UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 28, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-10299
(Exact name of Registrant as specified in its charter)
New York | 13-3513936 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
112 West 34th Street, New York, New York | 10120 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 720-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 | 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. YesAct.Yesx Noo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YesAct.Yeso Nox
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesdays.Yesx Noo
Indicate by check mark whether the Registrant 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.Yesx Noo
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.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerx | Accelerated filero | Non-accelerated filero | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes.Yeso Nox
The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding at March 16, 2015: | 139,649,989 | |||
The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, August 2, 2014, was approximately: | $ | 5,363,852,719 | * |
* | For purposes of this calculation only (a) all directors plus three 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’s definitive Proxy Statement (the “Proxy Statement”) to be filed in connection with the Annual Meeting of Shareholders to be held on May 16, 2012:20, 2015: Parts III and IV.
PART I | |||||
Item Business | 1 | ||||
Item Risk Factors | 2 | ||||
Item Unresolved Staff Comments | 9 | ||||
Item Properties | 9 | ||||
Item Legal Proceedings | 9 | ||||
Item Mine Safety Disclosures | 9 | ||||
PART II | |||||
Item Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11 | ||||
Item Selected Financial Data | 13 | ||||
Item Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||||
Item Quantitative and Qualitative Disclosures About Market Risk | |||||
Item Consolidated Financial Statements and Supplementary Data | |||||
Item Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||
Item Controls and Procedures | |||||
Item Other Information | |||||
PART III | |||||
Item Directors, Executive Officers and Corporate Governance | |||||
Item Executive Compensation | |||||
Item Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||
Item Certain Relationships and Related Transactions, and Director Independence | |||||
Item Principal Accounting Fees and Services | |||||
PART IV | |||||
Item Exhibits and Financial Statement Schedules |
Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailer of athletically inspired shoes and apparel, operating 3,3693,423 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of January 28, 2012.31, 2015. Foot Locker, Inc. and its subsidiaries hereafter are referred to as the “Registrant,” “Company,” “we,” “our,” or “us.” Information regarding the business is contained under the “Business Overview” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The Company maintains a website on the Internet atwww.footlocker-inc.com. The Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”), including its annual reports 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 clicking on the “SEC Filings” link. 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 to the Company’s Corporate Secretary at 112 West 34th Street, New York, N.Y. 10120. The Company intends to promptly disclose amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the Corporate Governance section of the Company’s corporate website.
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 theSegment Information note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
The service marks and trademarks appearing in this report (except for Nike, Inc. and Alshaya Trading Co. W.L.L.) are owned by Foot Locker, Inc. or its subsidiaries.
The Company and its consolidated subsidiaries had 13,08014,567 full-time and 26,07730,001 part-time employees at January 28, 2012.31, 2015. The Company considers employee relations to be satisfactory.
Financial information concerning competition is contained under the “Business Risk” section in theFinancial Instruments and Risk Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
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 theFinancial Instruments and Risk Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”
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. 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 ability to successfully implement and execute our long rangelong-range plan is dependent on many factors. Our strategies may require significant capital investment and management attention, which may result in the diversion of these resources from our core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store designs, competition, product differentiation, and the ability to attract and retain qualified personnel. If we cannot successfully execute our strategic growth initiatives or if the long rangelong-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 market 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 with relatively low barriers to entry. competitive.
Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores, and superstores, department stores, discount stores, traditional shoe stores, and mass merchandisers, and Internet 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 price, quality, selection of merchandise, reputation, store location, quality, advertising, price, and customer service. Our success also depends on our ability to differentiate ourselves from our competitors with respect to shopping convenience, a quality merchandise assortment of available merchandise and superior customer service. We cannot assure you 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 merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results.
In addition, all of our significant vendorssuppliers distribute products directly through the Internet and others may follow. Some vendorsof our suppliers currently operate retail stores and some have indicated that furtherthey intend to open additional retail stores will open.stores. Should this continue to occur, and if our customers decide to purchase directly from our vendors,suppliers, it could have a material adverse effect on our business, financial condition, and results of operations.
The athletic footwear and apparel industry 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 vendors.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 and licensed apparel as a fashion statement and are frequent purchasers. Any shiftOur failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends that would make athletic footwear or licensedathletic apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.
We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order the bulkmost 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.
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.prices from a limited number of suppliers. In addition, our vendorssuppliers provide volume discounts, cooperative advertising, and markdown allowances, as well as the ability to negotiate returns of excess or unneeded merchandise. We cannot be certain that such assistance fromterms with our vendorssuppliers will continue in the future.
The Company purchased approximately 8289 percent of its merchandise in 20112014 from its top five vendorssuppliers and expects to continue to obtain a significant percentage of its athletic product from these vendorssuppliers in future periods. Approximately 6173 percent was purchased from one vendorsupplier — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchase 45purchased 47 to 7784 percent of their merchandise from Nike. Merchandise that is high profile and in high demand is allocated by our vendorssuppliers 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 vendorssuppliers 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 (particularly Nike) 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 our strong dependence on 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.
Our stores in the United States and Canada are located primarily in enclosed regional and neighborhood malls. Our sales are dependent, in part, on the volume of mall traffic. Mall traffic may be adversely affected by, among other things,factors, economic downturns, the closing 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, or public health or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in affected areas, 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 anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available.available at favorable rates. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by the overall poor economic conditions as well as the closure of certain mall anchor tenants.
Several large landlords dominate the ownership of prime malls, particularly in the United States, Canada, and Australia, 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 landlords would negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.
Natural disasters, including earthquakes, hurricanes, floods, and tornados 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 vendors 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 the operations of our suppliers, our operations, our customers, or have an adverse effect on customer demand. 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.
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, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, supply chain disruptions, and weather conditions. Many of our products particularly high-end athletic footwear and licensed apparel, represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession 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.
A significant portion of our sales and operating income for 20112014 was attributable to our operations in Europe, Canada, Australia, and New Zealand, and Australia.Zealand. As a result, our business is subject to the risks associated with doing business outside of the United States such as foreign customer 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. Although we enter into forward foreign exchange contracts and option contracts to reduce the effect of foreign currency exchange rate fluctuations, our operations may be adversely affected by significant changes in the value of the U.S. dollar as it relates to certain foreign currencies.
In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.
Fluctuations in many different jurisdictionsthe value of the euro may affect the value of our European earnings when translated into U.S. dollars. Similarly our earnings in Canada, Australia, and we couldNew Zealand may be affected by the value of currencies when translated into U.S. dollars. Our operating results may be adversely affected by violations ofsignificant changes in these foreign currencies relative to 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, includingdollar. For the U.K. Bribery Act of 2010, which is broadermost part, our international subsidiaries transact in scopetheir functional currency, other than the FCPA, generally prohibit companies and their intermediaries from making improper payments to non-U.S. 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 U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws,U.K., whose inventory purchases are denominated in euro, which could result in foreign currency transaction gains or allegations of such violations,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 disrupt our business and result inhave a material adverse effect on our results of operations orand financial condition.
Macroeconomic developments
such as the recent recessions in Europe and the debt crisis in certain countries in the European Union, could negativelymay adversely affect our ability to conduct business in those geographies.
The Company’sOur performance is subject to global economic conditions and the related impact on consumer spending levels. The continuing European sovereign debt crisis could cause the value of the euro to deteriorate, reducing the purchasing power of our European customers and also reducing the value of our European earnings when translated into U.S. dollars. ThisContinued uncertainty about global economic conditions poses a risk as consumers and businesses 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 and services.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 prices. There is also a risk that if negative economic conditions persist for a long period of time or worsen, consumers may make long-lasting changesreductions to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis.behavior. These and other economic factors could adversely affect demand for the Company’sour products and services and the Company’sour financial condition and operating results.
Past disruptionsAny instability in the U.S. and global financial markets could result in diminished credit and equity markets made it difficult for many businesses to obtain financing on acceptable terms.availability. Although we currently have a revolving credit agreement in place until January 27, 2017, and other than amounts used for standby letters of credit, do not have any borrowings under it, (other than amounts used for standby letters of credit), 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. Additionally, our borrowing costs can be affected by independent rating agencies’ ratings, which are based largely on our performance as measured by credit metrics, including lease-adjusted leverage ratios.
The Company reliesWe rely on a few key vendorssuppliers for a majority of itsour merchandise purchases (including a significant portion from one key vendor)supplier). The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver our merchandise.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.
At January 31, 2015, our cash and cash equivalents totaled $967 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of January 31, 2015, we had $537 million of cash and cash equivalents held in foreign jurisdictions. 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 January 31, 2015, almost all of the investments were in institutions rated A or better from a major credit rating agency. Despite those ratings, 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 $613 million at January 31, 2015. 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 have an impact on the funded status of our pension plan and future funding requirements.
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. We determine fair value basedAs of January 31, 2015, we had $157 million of goodwill; this asset is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a combinationreporting unit level, or a two-step impairment test, if necessary. The determination of a discounted cash flow approach and market-based approach. If an impairment trigger is identified, the carrying value is compared to its estimated fair value and provisions for impairment are recorded as appropriate. Impairment losses are 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 strategic long-range plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by such factors as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict.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.
At January 28, 2012, our cash and cash equivalents totaled $851 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of January 28, 2012, the Company had $498 million of cash and cash equivalents held in foreign jurisdictions. 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. The Company continually monitors the creditworthiness of its counterparties. At January 28, 2012, almost all of the investments were in institutions rated A or better from a major credit rating agency. Despite those ratings, 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.
The trust which holds the assets of our U.S. pension plan has assets totaling $546 million at January 28, 2012. 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 risk through diversification, and we regularly monitor investment risk on 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 have an impact on the funded status of our pension plans and future funding requirements.
We are a U.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 profits and lossesresults by tax jurisdiction, our ability to use tax credits, 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.
A substantial portion of our cash and investments is invested outside of the U.S.United States. As we plan to permanently reinvest our foreign earnings outside the United States, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. Recent proposals to reform U.S. tax rules may result in a reduction or elimination of the deferral of U.S. income tax on our foreign earnings, which could adversely affect our effective tax rate. Any of these changes could have an adverse effect on our results of operations and financial condition.
Natural disasters, including earthquakes, hurricanes, floods, and tornados 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 products are subjectability to importpurchase 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 excise duties and/result in a significant part of our workforce being unable to operate or salesmaintain our infrastructure or value-added taxesperform 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 impact of these events depends, in many jurisdictions. Fluctuationspart, 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 tax rates and duties and changesthe event of an actual disaster. We may be required to suspend operations in tax legislationsome or regulationall of our locations, which could have a material adverse effect on our business, financial condition, and results of operationsoperations. 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 require our independent manufacturers to comply with our policies and financial condition.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.
We operate fourmultiple 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 U.S.,United States, Canada, Australia, and New Zealand. If complications arise with any facility or if any facility is severely damaged or destroyed, the Company’sour other distribution centers may not be ableunable to support the resulting additional distribution demands. ThisWe may be affected by disruptions in the global transportation network such as a port strike, 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 a significant amount of merchandise. An interruption in service by these carriers for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.
Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges, among and other factors, may increase freight costs and thereby increase our cost of sales. We enter into diesel fuel forward and option contracts to mitigate a portion of the risk associated with the variability caused by these surcharges.
Information technology is a critically important part of our business operations. We depend on information systems to process transactions, 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,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, computer “hackers”malicious hackers, sabotage, or other causes.
Our business involves the storage and transmission of customers’ personal information, such as consumer preferences and credit card information. We invest in industry standard security technology to protect the Company’sdata stored by the Company, as well as our data and business processes, against the risk of data security breachbreaches and cyber attack.cyber-attacks. Our data security management program includes identity, trust, vulnerability and threat management business processes, as well as enforcement of standard data protection policies such as Payment Card Industry compliance. We measure our data security effectiveness through industry accepted methods and remediate critical findings. 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 are adequatefollow leading practices in preventingthe prevention of security breaches and in reducing cyber-securitythe mitigation of cyber security risks, given the ever increasingever-increasing abilities of those intent on breaching cyber-securitycyber security measures and given the necessity of our reliance on the security and other effortsprocedures of third-party vendors, the total security effort at any point in time may not be completely effective and anyeffective. Any such security breaches and cyber incidents could adversely affect our business. Failure of our systems, including failures due to cyber attackscyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company,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 the Companyus could also severely damage our reputation, expose us to the risks of litigation and liability, 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.
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, including computer viruses, telecommunications failures, and similar disruptions. Also, we may require additional capital in the future to sustain or grow our digital commerce.
Business risks related to digital commerce include risks associated with the need to keep pace with rapid technological change, Internet cyber security risks, risks of system failure or inadequacy, governmental regulation, and legal uncertainties with respect to the Internet regulatory compliance, and collection of sales or other taxes by additional states or foreign jurisdictions. If any of these risks materializes, it could have a material adverse effect on the Company’sour business.
Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management team. Our executive and senior management team as well as store personnelhave substantial experience and field management.expertise in our business and have made significant contributions to our recent growth and success. Our successfuture performance depends to a significant extent both upon the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. CompetitionWhile 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.
Many of the store and field associates are in entry level or part-time positions withwhich, historically, have had high rates of turnover. 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 changing demographics. 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. In addition, a large number ofOur ability to meet our retail employees are paid thelabor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage which if increased would negatively affect our profitability.legislation, overtime regulations, and changing demographics.
There have been recent decisions, and administrative regulations issued, by theThe National Labor Relations Board that, if not successfully challenged, wouldcontinually considers changes to labor regulations, many of which could significantly changeaffect the nature of labor relations in the United States and how union elections and contract negotiations are conducted. The National Labor Relations Board’s current definition of a bargaining unit makes it possible for smaller groups of employees to be conducted inorganize labor unions.
Furthermore, recent regulations shorten the United States.election process, significantly reducing the time between the filing of a petition and an election being held. These regulations and recent decisions and regulations could impose more labor relations requirements and union activity on our business conducted in the United States, thereby potentially increasing our costs, andwhich could have a material adverse effect onnegatively affect our overall competitive position.profitability.
In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health care reform legislation the current lack of implementing regulations and interpretive guidance, and the phased-in naturelarge number of the implementation,eligible employees who currently choose not to participate in our plans, it is difficult to predict the overall effect of the statute and related regulations on our business over the coming years. Possible adverse effects ofDue to the health reform legislationcare law changes, some eligible employees who had historically not chosen to participate in our health care plans have found it more advantageous to participate in our plans effective January 1, 2015. Such changes include increasedtax penalties to persons for not obtaining health care coverage and being ineligible for certain health care subsidies if an employee is eligible for health care coverage under an employer’s plan. If a larger number of eligible employees, who currently choose not to participate in our plans, choose to enroll over the next few years, it may significantly increase our health care coverage costs exposure to expanded liability and requirements for us to revise ways in which we conduct business.negatively affect our financial results.
There has been an increasing focus and significant debate on global climate change, recently, including increased attention from regulatory agencies and legislative bodies globally.bodies. This increased focus may lead to new initiatives directed at regulating an as-yet unspecified array of environmental matters. Legislative, regulatory, or other efforts in the United States to combat climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business.
We are exposed to the risk that federal or state legislation may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs, such as 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 class actions and patent infringement claims, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.
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 non-U.S. 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 disrupt our business and result in a material adverse effect on our results of operations or financial condition.
We continue to document, test, and monitor our internal controls over financial reporting in order to satisfy all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; however, we cannot be assured that our disclosure controls and procedures and our internal controls 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, the price of our common stock, and market confidence in our reported financial information.information, and the price of our common stock.
None.
The 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 segment at the end of 20112014 were approximately 12.4512.73 and 7.387.48 million square feet, respectively. These properties, which are primarily leased, are located in the United States, Canada, various European countries, Australia, and New Zealand.
The Company currently operates fourseven distribution centers, of which twothree are owned and twofour are leased, occupying an aggregate of 2.42.9 million square feet. Three of the four distribution centers are located in the United States, three in Germany, and one is in the Netherlands. The three locations in Germany relate to the central warehouse distribution centers for the Runners Point Group store locations, as well as a distribution center for its direct-to-customer business. During 2014, we opened a new distribution center in Germany which provides us with increased capacity that will enable us to support the planned growth of both the store and direct-to-customer businesses. This larger distribution center will also allow us to consolidate the other two locations in Germany in 2015.
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.
Information regarding the Company’s legal proceedings is contained in theLegal Proceedings note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
Not applicable.
Information with respect to Executive Officers of the Company, as of March 26, 2012,30, 2015, is set forth below:
Executive Chairman of the Board | Ken C. Hicks | |
Richard A. Johnson | ||
Executive Vice President — Operations Support | Robert W. McHugh | |
Executive Vice President and Chief Financial Officer | Lauren B. Peters | |
Senior Vice President and Chief Human Resources Officer | Paulette R. Alviti | |
Senior Vice President, General Counsel and Secretary | ||
Senior Vice President — Real Estate | Jeffrey L. Berk | |
Senior Vice President and Chief Information Officer | Peter D. Brown | |
Senior Vice President and Chief Accounting Officer | Giovanna Cipriano | |
Vice President, Treasurer and Investor Relations | John A. Maurer |
Ken C. Hicks, age 59,62, has served as Executive Chairman of the Board since January 31, 2010 and2010. He served as President and Chief Executive Officer sincefrom August 17, 2009. Mr. Hicks served as President and Chief Merchandising Officer of J.C. Penney Company, Inc. (“JC Penney”) from 20052009 through 2009. He was President and Chief Operating Officer of Stores and Merchandise Operations of JC Penney from 2002 through 2004, and he served as President of Payless ShoeSource, Inc. from 1999 to 2002.November 30, 2014. Mr. Hicks is also a director of Avery Dennison Corporation.
Richard A. Johnson, age 54,57, has served as President and Chief Executive Officer since December 1, 2014. Mr. Johnson previously served as Executive Vice President and Chief Operating Officer from May 16, 2012 through November 30, 2014. He served as Executive Vice President and Group President — Retail Stores sincefrom July 2011. He served as2011 to May 15, 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.
Robert W. McHugh, age 53,56, has served as Executive Vice President — Operations Support since July 2011. He served as Executive Vice President and Chief Financial Officer from May 2009 to July 2011; and Senior Vice President and Chief Financial Officer from November 2005 through April 2009.2011.
Lauren B. Peters, age 50,53, has served as Executive Vice President and Chief Financial Officer since July 2011. She served as Senior Vice President — Strategic Planning from April 2002 to July 2011.
Gary M. Bahler,Paulette R. Alviti,age 60,44, has served as Senior Vice President and Chief Human Resources Officer since August 1998,June 2013. From March 2010 to May 2013, Ms. Alviti served in various roles at PepsiCo, Inc.: SVP and Chief Human Resources Officer Asia, Middle East, Africa (February to May 2013); SVP Global Talent Acquisition and Deployment (July 2012 to February 2013); and SVP — Human Resources (March 2010 to July 2012). From March 2008 to March 2010, she served as VP — Human Resources of The Pepsi Bottling Group, Inc.
Sheilagh M. Clarke, age 55, has served as Senior Vice President, General Counsel since February 1993 and Secretary since February 1990.June 1, 2014. She previously served as Vice President, Associate General Counsel and Assistant Secretary from May 2007 to May 31, 2014.
Jeffrey L. Berk, age 56,59, has served as Senior Vice President — Real Estate since February 2000.
Peter D. Brown, age 57,60, has served as Senior Vice President and Chief Information Officer since February 2011. He served as Senior Vice President, Chief Information Officer and Investor Relations from September 2006 to February 2011; and as Vice President — Investor Relations and Treasurer from October 2001 to September 2006.2011.
Giovanna Cipriano, age 42,45, has served as Senior Vice President and Chief Accounting Officer since May 2009. Ms. Cipriano served as Vice President and Chief Accounting Officer from November 2005 through April 2009.
Laurie J. Petrucci, age 53, has served as Senior Vice President — Human Resources since May 2001.
John A. Maurer, age 52,55, has served as Vice President, Treasurer and Investor Relations since February 2011. Mr. Maurer served as Vice President and Treasurer from September 2006 to February 2011. He served as Divisional Vice President and Assistant Treasurer from April 2006 to September 2006.
There are no family relationships among the executive officers or directors of the Company.
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. In addition, the stock is traded on the Cincinnati stock exchange. AtAs of January 28, 2012,31, 2015, the Company had 18,20915,353 shareholders of record owning 151,619,112140,864,188 common shares.
The following table provides, for the period indicated, the intra-day high and low sales prices for the Company’s common stock:
2011 | 2010 | 2014 | 2013 | |||||||||||||||||||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
1st Quarter | $ | 22.03 | $ | 17.21 | $ | 16.76 | $ | 11.30 | $ | 48.71 | $ | 36.65 | $ | 35.64 | $ | 31.30 | ||||||||||||||||
2nd Quarter | 25.50 | 21.00 | 15.79 | 12.27 | 52.07 | 46.20 | 37.70 | 32.61 | ||||||||||||||||||||||||
3rd Quarter | 23.02 | 16.66 | 16.09 | 11.59 | 58.40 | 47.90 | 37.85 | 31.91 | ||||||||||||||||||||||||
4th Quarter | 26.82 | 20.82 | 20.08 | 15.63 | 59.19 | 51.12 | 41.73 | 34.09 |
During each of the quarters of 20112014, the Company declared dividendsa dividend of $0.165$0.22 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 projections, as well as competitive factors.flow. On February 14, 2012,17, 2015, the Board of Directors declared a quarterly dividend of $0.18$0.25 per share to be paid on April 27, 2012.May 1, 2015. This dividend represents a 914 percent increase over the Company’s previous quarterly per share amount.
The following table is a summary of our fourth quarter share repurchases:
Date Purchased | Total Number of Shares Purchased(1) | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | Approximate Dollar Value of Shares that may yet be Purchased Under the Program(2) | ||||||||||||
Oct. 30, 2011 – Nov. 26, 2011 | — | — | — | $ | 103,463,547 | |||||||||||
Nov. 27, 2011 – Dec. 31, 2011 | 294,401 | $ | 23.84 | 289,100 | $ | 96,575,360 | ||||||||||
Jan. 1, 2012 – Jan. 28, 2012 | — | — | — | $ | 96,575,360 | |||||||||||
294,401 | $ | 23.84 | 289,100 | $ | 96,575,360 |
Date Purchased | Total Number of Shares Purchased(1) | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | Approximate Dollar Value of Shares that may yet be Purchased Under the Program(2) | ||||||||||||
Nov. 2, 2014 – Nov. 29, 2014 | 1,059,790 | (3) | $ | 55.92 | 1,059,790 | $ | 136,841,263 | |||||||||
Nov. 30, 2014 – Jan. 3, 2015 | 862,663 | $ | 56.06 | 861,771 | $ | 88,527,414 | ||||||||||
Jan. 4, 2015 – Jan. 31, 2015 | 419,584 | (3) | $ | 55.67 | 419,584 | $ | 65,167,625 | |||||||||
2,342,037 | $ | 55.93 | 2,341,145 |
(1) | These columns also reflect shares purchased in connection with stock swaps. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares. |
(2) |
(3) | On November 26, 2014, the Company paid $75 million under an Accelerated Share Repurchase (“ASR”) agreement with a financial institution and received an initial delivery of 1,059,790 shares. The transaction was completed by the end of the fourth quarter with the Company receiving 281,355 additional shares to settle the agreement. The price paid per share was calculated with reference to the average stock price of |
On February 14, 2012,17, 2015, the Company’s Board of Directors approved a new 3-year, $400 million$1 billion share repurchase program extending through January 2015,2018, replacing the Company’s previous $250$600 million program which terminated on that date.program.
The following graph compares the cumulative five-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell 2000 Index.
Indexed Share Price Performance
The Company has previously used the Russell 2000 Index in its performance graph. However, due to the increasing size of the Company’s market capitalization it was determined that the Russell Midcap Index is a more appropriate benchmark as the median market capitalization is the closest in the Russell family of indices to the Company’s. The next graphbelow compares the cumulative five-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell Midcap Index. It is
The following Performance Graph and related information shall not be deemed “soliciting material” or to be filed with the Company’s intentionSEC, 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 use the Russell Midcap Index for future performance graphs.extent that we specifically incorporate it by reference into such filing.
1/30/2010 | 1/29/2011 | 1/28/2012 | 2/2/2013 | 2/1/2014 | 1/31/2015 | |||||||||||||||||||
Foot Locker, Inc. | $ | 100.00 | $ | 157.40 | $ | 234.19 | $ | 306.11 | $ | 341.90 | $ | 471.39 | ||||||||||||
S&P 400 Retailing Index | $ | 100.00 | $ | 141.60 | $ | 170.80 | $ | 209.23 | $ | 234.04 | $ | 281.84 | ||||||||||||
Russell Midcap Index | $ | 100.00 | $ | 129.27 | $ | 132.08 | $ | 153.77 | $ | 185.53 | $ | 207.66 |
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.
($ in millions, except per share amounts) | 2011 | 2010 | 2009 | 2008 | 2007 | 2014 | 2013 | 2012(1) | 2011 | 2010 | ||||||||||||||||||||||||||||||
Summary of Continuing Operations | ||||||||||||||||||||||||||||||||||||||||
Summary of Operations | ||||||||||||||||||||||||||||||||||||||||
Sales | $ | 5,623 | 5,049 | 4,854 | 5,237 | 5,437 | $ | 7,151 | 6,505 | 6,182 | 5,623 | 5,049 | ||||||||||||||||||||||||||||
Gross margin | 1,796 | 1,516 | 1,332 | 1,460 | 1,420 | 2,374 | 2,133 | 2,034 | 1,796 | 1,516 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 1,244 | 1,138 | 1,099 | 1,174 | 1,176 | 1,426 | 1,334 | 1,294 | 1,244 | 1,138 | ||||||||||||||||||||||||||||||
Impairment and other charges | 5 | 10 | 41 | 259 | 128 | 4 | 2 | 12 | 5 | 10 | ||||||||||||||||||||||||||||||
Depreciation and amortization | 110 | 106 | 112 | 130 | 166 | 139 | 133 | 118 | 110 | 106 | ||||||||||||||||||||||||||||||
Interest expense, net | 6 | 9 | 10 | 5 | 1 | 5 | 5 | 5 | 6 | 9 | ||||||||||||||||||||||||||||||
Other income | (4 | ) | (4 | ) | (3 | ) | (8 | ) | (1 | ) | (9 | ) | (4 | ) | (2 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||
Income (loss) from continuing operations, after-tax | 278 | 169 | 47 | (79 | ) | 43 | ||||||||||||||||||||||||||||||||||
Net income | 520 | 429 | 397 | 278 | 169 | |||||||||||||||||||||||||||||||||||
Per Common Share Data | ||||||||||||||||||||||||||||||||||||||||
Basic earnings | 1.81 | 1.08 | 0.30 | (0.52 | ) | 0.29 | 3.61 | 2.89 | 2.62 | 1.81 | 1.08 | |||||||||||||||||||||||||||||
Diluted earnings | 1.80 | 1.07 | 0.30 | (0.52 | ) | 0.28 | 3.56 | 2.85 | 2.58 | 1.80 | 1.07 | |||||||||||||||||||||||||||||
Common stock dividends declared per share | 0.66 | 0.60 | 0.60 | 0.60 | 0.50 | 0.88 | 0.80 | 0.72 | 0.66 | 0.60 | ||||||||||||||||||||||||||||||
Weighted-average Common Shares Outstanding | ||||||||||||||||||||||||||||||||||||||||
Basic earnings | 153.0 | 155.7 | 156.0 | 154.0 | 154.0 | 143.9 | 148.4 | 151.2 | 153.0 | 155.7 | ||||||||||||||||||||||||||||||
Diluted earnings | 154.4 | 156.7 | 156.3 | 154.0 | 155.6 | 146.0 | 150.5 | 154.0 | 154.4 | 156.7 | ||||||||||||||||||||||||||||||
Financial Condition | ||||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents, and short-term investments | $ | 851 | 696 | 589 | 408 | 493 | $ | 967 | 867 | 928 | 851 | 696 | ||||||||||||||||||||||||||||
Merchandise inventories | 1,069 | 1,059 | 1,037 | 1,120 | 1,281 | 1,250 | 1,220 | 1,167 | 1,069 | 1,059 | ||||||||||||||||||||||||||||||
Property and equipment, net | 427 | 386 | 387 | 432 | 521 | 620 | 590 | 490 | 427 | 386 | ||||||||||||||||||||||||||||||
Total assets | 3,050 | 2,896 | 2,816 | 2,877 | 3,243 | 3,577 | 3,487 | 3,367 | 3,050 | 2,896 | ||||||||||||||||||||||||||||||
Long-term debt | 135 | 137 | 138 | 142 | 221 | |||||||||||||||||||||||||||||||||||
Long-term debt and obligations under capital leases | 134 | 139 | 133 | 135 | 137 | |||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 2,110 | 2,025 | 1,948 | 1,924 | 2,261 | 2,496 | 2,496 | 2,377 | 2,110 | 2,025 | ||||||||||||||||||||||||||||||
Financial Ratios | ||||||||||||||||||||||||||||||||||||||||
Sales per average gross square foot | $ | 406 | 360 | 333 | 350 | 352 | $ | 490 | 460 | 443 | 406 | 360 | ||||||||||||||||||||||||||||
Earnings before interest and taxes (EBIT)(2) | 441 | 266 | 83 | (95 | ) | (49 | ) | |||||||||||||||||||||||||||||||||
EBIT margin(2) | 7.8 | % | 5.3 | 1.7 | (1.8 | ) | (0.9 | ) | ||||||||||||||||||||||||||||||||
Net income margin(2) | 4.9 | % | 3.3 | 1.0 | (1.5 | ) | 0.8 | |||||||||||||||||||||||||||||||||
SG&A as a percentage of sales | 19.9 | % | 20.5 | 20.9 | 22.1 | 22.5 | ||||||||||||||||||||||||||||||||||
Earnings before interest and taxes (EBIT) | $ | 814 | 668 | 612 | 441 | 266 | ||||||||||||||||||||||||||||||||||
EBIT margin | 11.4 | % | 10.3 | 9.9 | 7.8 | 5.3 | ||||||||||||||||||||||||||||||||||
EBIT margin (non-GAAP)(3) | 11.4 | % | 10.4 | 9.9 | 7.9 | 5.4 | ||||||||||||||||||||||||||||||||||
Net income margin | 7.3 | % | 6.6 | 6.4 | 4.9 | 3.3 | ||||||||||||||||||||||||||||||||||
Net income margin (non-GAAP)(3) | 7.3 | % | 6.6 | 6.2 | 5.0 | 3.4 | ||||||||||||||||||||||||||||||||||
Return on assets (ROA) | 9.4 | % | 5.9 | 1.7 | (2.6 | ) | 1.3 | 14.7 | % | 12.5 | 12.4 | 9.4 | 5.9 | |||||||||||||||||||||||||||
Net debt capitalization percent(3) | 36.0 | % | 39.0 | 43.0 | 46.7 | 45.1 | ||||||||||||||||||||||||||||||||||
Return on invested capital (ROIC)(3) | 15.0 | % | 14.1 | 14.2 | 11.8 | 8.3 | ||||||||||||||||||||||||||||||||||
Net debt capitalization percent(3), (4) | 43.4 | % | 42.5 | 37.2 | 36.0 | 39.0 | ||||||||||||||||||||||||||||||||||
Current ratio | 3.8 | 4.0 | 4.1 | 4.2 | 4.0 | 3.5 | 3.8 | 3.7 | 3.8 | 4.0 | ||||||||||||||||||||||||||||||
Other Data | ||||||||||||||||||||||||||||||||||||||||
Capital expenditures | $ | 152 | 97 | 89 | 146 | 148 | $ | 190 | 206 | 163 | 152 | 97 | ||||||||||||||||||||||||||||
Number of stores at year end | 3,369 | 3,426 | 3,500 | 3,641 | 3,785 | 3,423 | 3,473 | 3,335 | 3,369 | 3,426 | ||||||||||||||||||||||||||||||
Total selling square footage at year end (in millions) | 7.38 | 7.54 | 7.74 | 8.09 | 8.50 | 7.48 | 7.47 | 7.26 | 7.38 | 7.54 | ||||||||||||||||||||||||||||||
Total gross square footage at year end (in millions) | 12.45 | 12.64 | 12.96 | 13.50 | 14.12 | 12.73 | 12.71 | 12.32 | 12.45 | 12.64 |
(1) | 2012 represents the 53 weeks ended February 2, 2013. |
(2) | Calculated as Athletic Store sales divided by the average monthly ending gross square footage of the last thirteen months. |
(3) | See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information and calculation. |
(4) | Represents total debt and obligations under capital leases, net of cash, cash equivalents, and short-term investments. Additionally, this calculation includes the present value of operating leases, and accordingly is considered a non-GAAP measure. |
Foot Locker, Inc., through its subsidiaries, operates in two reportable segments — Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whosewith formats that include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and CCS.Sidestep. The Direct-to-Customers segment reflects CCSincludes Footlocker.com, Inc. and Footlocker.com, Inc., which sells, through itsother affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through catalogs,their Internet and mobile devices,sites and Internet websites.catalogs.
The Foot Locker brand is one of the most widely recognized names in the market segmentsmarkets in which the Company operates, epitomizing highpremium quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, specificallysuch as Lady Foot Locker, and Kids Foot Locker, as well as Footlocker.com, its direct-to-customersdirect-to-customer business. Through various marketing channels, including broadcast, digital, print, and various sports sponsorships of various sportingand events, the Company reinforces its image with a consistent message- message — namely, that it is the destination for athletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment.
Store Profile
Square Footage | Square Footage | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
January 29, 2011 | Opened | Closed | January 28, 2012 | Relocations/ Remodels | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Selling | Gross | February 1, 2014 | Opened | Closed | January 31, 2015 | Relocations/ Remodels | Selling | Gross | ||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker U.S. | 1,144 | 5 | 31 | 1,118 | 67 | 2,656 | 4,499 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker International | 751 | 45 | 13 | 783 | 60 | 1,148 | 2,276 | |||||||||||||||||||||||||||||||||||||||||||||||||
Lady Foot Locker | 378 | — | 47 | 331 | 9 | 426 | 737 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker US | 1,044 | 11 | 40 | 1,015 | 94 | 2,494 | 4,298 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker Europe | 604 | 13 | 14 | 603 | 40 | 846 | 1,839 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker Canada | 128 | — | 2 | 126 | 31 | 270 | 422 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foot Locker Asia Pacific | 92 | 3 | 4 | 91 | 4 | 125 | 204 | |||||||||||||||||||||||||||||||||||||||||||||||||
Lady Foot Locker/SIX:02 | 257 | 8 | 52 | 213 | 51 | 299 | 501 | |||||||||||||||||||||||||||||||||||||||||||||||||
Kids Foot Locker | 294 | 3 | 8 | 289 | 8 | 403 | 692 | 336 | 28 | 7 | 357 | 25 | 529 | 912 | ||||||||||||||||||||||||||||||||||||||||||
Footaction | 307 | 1 | 16 | 292 | 14 | 846 | 1,351 | 277 | 2 | 7 | 272 | 20 | 789 | 1,258 | ||||||||||||||||||||||||||||||||||||||||||
Champs Sports | 540 | 5 | 11 | 534 | 24 | 1,868 | 2,845 | 542 | 11 | 6 | 547 | 50 | 1,913 | 2,927 | ||||||||||||||||||||||||||||||||||||||||||
CCS | 12 | 11 | 1 | 22 | — | 34 | 51 | |||||||||||||||||||||||||||||||||||||||||||||||||
Runners Point | 115 | 5 | 4 | 116 | 4 | 143 | 244 | |||||||||||||||||||||||||||||||||||||||||||||||||
Sidestep | 78 | 5 | — | 83 | — | 75 | 129 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | 3,426 | 70 | 127 | 3,369 | 182 | 7,381 | 12,451 | 3,473 | 86 | 136 | 3,423 | 319 | 7,483 | 12,734 |
Athletic Stores
The Company operates 3,3693,423 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segment’s operating businesses:businesses and their respective taglines:
Foot Locker — “Sneaker Central”“Approved” — Foot Locker is a leading global athletic footwear and apparel retailer.retailer, which caters to the sneaker enthusiast — If it’s at Foot Locker, it’s Approved. Its stores offer the latest in athletic-inspired performance products,athletically-inspired footwear and apparel, manufactured primarily by the leading athletic brands. Foot Locker offersprovides the best selection of premium products for a wide variety of activities, including basketball, running, and training. Its 1,901Additionally, we operate 178 House of Hoops, primarily a shop-in-shop concept, which sells premier basketball-inspired footwear and apparel. Foot Locker’s 1,835 stores are located in 23 countries including 1,1181,015 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 129126 in Canada, 563603 in Europe, and a combined 91 in Australia and New Zealand. The domestic stores have an average of 2,4002,500 selling square feet and the international stores have an average of 1,500 selling square feet.
Lady Foot Locker — “The—“The Place for Her” — Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel, and accessories for active women. Its stores carry major athletic footwear, apparel, and apparelaccessories brands as well as casual wear and an assortment of apparel designed for a variety of activities, including running, walking, training, and fitness. Its 331Lady Foot Locker operates 198 stores that are located in the United States and Puerto Rico, and the U.S. Virgin Islands, andRico. These stores have an average of 1,3001,400 selling square feet.
SIX:02 —“It’s Your Time” — SIX:02 is an elevated retail concept designed for her, featuring top brands in fitness apparel, footwear, and accessories for a variety of activities, including running, yoga, strength training, dance, and CrossFit. This banner connects with each local market’s fitness community through gym, studio, and trainer partnerships, and celebrates the time each woman invests in herself. SIX:02 operates 15 stores in the United States and have an average of 2,100 selling square feet.
Kids Foot Locker — “Where Kids Come First”“Go Big” — Kids Foot Locker is a national children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Its 289Of its 357 stores, 336 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 16 in Europe, and 5 in Canada. These stores have an average of 1,4001,500 selling square feetfeet.
Footaction — “Head-to-Toe Sport Inspired Style”“Own It” — Footaction is a national athletic footwear and apparel retailer.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. The primary customers arecustomer is a style-obsessed, confident, influential young males that seek street-inspired athletic styles.male who is always dressed to impress. Its 292272 stores are located throughout the United States and Puerto Rico and focus on marquee footwear and branded apparel.authentic, premium product. The Footaction stores have an average of 2,900 selling square feet.
Champs Sports — “We Know Game” — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. Its product categories include athletic footwear and apparel, and accessories, and a focusedsport-lifestyle inspired accessories. This assortment of equipment. This combination allows Champs Sports to differentiate itself from other mall-based stores by presenting complete product assortmentshead-to-toe merchandising stories representing the most powerful athletic brands, sports teams, and athletes in a select number of sporting activities. Its 534North America. Of its 547 stores, 517 are located throughout the United States, Canada, Puerto Rico, and the U.S. Virgin Islands.Islands and 30 in Canada. The Champs Sports stores have an average of 3,500 selling square feet.
CCSRunners Point — “We Are Board Culture”“Your Way, Our Passion” — CCS serves the needs of the 12 – 20 year old seeking an authentic board lifestyle shop. CCS is anchoredRunners Point specializes in skate but appealing to the surrounding culture. The CCS format offers board lifestyle merchandise that will fit the needs of the customer all year longrunning footwear, apparel, and stocks the best selection of both coreequipment for performance and lifestyle brands. This format complements the CCS catalog and Internet business, which was acquired in November 2008. This concept was expanded to 22purposes. Its 116 stores in 2011, all of which are located in the United StatesGermany and Austria. This banner caters to local running communities providing technical products, training tips and access to local running and group events. The Runners Point stores have an average 1,500of 1,200 selling square feet.
Sidestep — “Sneaker Lifestyle” — Sidestep is a predominantly sports fashion footwear banner. Its 83 stores are located in Germany, Austria, and the Netherlands. Sidestep caters to a more discerning, fashion consumer. Sidestep stores have an average of 900 selling square feet.
Direct-to-Customers
The Company’s Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells through its affiliates, directly to customers through catalogs as well as its Internet and mobile websites. Eastbay,sites and catalogs.
The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamsales.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, footaction.com, footlocker.ca, footlocker.eu, and champssports.com). Additionally, this segment includes the direct-to-customer subsidiary of Runners Point Group, which operates the websites for runnerspoint.com, sidestep-shoes.com, and sp24.com. These sites offer one of the affiliates,largest online selections of running sport items in Europe, while providing a seamless link between e-commerce and store banners.
Eastbay — “First Choice For Athletes” — Eastbay is among the largest direct marketers in the United States, providing the high school athleteand other athletes with a complete sports solution including athletic footwear, apparel, equipment, team licensed, and private-label merchandise. In 2008, the Company purchased CCS, an Internet and catalog retailermerchandise for a broad range of skateboard equipment, apparel, footwear, and accessories targeted primarily to teenaged boys. The retail store operations of CCS are included in the Athletic Stores segment. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, and teamsales.eastbay.com. Additionally this segment operates websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footaction.com, champssports.com, and ccs.com).sports.
Franchise Operations
In 2006, theThe Company entered into ahas two separate ten-year area development agreementagreements with the Alshaya Trading Co. W.L.L.,third parties for the operation of Foot Locker stores located within the Middle East subject to certain restrictions. Additionally, in 2007, the Company entered into a ten-year agreement with another third party for the exclusive right to open and operate Foot Locker stores in the Republic of Korea.
Additionally, franchised stores located in Germany and Switzerland operate under the Runners Point and Sidestep banners. A total of 3478 franchised stores were operating at January 28, 2012.31, 2015, of which 31 are operating in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea. Royalty income from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.
In the following tables, the Company has presented certain financial measures and ratios identified as non-GAAP. The Company believes this non-GAAP information is a useful measure to investors because it allows for a more direct comparison of the Company’s performance for 20112014 as compared with 2010prior years and is useful in assessing the Company’s progress in achieving its long-term financial objectives. The 2014 and 2013 results represent the 52 weeks ended January 31, 2015 and February 1, 2014, respectively, as compared with the 53 weeks in the 2012 reporting year. The following represents a reconciliation of the non-GAAP measures discussed throughout the Overview of Consolidated Results:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions, except per share amounts) | (in millions, except per share amounts) | |||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||
Sales | $ | 7,151 | $ | 6,505 | $ | 6,182 | ||||||||||||||||||
53rd week | — | — | 81 | |||||||||||||||||||||
Sales excluding 53rd week (non-GAAP) | $ | 7,151 | $ | 6,505 | $ | 6,101 | ||||||||||||||||||
Pre-tax income: | ||||||||||||||||||||||||
Income from continuing operations before income taxes | $ | 435 | $ | 257 | $ | 73 | ||||||||||||||||||
Income before income taxes | $ | 809 | $ | 663 | $ | 607 | ||||||||||||||||||
Pre-tax amounts excluded from GAAP: | ||||||||||||||||||||||||
Impairment of goodwill and other intangible assets | 5 | 10 | — | |||||||||||||||||||||
Impairment of assets | — | — | 36 | |||||||||||||||||||||
Reorganization costs | — | — | 5 | |||||||||||||||||||||
Runners Point Group integration and acquisition costs | 2 | 6 | — | |||||||||||||||||||||
Impairment and other charges | 5 | 10 | 41 | 4 | 2 | 12 | ||||||||||||||||||
Inventory reserve – recorded within cost of sales | — | — | 14 | |||||||||||||||||||||
Money market realized gain – recorded within other income | — | (2 | ) | — | ||||||||||||||||||||
Gain on sale of real estate | (4 | ) | — | — | ||||||||||||||||||||
53rd week | — | — | (22 | ) | ||||||||||||||||||||
Total pre-tax amounts excluded | 5 | 8 | 55 | 2 | 8 | (10 | ) | |||||||||||||||||
Income from continuing operations before income taxes (non-GAAP) | $ | 440 | $ | 265 | $ | 128 | ||||||||||||||||||
Income before income taxes (non-GAAP) | $ | 811 | $ | 671 | $ | 597 | ||||||||||||||||||
Calculation of Earnings Before Interest and Taxes (EBIT): | ||||||||||||||||||||||||
Income from continuing operations before income taxes | $ | 435 | $ | 257 | $ | 73 | ||||||||||||||||||
Income before income taxes | $ | 809 | $ | 663 | $ | 607 | ||||||||||||||||||
Interest expense, net | 6 | 9 | 10 | 5 | 5 | 5 | ||||||||||||||||||
EBIT | $ | 441 | $ | 266 | $ | 83 | $ | 814 | $ | 668 | $ | 612 | ||||||||||||
Income from continuing operations before income taxes (non-GAAP) | $ | 440 | $ | 265 | $ | 128 | ||||||||||||||||||
Income before income taxes (non-GAAP) | $ | 811 | $ | 671 | $ | 597 | ||||||||||||||||||
Interest expense, net | 6 | 9 | 10 | 5 | 5 | 5 | ||||||||||||||||||
EBIT (non-GAAP) | $ | 446 | $ | 274 | $ | 138 | $ | 816 | $ | 676 | $ | 602 | ||||||||||||
EBIT margin% | 7.8 | % | 5.3 | % | 1.7 | % | 11.4 | % | 10.3 | % | 9.9 | % | ||||||||||||
EBIT margin% (non-GAAP) | 7.9 | % | 5.4 | % | 2.8 | % | 11.4 | % | 10.4 | % | 9.9 | % | ||||||||||||
After-tax income: | ||||||||||||||||||||||||
Income from continuing operations | $ | 278 | $ | 169 | $ | 47 | ||||||||||||||||||
After-tax amounts excluded | 3 | 4 | 34 | |||||||||||||||||||||
Canadian tax rate changes excluded | — | — | 4 | |||||||||||||||||||||
Income from continuing operations after-tax (non-GAAP) | $ | 281 | $ | 173 | $ | 85 | ||||||||||||||||||
Net income | $ | 520 | $ | 429 | $ | 397 | ||||||||||||||||||
After-tax amounts excluded from GAAP: | ||||||||||||||||||||||||
Runners Point Group acquisition and integration costs | 2 | 5 | — | |||||||||||||||||||||
Impairment and other charges | 3 | 1 | 7 | |||||||||||||||||||||
Gain on sale of property | (3 | ) | — | — | ||||||||||||||||||||
53rd week | — | — | (14 | ) | ||||||||||||||||||||
Settlement of foreign tax audits | — | (3 | ) | (9 | ) | |||||||||||||||||||
Canadian tax rate changes | — | — | (1 | ) | ||||||||||||||||||||
Net income (non-GAAP) | $ | 522 | $ | 432 | $ | 380 | ||||||||||||||||||
Net income margin% | 4.9 | % | 3.3 | % | 1.0 | % | 7.3 | % | 6.6 | % | 6.4 | % | ||||||||||||
Net income margin% (non-GAAP) | 5.0 | % | 3.4 | % | 1.8 | % | 7.3 | % | 6.6 | % | 6.2 | % | ||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Income from continuing operations | $ | 1.80 | $ | 1.07 | $ | 0.30 | ||||||||||||||||||
Net income | $ | 3.56 | $ | 2.85 | $ | 2.58 | ||||||||||||||||||
Runners Point Group acquisition and integration costs | 0.01 | 0.03 | — | |||||||||||||||||||||
Impairment and other charges | 0.02 | 0.04 | 0.16 | 0.02 | 0.01 | 0.05 | ||||||||||||||||||
Inventory reserve | — | — | 0.06 | |||||||||||||||||||||
Money-market realized gain | — | (0.01 | ) | — | ||||||||||||||||||||
Gain on sale of property | (0.01 | ) | — | — | ||||||||||||||||||||
53rd week | — | — | (0.09 | ) | ||||||||||||||||||||
Settlement of foreign tax audits | — | (0.02 | ) | (0.06 | ) | |||||||||||||||||||
Canadian tax rate changes | — | — | 0.02 | — | — | (0.01 | ) | |||||||||||||||||
Income from continuing operations (non-GAAP) | $ | 1.82 | $ | 1.10 | $ | 0.54 | ||||||||||||||||||
Net income (non-GAAP) | $ | 3.58 | $ | 2.87 | $ | 2.47 |
The Company estimates the tax effect of the non-GAAP adjustments by applying its effectivemarginal tax rate to deductibleeach of the respective items. The gain
During 2013 and 2012, the Company recorded with respectbenefits of $3 million and $9 million, or $0.02 per diluted share and $0.06 per diluted share, respectively, to The Reserve International Liquidity Fund, Ltd. was recorded with noreflect the settlement of foreign tax expense due to the fact that the entity that held the investment has a zero statutory tax rate. During 2009, the provincial tax rates in Canada were reduced,audits, which resulted in a $4 million reduction in tax reserves established in prior periods. Additionally, in 2012, the valueCompany recorded a benefit of $1 million, or $0.01 per diluted share, to reflect the repeal of the Company’s net deferredlast two stages of certain Canadian provincial tax assets.rate changes.
When assessing Return on Invested Capital (“ROIC”), the Company adjusts its results to reflect its 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 is Return on Assets (“ROA”) and is also represented below. ROA increased to 9.414.7 percent as compared with 5.912.5 percent in the prior year reflecting the Company’s overall strong performance in 2011.2014. Our ROIC improvement is due to an increase in our earnings before interest and income taxes, partially offset by an increase in our average invested capital, primarily related to an increase in capitalized operating leases. This reflected the effect of opening larger stores, and resulting additional rent, supporting the various shop-in-shop initiatives.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
ROA(1) | 9.4 | % | 5.9 | % | 1.7 | % | 14.7 | % | 12.5 | % | 12.4 | % | ||||||||||||
ROIC% (non-GAAP)(2) | 11.8 | % | 8.3 | % | 5.3 | % | 15.0 | % | 14.1 | % | 14.2 | % |
(1) | Represents net income |
(2) | See below for the calculation of ROIC. |
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
EBIT (non-GAAP) | $ | 446 | $ | 274 | $ | 138 | $ | 816 | $ | 676 | $ | 602 | ||||||||||||
+ Rent expense | 544 | 522 | 526 | 635 | 600 | 560 | ||||||||||||||||||
- Estimated depreciation on capitalized operating leases(3) | (389 | ) | (366 | ) | (370 | ) | (482 | ) | (443 | ) | (409 | ) | ||||||||||||
Net operating profit | 601 | 430 | 294 | 969 | 833 | 753 | ||||||||||||||||||
- Adjusted income tax expense(4) | (218 | ) | (153 | ) | (104 | ) | (347 | ) | (298 | ) | (274 | ) | ||||||||||||
= Adjusted return after taxes | $ | 383 | $ | 277 | $ | 190 | $ | 622 | $ | 535 | $ | 479 | ||||||||||||
Average total assets | $ | 2,973 | $ | 2,856 | $ | 2,847 | $ | 3,532 | $ | 3,427 | $ | 3,209 | ||||||||||||
- Average cash, cash equivalents and short-term investments | (774 | ) | (642 | ) | (499 | ) | (917 | ) | (898 | ) | (890 | ) | ||||||||||||
- Average non-interest bearing current liabilities | (519 | ) | (461 | ) | (425 | ) | (659 | ) | (630 | ) | (592 | ) | ||||||||||||
- Average merchandise inventories | (1,064 | ) | (1,048 | ) | (1,079 | ) | (1,235 | ) | (1,194 | ) | (1,118 | ) | ||||||||||||
+ Average estimated asset base of capitalized operating leases(3) | 1,429 | 1,443 | 1,500 | 2,093 | 1,829 | 1,552 | ||||||||||||||||||
+ 13-month average merchandise inventories | 1,192 | 1,177 | 1,268 | 1,325 | 1,269 | 1,200 | ||||||||||||||||||
= Average invested capital | $ | 3,237 | $ | 3,325 | $ | 3,612 | $ | 4,139 | $ | 3,803 | $ | 3,361 | ||||||||||||
ROIC% | 11.8 | % | 8.3 | % | 5.3 | % | 15.0 | % | 14.1 | % | 14.2 | % |
(3) | The determination of the capitalized operating leases and the adjustments to income have been calculated on a lease-by-lease basis and have been consistently calculated in each of the years presented above. Capitalized operating leases represent the best estimate of the asset base that would be recorded for operating leases as if they had been classified as capital or as if the property were purchased. The present value of operating leases is discounted using various interest rates ranging from 2.8 percent to 14.5 percent, which represent the Company’s incremental borrowing rate at inception of the lease. |
(4) | The adjusted income tax expense represents the marginal tax rate applied to net operating profit for each of the periods presented. |
In March of 2010, the Company announced a strategic plan, which included a series of operating initiatives andThe following represents our long-term financial objectives to achieve its vision of becomingand our progress towards meeting those objectives. The following represents non-GAAP results for all the leading global retailer of athletically inspired shoesperiods presented. In addition, the 2012 results are shown on a 53-week basis.
Long-term Objectives | 2014 | 2013 | 2012 | |||||||||||||
Sales (in millions) | $ | 7,500 | $ | 7,151 | $ | 6,505 | $ | 6,101 | ||||||||
Sales per gross square foot | $ | 500 | $ | 490 | $ | 460 | $ | 443 | ||||||||
EBIT margin | 11.0 | % | 11.4 | % | 10.4 | % | 9.9 | % | ||||||||
Net income margin | 7.0 | % | 7.3 | % | 6.6 | % | 6.2 | % | ||||||||
ROIC | 14.0 | % | 15.0 | % | 14.1 | % | 14.2 | % |
Our results in 2014 were very strong and apparel. Several of those objectives were exceeded during 2011 and progress was made towards attaining many of the metrics. In March 2012, an updated long-range plan and new long-term financial objectives were announced in lightwe achieved three of our progress over the first two yearslong-term objectives. Highlights of our long-range plan. Our updated objectives and 2011 results are presented below:
2011 | Prior Long-term Objectives | Updated Long-term Objectives | ||||||||||
Sales (in millions) | $ | 5,623 | $ | 6,000 | $ | 7,500 | ||||||
Sales per gross square foot | $ | 406 | $ | 400 | $ | 500 | ||||||
EBIT margin (non-GAAP) | 7.9 | % | 8.0 | % | 11.0 | % | ||||||
Net income margin (non-GAAP) | 5.0 | % | 5.0 | % | 7.0 | % | ||||||
ROIC (non-GAAP) | 11.8 | % | 10.0 | % | 14.0 | % |
The Company recorded net income from continuing operations of $278 million, or $1.80 per diluted share in 2011; this compares with $169 million, or $1.07 per diluted share, for the prior-year period. Included in the results are impairment charges related to the CCS tradename intangible asset of $5 million and $10 million in 2011 and 2010, respectively. Excluding these charges in both periods, as well as the money market gain in 2010, non-GAAP diluted earnings per share increased by 65 percent to $1.82 per share in 2011 from $1.10 in 2010. Other highlights of our 20112014 financial performance include:
2014 | 2013 | 2012 | ||||||||||
Sales increase | 9.9 | % | 6.6 | % | 8.5 | % | ||||||
Comparable-store sales increase | 8.0 | % | 4.2 | % | 9.4 | % |
The following table represents a summary
2011 | 2010 | 2009 | ||||||||||
(in millions) | ||||||||||||
Sales | ||||||||||||
Athletic Stores | $ | 5,110 | $ | 4,617 | $ | 4,448 | ||||||
Direct-to-Customers | 513 | 432 | 406 | |||||||||
$ | 5,623 | $ | 5,049 | $ | 4,854 | |||||||
Operating Results | ||||||||||||
Athletic Stores(1) | $ | 495 | $ | 329 | $ | 114 | ||||||
Direct-to-Customers(2) | 45 | 30 | 32 | |||||||||
540 | 359 | 146 | ||||||||||
Restructuring (charge) income(3) | (1 | ) | — | 1 | ||||||||
Division profit | 539 | 359 | 147 | |||||||||
Less: Corporate expense(4) | 102 | 97 | 67 | |||||||||
Operating profit | 437 | 262 | 80 | |||||||||
Other income(5) | 4 | 4 | 3 | |||||||||
Earnings before interest expense and income taxes | 441 | 266 | 83 | |||||||||
Interest expense, net | 6 | 9 | 10 | |||||||||
Income from continuing operations before income taxes | $ | 435 | $ | 257 | $ | 73 |
2014 | 2013 | 2012 | ||||||||||
(in millions, except per share data) | ||||||||||||
Sales | $ | 7,151 | $ | 6,505 | $ | 6,182 | ||||||
Gross margin | 2,374 | 2,133 | 2,034 | |||||||||
Selling, general and administrative expenses | 1,426 | 1,334 | 1,294 | |||||||||
Depreciation and amortization | 139 | 133 | 118 | |||||||||
Interest expense, net | 5 | 5 | 5 | |||||||||
Net income | $ | 520 | $ | 429 | $ | 397 | ||||||
Diluted earnings per share | $ | 3.56 | $ | 2.85 | $ | 2.58 |
All references to comparable-store sales for a given period relate to sales from stores (including sales from the Direct-to-Customers segment and sales fromof stores that have been relocated or remodeled during the relevant periods) that arewere open at the period-end that haveand had been open for more than one year, andyear. The computation of comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations. Stores opened and closed during the period are not included. Sales from acquired businesses that include the purchase of inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, sales of Runners Point Group were included in the computation of comparable-store sales beginning October 2014.
Sales of $7,151 million in 20112014 increased to $5,623by 9.9 percent from sales of $6,505 million or by 11.4 percent as compared with 2010.in 2013, this represented comparable-store sales of 8.0 percent. Excluding the effect of foreign currency fluctuations and sales of Runners Point Group, sales increased 9.78.5 percent as compared with 2010. Comparable-store sales increased by 9.8 percent. This increase primarily reflects higher footwear sales. Apparel and accessories sales also increased, which represented approximately 24 percent of sales, reflecting a modest increase over the corresponding prior-year period of 23 percent.2013.
Sales of $5,049$6,505 million in 20102013 increased by 4.05.2 percent from sales of $4,854$6,182 million in 2009.2012, this represented comparable-store sales of 4.2 percent. Excluding the effect of foreign currency fluctuations and sales of Runners Point Group, sales increased 4.62.4 percent as compared with 2009. Comparable-storethe 53 weeks of 2012. Results for 2012 include the effect of the 53rd week, which represented sales of $81 million.
The following represents the percentage of sales from each of the major product categories:
2014 | 2013 | 2012 | ||||||||||
Footwear sales | 79% | 77% | 76% | |||||||||
Apparel and accessories sales | 21% | 23% | 24% |
2014 | 2013 | 2012 | ||||||||||
Gross margin rate | 33.2% | 32.8% | 32.9% | |||||||||
Change in the gross margin rate is comprised of: | 2014 vs. 2013 | 2013 vs. 2012 | ||||||||||
Occupancy and buyers’ compensation | 0.7 | — | ||||||||||
Merchandise margin | (0.3) | (0.1) | ||||||||||
Increase (decrease) in gross margin rate | 0.4% | (0.1)% |
The decrease in the occupancy and buyers’ compensation rate reflects improved leverage of primarily fixed costs. Merchandise margin declined by 30 basis points as the cost of merchandise increased in 2014 as compared with 2013. This primarily reflects the effect of lower initial markups driven by 5.8 percent.supplier and category mix, and lower shipping and handling margin, partially offset by lower markdowns.
The decline in the gross margin rate in 2013 as compared to 2012 primarily reflects the effect of lower initial markups. Excluding the effect of the 53rd week in 2012, the gross margin rate in 2013 was flat as compared with 2012.
Gross margin as a percentage of sales was 31.9 percent in 2011, increasing by 190 basis points as compared with 2010. This increase reflected a 70 basis points improvement in the merchandise margin rate, which is attributable to an improved inventory position, better merchandise flow, and lower markdowns as the Company was less promotional during 2011. The effect of vendor allowances, as compared with the prior year, contributed 10 basis points to this improvement. The increase in the gross margin rate also included a decrease of 120 basis points in the occupancy and buyers salary expense rate reflecting improved leverage on largely fixed costs.
Gross margin as a percentage of sales was 30.0 percent in 2010 increasing 260 basis points as compared with 2009. In 2009, the Company recorded a $14 million inventory reserve on certain aged apparel as part of its new apparel strategy. Excluding this charge, gross margin would have increased by 230 basis points as compared with 2009. This increase reflected an increase of 150 basis points in the merchandise margin rate reflecting lower markdowns as the Company was less promotional during the year as compared with the prior year. Lower vendor allowances during the current year, reflecting the overall lower promotional activity, negatively affected gross margin by 10 basis points. The increase in the gross margin also reflected a decrease of 80 basis points in the occupancy and buyers salary expense rate due to improved leverage and expense reductions.
Selling, general and administrative (“SG&A”) expenses increased by $106 million to $1,244 million in 2011, or by 9.3 percent, as compared with 2010. SG&A as a percentage of sales decreased to 22.1 percent as compared with 22.5 percent in 2010.
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
SG&A | $ | 1,426 | $ | 1,334 | $ | 1,294 | ||||||
$ Change | $ | 92 | $ | 40 | ||||||||
% Change | 6.9 | % | 3.1 | % | ||||||||
SG&A as a percentage of sales | 19.9 | % | 20.5 | % | 20.9 | % |
Excluding the effect of foreign currency fluctuations, in 2011, SG&A increased by $86 million. This$101 million for 2014 as compared with 2013. Runners Point Group, which was acquired in early July 2013, represented an incremental $39 million in expenses in 2014. Additionally, the Company incurred $2 million in integration costs during 2014. Excluding these items, the increase primarily reflectswas driven by higher variable expenses to support sales, such as store wages and banking expenses. Also during 2011, the Company increased its marketing and advertising spending by $25 million in order to support the Company’s strategic objective of differentiating its formats.
SG&A expenses increased by $39 million to $1,138 million in 2010, or by 3.5 percent, as compared with 2009. SG&A asAs a percentage of sales, decreased to 22.5 percent as compared with 22.6 percent in 2009, due toSG&A improved 60 basis points representing improved leverage on our sales increase. This improvement reflected continued effective expense management, including store wages, which benefitted from the utilization of hiring and the increase in sales. scheduling tools, as well as enhanced associate training.
Excluding the effect of foreign currency fluctuations, in 2010, SG&A increased by $47 million. This increase primarily reflects higher incentive compensation costs totaling $45$34 million partially offset by expense management efforts.
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 $11 million, $12 million, and $13 million in 2011, 2010, and 2009, respectively.
Corporate expense increased by $5 million to $102 million in 2011for 2013 as compared with 2010. The increase represents primarily higher share-based compensation expense and miscellaneous professional fees.
Corporate expense increased by $30 million to $972012. Runners Point Group represented an incremental $45 million in 2010 as compared with 2009. Incentive compensationexpenses. Additionally, the Company incurred $6 million in integration and acquisition costs represented an increase of $29 million as a resultduring 2013. Excluding foreign currency fluctuations, the effect of the Company’s outperformance as compared with plan. Additionally, 2009 included a $5 million charge related toacquisition, and the reorganizationeffect of its operations and corporate staff reductions.the 53rd week in 2012, SG&A decreased by $4 million. The decrease reflects effective expense management, specifically variable costs.
Depreciation
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Depreciation and Amortization | $ | 139 | $ | 133 | $ | 118 | ||||||
% Change | 4.5 | % | 12.7 | % | 7.3 | % |
The increases in both 2014 and amortization2013 reflect increased capital spending on store improvements and technology. Excluding the effect of $110 million increased by 3.8 percent in 2011 from $106 million in 2010. Foreignforeign currency fluctuations, increased depreciation and amortization expense by $2 million.
Depreciation and amortization of $106 million decreased by 5.4 percent in 2010 from $112increased $7 million in 2009. This decrease primarily reflects2014. The 2014 amount included $2 million of capital accrual adjustments made during the third quarter of 2014 which reduced depreciation and amortization resulting from store long-lived asset impairment charges recordedamortization. The change in 2009. Additionally, foreign currency fluctuations reduced depreciation and amortization expense by $1 million.2013 as compared with 2012 also included $6 million of Runners Point Group expense.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Interest expense | $ | 13 | $ | 14 | $ | 13 | $ | 11 | $ | 11 | $ | 11 | ||||||||||||
Interest income | (7 | ) | (5 | ) | (3 | ) | (6 | ) | (6 | ) | (6 | ) | ||||||||||||
Interest expense, net | $ | 6 | $ | 9 | $ | 10 | $ | 5 | $ | 5 | $ | 5 | ||||||||||||
Weighted-average interest rate (excluding fees) | 7.6 | % | 7.6 | % | 7.3 | % | 7.2 | % | 7.1 | % | 7.6 | % |
The overall reduction in netNet interest expense in 2011 as compared with 2010 primarily reflected increased income earned on higher cash2014 was essentially unchanged from 2013 and cash equivalent balances.
The reduction of net interest expense of $1 million in 2010 as compared with 2009 primarily related to increased income earned on higher cash and cash equivalent balances, partially offset by an increase in interest expense due to higher fees associated with the revolving credit facility.
2012. The Company did not have any short-term borrowings, other than amounts outstanding in connection with capital leases, for any of the periods presented.
Other income was $4 million in both 2011 and 2010 and was $3 million in 2009. For 2011, other income primarily includes $2 million of lease termination gains related to the sales of leasehold interests, $1 million for insurance recoveries, as well as royalty income. For 2010, other income includes a $2 million gain on its money-market investment, as well as royalty income, and gains on lease terminations related to certain lease interests in Europe. Other income in 2009 primarily reflects $4 million related to gains from insurance recoveries, gains on the purchase and retirement of bonds, and royalty income, partially offset by foreign currency option contract premiums of $1 million.
The effective tax rate for 20112014 was 36.035.7 percent, as compared with 34.335.3 percent in 2010.2013. The Company regularly assesses the adequacy of the provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes.
As a result, the reserves for unrecognized tax benefits may be adjusted as a result ofdue 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 limitation.limitations. The effective tax rate for 20112014 includes reserve releases of $3totaling $5 million due to audit settlements and lapses of statutes of limitations as well as other true-up adjustments. limitations.
Excluding these itemsthe reserve releases in 2014 and the prior-year adjustments discussed below,in 2013, the effective tax rate for 2014 increased slightly as compared with 2013 primarily due to the higher proportion of income earned in higher tax jurisdictions in 2011.2014.
The effective tax rate for 20102013 was 34.335.3 percent, as compared with 36.034.6 percent in 2009.2012. The effective tax rate for 2013 includes reserve releases totaling $6 million due to audit settlements and lapses of statutes of limitations. Additionally, in connection with the purchase of Runners Point Group, the Company recorded a tax expense of $1 million related to non-deductible acquisition costs. Excluding these items as well as the reserve releases in 2012, the effective tax rate for 2013 decreased as compared with 2012 primarily due to a benefitthe effect of $7 million from a favorablefull implementation of international tax settlement offsetplanning initiatives in part by $4 million charge recorded in the fourth quarter to correct a historical error in the calculation of income taxes on amounts included in accumulated other comprehensive loss pertaining to the Company’s Canadian pension plans. Additionally, the 2009 effective rate included Canadian provincial tax rate changes that resulted in a $4 million expense arising from a reduction in the value of the Company’s net deferred tax assets. Excluding these items, the effective rate increased as compared with the prior year reflecting a higher proportion of income earned in higher tax jurisdictions.
TABLE OF CONTENTS2013.
The Company’s two reportable segments, Athletic Stores and Direct-to-Customers, are based on its method of internal reporting. The Company evaluates performance based on several factors, the primary financial measure of which is division results. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Sales | ||||||||||||
Athletic Stores | $ | 6,286 | $ | 5,790 | $ | 5,568 | ||||||
Direct-to-Customers | 865 | 715 | 614 | |||||||||
$ | 7,151 | $ | 6,505 | $ | 6,182 | |||||||
Operating Results | ||||||||||||
Athletic Stores(1) | $ | 777 | $ | 656 | $ | 653 | ||||||
Direct-to-Customers(2) | 109 | 84 | 65 | |||||||||
Division profit | 886 | 740 | 718 | |||||||||
Less: Corporate expense (3) | 81 | 76 | 108 | |||||||||
Operating profit | 805 | 664 | 610 | |||||||||
Other income(4) | 9 | 4 | 2 | |||||||||
Earnings before interest expense and income taxes | 814 | 668 | 612 | |||||||||
Interest expense, net | 5 | 5 | 5 | |||||||||
Income before income taxes | $ | 809 | $ | 663 | $ | 607 |
(1) | Included in the results for 2014, 2013, and 2012 are impairment and other charges of $2 million, $2 million, and $5 million, respectively. The 2014 amount reflected impairment charges to fully write-down the value of certain trademarks. The 2013 and 2012 amounts were incurred in connection with the closure of CCS stores. |
(2) | Included in the results for 2014 and 2012 are non-cash impairment charges of $2 million and $7 million, respectively, related to the CCS trademarks. |
(3) | Corporate expense for 2014 and 2013 reflected 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 $4 million and $27 million for 2014 and 2013, respectively, thereby reducing corporate expense. |
(4) | Other income includes non-operating items such as: gains from insurance recoveries; discounts/premiums paid on the repurchase and retirement of bonds; royalty income; and the changes in fair value, premiums paid, realized gains associated with foreign currency option contracts and property sales. The increase in 2014 as compared with 2013 primarily reflects a $4 million gain on sale of real estate. |
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Sales | $ | 5,110 | $ | 4,617 | $ | 4,448 | $ | 6,286 | $ | 5,790 | $ | 5,568 | ||||||||||||
$ Change | $ | 496 | $ | 222 | ||||||||||||||||||||
% Change | 8.6 | % | 4.0 | % | ||||||||||||||||||||
Division profit | $ | 495 | $ | 329 | $ | 114 | $ | 777 | $ | 656 | $ | 653 | ||||||||||||
Division profit margin | 9.7 | % | 7.1 | % | 2.6 | % | 12.4 | % | 11.3 | % | 11.7 | % | ||||||||||||
Number of stores at year end | 3,369 | 3,426 | 3,500 | |||||||||||||||||||||
Sales per average gross square foot | $ | 406 | $ | 360 | $ | 333 |
Excluding the effect of foreign currency fluctuations, primarily related to the euro and Canadian dollar, sales from the Athletic Stores segment increased 9.4 percent. Comparable-store sales increased by 6.7 percent. This segment includes $133 million of incremental sales related to the Runners Point stores, which were acquired in early July 2013. Excluding the sales of $5,110the Runners Point stores, the comparable-store gain was primarily driven by Kids Foot Locker, Foot Locker U.S., Footaction, and Foot Locker Europe. While Lady Foot Locker’s overall sales declined in 2014, the banner experienced a comparable-store gain for the year. The shift into more performance oriented assortments has been resonating with customers, as both footwear and apparel grew on a comparable-store basis. The overall Lady Foot Locker sales decrease primarily reflects a net decline of 44 stores.
Basketball, running, and children’s footwear were strong drivers of sales increases. Sales of basketball footwear were driven by Jordan and key marquee player styles, while running shoes from Nike and Adidas had strong results. Additionally, children’s footwear continued to perform well across multiple divisions. Apparel sales were challenging primarily in Foot Locker Europe and Champs Sports, as customers have shifted away from certain lifestyle and licensed apparel programs, which had previously driven strong results. This segment continues to benefit from strong banner differentiation, which has created unique store designs and product assortments which have resonated with customers and enhanced the shopping experience.
Included in the 2014 division profit was a $1 million increased 10.7 percentimpairment charge related to the write-down of a tradename for our stores operating in 2011,the Republic of Ireland, reflecting historical and projected underperformance, and a $1 million charge to fully write down the value of a private-label brand acquired as part of the Runners Point Group acquisition, as a result of exiting the product line. The overall improvement primarily reflected higher sales, an improved gross margin rate, and effective control over variable expenses, such as store wages.
Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from the Athletic Stores segment increased by 8.93.7 percent in 2011.2013. Comparable-store sales also increased 8.9 percent as compared withby 3.0 percent. The Athletic Stores segment included $146 million of sales related to the prior year. The majorityRunners Point stores. Excluding the sales of the Runners Point stores, the increase representedwas primarily driven by Kids Foot Locker, Foot Locker Europe, and Foot Locker U.S. Kids Foot Locker and Foot Locker Europe increased footweartheir store count during 2013 by 31 and 14 stores, respectively. The increase in these banners was partially offset by sales reflecting the continued success of key styles of technical, light-weight running and basketball footwear. Apparel sales continue to benefit from offerings that coordinate with key footwear styles. All formats within this segment experienced significant increasesdeclines in sales as compared with the prior year, except for Lady Foot Locker. While Foot Locker, Europe’s comparable-stores sales were positive for the fourth quarterFootaction, and full-year of 2011, sales were negatively affected by the current economic conditions.Champs Sports. Lady Foot Locker’s sales declined in 2011, principally due to operating 47 fewer stores. This was coupled with2013 as management closed underperforming stores and redefined the product offerings. Lady Foot Locker’s store count declined by 46 stores during 2013. On a decline in toning footwearcomparable-store sales whichbasis, Footaction reported a modest increase for 2013. Comparable-store sales for Champs Sports were negatively affected, in part, by the results earlierlevel of store remodel projects, which require temporary store closure during remodel.
Within the Athletic Stores segment, footwear was the biggest driver, led by our children’s category, which had strong gains across all banners. Footwear sales increased in our largest category, basketball, which benefited from key marquee player shoes. The segment is also benefiting from the year. Management is performing a strategic reviewcontinued expansion of the women’s business and is developingshop-in-shop partnerships with our various initiatives intended to improve future performance.suppliers.
Athletic Stores reported a division profit of $495$656 million in 20112013 as compared with $329$653 million in 2010,2012, an increase of $166$3 million. Included in the 2013 results are costs of $2 million as comparedassociated with the corresponding prior-year period. Foreign currency fluctuations positively affected division profit by approximately $8 million as compared withclosure of the corresponding prior-year period. The increase primarily reflectsCCS stores. While the strong U.S. performance, led by Foot Locker and Champs Sports, however all international locations also increased. Strong sales and improved gross margin contributed to an overall profit flow-throughresults of 33.7 percent.
Athletic Stores sales of $4,617 million increased 3.8 percent in 2010, as compared with $4,448 million in 2009. Excluding the effect of foreign currency fluctuations, primarily related toRunners Point stores were accretive during the euro, sales from the Athletic Stores segment increased by 4.4 percent in 2010. Comparable-store sales for the Athletic Stores segment increased 5.7 percent as compared with the prior year. The Company’s U.S. operations sales increased 3.9 percent reflecting meaningful increases in all formats, except for Lady Foot Locker. Lady Foot Lockerperiod, it was negatively affected by the lower demand for certain styles, in particular toning. Excluding the effect of foreign currency fluctuations, international sales increased 5.5 percent in 2010 as compared with 2009. Foot Locker Europe’s sales reflected strong increases in men’s footwear and apparel.
Athletic Stores reported a division profit of $329 million in 2010 as compared with $114 million in 2009. The 2009 results included impairment charges totaling $32 million, which were recorded to write down long-lived assets such as store fixtures and leasehold improvements, at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions for 787 stores. Additionally, in 2009 the Company recorded a $14 million inventory reserve on certain aged apparel. Excluding these charges, division profit increased by $169 million as compared with the corresponding prior-year period. This increase reflects division profit gains in both the Company’s domestic and international operations. Foreign currency fluctuations negatively affected division profit by approximately $4 million as compared with the corresponding prior-year period.not significant.
Additionally, the 2013 results reflect the reallocation of corporate expense to this segment. Excluding these items, division profit margin for 2013 would have been essentially unchanged.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Sales | $ | 513 | $ | 432 | $ | 406 | $ | 865 | $ | 715 | $ | 614 | ||||||||||||
$ Change | $ | 150 | $ | 101 | ||||||||||||||||||||
% Change | 21 | % | 16 | % | ||||||||||||||||||||
Division profit | $ | 45 | $ | 30 | $ | 32 | $ | 109 | $ | 84 | $ | 65 | ||||||||||||
Division profit margin | 8.8 | % | 6.9 | % | 7.9 | % | 12.6 | % | 11.7 | % | 10.6 | % |
Direct-to-CustomersComparable sales increased 18.817.8 percent from the prior year, led by basketball and running footwear. The Direct-to-Customers segment includes $18 million of incremental sales related to $513 millionthe e-commerce division of Runners Point Group, which the Company acquired during the second quarter of 2013. Excluding these sales, the increase was primarily a result of continued strong sales performance related to the Company’s store-banner websites both in 2011,the U.S. and in Europe, as compared with $432 millionwell as increased Eastbay sales. Of the total increase, sales from our U.S. store-banner websites comprised the majority of the increase, reflecting the continued success of several initiatives, including improving the connectivity of the store banners to the e-commerce sites, enhancements to the mobile e-commerce sites, investments in 2010. Internet salestechnology to improve the shopping experience, and investments in making the sites more engaging. These increases were offset, in part, by a decline in the CCS business, which was transitioned to the Eastbay banner during the third quarter of 2014.
Division profit increased by 21.9 percent to $457$25 million as compared with Internet salesto 2013, representing a division profit margin improvement of $37590 basis points. The 2014 results include a $2 million 2010. Internet sales primarily reflectedimpairment charge related to the strong performanceCCS business which was triggered by the Company’s decision to transition the skate business to the Eastbay banner. Gross margin was negatively affected by the liquidation of the CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profit was the result of strong flow-through of sales to profit and good expense management.
Comparable sales increased 14.8 percent from the prior year. The Direct-to-Customers segment included $18 million of sales related to the e-commerce division of Runners Point Group. Excluding these sales, the increase was primarily a result of continued strong sales performance related to the Company’s store-banner websites, as well as increased Eastbay website, coupled with improvedsales. Of the total increase, sales from our store-banner websites comprised approximately three quarters of the store-banner websites. Catalog sales decreasedincrease reflecting success of several e-commerce initiatives. These increases were offset, in part, by 1.8 percent to $56 milliona further decline in 2011 from $57 million in 2010.the CCS business.
The Direct-to-Customers business generated division profit of $45$84 million in 2011,2013, as compared with $30$65 million in 2010. Division profit, as a percentage2012. The 2013 results reflect the reallocation of sales, was 8.8 percent in 2011 and 6.9 percent in 2010. During the fourth quarters of 2011 and 2010, impairment charges of $5 million and $10 million, respectively, were recorded to write down CCS intangible assets, specifically the non-amortizing tradename. The impairments were primarily the result of reduced revenue projections.corporate expense. Excluding the impairment charges in each of the periods,this change, division profit increased by $10 million reflecting the strong sales performance, partially offset by higher variable costs.
Direct-to-Customers sales increased 6.4 percent to $432 million in 2010, as compared with $406 million in 2009. Effective with the first quarter of 2010, CCS Internet and catalog salesmargin would have been included in the computation of comparable-store sales. Internet sales increased by 9.0 percent to $375 million, as compared with 2009 reflecting a strong sales performance through the Company’s store banner websites, which benefited from improved functionality and more compelling product assortments. Catalog sales decreased by 8.1 percent to $57 million in 2010 from $62 million in 2009.
The Direct-to-Customers business generated division profit of $30 million in 2010, as compared with $32 million in 2009. Division profit, as a percentage of sales, was 6.9 percent in 2010 and 7.9 percent in 2009. Included in the 2010 division profit is a $10 million12.3 percent. During 2012, an impairment charge whichof $7 million was recorded to write down CCS intangible assets. The impairment was primarily the result of reduced revenue projections. Included in 2009 division profit is a $4 million impairment charge, which was recorded to write off certain software development costs as a result of management’s decision to terminate the project. Excluding these charges,items, division profit increased by $4$17 million. The effect of the Runners Point Group acquisition was not significant to this segment’s 2013 division profit.
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Corporate expense | $ | 81 | $ | 76 | $ | 108 | ||||||
$ Change | $ | 5 | $ | (32 | ) |
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 $13 million, $12 million, and $13 million in 2014, 2013, and 2012, respectively.
Corporate expense increased by $5 million in 2014, as compared with 2013. This increase is primarily related to incentive compensation and legal costs, which increased $8 million and $2 million, respectively. Additionally, depreciation and amortization included in corporate expense increased by $1 million. These increases were partially offset by the priorannual adjustment to the allocation of corporate expense to the operating divisions, which reduced corporate expense by $4 million. In addition, acquisition and integration costs related to Runners Point Group were $4 million less in the current year.
Corporate expense decreased by $32 million to $76 million in 2013, as compared with 2012. The allocation of corporate expenses to the operating divisions was increased thereby reducing corporate expense by $27 million for 2013. In addition, incentive compensation decreased by $11 million and legal expenses, which in 2012 included a litigation charge, decreased by $4 million. Additionally, depreciation and amortization expense decreased by $1 million. These decreases were partially offset by $6 million of costs related to the Company’s acquisition and integration of Runners Point Group, as well as an increase of $5 million for share-based compensation expense.
Liquidity
The Company’s primary source of liquidity has been cash flow from operations,earnings, while the principal uses of cash have been to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, and future cash flow from operations and the Company’s current revolving credit facility will be adequate to fund these requirements.
As of January 28, 2012,31, 2015, the Company had $498$537 million of cash and cash equivalents held in foreign jurisdictions. Because we plan to permanently reinvest our foreign earnings, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from potential future remittances of undistributed earnings of foreign subsidiaries. Depending on the source, amount, and timing of a repatriation, some tax may be payable. The Company believes that its cash invested domestically and future domestic cash flows and its current revolving credit agreement are sufficient to satisfy domestic requirements.
The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Such repurchases, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of January 31, 2015, approximately $65 million was remaining on the share repurchase program. On February 14, 2012,17, 2015, the Company’s Board of Directors approved a new 3-year, $400 million$1 billion share repurchase program extending through January 2015,2018, replacing the Company’s previous $250$600 million program.
Also on February 17, 2015, the Board of Directors declared a quarterly dividend of $0.25 per share to be paid on May 1, 2015. This dividend represents a 14 percent increase over the Company’s previous quarterly per share amount.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendorssuppliers for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.
Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key vendors.suppliers. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key vendors.suppliers. In both 20112014 and 2010,2013, the Company purchased approximately 8289 percent and 88 percent, respectively, of its merchandise from its top five vendorssuppliers and expects to continue to obtain a significant percentage of its athletic product from these vendorssuppliers in future periods. Approximately 6173 percent in 20112014 and 6368 percent in 20102013 was purchased from one vendorsupplier — Nike, Inc.
The Company’s 20122015 planned capital expenditures and lease acquisition costs are approximately $160$220 million. Planned capital expenditures are $147$218 million and planned lease acquisition costs related to the Company’s operations in Europe are $13$2 million. The Company’s planned capital expenditures include $110$176 million related to modernizationsremodeling and expansion of existing stores and the planned opening of 82approximately 100 new stores as well as $37primarily related to Kids Foot Locker, European expansion, and SIX:02. Additionally, the planned spending includes $42 million for the development of information systems and infrastructure.infrastructure, including a new e-commerce order management system, point of sale device enhancements, and further rollout of our merchandise allocation system. The Company has the ability to revise and reschedule much of the anticipated capital expenditure program, should the Company’s financial position require it.
In addition to net cash provided by operating activities, the Company uses free cash flow as a useful measure of performance and as an indication of the strength of the Company and its ability to generate cash. The Company defines free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). The Company believes the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from the Company’s 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 the Company’s net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net cash provided by operating activities of continuing operations | $ | 497 | $ | 326 | $ | 346 | ||||||||||||||||||
Net cash provided by operating activities | $ | 712 | $ | 530 | $ | 416 | ||||||||||||||||||
Capital expenditures | (152 | ) | (97 | ) | (89 | ) | (190 | ) | (206 | ) | (163 | ) | ||||||||||||
Free cash flow (non-GAAP) | $ | 345 | $ | 229 | $ | 257 | $ | 522 | $ | 324 | $ | 253 |
Operating
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Net cash provided by operating activities | $ | 712 | $ | 530 | $ | 416 | ||||||
$ Change | $ | 182 | $ | 114 |
The amount provided by operating activities from continuing operations provided cash of $497 million in 2011 as compared with $326 million in 2010. These amounts reflectreflects income from continuing operations adjusted for non-cash items and working capital changes. Non-cashAdjustments to net income for non-cash items include non-cash impairment charges, depreciation and other charges were $5 millionamortization, deferred income taxes, share-based compensation expense and $10 million forrelated tax benefits. The improvement in 2014 represented the years ending January 28, 2012Company’s earnings strength and January 29, 2011, respectively, reflecting the CCS tradename impairment charges.working capital improvements. During 2011,2014, the Company contributed $28$6 million to its Canadian qualified pension plans as compared with $2 million contributed in 2013. Cash paid for income taxes was $251 million for 2014 as compared with $175 million for 2013.
The improvement in 2013 as compared with 2012 also reflected the Company’s earnings strength. During 2012, the Company contributed $25 million and $1 million to its U.S. and Canadian qualified pension plans, respectively. Cash paid for income taxes was $175 million for 2013 as compared with $32 million contributed in 2010. The change in merchandise inventory, net of the change in accounts payable, as compared with the prior-year period, reflects the continued improvement in flowing merchandise. The change in income tax receivables and payables primarily reflects the receipt of a $46 million IRS refund resulting from a loss carryback.
Operating activities from continuing operations provided cash of $326 million in 2010 as compared with $346 million in 2009. Non-cash impairment and other charges were $10 million and $36$230 million for the years ending January 29, 2011 and January 30, 2010, respectively. The 2009 charges totaled $36 million, comprised of $32 million to write-down long-lived assets such as store fixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions and $4 million to write off software development costs. During 2010, the Company contributed $32 million to its U.S. and Canadian qualified pension plans as compared with $100 million contributed in 2009. The change in merchandise inventory, net of the change in accounts payable, as compared with the prior-year period, represents inventory required to support the favorable sales trend. During 2010, the Company paid $24 million to settle the liability associated with the terminated European net investment hedge, whereas in the prior-year period the Company terminated its interest rate swaps and received $19 million.2012.
Investing Activities
Net cash used in investing activities of the Company’s continuing operations was $149 million in 2011 as compared with $87 million used in investing activities in 2010.
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Net cash used in investing activities | $ | 176 | $ | 248 | $ | 212 | ||||||
$ Change | $ | (72 | ) | $ | 36 |
Capital expenditures in 2014 were $152$190 million, primarily related to the remodeling of 182319 stores, the build-out of 7086 new stores, and various corporate technology upgrades and e-commerce website enhancements, representing an increaseupgrades. This represented a decrease of $55$16 million as compared with the prior year.
Net cash usedyear, as the timing of certain projects shifted to later in investing activities of the Company’s continuing operations was $87 million in 2010 as compared with $72 million used in investing activities in 2009.current year. During 2010,2014, the Company receivedsold real estate for proceeds of $5 million and recorded a gain on sale of $4 million. During 2014, maturities of short-term investments totaled $9 million. This compares with net sales and maturities of $37 million fromof short-term investments during 2013.
During 2013, the Reserve International Liquidity Fund representing further redemptions.Company completed its purchase of Runners Point Group for $81 million, net of cash acquired. Capital expenditures in 2013 were $97$206 million, primarily related to storethe remodeling of 320 stores, the build-out of 84 new stores, and to the development of information systems and infrastructure, representingvarious corporate technology upgrades. This represented an increase of $8$43 million as compared with the prior year.2012. Net sales and maturities of short-term investments were $37 million during 2013, as compared with net purchases of $49 million during 2012.
Financing Activities
Net cash
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Net cash used in financing activities | $ | 401 | $ | 309 | $ | 181 | ||||||
$ Change | $ | 92 | $ | 128 |
Cash used in financing activities consists primarily of continuing operations was $178 million in 2011the Company’s return to shareholders initiatives, including its share repurchase program and cash dividend payments, as compared with $127 million in 2010. follows:
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Share repurchases | $ | 305 | $ | 229 | $ | 129 | ||||||
Dividends paid on common stock | 127 | 118 | 109 | |||||||||
Total returned to shareholders | $ | 432 | $ | 347 | 238 |
During 2011,2014, 2013, and 2012, the Company repurchased 4,904,1005,888,698 shares, 6,424,286 shares, and 4,000,161 shares of its common stock under its common share repurchase program for $104 million.programs. Additionally, the Company declared and paid dividends totaling $101 million and $93 million in 2011 and 2010, respectively, representing a quarterly rate of $0.165$0.22, $0.20 and $0.15$0.18 per share in 20112014, 2013, and 2010,2012, respectively. During 2011 and 2010,
Offsetting the Companyamounts above were proceeds received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $22 million, $30 million, and $13$48 million for 2014, 2013, and 2012, respectively. During 2011, inIn connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $5$12 million, as a financing activity.
TABLE OF CONTENTS$9 million, and $11 million for 2014, 2013, and 2012, respectively.
Net cash used in financing activitiesThe activity during 2014 also reflected payments on capital lease obligations of continuing operations was $127$3 million, in 2010 as compared with $94$1 million in 2009. During 2010, the Company repurchased 3,215,000 shares of its common stock for $50 million. Additionally, the Company declared and paid dividends totaling $93 million and $94 million in 2010 and 2009, respectively, representing a quarterly rate of $0.15 per share in both 2010 and 2009. During 2010 and 2009, the Company received proceeds from the issuance of common stock and treasury stockduring 2013. These obligations were recorded in connection with the employee stock programsacquisition of $13 million and $3 million, respectively. During 2010, in connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $3 million as a financing activity.Runners Point Group.
On January 27, 2012, the Company entered into an amended and restated credit agreement (the “2011 Restated Credit Agreement) with its banks, replacing the 2009 Credit Agreement. The 2011 Restated Credit Agreement provides for a $200 million asset based revolving credit facility maturing on January 27, 2017. In addition, during the term of the 2011 Restated Credit Agreement, the Company may make up to four requests for additional credit commitments in an aggregate amount not to exceed $200 million. Interest is based on the LIBOR rate in effect at the time of the borrowing plus a 1.25 to 1.50 percent margin depending on certain provisions as defined in the 2011 Restated Credit Agreement.
The 2011 Restated Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets, but excluding intellectual property. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. With regard to the payment of dividends and share repurchases, there are no restrictions if the Company is not borrowing and the payments are funded through cash on hand. If the Company is borrowing, Availability as of the end of each fiscal month during the subsequent projected six fiscal months following the payment must be at least 20 percent of the lesser of the Aggregate Commitments and the Borrowing Base (as(all terms as defined in the 2011 Restated Credit Agreement). The Company’s management currently does not currently expect to borrow under the facility in 2012,2015, other than amounts used to support standby letters of credit.
Credit Rating
As of March 26, 2012,30, 2015, the Company’s corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BBBB+ and Ba3,Ba1, respectively. In addition, Moody’s Investors Service has rated the Company’s senior unsecured notes B1.Ba2.
Debt Capitalization and Equity (non-GAAP Measure)
For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases is considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 4.252.8 percent to 14.5 percent, which represent the Company’s incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the inclusion of the present value of operating leases in total debt is useful to our investors, credit constituencies, and rating agencies.
The following table sets forth the components of the Company’s capitalization, both with and without the present value of operating leases:
2011 | 2010 | 2014 | 2013 | |||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||
Long-term debt | $ | 135 | $ | 137 | ||||||||||||||||
Long-term debt and obligations under capital leases | $ | 134 | $ | 139 | ||||||||||||||||
Present value of operating leases | 1,905 | 1,852 | 2,745 | 2,571 | ||||||||||||||||
Total debt including the present value of operating leases | 2,040 | 1,989 | 2,879 | 2,710 | ||||||||||||||||
Less: | ||||||||||||||||||||
Cash and cash equivalents | 851 | 696 | 967 | 858 | ||||||||||||||||
Short-term investments | — | 9 | ||||||||||||||||||
Total net debt including the present value of operating leases | 1,189 | 1,293 | 1,912 | 1,843 | ||||||||||||||||
Shareholders’ equity | 2,110 | 2,025 | 2,496 | 2,496 | ||||||||||||||||
Total capitalization | $ | 3,299 | $ | 3,318 | $ | 4,408 | $ | 4,339 | ||||||||||||
Total net debt capitalization percent | — | % | — | % | — | % | — | % | ||||||||||||
Total net debt capitalization percent including the present value of operating leases (non-GAAP) | 36.0 | % | 39.0 | % | ||||||||||||||||
Total net debt capitalization percent including the present value of | ||||||||||||||||||||
operating leases (non-GAAP) | 43.4 | % | 42.5 | % |
The Company increasedCompany’s cash, and cash equivalents, and short-term investments increased by $155$100 million during 2011,2014, which was the result of strong cash flow generation from operating activities. Including the present value of operating leases, the Company’s net debt capitalization percent increased 90 basis points in 2014. The change in total debt including the present value of the operating leases, as compared with the prior-year period, primarily reflects the effect of lease renewals, partially offset in part, by store closures and the effect of foreign currencyexchange fluctuations. Including the present value of operating leases, the Company’s net debt capitalization percent decreased 300 basis points in 2011.
The following tables represent the scheduled maturities of the Company’s contractual cash obligations and other commercial commitments at January 28, 2012:31, 2015:
Payments Due by Fiscal Period | Payments Due by Fiscal Period | |||||||||||||||||||||||||||||||||||||||
Contractual Cash Obligations | Total | 2012 | 2013 – 2014 | 2015 – 2016 | 2017 and Beyond | |||||||||||||||||||||||||||||||||||
Total | 2015 | 2016 – 2017 | 2018 – 2019 | 2020 and Beyond | ||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
Long-term debt(1) | $ | 230 | $ | 11 | $ | 22 | $ | 22 | $ | 175 | $ | 195 | $ | 11 | $ | 22 | $ | 22 | $ | 140 | ||||||||||||||||||||
Operating leases(2) | 2,517 | 478 | 786 | 581 | 672 | 3,426 | 567 | 969 | 726 | 1,164 | ||||||||||||||||||||||||||||||
Capital leases | 4 | 2 | 2 | — | — | |||||||||||||||||||||||||||||||||||
Other long-term liabilities(3) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total contractual cash obligations | $ | 2,747 | $ | 489 | $ | 808 | $ | 603 | $ | 847 | $ | 3,625 | $ | 580 | $ | 993 | $ | 748 | $ | 1,304 | ||||||||||||||||||||
Other Commercial Commitments | ||||||||||||||||||||||||||||||||||||||||
Purchase commitments(4) | 2,238 | 2,238 | — | — | — | |||||||||||||||||||||||||||||||||||
Other(5) | 24 | 15 | 9 | — | — | |||||||||||||||||||||||||||||||||||
Total commercial commitments | $ | 2,262 | $ | 2,253 | $ | 9 | $ | — | $ | — |
Total Amounts Committed | Payments Due by Fiscal Period | |||||||||||||||||||
Other Commercial Commitments | 2012 | 2013 – 2014 | 2015 – 2016 | 2017 and Beyond | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Unused line of credit(4) | $ | 199 | $ | — | $ | — | $ | 199 | $ | — | ||||||||||
Standby letters of credit | 1 | — | — | 1 | — | |||||||||||||||
Purchase commitments(5) | 1,801 | 1,801 | — | — | — | |||||||||||||||
Other(6) | 27 | 17 | 8 | 1 | 1 | |||||||||||||||
Total commercial commitments | $ | 2,028 | $ | 1,818 | $ | 8 | $ | 201 | $ | 1 |
(1) | The amounts presented above represent the contractual maturities of the Company’s 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-cancelable operating leases. In addition to minimum rent, certain of the Company’s leases require the payment of additional costs for insurance, maintenance, and other costs. These costs have historically represented approximately |
(3) | The Company’s other liabilities in the Consolidated Balance Sheet at January |
(4) | Represents |
Represents payments required by non-merchandise purchase agreements. |
The Company does not have any off-balance sheet financing, other thanmajority the Company’s contractual obligations relate to operating leases entered intofor our stores. Future scheduled lease payments under non-cancellable operating leases as of January 31, 2015 are described in the normal course of business as disclosed table underContractual Obligations and Commitmentsabove or unconsolidated special purpose entities. and with additional information in theLeasesnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities. The Company’sOur policy prohibits the use of derivatives for which there is no underlying exposure.
In connection with the sale of various businesses and assets, the Company 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, management believes that the resolution of such contingencies will not significantly affect the Company’s consolidated financial position, liquidity, or results of operations. The Company is also operating 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.
Management’s responsibility for integrity and objectivity in the preparation and presentation of the Company’s financial statements requires diligent application of appropriate accounting policies. Generally, the Company’s accounting policies and methods are those specifically required by U.S. generally accepted accounting principles. Included in theSummary of Significant Accounting Policiesnote in “Item 8. Consolidated Financial Statements and Supplementary Data” is a summary of the Company’s most significant accounting policies. In some cases, management is required to calculate amounts based on estimates for matters that are inherently uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate subjective judgments.
Merchandise Inventories and Cost of Sales
Merchandise inventories for the Company’s Athletic 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, 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 management’s estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts.
Significant 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. The Company provides reserves 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. Management believes this method and its related assumptions, which have been consistently applied, to be reasonable.
In the normal course of business, the Company receives allowances from its vendors for markdowns taken. Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Vendor allowances contributed 30 basis points to the 2011 gross margin rate. The Company also has volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and were not significant to the 2011 gross margin rate.
The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors for specific advertising campaigns and catalogs. Cooperative income, to the extent that it reimburses specific, incremental and identifiable costs incurred to date, is recorded in SG&A in the same period as the associated expenses are incurred. Cooperative reimbursements amounted to approximately 18 percent and 11 percent of total advertising and catalog costs, respectively, in 2011. Reimbursements received that are in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the cost of merchandise and are reflected in cost of sales as the merchandise is sold and were not significant in 2011.
The Company recognizesperforms an impairment lossreview when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s strategic long-range plans, in determining theperforming an impairment amount.review. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset 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. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results.
The Company performs anreviews goodwill for impairment reviewannually during the first quarter of its goodwill and intangible assets with indefinite livesfiscal year or more frequently if impairment indicators arise and, atarise. The review of impairment consists of either using a minimum, annually. We considerqualitative 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. In performing the qualitative assessment, management considers many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. The Company has chosen to perform this review atIf, based on the beginningresults of each fiscal year, andthe qualitative assessment, it is done inconcluded 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 approach.test. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of that reporting unit exceeds its estimated fair value.
In 2014, the Company elected to perform its review of goodwill using the two-step impairment test approach. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests, or securities that have been sold. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
The Company has evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations. The fair value of all the reporting units substantially exceeded their carrying values.
Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
The Company’s review of goodwill did not result in any During 2014, impairment charges for the years ended January 28, 2012 and January 29, 2011 as the fair value of each of the reporting units substantially exceeds its carrying value.totaled $4 million.
The Company recorded impairment charges of $5 million and $10 million in 2011 and 2010, respectively, related to its CCS tradename, primarily as a result of reduced revenue projections for this business.
The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Company estimatesBlack-Scholes option pricing valuation model requires the use of subjective assumptions. Changes in these assumptions, listed below, can materially affect the fair value of the options.
Risk-free Interest Rate — The risk-free interest rate 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 options granted using its historical exercise and post-vesting employment termination patterns, which the Company believes are representative of future behavior. Changing the expected term by one year changes the fair value by 7 to 9 percent depending if the change was an increase or decrease to the expected term.award being valued.
Expected Volatility — The Company estimates the expected volatility of its 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. A 50 basis point change in volatility would havecause a 1 percent change to the fair value.
Expected Term — The risk-free interest rate assumptionexpected term of options granted is determinedestimated using historical exercise and post-vesting employment termination patterns, which the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to thoseCompany believes are representative of future behavior. Changing the expected term ofby one year changes the award being valued.fair value by 7 to 8 percent depending on if the change was an increase or decrease to the expected term.
Dividend Yield — The expected dividend yield is derived from the Company’s historical experience. A 50 basis point change to the dividend yield would change the fair value by approximately 45 percent. The Company records stock-based
Share-based compensation expense onlyis recorded for those awards expected to vest using an estimated forfeiture rate based on itsthe Company’s historical pre-vesting forfeiture data, which it believes are representative of future behavior, and periodically will revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Black-Scholes option pricing valuation model requires the use of subjective assumptions. Changes in these assumptions can materially affect the fair value of the options. The Company may elect to use different assumptions under the Black-Scholes option pricing model in the future if there is a difference between the assumptions used and the actual factors that become known over time.
Pension and Postretirement Liabilities
The Company determinesManagement reviews all assumptions used to determine its obligations for pension and postretirement liabilities based upon assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, and mortality, among others. Management reviews all assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with regard to the plans. The assumptions used are:
Long-Term Rate of Return Assumption — 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 future contributions by the Company. 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 20112014 pension expense was 6.596.25 percent.
A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 20112014 pension expense by approximately $3 million. The actual return on plan assets in a given year typically differs from the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into expense over the average life expectancy of its inactive participants.
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. In 2011, the Company changed how the discount rate was selected to measure the present value of U.S. benefit obligations from the Citibank Pension Discount curve to Towers Watson’s Bond:Link model. The current discount rate 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 discount rate selected to measure the present value of the Company’s Canadian benefit obligations was developed by using the plan’s bond portfolio indices, which match the benefit obligations.
The fluctuations in stock and bond markets could cause actual investment results to be significantly different from those assumed, and therefore, significantly impact the valuation of the assets in our pension trust. The weighted-average discount rates used to determine the 20112014 benefit obligations related to the Company’s pension and postretirement plans were 4.163.43 percent and 4.003.40 percent, respectively.
Changing the weighted-average discount rate by 50 basis points would have changed the accumulated benefit obligation of the pension plans at January 31, 2015 by approximately $35 million and $38 million, depending on if the change was an increase or decrease, respectively. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation of the pension plans at January 28, 2012 by approximately $32 million, and would have increased the accumulated benefit obligation on the postretirement plan by approximately $1$2 million. Such a decrease would not have significantly changed 20112014 pension expense or postretirement income.
Trend Rate — The Company maintains two postretirement medical plans, one covering certain executive officers and certain key employees of the Company (“SERP Medical Plan”), and the other covering all other associates. With respect to the SERP Medical Plan, a one percent change in the assumed health care cost trend rate would change this plan’s accumulated benefit obligation by approximately $2 million.$4 million and $3 million, depending on if the change was an increase or decrease, respectively. With respect to the postretirement medical plan covering all other associates, there is limited risk to the Company 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 — In 2014, the Company changed the mortality table used to calculate the present value of pension and postretirement plan liabilities, excluding the SERP Medical Plan. We previously used the RP 2000 mortality table projected with scale AA to 2019 for males and to 2013 for females. In 2014, we used the RP 2000 mortality table with generational projection using scale AA for both males and females. This mortality table was chosen after considering alternative tables including the RP-2014 table. We chose the RP 2000 table because it resulted in the closest match to the Company’s actual experience. For the SERP Medical Plan, the mortality assumption was updated to the RP 2014 table with generational projection using MP 2014. These changes did not significantly affect the Company’s total obligations.
The Company expects to record postretirement income of approximately $4$1 million and pension expense of approximately $17$16 million in 2012.2015.
Income Taxes
In accordance with U.S. GAAP, deferred 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. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its 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 the Company’s strategic long-range plans. A one percent change in the Company’s overall statutory tax rate for 20112014 would have resulted in a $7$5 million change in 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.
The Company has operations in multiple taxing jurisdictions and is 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 management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.
The Company expects its 20122015 effective tax rate to approximate 37 percent.36.5 percent, excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending primarily on the percentagelevel and mix of the Company’s income earned in the United States as compared with its international operations.
In September 2011, the FASB issued ASU No. 2011-08,Testing Goodwill for Impairment, that is effective in 2012. The revised standard is intended to reduce cost and complexityDescriptions of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. We do not believe that the adoption of this ASU will have a significant effect on our results of operations or financial position.
Other recently issued accounting pronouncements did not, orprinciples, if any, and the accounting principles adopted by the Company during the year ended January 31, 2015 are not believed by management to, have a material effect onincluded in the Company’s present or future consolidated financial statements.Summary of Significant Accounting Policiesnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”
This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendorssuppliers for a majority of its merchandise purchases (including a significant portion from one key vendor)supplier), pandemics and similar major health concerns, unseasonable weather, further deterioration of global financial markets, economic conditions worldwide, further deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.
For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” 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.
Information regarding foreign exchange risk management is included in theFinancial Instruments and Risk Managementnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”
The following Consolidated Financial Statements of the Company for the years ended January 31, 2015, February 1, 2014, and February 2, 2013 are included as part of this Report:
The Board of Directors and Shareholders of
Foot Locker, Inc.:
We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 28, 201231, 2015 and January 29, 2011,February 1, 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended January 28, 2012.31, 2015. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of January 28, 201231, 2015 and January 29, 2011,February 1, 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended January 28, 2012,31, 2015, 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), Foot Locker, Inc.’s internal control over financial reporting as of January 28, 2012,31, 2015, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 26, 201230, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
New York, New York
March 26, 201230, 2015
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions, except per share amounts) | (in millions, except per share amounts) | |||||||||||||||||||||||
Sales | $ | 5,623 | $ | 5,049 | $ | 4,854 | $ | 7,151 | $ | 6,505 | $ | 6,182 | ||||||||||||
Cost of sales | 3,827 | 3,533 | 3,522 | 4,777 | 4,372 | 4,148 | ||||||||||||||||||
Selling, general and administrative expenses | 1,244 | 1,138 | 1,099 | 1,426 | 1,334 | 1,294 | ||||||||||||||||||
Depreciation and amortization | 110 | 106 | 112 | 139 | 133 | 118 | ||||||||||||||||||
Impairment and other charges | 5 | 10 | 41 | 4 | 2 | 12 | ||||||||||||||||||
Interest expense, net | 6 | 9 | 10 | 5 | 5 | 5 | ||||||||||||||||||
Other income | (4 | ) | (4 | ) | (3 | ) | (9 | ) | (4 | ) | (2 | ) | ||||||||||||
5,188 | 4,792 | 4,781 | 6,342 | 5,842 | 5,575 | |||||||||||||||||||
Income from continuing operations before income taxes | 435 | 257 | 73 | |||||||||||||||||||||
Income before income taxes | 809 | 663 | 607 | |||||||||||||||||||||
Income tax expense | 157 | 88 | 26 | 289 | 234 | 210 | ||||||||||||||||||
Income from continuing operations | 278 | 169 | 47 | |||||||||||||||||||||
Income on disposal of discontinued operations, net of income tax benefit of $—, $—, and $1, respectively | — | — | 1 | |||||||||||||||||||||
Net income | $ | 278 | $ | 169 | $ | 48 | $ | 520 | $ | 429 | $ | 397 | ||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Income from continuing operations | $ | 1.81 | $ | 1.08 | $ | 0.30 | ||||||||||||||||||
Income from discontinued operations | — | — | — | |||||||||||||||||||||
Net income | $ | 1.81 | $ | 1.08 | $ | 0.30 | ||||||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Income from continuing operations | $ | 1.80 | $ | 1.07 | $ | 0.30 | ||||||||||||||||||
Income from discontinued operations | — | — | — | |||||||||||||||||||||
Net income | $ | 1.80 | $ | 1.07 | $ | 0.30 | ||||||||||||||||||
Basic earnings per share | $ | 3.61 | $ | 2.89 | $ | 2.62 | ||||||||||||||||||
Weighted-average shares outstanding | 143.9 | 148.4 | 151.2 | |||||||||||||||||||||
Diluted earnings per share | $ | 3.56 | $ | 2.85 | $ | 2.58 | ||||||||||||||||||
Weighted-average shares outstanding, assuming dilution | 146.0 | 150.5 | 154.0 |
See Accompanying Notes to Consolidated Financial Statements.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net income | $ | 278 | $ | 169 | $ | 48 | $ | 520 | $ | 429 | $ | 397 | ||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||
Other comprehensive income, net of income tax | ||||||||||||||||||||||||
Foreign currency translation adjustment: | ||||||||||||||||||||||||
Translation adjustment arising during the period, net of tax | (23 | ) | 11 | 65 | ||||||||||||||||||||
Translation adjustment arising during the period, net of income tax | (132 | ) | (25 | ) | 19 | |||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||
Change in fair value of derivatives, net of income tax | (2 | ) | 1 | (2 | ) | (1 | ) | (5 | ) | 4 | ||||||||||||||
Pension and postretirement adjustments: | ||||||||||||||||||||||||
Net actuarial gain (loss) and prior service cost arising during the year, net of income tax benefits of $11, $1, and $4 million, respectively | (16 | ) | 7 | (12 | ) | |||||||||||||||||||
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 $2 million, respectively | 6 | 8 | 4 | |||||||||||||||||||||
Net actuarial gain (loss) and prior service cost and foreign currency fluctuations arising during the year, net of income tax expense (benefit) of $(7), $2, and $1 million, respectively | (8 | ) | 6 | 1 | ||||||||||||||||||||
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $4, $5, and $5 million, respectively | 8 | 9 | 8 | |||||||||||||||||||||
Available for sale securities: | ||||||||||||||||||||||||
Unrealized gain | — | — | 3 | |||||||||||||||||||||
Unrealized gain on available-for-sale securities | — | — | 1 | |||||||||||||||||||||
Comprehensive income | $ | 243 | $ | 196 | $ | 106 | $ | 387 | $ | 414 | $ | 430 |
See Accompanying Notes to Consolidated Financial Statements.
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 851 | $ | 696 | $ | 967 | $ | 858 | ||||||||
Short-term investments | — | 9 | ||||||||||||||
Merchandise inventories | 1,069 | 1,059 | 1,250 | 1,220 | ||||||||||||
Other current assets | 159 | 179 | 239 | 263 | ||||||||||||
2,079 | 1,934 | 2,456 | 2,350 | |||||||||||||
Property and equipment, net | 427 | 386 | 620 | 590 | ||||||||||||
Deferred taxes | 284 | 296 | 221 | 241 | ||||||||||||
Goodwill | 144 | 145 | 157 | 163 | ||||||||||||
Other intangible assets, net | 54 | 72 | 49 | 67 | ||||||||||||
Other assets | 62 | 63 | 74 | 76 | ||||||||||||
$ | 3,050 | $ | 2,896 | $ | 3,577 | $ | 3,487 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 240 | $ | 223 | $ | 301 | $ | 263 | ||||||||
Accrued and other liabilities | 308 | 266 | 393 | 360 | ||||||||||||
Current portion of capital lease obligations | 2 | 3 | ||||||||||||||
548 | 489 | 696 | 626 | |||||||||||||
Long-term debt | 135 | 137 | ||||||||||||||
Long-term debt and obligations under capital leases | 132 | 136 | ||||||||||||||
Other liabilities | 257 | 245 | 253 | 229 | ||||||||||||
Total liabilities | 940 | 871 | 1,081 | 991 | ||||||||||||
Shareholders’ equity | 2,110 | 2,025 | 2,496 | 2,496 | ||||||||||||
$ | 3,050 | $ | 2,896 | $ | 3,577 | $ | 3,487 |
See Accompanying Notes to Consolidated Financial Statements.
Additional Paid-In Capital & Common Stock | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | Additional Paid-In Capital & Common Stock | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
(shares in thousands, amounts in millions) | (shares in thousands, amounts in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 31, 2009 | 159,599 | $ | 691 | (4,681) | $ | (102) | $ | 1,581 | $ | (246) | $ | 1,924 | ||||||||||||||||||||||||||||||||||||||||||||
Balance at January 28, 2012 | 164,460 | $ | 779 | (12,841 | ) | $ | (253 | ) | $ | 1,788 | $ | (204 | ) | $ | 2,110 | |||||||||||||||||||||||||||||||||||||||||
Restricted stock issued | 1,004 | — | — | — | — | 99 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Issued under director and stock plans | 664 | 6 | — | — | 6 | 2,350 | 46 | — | — | 46 | ||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | 12 | — | — | 12 | — | 20 | — | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | — | — | (10 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total tax benefit from exercise of options | — | 11 | — | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | — | — | (32 | ) | (1 | ) | (1 | ) | — | (214 | ) | (7 | ) | (7 | ) | |||||||||||||||||||||||||||||||||||||||||
Acquired in exchange of stock options | — | — | (3 | ) | — | — | — | — | (2 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Share repurchases | — | — | (4,000 | ) | (129 | ) | (129 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Reissued – employee stock purchase plan | — | — | 218 | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 48 | 48 | 397 | 397 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.60 per share) | (94 | ) | (94 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.72 per share) | (109 | ) | (109 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustment, net of tax | 65 | 65 | 19 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | (2 | ) | (2 | ) | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | (13 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, with no tax expense | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 30, 2010 | 161,267 | $ | 709 | (4,726) | $ | (103) | $ | 1,535 | $ | (193) | $ | 1,948 | ||||||||||||||||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, with no tax | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at February 2, 2013 | 166,909 | $ | 856 | (16,839 | ) | $ | (384 | ) | $ | 2,076 | $ | (171 | ) | $ | 2,377 | |||||||||||||||||||||||||||||||||||||||||
Restricted stock issued | 205 | — | — | — | 665 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Issued under director and stock plans | 1,187 | 10 | — | — | 10 | 1,465 | 31 | — | — | 31 | ||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | 13 | — | — | 13 | — | 25 | — | — | 25 | ||||||||||||||||||||||||||||||||||||||||||||||
Total tax benefit from exercise of options | — | 2 | — | — | 2 | — | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | — | 1 | (50 | ) | — | 1 | — | — | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | — | — | (292 | ) | (4 | ) | (4 | ) | — | — | (479 | ) | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||
Acquired in exchange of stock options | — | — | (34 | ) | (1 | ) | (1 | ) | — | — | (1 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
Share repurchases | — | — | (3,215 | ) | (50 | ) | (50 | ) | — | — | (6,424 | ) | (229 | ) | (229 | ) | ||||||||||||||||||||||||||||||||||||||||
Reissued under employee stock purchase plan | — | — | 278 | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Reissued – employee stock purchase plan | — | — | 133 | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 169 | 169 | 429 | 429 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.60 per share) | (93 | ) | (93 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.80 per share) | (118 | ) | (118 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustment, net of tax | 11 | 11 | (25 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | 1 | 1 | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | 12 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 29, 2011 | 162,659 | $ | 735 | (8,039) | $ | (152) | $ | 1,611 | $ | (169) | $ | 2,025 | ||||||||||||||||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 15 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at February 1, 2014 | 169,039 | $ | 921 | (23,612 | ) | $ | (626 | ) | $ | 2,387 | $ | (186 ) | $ | 2,496 | ||||||||||||||||||||||||||||||||||||||||||
Restricted stock issued | 242 | — | — | — | — | 578 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Issued under director and stock plans | 1,559 | 19 | — | — | 19 | 912 | 22 | — | — | 22 | ||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | 18 | — | — | 18 | — | 24 | — | — | 24 | ||||||||||||||||||||||||||||||||||||||||||||||
Total tax benefit from exercise of options | — | 6 | — | — | 6 | — | 12 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||
Forfeitures of restricted stock | — | 1 | (60 | ) | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | — | — | (140 | ) | (3 | ) | (3 | ) | — | — | (324 | ) | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||
Acquired in exchange of stock options | — | — | (34 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Share repurchases | — | — | (4,904 | ) | (104 | ) | (104 | ) | — | — | (5,889 | ) | (305 | ) | (305 | ) | ||||||||||||||||||||||||||||||||||||||||
Reissued under employee stock purchase plan | — | — | 336 | 7 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Reissued – employee stock purchase plan | — | — | 160 | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 278 | 278 | 520 | 520 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.66 per share) | (101 | ) | (101 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.88 per share) | (127 | ) | (127 ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustment, net of tax | (23 | ) | (23 | ) | (132 | ) | (132 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | (2 | ) | (2 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | (10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 28, 2012 | 164,460 | $ | 779 | (12,841) | $ | (253) | $ | 1,788 | $ | (204) | $ | 2,110 | ||||||||||||||||||||||||||||||||||||||||||||
Balance at January 31, 2015 | 170,529 | $ | 979 | (29,665 | ) | $ | (944 | ) | $ | 2,780 | $ | (319 | ) | $ | 2,496 |
See Accompanying Notes to Consolidated Financial Statements.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
From Operating Activities | ||||||||||||||||||||||||
Net income | $ | 278 | $ | 169 | $ | 48 | $ | 520 | $ | 429 | $ | 397 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: | ||||||||||||||||||||||||
Discontinued operations, net of tax | — | — | (1 | ) | ||||||||||||||||||||
Non-cash impairment and other charges | 5 | 10 | 36 | |||||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
Non-cash impairment charges | 4 | — | 12 | |||||||||||||||||||||
Depreciation and amortization | 110 | 106 | 112 | 139 | 133 | 118 | ||||||||||||||||||
Deferred tax provision | 20 | 19 | 20 | |||||||||||||||||||||
Share-based compensation expense | 18 | 13 | 12 | 24 | 25 | 20 | ||||||||||||||||||
Deferred tax provision | 29 | 84 | 2 | |||||||||||||||||||||
Excess tax benefits on share-based compensation | (12 | ) | (8 | ) | (9 | ) | ||||||||||||||||||
Gain on sale of real estate | (4 | ) | — | — | ||||||||||||||||||||
Qualified pension plan contributions | (28 | ) | (32 | ) | (100 | ) | (6 | ) | (2 | ) | (26 | ) | ||||||||||||
Change in assets and liabilities: | ||||||||||||||||||||||||
Merchandise inventories | (17 | ) | (19 | ) | 111 | (81 | ) | (20 | ) | (91 | ) | |||||||||||||
Accounts payable | 19 | 7 | 23 | 51 | (48 | ) | 57 | |||||||||||||||||
Accrued and other liabilities | 38 | 35 | (30 | ) | 33 | (10 | ) | (4 | ) | |||||||||||||||
Income tax receivables and payables | 24 | (33 | ) | 27 | — | 38 | (34 | ) | ||||||||||||||||
Payment on the settlement of the net investment hedge | — | (24 | ) | — | ||||||||||||||||||||
Proceeds from the termination of interest rate swaps | — | — | 19 | |||||||||||||||||||||
Other, net | 21 | 10 | 87 | 24 | (26 | ) | (44 | ) | ||||||||||||||||
Net cash provided by operating activities of continuing operations | 497 | 326 | 346 | |||||||||||||||||||||
Net cash provided by operating activities | 712 | 530 | 416 | |||||||||||||||||||||
From Investing Activities | ||||||||||||||||||||||||
Gain from lease terminations | 2 | 1 | — | — | 2 | — | ||||||||||||||||||
Gain from insurance recoveries | 1 | — | 1 | |||||||||||||||||||||
Sales of short-term investments | — | 9 | 16 | |||||||||||||||||||||
Proceeds from sale of real estate | 5 | — | — | |||||||||||||||||||||
Purchases of short-term investments | — | (23 | ) | (88 | ) | |||||||||||||||||||
Sales and maturities of short-term investments | 9 | 60 | 39 | |||||||||||||||||||||
Purchase of business, net of cash acquired | — | (81 | ) | — | ||||||||||||||||||||
Capital expenditures | (152 | ) | (97 | ) | (89 | ) | (190 | ) | (206 | ) | (163 | ) | ||||||||||||
Net cash used in investing activities of continuing operations | (149 | ) | (87 | ) | (72 | ) | ||||||||||||||||||
Net cash used in investing activities | (176 | ) | (248 | ) | (212 | ) | ||||||||||||||||||
From Financing Activities | ||||||||||||||||||||||||
Reduction in long-term debt | — | — | (3 | ) | ||||||||||||||||||||
Purchase of treasury shares | (305 | ) | (229 | ) | (129 | ) | ||||||||||||||||||
Dividends paid on common stock | (101 | ) | (93 | ) | (94 | ) | (127 | ) | (118 | ) | (109 | ) | ||||||||||||
Issuance of common stock | 18 | 10 | 3 | 17 | 27 | 43 | ||||||||||||||||||
Purchase of treasury shares | (104 | ) | (50 | ) | — | |||||||||||||||||||
Treasury stock reissued under employee stock plan | 4 | 3 | — | 5 | 3 | 5 | ||||||||||||||||||
Excess tax benefits on share-based compensation | 5 | 3 | — | 12 | 9 | 11 | ||||||||||||||||||
Net cash used in financing activities of continuing operations | (178 | ) | (127 | ) | (94 | ) | ||||||||||||||||||
Reduction in long-term debt and obligations under capital leases | (3 | ) | (1 | ) | (2 | ) | ||||||||||||||||||
Net cash used in financing activities | (401 | ) | (309 | ) | (181 | ) | ||||||||||||||||||
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents | (15 | ) | 2 | 18 | (26 | ) | 5 | 6 | ||||||||||||||||
Net Cash used by Discontinued Operations | — | — | (1 | ) | ||||||||||||||||||||
Net Change in Cash and Cash Equivalents | 155 | 114 | 197 | 109 | (22 | ) | 29 | |||||||||||||||||
Cash and Cash Equivalents at Beginning of Year | 696 | 582 | 385 | 858 | 880 | 851 | ||||||||||||||||||
Cash and Cash Equivalents at End of Year | $ | 851 | $ | 696 | $ | 582 | $ | 967 | $ | 858 | $ | 880 | ||||||||||||
Cash Paid During the Year: | ||||||||||||||||||||||||
Interest | $ | 12 | $ | 12 | $ | 12 | $ | 11 | $ | 11 | $ | 11 | ||||||||||||
Income taxes | $ | 143 | $ | 53 | $ | 19 | $ | 251 | $ | 175 | $ | 230 |
See Accompanying Notes to Consolidated Financial Statements.
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. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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.
The reporting periodfiscal year end for the Company is the Saturday closest to the last day in January. Fiscal year 2014 represents the 52 weeks ending January 31, 2015. Fiscal years 2011, 2010,2013 and 20092012 represent the 52 week periodsperiod ending January 28, 2012, January 29, 2011,February 1, 2014, and January 30, 2010,the 53 week period ending February 2, 2013, respectively. References to years in this annual report relate to fiscal years rather than calendar years.
Revenue from retail stores is recognized at the point of sale when the product is delivered to customers. Internet and catalog sales revenue is recognized upon estimated receipt by the customer. Sales include shipping and handling fees for all periods presented. Sales include merchandise, net of returns, and exclude 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.
The Company sells 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 when the likelihood of the gift card being redeemed by the customer is remote and there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions, referred to as breakage. The Company has determined its gift card breakage rate based upon historical redemption patterns. Historical experience indicates that after 12 months, the likelihood of redemption is deemed to be remote. Gift card breakage income is included in selling, general and administrative expenses and totaled $4 million, $2 million, and $4 million in 2011, 2010, and 2009, respectively. Unredeemedunredeemed gift cards are recorded as a current liability.
The Company has selected to present the operations of the discontinued businesses as one line in the Consolidated Statements of Cash Flows. For all the periods presented this caption includes only operating activities. Gift card breakage was $5 million for 2014, $4 million for 2013, and $3 million for 2012.
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 theany sublease rental income, is provided for once the store ceases to be used.
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 isare recorded in the same period as the associated expenses are incurred.
Reimbursement received in excess of expenses incurred related to specific, incremental, and identifiable advertising costs, is accounted for as a reduction to the cost of merchandise, which is reflected in cost of sales as the merchandise is sold.
Advertising costs, which are included as a component of selling, general and administrative expenses, were as follows:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Advertising expenses | $ | 121 | $ | 97 | $ | 94 | $ | 125 | $ | 124 | $ | 132 | ||||||||||||
Cooperative advertising reimbursements | (22 | ) | (23 | ) | (25 | ) | (21 | ) | (22 | ) | (25 | ) | ||||||||||||
Net advertising expense | $ | 99 | $ | 74 | $ | 69 | $ | 104 | $ | 102 | $ | 107 |
Catalog costs, which are primarily comprisecomprised of paper, printing, and postage, are capitalized and amortized over the expected customer response period related to each catalog, which is 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 totaled $3 million for both January 31, 2015 and $4 million at January 28, 2012 and January 29, 2011, respectively.February 1, 2014.
Catalog costs, which are included as a component of selling, general and administrative expenses, were as follows:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Catalog costs | $ | 44 | $ | 45 | $ | 48 | $ | 32 | $ | 36 | $ | 45 | ||||||||||||
Cooperative reimbursements | (5 | ) | (5 | ) | (4 | ) | (7 | ) | (5 | ) | (6 | ) | ||||||||||||
Net catalog expense | $ | 39 | $ | 40 | $ | 44 | $ | 25 | $ | 31 | $ | 39 |
The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.
The computation of basic and diluted earnings per share is as follows:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions, except per share data) | (in millions, except per share data) | |||||||||||||||||||||||
Net income from continuing operations | $ | 278 | $ | 169 | $ | 47 | ||||||||||||||||||
Net Income | $ | 520 | $ | 429 | $ | 397 | ||||||||||||||||||
Weighted-average common shares outstanding | 153.0 | 155.7 | 156.0 | 143.9 | 148.4 | 151.2 | ||||||||||||||||||
Basic Earnings per share from continuing operations | $ | 1.81 | $ | 1.08 | $ | 0.30 | ||||||||||||||||||
Basic earnings per share | $ | 3.61 | $ | 2.89 | $ | 2.62 | ||||||||||||||||||
Weighted-average common shares outstanding | 153.0 | 155.7 | 156.0 | 143.9 | 148.4 | 151.2 | ||||||||||||||||||
Dilutive effect of potential common shares | 1.4 | 1.0 | 0.3 | 2.1 | 2.1 | 2.8 | ||||||||||||||||||
Weighted-average common shares outstanding assuming dilution | 154.4 | 156.7 | 156.3 | 146.0 | 150.5 | 154.0 | ||||||||||||||||||
Diluted earnings per share from continuing operations | $ | 1.80 | $ | 1.07 | $ | 0.30 | ||||||||||||||||||
Diluted earnings per share | $ | 3.56 | $ | 2.85 | $ | 2.58 |
Potential common shares include the dilutive effect of stock options and restricted stock units. Options to purchase 3.80.6 million, 4.51.0 million, and 6.30.8 million shares of common stock at January 28, 2012, January 29, 2011,31, 2015, February 1, 2014, and January 30, 2010,February 2, 2013, respectively, were not included in the computations primarily because the exercise price of the options was greater than the average market price of the common shares and, therefore, the effect of their inclusion would be antidilutive. Contingently issuable shares of 0.90.3 million, 0.2 million, and 0.1 million at January 31, 2015, February 1, 2014, and February 2, 2013, respectively, have not been included as the vesting conditions have not been satisfied.
The Company recognizes compensation expense in the financial statements for share-based awards based on the grant date fair value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards. See Note 21,Share-Based Compensation, for information on the assumptions the Company 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. The Company may make repurchases of its common stock from time to time, subject to legal and contractual restrictions, market conditions, and other factors.
Cash equivalents at January 28, 201231, 2015 and January 29, 2011February 1, 2014 were $830$930 million and $675$819 million, respectively. Included in theseCash equivalents include amounts are $191 millionon demand with banks and $165 million of short-term deposits as of January 28, 2012 and January 29, 2011, respectively. The Company considers all highly liquid investments with original maturities of three months or less, including commercial paper and money market funds, to be cash equivalents.funds. Additionally, amounts due from third partythird-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.
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. The Company routinely reviews available-for-sale securities 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. TheAs of January 31, 2015, the Company held $6 million of available-for-sale securities, which represented the Company’s auction rate security was valued at $5 million for both January 28, 2012 and January 29, 2011.security. See Note 19, Fair Value Measurements, for further discussion of these investments.
Merchandise inventories for the Company’s Athletic 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.
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 provides reserves based on current selling prices when the inventory has not been marked down to market. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which approximates FIFO. Transportation, distribution center,
and sourcing costs are capitalized in merchandise inventories. The Company expenses the freight associated with transfers between its store locations in the period incurred. The Company maintains 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 vendorssuppliers for damaged product returns, markdown allowances, and volume rebates, as well as cooperative advertising reimbursements received in excess of specific, incremental advertising expenses. Occupancy includescosts include the amortization of amounts received from landlords for tenant improvements.
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Significant additions and improvements to property and equipment are capitalized. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:
Buildings | Maximum of 50 years | |
Leasehold improvements | 10 years or term of lease, if shorter | |
Furniture, fixtures, and equipment | 3 – 10 years | |
Software | 2 – 7 years |
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. Owned property
The Company capitalizes certain external and equipmentinternal 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 depreciated on a straight-line basis overdirectly associated with and devote time to the estimated useful livesinternal-use software project. Capitalization of such costs ceases no later than the assets: maximum of 50 yearspoint at which the project is substantially complete and ready for buildingsits intended use. Training and 3 to 10 years for furniture, fixtures,maintenance costs are expensed as incurred, while upgrades and equipment. Property and equipment under capital leases and improvements to leased premises are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term. Capitalized software reflects certain costs related to software developed for internal use thatenhancements are capitalized and amortized. After substantial completion of a project, the costs are amortized on a straight-line basis over a 2 to 7 year period.if it is probable that such expenditures will result in additional functionality. Capitalized software, net of accumulated amortization, is included as a component of property and equipment and was $27$39 million and $38 million at both January 28, 201231, 2015 and January 29, 2011.February 1, 2014, respectively.
The Company recognizesreviews long-lived tangible and intangible assets with finite lives for impairment losses whenever events or changes in circumstances indicate that the carrying amounts of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level, as well as qualitative measures. The Company considers historical performance and future estimated results, which are predominately identified from the Company’s strategic long-range plans, in its evaluation of potential store-level impairment and then compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset 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 estimates fair value based on the best information available using estimates, judgments, and projections as considered necessary.
The Company reviews goodwillGoodwill and intangible assets with indefinite lives are reviewed for impairment annually during the first quarter of its 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 combination of market and discounted cash flow approaches.
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. We estimate the fair value based on an income approach using the relief-from-royalty method.
All derivative financial instruments are recorded in the Company’s 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 Company to increased earnings volatility.
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:
Level 1 –— Quoted prices for identical instruments in active markets.
Level 2 –— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
Level 3 –— Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
The Company determinesaccounts for its income taxes under the asset and liability method, which requires the recognition of deferred tax provision underassets and liabilities for the liabilityexpected future tax consequences of events that have been included in the financial statements. Under this method, under which deferred tax assets and liabilities are recognized fordetermined on the expected tax consequencesbasis of temporarythe differences between the financial statements and the tax basis of assets and liabilities and their reported amounts using presently enacted tax rates.rates in effect for the year in which the differences are expected to reverse. 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. 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 on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes net deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers 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 determines that it would be able to realize their deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
A taxing authority may challenge positions that the Company adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax positions for such transactions and records 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 recognizes 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.
In 2011, the Company changed how theThe discount rate was selected to measurefor the present value of U.S. benefit obligations from the Citibank Pension Discount curve to Towers Watson’s Bond:Link model. The current discount rateplans 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 the plan’s bond portfolio indices, which match the benefit obligations.
The Company is 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 $14$13 million and $15$11 million at January 28, 201231, 2015 and January 29, 2011,February 1, 2014, respectively. The Company discounts its workers’ compensation and general liability reserves using a risk-free interest rate. Imputed interest expense related to these liabilities was not significant for 2011, 2010, and 2009.any of the periods presented.
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.
The functional currency of the Company’s 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 loss within shareholders’ equity.
In September 2011,May 2014, Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the FASB issuedtransfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2011-08,Testing Goodwill for Impairment, that2014-09 is effective in 2012. The revised standard is intendedfor annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted either retrospectively to reduce cost and complexityeach prior reporting period presented or as a cumulative-effect adjustment as of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. We do not believe that thedate of adoption. The adoption of this ASU willguidance is not expected to have a significant effect on our consolidated financial position, results of operations, or financial position.cash flows.
Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.
The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of January 28, 2012,31, 2015, the Company has two reportable segments, Athletic Stores and Direct-to-Customers. The accounting policies of both segments are the same as those described in theSummary of Significant Accounting Policiesnote.
The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.
2011 | 2010 | 2009 | ||||||||||
(in millions) | ||||||||||||
Sales | ||||||||||||
Athletic Stores | $ | 5,110 | $ | 4,617 | $ | 4,448 | ||||||
Direct-to-Customers | 513 | 432 | 406 | |||||||||
Total sales | $ | 5,623 | $ | 5,049 | $ | 4,854 | ||||||
Operating Results | ||||||||||||
Athletic Stores(1) | $ | 495 | $ | 329 | $ | 114 | ||||||
Direct-to-Customers(2) | 45 | 30 | 32 | |||||||||
540 | 359 | 146 | ||||||||||
Restructuring (charge) income(3) | (1 | ) | — | 1 | ||||||||
Division profit | 539 | 359 | 147 | |||||||||
Less: Corporate expense(4) | 102 | 97 | 67 | |||||||||
Operating profit | 437 | 262 | 80 | |||||||||
Other income(5) | 4 | 4 | 3 | |||||||||
Interest expense, net | 6 | 9 | 10 | |||||||||
Income from continuing operations before income taxes | $ | 435 | $ | 257 | $ | 73 |
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Sales | ||||||||||||
Athletic Stores | $ | 6,286 | $ | 5,790 | $ | 5,568 | ||||||
Direct-to-Customers | 865 | 715 | 614 | |||||||||
Total sales | $ | 7,151 | $ | 6,505 | $ | 6,182 | ||||||
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Operating Results | ||||||||||||
Athletic Stores(1) | $ | 777 | $ | 656 | $ | 653 | ||||||
Direct-to-Customers(2) | 109 | 84 | 65 | |||||||||
Division profit | 886 | 740 | 718 | |||||||||
Less: Corporate expense(3) | 81 | 76 | 108 | |||||||||
Operating profit | 805 | 664 | 610 | |||||||||
Other income | 9 | 4 | 2 | |||||||||
Interest expense, net | 5 | 5 | 5 | |||||||||
Income before income taxes | $ | 809 | $ | 663 | $ | 607 |
(1) | Included in the results for 2014, 2013, and 2012 are impairment and other charges of $2 million, $2 million, and $5 million, respectively. The |
(2) | Included in the results for |
(3) |
Depreciation and Amortization | Capital Expenditures | Total Assets | Depreciation and Amortization | Capital Expenditures(1) | Total Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Athletic Stores | $ | 90 | $ | 85 | $ | 90 | $ | 117 | $ | 72 | $ | 70 | $ | 2,065 | $ | 1,993 | $ | 1,875 | $ | 119 | $ | 112 | $ | 96 | $ | 151 | $ | 163 | $ | 128 | $ | 2,499 | $ | 2,398 | $ | 2,310 | ||||||||||||||||||||||||||||||||||||
Direct-to-Customers | 9 | 9 | 9 | 6 | 4 | 5 | 284 | 280 | 289 | 7 | 9 | 9 | 9 | 5 | 5 | 315 | 320 | 290 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
99 | 94 | 99 | 123 | 76 | 75 | 2,349 | 2,273 | 2,164 | 126 | 121 | 105 | 160 | 168 | 133 | 2,814 | 2,718 | 2,600 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 11 | 12 | 13 | 29 | 21 | 14 | 701 | 623 | 652 | 13 | 12 | 13 | 30 | 38 | 30 | 763 | 769 | 767 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Company | $ | 110 | $ | 106 | $ | 112 | $ | 152 | $ | 97 | $ | 89 | $ | 3,050 | $ | 2,896 | $ | 2,816 | $ | 139 | $ | 133 | $ | 118 | $ | 190 | $ | 206 | $ | 163 | $ | 3,577 | $ | 3,487 | $ | 3,367 |
(1) | Reflects cash capital expenditures for all years presented. |
Sales and long-lived asset information by geographic area as of and for the fiscal years ended January 28, 2012, January 29, 2011,31, 2015, February 1, 2014, and January 30, 2010February 2, 2013 are presented in the following table.tables. Sales are attributed to the country in which the sales originate, which is where the legal subsidiary is domiciled.originate. Long-lived assets reflect property and equipment.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Sales | ||||||||||||||||||||||||
United States | $ | 3,959 | $ | 3,568 | $ | 3,425 | $ | 4,976 | $ | 4,567 | $ | 4,495 | ||||||||||||
International | 1,664 | 1,481 | 1,429 | 2,175 | 1,938 | 1,687 | ||||||||||||||||||
Total sales | $ | 5,623 | $ | 5,049 | $ | 4,854 | $ | 7,151 | $ | 6,505 | $ | 6,182 |
The Company’s sales in Italy, Canada, and France represent approximately 23, 18, and 15 percent, respectively, of the International category’s sales for
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Long-Lived Assets | ||||||||||||
United States | $ | 446 | $ | 394 | $ | 321 | ||||||
International | 174 | 196 | 169 | |||||||||
Total long-lived assets | $ | 620 | $ | 590 | $ | 490 |
For the period ended January 28, 2012.31, 2015, the countries that comprised the majority of the sales and long-lived assets for the international category were Germany, Italy, Canada, and France. No other individual country included in the International category is significant.
2011 | 2010 | 2009 | ||||||||||
(in millions) | ||||||||||||
Long-Lived Assets | ||||||||||||
United States | $ | 285 | $ | 257 | $ | 266 | ||||||
International | 142 | 129 | 121 | |||||||||
Total long-lived assets | $ | 427 | $ | 386 | $ | 387 |
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Charges recorded in connection with CCS- | ||||||||||||||||||||||||
Impairment of intangible assets | $ | 5 | $ | 10 | $ | — | $ | 2 | $ | — | $ | 7 | ||||||||||||
Impairment of assets | — | — | 36 | |||||||||||||||||||||
Reorganization costs | — | — | 5 | |||||||||||||||||||||
Impairment of long-lived assets | — | — | 5 | |||||||||||||||||||||
CCS store closure costs | — | 2 | — | |||||||||||||||||||||
Total CCS charges | $ | 2 | $ | 2 | $ | 12 | ||||||||||||||||||
Other intangible asset impairments | 2 | — | — | |||||||||||||||||||||
Total impairment and other charges | $ | 5 | $ | 10 | $ | 41 | $ | 4 | $ | 2 | $ | 12 |
The Company acquired the CCS e-commerce business in 2008 and later expanded its operations to include physical stores. During 2012, due to the continued underperformance of Intangible Assets
Intangiblethis business, impairment and other charges totaling $12 million were recorded. This represented an impairment of the tradename of $7 million and $5 million to writedown long-lived assets that are determined to have finite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate thatof the carrying value may be impaired. Intangible assets with indefinite lives are tested for impairment if impairment indicators arise and, at a minimum, annually.CCS stores. During the fourth quarters of 2011 and 2010,2013, the Company determined that triggering events had occurredrecorded $2 million of store closing costs, primarily related to itslease buy-out expenses, resulting from the decision to close the CCS intangible assets, which is part ofstore locations. Finally, during 2014 the Direct-to-Customers segment, reflecting decreases in projected revenues. Accordingly, a charge of $5 millionCompany exited the e-commerce business and $10 million was recorded to write-downfurther impaired the CCS tradename for 2011 and 2010, respectively. Theto its fair value, which was determined using an income approach usingrealized upon sale.
During 2014, the relief-from-royalty method.
No impairment charges$1 million to fully write down the remaining value of the tradename related to long-lived assets were recorded during 2011 or 2010. During 2009, the Company recorded non-cash impairment charges totaling $36 million; $32 million was recorded to write-down long-lived assets at its Lady Foot Locker, Kids Foot Locker, Footaction,Company’s stores in the Republic of Ireland, reflecting historical and Champs Sports divisions, and a $4 million charge was recorded to write off certain software development costs for the Direct-to-Customers segment as a result of management’s decision to terminate the project.
In 2009, the Company consolidated the management team of the Lady Foot Locker business with the team that managed the Foot Locker U.S., Kids Foot Locker, and Footaction businesses. As a result of this divisional reorganization, as well as certain corporate staff reductions taken to improve corporate efficiency,projected underperformance. Additionally, the Company recorded a non-cash impairment charge to fully write down the value of $5 million. This charge was comprised primarilya private-label brand acquired as part of severance coststhe Runners Point Group acquisition, to eliminate approximately 120 positions.reflect the exit of this product line.
Other income reflectsincludes non-operating income and includes items, such asas: gains from insurance recoveries; discounts/premiums paid on the repurchase and retirement of bonds; royalty income fromincome; and the Company’s franchising agreements, lease terminationchanges in fair value, premiums paid, realized gains realized gains/losses and premiums associated with foreign currency option contracts gains on the purchase and retirement of bonds, and other non-operating items.property sales. Other income was $9 million in 2014, $4 million in both 20112013, and 2010 and was $3$2 million in 2009.2012.
For 2011,2014, other income primarily includes a $4 million gain on a sale of property, $2 million of royalty income, $2 million of realized gain associated with foreign currency option contracts and $1 million of lease termination gains related to the sales of leasehold interests. For 2013, other income includes $2 million of royalty income and $2 million of lease termination gains related to the sales of leasehold interests, $1 million for insurance recoveries, as well asinterests. For 2012, other income primarily includes royalty income. For 2010, other income includes a $2 million gain on its money-market investment, as well as royalty income, and gains on lease terminations related to certain lease interests in Europe. Other income in 2009 primarily reflects $4 million related to gains from insurance recoveries, gains on the purchase and retirement of bonds, and royalty income, partially offset by foreign currency option contract premiums of $1 million.
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
LIFO inventories | $ | 683 | $ | 694 | $ | 821 | $ | 746 | ||||||||
FIFO inventories | 386 | 365 | 429 | 474 | ||||||||||||
Total merchandise inventories | $ | 1,069 | $ | 1,059 | $ | 1,250 | $ | 1,220 |
The value of the Company’s LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net receivables | $ | 49 | $ | 41 | $ | 78 | $ | 99 | ||||||||
Prepaid rent | 77 | 75 | ||||||||||||||
Prepaid income taxes | 36 | 18 | 34 | 35 | ||||||||||||
Prepaid expenses and other current assets | 33 | 31 | 32 | 34 | ||||||||||||
Prepaid rent | 27 | 27 | ||||||||||||||
Deferred taxes and costs | 13 | 13 | 17 | 20 | ||||||||||||
Income tax receivable | 1 | 47 | 1 | — | ||||||||||||
Fair value of derivative contracts | — | 2 | ||||||||||||||
$ | 159 | $ | 179 | $ | 239 | $ | 263 |
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Land | $ | 3 | $ | 3 | $ | 4 | $ | 6 | ||||||||
Buildings: | ||||||||||||||||
Owned | 31 | 31 | 44 | 44 | ||||||||||||
Furniture, fixtures and equipment: | ||||||||||||||||
Furniture, fixtures, equipment and software development costs: | ||||||||||||||||
Owned | 799 | 778 | 900 | 888 | ||||||||||||
Assets under capital leases | 9 | 10 | ||||||||||||||
833 | 812 | 957 | 948 | |||||||||||||
Less: accumulated depreciation | (615 | ) | (624 | ) | (606 | ) | (621 | ) | ||||||||
218 | 188 | 351 | 327 | |||||||||||||
Alterations to leased and owned buildings | ||||||||||||||||
Cost | 729 | 713 | 779 | 804 | ||||||||||||
Less: accumulated amortization | (520 | ) | (515 | ) | (510 | ) | (541 | ) | ||||||||
209 | 198 | 269 | 263 | |||||||||||||
$ | 427 | $ | 386 | $ | 620 | $ | 590 |
The Athletic Stores segment’s goodwill is net of accumulated impairment charges of $167 million for all periods presented. The 20112014 and 20102013 annual goodwill impairment tests did not result in an impairment charge as the fair value of each reporting unit exceeded the carrying values of each respective reporting unit.charge.
Athletic Stores | Direct-to- Customers | Total | ||||||||||
(in millions) | ||||||||||||
Goodwill at January 30, 2010 | $ | 18 | $ | 127 | $ | 145 | ||||||
Foreign currency translation adjustment | — | — | — | |||||||||
Goodwill at January 29, 2011 | 18 | 127 | 145 | |||||||||
Foreign currency translation adjustment | (1 | ) | — | (1 | ) | |||||||
Goodwill at January 28, 2012 | $ | 17 | $ | 127 | $ | 144 |
Athletic Stores | Direct-to- Customers | Total | ||||||||||
(in millions) | ||||||||||||
Goodwill at February 2, 2013 | $ | 18 | $ | 127 | $ | 145 | ||||||
Goodwill from Runners Point Group acquisition | 3 | 15 | 18 | |||||||||
Goodwill at February 1, 2014 | $ | 21 | $ | 142 | $ | 163 | ||||||
Foreign currency translation adjustment | (4 | ) | (2 | ) | (6 | ) | ||||||
Goodwill at January 31, 2015 | $ | 17 | $ | 140 | $ | 157 |
January 28, 2012 | Wtd. Avg. Life in Years | January 29, 2011 | ||||||||||||||||||||||||||
($ in millions) | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort. | Net Value | ||||||||||||||||||||||
Amortized intangible assets:(1),(2) | ||||||||||||||||||||||||||||
Lease acquisition costs | $ | 171 | $ | (149 | ) | $ | 22 | 11.3 | $ | 178 | $ | (150 | ) | $ | 28 | |||||||||||||
Trademarks | 21 | (8 | ) | 13 | 19.7 | 21 | (7 | ) | 14 | |||||||||||||||||||
Loyalty program | 1 | (1 | ) | — | — | 1 | (1 | ) | — | |||||||||||||||||||
Favorable leases | 7 | (7 | ) | — | 8.4 | 9 | (8 | ) | 1 | |||||||||||||||||||
CCS customer relationships | 21 | (13 | ) | 8 | 5.0 | 21 | (9 | ) | 12 | |||||||||||||||||||
$ | 221 | $ | (178 | ) | $ | 43 | 11.4 | $ | 230 | $ | (175 | ) | $ | 55 | ||||||||||||||
Indefinite life intangible assets: | ||||||||||||||||||||||||||||
Republic of Ireland trademark(1) | 1 | 2 | ||||||||||||||||||||||||||
CCS tradename(3) | 10 | 15 | ||||||||||||||||||||||||||
$ | 11 | $ | 17 | |||||||||||||||||||||||||
Identifiable intangible assets, net | $ | 54 | $ | 72 |
January 31, 2015 | Wtd. Avg. Life in Years(2) | February 1, 2014 | ||||||||||||||||||||||||||
(in millions) | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort. | Net Value | ||||||||||||||||||||||
Amortized intangible assets:(1) | ||||||||||||||||||||||||||||
Lease acquisition costs | $ | 128 | $ | (116 | ) | $ | 12 | 12.0 | $ | 155 | $ | (137 | ) | $ | 18 | |||||||||||||
Trademarks | 21 | (12 | ) | 9 | 19.7 | 21 | (11 | ) | 10 | |||||||||||||||||||
Favorable leases | 7 | (4 | ) | 3 | 7.4 | 8 | (3 | ) | 5 | |||||||||||||||||||
$ | 156 | $ | (132 | ) | $ | 24 | 14.2 | $ | 184 | $ | (151 | ) | $ | 33 | ||||||||||||||
Indefinite life intangible assets(1) | ||||||||||||||||||||||||||||
Runners Point Group trademarks(3) | 25 | 30 | ||||||||||||||||||||||||||
Other trademarks(4) | — | 4 | ||||||||||||||||||||||||||
$ | 25 | $ | 34 | |||||||||||||||||||||||||
Other intangible assets, net | $ | 49 | $ | 67 |
(1) | Includes the effect of foreign currency translation related primarily to the movements of the euro in relation to the U.S. dollar. |
(2) | The weighted-average useful life disclosed excludes those assets that are fully amortized. |
(3) |
(4) | During 2014, the values of other trademarks were fully impaired. Impairment charges of $3 million and $7 million were recorded in 2014 and 2012, respectively, and are described more fully in Note 3,Impairment Charges. |
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 2011,The amortizing intangible asset activity during 2014 of $9 million reflects a $4 million decrease related to foreign currency exchange fluctuations, partially offset by additions of $7$1 million were recorded primarily fromrelated to new leases in Europe. Retirements recorded during 2011 were $3 million. Amortization expense for intangibles subject to amortization was $16$6 million, $17$11 million, and $19$14 million for 2011, 2010,2014, 2013, and 2009,2012, respectively.
Estimated future amortization expense for finite lived intangibles for the next five years is as follows:
(in millions) | ||||
2012 | $ | 14 | ||
2013 | 9 | |||
2014 | 4 | |||
2015 | 3 | |||
2016 | 2 |
(in millions) | ||||
2015 | $ | 4 | ||
2016 | 4 | |||
2017 | 3 | |||
2018 | 3 | |||
2019 | 3 |
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Funds deposited in insurance trust(1) | $ | 9 | $ | 10 | ||||||||||||
Restricted cash(1) | $ | 22 | $ | 25 | ||||||||||||
Pension asset | 8 | 2 | 13 | 4 | ||||||||||||
Auction rate security | 5 | 5 | 6 | 6 | ||||||||||||
Prepaid income taxes | 4 | 5 | ||||||||||||||
Deferred tax costs | 1 | 3 | 5 | 7 | ||||||||||||
Income tax asset | 1 | 1 | ||||||||||||||
Funds deposited in insurance trust(2) | 4 | 6 | ||||||||||||||
Other | 34 | 37 | 24 | 28 | ||||||||||||
$ | 62 | $ | 63 | $ | 74 | $ | 76 |
(1) | Restricted cash is comprised of amounts held in escrow in connection with various leasing arrangements in Europe. |
(2) | The Company is required by its insurers to collateralize part of the self-insured workers’ compensation and liability claims. The Company has chosen to satisfy these collateral requirements by depositing funds in |
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Taxes other than income taxes | $ | 56 | $ | 56 | ||||||||||||
Other payroll and payroll related costs, excluding taxes | $ | 61 | $ | 43 | 54 | 54 | ||||||||||
Incentive bonuses | 55 | 48 | 51 | 41 | ||||||||||||
Taxes other than income taxes | 45 | 37 | ||||||||||||||
Customer deposits(1) | 30 | 29 | ||||||||||||||
Property and equipment(1) | 49 | 39 | ||||||||||||||
Current deferred tax liabilities | 24 | 20 | 48 | 46 | ||||||||||||
Property and equipment | 22 | 19 | ||||||||||||||
Pension and postretirement benefits | 4 | 4 | ||||||||||||||
Sales return reserve | 4 | 4 | ||||||||||||||
Customer deposits(2) | 44 | 38 | ||||||||||||||
Income taxes payable | 3 | 8 | 10 | 5 | ||||||||||||
Fair value of derivatives | 2 | — | ||||||||||||||
Other | 58 | 54 | 81 | 81 | ||||||||||||
$ | 308 | $ | 266 | $ | 393 | $ | 360 |
(1) | Accruals for property and equipment are properly excluded from the statements of cash flows for all years presented. |
(2) | Customer deposits include unredeemed gift cards and certificates, merchandise credits, and deferred revenue related to undelivered merchandise, including layaway sales. |
On January 27, 2012, the Company entered into an amended and restated credit agreement (the “2011 Restated Credit Agreement”) with its banks, replacing the 2009 Credit Agreement.banks. The 2011 Restated Credit Agreement provides for a $200 million asset based revolving credit facility maturing on January 27, 2017. In addition, during the term of the 2011 Restated Credit Agreement, the Company may make up to four requests for additional credit commitments in an aggregate amount not to exceed $200 million. Interest is based on the LIBOR rate in effect at the time of the borrowing plus a 1.25 to 1.50 percent margin depending on certain provisions as defined in the 2011 Restated Credit Agreement.
The 2011 Restated Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets, but excluding intellectual property. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. With regard to the payment of dividends and share repurchases, there are no restrictions if the Company is not borrowing and the payments are funded through cash on hand. If the Company is borrowing, Availability as of the end of each fiscal month during the subsequent projected six fiscal months following the payment must be at least 20 percent of the lesser of the Aggregate Commitments and the Borrowing Base (as(all terms as defined in the 2011 Restated Credit Agreement). The Company’s management does not currently expect to borrow under the facility in 2012.
At January 28, 2012, the Company had unused domestic lines of credit of $199 million, while $1 million was committed2015, other than amounts used to support standby letters of credit.credit in connection with insurance programs. The letters of credit are primarily used for insurance programs.outstanding as of January 31, 2015 were not significant.
Deferred financing fees are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method. The unamortized balance at January 28, 201231, 2015 is $3$1 million.
The quarterly facility fees paid on the unused portion were 0.75was 0.25 percent for both 20112014 and 2010. Under the terms of the 2011 Restated Credit Agreement, the quarterly facility fee will be 0.25 percent on the unused portion.2013. There were no short-term borrowings during 20112014 or 2010.2013. Interest expense, including facility fees, related to the revolving credit facility was $4 million, $4 million, and $3$1 million for 2011, 2010, and 2009, respectively.all years presented.
The Company’s long-term debt reflects the Company’s 8.50 percent debentures payable in 2022, and was $135 million and $137 million for the years ended January 28, 2012 and January 29, 2011, respectively. Excluding the unamortized gain of the interest rate swaps of $15 million, the principal outstanding is $120 million. The gain is being amortized as part of interest expense over the remaining term of the debt, using the effective-yield method.
2014 | 2013 | |||||||
(in millions) | ||||||||
8.5% debentures payable 2022 | $ | 118 | $ | 118 | ||||
Unamortized gain related to interest rate swaps(1) | 12 | 13 | ||||||
Obligations under capital leases | 4 | 8 | ||||||
$ | 134 | $ | 139 | |||||
Less: current portion of obligations under capital leases | 2 | 3 | ||||||
$ | 132 | $ | 136 |
(1) | In 2009, the Company terminated an interest rate swap at a gain. This gain is being amortized as part of interest expense over the remaining term of the debt using the effective-yield method. |
Interest expense related to long-term debt including the effect of the interest rate swaps and the amortization of the associated debt issuance costs, was $9 million for all years presented.
Maturities of long-term debt and minimum rent payments under capital leases in future periods are:
Long-Term Debt | Capital Leases | Total | ||||||||||
(in millions) | ||||||||||||
2015 | $ | — | $ | 2 | $ | 2 | ||||||
2016 | — | 1 | 1 | |||||||||
2017 | — | 1 | 1 | |||||||||
2018 – 2019 | — | — | — | |||||||||
Thereafter | 118 | — | 118 | |||||||||
$ | 118 | $ | 4 | $ | 122 | |||||||
Less: Imputed interest | — | — | — | |||||||||
Current portion | — | 2 | 2 | |||||||||
$ | 118 | $ | 2 | $ | 120 |
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Straight-line rent liability | $ | 103 | $ | 100 | $ | 124 | $ | 116 | ||||||||
Pension benefits | 70 | 67 | 46 | 25 | ||||||||||||
Income taxes | 31 | 28 | 24 | 27 | ||||||||||||
Postretirement benefits | 14 | 11 | 18 | 14 | ||||||||||||
Deferred taxes | 14 | 18 | ||||||||||||||
Workers’ compensation and general liability reserves | 11 | 11 | 9 | 9 | ||||||||||||
Deferred taxes | 5 | — | ||||||||||||||
Other | 23 | 28 | 18 | 20 | ||||||||||||
$ | 257 | $ | 245 | $ | 253 | $ | 229 |
The Company is obligated under operating leases for almost all of its store properties. Some of the store leases contain renewal options with varying terms and conditions. Management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases on other premises. Operating lease periods generally range from 5 to 10 years. Certain leases provide for additional rent payments based on a percentage of store sales.
Most of the Company’s leases require the payment of certain executory costs such as insurance, maintenance, and other costs in addition to the future minimum lease payments. These costs, including the amortization of lease rights, totaled $130 million, $131 million, and $138$132 million in 2011, 2010,2014 and 2009, respectively.$128 million in both 2013 and 2012. Included in the amounts below, are non-store expenses that totaled $17 million in 20112014 and $15$16 million in 2010both 2013 and 2009.2012.
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Minimum rent | $ | 525 | $ | 507 | $ | 514 | $ | 615 | $ | 580 | $ | 537 | ||||||||||||
Contingent rent based on sales | 20 | 16 | 14 | 25 | 22 | 24 | ||||||||||||||||||
Sublease income | (1 | ) | (1 | ) | (2 | ) | (5 | ) | (2 | ) | (1 | ) | ||||||||||||
$ | 544 | $ | 522 | $ | 526 | $ | 635 | $ | 600 | $ | 560 |
Future minimum lease payments under non-cancelable operating leases, net of future non-cancelable operating sublease payments, are:
(in millions) | (in millions) | |||||||
2012 | $ | 478 | ||||||
2013 | 420 | |||||||
2014 | 366 | |||||||
2015 | 321 | $ | 567 | |||||
2016 | 260 | 516 | ||||||
2017 | 453 | |||||||
2018 | 387 | |||||||
2019 | 339 | |||||||
Thereafter | 672 | 1,164 | ||||||
Total operating lease commitments | $ | 2,517 | $ | 3,426 |
Accumulated other comprehensive loss, net of tax, is comprised of the following:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Foreign currency translation adjustments | $ | 63 | $ | 86 | $ | 75 | $ | (75 | ) | $ | 57 | $ | 82 | |||||||||||
Cash flow hedges | (1 | ) | 1 | — | (3 | ) | (2 | ) | 3 | |||||||||||||||
Unrecognized pension cost and postretirement benefit | (264 | ) | (254 | ) | (266 | ) | (240 | ) | (240 | ) | (255 | ) | ||||||||||||
Unrealized loss on available-for-sale security | (2 | ) | (2 | ) | (2 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
$ | (204 | ) | $ | (169 | ) | $ | (193 | ) | $ | (319 | ) | $ | (186 | ) | $ | (171 | ) |
The changes in accumulated other comprehensive loss for the period ended January 31, 2015 were as follows:
(in millions) | Foreign currency translation adjustments | Cash flow hedges | Items related to pension and postretirement benefits | Unrealized loss on available-for- sale security | Total | |||||||||||||||
Balance as of February 1, 2014 | $ | 57 | $ | (2 | ) | $ | (240 | ) | $ | (1 | ) | $ | (186 | ) | ||||||
OCI before reclassification | (132 | ) | (1 | ) | (8 | ) | — | (141 | ) | |||||||||||
Reclassified from AOCI | — | — | 8 | — | 8 | |||||||||||||||
Other comprehensive income/(loss) | (132 | ) | (1 | ) | — | — | (133 | ) | ||||||||||||
Balance as of January 31, 2015 | $ | (75 | ) | $ | (3 | ) | $ | (240 | ) | $ | (1 | ) | $ | (319 | ) |
Reclassifications from accumulated other comprehensive loss for the period ended January 31, 2015 were as follows:
(in millions) | ||||
Amortization of actuarial (gain) loss: | ||||
Pension benefits – amortization of actuarial loss | $ | 15 | ||
Postretirement benefits – amortization of actuarial gain | (3 | ) | ||
Net periodic benefit cost (see Note 20) | 12 | |||
Income tax expense | 4 | |||
Net of tax | $ | 8 |
Following are the domestic and international components of pre-tax income from continuing operations:income:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Domestic | $ | 321 | $ | 158 | $ | (23 | ) | $ | 654 | $ | 558 | $ | 508 | |||||||||||
International | 114 | 99 | 96 | 155 | 105 | 99 | ||||||||||||||||||
Total pre-tax income | $ | 435 | $ | 257 | $ | 73 | $ | 809 | $ | 663 | $ | 607 |
The income tax provision consists of the following:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | 93 | $ | (28 | ) | $ | (6 | ) | $ | 195 | $ | 164 | $ | 152 | ||||||||||
State and local | 11 | 4 | — | 34 | 26 | 22 | ||||||||||||||||||
International | 24 | 28 | 30 | 40 | 25 | 16 | ||||||||||||||||||
Total current tax provision | 128 | 4 | 24 | 269 | 215 | 190 | ||||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | 16 | 79 | (3 | ) | 16 | 13 | 13 | |||||||||||||||||
State and local | 6 | 4 | — | 3 | 5 | 5 | ||||||||||||||||||
International | 7 | 1 | 5 | 1 | 1 | 2 | ||||||||||||||||||
Total deferred tax provision | 29 | 84 | 2 | 20 | 19 | 20 | ||||||||||||||||||
Total income tax provision | $ | 157 | $ | 88 | $ | 26 | $ | 289 | $ | 234 | $ | 210 |
Provision has been made in the accompanying Consolidated Statements of Operations for additional income taxes applicable to dividends received or expected to be received, if any, from international subsidiaries. The amount of unremitted earnings of international subsidiaries for which no such tax is provided and which is considered to be permanently reinvested in the subsidiaries totaled $771$999 million and $679$890 million at January 28, 201231, 2015 and January 29, 2011,February 1, 2014, respectively. The determination of the amount of the deferred tax liability related to permanently reinvested earnings is not practicable.
A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income from continuing operations is as follows:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||||
State and local income taxes, net of federal tax benefit | 3.1 | 2.3 | 0.2 | 3.2 | 3.5 | 3.2 | ||||||||||||||||||
International income taxed at varying rates | (0.3 | ) | 1.0 | 1.3 | (1.9 | ) | (1.6 | ) | (0.4 | ) | ||||||||||||||
Foreign tax credits | (1.3 | ) | (2.0 | ) | (7.4 | ) | (2.5 | ) | (2.5 | ) | (1.8 | ) | ||||||||||||
Decrease in valuation allowance | — | (0.4 | ) | — | ||||||||||||||||||||
Domestic/foreign tax settlements | 0.3 | (2.3 | ) | (2.8 | ) | (0.6 | ) | (1.1 | ) | (2.2 | ) | |||||||||||||
Federal tax credits | (0.6 | ) | (0.7 | ) | (2.0 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||||||||
Canadian tax rate changes | — | — | 6.0 | |||||||||||||||||||||
Other, net | (0.2 | ) | 1.4 | 5.7 | 2.7 | 2.2 | 1.0 | |||||||||||||||||
Effective income tax rate | 36.0 | % | 34.3 | % | 36.0 | % | 35.7 | % | 35.3 | % | 34.6 | % |
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’s deferred tax assets and deferred tax liabilities are as follows:
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Deferred tax assets: | ||||||||||||||||
Tax loss/credit carryforwards and capital loss | $ | 18 | $ | 31 | $ | 9 | $ | 12 | ||||||||
Employee benefits | 77 | 67 | 65 | 55 | ||||||||||||
Property and equipment | 166 | 173 | 137 | 147 | ||||||||||||
Straight-line rent | 27 | 27 | 33 | 30 | ||||||||||||
Goodwill and other intangible assets | 21 | 23 | — | 6 | ||||||||||||
Other | 32 | 32 | 38 | 33 | ||||||||||||
Total deferred tax assets | 341 | 353 | 282 | 283 | ||||||||||||
Valuation allowance | (5 | ) | (6 | ) | (6 | ) | (6 | ) | ||||||||
Total deferred tax assets, net | 336 | 347 | $ | 276 | $ | 277 | ||||||||||
Deferred tax liabilities: | ||||||||||||||||
Inventories | 71 | 63 | ||||||||||||||
Merchandise inventories | 96 | 85 | ||||||||||||||
Goodwill and other intangible assets | 17 | — | ||||||||||||||
Other | 8 | 6 | 1 | 11 | ||||||||||||
Total deferred tax liabilities | 79 | 69 | $ | 114 | $ | 96 | ||||||||||
Net deferred tax asset | $ | 257 | $ | 278 | $ | 162 | $ | 181 | ||||||||
Balance Sheet caption reported in: | ||||||||||||||||
Deferred taxes | $ | 284 | $ | 296 | $ | 221 | $ | 241 | ||||||||
Other current assets | 2 | 2 | 3 | 4 | ||||||||||||
Accrued and other current liabilities | (24 | ) | (20 | ) | (48 | ) | (46 | ) | ||||||||
Other liabilities | (5 | ) | — | (14 | ) | (18 | ) | |||||||||
$ | 257 | $ | 278 | $ | 162 | $ | 181 |
Based upon the level of historical taxable income and projections for future taxable income, which are based upon the Company’s strategic long-range plans, over the periods in which the temporary differences are anticipated to reverse, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances at January 31, 2015. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
As of January 31, 2015, the Company has a valuation allowance of $6 million to reduce its deferred tax assets to an amount that is more likely than not to be realized. A valuation allowance of $3 million relates to the deferred tax assets arising from a capital loss associated with an impairment of the Northern Group note receivable in 2008. The Company does not anticipate realizing capital gains to utilize the capital loss associated with the note receivable impairment. A valuation allowance of $2 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 certain foreign entities, the Company believes it is more likely than not that the benefit of these loss carryforwards will not be realized. Additionally, the Company recorded an unrealized loss related to its investment in an auction rate security. This loss, if and when recognized for tax purposes, would be a capital loss. The Company has not identified any reliable sources of future capital gains that would be generated to absorb this potential loss. In recognition of this risk, the Company has a valuation allowance of $1 million for any loss that would be recognized upon disposition of this security.
At January 31, 2015, the Company has state operating loss carryforwards with a potential tax benefit of $2 million that expire between 2015 and 2034. The Company will have, when realized, a capital loss with a potential benefit of $3 million arising from a note receivable. This loss will carryforward for 5 years after realization. The Company has U.S. state credits of $1 million that expire in 2024. The Company has international operating loss carryforwards with a potential tax benefit of $3 million, a portion of which will expire between 2015 and 2034 and a portion of which will never expire. The state and international operating loss carryforwards do not include unrecognized tax benefits.
The Company operates in multiple taxing jurisdictions and is 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 has adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax positions for such transactions and records reserves for those differences.
The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service through 2010.2013. The Company is participating in the IRS’s Compliance Assurance Process (“CAP”) for 2011,2014, which is expected to conclude during 2012.2015. The Company has started the CAP for 2012.2015. Due to the recent utilization of net operating loss carryforwards, the Company is subject to state and local tax examinations effectively including years from 1996 to the present. To date, no adjustments have been proposed in any audits that will have a material effect on the Company’s financial position or results of operations.
As of January 28, 2012, the Company has a valuation allowance of $5 million to reduce its deferred tax assets to an amount that is more likely than not to be realized. The valuation allowance primarily relates to the deferred tax assets arising from a capital loss associated with the 2008 impairment of the Northern Group note receivable, state tax loss carryforwards, and state tax credits. A full valuation allowance is required for the capital loss because the Company does not anticipate realizing capital gains to utilize this loss. The valuation allowance for state tax loss and credit carryforwards decreased in 2011 principally due to anticipated expirations of those attributes.
Based upon the level of historical taxable income and projections for future taxable income, which are based upon the Company’s strategic long-range plans, over the periods in which the temporary differences are anticipated to reverse, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances at January 28, 2012. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At January 28, 2012, the Company has state operating loss carryforwards with a potential tax benefit of $11 million that expire between 201231, 2015 and 2030. The Company will have, when realized, a capital loss with a potential benefit of $3 million arising from a note receivable. This loss will carryforward for 5 years after realization. The Company has U.S. state and Canadian provincial credit carryforwards that total $2 million, expiring between 2012 and 2021. The Company has international operating loss carryforwards with a potential tax benefit of $2 million, expiring between 2012 and 2031.
At January 28, 2012 and January 29, 2011,February 1, 2014, the Company had $65$40 million and $62$48 million, respectively of gross unrecognized tax benefits, and $64$39 million and $61$46 million, respectively, of net unrecognized tax benefits that would, if recognized, affect the Company’s annual effective tax rate. The Company has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. Interest expense for 2014 was not significant. The Company recognized $1 million of interest expenseincome, in each of 2011, 2010,2013 and 2009.2012. The total amount of accrued interest and penalties was $4$2 million in 2014 and 2013, and $3 million and $5 million in 2011, 2010, and 2009, respectively.2012.
The following table summarizes the activity related to unrecognized tax benefits:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Unrecognized tax benefits at beginning of year | $ | 62 | $ | 70 | $ | 58 | $ | 48 | $ | 54 | $ | 65 | ||||||||||||
Foreign currency translation adjustments | (1 | ) | 3 | 6 | (6 | ) | (4 | ) | 1 | |||||||||||||||
Increases related to current year tax positions | 7 | 4 | 4 | 3 | 3 | 4 | ||||||||||||||||||
Increases related to prior period tax positions | 1 | 3 | 4 | 1 | 4 | 3 | ||||||||||||||||||
Decreases related to prior period tax positions | — | (7 | ) | (2 | ) | (1 | ) | (2 | ) | (3 | ) | |||||||||||||
Settlements | (3 | ) | (9 | ) | — | (1 | ) | (7 | ) | (15 | ) | |||||||||||||
Lapse of statute of limitations | (1 | ) | (2 | ) | — | (4 | ) | — | (1 | ) | ||||||||||||||
Unrecognized tax benefits at end of year | $ | 65 | $ | 62 | $ | 70 | $ | 40 | $ | 48 | $ | 54 |
It is reasonably possible that the liability associated with the Company’s 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 in an amount ranging from $0 to $5 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution of these issues 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 its accounting policies, the Company has not recorded any potential impact of these settlements.
The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third partythird-party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate thethis counterparty credit risk, the Company has a policypractice of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument.
Additional information is contained within Note 19,Fair Value Measurements.
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and hedge ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of thea forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction willwould occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. No such gains or losses were recognized in earnings for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.
The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For the most part, merchandise inventories are purchased by each geographic area in their respective local currency other than in the United Kingdom, which purchases its merchandise inventories using the euro.
For option and forward 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”) and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. The Company had notFor all years presented, all of the Company’s hedged forecasted transactions for moreare less than the next twelve months, and the Company expects all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months. During 2011,2014, the net changeschange in the fair value of the contractsforeign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory resulted in a loss of $2$1 million and therefore increased AOCL forAOCL. At January 31, 2015 there was a $3 million loss included in AOCL.
The notional value of the year endedcontracts outstanding at January 28, 2012.31, 2015 was $63 million and these contracts extend through January 2016.
The Company mitigatesenters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of certain foreign currency-denominated merchandise purchases and intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately within selling, general and administrative expenses. The net change in fair value was not significant for 2014, was $1 million for 2013, and was not significant for 2012. The notional value of the contracts outstanding at January 31, 2015 was $34 million, and these contracts extend through October 2015.
The Company may mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominatedforeign currency-denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are designated as non-hedges, are recorded in earnings immediately within other income. TheDuring 2014, the Company recorded realized gains of $1 million, net of premiums paid, and changes in the fair market value recorded in the Condensed Consolidated Statements of Operations were not significant for any of the periods presented.
The Company also enters into forward foreign exchange contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions that are not designated as hedges. Net changes in the fair value of foreign exchange derivative financial instruments designated as non-hedges were substantially offset by the changes in value of the underlying transactions, which were recorded in selling, general and administrative expenses.connection with such contracts. The amounts recorded for all the periods presentedin prior years were not significant.
The Company enters into diesel fuel forward and option There were no contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented.outstanding at January 31, 2015.
The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:
(in millions) | Balance Sheet Caption | 2011 | 2010 | Balance Sheet Caption | 2014 | 2013 | ||||||||||||||||||
Hedging Instruments: | ||||||||||||||||||||||||
Forward foreign exchange contracts | Current asset | $ | — | $ | 2 | |||||||||||||||||||
Forward foreign exchange contracts | Current liability | $ | 2 | $ | — | |||||||||||||||||||
Foreign exchange forward contracts | Current liabilities | $ | 4 | $ | 2 | |||||||||||||||||||
Non-hedging Instruments: | ||||||||||||||||||||||||
Foreign exchange forward contracts | Current liabilities | $ | 1 | $ | — |
The table below presents the notional amounts for all outstanding derivatives and the weighted-average exchange rates of foreign exchange forward contracts at January 28, 2012:31, 2015:
Contract Value (U.S. in millions) | Weighted-Average Exchange Rate | Contract Value (U.S. in millions) | Weighted-Average Exchange Rate | |||||||||||||
Inventory | ||||||||||||||||
Buy €/Sell British £ | $ | 65 | .8563 | $ | 63 | .7996 | ||||||||||
Buy US/Sell € | 2 | .7798 | ||||||||||||||
Intercompany | ||||||||||||||||
Buy €/Sell British £ | $ | 20 | .8471 | $ | 32 | .7640 | ||||||||||
Buy British £/Sell € | 9 | 1.2014 | ||||||||||||||
Buy US/Sell CAD$ | 3 | 1.0194 | ||||||||||||||
Diesel fuel forwards | $ | 7 | — | |||||||||||||
Buy US/Sell CAD | $ | 2 | 1.1912 |
The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising, and customer service are important competitive factors in the Company’s business. The Company operates in 23 countries and purchased approximately 8289 percent of its merchandise in 20112014 from its top 5 vendors.suppliers. In 2011,2014, the Company purchased approximately 6173 percent of its athletic merchandise from one major vendor,supplier, Nike, Inc. (“Nike”), and approximately 1711 percent from another major vendor.supplier. Each of our operating divisions is highly dependent on Nike; they individually purchase 45purchased 47 to 7784 percent of their merchandise from Nike. The Company generally considers all vendor relations to be satisfactory.
Included in the Company’s Consolidated Balance Sheet at January 28, 2012,31, 2015, are the net assets of the Company’s European operations, which total $794$883 million and which are located in 19 countries, 11 of which have adopted the euro as their functional currency.
The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:
As of January 28, 2012 | As of January 29, 2011 | As of January 31, 2015 | As of February 1, 2014 | |||||||||||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Auction rate security | $ | — | $ | 5 | $ | — | $ | — | $ | 5 | $ | — | ||||||||||||||||||||||||||||||||||||
Forward foreign exchange contracts | — | — | — | — | 2 | — | ||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities | $ | — | $ | 6 | $ | — | $ | — | $ | 6 | $ | — | ||||||||||||||||||||||||||||||||||||
Short-term investments | — | — | — | — | 9 | — | ||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | — | $ | 5 | $ | — | $ | — | $ | 7 | $ | — | $ | — | $ | 6 | $ | — | $ | — | $ | 15 | $ | — | ||||||||||||||||||||||||
Liabilities | �� | |||||||||||||||||||||||||||||||||||||||||||||||
Forward foreign exchange contracts | — | 2 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts | — | 5 | — | — | 2 | — | ||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5 | $ | — | $ | — | $ | 2 | $ | — |
Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.
The Company’s short-term investments matured during the second quarter of 2014. In the prior periods presented, these investments represented corporate bonds with maturity dates within one year of the purchase date. These securities were valued using model-derived valuations in which all significant inputs or significant value-drivers were observable in active markets and therefore are classified as Level 2 instruments.
The Company’s derivative financial instruments are valued using observable market-based inputs to industry valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility obtained from various market sources.
At January 28, 2012 and January 29, 2011,therefore are classified as Level 2 instruments.
There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the Company held a preferred stock auction rate security with a face value of $7 million. The security earns and pays interest based on the stated terms. The Company classifies the security as long-term available-for-sale and reports the security at fair value as a component of other assets on the Company’s Consolidated Balance Sheets. The Company evaluates the security for other-than-temporary impairments at each reporting period. The security is considered temporarily impaired at January 28, 2012 with a cumulative unrealized loss of $2 million reflected in accumulated other comprehensive loss in the Company’s Consolidated Statement of Comprehensive Loss. The Company has the intent and the ability to hold the security.periods presented
The following table provides a summary of recognized assets that are measured at fair value on a non-recurring basis. See Note 3,Impairment and Other Charges, for further discussion and additional disclosures.
(in millions) | Level 1 | Level 2 | Level 3 | Loss Recognized | ||||||||||||
Year ended January 28, 2012: | ||||||||||||||||
Intangible assets | $ | — | $ | — | $ | 10 | $ | 5 | ||||||||
Year ended January 29, 2011: | ||||||||||||||||
Intangible assets | $ | — | $ | — | $ | 15 | $ | 10 |
The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:
2011 | 2010 | |||||||
(in millions) | ||||||||
Carrying Value | $ | 135 | $ | 137 | ||||
Fair Value | $ | 140 | $ | 139 |
2014 | 2013 | |||||||
(in millions) | ||||||||
Carrying value | $ | 134 | $ | 139 | ||||
Fair value | $ | 163 | $ | 159 |
The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets and therefore are classified as Level 2. The carrying values of cash and cash equivalents, short-term investments, and other current receivables and payables approximate their fair value.
The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition, to providing pension benefits, the Company has a defined benefit plan for certain individuals of Runners Point Group. The Company also sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the last day of the fiscal year.
The following tables set forth the plans’ changes in benefit obligations and plan assets, funded status, and amounts recognized in the Consolidated Balance Sheets, measured at January 28, 201231, 2015 and January 29, 2011:February 1, 2014:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 669 | $ | 654 | $ | 12 | $ | 13 | $ | 674 | $ | 706 | $ | 15 | $ | 15 | ||||||||||||||||
Service cost | 12 | 13 | — | — | 15 | 14 | — | — | ||||||||||||||||||||||||
Interest cost | 32 | 33 | 1 | — | 28 | 25 | 1 | 1 | ||||||||||||||||||||||||
Plan participants’ contributions | — | — | 3 | 3 | — | — | 2 | 2 | ||||||||||||||||||||||||
Actuarial loss | 47 | 24 | 2 | — | ||||||||||||||||||||||||||||
Actuarial (gain) loss | 67 | (11 | ) | 4 | — | |||||||||||||||||||||||||||
Foreign currency translation adjustments | (1 | ) | 6 | — | — | (9 | ) | (9 | ) | — | — | |||||||||||||||||||||
Plan amendment | — | — | 1 | — | ||||||||||||||||||||||||||||
Runners Point Group acquisition | — | 1 | — | — | ||||||||||||||||||||||||||||
Benefits paid | (55 | ) | (61 | ) | (4 | ) | (4 | ) | (53 | ) | (52 | ) | (3 | ) | (3 | ) | ||||||||||||||||
Benefit obligation at end of year | $ | 704 | $ | 669 | $ | 15 | $ | 12 | $ | 722 | $ | 674 | $ | 19 | $ | 15 | ||||||||||||||||
Change in plan assets | ||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 601 | $ | 550 | $ | 650 | $ | 673 | ||||||||||||||||||||||||
Actual return on plan assets | 63 | 70 | 90 | 33 | ||||||||||||||||||||||||||||
Employer contributions | 31 | 36 | 9 | 5 | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | (1 | ) | 6 | (10 | ) | (9 | ) | |||||||||||||||||||||||||
Benefits paid | (55 | ) | (61 | ) | (53 | ) | (52 | ) | ||||||||||||||||||||||||
Fair value of plan assets at end of year | $ | 639 | $ | 601 | $ | 686 | $ | 650 | ||||||||||||||||||||||||
Funded status | $ | (65 | ) | $ | (68 | ) | $ | (15 | ) | $ | (12 | ) | ||||||||||||||||||||
Amounts recognized on the Balance Sheet: | ||||||||||||||||||||||||||||||||
Other assets | $ | 8 | $ | 2 | $ | — | $ | — | ||||||||||||||||||||||||
Accrued and other liabilities | (3 | ) | (3 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||
Other liabilities | (70 | ) | (67 | ) | (14 | ) | (11 | ) | ||||||||||||||||||||||||
$ | (65 | ) | $ | (68 | ) | $ | (15 | ) | $ | (12 | ) | |||||||||||||||||||||
Amounts recognized in accumulated other comprehensive loss, pre-tax: | ||||||||||||||||||||||||||||||||
Net loss (gain) | $ | 446 | $ | 438 | $ | (21 | ) | $ | (28 | ) | ||||||||||||||||||||||
Prior service cost (credit) | 1 | 1 | — | (2 | ) | |||||||||||||||||||||||||||
$ | 447 | $ | 439 | $ | (21 | ) | $ | (30 | ) |
Pension Benefits | Postretirement Benefits | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | ||||||||||||||||
Funded status | $ | (36 | ) | $ | (24 | ) | $ | (19 | ) | $ | (15 | ) | ||||
Amounts recognized on the balance sheet: | ||||||||||||||||
Other assets | $ | 13 | $ | 4 | $ | — | $ | — | ||||||||
Accrued and other liabilities | (3 | ) | (3 | ) | (1 | ) | (1 | ) | ||||||||
Other liabilities | (46 | ) | (25 | ) | (18 | ) | (14 | ) | ||||||||
$ | (36 | ) | $ | (24 | ) | $ | (19 | ) | $ | (15 | ) | |||||
Amounts recognized in accumulated other comprehensive loss, pre-tax: | ||||||||||||||||
Net loss (gain) | $ | 394 | $ | 399 | $ | (6 | ) | $ | (13 | ) | ||||||
Prior service cost | 1 | 1 | — | — | ||||||||||||
$ | 395 | $ | 400 | $ | (6 | ) | $ | (13 | ) |
As of January 28, 201231, 2015 and January 29, 2011,February 1, 2014, the Canadian qualified pension plan’s assets exceeded its accumulated benefit obligation. Information for those pension plans with an accumulated benefit obligation in excess of plan assets is as follows:
2011 | 2010 | 2014 | 2013 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Projected benefit obligation | $ | 619 | $ | 581 | $ | 662 | $ | 603 | ||||||||
Accumulated benefit obligation | 619 | 581 | 662 | 603 | ||||||||||||
Fair value of plan assets | 546 | 511 | 613 | 575 |
The following tables set forth the changes in accumulated other comprehensive loss (pre-tax) at January 28, 2012:31, 2015:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net actuarial loss (gain) at beginning of year | $ | 438 | $ | (28 | ) | $ | 399 | $ | (13 | ) | ||||||
Amortization of net (loss) gain | (15 | ) | 5 | (15 | ) | 3 | ||||||||||
Loss arising during the year | 24 | 2 | 15 | 4 | ||||||||||||
Foreign currency translation adjustments | (1 | ) | — | |||||||||||||
Foreign currency fluctuations | (5 | ) | — | |||||||||||||
Net actuarial loss (gain) at end of year(1) | $ | 446 | $ | (21 | ) | $ | 394 | $ | (6 | ) | ||||||
Net prior service cost (benefit) at beginning of year | $ | 1 | $ | (2 | ) | |||||||||||
Amortization of prior service cost | — | 1 | ||||||||||||||
Loss arising during the year | — | 1 | ||||||||||||||
Net prior service cost at end of year(1) | $ | 1 | $ | — | 1 | — | ||||||||||
Total amount recognized | $ | 447 | $ | (21 | ) | $ | 395 | $ | (6 | ) |
(1) | The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (income) during the next year are approximately |
The following weighted-average assumptions were used to determine the benefit obligations under the plans:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Discount rate | 4.16 | % | 4.98 | % | 4.00 | % | 4.60 | % | 3.43 | % | 4.32 | % | 3.40 | % | 4.20 | % | ||||||||||||||||
Rate of compensation increase | 3.69 | % | 3.68 | % | 3.67 | % | 3.69 | % |
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 $476$557 million and $493$579 million for 20112014 and 2010,2013, respectively.
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 | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||
Discount rate | 4.99 | % | 5.25 | % | 6.22 | % | 4.60 | % | 4.90 | % | 6.20 | % | 4.33 | % | 3.79 | % | 4.16 | % | 4.20 | % | 3.70 | % | 4.00 | % | ||||||||||||||||||||||||
Rate of compensation increase | 3.69 | % | 3.68 | % | 3.67 | % | 3.67 | % | 3.69 | % | 3.68 | % | ||||||||||||||||||||||||||||||||||||
Expected long-term rate of return on assets | 6.59 | % | 7.22 | % | 7.63 | % | 6.25 | % | 6.24 | % | 6.63 | % |
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 future contributions by the Company.
The components of net benefit expense (income) are:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 12 | $ | 13 | $ | 11 | $ | — | $ | — | $ | — | $ | 15 | $ | 14 | $ | 13 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Interest cost | 32 | 33 | 36 | 1 | — | 1 | 28 | 25 | 28 | 1 | 1 | — | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (40 | ) | (40 | ) | (43 | ) | — | — | — | (38 | ) | (39 | ) | (40 | ) | — | — | — | ||||||||||||||||||||||||||||||
Amortization of prior service cost | — | — | 1 | (1 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Amortization of net loss (gain) | 15 | 17 | 13 | (5 | ) | (6 | ) | (7 | ) | 15 | 17 | 17 | (3 | ) | (3 | ) | (4 | ) | ||||||||||||||||||||||||||||||
Net benefit expense (income) | $ | 19 | $ | 23 | $ | 18 | $ | (5 | ) | $ | (6 | ) | $ | (6 | ) | $ | 20 | $ | 17 | $ | 18 | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) |
Beginning with 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 increase.
In addition, theThe 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 certain other key employees of the Company (“SERP Medical Plan”). The SERP Medical Plan’s accumulated projected benefit obligation at January 28, 201231, 2015 was approximately $9$15 million.
The assumed health carefollowing initial and ultimate cost trend rates relatedrate assumptions were used to determine the measurement ofbenefit obligations under the Company’s SERP Medical Plan obligations for the year ended January 28, 2012 are as follows:Plan:
Medical Trend Rate | Dental Trend Rate | |||||||||||||||||||||||||||||||
Medical | Dental | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||
Initial cost trend rate | 8.00 | % | 5.50 | % | 7.00 | % | 7.00 | % | 7.50 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||||
Ultimate cost trend rate | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||||
Year that the ultimate cost trend rate is reached | 2018 | 2013 | 2019 | 2018 | 2018 | 2013 | 2013 | 2013 |
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 | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||
Initial cost trend rate | 7.00 | % | 7.50 | % | 8.00 | % | 5.00 | % | 5.00 | % | 5.50 | % | ||||||||||||
Ultimate cost trend rate | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||
Year that the ultimate cost trend rate is reached | 2018 | 2018 | 2018 | 2013 | 2013 | 2013 |
A one percentage-point change in the assumed health care cost trend rates would have the following effects:effects on the SERP Medical Plan:
1% Increase | 1% (Decrease) | 1% Increase | 1% (Decrease) | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Effect on total service and interest cost components | $ | — | $ | — | $ | — | $ | — | ||||||||
Effect on accumulated postretirement benefit obligation | 2 | (2 | ) | 4 | (3 | ) |
In 2014, the Company changed the mortality table used to calculate the present value of pension and postretirement plan liabilities, excluding the SERP Medical Plan. We previously used the RP 2000 mortality table projected with scale AA to 2019 for males and to 2013 for females. In 2014, we used the RP 2000 mortality table with generational projection using scale AA for both males and females. We chose the RP 2000 table because it resulted in the closest match to the Company’s actual experience. For the SERP Medical Plan, the mortality assumption was updated to the RP 2014 table with generational projection using MP 2014.
During 2011,2014, the target composition of the Company’s U.S. qualified pension plan assets was changed to represent 4558 percent fixed-income securities, 38 percent equity, and 554 percent fixed-income securities.real estate investment trust. The Company may alter the targets from time to time depending on market conditions and the funding requirements of the pension plan. This current asset allocation willis expected to limit volatility with regard to the funded status of the plan, but will 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 that plan assets are invested in a prudent 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 risk deemed appropriate.
The Company’s investment strategy seeks to utilize asset classes with differing rates of return, volatility, and correlation in order to reduce risk by providing diversification relative to equities. 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.
The target composition of the Company’s Canadian qualified pension plan assets is 95 percent debtfixed-income securities and 5 percent equity. The Company believes that plan assets are invested in a prudent manner with the same overall objective and investment strategy as noted above 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. This allocation has resulted in higher pension expense due to the lower long-term rate of return associated with fixed-income securities.
The assets related to the Runners Point Group pension plans were not significant.
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. security exchanges are valued at closing market prices on the measurement date.
Investments in real estate are carried at their estimated fair value based on information supplied by independent appraisers whereby each property is independently appraised and adjusted accordingly at least once within a five-year period. The Company’s management reviews the fair value of each property during the intervening years to determine whether an impairment has occurred since receiving the latest independent appraisal and that no change is required to the fair value.
The fair values of the Company’s U.S. pension plan assets at January 28, 201231, 2015 and January 29, 2011 areFebruary 1, 2014 were as follows:
Level 1 | Level 2 | Level 3 | 2011 Total | 2010 Total* | Level 1 | Level 2 | Level 3 | 2014 Total | 2013 Total* | |||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 13 | $ | — | $ | 13 | $ | 4 | $ | — | $ | 1 | $ | — | $ | 1 | $ | — | ||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. large-cap(1) | — | 120 | — | 120 | 137 | — | 102 | — | 102 | 101 | ||||||||||||||||||||||||||||||
U.S. mid-cap(1) | — | 42 | — | 42 | 40 | — | 31 | — | 31 | 30 | ||||||||||||||||||||||||||||||
International(2) | — | 72 | — | 72 | 70 | — | 71 | — | 71 | 67 | ||||||||||||||||||||||||||||||
Corporate stock(3) | 11 | — | — | 11 | 7 | 21 | — | — | 21 | 15 | ||||||||||||||||||||||||||||||
Fixed-income securities: | ||||||||||||||||||||||||||||||||||||||||
Long duration corporate and government bonds(4) | — | 221 | — | 221 | 214 | — | 254 | — | 254 | 236 | ||||||||||||||||||||||||||||||
Intermediate duration corporate and government bonds(5) | — | 58 | — | 58 | 29 | — | 110 | — | 110 | 105 | ||||||||||||||||||||||||||||||
Other types of investments: | ||||||||||||||||||||||||||||||||||||||||
Real estate | — | — | 8 | 8 | 9 | |||||||||||||||||||||||||||||||||||
Real estate securities(6) | — | 20 | — | 20 | 20 | |||||||||||||||||||||||||||||||||||
Insurance contracts | — | 1 | — | 1 | 1 | — | 1 | — | 1 | 1 | ||||||||||||||||||||||||||||||
Other(7) | — | 2 | — | 2 | — | |||||||||||||||||||||||||||||||||||
Total assets at fair value | $ | 11 | $ | 527 | $ | 8 | $ | 546 | $ | 511 | $ | 21 | $ | 592 | $ | — | $ | 613 | $ | 575 |
* | Each category of plan assets is classified within the same level of the fair value hierarchy for |
(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 |
(3) | This category consists of the Company’s common stock. The increase from the prior year is due to price appreciation No additional stock was contributed during the year. |
(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 |
(6) | This category consists of one fund that invests in global real estate securities. |
(7) | This category consists primarily of cash related to net pending trade purchases and sales. |
The following table is a reconciliation of the fair value ofNo Level 3 assets were held by the U.S. pension plan’s real estate investments classified as Level 3:
(in millions) | Level 3 | |||
Balance at January 30, 2010 | $ | 7 | ||
Changes during the year | 2 | |||
Balance at January 29, 2011 | $ | 9 | ||
Unrealized loss on appraised value of real estate | (1 | ) | ||
Balance at January 28, 2012 | $ | 8 |
The fair values of the Company’s Canadian pension plan assets at January 28, 201231, 2015 and January 29, 2011 areFebruary 1, 2014 were as follows:
Level 1 | Level 2 | Level 3 | 2011 Total | 2010 Total* | Level 1 | Level 2 | Level 3 | 2014 Total | 2013 Total* | |||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 5 | $ | — | $ | 5 | $ | 1 | $ | — | $ | 3 | $ | — | $ | 3 | $ | — | ||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||
Canadian and International(1) | — | 5 | — | 5 | 6 | |||||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||||||
Canadian and international(1) | 5 | — | — | 5 | 5 | |||||||||||||||||||||||||||||||||||
Fixed-income securities: | ||||||||||||||||||||||||||||||||||||||||
Cash matched bonds(2) | — | 83 | — | 83 | 83 | — | 65 | — | 65 | 70 | ||||||||||||||||||||||||||||||
Total assets at fair value | $ | — | $ | 93 | $ | — | $ | 93 | $ | 90 | $ | 5 | $ | 68 | $ | — | $ | 73 | $ | 75 |
* | Each category of plan assets is classified within the same level of the fair value hierarchy for |
(1) |
(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 2011.2014 and 2013.
During 20112014, the Company made contributions of $25 million and $3$6 million to its U.S. and Canadian plans, respectively.qualified pension plan. The Company continuously evaluates the amount and timing of any future contributions. The Company currently does not expect to contribute to its U.S. or Canadian qualified plans in 2015. Additional contributions will depend on the plan asset performance and other factors. During 2014, the Company also paid $3 million in pension benefits related to its non-qualified pension plans.
Estimated future benefit payments for each of the next five years and the five years thereafter are as follows:
Pension Benefits | Postretirement Benefits | |||||||
(in millions) | ||||||||
2012 | $ | 75 | $ | 1 | ||||
2013 | 59 | 1 | ||||||
2014 | 58 | 1 | ||||||
2015 | 56 | 1 | ||||||
2016 | 54 | 1 | ||||||
2017 – 2021 | 249 | 5 |
Pension Benefits | Postretirement Benefits | |||||||
(in millions) | ||||||||
2015 | $ | 66 | $ | 1 | ||||
2016 | 55 | 1 | ||||||
2017 | 53 | 1 | ||||||
2018 | 52 | 1 | ||||||
2019 | 53 | 1 | ||||||
2020 – 2024 | 232 | 5 |
In February 2007, the Company and its U.S. pension plan, the Foot Locker Retirement Plan, were named as defendants in a class action in federal court in New York. The Complaint alleged that the Company’s pension plan violated the Employee Retirement Income Security Act of 1974, including, without limitation, its age discrimination and notice provisions, as a result of the Company’s conversion of its defined benefit plan to a defined benefit pension plan with a cash balance feature in 1996. The Company is defending the action vigorously. The Company is currently unable to make an estimate of loss or range of loss. Management does not believe that the outcome of any such proceedings would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.
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 an 1165(e) Plan that is available to employees whose primary place of employment is in Puerto Rico. Both plans require that thelimit participation to employees who have attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. As of January 1, 2012,2015, the savings plans allow eligible employees to contribute up to 40 percent and $10,000,of their compensation on a pre-tax basis, subject to a maximum of $18,000 for the U.S. plan and $15,000 for the Puerto Rico plans, respectively,plan of their compensation on a pre-tax basis. The Company matchesCompany’s matching contribution is an amount equal to 25 percent of employees’ pre-tax contributions up to 25 percent of the first 4 percent of the employees’ contributionscompensation (subject to certain limitations). This matching contribution is made with Company stock and such matching Company contributions are vested incrementally over the first 5 years of participation for both plans. The charge to operations for the Company’s matching contribution was $2 million in each of 2011 and 2010 and $3 million in 2009.for all years presented.
Under the Company’s 2007 Stock Incentive Plan (the “2007 Stock Plan”), stock options, restricted stock, restricted stock units, stock appreciation rights, (SARs), or other stock-based awards may be granted to officers and other employees of the Company, including its subsidiaries and operating divisions worldwide. Nonemployee directors are also eligible to receive awards under this plan. 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. Options for nonemployee directors become exercisable one year from the date of grant. On May 19, 2010, the 2007 Stock Plan was amended to increase the maximum number of shares of stock reserved for all awards to 12,000,000. The options terminate up to ten years from the date of grant. On May 21, 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.
UnderIn 2013, the Company’sCompany adopted the 2013 Foot Locker Employees Stock Purchase Plan (“2013 ESPP”), whose terms are substantially the same as the 2003 Employees Stock Purchase Plan (the “ESPP”(“2003 ESPP”),. No further shares may be issued under the 2003 ESPP. Under the 2013 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. Under the 2013 ESPP, 3,000,000 shares of common stock are authorizedwere available for purchase beginning June 2005. Of the 3,000,000 shares2014, of common stock authorized for purchase under this plan, 919which 958 participating employees purchased 336,116160,859 shares in 2011, and 764 participating employees purchased 278,212 shares in 2010. To date, a total of 1,278,045 shares have been purchased under this plan.2014.
Total compensation expense included in SG&A and the associated tax benefits recognized related to the Company’s share-based compensation plans was $18 million, $13 million, and $12 million for 2011, 2010, and 2009, respectively. The total related tax benefit realized was $5 million, $3 million for 2011 and 2010, respectively and was not significant for 2009.were as follows:
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Options and shares purchased under the employee stock purchase plan | $ | 13 | $ | 12 | $ | 10 | ||||||
Restricted stock and units | 11 | 13 | 10 | |||||||||
Total share-based compensation expense | $ | 24 | $ | 25 | $ | 20 | ||||||
Tax benefit | $ | 7 | $ | 8 | $ | 6 | ||||||
Tax deductions in excess of the cumulative compensation cost | $ | 12 | $ | 9 | $ | 11 |
The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.
The Company estimates the expected term of share-based awards granted using the Company’s historical exercise and post-vesting employment termination patterns, which it believes 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 estimates the expected volatility of its 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 believes that the 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.
The Company records stock-basedshare-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data. The Company estimates pre-vesting option forfeitures at the time of grant and periodically revises those estimates in subsequent periods if actual forfeitures differ from those estimates.
The following table shows the Company’s assumptions used to compute the share-based compensation expense:
Stock Option Plans | Stock Purchase Plan | Stock Option Plans | Stock Purchase Plan | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||
Weighted-average risk free rate of interest | 2.07 | % | 2.34 | % | 1.93 | % | 0.31 | % | 0.85 | % | 1.74 | % | 2.07 | % | 1.02 | % | 1.49 | % | 0.14 | % | 0.17 | % | 0.22 | % | ||||||||||||||||||||||||
Expected volatility | 45 | % | 45 | % | 53 | % | 37 | % | 39 | % | 39 | % | 39 | % | 42 | % | 43 | % | 24 | % | 40 | % | 38 | % | ||||||||||||||||||||||||
Weighted-average expected award life- in years | 5.0 | 5.0 | 4.6 | 1.0 | 1.0 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
Weighted-average expected award life (in years) | 6.1 | 6.0 | 5.5 | 1.0 | 1.0 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
Dividend yield | 3.5 | % | 4.0 | % | 6.0 | % | 3.4 | % | 4.8 | % | 4.4 | % | 1.9 | % | 2.3 | % | 2.3 | % | 2.0 | % | 2.3 | % | 2.5 | % | ||||||||||||||||||||||||
Weighted-average fair value | $ | 5.86 | $ | 4.47 | $ | 2.89 | $ | 3.91 | $ | 2.54 | $ | 4.17 | $ | 15.30 | $ | 10.98 | $ | 10.13 | $ | 7.35 | $ | 5.79 | $ | 6.11 |
Compensation expense related to the Company’s stock options and employee stock purchase plan was $8 million, $5 million, and $4 million for 2011, 2010, and 2009, respectively. As of January 28, 2012, there was $5 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of approximately 1 year.
The information set forth in the following table covers options granted under the Company’s stock option plans:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||||||
Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | |||||||||||||||||||||||||||||||||||||
(in thousands, except prices per share) | (in thousands, except prices per share) | |||||||||||||||||||||||||||||||||||||||||||||||
Options outstanding at beginning of year | 7,220 | $ | 17.17 | 7,002 | $ | 16.88 | 6,080 | $ | 18.64 | 5,668 | $ | 22.66 | 5,907 | $ | 19.93 | 7,227 | $ | 18.44 | ||||||||||||||||||||||||||||||
Granted | 1,612 | $ | 19.13 | 1,311 | $ | 15.10 | 1,521 | $ | 10.02 | 849 | $ | 46.20 | 1,154 | $ | 34.25 | 940 | $ | 30.96 | ||||||||||||||||||||||||||||||
Exercised | (1,454 | ) | $ | 13.02 | (942 | ) | $ | 11.65 | (181 | ) | $ | 8.76 | (810 | ) | $ | 21.74 | (1,328 | ) | $ | 20.26 | (2,213 | ) | $ | 19.67 | ||||||||||||||||||||||||
Expired or cancelled | (151 | ) | $ | 17.38 | (151 | ) | $ | 20.41 | (418 | ) | $ | 21.03 | (138 | ) | $ | 42.55 | (65 | ) | $ | 29.55 | (47 | ) | $ | 23.74 | ||||||||||||||||||||||||
Options outstanding at end of year | 7,227 | $ | 18.44 | 7,220 | $ | 17.17 | 7,002 | $ | 16.88 | 5,569 | $ | 25.89 | 5,668 | $ | 22.66 | 5,907 | $ | 19.93 | ||||||||||||||||||||||||||||||
Options exercisable at end of year | 4,598 | $ | 19.35 | 5,088 | $ | 18.81 | 5,084 | $ | 18.85 | 3,759 | $ | 19.74 | 3,495 | $ | 18.02 | 3,593 | $ | 17.83 | ||||||||||||||||||||||||||||||
Options vested and expected to vest | 5,546 | $ | 25.82 | 5,558 | $ | 22.45 | 5,804 | $ | 19.82 | |||||||||||||||||||||||||||||||||||||||
Options available for future grant at end of year | 7,155 | 10,339 | 2,214 | 13,911 | 3,267 | 5,518 |
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:
2011 | 2010 | 2009 | ||||||||||
(in millions) | ||||||||||||
Exercised | $ | 15 | $ | 5 | $ | — |
2014 | 2013 | 2012 | ||||||||||
(in millions) | ||||||||||||
Exercised | $ | 22 | $ | 21 | $ | 29 |
The aggregate intrinsic value for stock options outstanding, outstanding and for stock options exercisable, and vested and expected to vest (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:
2011 | 2010 | 2009 | 2014 | 2013 | 2012 | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Outstanding | $ | 59 | $ | 23 | $ | 2 | $ | 152 | $ | 90 | $ | 86 | ||||||||||||
Outstanding and Exercisable | $ | 33 | $ | 13 | $ | 1 | ||||||||||||||||||
Outstanding and exercisable | $ | 126 | $ | 72 | $ | 60 | ||||||||||||||||||
Vested and expected to vest | $ | 152 | $ | 90 | $ | 86 |
As of January 31, 2015, there was $7 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.35 years.
The Company received $18$17 million in cash from option exercises for the year ended January 28, 2012.31, 2015. The tax benefit realized from option exercises was $8 million, $7 million, and $11 million for 2014, 2013, and 2012, respectively.
The following table summarizes information about stock options outstanding and exercisable at January 28, 2012:31, 2015:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||||||||||
(in thousands, except prices per share and contractual life) | ||||||||||||||||||||
$ 9.85 to $15.10 | 2,840 | 6.92 | $ | 12.38 | 1,732 | $ | 11.55 | |||||||||||||
$15.74 to $21.48 | 1,850 | 7.46 | $ | 18.53 | 404 | $ | 17.37 | |||||||||||||
$21.80 to $25.39 | 1,893 | 3.48 | $ | 24.28 | 1,818 | $ | 24.26 | |||||||||||||
$25.46 to $28.16 | 644 | 2.45 | $ | 27.68 | 644 | $ | 27.68 | |||||||||||||
7,227 | 5.76 | $ | 18.44 | 4,598 | $ | 19.35 |
Changes in the Company’s nonvested options at January 28, 2012 are summarized as follows:
Number of Shares | Weighted- Average Grant Date Fair Value per share | |||||||
(in thousands, except prices per share) | ||||||||
Nonvested at January 29, 2011 | 2,132 | $ | 13.23 | |||||
Granted | 1,612 | 19.13 | ||||||
Vested | (964 | ) | 12.60 | |||||
Expired or cancelled | (151 | ) | 17.38 | |||||
Nonvested at January 28, 2012 | 2,629 | $ | 16.84 |
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||||||||||||||
(in thousands, except prices per share and contractual life) | ||||||||||||||||||||||||
$9.85 to $15.10 | 1,466 | 4.63 | $ | 12.39 | 1,466 | $ | 12.39 | |||||||||||||||||
$18.80 to $24.76 | 1,453 | 5.03 | $ | 20.10 | 1,453 | $ | 20.10 | |||||||||||||||||
$25.19 to $34.27 | 1,896 | 7.45 | $ | 32.70 | 828 | $ | 31.82 | |||||||||||||||||
$34.42 to $56.35 | 754 | 9.15 | $ | 46.15 | 12 | $ | 40.51 | |||||||||||||||||
5,569 | 6.31 | $ | 25.89 | 3,759 | $ | 19.74 |
Restricted shares of the Company’s common stock and restricted stock units may be awarded to certain officers and key employees of the Company. The Company also issuesAwards made to executives outside of the United States and to nonemployee directors are made in the form of restricted stock units to its non-employee directors.units. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. In 2011, 2010,2014, 2013, and 2009,2012, there were 1,098,177, 653,535,755,936, 1,027,542, and 227,0001,254,876 restricted stock units outstanding, respectively. Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.
Generally, awards fully vest after the passage of time, typically three years. However, restricted stock unit grants made after May 19, 2010 in connection with the Company’s long-term incentive program vest after the attainment of certain performance metrics and the passage of time. Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vest with the passage of time; for performance-based restricted stock, granted after May 19, 2010, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid on restricted stock units.
Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.
Restricted share and unit activity is summarized as follows:
2014 | 2013 | 2012 | ||||||||||||||||||||||
Number of Shares | Wtg. Avg. Grant Date Fair Value per share | Number of Shares | Wtg. Avg. Grant Date Fair Value per share | Number of Shares | Wtg. Avg. Grant Date Fair Value per share | |||||||||||||||||||
(in thousands, except prices per share) | ||||||||||||||||||||||||
Nonvested at beginning of year | 1,369 | $ | 27.20 | 1,564 | $ | 19.50 | 2,068 | $ | 14.52 | |||||||||||||||
Granted | 360 | $ | 46.48 | 469 | $ | 35.03 | 278 | $ | 30.89 | |||||||||||||||
Vested | (649 | ) | $ | 20.84 | (649 | ) | $ | 14.50 | (782 | ) | $ | 10.37 | ||||||||||||
Expired or cancelled | (42 | ) | $ | 24.69 | (15 | ) | $ | 18.30 | — | $ | — | |||||||||||||
Nonvested at end of year | 1,038 | $ | 37.96 | 1,369 | $ | 27.20 | 1,564 | $ | 19.50 | |||||||||||||||
Aggregate value (in millions) | $ | 39 | $ | 37 | $ | 30 | ||||||||||||||||||
Wtg. Avg. remaining contractual life (in years) | 1.12 | 0.89 | 0.84 |
The Company recorded compensation expense related to restricted shares, nettotal fair value of estimated forfeitures, of $10awards for which restrictions lapsed was $14 million, $8$9 million, and $8 million for 2011, 2010,2014, 2013, and 2009,2012, respectively. At January 28, 2012,31, 2015, there was $14$12 million of total unrecognized compensation cost net of estimated forfeitures, related to nonvested restricted stock awards. Restricted share and unit activity is summarized as follows:
Number of Shares and Units | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in thousands) | ||||||||||||
Outstanding at beginning of year | 1,759 | 1,680 | 844 | |||||||||
Granted | 686 | 651 | 1,115 | |||||||||
Vested | (327 | ) | (492 | ) | (279 | ) | ||||||
Cancelled or forfeited | (50 | ) | (80 | ) | — | |||||||
Outstanding at end of year | 2,068 | 1,759 | 1,680 | |||||||||
Aggregate value (in millions) | $ | 30 | $ | 20 | $ | 23 | ||||||
Weighted-average remaining contractual life | 1.19 years | 1.44 years | 1.50 years |
The weighted-average grant-date fair value per share was $20.18, $13.75, and $9.90 for 2011, 2010, and 2009, respectively. The total fair value of awards for which restrictions lapsed was $4 million, $10 million, and $5 million for 2011, 2010, and 2009 respectively.
Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or disposed of by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and labor-and-employment-relatedemployment-related claims.
Certain of the Company’s subsidiaries are defendants in a number of lawsuits filed in state and federal courts containing various class action allegations under federal or state wage and hour laws, including allegations concerning unpaid overtime, meal and rest breaks, and uniforms.
The Company is a defendant in one such case in which plaintiff alleges that the Company permitted unpaid off-the-clock hours in violation of the Fair Labor Standards Act and state labor laws. The case,Pereira v. Foot Locker, was filed in the U.S. District Court for the Eastern District of Pennsylvania in 2007. In his complaint, in addition to unpaid wage and overtime allegations, plaintiff seeks compensatory and punitive damages, injunctive relief, and attorneys’ fees and costs. In 2009, the Court conditionally certified a nationwide collective action. During the course of 2010, notices were sent to approximately 81,888 current and former employees of the Company offering them the opportunity to participate in the class action, and approximately 5,027 have opted in.
The Company is a defendant in additional purported wage and hour class actions that assert claims similar to those asserted inPereira and seek similar remedies. With the exception ofHill v. Foot Locker filed in state court in Illinois,Kissinger v. Foot Locker filed in 2011,state court of California, andCortes v. Foot Locker filed in federal court ofin New York, all of these actions were consolidated by the United States Judicial Panel on Multidistrict Litigation withPereira.PereiraThe consolidated cases are inunder the discovery stages of proceedings. captionIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigation.InHill v. Foot Locker, in May 2011, the court granted plaintiffs’ motion for certification of an opt-out class covering certain Illinois employees only. The Company’s motion for leave to appeal was denied. The Company is currently engaged in mediation with plaintiff inPereiraand his counsel in an attempt to determine whether it will be possibleplaintiffs have entered into a proposed settlement agreement to resolve the consolidated cases, Hill andHillCortes,. Meanwhile,that is subject to court approval. The court recently granted preliminary approval of the proposed settlement agreement.
The Company and the Company’s U.S. retirement plan are defendants in a purported class action (Osberg v. Foot Locker, filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company is vigorously defending them. Dueand the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff’s current claims are for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 and violation of the statutory provisions governing the content of the Summary Plan Description. The district court issued rulings certifying the class. The Company sought leave to appeal the class certification rulings to the inherent uncertaintiesU.S. Court of such matters, includingAppeals for the early stages of certain matters, the CompanySecond Circuit, but these applications were denied. Trial is currently unable to make an estimate of the range of loss.scheduled for June 22, 2015.
Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, including thePereiraIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigationconsolidated cases ,Hill, Cortes, Kissinger,andHill Osberg, as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.
In connection with the sale of various businesses Litigation is inherently unpredictable, and assets, the Company mayjudgments could be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties,rendered or indemnificationssettlements entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not have a material effect oncould adversely affect the Company’s consolidated financial position, liquidity,operating results or results of operations. The Company is also operating certain stores and making rental payments for which lease agreements arecash flows in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that a lease will be executed.particular period.
The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and disclosed above, or unconsolidated special purpose entities. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities.TABLE OF CONTENTS
1st Q | 2nd Q | 3rd Q | 4th Q | Year | ||||||||||||||||
(in millions, except per share amounts) | ||||||||||||||||||||
Sales | ||||||||||||||||||||
2011 | 1,452 | 1,275 | 1,394 | 1,502 | $ | 5,623 | ||||||||||||||
2010 | 1,281 | 1,096 | 1,280 | 1,392 | $ | 5,049 | ||||||||||||||
Gross margin(1) | ||||||||||||||||||||
2011 | 475 | 388 | 453 | 480 | $ | 1,796 | ||||||||||||||
2010 | 393 | 305 | 388 | 430 | $ | 1,516 | ||||||||||||||
Operating profit(2) | ||||||||||||||||||||
2011 | 150 | 59 | 106 | 122 | $ | 437 | ||||||||||||||
2010 | 87 | 11 | 74 | 90 | $ | 262 | ||||||||||||||
Net income | ||||||||||||||||||||
2011 | 94 | 37 | 66 | 81 | (3) | $ | 278 | |||||||||||||
2010 | 54 | 6 | 52 | 57(3),(4) | $ | 169 | ||||||||||||||
Basic earnings per share: | ||||||||||||||||||||
2011 | 0.61 | 0.24 | 0.43 | 0.53 | $ | 1.81 | ||||||||||||||
2010 | 0.35 | 0.04 | 0.33 | 0.36 | $ | 1.08 | ||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||
2011 | 0.60 | 0.24 | 0.43 | 0.53 | $ | 1.80 | ||||||||||||||
2010 | 0.34 | 0.04 | 0.33 | 0.36 | $ | 1.07 |
1st Q | 2nd Q | 3rd Q | 4th Q | Year | ||||||||||||||||
(in millions, except per share amounts) | ||||||||||||||||||||
Sales | ||||||||||||||||||||
2014 | 1,868 | 1,641 | 1,731 | 1,911 | $ | 7,151 | ||||||||||||||
2013 | 1,638 | 1,454 | 1,622 | 1,791 | $ | 6,505 | ||||||||||||||
Gross margin(1) | ||||||||||||||||||||
2014 | 646 | 525 | 574 | 629 | $ | 2,374 | ||||||||||||||
2013 | 561 | 453 | 537 | 582 | $ | 2,133 | ||||||||||||||
Operating profit(2) | ||||||||||||||||||||
2014 | 254 | 144 | 187 | 220 | $ | 805 | ||||||||||||||
2013 | 215 | 106 | 162 | 181 | $ | 664 | ||||||||||||||
Net income | ||||||||||||||||||||
2014 | 162 | 92 | 120 | 146 | $ | 520 | ||||||||||||||
2013 | 138 | 66 | 104 | 121 | $ | 429 | ||||||||||||||
Basic earnings per share: | ||||||||||||||||||||
2014 | 1.12 | 0.63 | 0.84 | 1.03 | $ | 3.61 | ||||||||||||||
2013 | 0.92 | 0.44 | 0.70 | 0.83 | $ | 2.89 | ||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||
2014 | 1.10 | 0.63 | 0.82 | 1.01 | $ | 3.56 | ||||||||||||||
2013 | 0.90 | 0.44 | 0.70 | 0.81 | $ | 2.85 |
(1) | Gross margin represents sales less cost of sales. |
(2) | Operating profit represents income |
There were no disagreements between the Company and its independent registered public accounting firm on matters of accounting principles or practices.
(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”), and completed an evaluation 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 January 28, 2012.31, 2015. 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 “COSO“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 January 28, 2012.31, 2015. 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. |
During the Company’s last fiscal quarter there were no changes in internal control over financial reporting 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. |
The Board of Directors and Stockholders of
Foot Locker, Inc.:
We have audited Foot Locker, Inc.’s internal control over financial reporting as of January 28, 2012,31, 2015, based on criteria established in Internal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Foot Locker, Inc.’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 (Item 9A(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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.
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.
In our opinion, Foot Locker, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012,31, 2015, based on the criteria established inInternal 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), the consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 28, 2012,31, 2015 and January 29, 2011,February 1, 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended January 28, 2012,31, 2015, and our report dated March 26, 2012,30, 2015, expressed an unqualified opinion on these consolidated financial statements.
/s/ KPMG LLP
New York, New York
March 26, 201230, 2015
None.
(a) | Directors of the Company |
Information relative to directors of the Company is set forth under the section captioned “Proposal 1 — Election1-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 is set forth immediately following Item 4 in Part I.
(c) | Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is 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 is contained in the Proxy Statement under the section captioned “Committees of the Board of Directors” 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, is set forth under the heading “Code of Business Conduct” under the Corporate Governance Information section of the Proxy Statement and is incorporated herein by reference. |
Information set forth in the Proxy Statement beginning with the section captioned “Directors Compensation and Benefits” 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 Committee Interlocks and Insider Participation” is incorporated herein by reference.
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.
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.
Information about the principal accounting fees and services is set forth under the section captioned “Audit and Non-Audit Fees” in the Proxy Statement and is incorporated herein by reference. Information about the Audit Committee’s pre-approval policies and procedures is set forth in the section captioned “Audit Committee Pre-Approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules(a)(1) and |
(a)(1)(a)(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 7677 through 79. The exhibits filed with this report immediately follow the index.
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.
FOOT LOCKER, INC. | ||||
By: | /s/ Chief Executive Officer | |||
Date: March |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 2012,30, 2015, by the following persons on behalf of the Company and in the capacities indicated.
/s/ President, Chief Executive Officer, and Director | /s/ LAUREN B. PETERS Lauren B. Peters Executive Vice President and Chief Financial Officer | |
/s/ GIOVANNA CIPRIANO Giovanna Cipriano Senior Vice President and Chief Accounting Officer | /s/ Ken C. Hicks Executive Chairman | |
/s/ MAXINE CLARK Maxine Clark Director | /s/ GUILLERMO G. MARMOL Guillermo G. Marmol Director | |
/s/ NICHOLAS DIPAOLO Nicholas DiPaolo Director | /s/ Matthew M. McKenna Director | |
/s/ ALAN D. FELDMAN Alan D. Feldman | ||
Director | /s/ CHERYL NIDO TURPIN Cheryl Nido Turpin Director | |
/s/ Jarobin Gilbert Jr. Director | /s/ STEVEN OAKLAND Steven Oakland Director | |
/s/ DONA D. YOUNG Dona D. Young Director | ||
Exhibit No. | Description | |
3(i)(a) | Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on April 7, 1989 (incorporated herein by reference to Exhibit 3(i)(a) to the Quarterly Report on Form 10-Q for the quarterly period ended July 26, 1997 filed | |
3(i)(b) | 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 (incorporated herein by reference to Exhibit 3(i)(b) to the July 26, 1997 Form 10-Q), (d) June 11, 1998 (incorporated herein by reference to Exhibit 4.2(a) (e) November 1, 2001 (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) | |
3(ii) | By-laws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the | |
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 | |
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 | |
10.1 | Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) to the | |
10.2 | Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.4 to the | |
10.3 | Amendment to the Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the | |
10.4 | Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d) to the Registration Statement on Form 8-B filed | |
10.5 | Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K). |
10.6 | 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 | |
10.7 | Supplemental Executive Retirement Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated August 13, 2007 filed | |
10.8 | Amendment to the Foot Locker Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to the Current Report on | |
10.9 | Amendment Number Two to the Foot Locker Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K dated March 26, 2014 filed on April 1, 2014 (the “March 26, 2014 Form 8-K”)). |
Exhibit No. | Description | |
10.10 | Long-Term Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit | |
Annual Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10.1 to the | ||
Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement). | ||
Amendment to form of indemnification agreement (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2001 filed | ||
10.14 | 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). | |
10.15 | Amendment to Trust Agreement made as of April 11, 2001 (incorporated herein by reference to Exhibit 10.4 to the May 5, 2001 Form 10-Q). | |
10.16 | Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement). | |
10.17 | Amendments to the Foot Locker Directors’ Retirement Plan (incorporated herein by reference to Exhibit 10(c) to the | |
10.18 | Employment Agreement, dated November 6, 2014, by and between Richard A. Johnson and the Company (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K dated November 3, 2014 filed on November 7, 2014). | |
10.19 | Employment Agreement with Ken C. Hicks, dated June 25, 2009 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K dated June 24, 2009 filed on June 26, | |
Amendment, dated November 6, 2014, to the Employment Agreement, | ||
10.21 | Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.2 to the |
10.22 | Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.21 to the | |
10.23 | Foot Locker, Inc. Excess Cash Balance Plan (incorporated herein by reference to Exhibit 10.22 to the 2008 Form 10-K)). | |
10.24 | Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the | |
10.25 | From of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.2 to the March 26, 2014 Form 8-K). | |
10.26 | Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated December 23, 2014 filed on December 30, 2014 (the | |
Foot Locker 2002 Directors Stock Plan (incorporated herein by reference to Exhibit 10.24 to the 2008 Form 10-K). | ||
Automobile Expense Reimbursement Program for Senior Executives (incorporated herein by reference to Exhibit 10.26 to the 2008 Form 10-K). | ||
Executive Medical Expense Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.27 to the 2008 Form 10-K). |
Exhibit No. | Description | |
10.30 | Financial Planning Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.28 to the 2008 Form 10-K). | |
Form of Nonstatutory Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the fiscal year ended January 28, 2006 filed | ||
Form of Nonstatutory Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.1 to the March 26, 2014 Form 8-K). | ||
10.33 | Form of Incentive Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.41 to the 2005 Form 10-K). | |
Form of Nonstatutory Stock Option Award Agreement for Non-employee Directors (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2004 | ||
Long-Term Disability Program for Senior Executives (incorporated herein by reference to Exhibit 10.32 to the 2008 Form 10-K). | ||
Foot Locker 2007 Stock Incentive Plan, amended and restated as of May | ||
Amended and Restated Credit Agreement dated as of January 27, 2012 (incorporated herein by reference to Exhibit 10.1 to the | ||
Guaranty dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.2 to the | ||
Amended and Restated Security Agreement dated as of January 27, 2012 (incorporated herein by reference to Exhibit 10.2 to the | ||
Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.1 to the | ||
Form of Restricted Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.3 to the March 28, 2013 Form 8-K). | ||
10.42 | Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.2 to the December 23, 2014 Form 8-K). | |
10.43 | Bonus Waiver Letter for 2009 signed by Ken C. Hicks (incorporated herein by reference to Exhibit 10.1 to the |
12 | Computation of Ratio of Earnings to Fixed Charges.* | |
21 | Subsidiaries of the Registrant.* | |
23 | Consent of Independent Registered Public Accounting Firm.* | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
101.SCH | XBRL Taxonomy Extension Schema.* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase.* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase.* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase.* | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase.* |
* | Filed herewith. |
** | Furnished herewith. |
79