) |
Share-based compensation expense |
|
| 15 |
|
| 22 |
|
| 22 |
Qualified pension plan contributions |
|
| (25) |
|
| (36) |
|
| (4) |
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Merchandise inventories |
|
| 69 |
|
| (25) |
|
| (49) |
Accounts payable |
|
| — |
|
| (31) |
|
| (17) |
Accrued and other liabilities |
|
| (30) |
|
| 27 |
|
| — |
Pension litigation accrual |
|
| 178 |
|
| — |
|
| 100 |
Other, net |
|
| 24 |
|
| 60 |
|
| 51 |
Net cash provided by operating activities |
|
| 813 |
|
| 844 |
|
| 791 |
|
|
|
|
|
|
|
|
|
|
From investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (274) |
|
| (266) |
|
| (228) |
Cash paid for a cost method investment |
|
| (15) |
|
| — |
|
| — |
Purchase of business, net of cash acquired |
|
| — |
|
| — |
|
| (2) |
Net cash used in investing activities |
|
| (289) |
|
| (266) |
|
| (230) |
|
|
|
|
|
|
|
|
|
|
From financing activities: |
|
|
|
| �� |
|
|
|
|
Purchase of treasury shares |
|
| (467) |
|
| (432) |
|
| (419) |
Dividends paid on common stock |
|
| (157) |
|
| (147) |
|
| (139) |
Proceeds from exercise of stock options |
|
| 13 |
|
| 29 |
|
| 64 |
Treasury stock reissued under employee stock plan |
|
| 5 |
|
| 4 |
|
| 5 |
Shares of common stock repurchased to satisfy tax withholding obligations |
|
| (10) |
|
| (7) |
|
| (9) |
Payment of revolving credit agreement costs |
|
| — |
|
| (2) |
|
| — |
Reduction in obligations under capital leases |
|
| — |
|
| (1) |
|
| (2) |
Net cash used in financing activities |
|
| (616) |
|
| (556) |
|
| (500) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
|
| 50 |
|
| 3 |
|
| (6) |
Net change in cash, cash equivalents, and restricted cash |
|
| (42) |
|
| 25 |
|
| 55 |
Cash, cash equivalents, and restricted cash at beginning of year |
|
| 1,073 |
|
| 1,048 |
|
| 993 |
Cash, cash equivalents, and restricted cash at end of year |
| $ | 1,031 |
| $ | 1,073 |
| $ | 1,048 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year: |
|
|
|
|
|
|
|
|
|
Interest |
| $ | 11 |
| $ | 11 |
| $ | 11 |
Income taxes |
| $ | 237 |
| $ | 341 |
| $ | 283 |
See Accompanying Notes to Consolidated Financial Statements.Statements.
* Amounts for 2016 and 2015 have been revised from previously reported amounts to reflect the adoption of new accounting standards in 2017. For additional information, see Note 1, Summary of Significant Accounting Policies.
2019 Form 10-K Page 42
41
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Foot Locker, Inc. and its domestic and international subsidiaries, (the “Company”), all of which are wholly owned. All significant intercompany amounts have been eliminated. As used in these Notes to Consolidated Financial Statements the terms “Foot Locker,” “Company,” “we,” “our,” and “us” refer to Foot Locker, Inc. and its consolidated subsidiaries. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Reporting Year
The fiscal year end for the Company is a 52-week or 53-week period ending the Saturday closest to the last day in January. Fiscal year 2019 and fiscal year 2018 represented the 52 weeks ended February 1, 2020 and February 2, 2019, respectively. Fiscal year 2017 representsrepresented the 53 weeks ended February 3, 2018. Fiscal years 2016 and 2015 represented the 52 weeks ended January 28, 2017 and January 30, 2016, respectively. References to years in this annual report relate to fiscal years rather than calendar years.
Revenue Recognition
Revenue from retail storesStore revenue is recognized at the point of sale when the product is delivered to customers. Internet and catalog sales revenue is recognized upon estimated product receipt by the customer. Sales include shipping and handling fees for all periods presented. Sales includeincludes merchandise, net of returns, and excludeexcludes taxes. The Company provides for estimated returns based on return history and sales levels. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid.
Please see In the Recent Accounting Pronouncements section later in this note regarding the accounting changes relating to thefirst quarter of 2018, adoption ofwe adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.Customers (Topic 606). In conjunction with the adoption of Topic 606, we recognize revenue for merchandise that is shipped to our customers from our distribution centers and stores upon shipment as the customer has control of the product upon shipment. Prior to the adoption of Topic 606, we recognized such revenue upon date of delivery. As a result of this change, we recorded $1 million, net of tax, as an increase to opening retained earnings to reflect the cumulative effect of adopting this change. Beginning in 2018, we account for shipping and handling as a fulfillment activity. We accrue the cost and recognize revenue for these activities upon shipment date, therefore total sales recognized includes shipping and handling fees.
Gift Cards
The Company sellsWe sell gift cards to its customers, which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed or whenby customers. Effective with the likelihoodadoption of theTopic 606 in 2018, gift card being redeemedbreakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, is remote andunless there is noa legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions, referred to as breakage. The Company has determined itsjurisdictions. This reflected a change in our accounting for gift card breakage ratefrom the remote method to the proportional method. As a result of adopting Topic 606, we recorded $4 million, or $3 million net of tax, as an increase to opening retained earnings to reflect the cumulative effect of this change based upon historical redemption patterns. Historical experience indicates that after 12 months, the likelihood of redemption is deemed to be remote. Gift cardAdditionally, breakage income, which is included inrecognized as Sales, was previously recorded within selling, general and administrative expenses and unredeemed(“SG&A”) prior to the adoption of Topic 606. The table below presents the activity of our gift card liability balance:
| | | | | | |
| | | | | ||
| | 2019 | | 2018 | ||
| | ($ in millions) | ||||
Gift card liability at beginning of year | | $ | 35 | | $ | 38 |
Redemptions | | | (105) | | | (96) |
Cumulative catch-up adjustment to retained earnings from the adoption of Topic 606 | | | — | | | (4) |
Breakage recognized in sales | | | (7) | | | (6) |
Activations | | | 112 | | | 104 |
Foreign currency fluctuations | | | — | | | (1) |
Gift card liability at end of year | | $ | 35 | | $ | 35 |
We elected not to disclose the information about remaining performance obligations since the amount of gift cards are recorded as a current liability. Gift card breakage was $6 millionredeemed after 12 months is not significant for both 20172019 and 2016, and was $5 million for 2015.2018.
2019 Form 10-K Page 43
Please see the Recent Accounting Pronouncements section later in this note regarding the accounting changes relating to the 2018 adoption of ASU 2014-09, Revenue from Contracts with Customers.
Store Pre-Opening and Closing CostsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Store pre-opening costs are charged to expense as incurred. In the event a store is closed before its lease has expired, the estimated post-closing lease exit costs, less any sublease rental income, is provided for once the store ceases to be used.
Advertising Costs and Sales Promotion
Advertising and sales promotion costs are expensed at the time the advertising or promotion takes place, net of reimbursements for cooperative advertising. Advertising expenses also include advertising costs as required by some of the Company’s mall-based leases. Cooperative advertising reimbursements earned for the launch and promotion of certain products agreed upon with vendors are recorded in the same period as the associated expenses are incurred.
42
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Digital advertising costs are expensed as incurred, net of reimbursements for cooperative advertising. Digital advertising includes search engine marketing, such as display ads and keyword search terms, and other various forms of digital advertising.Reimbursement Reimbursements received in excess of expenses incurred related to specific, incremental, and identifiable advertising costs isare accounted for as a reduction to the cost of merchandise and isare reflected in cost of sales aswhen the merchandise is sold.
Advertising costs, including digital advertising, which are included as a component of selling, general and administrative expenses,SG&A, were as follows:
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
|
| ($ in millions) | |||||||
Advertising expenses (1) | | $ | 91 | | $ | 111 | | $ | 108 |
Digital advertising expenses | |
| 95 | |
| 96 | |
| 96 |
Cooperative advertising reimbursements | |
| (20) | |
| (25) | |
| (20) |
Net advertising expense | | $ | 166 | | $ | 182 | | $ | 184 |
(1) | Effective with the adoption of the new lease standard in 2019, advertising costs that are required by some of our mall-based leases are recorded as an element of rent expense. These costs were $14 million for both 2018 and 2017. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
|
| ($ in millions) | |||||
Advertising expenses |
| $ | 108 | $ | 118 | $ | 119 |
Digital advertising expenses |
|
| 96 |
| 84 |
| 65 |
Cooperative advertising reimbursements |
|
| (20) |
| (20) |
| (19) |
Net advertising expense |
| $ | 184 | $ | 182 | $ | 165 |
Catalog Costs
Catalog costs, which are primarily comprised of paper, printing, and postage, are expensed at the time the catalogs are distributed. Prior to the adoption of Topic 606, catalog costs were capitalized and amortized over the expected customer response period related to each catalog, which iswas generally 90 days. Cooperative reimbursements earned for the promotion of certain products are agreed upon with vendors and are recorded in the same period as the associated catalog expenses are amortized. Prepaid catalog costs were $1 million at both February 3, 2018 and January 28, 2017.recorded.
Catalog costs, which are included as a component of selling, general and administrative expenses,SG&A, were as follows:
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
| |||||||||
|
| 2017 | 2016 | 2015 | ||||||||||||
|
| ($ in millions) | ||||||||||||||
| | | | | | | ||||||||||
|
| 2019 |
| 2018 |
| 2017 | ||||||||||
| | ($ in millions) | ||||||||||||||
Catalog costs |
| $ | 19 | $ | 26 | $ | 28 | | $ | 15 | | $ | 18 | | $ | 19 |
Cooperative reimbursements |
|
| (2) |
| (6) |
| (7) | |
| — | |
| — | |
| (2) |
Net catalog expense |
| $ | 17 | $ | 20 | $ | 21 | | $ | 15 | | $ | 18 | | $ | 17 |
Share-Based Compensation
We recognize compensation expense for share-based awards based on the grant date fair value of those awards. Share-based compensation expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award. We use the Black-Scholes option-pricing model to determine the fair value of stock options, which requires the input of subjective assumptions regarding the expected term, expected volatility, and risk-free interest rate. See Note 21, Share-Based Compensation, for information on the assumptions used to calculate the fair value of stock options. Awards of restricted stock units, cliff vest after the passage of time, generally three years. Performance-based restricted stock unit awards are earned on achievement of pre-established goals and with regards to certain awards, vest after an additional one-year period. Upon exercise of stock options, issuance of restricted stock or units, or issuance of shares under the employee stock purchase plan, we will issue authorized but unissued common stock or use common stock held in treasury.
2019 Form 10-K Page 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
The Company accountsWe account for and discloses earnings per share (“EPS”) using the treasury stock method. Basic earnings per shareEPS 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 shareEPS reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per shareEPS computation plus dilutive common stock equivalents.
The computation of basic and diluted earnings per shareEPS is as follows:
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
| ||||||||
|
| 2017 | 2016 | 2015 | |||||||||||
| (in millions, except per share data) | ||||||||||||||
| | | | | | | | ||||||||
|
| 2019 |
| 2018 | 2017 | ||||||||||
| | (in millions, except per share data) | | ||||||||||||
Net Income |
| $ | 284 | $ | 664 | $ | 541 | | $ | 491 | | $ | 541 | $ | 284 |
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
Weighted-average common shares outstanding |
|
| 127.2 |
| 134.0 |
| 139.1 | |
| 108.7 | |
| 115.6 |
| 127.2 |
Dilutive effect of potential common shares |
|
| 0.7 |
| 1.1 |
| 1.7 | |
| 0.4 | |
| 0.5 |
| 0.7 |
Weighted-average common shares outstanding assuming dilution |
|
| 127.9 |
| 135.1 |
| 140.8 | |
| 109.1 | |
| 116.1 |
| 127.9 |
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
Earnings per share - basic |
| $ | 2.23 | $ | 4.95 | $ | 3.89 | | $ | 4.52 | | $ | 4.68 | $ | 2.23 |
Earnings per share - diluted |
| $ | 2.22 | $ | 4.91 | $ | 3.84 | | $ | 4.50 | | $ | 4.66 | $ | 2.22 |
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | ||||||||
Anti-dilutive share-based awards excluded from diluted calculation |
| 1.6 |
| 0.4 |
| 0.6 | |
| 2.2 | |
| 1.9 |
| 1.6 |
43
FOOT LOCKER, INC.
NOTES TO 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 0.5 million for 2019, 0.9 million for 2018, and 0.2 million for all periods presented,2017, have not been included as the vesting conditions have not been satisfied. These shares relate to restricted stock unit awards issued in connection with the Company’s long-term incentive program.
Share-Based Compensation
The Company recognizes compensation expense for share-based awards based on the grant date fair value of those awards. Additionally, stock-based compensation expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award. See Note 21, Share-Based Compensation, for information on the assumptions used to calculate the fair value of share-based compensation. Upon exercise of stock options, issuance of restricted stock or units, or issuance of shares under the employees stock purchase plan, the Company will issue authorized but unissued common stock or use common stock held in treasury.
Cash, Cash Equivalents, and Restricted Cash
Cash consists of funds held on hand and in bank accounts. Cash equivalents include amounts on demand with banks and all highly liquid investments with original maturities of three months or less, including money market funds. Additionally, amounts due from third-party credit card processors for the settlement of debit and credit card transactions are included as cash equivalents as they are generally collected within three business days. RestrictedWe present book overdrafts, representing checks issued but still outstanding in excess of bank balances, as part of accounts payable.
Restricted cash represents cash that is restricted as to withdrawal or use under the terms of various agreements. Restricted cash includes amounts held in a qualified settlement fund in connection with the pension litigation, amounts held in escrow in connection with various leasing arrangements in Europe, and deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.
The following table provides the reconciliation of cash, cash equivalents, and restricted cash, as reported on our consolidated statements of cash flows.
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
|
| 2017 |
| 2016 |
| 2015 | ||||||||||||
|
| ($ in millions) | ||||||||||||||||
| | | | | | | ||||||||||||
|
| 2019 |
| 2018 |
| 2017 | ||||||||||||
| | ($ in millions) | ||||||||||||||||
Cash and cash equivalents (1) |
| $ | 849 |
| $ | 1,046 |
| $ | 1,021 | | $ | 907 | | $ | 891 | | $ | 849 |
Restricted cash included in other current assets |
|
| 1 |
|
| — |
|
| 1 | |||||||||
Restricted cash included in other current assets (2) | | 6 | | | 59 | | 1 | |||||||||||
Restricted cash included in other non-current assets (2) |
|
| 181 |
|
| 27 |
|
| 26 | | 29 | | 31 | | 181 | |||
Cash, cash equivalents, and restricted cash |
| $ | 1,031 |
| $ | 1,073 |
| $ | 1,048 | | $ | 942 | | $ | 981 | | $ | 1,031 |
(1) | Includes cash equivalents of | |
|
|
(2) | In connection with the pension matter, as further discussed in Note 3, Impairment and Other Charges, we deposited $150 million |
2019 Form 10-K Page 45
Investments
Changes in the fair value of available-for-sale securities are reported as a component of accumulated other comprehensive loss in the Consolidated Statements of Shareholders’ Equity and are not reflected in the Consolidated Statements of Operations until a sale transaction occurs or when declines in fair value are deemed to be other-than-temporary. Available-for-sale securities are routinely reviewed for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of a security may not be recoverable, the security is written down to fair value. As of February 3, 2018, the Company held one available-for-sale security, which was the Company’s $7 million auction rate security. See Note 19, Fair Value Measurements, for further discussion.
44
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company’s investment in a privately-held company is accounted for using the cost method and had a carrying value of $15 million as of February 3, 2018. This investment is included within other assets.If a significant adverse effect on the fair value of the investment were to occur and was deemed to be other-than-temporary, the fair value of the investment would be estimated, and the amount by which the carrying value of the cost-method investment exceeds its fair value would be recorded as an impairment loss.
Merchandise Inventories and Cost of Sales
Merchandise inventories for the Company’s Athletic Storesour stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out (“LIFO”) basis for domestic inventories and on the first-in, first-out (“FIFO”) basis for international inventories. Merchandise inventories of the Direct-to-Customerse-commerce business are valued at the lower of cost or marketnet realizable value using weighted-average cost, which approximates FIFO.
The retail inventory method is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail inventory method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The Company providesWe provide reserves based on current selling prices when the inventory has not been marked down to market.
Transportation, distribution center, and sourcing costs are capitalized in merchandise inventories. The Company expensesWe expense the freight associated with transfers between itsour store locations in the period incurred. The Company maintainsWe maintain an accrual for shrinkage based on historical rates.
Cost of sales is comprised of the cost of merchandise, as well as occupancy, buyers’ compensation, and shipping and handling costs. The cost of merchandise is recorded net of amounts received from suppliers for damaged product returns, markdown allowances, and volume rebates, as well as cooperative advertising reimbursements received in excess of specific, incremental advertising expenses. Occupancy costs include
Investments
In 2018, we adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Our equity investments that are not accounted for under the amortizationequity method are measured at cost adjusted for changes in observable prices minus impairment, under the practicability exception. As of amounts received from landlordsFebruary 1, 2020 and February 2, 2019, we had $137 million and $94 million, respectively, of investments which are accounted for tenant improvements.under this method. Additionally, our auction rate security, classified as available-for-sale, is recorded at fair value with gains and losses reported in Other income, net in our Consolidated Statements of Operations, whereas previously changes in the fair value were reported as a component of accumulated other comprehensive loss (“AOCL”) in the Consolidated Statements of Shareholders’ Equity and were not reflected in the Consolidated Statements of Operations until a sale transaction occurred or when declines in fair value were deemed to be other-than-temporary. The adjustment recorded in 2018 to retained earnings as a result of adopting ASU 2016-01 was not significant.
Minority interests, including our equity method investment, had a carrying value of $142 million and $104 million as of February 1, 2020 and February 2, 2019, respectively, and are included within Other assets. As of February 1, 2020, we held 1 available-for-sale security, which was our $7 million auction rate security.
See Note 19, Fair Value Measurements, for further discussion.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Significant additions and improvements to property and equipment are capitalized. Major renewals or replacements that substantially extend the useful life of an asset are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:
| | | |
| | | |
Buildings | Maximum of 50 years | ||
Store leasehold improvements | | Shorter of the asset useful life or expected term of the lease | |
Furniture, fixtures, and equipment |
| 3‑10 years | |
Software |
|
|
2019 Form 10-K Page 46
Maintenance and repairs are charged to current operations as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal-Use Software Development Costs
The Company capitalizesWe capitalize certain external and internal computer software and software development costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing, and installation activities. Capitalized costs include only external direct cost of materials and services consumed in developing or obtaining internal-use software, and payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software, net of accumulated amortization, is included as a component of propertyProperty and equipment, net and was $67 million and $59$80 million at both February 3, 20181, 2020 and January 28, 2017, respectively.February 2, 2019.
45
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RecoverabilityImpairment of Long-Lived Tangible Assets and Right-of-Use Assets
The Company performsWe perform an impairment review when circumstances indicate that the carrying value of long-lived tangible assets and right-of-use assets may not be recoverable. Management’srecoverable (“a triggering event”). Our policy in determining whether an impairment indicator exists, a triggering event exists comprises the evaluation of measurable operating performance criteria and qualitative measures at the divisionlowest level as well as qualitative measures. The Company considers historical performancefor which identifiable cash flows are largely independent of cash flows for other assets and liabilities, which is at the store level. We also evaluate triggering events at the banner level. In evaluating potential store level impairment, we compare future estimated results, which are predominately identified from the Company’s long-range strategic plans, in its evaluation of potential store-level impairment and then compares the carrying amount of the asset with the estimated futureundiscounted cash flows expected to result from the use of the asset.asset group to the carrying amount of the asset group. The future cash flows are estimated predominately based on our historical performance and long-range strategic plans. If the carrying amount of the asset group exceeds the estimated expected undiscounted future cash flows, the Company measureswe measure the amount of the impairment by comparing the carrying amount of the asset group with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. The Company estimatesusing a risk adjusted discount rate and using current market-based information for right-of-use assets. We estimate fair value based on the best information available using estimates, judgments, and projections as considered necessary.
Leases
Lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use. The lease term includes options to extend or terminate a lease only when we are reasonably certain that we will exercise that option. The right-of-use asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, initial direct costs, and any tenant improvement allowances received. For operating leases, right-of-use assets are reduced over the lease term by the straight-line lease expense recognized less the amount of accretion of the lease liability determined using the effective interest method.
We combine lease components and non-lease components. Given our policy election to combine lease and non-lease components, we also consider fixed common area maintenance (“CAM”) part of our fixed future lease payments; therefore, fixed CAM is also included in our lease liability. We recognize rent expense for operating leases as of the possession date for store leases or the commencement of the agreement for a non-store lease. Rental expense, inclusive of rent holidays, concessions, and tenant allowances are recognized over the lease term on a straight-line basis. Contingent payments based upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the lease and, accordingly, are charged to operations as incurred.
As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rates based on the remaining lease term to determine the present value of future lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for short-term leases on a straight-line basis over the lease term.
2019 Form 10-K Page 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are reviewed for impairment annually during the first quarter of each fiscal year or more frequently if impairment indicators arise. The review of goodwill impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a two-step impairment test, if necessary. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of the intangible asset is greater than its carrying value, the two-step test is performed to identify potential impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, it is unnecessary to perform the two-step impairment test.
Based on certain circumstances, we may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step impairment test. The first step of the two-step goodwill impairment test compares the fair value of the reporting unit to its carrying amount, including goodwill. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying value of the asset exceeds its fair value, an impairment loss is recognized in the amount of the excess. The fair value of each reporting unit is determined using a discounted cash flow approach.
Intangible assets that are determined to have finite lives are amortized over their useful lives and are measured for impairment only when events or changes in circumstances indicate that the carrying value may be impaired. Intangible assets with indefinite lives are tested for impairment if impairment indicators arise and, at a minimum, annually. The impairment review for intangible assets with indefinite lives consists of either performing a qualitative or a quantitative assessment. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of the indefinite-lived intangible is less than its carrying amount, or if we elect to proceed directly to a quantitative assessment, we calculate the fair value using a discounted cash flow method, based on the relief from royalty concept,method, and compare the fair value to the carrying value to determine if the asset is impaired. Intangible assets that are determined to have finite lives are amortized over their useful lives and are measured for impairment only when events or changes in circumstances indicate that the carrying value may be impaired.
Derivative Financial Instruments
All derivative financial instruments are recorded in the Company’sour Consolidated Balance Sheets at their fair values. For derivatives designated as a hedge, and effective as part of a hedge transaction, the effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive income/loss or as a basis adjustment to the underlying hedged item and reclassified to earnings in the period in which the hedged item affects earnings. The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is disposed of. To the extent derivatives do not qualify or are not designated as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject the Companyus to increased earnings volatility.
46
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company’s financial assets recorded at fair value are categorized as follows:
|
| |
|
| |
|
|
Income Taxes
The Company accountsWe account for itsour income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized for tax credits and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizesWe recognize net deferred tax assets to the extent that it believeswe believe these assets are more likely than not to be realized. In making such a determination, the Company considerswe consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determineswe determine that itwe would be able to realize itsour deferred tax assets in the future in excess of their net recorded amount, the Companywe would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
2019 Form 10-K Page 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A taxing authority may challenge positions that the Companywe adopted in itsour income tax filings. Accordingly, the Companywe may apply different tax treatments for transactions in filing itsour income tax returns than for income tax financial reporting. The CompanyWe regularly assesses itsassess our tax positions for such transactions and recordsrecord reserves for those differences when considered necessary. Tax positions are recognized only when it is more likely than not, based on technical merits, that the positions will be sustained upon examination. Tax positions that meet the more-likely-than-not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The Company recognizesWe recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying Consolidated Statement of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet.
Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries is made only on those amounts in excess of the funds considered to be permanently reinvested.
47
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our income tax provision for 2017 includes the estimated effects of U.S. tax reform (“Tax Act”) enacted on December 22, 2017. The Tax Act significantly revises U.S. corporate income taxation, among other changes, lowering corporate income tax rates, implementing a modified territorial tax regime, and imposing a one-time transition tax through a deemed repatriation of accumulated untaxed earnings and profits of foreign subsidiaries. The Company has made estimates of the effects and recorded provisional amounts in its 2017 financial statements as permitted under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides guidance on accounting for the Tax Act’s effects. The ultimate effect of the Tax Act may differ from the provisional amount, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we have made, regulatory and administrative guidance that may be issued, and actions we may take as a result of the Tax Act. See also Note 17, Income Taxes for more information.
Pension and Postretirement Obligations
Pension benefit obligations and net periodic pension costs are calculated using many actuarial assumptions. Two key assumptions used in accounting for pension liabilities and expenses are the discount rate and expected rate of return on plan assets. The discount rate for the U.S. plans is determined by reference to the Bond:Link interest rate model based upon a portfolio of highly-rated U.S. corporate bonds with individual bonds that are theoretically purchased to settle the plan’s anticipated cash outflows. The cash flows are discounted to their present value and an overall discount rate is determined. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations was developed by using that plan’s bond portfolio indices, which match the benefit obligations. The Company measures itsWe measure our plan assets and benefit obligations using the month-end date that is closest to our fiscal year end. The expected return on plan assets assumption is derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected performance of those assets.
Insurance Liabilities
The Company isWe are primarily self-insured for health care, workers’ compensation, and general liability costs. Accordingly, provisions are made for the Company’s actuarially determined estimates of discounted future claim costs for such risks, for the aggregate of claims reported, and claims incurred but not yet reported. Self-insured liabilities totaled $10 million and $12 million atfor both February 3, 20181, 2020 and January 28, 2017, respectively. The Company discounts its workers’February 2, 2019. Workers’ compensation and general liability reserves are discounted using a risk-free interest rate. Imputed interest expense related to these liabilities was not significant for any of the periods presented.
Accounting for Leases
The Company recognizes rent expense for operating leases as of the possession date for store leases or the commencement of the agreement for a non-store lease. Rental expense, inclusive of rent holidays, concessions, and tenant allowances are recognized over the lease term on a straight-line basis. Contingent payments based upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the lease and, accordingly, are charged to operations as incurred.
Treasury Stock Retirement
The CompanyWe periodically retiresretire treasury shares that it acquireswe acquire through share repurchases and returnsreturn those shares to the status of authorized but unissued. The Company accountsWe account for treasury stock transactions under the cost method. For each reacquisition of common stock, the number of shares and the acquisition price for those shares is added to the existing treasury stock count and total value. When treasury shares are retired, the Company’sour policy is to allocate the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in capital as of the retirement date.
During 2017 and 2016, the CompanyWe retired 12 million and 429 million shares respectively,in both 2019 and 2018 of itsour common stock held in treasury. The shares were returned to the status of authorized but unissued. As a result, treasury stock decreased by $487$368 million and $1,728$400 million as of February 3, 20181, 2020 and January 28, 2017,February 2, 2019, respectively.
48
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The functional currency of the Company’sour international operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted-average rates of exchange prevailing during the year. The unearned gains and losses resulting from such translation are included as a separate component of accumulated other comprehensive lossAOCL within shareholders’ equity.
2019 Form 10-K Page 49
Recent
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements
In May 2014, the We adopted 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 exchangeguidance on accounting for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. This ASU can be adopted either retrospectively to each prior reporting period presented orleases on a modified retrospective basis with the cumulative-effect recognized as an adjustment to retained earnings as of the date of adoption. The Company has identified a change for the following items:
|
|
|
|
|
|
|
|
|
|
We have substantially completed our evaluation of the effect of ASU 2014-09, and will adopt the guidance beginning with our first quarter ending May 5, 2018,February 3, 2019 (the “effective date”) using the modified retrospectiveoptional transition method. The adjustment to retained earnings will primarily representmethod, which applies the change in timing relating to gift card breakage and the change in timing related to the recognition of e-commerce sales, and is not expected to be significant.
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 to $4 billion of assets and liabilities on 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 ofguidance at the beginning of the period in which it is adopted. Prior period amounts have not been adjusted in connection with the adoption 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 recognizethis standard. We elected the package of practical expedients under the new guidance. Based on deferred tax amounts relatedstandard, which permits companies to applicable past intercompany transactionsnot reassess lease classification, lease identification, or initial direct costs for existing or expired leases prior to the effective date. We have lease agreements with non-lease components that relate to the lease components. We also elected the practical expedient to account for non-lease components and the foreign exchange rateslease components to which they relate, as a single lease component for all classes of underlying assets. Also, we elected to keep short-term leases with an initial term of twelve months or less off the balance sheet.
Upon adoption of this new standard, as of February 3, 2018,2019, we expectrecorded right-of-use assets and lease obligations on the Consolidated Balance Sheet for our operating leases of $3,148 million and $3,422 million, respectively. As part of adopting the standard, previously recognized liabilities for deferred rent and lease incentives were reclassified as a component of the right-of-use assets. Additionally, upon adoption, will resultwe evaluated right-of-use assets for impairment and determined that approximately $29 million of impairment was required related to newly recognized right-of-use assets that would have been impaired in an increase in deferred income tax assetsprevious periods. This standard did not significantly affect our Consolidated Statements of $37 million.Operations, Comprehensive Income, or Cash Flows.
49
Recent Accounting Pronouncements Not Yet Adopted
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OtherAll recently issued accounting pronouncements did not, or are not believed by managementexpected to have a material effect on the Company’s present or future consolidated financial statements.
2. Segment Information
Recently Adopted Accounting PronouncementsWe have integrated all available shopping channels including stores, websites, apps, social channels, and catalogs. Store sales are primarily fulfilled from the store’s inventory but may also be shipped from our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are primarily shipped to our customers through our distribution centers but may also be shipped from a store or a combination of our distribution centers and stores depending on the availability of particular items.
In March 2016, the FASB issued ASU 2016-09, ImprovementsOur operating segments are identified according to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including tax consequences, forfeitures,how our business activities are managed and classifications of the tax related items in the statement of cash flows. The Company adopted ASU 2016-09 duringevaluated by our chief operating decision maker, our CEO. During 2018, we expanded into Asia and launched our digital channels across Singapore, Hong Kong, and Malaysia. During the first quarter of 2017. Amendments relating2019, we changed our organizational and internal reporting structure to accounting for excess tax benefits and deficiencies have been adopted prospectively. For the year ended February 3, 2018, the Company recorded $9 million of excess tax benefits related to share-based compensation awards 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 consolidated statement of cash flow. As a result of adopting this change retrospectively, we reclassified excess tax benefits of $20 million and $35 million, which were previously classified as cash flows from financing activities, to operating activitiessupport an accelerated growth strategy for the years ended January 28, 2017region. We opened an Asian headquarters in Singapore and January 30, 2016, respectively. Additionally, the presentation of employee taxes paid to taxing authorities for share-based transactions of $7 millionrealigned our organization into three distinct geographic regions: North America Europe, Middle East and $9 million, previously classified as cash flows from operating activities, were reclassified to financing activities for the years ended January 28, 2017Africa (“EMEA”), and January 30, 2016, respectively. 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.Asia Pacific.
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 periodAccordingly, 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,2019 we restatedre-evaluated our cashoperating segments. We determined that we have 3 operating segments, North America, EMEA, and cash equivalents balancesAsia Pacific. Our North America operating segment includes the results of the following banners operating in the consolidated statementsU.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, and Footaction, including each of cash flows to include restricted cash of $27 milliontheir related e-commerce businesses, as of January 28, 2017well as our Eastbay business that includes internet, catalog, and January 30, 2016. Please seeteam sales. Our EMEA operating segment includes the Cash, Cash Equivalents, and Restricted Cash section earlier in this note for a reconciliation of cash and cash equivalents as presented on our consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our consolidated statements of cash flows.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted corporate tax rates. As permitted by the ASU, the Company has elected to adopt this ASU early asresults of the year ended February 3, 2018, resultingfollowing banners operating in a reclassificationEurope: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of $41 million from accumulated other comprehensive loss to retained earnings. The amounttheir related e-commerce businesses. Our Asia Pacific operating segment includes the results of Foot Locker and Kids Foot Locker operating in Australia, New Zealand, and Asia as well as the reclassification is calculated on the basis of the difference between the historicalrelated e-commerce businesses operating in Australia and newly enacted tax rates on deferred taxes related primarily to our pensionAsia. We further aggregated these operating segments into 1 reportable segment based upon their shared customer base and postretirement benefit plans.similar economic characteristics.
2. Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of February 3, 2018, the Company had two reportable segments, Athletic Stores and Direct-to-Customers. The accounting policies of both segments are the same as those described in Note 1, Summary of Significant Accounting Policies. The Company evaluatesWe evaluate performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division results.profit. Division profit reflects income before income taxes, pension litigation and reorganizationother charges, corporate expense, non-operating income, and net interest (income) / expense.income.
2019 Form 10-K Page 50
Effective as of the beginning of fiscal year 2018, the Company will report one reportable segment based upon the change in our method of internal reporting.
50
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes our results:
| | | | | | | | |
|
| 2019 |
| 2018 | 2017 | |||
| | ($ in millions) | ||||||
Division profit (1) | | $ | 738 | | $ | 789 | $ | 810 |
Less: Other charges (2) | |
| 15 | |
| 18 |
| 191 |
Less: Corporate expense (3) | |
| 74 | |
| 72 |
| 48 |
Income from operations | |
| 649 | |
| 699 |
| 571 |
Interest income, net | |
| 11 | |
| 9 |
| 2 |
Other income, net | |
| 12 | |
| 5 |
| 5 |
Income before income taxes | | $ | 672 | | $ | 713 | $ | 578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
Sales |
| ($ in millions) | |||||
Athletic Stores |
| $ | 6,673 | $ | 6,744 | $ | 6,468 |
Direct-to-Customers |
|
| 1,109 |
| 1,022 |
| 944 |
Total sales |
| $ | 7,782 | $ | 7,766 | $ | 7,412 |
Operating Results |
|
|
|
|
|
|
|
Athletic Stores (1) |
| $ | 675 | $ | 927 | $ | 872 |
Direct-to-Customers (2) |
|
| 135 |
| 143 |
| 142 |
Division profit |
|
| 810 |
| 1,070 |
| 1,014 |
Less: Pension litigation and reorganization charges (3), (4) |
|
| 191 |
| — |
| 100 |
Less: Corporate expense (5) |
|
| 48 |
| 70 |
| 77 |
Operating profit |
|
| 571 |
| 1,000 |
| 837 |
Interest (income) / expense, net |
|
| (2) |
| 2 |
| 4 |
Other income |
|
| 5 |
| 6 |
| 4 |
Income before income taxes |
| $ | 578 | $ | 1,004 | $ | 837 |
(1) | Included in the results for 2019, 2018, and 2017, |
(2) | Included in the 2019, 2018 and 2017 | ||||||||||||||||||||||
|
| ||||||||||||||||||||||
|
| ||||||||||||||||||||||
|
|
| Corporate expense for all years presented reflects the reallocation of expense between corporate and the operating divisions. Based upon annual internal studies of corporate expense, the allocation of such expenses to the operating divisions was increased by $32 million for 2019, $40 million for 2018, and $4 million for 2017, | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Amortization |
| Capital Expenditures (1) |
| Total Assets | |||||||||||||||
|
| 2017 | 2016 | 2015 |
| 2017 | 2016 | 2015 |
| 2017 | 2016 | 2015 | |||||||||
|
| ($ in millions) | |||||||||||||||||||
Athletic Stores |
| $ | 153 | $ | 140 | $ | 130 |
| $ | 202 | $ | 193 | $ | 181 |
| $ | 2,775 | $ | 2,802 | $ | 2,612 |
Direct-to-Customers |
|
| 4 |
| 4 |
| 7 |
|
| 3 |
| 4 |
| 7 |
|
| 357 |
| 338 |
| 330 |
|
|
| 157 |
| 144 |
| 137 |
|
| 205 |
| 197 |
| 188 |
|
| 3,132 |
| 3,140 |
| 2,942 |
Corporate |
|
| 16 |
| 14 |
| 11 |
|
| 69 |
| 69 |
| 40 |
|
| 829 |
| 700 |
| 833 |
Total Company |
| $ | 173 | $ | 158 | $ | 148 |
| $ | 274 | $ | 266 | $ | 228 |
| $ | 3,961 | $ | 3,840 | $ | 3,775 |
|
|
Sales disaggregated based upon channel for the fiscal years ended February 1, 2020, February 2, 2019, and February 3, 2018 are presented in the following table.
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | ($ in millions) | |||||||
Sales | | | | | | | | | |
Stores | | $ | 6,720 | | $ | 6,714 | | $ | 6,673 |
Direct-to-customers | |
| 1,285 | |
| 1,225 | |
| 1,109 |
Total sales | | $ | 8,005 | | $ | 7,939 | | $ | 7,782 |
Sales and long-lived asset information by geographic area as of and for the fiscal years ended February 1, 2020, February 2, 2019, and February 3, 2018 January 28, 2017, and January 30, 2016 are presented in the following tables. Sales are attributed to the country in which the sales transaction is fulfilled. Long-lived assets reflect property and equipment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
Sales |
| ($ in millions) | |||||
United States |
| $ | 5,532 | $ | 5,562 | $ | 5,305 |
International |
|
| 2,250 |
| 2,204 |
| 2,107 |
Total sales |
| $ | 7,782 | $ | 7,766 | $ | 7,412 |
equipment and operating lease right-of-use assets.
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
| | | ($ in millions) | ||||||
Sales by Geography | | | | | | | | | |
United States | | $ | 5,691 | | $ | 5,647 | | $ | 5,532 |
International | |
| 2,314 | |
| 2,292 | |
| 2,250 |
Total sales | | $ | 8,005 | | $ | 7,939 | | $ | 7,782 |
| | | | | | | | | |
Long-Lived Assets | | | | | | | | | |
United States | | $ | 2,479 | | $ | 602 | | $ | 607 |
International | |
| 1,244 | |
| 234 | |
| 259 |
Total long-lived assets | | $ | 3,723 | | $ | 836 | | $ | 866 |
51
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
Long-Lived Assets |
| ($ in millions) | |||||
United States |
| $ | 607 | $ | 575 | $ | 486 |
International |
|
| 259 |
| 190 |
| 175 |
Total long-lived assets |
| $ | 866 | $ | 765 | $ | 661 |
For the year ended February 3, 2018,1, 2020, the countries that comprised the majority of the sales and long-lived assets for the international category were Canada, Italy, France, Germany, and France.England. No other individual country included in the international category was significant.
2019 Form 10-K Page 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Depreciation and | | | | | | | | | | | | | | | | | | | |||||||
| | Amortization | | Capital Expenditures (1) | | Total Assets | |||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 | |||||||||
| | ($ in millions) | |||||||||||||||||||||||||
Division | | $ | 160 | | $ | 160 | | $ | 157 | | $ | 105 | | $ | 112 | | $ | 205 | | $ | 5,523 | | $ | 2,900 | | $ | 3,132 |
Corporate | |
| 19 | |
| 18 | |
| 16 | |
| 82 | |
| 75 | |
| 69 | |
| 1,066 | |
| 920 | |
| 829 |
Total Company | | $ | 179 | | $ | 178 | | $ | 173 | | $ | 187 | | $ | 187 | | $ | 274 | | $ | 6,589 | | $ | 3,820 | | $ | 3,961 |
(1) Represents cash capital expenditures for all years presented.
3. LitigationImpairment and Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
|
| ($ in millions) | |||||
Pension litigation charge |
| $ | 178 | $ | — | $ | 100 |
Reorganization costs |
|
| 13 |
| — |
| — |
Impairment of long-lived assets |
|
| 20 |
| 6 |
| 4 |
Other intangible asset impairments |
|
| — |
| — |
| 1 |
Total litigation and other charges |
| $ | 211 | $ | 6 | $ | 105 |
During
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
|
| ($ in millions) | |||||||
Impairment of long-lived assets | | $ | 37 | | $ | 4 | | $ | 20 |
Lease termination costs | | | 13 | | | — | | | — |
Impairment of investments | | | 11 | | | — | | | — |
Pension litigation related charges | | | 4 | | | 18 | | | 178 |
Other intangible asset impairments | |
| — | |
| 15 | |
| — |
Reorganization costs | |
| — | |
| — | |
| 13 |
Total impairment and other charges | | $ | 65 | | $ | 37 | | $ | 211 |
The Company and the third quarter of 2017,Company’s U.S. pension plan were involved in litigation related to the Company reorganized its organizational structure by adjusting certain 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 reconciliationconversion of the accrualplan to a cash balance plan. The court entered its final judgment in 2018, which required the plan be reformed as directed by the court order. We recorded charges in 2019, 2018, and 2017 related to the pension matter and related plan reformation totaling $4 million, $18 million, and $178 million, respectively. These charges recorded represented the cost of February 3, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Severance and |
|
| Other Related |
|
|
|
|
|
| Benefit Costs |
|
| Charges |
|
| Total |
|
| ($ in millions) | |||||||
Balance at January 28, 2017 |
| $ | — |
| $ | — |
| $ | — |
Amounts charged to expense |
|
| 11 |
|
| 2 |
|
| 13 |
Cash payments |
|
| (6) |
|
| — |
|
| (6) |
Balance at February 3, 2018 |
| $ | 5 |
| $ | 2 |
| $ | 7 |
the reformation and related administrative expenses.
During 2017,2019, due to the underperformance of our SIX:02Footaction stores and the continued underperformance of our Runners Point and Sidestep stores, managementwe determined that a triggering event had occurred and, therefore, an impairment review was conducted. The CompanyAdditionally, we evaluated certain other underperforming stores and a vacant store that had been previously subleased. We evaluated the long-lived assets, including the right-of-use assets, of these stores and recorded non-cash charges of $37 million to write down right-of-use assets, store fixtures and leasehold improvements. During the year, we also recorded $13 million of lease termination costs related to the closure of our SIX:02 locations.
We recorded non-cash charges of $11 million related to the write-down of two minority investments in 2019. Super Heroic, a children’s athletics start up, filed for bankruptcy and, accordingly, we have fully written off the investment. Rockets of Awesome, a children’s clothing brand, has had deterioration in their future outlook and has initiated efforts to preserve cash by reducing expenses. Due to the underperformance of this investee, we have partially written down our investment to fair value, determined by utilizing revenue multiples of similar companies.
During 2018 and 2017, due to the underperformance of our SIX:02 stores, forRunners Point, and Sidestep stores, we recorded non-cash impairment charges of $4 million and recorded a non-cash charge of $16$20 million, respectively, to write down store fixtures and leasehold improvements for 30 stores. The Company also evaluated the long-lived assets of our Runners Point and Sidestep stores for impairment and recorded a non-cash charge of $4 million to write down store fixtures and leasehold improvements for 123 stores. As of February 3,improvements. In 2018, the remaining net book value of long-lived assets totaled $2 million for SIX:02, and totaled $12 million for Runners Point and Sidestep. The Companywe also performed an impairment review of other intangible assets for Runners Point and Sidestep and the resulting non-cash impairment charge was not significant.
In 2016 and 2015, the Company also recorded non-cash impairment charges for Runners Point and Sidestep stores to write down long-lived assets of $6 million for 116 stores and $4 million for 61 stores, respectively. As a result of the impairment review related to long-lived assets, the Company performed a review of other intangible assets in 2016 and 2015. No impairment charges of these assets was required as a result of the 2016 review; however, in 2015 a non-cash impairment charge of $1$15 million was recorded to fully write down the value of an e-commerce the trademarks/trade name resulting fromnames associated with Runners Point.
During 2017, we recorded a decline in sales,charge of $13 million as the Company shifted away from the usea result of this website.reorganizing our organizational structure by adjusting certain responsibilities between our various businesses and certain corporate staff reductions taken to improve corporate efficiency.
The Company recorded $178 million and $100 million in pension litigation charges during 2017 and 2015, respectively. Please see Note 22, Legal Proceedings for further information.
2019 Form 10-K Page 52
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Other Income, net
Other income, net includes non-operating items, such as: gains from insurance recoveries; discounts/premiums paid on the repurchase and retirement of bonds; royalty income; changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts; and property sales.
- | gains from insurance recoveries, |
- | lease termination gains related to the sales of leasehold interests, |
- | franchise royalty income, |
- | changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts, |
- | changes in the market value of our available-for-sale security in conjunction with the adoption of ASU 2016-01 effective with the beginning of 2018, |
- | our share of earnings or losses related to our equity method investment, and |
- | net benefit expense related to our pension and postretirement programs excluding the service cost component as required by the adoption of ASU 2017-07 as of the beginning of 2018. |
Other income, net was $12 million in 2019 and $5 million in 2017,both 2018 and 2017.
For 2019, Other income, net included $8 million of royalty income, a $4 million gain associated with the acquisition of a Canadian distribution center lease and related assets from the partial exchange of a note that had previously been written down to zero, a $2 million gain related to the sale of a building, a $1 million gain on our available-for-sale security, partially offset by $2 million of net benefit expense relating to our pension and post retirement programs, and a $1 million loss related to an equity method investment.
For 2018, Other income, net included $6 million of royalty income, $1 million of lease termination gains, a $1 million loss on our available-for-sale security, and $1 million of net benefit expense relating to our pension and post retirement programs. Included in 2016, and $4 million in 2015.
For 2017 other income includeswas $4 million of royalty income and $1 million of lease termination gains related to the sales of leasehold interests. Other income in 2016 included a gain of $2 million on a forward foreign currency contract associated with an intercompany transaction that did not qualify for hedge accounting; $2 million of royalty income; $1 million related to an insurance recovery; and $1 million of lease termination gains related to the sales of leasehold interests. Included in 2015 is a $2 million insurance recovery related to a business interruption claim and $2 million of royalty income.gains.
5. Merchandise Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | ||
|
| ($ in millions) | |||
LIFO inventories |
| $ | 809 | $ | 861 |
FIFO inventories |
|
| 469 |
| 446 |
Total merchandise inventories |
| $ | 1,278 | $ | 1,307 |
| | | | | | |
|
| February 1, |
| February 2, | ||
| | ($ in millions) | ||||
LIFO inventories | | $ | 810 | | $ | 838 |
FIFO inventories | |
| 398 | |
| 431 |
Total merchandise inventories | | $ | 1,208 | | $ | 1,269 |
The value of the Company’sour LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.
6. Other Current Assets
| | | | | | |
|
| February 1, |
| February 2, | ||
| | ($ in millions) | ||||
Net receivables | | $ | 100 | | $ | 87 |
Prepaid rent | | | 55 | | | 93 |
Prepaid income taxes | | | 48 | | | 46 |
Other prepaid expenses | |
| 46 | |
| 35 |
Deferred tax costs | |
| 9 | |
| 10 |
Restricted cash (1) | | | 6 | | | 59 |
Income taxes receivable | | | 1 | | | 20 |
Other | |
| 6 | |
| 8 |
| | $ | 271 | | $ | 358 |
(1) | Restricted cash as of February 2, 2019 included $55 million of the qualified settlement fund that was established during 2017 in connection with the pension matter. |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | ||
|
| ($ in millions) | |||
Prepaid income taxes |
| $ | 174 | $ | 48 |
Net receivables |
|
| 106 |
| 101 |
Prepaid rent |
|
| 96 |
| 86 |
Other prepaid expenses |
|
| 31 |
| 27 |
Deferred tax costs |
|
| 13 |
| 13 |
Other |
|
| 4 |
| 5 |
|
| $ | 424 | $ | 280 |
2019 Form 10-K Page 53
7. Property and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | ||
|
| ($ in millions) | |||
Land |
| $ | 4 | $ | 4 |
Buildings: |
|
|
|
|
|
Owned |
|
| 44 |
| 43 |
Furniture, fixtures, equipment and software development costs: |
|
|
|
|
|
Owned |
|
| 1,145 |
| 1,029 |
Assets under capital leases |
|
| — |
| 2 |
|
|
| 1,193 |
| 1,078 |
Less: accumulated depreciation |
|
| (753) |
| (674) |
|
|
| 440 |
| 404 |
Alterations to leased and owned buildings: |
|
|
|
|
|
Cost |
|
| 965 |
| 849 |
Less: accumulated amortization |
|
| (539) |
| (488) |
|
|
| 426 |
| 361 |
|
| $ | 866 | $ | 765 |
53
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Property and Equipment, net
| | | | | | |
|
| February 1, |
| February 2, | ||
| | ($ in millions) | ||||
Land | | $ | 4 | | $ | 4 |
Buildings: | |
|
| |
|
|
Owned | |
| 54 | |
| 46 |
Furniture, fixtures, equipment and software development costs: | |
|
| |
|
|
Owned | |
| 1,203 | |
| 1,177 |
| |
| 1,261 | |
| 1,227 |
Less: accumulated depreciation | |
| (818) | |
| (785) |
| |
| 443 | |
| 442 |
Alterations to leased and owned buildings: | |
|
| |
|
|
Cost | |
| 937 | |
| 926 |
Less: accumulated amortization | |
| (556) | |
| (532) |
| |
| 381 | |
| 394 |
| | $ | 824 | | $ | 836 |
8. Goodwill
The Athletic Stores segment’sAs a result of the change in our organizational and internal reporting structures, we reassessed our reporting units and deemed the collective omni-channel banners in North America, EMEA, and Asia Pacific to be the 3 reporting units at which goodwill is tested. Therefore, goodwill was re-allocated to these reporting units based on their relative fair values. We conducted our 2019 annual impairment review both before and after this change and neither review resulted in the recognition of impairment, as the fair value of each reporting unit exceeded its carrying value. Goodwill is net of accumulated impairment charges of $167 million for all periods presented. The 2017 and 2016 annual goodwill impairment tests did not result in an impairment charge.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Direct-to- |
|
|
| |
|
| Athletic Stores |
| Customers |
| Total | |||
|
| ($ in millions) | |||||||
Goodwill at January 30, 2016 |
| $ | 17 |
| $ | 139 |
| $ | 156 |
Foreign currency translation adjustment |
|
| (1) |
|
| — |
|
| (1) |
Goodwill at January 28, 2017 |
| $ | 16 |
| $ | 139 |
| $ | 155 |
Foreign currency translation adjustment |
|
| 3 |
|
| 2 |
|
| 5 |
Goodwill at February 3, 2018 |
| $ | 19 |
| $ | 141 |
| $ | 160 |
9. Other Intangible Assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
| February 3, 2018 |
| January 28, 2017 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Wtd. Avg. |
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
| Gross |
| Accum. |
| Net |
| Life in |
| Gross |
| Accum. |
| Net | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | |||||||||||||||||||||||||||
| | February 1, 2020 | | | | | February 2, 2019 | ||||||||||||||||||||||||||||||||||
| | Gross | | Accum. | | Net | | Life in | | Gross | | Accum. | | Net | |||||||||||||||||||||||||||
($ in millions) | ($ in millions) |
| value |
| amort. |
| value |
| Years (2) |
| value |
| amort. |
| value | | value | | amort. | | value | | Years (2) | | value | | amort. | | value | ||||||||||||
Amortized intangible assets: (1) | Amortized intangible assets: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | ||||||||||
| Lease acquisition costs |
| $ | 135 |
| $ | (122) |
| $ | 13 |
| 10.0 |
| $ | 116 |
| $ | (105) |
| $ | 11 | ||||||||||||||||||||
| Trademarks / trade names |
| 20 |
| (14) |
| 6 |
| 20.0 |
| 20 |
| (13) |
| 7 | ||||||||||||||||||||||||||
| Favorable leases |
| 7 |
| (6) |
| 1 |
| 8.6 |
| 7 |
| (5) |
| 2 | ||||||||||||||||||||||||||
|
|
| $ | 162 |
| $ | (142) |
| $ | 20 |
| 13.8 |
| $ | 143 |
| $ | (123) |
| $ | 20 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Lease acquisition costs | | $ | 115 | | $ | (108) | | $ | 7 | | 9.8 | | $ | 120 | | $ | (111) | | $ | 9 | |||||||||||||||||||||
Trademarks / trade names | | 20 | | (16) | | 4 | | 20.0 | | | 20 | | (15) | | 5 | ||||||||||||||||||||||||||
Favorable leases | | — | | — | | — | | — | | | 7 | | (6) | | 1 | ||||||||||||||||||||||||||
| | $ | 135 | | $ | (124) | | $ | 11 | | 14.6 | | $ | 147 | | $ | (132) | | $ | 15 | |||||||||||||||||||||
| | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Indefinite life intangible assets: (1) | Indefinite life intangible assets: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |||||||||||
| Runners Point Group trademarks / trade names |
|
|
|
|
|
| 26 |
|
|
|
|
|
|
| 22 | |||||||||||||||||||||||||
Trademarks / trade names | | | | | | $ | 9 | | | | | | | | | $ | 9 | ||||||||||||||||||||||||
Other intangible assets, net | Other intangible assets, net |
|
|
|
|
| $ | 46 |
|
|
|
|
|
|
| $ | 42 | | | | | | $ | 20 | | | | | | | | | $ | 24 |
(1) |
| The change in the ending balances also reflect the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar. |
(2) |
|
|
2019 Form 10-K Page 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortizing intangible assets primarily represent lease acquisition costs, which are amounts that are required to secure prime lease locations and other lease rights, primarily in Europe. During 2017, the Company recorded $2 million of lease acquisition additions, primarily related to our European businesses. These additions are being amortized over a weighted-average life of 10 years. Amortization expense recorded is as follows:
|
|
|
|
|
|
|
|
|
| ||||||||
| | | | | | | |||||||||||
| | | | | | ||||||||||||
($ in millions) | ($ in millions) |
| 2017 |
|
| 2016 |
|
| 2015 | 2019 |
| 2018 |
| 2017 | |||
Amortization expense |
| $ | 4 |
| $ | 4 |
| $ | 4 | $ | 3 | | $ | 4 | | $ | 4 |
Estimated future amortization expense for finite lived intangibles for the next five years is as follows:
|
|
|
|
|
|
| |||
|
|
|
|
| ($ in millions) | ||||
2018 |
|
|
|
| $ | 4 | |||
2019 |
|
|
|
|
| 4 | |||
| | | |||||||
|
| ($ in millions) | |||||||
2020 |
|
|
|
|
| 3 | | $ | 3 |
2021 |
|
|
|
|
| 3 | | | 2 |
2022 |
|
|
|
|
| 2 | |
| 2 |
2023 | | 2 | |||||||
2024 | |
| 1 |
54
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Other Assets
|
|
|
|
| |||||||
|
|
|
|
| |||||||
|
| 2017 | 2016 | ||||||||
|
| ($ in millions) | |||||||||
| | | | | |||||||
|
| February 1, |
| February 2, | |||||||
|
| ($ in millions) | |||||||||
Minority investments | | $ | 142 | | $ | 104 | |||||
Restricted cash |
| $ | 181 | $ | 27 | | | 29 | | 31 | |
Pension asset |
|
| 36 |
| 10 | |
| 3 | |
| 7 |
Deferred tax costs |
|
| 11 |
| 10 | ||||||
Auction rate security |
|
| 7 |
| 6 | |
| 7 | |
| 6 |
Cost method investment |
|
| 15 |
| — | ||||||
Other |
|
| 40 |
| 31 | |
| 42 | |
| 50 |
|
| $ | 290 | $ | 84 | ||||||
| | $ | 223 | | $ | 198 |
|
|
11. Accrued and Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | ||
|
| ($ in millions) | |||
Other payroll and payroll related costs, excluding taxes |
| $ | 67 | $ | 57 |
Taxes other than income taxes |
|
| 63 |
| 66 |
Property and equipment (1) |
|
| 58 |
| 38 |
Customer deposits (2) |
|
| 49 |
| 49 |
Advertising |
|
| 22 |
| 35 |
Income taxes payable |
|
| 11 |
| 5 |
Incentive bonuses |
|
| 6 |
| 32 |
Other |
|
| 82 |
| 81 |
|
| $ | 358 | $ | 363 |
| | | | | | |
|
| February 1, |
| February 2, | ||
|
| ($ in millions) | ||||
Other payroll and payroll related costs, excluding taxes | | $ | 64 | | $ | 70 |
Taxes other than income taxes | |
| 57 | |
| 64 |
Customer deposits | |
| 43 | |
| 41 |
Property and equipment (1) | |
| 40 | |
| 26 |
Incentive bonuses | |
| 28 | |
| 41 |
Advertising | |
| 21 | |
| 37 |
Income taxes payable | |
| 4 | |
| 5 |
Other | |
| 86 | |
| 93 |
| | $ | 343 | | $ | 377 |
(1) | Accruals for property and equipment are excluded from the |
|
|
12. Revolving Credit Facility
On May 19, 2016, the Companywe entered into a credit agreement with itsour banks (“2016 Credit Agreement”). The 2016 Credit Agreement provides for a $400 million asset-based revolving credit facility maturing on May19,2021. During the term of the 2016 Credit Agreement, the Companywe may also increase the commitments by up to $200 million, subject to customary conditions. Interest is determined, at the Company’sour option, by the federal funds rate plus a margin of 0.125 percent to 0.375 percent, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 1.125 percent to 1.375 percent depending on availability under the 2016 Credit Agreement. In addition, the Company iswe are paying a commitment fee of 0.20 percent per annum on the unused portion of the commitments.
2019 Form 10-K Page 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2016 Credit Agreement provides for a security interest in certain of the Company’sour domestic store assets, including inventory assets, accounts receivable, cash deposits, and certain insurance proceeds. The Company isWe are not required to comply with any financial covenants unless certain events of default have occurred and are continuing, or if availability under the 2016 Credit Agreement does not exceed the greater of $40 million and 10 percent of the Loan Cap (as defined in the 2016 Credit Agreement). There are no restrictions relating to the payment of dividends and share repurchases as long as no default or event of default has occurred and the aggregate principal amount of unused commitments under the 2016 Credit Agreement is not less than 15 percent of the lesser of the aggregate amount of the commitments and the Borrowing Base, determined as of the preceding fiscal month and on a proforma basis for the following six fiscal months.
55
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company usesWe use the 2016 Credit Agreement to support standby letters of credit in connection with insurance programs. The letters of credit outstanding as of February 3, 20181, 2020 were not significant. During 2016, the Company paid approximately $2 million in
The fees relating to the 2016 Credit Agreement. Deferred financing feesAgreement are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method.facility. The unamortized balance at February 3, 2018 is $1 million. The quarterly facility fees paid on the unused portion1, 2020 was 0.20 percent in 2017.not significant. Interest expense, including facility fees, related to the revolving credit facility was $1 million for all years presented.
13. Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| ($ in millions) | ||||
8.5% debentures payable January 2022 |
| $ | 118 |
| $ | 118 |
Unamortized gain related to interest rate swaps (1) |
|
| 7 |
|
| 9 |
|
| $ | 125 |
| $ | 127 |
| | | | | | |
|
| February 1, |
| February 2, | ||
|
| ($ in millions) | ||||
8.5% debentures payable January 2022 | | $ | 118 | | $ | 118 |
Unamortized gain related to interest rate swaps (1) | |
| 4 | |
| 6 |
| | $ | 122 | | $ | 124 |
(1) | |
| In 2009, |
Interest expense related to long-term debt and the amortization of the associated debt issuance costs was $9million and $8 million as of February 3, 2018in both 2019 and January 28, 2017, respectively.2018.
14. Other Liabilities
| | | | | | |
|
| February 1, |
| February 2, | ||
|
| ($ in millions) | ||||
Pension benefits | | $ | 61 | | $ | 99 |
Income taxes | |
| 32 | |
| 29 |
Postretirement benefits | |
| 10 | |
| 11 |
Workers’ compensation and general liability reserves | |
| 8 | |
| 7 |
Deferred taxes | |
| 2 | |
| 6 |
Straight-line rent liability (1) | | | — | | | 265 |
Other | |
| 9 | |
| 9 |
| | $ | 122 | | $ | 426 |
\
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| ($ in millions) | ||||
Pension litigation liability |
| $ | 278 |
| $ | 100 |
Straight-line rent liability (1) |
|
| 245 |
|
| 205 |
Income taxes |
|
| 114 |
|
| 23 |
Pension benefits |
|
| 19 |
|
| 26 |
Deferred taxes |
|
| 15 |
|
| 3 |
Postretirement benefits |
|
| 14 |
|
| 14 |
Workers’ compensation and general liability reserves |
|
| 7 |
|
| 8 |
Other |
|
| 9 |
|
| 12 |
|
| $ | 701 |
| $ | 391 |
(1) | |
|
|
15. Leases
On February 3, 2019, we adopted the new lease accounting standard. We applied the modified retrospective method of adoption and therefore, results for the current year are presented under the new guidance, while prior periods have not been adjusted. The Company is obligated undermajority of our leases are operating leases for almost all of itsour company-operated retail store properties.locations. We also lease, among other things, distribution and warehouse facilities, and office space for corporate administrative purposes.
2019 Form 10-K Page 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating lease periods generally range from 5 to 10 years and generally contain rent escalation provisions. Some of the store leases contain renewal options with varying terms and conditions. Management expects that
As February 1, 2020, amounts recognized in the normal courseConsolidated Balance Sheet related to operating leases were as follows:
| | | |
|
| ($ in millions) | |
Assets | | | |
Operating lease right-of-use assets | | $ | 2,899 |
| | | |
Liabilities | | | |
Current | | | |
Operating lease liabilities | |
| 518 |
Noncurrent | | | |
Operating lease liabilities | | | 2,678 |
Total lease liabilities | | $ | 3,196 |
Other information related to operating leases as of business, expiringFebruary 1, 2020 consisted of the following:
| | | |
| | | |
| | | |
Weighted average remaining lease term (years) | | 7.3 | |
Weighted average discount rate | | 5.4 | % |
Total lease costs include fixed operating lease costs, variable lease costs, and short-term lease costs. Most of our real estate leases will generally be renewed or, upon making a decision to relocate, replaced by leases onrequire we pay certain expenses, such as CAM costs, real estate taxes, and other premises. Operatingexecutory costs, of which the fixed portion is included in operating lease periods generally range from 5 to 10 years.
Certain leases provide for additional rent paymentscosts. Variable lease costs include non-lease components which are not fixed and are not included in determining the present value of our lease liability. Variable lease costs also include amounts based on a percentage of store sales. Also, mostgross sales in excess of specified levels that are recognized when probable. Lease costs which relate to retail stores and distribution centers are classified within cost of sales, while non-store lease costs are included in SG&A. The components of lease cost as of February 1, 2020 were as follows:
| | | |
|
| ($ in millions) | |
Operating lease costs | | $ | 668 |
Variable lease costs | | | 332 |
Short-term lease costs | | | 23 |
Sublease income | | | (1) |
Net lease cost | | $ | 1,022 |
Rent expense for the Company’sprior year period is accounted for under previous lease guidance. Rent expense for operating leases require the paymentfor 2018 and 2017 amounted to $750 million and $735 million, respectively, and consisted of certain executoryminimum and contingent rentals of $728 million and $27 million, respectively, for 2018 and $714 million and $26 million, respectively, for 2017, less sublease income of $5 million in both years. Other costs such as insurance, maintenance, and other costs in additionrelated to the future minimum lease payments. These costs,our leases, including the amortization of lease rights, totaled $147 million and $146 million in 2017, $141 million in 2016,for the years ended February 2, 2019 and $137 million in 2015. February 3, 2018, respectively.
Supplemental cash flow information related to leases for the year ended February 1, 2020 was as follows:
| | | |
|
| ($ in millions) | |
Cash paid for amounts included in measurement of operating lease liabilities: | | $ | 679 |
Right-of-use assets obtained in exchange for lease obligations: | | | 322 |
562019 Form 10-K Page 57
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of February 1, 2020 are as follows:
Included in
| | | |
|
| ($ in millions) | |
2020 | | $ | 673 |
2021 | |
| 622 |
2022 | |
| 563 |
2023 | |
| 491 |
2024 | |
| 411 |
Thereafter | |
| 1,129 |
Total lease payments | | | 3,889 |
Less: Interest | | | 693 |
Total lease liabilities | | $ | 3,196 |
As of February 1, 2020, we signed operating leases primarily for retail stores that have not yet commenced; the amounts below are non-store expenses that totaled $24 million in both 2017 and 2016, and $18 million in 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
| ($ in millions) | |||||
Minimum rent | $ | 714 | $ | 667 | $ | 618 |
Contingent rent based on sales |
| 26 |
| 29 |
| 27 |
Sublease income |
| (5) |
| (6) |
| (5) |
| $ | 735 | $ | 690 | $ | 640 |
Future minimumtotal future undiscounted lease payments under these leases are $35 million.
As of February 2, 2019, the estimated future minimum non-cancellable operating leases, net of future non-cancellable operating sublease payments, are:lease commitments were as follows:
|
|
| |||
|
|
| |||
| ($ in millions) | ||||
2018 | $ | 678 | |||
| | | |||
|
| ($ in millions) | |||
2019 |
| 637 | | $ | 672 |
2020 |
| 594 | |
| 631 |
2021 |
| 554 | |
| 583 |
2022 |
| 496 | |
| 527 |
2023 | |
| 456 | ||
Thereafter |
| 1,721 | |
| 1,408 |
Total operating lease commitments | $ | 4,680 | | $ | 4,277 |
16. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss,AOCL, net of tax, is comprised of the following:
| | | | | | | | | |
|
| 2019 |
| 2018 | | 2017 | |||
|
| ($ in millions) | |||||||
Foreign currency translation adjustments | | $ | (104) | | $ | (84) | | $ | (9) |
Cash flow hedges | |
| (3) | |
| — | |
| — |
Unrecognized pension cost and postretirement benefit | |
| (287) | |
| (286) | |
| (270) |
| | $ | (394) | | $ | (370) | | $ | (279) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | 2016 | 2015 | |||
| ($ in millions) | |||||
Foreign currency translation adjustments | $ | (9) | $ | (127) | $ | (119) |
Cash flow hedges |
| — |
| 1 |
| 2 |
Unrecognized pension cost and postretirement benefit |
| (270) |
| (236) |
| (248) |
Unrealized loss on available-for-sale security |
| — |
| (1) |
| (1) |
| $ | (279) | $ | (363) | $ | (366) |
The changes in accumulated other comprehensive lossAOCL for the periodyear ended February 3, 20181, 2020 were as follows:
| | | | | | | | | | | | |
| | Foreign | | | | | Items Related | | | | ||
| | Currency | | | | | to Pension and | | | | ||
| | Translation | | Cash Flow | | Postretirement | | | | |||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Total | ||||
Balance as of February 2, 2019 | | $ | (84) | | $ | — | | $ | (286) | | $ | (370) |
| | | | | | | | | | | | |
OCI before reclassification | |
| (20) | |
| (3) | |
| — | |
| (23) |
Amortization of pension actuarial loss, net of tax | |
| — | |
| — | |
| 8 | |
| 8 |
Pension remeasurement, net of tax | |
| — | |
| — | |
| (9) | |
| (9) |
Other comprehensive income | |
| (20) | |
| (3) | |
| (1) | |
| (24) |
Balance as of February 1, 2020 | | $ | (104) | | $ | (3) | | $ | (287) | | $ | (394) |
2019 Form 10-K Page 58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized |
|
|
| ||
|
| Foreign |
|
|
| Items Related |
| (Loss)/Gain |
|
|
| ||||
|
| Currency |
|
|
| to Pension and |
| on |
|
|
| ||||
|
| Translation |
| Cash Flow |
| Postretirement |
| Available-For- |
|
| |||||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Sale Security |
| Total | |||||
Balance as of January 28, 2017 |
| $ | (127) |
| $ | 1 |
| $ | (236) |
| $ | (1) |
| $ | (363) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassification |
|
| 114 |
|
| (1) |
|
| 4 |
|
| 1 |
|
| 118 |
Reclassified from AOCI |
|
| — |
|
| — |
|
| 7 |
|
| — |
|
| 7 |
Reclassification of tax effects due to the adoption of ASU 2018-02 |
|
| 4 |
|
| — |
|
| (45) |
|
| — |
|
| (41) |
Other comprehensive income/ (loss) |
|
| 118 |
|
| (1) |
|
| (34) |
|
| 1 |
|
| 84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 3, 2018 |
| $ | (9) |
| $ | — |
| $ | (270) |
| $ | — |
| $ | (279) |
57
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications to income from accumulated other comprehensive lossAOCL for the periodyear ended February 3, 20181, 2020 were as follows:
| ||
| ||
|
| |
| ||
| ||
| ||
|
|
| | | |
|
| ($ in millions) | |
Amortization of actuarial (gain) loss: |
| |
|
Pension benefits- amortization of actuarial loss | | $ | 12 |
Postretirement benefits- amortization of actuarial gain | |
| (1) |
Net periodic benefit cost (see Note 20) | |
| 11 |
Income tax benefit | |
| (3) |
Total, net of tax | | $ | 8 |
17. Income Taxes
The domestic and international components of pre-tax income are as follows:
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
| |||||||||
| 2017 |
| 2016 |
| 2015 | ||||||||||||
| ($ in millions) | ||||||||||||||||
| | | | | | | |||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||
|
| ($ in millions) | |||||||||||||||
Domestic | $ | 432 |
| $ | 779 |
| $ | 668 | | $ | 591 | | $ | 629 | | $ | 432 |
International |
| 146 |
|
| 225 |
|
| 169 | |
| 81 | |
| 84 | |
| 146 |
Total pre-tax income | $ | 578 |
| $ | 1,004 |
| $ | 837 | | $ | 672 | | $ | 713 | | $ | 578 |
Domestic pre-tax income includes the results of non-U.S. businesses that are operated in branches owned directly by the U.S. which, therefore, are subject to U.S. income tax.
The income tax provision consists of the following:
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
| |||||||||
| 2017 |
| 2016 |
| 2015 | ||||||||||||
| | | | | | | | ||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||
Current: | ($ in millions) |
| ($ in millions) | ||||||||||||||
Federal | $ | 129 |
| $ | 249 |
| $ | 212 | | $ | 106 | | $ | 91 | | $ | 129 |
State and local |
| 18 |
|
| 44 |
|
| 37 | |
| 39 | |
| 42 | |
| 18 |
International |
| 42 |
|
| 48 |
|
| 53 | |
| 31 | |
| 30 | |
| 42 |
Total current tax provision |
| 189 |
|
| 341 |
|
| 302 | |
| 176 | |
| 163 | |
| 189 |
Deferred: |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Federal |
| 98 |
|
| (6) |
|
| (8) | |
| (1) | |
| (4) | |
| 98 |
State and local |
| 5 |
|
| 1 |
|
| (1) | |
| — | |
| 1 | |
| 5 |
International |
| 2 |
|
| 4 |
|
| 3 | |
| 6 | |
| 12 | |
| 2 |
Total deferred tax provision |
| 105 |
|
| (1) |
|
| (6) | |
| 5 | |
| 9 | |
| 105 |
Total income tax provision | $ | 294 |
| $ | 340 |
| $ | 296 | | $ | 181 | | $ | 172 | | $ | 294 |
The Company previously considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. GivenPublic Law 115-97, informally known as the Tax Act’s significant changesCuts and potential opportunitiesJobs Act (the “Tax Act”), was enacted on December 22, 2017. The Tax Act lowered the U.S. statutory income tax rate from 35 percent to repatriate cash without significant incremental21 percent, imposed a one-time transition tax on our foreign earnings, which previously had been deferred from U.S. income tax, and created a modified territorial system. During the fourth quarter of 2017, we recognized a $99 million provisional charge for the mandatory deemed repatriation of foreign sourced net earnings and a corresponding change in the permanent reinvestment assertion under ASC 740-30. During 2018, we finalized our assessment of the income tax effects of the Tax Act and included measurement period adjustments that reduced the provisional amounts by $28 million.
The Tax Act included a provision effective in 2018 to tax global intangible low-taxed income (“GILTI”) of our foreign subsidiaries. We treat GILTI tax as a current period expense. The GILTI tax expense for 2019 and 2018 was not significant.
2019 Form 10-K Page 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following enactment of the Tax Act and the one-time transition tax, our historical foreign earnings are not subject to additional U.S. federal tax the Company is in the processupon repatriation. Further, no additional U.S. federal tax will be due upon repatriation of evaluating its current permanent reinvestment assertions.foreign earnings because they are either exempt or subject to U.S. tax as earned. At February 1, 2020, we had accumulated undistributed foreign earnings of approximately $704 million. This evaluation includes the possible repatriationamount consists of historical earnings (2017 and prior) that have now beenwere previously taxed under the Tax Act.
The Company had aggregate undistributed earningsAct and profits (“E&P”) frompost-Tax Act earnings. Investments in our foreign subsidiaries, including working capital, will continue to be permanently reinvested. Cash balances in excess of approximately $1,407 million at February 3, 2018, which is now classified as previously taxed income (“PTI”) subsequentworking capital needs are considered to be available for repatriation to the Tax Act. The Company recorded a provisional $86 million “transition tax” in connection with this E&P. Additionally, the Company has recorded a provisional $13 million deferred tax liability as of the date of the change in the Company’s permanent reinvestment assertion primarily for state income taxesUnited States and foreign withholding taxes will be accrued as necessary on these amounts. We have not recorded a deferred tax liability for the future repatriation of PTI. The Company currently considersdifference between the remaining financial statement carrying amounts overamount and the tax basis of our investments in its foreign subsidiaries to be indefinitely reinvested, and has not recorded a provisional deferred tax liability.subsidiaries. The determination of any unrecorded provisional deferred tax liability on this amount is not practicable due to the uncertainty of how these investments would be recovered.
58
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income is as follows:
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
Federal statutory income tax rate (1) |
| 21.0 | % | 21.0 | % | 33.7 | % |
Deemed repatriation tax |
| — |
| (2.7) |
| 17.1 | |
Increase in valuation allowance |
| 1.0 |
| 2.4 |
| 1.6 | |
State and local income taxes, net of federal tax benefit |
| 4.5 |
| 4.7 |
| 2.0 | |
International income taxed at varying rates |
| 1.9 |
| 1.6 |
| (2.3) | |
Foreign tax credits |
| (2.0) |
| (2.1) |
| (2.6) | |
Domestic/foreign tax settlements |
| — |
| (0.7) |
| (0.2) | |
Federal tax credits |
| (0.2) |
| (0.2) |
| (0.2) | |
Other, net |
| 0.8 |
| 0.1 |
| 1.7 | |
Effective income tax rate |
| 27.0 | % | 24.1 | % | 50.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Federal statutory income tax rate (1) |
| 33.7 | % |
| 35.0 | % |
| 35.0 | % |
Deemed repatriation tax |
| 17.1 |
|
| — |
|
| — |
|
Increase in valuation allowance |
| 1.6 |
|
| — |
|
| — |
|
State and local income taxes, net of federal tax benefit |
| 2.0 |
|
| 3.1 |
|
| 2.8 |
|
International income taxed at varying rates |
| (2.3) |
|
| (3.7) |
|
| (2.1) |
|
Foreign tax credits |
| (2.6) |
|
| (1.9) |
|
| (2.8) |
|
Domestic/foreign tax settlements |
| (0.2) |
|
| (0.1) |
|
| (0.1) |
|
Federal tax credits |
| (0.2) |
|
| (0.2) |
|
| (0.2) |
|
Other, net |
| 1.7 |
|
| 1.7 |
|
| 2.8 |
|
Effective income tax rate |
| 50.8 | % |
| 33.9 | % |
| 35.4 | % |
(1) | |
|
|
Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Items that give rise to significant portions of the Company’sour deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Deferred tax assets: | ($ in millions) | ||||
Tax loss/credit carryforwards and capital loss | $ | 23 |
| $ | 12 |
Employee benefits |
| 16 |
|
| 76 |
Property and equipment |
| 54 |
|
| 110 |
Straight-line rent |
| 44 |
|
| 51 |
Other |
| 27 |
|
| 47 |
Total deferred tax assets | $ | 164 |
| $ | 296 |
Valuation allowance |
| (17) |
|
| (7) |
Total deferred tax assets, net | $ | 147 |
| $ | 289 |
Deferred tax liabilities: |
|
|
|
|
|
Merchandise inventories | $ | 79 |
| $ | 104 |
Goodwill and other intangible assets |
| 20 |
|
| 21 |
Other |
| 15 |
|
| 6 |
Total deferred tax liabilities | $ | 114 |
| $ | 131 |
Net deferred tax asset | $ | 33 |
| $ | 158 |
Balance Sheet caption reported in: |
|
|
|
|
|
Deferred taxes | $ | 48 |
| $ | 161 |
Other liabilities |
| (15) |
|
| (3) |
| $ | 33 |
| $ | 158 |
As a result of the Tax Act’s corporate income tax rate reduction to 21 percent, the Company remeasured its deferred tax assets and liabilities, and the adjustment was not significant.
| | | | | | |
|
| 2019 |
| 2018 | ||
Deferred tax assets: |
| ($ in millions) | ||||
Tax loss/credit carryforwards and capital loss | | $ | 54 | | $ | 39 |
Employee benefits | |
| 40 | |
| 38 |
Property and equipment | |
| 30 | |
| 35 |
Goodwill and other intangible assets | |
| 14 | |
| 24 |
Operating leases - liabilities | | | 844 | | | — |
Straight-line rent | |
| — | |
| 47 |
Other | |
| 29 | |
| 25 |
Total deferred tax assets | | $ | 1,011 | | $ | 208 |
Valuation allowance | |
| (39) | |
| (33) |
Total deferred tax assets, net | | $ | 972 | | $ | 175 |
Deferred tax liabilities: | |
|
| |
|
|
Merchandise inventories | | $ | 86 | | $ | 77 |
Operating leases - assets | | | 794 | | | — |
Other | |
| 13 | |
| 17 |
Total deferred tax liabilities | | $ | 893 | | $ | 94 |
Net deferred tax asset | | $ | 79 | | $ | 81 |
Balance Sheet caption reported in: | |
|
| |
|
|
Deferred taxes | | $ | 81 | | $ | 87 |
Other liabilities | |
| (2) | |
| (6) |
| | $ | 79 | | $ | 81 |
2019 Form 10-K Page 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based upon the level of historical taxable income and projections for future taxable income, which are based upon the Company’sour long-range strategic plans, management believeswe believe it is more likely than not that the Companywe will realize the benefits of these deductible differences, net of the valuation allowances at February 3, 2018,1, 2020, over the periods in which the temporary differences are anticipated to reverse. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
59
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 3, 2018, the Company has1, 2020, we have a valuation allowance of $17$39 million to reduce itsour deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $15$36 million was recorded against tax loss carryforwards of certain foreign entities. Based on the history of losses and the absence of prudent and feasible business plans for generating future taxable income in these entities, the Company believeswe believe it is more likely than not that the benefit of these loss carryforwards will not be realized. An additionalAs of February 1, 2020, a valuation allowance of $2 million relates towas established for foreign taxes assessed at rates in excess of the U.S. federal tax rate for which no U.S. foreign tax credit is available. Additionally, since we do not have any reasonably foreseeable sources of Canadian capital gains, a valuation allowance of $1 million was established during 2019 for a deferred tax assetsasset arising from a capital loss associated with an impairment of the Northern Groupuncollectible Canadian note receivable in 2008. The Company does not anticipate realizing capital gains to utilize the capital loss associated with the note receivable impairment.receivable.
At February 3, 2018, the Company has U.S. state operating loss carryforwards with a potential tax benefit of $1 million that expire between 2021 and 2037. The Company will1, 2020, we have when realized, a capital loss with a potential benefit of $2 million arising from a note receivable. This loss will carryforward for 5 years after realization. The Company has international minimum tax credit carryforwards with a potential tax benefit of $4 million and operating loss carryforwards with a potential tax benefit of $16$41 million, a portion of which will expire between 20182020 and 20262027 and a portion of which will never expire. We will have, when realized, capital losses with a potential benefit of $1 million arising from a Canadian note receivable and $2 million from a minority interest investment. The stateCanadian loss will carryforward indefinitely after realization and the minority interest loss can be carried forward five years after realization. The international operating loss carryforwards do not include unrecognized tax benefits. We also have foreign tax credit carryforwards with a potential tax benefit of $6 million that will expire between 2018 and 2029.
The Company operatesWe operate in multiple taxing jurisdictions and isare subject to audit. Audits can involve complex issues that may require an extended period of time to resolve. A taxing authority may challenge positions that the Company haswe adopted in itsour income tax filings. Accordingly, the Companywe may apply different tax treatments for transactions in filing itsour income tax returns than for income tax financial reporting. The CompanyWe regularly assesses itsassess our tax positions for such transactions and recordsrecord reserves for those differences.
The Company’sOur 2018 U.S. Federal income tax filings have been examinedfiling is under examination by the Internal Revenue Service through 2016. The Company isService. We expect to conclude the examination in the first quarter of 2020. We are participating in the IRS’s Compliance Assurance Process (“CAP”) for 2017,2019, which is expected to conclude during 2018. The Company has2020. We have started the CAP for 2018. Due to the recent utilization of net operating loss carryforwards, the Company is2020. We are subject to state and local tax examinations effectively including years from 20002015 to the present. To date, no adjustments have been proposed in any audits that will have a material effect on the Company’sour financial position or results of operations.
At February 3, 2018 and January 28, 2017, the Company1, 2020, we had $44$45 million and $38 million, respectively, of gross unrecognized tax benefits, and $44of which $34 million and $38 million, respectively, of net unrecognized tax benefits that would, if recognized, affect the Company’sour annual effective tax rate. The Company hasWe classified certain income tax liabilities as current or noncurrent based on management’sour estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. Interest income was not significant in 2017, wasThe Company recognized $1 million of interest expense in 2016, and2019. Interest was not significant for 2015. Accrued2018 or 2017. The total amount of accrued interest and penalties was not significant for 2017,$2 million, $1 million, and NaN in 2016,2019, 2018, and $2 million in 2015.2017, respectively.
The following table summarizes the activity related to unrecognized tax benefits:
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
| |||||||||
| 2017 |
| 2016 |
| 2015 | ||||||||||||
| ($ in millions) | ||||||||||||||||
| | | | | | | |||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||
|
| ($ in millions) | |||||||||||||||
Unrecognized tax benefits at beginning of year | $ | 38 |
| $ | 38 |
| $ | 40 | | $ | 34 | | $ | 44 | | $ | 38 |
Foreign currency translation adjustments |
| 4 |
| 1 |
|
| (2) | |
| (1) | |
| (3) | |
| 4 | |
Increases related to current year tax positions |
| 3 |
| 8 |
|
| 4 | |
| 3 | |
| 2 | |
| 3 | |
Increases related to prior period tax positions |
| 1 |
| 1 |
|
| 2 | |
| 12 | |
| 9 | |
| 1 | |
Decreases related to prior period tax positions |
| — |
|
| (2) |
|
| — | |
| — | |
| (13) | |
| — |
Settlements |
| (1) |
| (7) |
|
| (1) | |
| (2) | |
| (3) | |
| (1) | |
Lapse of statute of limitations |
| (1) |
| (1) |
|
| (5) | |
| (1) | |
| (2) | |
| (1) | |
Unrecognized tax benefits at end of year | $ | 44 |
| $ | 38 |
| $ | 38 | | $ | 45 | | $ | 34 | | $ | 44 |
2019 Form 10-K Page 61
60
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is reasonably possible that the liability associated with the Company’sour unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits, or the expiration of statutes of limitations. Settlements could increase earnings upduring 2020 are not expected to $5 millionbe significant based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believeswe believe that an adequate provision has been made for such issues, the ultimate resolution could have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings. Due to the uncertainty of amounts and in accordance with itsour accounting policies, the Company haswe have not recorded any potential consequences of these settlements. In addition, to the extent there are settlements in the future for certain foreign unrecognized tax benefits, the transition tax may also be revised accordingly.
18. Financial Instruments and Risk Management
The Company operatesWe operate internationally and utilizesutilize certain derivative financial instruments to mitigate itsour foreign currency exposures, primarily related to third-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company iswe are 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 monitorsWe monitor the creditworthiness of counterparties throughout the duration of the derivative instrument.
Additional information is contained within Note 19, Fair Value Measurements.
Derivative Holdings Designated as Hedges
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Companywe formally documentsdocument the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as itsour 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. Gains or losses recognized in earnings for any of the periods presented were not significant. 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 evaluateswe evaluate periodically.
The primary currencies to which the Company iswe are exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part,Generally, merchandise inventories are purchased by each geographic area in their respective local currency. The most significantcurrency with the exception to this isof the United Kingdom, whose merchandise inventory purchases are denominated in euros.
For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of Accumulated Other Comprehensive Loss (“AOCL”)AOCL and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was 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.
61
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The notional value of the contracts outstanding at February 1, 2020 and February 2, 2019 was $92 million and $117million, respectively. As of February 3, 2018,1, 2020, all of the Company’sour hedged forecasted transactions extend less than twelve months into the future, and the Company expectswe expect all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months. The balance in AOCL as of February 1, 2020 was a gainloss of $1$3 million and as of January 28, 2017. During 2017, the net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventoryFebruary 2, 2019 it was more than offset by amounts recognized in cost of sales, therefore AOCL was reduced to zero. not significant.
2019 Form 10-K Page 62
The notional value of the contracts outstanding at February 3, 2018 was $118 million, and these contracts mature at various dates through January 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Holdings Not Designated as Hedges
The Company entersWe enter 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 expensesSG&A or otherOther income, net, depending on the type of transaction. The aggregate amount recognized for these contracts was not significant asfor any of February 3, 2018 and represented income of $1 million as of January 28, 2017. the periods presented.
The notional value of foreign exchange forward contracts outstanding at February 3, 20181, 2020 and February 2, 2019 was $2$1 million and these contracts mature during September 2018.
From time to time, the Company mitigates the effect of fluctuating$11 million, respectively. The foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented. There were no currency optionforward contracts outstanding at February 3, 2018.1, 2020 matured during February 2020.
Fair Value of Derivative Contracts
The following represents the fair value of the Company’sour derivative contracts. Many of the Company’sour agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
| ||||||||||
|
| Balance Sheet |
|
|
|
| ||||||||||
| | | | | | | ||||||||||
|
| Balance Sheet |
| February 1, |
| February 2, | ||||||||||
($ in millions) |
| Caption |
| 2017 |
| 2016 | | Caption | | 2020 |
| 2019 | ||||
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
Foreign exchange forward contracts |
| Current assets |
| $ | 1 |
| $ | 3 |
| Current liabilities | | $ | 4 | | $ | 1 |
Foreign exchange forward contracts |
| Current liabilities |
| $ | 1 |
| $ | 3 |
Notional Values and Foreign Currency Exchange Rates
The table below presents the notional amounts for all outstanding derivatives and the weighted-average exchange rates of foreign exchange forward contracts at February 3, 2018:1, 2020:
| | | | | |
|
| | Contract Value |
| Weighted-Average |
| | | ($ in millions) | | Exchange Rate |
Inventory | |
|
|
|
|
Buy €/Sell British £ |
| $ | 92 |
| 0.8847 |
| | | | | |
Intercompany | | | |
| |
Buy US $/Sell CAD $ | | $ | 1 | | 1.3167 |
|
|
|
|
|
| Contract Value |
| Weighted-Average | |
| ($ in millions) |
| Exchange Rate | |
Inventory |
|
|
|
|
Buy €/Sell British £ | $ | 111 |
| 0.8749 |
|
|
|
|
|
Intercompany |
|
|
|
|
Buy US $/Sell € | $ | 7 |
| 1.2118 |
Buy US $/Sell CAD $ | $ | 2 |
| 1.2568 |
62
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Risk
The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising, and customer experience are important competitive factors in the Company’s business. The Company operatesWe operate in 2427 countries and purchased approximately 9391 percent of itsour merchandise in 20172019 from itsour top 5 suppliers. In 2017, the Company2019, we purchased approximately 6771 percent of itsour athletic merchandise from one major supplier, Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchased 4443 to 7377 percent of their merchandise from Nike.
Included in the Company’sour Consolidated Balance Sheet at February 3, 2018,1, 2020, are the net assets of the Company’s European operations, which total $1,058$487 million and are located in 20 countries, 11 of which have adopted the euro as their functional currency.
19. Fair Value Measurements
We categorize our financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following table provides a summaryfair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the recognized assets and liabilitieshierarchy, the category level is based on the lowest priority level input that are measured atis significant to the fair value onmeasurement of the instrument.
2019 Form 10-K Page 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of February 3, 2018 |
| As of January 28, 2017 | ||||||||||||||
|
| ($ in millions) | ||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale security |
| $ | — |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 6 |
| $ | — |
Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 3 |
|
| — |
Total Assets |
| $ | — |
| $ | 8 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 3 |
|
| — |
Total Liabilities |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 3 |
| $ | — |
Securities classified as available-for-sale areliability in an orderly transaction between market participants exclusive of any transaction costs. Our financial assets recorded at fair value with unrealized gains and losses reported, net of tax,are categorized as follows:
Level 1 - Quoted prices for identical instruments in other comprehensive income, unless the unrealized gains or losses are determined to beactive markets.
Level 2 - Observable inputs other than temporary.quoted prices included within Level 1, including 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 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
Our 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. instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| | | | | | | | | | | | | | | | | | |
| | As of February 1, 2020 | | As of February 2, 2019 | ||||||||||||||
| | ($ in millions) | ||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Available-for-sale security | | | — | | | 7 | | | — | | | — | | | 6 | | | — |
Total Assets | | $ | — | | $ | 7 | | $ | — | | $ | — | | $ | 6 | | $ | — |
| | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange forward contracts | |
| — | |
| 4 | | | — | |
| — | |
| 1 | |
| — |
Total Liabilities | | $ | — | | $ | 4 | | $ | — | | $ | — | | $ | 1 | | $ | — |
There were no 0 transfersintoor out of Level 1, Level 2, or Level 3 for any of the periods presented.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In 2017Assets and 2016,liabilities recognized or disclosed at fair value on the Company performed impairment reviews of long-livedconsolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, operating lease right-of-use assets, goodwill, other intangible assets and minority investments that are not accounted for Runners Point and Sidestep. Additionally, during 2017,under the Company performed an impairment reviewequity method of long-livedaccounting. These assets for SIX:02. The fair value of all of the assets reviewed for both periods wereare measured using Level 3 inputs. Please see Note 3, Litigation and Other Charges for further information.inputs, if determined to be impaired.
Long-Term Debt
The carrying value and estimated fair value of long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| ($ in millions) | ||||
Carrying value |
| $ | 125 |
| $ | 127 |
Fair value |
| $ | 144 |
| $ | 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.
| | | | | | |
|
| February 1, |
| February 2, | ||
|
| ($ in millions) | ||||
Carrying value | | $ | 122 | | $ | 124 |
Fair value | | $ | 135 | | $ | 136 |
The carrying values of cash and cash equivalents, restricted cash, and other current receivables and payables approximate their fair value.
2019 Form 10-K Page 64
63
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Retirement Plans and Other Benefits
The Company and the Company’s U.S. retirement plan are defendants in a class action lawsuit. Please see Note 22, Legal Proceedings for further information. The amounts presented in this note do not include the expected plan reformation.
Pension and Other Postretirement Plans
The Company hasWe have defined benefit pension plans covering certain of itsour North American employees. In May 2019, the U.S. qualified pension plan was amended such that all employees which are fundedwho were not participants in the plan as of December 31, 2019, will not become participants after such date. All benefit accruals were frozen as of December 31, 2019 for all plan participants with less than eleven years of service as of December 31, 2019. For participants with more than eleven years of service as of December 31, 2019, benefit accruals will be frozen as of December 31, 2022. Participants will continue to accrue interest in accordance with the provisions of the laws where the plans are in effect. In addition, the Company has a defined benefit plan for certain individuals of Runners Point Group. The Companyplan’s provisions.
We also sponsorssponsor postretirement medical and life insurance plans, which are available to most of itsour retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the month-end date that is closest to our fiscal year end.
end. The following tables set forth the plans’ changes in benefit obligations and plan assets, funded status, and amounts recognized in the Consolidated Balance Sheets, as of February 3, 2018 and January 28, 2017:Sheets:
| | | | | | | | | | | | |
| | Pension Benefits | Postretirement Benefits | |||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| | ($ in millions) | ||||||||||
Change in benefit obligation |
| |
|
| |
|
| |
|
| |
|
Benefit obligation at beginning of year | | $ | 739 | | $ | 683 | | $ | 12 | | $ | 15 |
Service cost | |
| 20 | |
| 18 | |
| — | |
| — |
Interest cost | |
| 27 | |
| 29 | |
| — | |
| — |
Plan participants’ contributions | |
| — | |
| — | |
| 1 | |
| 1 |
Actuarial (gain) / loss | |
| 76 | |
| (16) | |
| — | |
| (2) |
Foreign currency translation adjustments | |
| (1) | |
| (4) | |
| — | |
| — |
Plan reformation (1) | | | — | | | 194 | | | — | | | — |
Benefits paid | |
| (85) | |
| (165) | |
| (2) | |
| (2) |
Settlement | | | (1) | | | — | | | — | | | — |
Benefit obligation at end of year | | $ | 775 | | $ | 739 | | $ | 11 | | $ | 12 |
| | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 644 | | $ | 697 | | | | | | |
Actual return on plan assets | |
| 100 | |
| (15) | | | | | | |
Employer contributions | |
| 57 | |
| 131 | | | | | | |
Foreign currency translation adjustments | |
| (1) | |
| (4) | | | | | | |
Benefits paid | |
| (85) | |
| (165) | | | | | | |
Fair value of plan assets at end of year | | $ | 715 | | $ | 644 | | | | | | |
| | | | | | | | | | | | |
Funded status | | $ | (60) | | | (95) | | $ | (11) | | $ | (12) |
| | | | | | | | | | | | |
Amounts recognized on the balance sheet: | | | | | | | | | | | | |
Other assets | | $ | 3 | | $ | 7 | | $ | — | | $ | — |
Accrued and other liabilities | |
| (2) | |
| (3) | |
| (1) | |
| (1) |
Other liabilities | |
| (61) | |
| (99) | |
| (10) | |
| (11) |
| | $ | (60) | | $ | (95) | | $ | (11) | | $ | (12) |
| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Postretirement Benefits | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| ($ in millions) | ||||||||||
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
| $ | 666 |
| $ | 667 |
| $ | 15 |
| $ | 14 |
Service cost |
|
| 17 |
|
| 16 |
|
| — |
|
| — |
Interest cost |
|
| 25 |
|
| 26 |
|
| 1 |
|
| 1 |
Plan participants’ contributions |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
Actuarial loss |
|
| 25 |
|
| 7 |
|
| — |
|
| 1 |
Foreign currency translation adjustments |
|
| 3 |
|
| 4 |
|
| — |
|
| — |
Benefits paid |
|
| (53) |
|
| (54) |
|
| (2) |
|
| (2) |
Benefit obligation at end of year |
| $ | 683 |
| $ | 666 |
| $ | 15 |
| $ | 15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
| $ | 647 |
| $ | 602 |
|
|
|
|
|
|
Actual return on plan assets |
|
| 70 |
|
| 55 |
|
|
|
|
|
|
Employer contributions |
|
| 29 |
|
| 40 |
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 4 |
|
| 4 |
|
|
|
|
|
|
Benefits paid |
|
| (53) |
|
| (54) |
|
|
|
|
|
|
Fair value of plan assets at end of year |
| $ | 697 |
| $ | 647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
| $ | 14 |
| $ | (19) |
| $ | (15) |
| $ | (15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
| $ | 36 |
| $ | 10 |
| $ | — |
| $ | — |
Accrued and other liabilities |
|
| (3) |
|
| (3) |
|
| (1) |
|
| (1) |
Other liabilities |
|
| (19) |
|
| (26) |
|
| (14) |
|
| (14) |
|
| $ | 14 |
| $ | (19) |
| $ | (15) |
| $ | (15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other |
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive loss, pre-tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) |
| $ | 368 |
| $ | 387 |
| $ | (5) |
| $ | (7) |
Prior service cost |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| $ | 369 |
| $ | 388 |
| $ | (5) |
| $ | (7) |
(1) | In connection with the pension litigation, the Company reformed its U.S. qualified pension plan during the second quarter of 2018 in accordance with the court’s order. |
2019 Form 10-K Page 65
64
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 3, 2018, the assets of both the Canadian and U.S. qualified pension plans exceeded their accumulated benefit obligations. As of January 28, 2017, the
| | | | | | | | | | | | |
| | Pension Benefits | Postretirement Benefits | |||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Amounts recognized in accumulated other | | | | | | | | | | | | |
comprehensive loss, pre-tax: | | | | | | | | | | | | |
Net loss (gain) | | $ | 392 | | $ | 391 | | $ | (5) | | $ | (6) |
Prior service cost | |
| — | |
| 1 | |
| — | |
| — |
| | $ | 392 | | $ | 392 | | $ | (5) | | $ | (6) |
The Canadian qualified pension plan’s assets exceeded its accumulated benefit obligation.obligation for both 2019 and 2018. The Company’s non-qualified pension plans have an accumulated benefit obligation in excess of plan assets, as these plans are unfunded. Accordingly, the table below reflects the non-qualified plans for 2017, whereas the amounts presented for 2016 included both the U.S. qualified plan and the non-qualified plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| ($ in millions) | ||||
Projected benefit obligation |
| $ | 22 |
| $ | 617 |
Accumulated benefit obligation |
|
| 22 |
|
| 617 |
Fair value of plan assets |
|
| — |
|
| 589 |
plans for both 2019 and 2018.
| | | | | | |
|
| 2019 |
| 2018 | ||
|
| ($ in millions) | ||||
Projected benefit obligation | | $ | 727 | | $ | 696 |
Accumulated benefit obligation | |
| 727 | |
| 696 |
Fair value of plan assets | |
| 664 | |
| 593 |
The following tables set forth the changes in accumulated other comprehensive lossAOCL (pre-tax) at February 3, 2018:1, 2020:
| | | | | | |
| | Pension | | Postretirement | ||
|
| Benefits |
| Benefits | ||
|
| ($ in millions) | ||||
Net actuarial loss (gain) at beginning of year | | $ | 391 | | $ | (6) |
Amortization of net (loss) gain | |
| (12) | |
| 1 |
Loss arising during the year | |
| 13 | |
| — |
Foreign currency fluctuations | |
| — | |
| — |
Net actuarial loss (gain) at end of year (1) | | $ | 392 | | $ | (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension |
| Postretirement | ||
|
| Benefits |
| Benefits | ||
|
| ($ in millions) | ||||
Net actuarial loss (gain) at beginning of year |
| $ | 387 |
| $ | (7) |
Amortization of net (loss) gain |
|
| (13) |
|
| 2 |
Gain arising during the year |
|
| (8) |
|
| — |
Foreign currency fluctuations |
|
| 2 |
|
| — |
Net actuarial loss (gain) at end of year (1) |
| $ | 368 |
| $ | (5) |
Net prior service cost at end of year (2) |
|
| 1 |
|
| — |
Total amount recognized |
| $ | 369 |
| $ | (5) |
(1) |
| The amounts in |
|
|
The following weighted-average assumptions were used to determine the benefit obligations under the plans:
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Pension Benefits |
| Postretirement Benefits |
| |||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | | | | | | |||||||||||||
| | Pension Benefits | Postretirement Benefits |
| ||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||||||||||
Discount rate |
|
| 3.7 | % |
| 4.0 | % |
| 3.7 | % |
| 4.0 | % |
| 2.9 | % | 4.0 | % | 3.0 | % | 4.1 | % |
Rate of compensation increase |
|
| 3.6 | % |
| 3.7 | % |
|
|
|
|
|
|
| 3.6 | % | 3.6 | % |
|
|
| |
Pension expense is actuarially calculated annually based on data available at the beginning of each year. The expected return on plan assets is determined by multiplying the expected long-term rate of return on assets by the market-related value of plan assets for the U.S. qualified pension plan and market value for the Canadian qualified pension plan. The market-related value of plan assets is a calculated value that recognizes investment gains and losses in fair value related to equities over three or five years, depending on which computation results in a market-related value closer to market value. Market-related value for the U.S. qualified plan was $585$601 million and $550$615 million for 20172019 and 2016,2018, respectively.
2019 Form 10-K Page 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions used in the calculation of net benefit cost include the discount rate selected and disclosed at the end of the previous year, as well as other assumptions detailed in the table below:
| | | | | | | | | | | | | |
| | Pension Benefits | Postretirement Benefits |
| |||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
|
Discount rate (1) |
| 4.0 | % | 4.0 | % | 4.0 | % | 4.1 | % | 3.7 | % | 4.0 | % |
Rate of compensation increase |
| 3.6 | % | 3.6 | % | 3.6 | % |
|
|
|
|
| |
Expected long-term rate of return on assets |
| 5.8 | % | 5.9 | % | 5.8 | % |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Postretirement Benefits |
| ||||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2015 |
| ||||||
Discount rate |
|
| 4.0 | % |
| 4.1 | % |
| 3.4 | % |
| 4.0 | % |
| 4.1 | % |
| 3.4 | % |
Rate of compensation increase |
|
| 3.6 | % |
| 3.7 | % |
| 3.7 | % |
|
|
|
|
|
|
|
|
|
Expected long-term rate of return on assets |
|
| 5.8 | % |
| 6.1 | % |
| 6.1 | % |
|
|
|
|
|
|
|
|
|
(1) | The U.S qualified pension plan was remeasured during the second quarter of 2018 in connection with the pension litigation. The discount rate used to determine the benefit obligation in 2018 before the remeasurement was 3.7%. |
65
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected long-term rate of return on invested plan assets is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce the variability of future contributions by the Company.
The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income.
The
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | Postretirement Benefits | |||||||||||||||
| | 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 | ||||||
| | | | | | | | | | | | | | | | | | |
Service cost | | $ | 20 | | $ | 18 | | $ | 17 | | $ | — | | $ | — | | $ | — |
Interest cost | |
| 27 | |
| 29 | |
| 25 | |
| — | |
| — | |
| 1 |
Expected return on plan assets | |
| (37) | |
| (38) | |
| (37) | |
| — | |
| — | |
| — |
Amortization of net loss (gain) | |
| 12 | |
| 12 | |
| 13 | |
| (1) | |
| (1) | |
| (2) |
Net benefit expense (income) | | $ | 22 | | $ | 21 | | $ | 18 | | $ | (1) | | $ | (1) | | $ | (1) |
Service cost is recognized as a component of SG&A and the remaining pension and postretirement expense components are recognized as part of Other income, net. In 2017 all components of net benefit expense (income) are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Postretirement Benefits | ||||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2015 | ||||||
|
| ($ in millions) | ||||||||||||||||
Service cost |
| $ | 17 |
| $ | 16 |
| $ | 17 |
| $ | — |
| $ | — |
| $ | — |
Interest cost |
|
| 25 |
|
| 26 |
|
| 24 |
|
| 1 |
|
| 1 |
|
| 1 |
Expected return on plan assets |
|
| (37) |
|
| (37) |
|
| (39) |
|
| — |
|
| — |
|
| — |
Amortization of net loss (gain) |
|
| 13 |
|
| 14 |
|
| 14 |
|
| (2) |
|
| (2) |
|
| (1) |
Net benefit expense (income) |
| $ | 18 |
| $ | 19 |
| $ | 16 |
| $ | (1) |
| $ | (1) |
| $ | — |
were recognized as part of SG&A.
Beginning in 2001, new retirees were charged the expected full cost of the medical plan, and then-existing retirees will incur 100 percent of the expected future increases in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increases.
The Company maintains a Supplemental Executive Retirement Plan (“SERP”), which is an unfunded plan that includes provisions for the continuation of medical and dental insurance benefits to certain executive officers and other key employees of the Company (“SERP Medical Plan”). The SERP Medical Plan’s accumulated projected benefit obligation at February 3, 20181, 2020 was $12$10 million. The following initial and ultimate cost trend rate assumptions were used to determine the benefit obligations under the SERP Medical Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Medical Trend Rate |
| Dental Trend Rate |
| |||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
Initial cost trend rate |
| 7.0 | % |
| 7.0 | % |
| 7.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
Ultimate cost trend rate |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
Year that the ultimate cost trend rate is reached |
| 2025 |
|
| 2021 |
|
| 2021 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| | | | | | | | | | | | | |
| | Medical Trend Rate | Dental Trend Rate |
| |||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
|
Initial cost trend rate |
| 6.5 | % | 6.5 | % | 7.0 | % | 5.0 | % | 5.0 | % | 5.0 | % |
Ultimate cost trend rate |
| 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % |
Year that the ultimate cost trend rate is reached |
| 2025 |
| 2025 |
| 2025 |
| 2020 |
| 2019 |
| 2018 | |
2019 Form 10-K Page 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following initial and ultimate cost trend rate assumptions were used to determine the net periodic cost under the SERP Medical Plan:
| | | | | | | | | | | | | |
| | Medical Trend Rate | Dental Trend Rate |
| |||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
|
Initial cost trend rate |
| 6.5 | % | 7.0 | % | 7.0 | % | 5.0 | % | 5.0 | % | 5.0 | % |
Ultimate cost trend rate |
| 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % |
Year that the ultimate cost trend rate is reached |
| 2025 |
| 2025 |
| 2021 |
| 2019 |
| 2018 |
| 2017 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Medical Trend Rate |
| Dental Trend Rate |
| |||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
Initial cost trend rate |
| 7.0 | % |
| 7.0 | % |
| 7.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
Ultimate cost trend rate |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
| 5.0 | % |
Year that the ultimate cost trend rate is reached |
| 2021 |
|
| 2021 |
|
| 2019 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
A one percentage-point change in the assumed health care cost trend rates would have the following effects on the SERP Medical Plan:
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| 1% Increase |
| 1% (Decrease) | ||||||||
|
| ($ in millions) | ||||||||||
| | | | | ||||||||
|
| 1% Increase |
| 1% (Decrease) | ||||||||
| | ($ in millions) | ||||||||||
Effect on total service and interest cost components |
| $ | — |
| $ | — | | $ | 1 | | $ | — |
Effect on accumulated postretirement benefit obligation |
| 3 |
| (2) | |
| 2 | |
| (1) |
66
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2017, theThe mortality assumption used to value the Company’s 2019 U.S. pension obligations was updated to the Pri-2012 mortality table with generational projection using modified MP-2019 for both males and females, while in the prior year the obligation was valued using the RP-2017 mortality table with generational projection using modified MP-2017MP-2017. The Company used the 2014 CPM Private Sector mortality table projected generationally with Scale CPM-B for both males and females and terminated vested participants. The mortality assumptionto value its Canadian pension obligations for 2019, while in the prior year the obligation was updated during the current year as the Company’s actual experience more closely matched the RP-2017 table than the previous table. In 2016, the Company usedvalued using the RP-2000 mortality table with generational projection using scale AA for both males and females to value its pension obligations. This table was also used to value the Canadian pension obligations for 2017.AA. For the SERP Medical Plan, the mortality assumption used to value the 20172019 obligation was updated to the RPH-2017PriH-2012 table with generational projection using MP-2017,MP-2019, while in the prior year the obligation was valued using the RPH-2016RPH-2018 table with generational projection using MP-2016.MP-2018.
Plan Assets
The target composition of the Company’s Canadian qualified pension plan assets is 95 percent fixed-income securities and 5 percent equities. The Company believes plan assets are invested in a prudentconservative manner with the same overall objective and investment strategy as noted below for the U.S. pension plan. The bond portfolio is comprised of government and corporate bonds chosen to match the duration of the pension plan’s benefit payment obligations. This current asset allocation will limit future volatility with regard to the funded status of the plan.
The target composition of the Company’s U.S. qualified pension plan assets is 60 percent fixed-income securities, 36.5 percent equities, and 3.5 percent real estate. The Company may alter the asset allocation targets from time to time depending on market conditions and the funding requirements of the pension plan. This current asset allocation has and is expected to limit volatility with regard to the funded status of the plan, but may result in higher pension expense due to the lower long-term rate of return associated with fixed-income securities. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above.
The Company believes plan assets are invested in a prudentconservative manner with an objective of providing a total return that, over the long term, provides sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the level of funding risk deemed appropriate. The Company’s investment strategy seeks to diversify assets among classes of investments with differing rates of return, volatility, and correlation in order to reduce funding risk. Diversification within asset classes is also utilized to ensure that there are no significant concentrations of risk in plan assets and to reduce the effect that the return on any single investment may have on the entire portfolio.
2019 Form 10-K Page 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation of Investments
Significant portions of plan assets are invested in commingled trust funds. These funds are valued at the net asset value of units held by the plan at year end. Stocks traded on U.S. and Canadian security exchanges are valued at closing market prices on the measurement date.
The fair values of the Company’s Canadian pension plan assets at February 3, 20181, 2020 and January 28, 2017February 2, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| 2017 Total |
| 2016 Total* | ||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | 1 | |||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| 2019 Total |
| 2018 Total* | |||||||||||||||||||
| | ($ in millions) | |||||||||||||||||||||||||||
Cash equivalents | | $ | — | | $ | 1 | | $ | — | | $ | 1 | | $ | 1 | ||||||||||||||
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
|
| |
|
| |
Canadian and international (1) |
| 4 |
|
| — |
| — |
|
| 4 |
|
| 3 | |
| 2 | |
| — | |
| — | |
| 2 | |
| 3 | |
Fixed-income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
|
| |
|
| |
Cash matched bonds (2) |
| — |
|
| 53 |
| — |
|
| 53 |
|
| 54 | |
| — | |
| 48 | |
| — | |
| 48 | |
| 47 | |
Total assets at fair value | $ | 4 |
| $ | 54 |
| $ | — |
| $ | 58 |
| $ | 58 | | $ | 2 | | $ | 49 | | $ | — | | $ | 51 | | $ | 51 |
*Each category of plan assets is classified within the same level of the fair value hierarchy for 2017 and 2016.
| Each category of plan assets is classified within the same level of the fair value hierarchy for 2019 and 2018. |
(1) | This category comprises one mutual fund that invests primarily in a diverse portfolio of Canadian securities. |
(2) | This category consists of fixed-income securities, including strips and coupons, issued or guaranteed by the Government of Canada, provinces or municipalities of Canada including their agencies and crown corporations, as well as other governmental bonds and corporate bonds. |
No Level 3 assets were held by the Canadian pension plan during 2017 and 2016.
67
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s U.S. pension plan assets at February 3, 20181, 2020 and January 28, 2017February 2, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| 2017 Total |
| 2016 Total* | ||||||||||||||||||||
|
| ($ in millions) | |||||||||||||||||||||||||||
Cash and cash equivalents | $ | — |
| $ | 4 |
| $ | — |
| $ | 4 |
| $ | 4 | |||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| 2019 Total |
| 2018 Total* | |||||||||||||||||||
| | ($ in millions) | |||||||||||||||||||||||||||
Cash equivalents | | $ | — | | $ | 3 | | $ | — | | $ | 3 | | $ | 3 | ||||||||||||||
Equity securities: |
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
|
| |
|
| ||||
U.S. large-cap (1) |
| — |
| 115 |
| — |
| 115 |
| 103 | |
| — | |
| 116 | |
| — | |
| 116 | |
| 106 | ||||
U.S. mid-cap (1) |
| — |
| 34 |
| — |
| 34 |
| 31 | |
| — | |
| 34 | |
| — | |
| 34 | |
| 32 | ||||
International (2) |
| — |
| 78 |
| — |
| 78 |
| 70 | |
| — | |
| 78 | |
| — | |
| 78 | |
| 72 | ||||
Corporate stock (3) |
| 19 |
| — |
| — |
| 19 |
| 27 | |
| 15 | |
| — | |
| — | |
| 15 | |
| 22 | ||||
Fixed-income securities: |
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
|
| |
|
| ||||
Long duration corporate and government bonds (4) |
| — |
| 254 |
| — |
| 254 |
| 231 | |
| — | |
| 273 | |
| — | |
| 273 | |
| 234 | ||||
Intermediate duration corporate and government bonds (5) |
| — |
| 113 |
| — |
| 113 |
| 103 | |
| — | |
| 121 | |
| — | |
| 121 | |
| 104 | ||||
Other types of investments: |
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
|
| |
|
| ||||
Real estate securities (6) |
| — |
| 21 |
| — |
| 21 |
| 19 | |
| — | |
| 23 | |
| — | |
| 23 | |
| 20 | ||||
Insurance contracts |
| — |
| 1 |
| — |
| 1 |
| 1 | |
| — | |
| 1 | |
| — | |
| 1 | |
| — | ||||
Total assets at fair value | $ | 19 |
| $ | 620 | — | $ | — |
| $ | 639 |
| $ | 589 | | $ | 15 | | $ | 649 | | $ | — | | $ | 664 | | $ | 593 |
*Each category of plan assets is classified within the same level of the fair value hierarchy for 2017 and 2016.
| Each category of plan assets is classified within the same level of the fair value hierarchy for 2019 and 2018. |
(1) | These categories consist of various managed funds that invest primarily in common stocks, as well as other equity securities and a combination of other funds. |
(2) | This category comprises three managed funds that invest primarily in international common stocks, as well as other equity securities and a combination of other funds. |
(3) | This category consists of the Company’s common stock. |
(4) | This category consists of various fixed-income funds that invest primarily in long-term bonds, as well as a combination of other funds, that together are designed to exceed the performance of related long-term market indices. |
(5) | This category consists of two fixed-income funds that invest primarily in intermediate duration bonds, as well as a combination of other funds, that together are designed to exceed the performance of related indices. |
(6) | This category consists of one fund that invests in global real estate securities. |
No Level 3 assets were held by the U.S. pension plan during 2017
2019 Form 10-K Page 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contributions and 2016.Expected Payments
The CompanyWe made a contribution of $25$55 million and $128 million to itsour U.S. qualified pension plan during 2017.2019 and 2018, respectively. During 2017, the Company2019, we also paid $4$2 million in pension benefits related to itsour non-qualified pension plans.
The Company We do not anticipate making any contributions to the U.S. qualified pension plans in 2020, however we continually evaluatesevaluate the amount and timing of any potential contributions. Actual contributions are dependentbased on several factors; however the Company anticipates making a $128 million contribution during 2018 in connection with the expected U.S. pension plan reformation. See Note 22, Legal Proceedings, for further information.market conditions and other factors.
Estimated future benefit payments (excluding any amounts related to the expected U.S. pension plan reformation) for each of the next five years and the five years thereafter are as follows:
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| Pension |
| Postretirement | ||||||||
|
| Benefits |
| Benefits | ||||||||
|
| ($ in millions) | ||||||||||
2018 |
| $ | 66 |
| $ | 1 | ||||||
2019 |
| 54 |
| 1 | ||||||||
| | | | | ||||||||
|
| Pension |
| Postretirement | ||||||||
| | Benefits | | Benefits | ||||||||
| | ($ in millions) | ||||||||||
2020 |
| 53 |
| 1 | | $ | 103 | | $ | 1 | ||
2021 |
| 52 |
| 1 | |
| 52 | |
| 1 | ||
2022 |
| 51 |
| 1 | |
| 52 | |
| 1 | ||
2023–2027 |
| 236 |
| 2 | ||||||||
2023 | |
| 49 | |
| — | ||||||
2024 | |
| 46 | |
| — | ||||||
2025-2029 | |
| 211 | |
| 2 |
68
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Savings Plans
The Company has two qualified savings plans, a 401(k) plan that is available to employees whose primary place of employment is the U.S., and another plan that is available to employees whose primary place of employment is in Puerto Rico. Prior to January 1, 2018, both plans limited participation to employees who had attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. Effective January 1, 2018, eligibleEligible associates may contribute to the plans following 28 days of employment and are eligible for Company matching contributions upon completion of one year of service consisting of at least 1,000 hours. As of January 1, 2018,2020, the savings plans allow eligible employees to contribute up to 40 percent of their compensation on a pre-tax basis, subject to a maximum of $18,500$19,500 for the U.S. plan and $15,000$15,000 for the Puerto Rico plan. ThePrior to January 1, 2020, the Company matchesmatched 25 percent of employees’ pre-tax contributions on up to the first 4 percent of the employees’ compensation (subject to certain limitations). MatchingEffective January 1, 2020, the Company matches 100 percent of employees’ pre-tax contributions made beforeon up to the first 1 percent and 50 percent of the next 5 percent of the employees’ compensation (subject to certain limitations). Prior to January1,2016 were made with Company stock, subsequent to this date matching contributions were made in cash. Such 2020, such matching contributions are vested incrementally over the first 5five years of participation for both plans. Effective January 1, 2020, matching contributions are vested over two years. The charge to operations for the Company’s matching contribution was $3$4 million for each of the years presented.both 2019 and 2018.
21. Share-Based Compensation
Stock Awards
Under the Company’sour 2007 Stock Incentive Plan (the “2007 Stock Plan”), stock options, restricted stock, restricted stock units, stock appreciation rights, or other stock-basedshare-based awards may be granted to nonemployee directors, officers and other employees of the Company, including its subsidiaries and operating divisions worldwide. Nonemployee directors are also eligible to receive stock options under this plan, although none are outstanding as of February 3, 2018. Options for employees become exercisable in substantially equal annual installments over a three-year period, beginning with the first anniversary of the date of grant of the option, unless a shorter or longer duration is established at the time of the option grant. The options terminate up to ten years from the date of grant. On May21, 2014, the 2007 Stock Plan was amended to increase the number of shares of the Company’s common stock reserved for all awards to 14 million shares. As of February 3, 2018,1, 2020, there were 10,760,2707,476,896 shares available for issuance under this plan.
Employees Stock Purchase Plan
Under the Company’sour 2013 Foot Locker Employees Stock Purchase Plan (“ESPP”), participating employees are able to contribute up to 10 percent of their annual compensation, not to exceed $25,000 in any plan year, through payroll deductions to acquire shares of the Company’s common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Of the 3,000,000 shares of common stock authorized under this plan, there were 2,523,8652,379,218 shares available for purchase as of February 3, 2018.1, 2020. During 20172019 and 2016,2018, participating employees purchased 109,79096,451 shares and 80,99248,196 shares, respectively.
2019 Form 10-K Page 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Expense
Total compensation expense included in SG&A and the associated tax benefits recognized related to the Company’sour share-based compensation plans, were as follows:
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
| 2017 |
| 2016 |
| 2015 | ||||||||||||
| ($ in millions) | ||||||||||||||||
| | | | | | | |||||||||||
|
| 2019 |
| 2018 |
| 2017 | |||||||||||
| | ($ in millions) | |||||||||||||||
Options and shares purchased under the ESPP | $ | 9 |
| $ | 10 |
| $ | 11 | | $ | 6 | | $ | 7 | | $ | 9 |
Restricted stock and restricted stock units |
| 6 |
| 12 |
|
| 11 | |
| 12 | |
| 15 | |
| 6 | |
Total share-based compensation expense | $ | 15 |
| $ | 22 |
| $ | 22 | | $ | 18 | | $ | 22 | | $ | 15 |
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | |||||||||||
Tax benefit recognized | $ | 4 |
| $ | 6 |
| $ | 8 | | $ | 2 | | $ | 3 | | $ | 4 |
69
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation Model and Assumptions
The Black-Scholes option-pricing model is used to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.
The Company estimatesWe estimate the expected term of share-based awards using the Company’s historical exercise and post-vesting employment termination patterns, which it believeswe believe are representative of future behavior. The expected term for the employee stock purchase plan valuation is based on the length of each purchase period as measured at the beginning of the offering period, which is one year.
The Company estimatesWe estimate the expected volatility of itsour common stock at the grant date using a weighted-average of the Company’s historical volatility and implied volatility from traded options on the Company’s common stock. The Company believesWe believe that this combination of historical volatility and implied volatility provides a better estimate of future stock price volatility.
The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived from the Company’s historical experience.
As of Q1 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. Prior to 2017, the Company recorded share-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data.
The following table shows the Company’s assumptions used to compute the share-based compensation expense:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | Stock Option Plans | Stock Purchase Plan |
| |||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| ||||||
Weighted-average risk free rate of interest |
| | 2.2 | % | | 2.7 | % | | 2.1 | % | | 2.2 | % | | 2.0 | % | | 1.0 | % |
Expected volatility |
| | 38 | % | | 37 | % | | 25 | % | | 54 | % | | 50 | % | | 30 | % |
Weighted-average expected award life (in years) |
| | 5.5 |
| | 5.5 |
| | 5.4 |
| | 1.0 |
| | 1.0 |
| | 1.0 | |
Dividend yield |
| | 2.6 | % | | 3.1 | % | | 1.9 | % | | 3.1 | % | | 2.0 | % | | 2.0 | % |
Weighted-average fair value | | $ | 17.07 | | $ | 12.42 | | $ | 14.74 | | $ | 16.68 | | $ | 15.29 | | $ | 10.96 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock Option Plans |
| Stock Purchase Plan | ||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
Weighted-average risk free rate of interest |
| 2.1 | % |
| 1.4 | % |
| 1.5 | % |
| 1.0 | % |
| 0.5 | % |
| 0.2 | % |
Expected volatility |
| 25 | % |
| 30 | % |
| 30 | % |
| 30 | % |
| 27 | % |
| 25 | % |
Weighted-average expected award life (in years) |
| 5.4 |
|
| 5.7 |
|
| 6.0 |
|
| 1.0 |
|
| 1.0 |
|
| 1.0 |
|
Dividend yield |
| 1.9 | % |
| 1.7 | % |
| 1.6 | % |
| 2.0 | % |
| 1.8 | % |
| 1.6 | % |
Weighted-average fair value | $ | 14.74 |
| $ | 15.71 |
| $ | 16.07 |
| $ | 10.96 |
| $ | 13.33 |
| $ | 10.47 |
|
2019 Form 10-K Page 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The information set forth in the following table covers options granted under the Company’s stock option plans:
| | | | | | | | |
|
| |
| 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 |
| 2,861 | | | |
| $ | 52.34 |
Granted |
| 321 | |
| |
| | 58.65 |
Exercised |
| (171) | |
| |
| | 26.97 |
Expired or cancelled |
| (130) | |
| |
| | 59.79 |
Options outstanding at February 1, 2020 |
| 2,881 | |
| 5.7 | | $ | 54.21 |
Options exercisable at February 1, 2020 |
| 2,162 | |
| 4.8 | | $ | 53.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
| Weighted- | ||
|
|
| Number |
|
| Average |
|
| Average | ||
|
|
| of |
|
| Remaining |
|
| Exercise | ||
|
|
| Shares |
|
| Contractual Life |
|
| Price | ||
|
|
| (in thousands) |
|
| (in years) |
|
| (per share) | ||
Options outstanding at January 28, 2017 |
|
| 2,806 |
|
|
|
|
|
| $ | 42.61 |
Granted |
|
| 547 |
|
|
|
|
|
|
| 69.58 |
Exercised |
|
| (593) |
|
|
|
|
|
|
| 21.35 |
Expired or cancelled |
|
| (21) |
|
|
|
|
|
|
| 61.50 |
Options outstanding at February 3, 2018 |
|
| 2,739 |
|
|
| 6.5 |
|
| $ | 52.45 |
Options exercisable at February 3, 2018 |
|
| 1,699 |
|
|
| 5.2 |
|
| $ | 43.85 |
70
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total fair value of options vested during 2017, 2016,2019 and 20152018 was $6 million and $8 million, $9 million, and $15 million, respectively.
During the year ended February 3, 2018, the Company1, 2020, we received $13$5 million in cash from option exercises and recognized a related tax benefit of $8$1 million.
The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
| ($ in millions) | |||||||
Exercised | $ | 22 |
| $ | 56 |
| $ | 99 |
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 | |||
| | ($ in millions) | |||||||
Exercised | | $ | 5 | | $ | 4 | | $ | 22 |
The aggregate intrinsic value for stock options outstanding, and those 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) is presented below:
| ||
| ||
|
| |
|
|
| | | |
| | 2019 | |
| | ($ in millions) | |
Outstanding | | $ | 5 |
Outstanding and exercisable | | $ | 4 |
As of February 3, 2018,1, 2020, there was $5$3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.51.4 years.
The following table summarizes information about stock options outstanding and exercisable at February 3, 2018:1, 2020:
| | | | | | | | | | | | |
| | 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 $18.84 |
| 126 |
| 1.1 | | $ | 18.60 |
| 126 | | $ | 18.60 |
$24.75 to $36.51 |
| 377 |
| 3.1 | |
| 32.13 |
| 334 | |
| 31.77 |
$44.78 to $45.75 |
| 567 |
| 6.3 | |
| 44.91 |
| 348 | |
| 44.99 |
$46.64 to $62.11 |
| 927 |
| 6.3 | |
| 59.99 |
| 615 | |
| 60.82 |
$63.33 to $73.21 | | 884 | | 6.4 | | | 68.57 | | 739 | | | 67.75 |
|
| 2,881 |
| 5.7 | | $ | 54.21 |
| 2,162 | | $ | 53.70 |
2019 Form 10-K Page 72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| 312 |
| 2.6 |
| $ | 17.40 |
| 312 |
| $ | 17.40 |
$30.92 to $45.75 |
| 762 |
| 5.2 |
|
| 38.46 |
| 722 |
|
| 38.64 |
$48.55 to $62.11 |
| 703 |
| 6.6 |
|
| 61.04 |
| 499 |
|
| 61.08 |
$63.79 to $73.21 |
| 962 |
| 8.6 |
|
| 68.60 |
| 166 |
|
| 64.35 |
|
| 2,739 |
| 6.5 |
| $ | 52.45 |
| 1,699 |
| $ | 43.85 |
Restricted Stock and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
Restricted sharesstock units (“RSU”) 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’Company’s long-term incentive program, and to nonemployee directors. Each RSU award represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. In 2017, 2016, and 2015 there were 360,782, 648,558, and 588,308 RSU awards outstanding, respectively.
71
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, with regards to certain awards, 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. Noan additional one-year period.
NaN dividends are paid or accumulated on any RSU awards.
Compensation expense is recognized using the fair market value onat the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. Restricted stock and
RSU activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
| Number |
| Remaining |
| Weighted-Average | |
|
| of |
| Contractual |
| Grant Date | |
|
| Shares |
| Life |
| Fair Value | |
|
| (in thousands) |
| (in years) |
|
| (per share) |
Nonvested at January 28, 2017 |
| 798 |
|
|
| $ | 56.91 |
Granted |
| 329 |
|
|
|
| 63.68 |
Vested |
| (305) |
|
|
|
| 49.97 |
Expired or cancelled |
| (448) |
|
|
|
| 64.75 |
Nonvested at February 3, 2018 |
| 374 |
| 1.3 |
| $ | 59.15 |
Aggregate value ($ in millions) | $ | 22 |
|
|
|
|
|
| | | | | | | | | |
| | | | | Weighted-Average | | | ||
| | Number | Remaining | Weighted-Average | |||||
| | of | Contractual | Grant Date | |||||
| | Shares | Life | Fair Value | |||||
|
| | (in thousands) |
| | (in years) |
| | (per share) |
Nonvested at beginning of year |
| | 1,022 | |
| | | $ | 47.47 |
Granted (1) |
| | 306 | |
| |
| | 58.48 |
Vested |
| | (89) | |
| |
| | 60.54 |
Performance adjustment (2) | | | (259) | | | | | | |
Forfeited |
| | (44) | |
| |
| | 52.81 |
Nonvested at February 1, 2020 |
| | 936 | |
| 1.3 | | $ | 49.25 |
| | | | | | | | | |
Aggregate value ($ in millions) | | $ | 46 | |
|
| |
| |
| 0.4 million performance-based RSUs were granted during 2018 and are included as granted in the table above. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets. |
(1) | Included in the units granted are approximately 0.2 million performance-based RSUs. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets. |
(2) | This represents adjustments made to performance-based RSU awards and reflect changes in estimates based upon the Company’s current performance against predefined financial targets. |
The total fair value of awards for which restrictions lapsedvested was $5 million, $7 million, and $15 million $9 million,for 2019, 2018, and $10 million for 2017, 2016, and 2015, respectively. At February 3, 2018,1, 2020, there was $8$20 million of total unrecognized compensation cost related to nonvested restricted stock and RSU awards.
22. 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 ofdiscontinued by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims. Additionally, the Company is a defendant in a purported Fair Credit Reporting Act class action in California and a purported meal break class action in California. The Company and certain officers of the Company arewere defendants in a purported securities law class actionsaction in New York.
The Company During the third quarter of 2019, the Court granted the Company’s motion to dismiss the class action and the Company’s U.S. retirement plan areplaintiffs’ time to appeal has expired. The directors and certain officers of the Company were defendants in a class action (Osberg v. Foot Locker Inc. et ano.,related derivative actions filed in state and federal court. The courts ordered the U.S. District Court fordismissals of plaintiffs’ complaints following the Southern Districtparties’ submission of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plana joint stipulation 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. In February 2018, the Company’s Petition for Writ of Certiorari with the U.S. Supreme Court was denied. Accordingly, the Company must reform the pension plan consistent with the trial court’s judgment, and will be working with plaintiffs’ counsel and the court on the specific steps needed to implement the judgment. The Company has estimated that the cost of plan reformation is $278 million as of February 3, 2018 and this amount will continue to increase with interest until paid, as required by the provisions of the required plan reformation. The previous amount accrued was $150 million. Accordingly, during the fourth quarter of 2017, the Company recorded an additional charge of $128 million, bringing the cumulative amount accrued for this matter to $278million. The Company is currently formulating the actions and steps necessary to reform the plan and has determined that it will make a $128 million contribution during 2018 to the pension trust to fund a portion of this obligation. Also during the fourth quarter of 2017, the Company established a qualified settlement fund in the amount of $150 million, which will also be used to fund future pension contributions that may be required as a result of the plan reformation and plaintiffs’ legal fees.dismiss.
2019 Form 10-K Page 73
72
FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management doesWe do 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’sour 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 judgmentsunpredictable. Judgments could be rendered or settlements entered intomade that could adversely affect the Company’s operating results or cash flows in a particular period.
23. Quarterly Results (Unaudited)
| | | | | | | | | | | |
|
| 1st Quarter |
| 2nd Quarter |
| 3rd Quarter |
| 4th Quarter |
| Fiscal Year | |
| | | | | | | | | | | |
Sales |
|
|
|
|
|
|
|
|
| |
|
2019 |
| 2,078 | | 1,774 | | 1,932 | | 2,221 | | $ | 8,005 |
2018 |
| 2,025 | | 1,782 | | 1,860 | | 2,272 | | $ | 7,939 |
Gross margin (1) |
|
|
|
|
|
|
|
| |
|
|
2019 |
| 689 | | 534 | | 620 | | 700 | | $ | 2,543 |
2018 |
| 666 | | 539 | | 588 | | 735 | | $ | 2,528 |
Operating profit (2) |
|
|
|
|
|
|
|
| |
|
|
2019 |
| 228 | | 81 | | 164 | | 176 | | $ | 649 |
2018 |
| 224 | | 112 | | 144 | | 219 | | $ | 699 |
Net income (3), (4), (5) |
| | | | | | | | |
|
|
2019 |
| 172 | | 60 | | 125 | | 134 | | $ | 491 |
2018 |
| 165 | | 88 | | 130 | | 158 | | $ | 541 |
Basic earnings per share (6) |
| | | | | | | | |
|
|
2019 |
| 1.53 | | 0.55 | | 1.16 | | 1.28 | | $ | 4.52 |
2018 |
| 1.39 | | 0.76 | | 1.14 | | 1.40 | | $ | 4.68 |
Diluted earnings per share (6) |
| | | | | | | | |
|
|
2019 |
| 1.52 | | 0.55 | | 1.16 | | 1.27 | | $ | 4.50 |
2018 |
| 1.38 | | 0.75 | | 1.14 | | 1.39 | | $ | 4.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1st Quarter |
| 2nd Quarter |
| 3rd Quarter |
| 4th Quarter (1) |
| Fiscal Year | |
|
|
| |||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 2,001 |
| 1,701 |
| 1,870 |
| 2,210 |
| $ | 7,782 |
2016 |
| 1,987 |
| 1,780 |
| 1,886 |
| 2,113 |
| $ | 7,766 |
Gross margin (2) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 680 |
| 503 |
| 580 |
| 693 |
| $ | 2,456 |
2016 |
| 696 |
| 587 |
| 640 |
| 713 |
| $ | 2,636 |
Operating profit (3) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 268 |
| 72 |
| 155 |
| 76 |
| $ | 571 |
2016 |
| 296 |
| 198 |
| 228 |
| 278 |
| $ | 1,000 |
Net income/(loss) (4), (5), (6), (7) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 180 |
| 51 |
| 102 |
| (49) |
| $ | 284 |
2016 |
| 191 |
| 127 |
| 157 |
| 189 |
| $ | 664 |
Basic earnings per share (8) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 1.37 |
| 0.39 |
| 0.81 |
| (0.40) |
| $ | 2.23 |
2016 |
| 1.40 |
| 0.94 |
| 1.18 |
| 1.43 |
| $ | 4.95 |
Diluted earnings per share (8) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| 1.36 |
| 0.39 |
| 0.81 |
| (0.40) |
| $ | 2.22 |
2016 |
| 1.39 |
| 0.94 |
| 1.17 |
| 1.42 |
| $ | 4.91 |
(1) | |
|
|
| Gross margin represents sales less 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 (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities. |
| Operating profit represents income before income taxes, net interest |
|
|
(4) | During the |
|
|
(5) | During second, third, and fourth quarters 2018, we recorded benefits of $1 million, $23 million, and $4 million, respectively, from the completion of the accounting for the Tax Act. See Note 17, Income Taxes for further information. |
(6) |
|
|
|
| Quarterly income per share amounts |
24. Subsequent Events
On February 19, 2020, we announced that our Board of Directors declared a quarterly dividend of $0.40 per share on our common stock. The dividend will be payable on May 1, 2020 to shareholders of record at the close of business on April 17, 2020. Although it is our Company’s intention to continue to pay a quarterly cash dividend in the future, any decision to pay future cash dividends will be made by the Board of Directors and will depend on future earnings, financial condition, and other factors.
COVID-19 is having a significant effect on overall economic conditions in the various geographic areas in which we have operations. Our top priority is to protect our associates and their families, our customers, and our operations. We are taking all precautionary measures as directed by health authorities and local and national governments. On March 18, 2020, in response to intensifying efforts to contain the spread of COVID-19, we temporarily closed our stores across all of our brands in North America, EMEA, and Malaysia. On March 25, 2020, we temporarily closed our stores in New Zealand.
2019 Form 10-K Page 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The rest of our locations in the Asia Pacific region, which include Hong Kong, Singapore, and Australia, will remain open subject to direction from local and national governments.
We continue to monitor the outbreak of COVID-19 and other closures, or closures for a longer period, may be required to help ensure the health and safety of our associates and our customers. COVID-19 has and may continue to have an effect on ports and trade, as well as global travel. We have set up a special management committee and the committee is taking the necessary precautionary measures to protect the health and safety of our associates as well as following the guidance provided by local health authorities. Given the dynamic nature of these circumstances, the duration of business disruption, and reduced customer traffic, the related financial affect cannot be reasonably estimated at this time but are expected to materially affect our business for the first quarter and full year of 2020.
On March 19, 2020, in order to increase our cash position and help preserve our financial flexibility, we have drawn $330 million of our credit facility.
732019 Form 10-K Page 75
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements between the Company and its independent registered public accounting firm on matters of accounting principles or practices.
Item 9A. Controls and Procedures
(a) | |||
| Evaluation of Disclosure Controls and Procedures. |
The Company’s management performed an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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”)) as of February 1, 2020. 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.
(b) |
| ||
| Management’s Annual Report on Internal Control over Financial Reporting. | ||
|
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company uses the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 COSO Framework”). Using the 2013 COSO Framework, the Company’s management, including the CEO and CFO, evaluated the Company’s internal control over financial reporting and concluded that the Company’s internal control over financial reporting was effective as of February 1, 2020. KPMG LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements included in this annual report, has issued an attestation report on the Company’s effectiveness of internal control over financial reporting, which is included in Item 9A(d).
(c) | |||||
| Changes in Internal Control over Financial Reporting. |
We are currently migrating our point-of-sale software to a new platform. Approximately 2,900 stores have been converted to the new software platform as of February 1, 2020, and we currently expect to complete the implementation in the first half of 2020. In connection with this implementation and resulting business process changes, we may make changes to the design and operation of our internal control over financial reporting.
Additionally, during the fourth quarter of 2018 the Company implemented a new leasing accounting system in advance of the adoption of the new leasing standard that was effective the first quarter of 2019. We revised our controls in connection with this adoption and further refined business processes and made changes to the design and implementation of our internal control in connection with the new standard.
During the Company’s last fiscal quarter there were no changes in internal control over financial reporting, other than the implementation of new point-of-sale software and lease accounting system noted above, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(d) |
| ||||
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting- the report appears on the following page. |
2019 Form 10-K Page 76
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Shareholders and Board of Directors and Shareholders of
Foot Locker, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Foot Locker, Inc.’s and subsidiaries (the “Company”) internal control over financial reporting as of February 3, 2018,1, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018,1, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 3, 20181, 2020 and January 28, 2017,February 2, 2019, the related consolidated statements of operations, comprehensive income, stockholders’changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended February 3, 2018,1, 2020, and the related notes (collectively, the “consolidated financial statements”), and our report dated March 29, 201827, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
New York, New York
March 29, 201827, 2020
2019 Form 10-K Page 77
75
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
(a) | |||
| Directors of the Company |
Information relative to directors of the Company will be set forth under the section captioned “Proposal 1-Election of Directors” in the Proxy Statement and is incorporated herein by reference.
(b) |
| ||
| Executive Officers of the Company |
Information with respect to executive officers of the Company will be set forth in Item 4A in Part I.
(c) |
| ||
| Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference. |
(d) |
| Information on our audit committee and the audit committee financial expert will be contained in the Proxy Statement under the section captioned “Committees of the Board” and is incorporated herein by reference. |
(e) |
| Information about the Code of Business Conduct governing our employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and the Board of Directors, will be set forth under the heading “Code of Business Conduct” under the Corporate Governance section of the Proxy Statement and is incorporated herein by reference. |
Item 11. Executive Compensation
Information set forth in the Proxy Statement beginning with the section captioned “Directors’ Compensation and Benefits”“Director Compensation” through and including the section captioned “Pension Benefits” is incorporated herein by reference, and information set forth in the Proxy Statement under the heading “Compensation and Management Resources Committee Interlocks and Insider Participation” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information set forth in the Proxy Statement under the sections captioned “Equity Compensation Plan Information” and “Beneficial Ownership of the Company’s Stock” is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information set forth in the Proxy Statement under the section captioned “Related Person Transactions” and under the section captioned “Directors’ Independence” is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information about the principal accounting fees and services is set forth under the section captioned “Proposal 3: Ratification of the Appointment of our Independent Registered Public Accounting Firm — Audit and Non-Audit Fees” in the Proxy Statement and is incorporated herein by reference. Information about the Audit Committee’s pre-approvalpreapproval policies and procedures is set forth in the section captioned “Proposal 3: Ratification of the Appointment of our Independent Registered Public Accounting Firm — Audit Committee Pre-ApprovalPreapproval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.
2019 Form 10-K Page 78
76
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) and (2) Financial Statements
The list of financial statements required by this item is set forth in Item 8. “Consolidated Financial Statements and Supplementary Data.” All other schedules specified under Regulation S-X have been omitted because they are not applicable, because they are not required, or because the information required is included in the financial statements or notes thereto.
(a)(3) and (c) Exhibits
An index of the exhibits which are required by this item and which are included or incorporated herein by reference in this report appears on pages 79 through 81. 82.
Item 16. Form 10-K Summary
None.
772019 Form 10-K Page 79
Pursuant to the requirements of Section 13 or 15(d) 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.
| ||
| ||
| ||
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 2018, by the following persons on behalf of the Company and in the capacities indicated.
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||
| ||
| ||
78
FOOT LOCKER, INC.
INDEX OF EXHIBITS
Exhibit No. | Description | |
---|---|---|
3.1 | | |
|
| |
| ||
| | |
3.2 | | Certificates of Amendment of the Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on (a) July 20, 1989, (b) July 24, 1990, (c) July 9, 1997 |
| | |
3.3 | | |
| | |
4.1 | | The rights of holders of the Registrant’s equity securities are defined in the Registrant’s Certificate of Incorporation, as amended (incorporated herein by reference to (a) Exhibits 3(i)(a) and 3(i)(b) to the July 26, 1997 Form 10-Q, Exhibit 4.2(a) to the 1998 Form S-8, and Exhibit 4.2 to the 2001 Form S-8. |
| | |
4.2 | | Indenture, dated as of October 10, 1991 (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 33-43334)). |
| | |
4.3 | | Form of 8-1/2% Debentures due 2022 (incorporated herein by reference to Exhibit 4 to the Current Report on Form 8-K dated January 16, 1992). |
| | |
4.4* | | |
| | |
10.1 | | |
| | |
10.2† | | |
| | |
10.3† | | |
| | |
10.4† | | |
| | |
10.5† | | |
| | |
10.6† | | Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d) to the Registration Statement on Form 8-B filed on August 7, 1989 (Registration No. 1-10299) (the “8-B Registration Statement”)). |
| | |
2019 Form 10-K Page 80
Exhibit No. | Description | |
---|---|---|
10.7† | | Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the Annual Report on Form 10-K for the fiscal year ended January 28, 1995 filed on April 24, 1995). |
| | |
10.8† | | Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the Annual Report on Form 10-K for the fiscal year ended January 27, 1996 filed on April 26, 1996). |
| | |
10.9† | | |
| | |
10.10† | |
79
|
| |
| | |
10.11† | | |
| | |
10.12† | | |
| | |
10.13† | | |
| | |
10.14† | | Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement). |
| | |
10.15† | | Amendments to the Foot Locker Directors’ Retirement Plan (incorporated herein by reference to Exhibit 10(c) to the Quarterly Report on Form 10-Q for the quarterly period ended October 28, 1995 filed on December 11, 1995). |
| | |
10.16† | | |
| | |
10.17† | | |
| | |
10.18† | | |
| | |
10.19† | | |
| | |
10.20† | | |
| | |
10.21† | | |
| | |
10.22† | |
2019 Form 10-K Page 81
Exhibit No. | Description | |
---|---|---|
| | |
| | |
| | |
10.24† | | |
| | |
10.25† | | |
| | |
10.26† | | |
| | |
10.27† | | |
| | |
10.28† | | |
| | |
10.29 | | Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement). |
| | |
10.30 | | |
| | |
10.31 | | Trust Agreement dated as of November 12, 1987 (“Trust Agreement”), between F.W. Woolworth Co. and The Bank of New York, as amended and assumed by the Registrant (incorporated herein by reference to Exhibit 10(j) to the 8-B Registration Statement). |
| | |
10.32 | | |
| | |
10.33† | | |
| | |
10.34† | | |
| |
80
| ||
|
| |
| | |
| | |
21* | |
|
| | |
23* | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32** | | |
| |
|
| | XBRL Instance Document. |
2019 Form 10-K Page 82
Exhibit No. | Description | |
---|---|---|
| | |
101.SCH* | | XBRL Taxonomy Extension Schema. |
| | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase. |
| | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase. |
| | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase. |
| | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase. |
† | Management contract or compensatory plan or arrangement. |
* | Filed herewith |
** | Furnished herewith |
2019 Form 10-K Page 83
SIGNATURES
†Management contractPursuant to the requirements of Section 13 or compensatory plan or arrangement.15(d) 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. |
| |
| By: /s/ RICHARD A. JOHNSON |
| Richard A. Johnson |
| |
| Date: March 27, 2020 |
*Filed herewith.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 2020, by the following persons on behalf of the Company and in the capacities indicated.
| | |
/s/ RICHARD A. JOHNSON | /s/ LAUREN B. PETERS | |
Richard A. Johnson | | Lauren B. Peters |
Chairman, President and | | Executive Vice President and |
Chief Executive Officer | | Chief Financial Officer |
| | |
/s/ GIOVANNA CIPRIANO | | /s/ ULICE PAYNE, JR. |
Giovanna Cipriano | | Ulice Payne, Jr. |
Senior Vice President and Chief Accounting Officer | | Director |
| | |
/s/ MAXINE CLARK | | /s/ DARLENE NICOSIA |
Maxine Clark | | Darlene Nicosia |
Director | | Director |
| | |
/s/ ALAN D. FELDMAN | | /s/ CHERYL NIDO TURPIN |
Alan D. Feldman | | Cheryl Nido Turpin |
Director | | Director |
| | |
/s/ GUILLERMO G. MARMOL | | /s/ KIMBERLY K. UNDERHILL |
Guillermo G. Marmol | | Kimberly K. Underhill |
Director | | Director |
| | |
/s/ MATTHEW M. MCKENNA | | /s/ TRISTAN WALKER |
Matthew M. McKenna | | Tristan Walker |
Director | | Director |
| | |
/s/ STEVEN OAKLAND | | /s/ DONA D. YOUNG |
Steven Oakland | | Dona D. Young |
Director | | Lead Director |
| | |
**Furnished herewith
2019 Form 10-K Page 84
812019 Form 10-K Page 85