UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 29, 2005
February 3, 2007
Commission file number 1-10299
New York | 13-3513936 | |||||||||||
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||||||||
incorporation or organization) | ||||||||||||
112 West 34thStreet, 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: | ||||||||||||
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 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesxNoo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 12(g)13 or Section 15(d) of the Act:NoneAct. YesoNox
Large accelerated filerxAccelerated fileroNon-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Act. Yes [X] oNo [ ]
See pages 5967 through 6370 for Index of Exhibits.
Number of shares of Common Stock outstanding at March | 154,675,352 | |||||||
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, July | $ |
* | For purposes of this calculation only (a) all directors plus one executive officer 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 at July |
TABLE OF CONTENTS
PART I | ||||||||||||||
Item | Business | 1 | ||||||||||||
Item | Risk Factors | 2 | ||||||||||||
Item 1B | Unresolved Staff Comments | 4 | ||||||||||||
Item 2 | Properties | 4 | ||||||||||||
Item 3 | Legal Proceedings | 4 | ||||||||||||
Item 4 | Submission of Matters to a Vote of Security Holders | 5 | ||||||||||||
PART II | ||||||||||||||
Item 5 | Market for the Company’s Common Equity and Related Stockholder Matters and Issuer | 6 | ||||||||||||
Purchases of Equity Securities | ||||||||||||||
Item 6 | Selected Financial Data | 7 | ||||||||||||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 7 | ||||||||||||
Item 7A | Quantitative and Qualitative Disclosures | 21 | ||||||||||||
Item 8 | Consolidated Financial Statements and Supplementary Data | 22 | ||||||||||||
Item 9 | Changes | 63 | ||||||||||||
Item 9A | Controls and Procedures | 63 | ||||||||||||
Item 9B | Other Information | 63 | ||||||||||||
PART III | ||||||||||||||
Item | Directors, Executive Officers and Corporate Goverance | 64 | ||||||||||||
Item 11 | Executive Compensation | 64 | ||||||||||||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder | 64 | ||||||||||||
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 64 | ||||||||||||
Item 14 | Principal Accountant Fees and Services | 64 | ||||||||||||
PART IV | ||||||||||||||
Item 15 | Exhibits and Financial Statement Schedules | 65 |
PART I
Item 1. Business
|
General
Information Regarding Business Segments and Geographic Areas
Employees
Competition
Merchandise Purchases
1
The statements contained in this Annual Report on Form 10-K and incorporated by reference (“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. The words “may,” “believes,” “expects,” “plans,” “intends,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in these forward-looking statements could differ materially from those stated in the 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. Accordingly, readers of the Annual Report should consider these risks and uncertainties in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The industry in which we operate is dependent upon fashion trends, customer preferences and other fashion-related factors.
The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. 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. For example, we order 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, slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.
A substantial portion of our highest margin sales are to young males (ages 12–25), many of whom we believe purchase athletic footwear and licensed apparel as a fashion statement and are frequent purchasers of athletic footwear. Any shift in fashion trends that would make athletic footwear or licensed apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.
The businesses in which we operate are highly competitive.
The retail athletic footwear and apparel business is highly competitive with relatively low barriers to entry. 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, 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, advertising, and 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, some of our vendors distribute products directly through the Internet and others may follow. Some vendors operate retail stores and some have indicated that further retail stores will open. Should this continue to occur, and if our customers decide to purchase directly from our vendors, it could have a material adverse effect on our business, financial condition, and results of operations.
2
We depend on mall traffic and our ability to identify suitable store locations.
Our sales, particularly in the United States and Canada, are dependent in part on a high volume of mall traffic. Our stores are located primarily in enclosed regional and neighborhood malls. Mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor department stores or changes in customer preferences or acts of terrorism. A decline in the popularity of mall shopping among our target customers could have a material adverse effect on us.
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.
The effects of natural disasters, terrorism, acts of war and retail industry conditions may adversely affect our business.
Natural disasters, including 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. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.
A change in the relationship with any of our key vendors or the unavailability of our key products at competitive prices could affect our financial health.
Our business is dependent to a significant degree upon our ability to purchase brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising, and markdown allowances from our vendors. The Company purchased approximately 78 percent of its merchandise in 2006 from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 50 percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike, they individually purchase 40 to 65 percent of their merchandise from Nike. We have no long-term supply contracts with any of our vendors. 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 financial condition and 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.
Merchandise that is high profile and in high demand is allocated by our vendors 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 vendors will continue to allocate sufficient amounts of such merchandise to us in the future. In addition, our vendors provide support to us through cooperative advertising allowances and promotional events. We cannot be certain that such assistance from our vendors will continue in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations.
We may experience fluctuations in and cyclicality of our comparable store sales results.
Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, 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.
3
Our operations may be adversely affected by economic or political conditions in other countries.
Approximately 24 percent of our sales and a significant portion of our operating profits for 2006 were attributable to our sales in Europe, Canada, New Zealand, and Australia. As a result, our business is subject to the risks associated with doing business outside of the United States, such as foreign governmental regulations, foreign customer preferences, political unrest, disruptions or delays in shipments, and changes in economic conditions in countries in which we operate. 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.
Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary athletic footwear, apparel, and related products, tend to decline during recessionary periods when disposable income is low and customers are hesitant to use available credit.
Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.
We operate three distribution centers worldwide to support our athletic business. If complications arise with any facility or any facility is severely damaged or destroyed, the other distribution centers may not be able to support the resulting additional distribution demands. This may adversely affect our ability to deliver inventory on a timely basis. We depend upon UPS for shipment of a significant amount of merchandise. An interruption in service by UPS 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 and other factors may increase freight costs and thereby increase our cost of sales.
A major failure of our information systems could harm our business.
We depend on information systems to process transactions, manage inventory, operate our website, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could have a negative effect on our business. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We cannot be assured that our systems will be adequate to support future growth.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The properties of the Company and its consolidated subsidiaries consist of land, leased and owned stores, and administrative and distribution facilities. TotalGross operating square footage and total selling area for the Athletic Stores segment at the end of 20042006 was approximately 8.8914.55 and 8.74 million square feet.feet, respectively. These properties are primarily located in the United States, Canada, various European countries, Australia, and New Zealand.
Item 3. Legal Proceedings
Information regarding the Company’s legal proceedings are leased and partly sublet, occupying approximately 0.26 million square feet.
4
Item 4. Submission of such proceedings will haveMatters to a material effect on the Company’s consolidated financial position, liquidity, or resultsVote of operations.
Executive Officers of the Company
Chairman of the Board, President and Chief Executive Officer | Matthew D. Serra | |||||
President and Chief Executive Officer - Foot Locker, Inc. — International | Ronald J. Halls | |||||
President and Chief Executive Officer - Foot Locker, Inc. — U.S.A. | Richard T. Mina | |||||
Senior Vice President, General Counsel and Secretary | Gary M. Bahler | |||||
Senior Vice President — Real Estate | Jeffrey L. Berk | |||||
Senior Vice President, | Peter D. Brown | |||||
Senior Vice President and Chief Financial Officer | ||||||
Senior Vice President — Strategic Planning | Lauren B. Peters | |||||
Senior Vice President — Human Resources | Laurie J. Petrucci | |||||
Vice President and Chief Accounting Officer | Giovanna Cipriano | |||||
Vice President and Treasurer |
2
Robert W. McHugh, age 48, has served as Senior Vice President and Chief Financial Officer since November 2005. He served as Vice President and Chief FinancialAccounting Officer from January 2000 to November 2005.
Lauren B. Peters, age 45, has served as Senior Vice President — Strategic Planning since April 2002. Ms. Peters served as Vice President — Planning from January 2000 to April 2002.
Laurie J. Petrucci, age 48, has served as Senior Vice President — Human Resources since May 2001. Ms. Petrucci served as Senior Vice President — Human Resources of Ladythe Foot Locker Worldwide division from October 1999March 2000 to August 2000.May 2001.
There are no family relationships among the executive officers or directors of the Company.
5
PART II
Information regarding the Company’s market for stock exchange listings, common equity, quarterly high and low prices, and dividend policy are contained in the “Shareholder Information and Market Prices” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”
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. 31, 2004 through Nov. 27, 2004 | — | $ | — | — | $50,000,000 | |||||||||||||
Nov. 28, 2004 through Jan. 1, 2005 | 6,670 | 26.28 | — | 50,000,000 | ||||||||||||||
Jan. 2, 2005 through Jan. 29, 2005 | — | — | — | 50,000,000 | ||||||||||||||
Total | 6,670 | $ | 26.28 | — |
Performance Graph
The following graph compares the cumulative 5-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the Russell 2000 Index and a selected peer group, which represents its peers as retailers in the athletic footwear and apparel industry. The peer group comprises:
Indexed Share Price Performance
6
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Business Overview
3
Athletic Stores
7
Store Profile
At | At | |||||||
January 28, 2006 | Opened | Closed | February 3, 2007 | |||||
Foot Locker | 2,121 | 57 | 77 | 2,101 | ||||
Champs Sports | 556 | 27 | 7 | 576 | ||||
Footaction | 363 | 17 | 7 | 373 | ||||
Lady Foot Locker | 554 | 22 | 19 | 557 | ||||
Kids Foot Locker | 327 | 23 | 15 | 335 | ||||
Total Athletic Stores | 3,921 | 146 | 125 | 3,942 |
At January 31, 2004 | Acquired | Opened | Closed | At January 29, 2005 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Foot Locker | 2,088 | 11 | 84 | 48 | 2,135 | ||||||||||||||||||
Champs Sports | 581 | — | 5 | 16 | 570 | ||||||||||||||||||
Footaction | — | 349 | 4 | 4 | 349 | ||||||||||||||||||
Lady Foot Locker | 584 | — | 2 | 19 | 567 | ||||||||||||||||||
Kids Foot Locker | �� | 357 | — | 1 | 12 | 346 | |||||||||||||||||
Total Athletic Stores | 3,610 | 360 | 96 | 99 | 3,967 |
Direct-to-Customers
4
Executive SummaryFranchise Operations
In March of 2006, the Company entered into a ten-year area development agreement with the Alshaya Trading Co. W.L.L., in which the Company agreed to enter into separate license agreements for the operation of a minimum of 75 Foot Locker stores, subject to certain restrictions, located within the Middle East. Three of these franchised stores were operational at February 3, 2007. Revenue from the three franchised stores was not significant for the year-ended February 3, 2007. These stores are not included in the Company’s operating store count above.
Overview of Consolidated Results
2006 was a challenging year for the Company due to the continued highly competitive retail environment both in the United States and abroad. The 2006 results represent the 53 weeks ended February 3, 2007 as compared with the 52 weeks in the 2005 and 2004 reporting years. Income from continuing operations in 2006, after-tax, was $247 million, or $1.58 per diluted share, as compared with $263 million or $1.67 per diluted share in 2005. The following were the financial highlights of 2006:
8
Additionally, the following were the key factors affecting the Company’s performance during 2006:
The following table represents a summary of sales and operating profit, reconciled to income from continuing operations for the year ended January 29, 2005 of $255 million, or $1.64 per diluted share, an increase of 22 percent as compared with 2003. Net income for the year ended January 29, 2005 increased to $293 million, or $1.88 per diluted share, and includes $0.24 per diluted share from discontinued operations. Earnings per share of $0.24 or $38 million in discontinued operations reflects the resolution of U.S. income tax examinations of $37 million, as well as income of $1 million related to a refund of custom duties related to certain of the businesses that comprised the Specialty Footwear segment.
2006 | 2005 | 2004 | |||||||||||
(in millions) | |||||||||||||
Sales | |||||||||||||
Athletic Stores | $ | 5,370 | $ | 5,272 | $ | 4,989 | |||||||
Direct-to-Customers | 380 | 381 | 366 | ||||||||||
$ | 5,750 | $ | 5,653 | $ | 5,355 | ||||||||
Operating Result | |||||||||||||
Athletic Stores | $ | 405 | $ | 419 | $ | 420 | |||||||
Direct-to-Customers | 45 | 48 | 45 | ||||||||||
Division profit | 450 | 467 | 465 | ||||||||||
Restructuring charges(1) | (1 | ) | — | (2 | ) | ||||||||
Total division profit | 449 | 467 | 463 | ||||||||||
Corporate expense | (68 | ) | (58 | ) | (74 | ) | |||||||
Total operating profit | 381 | 409 | 389 | ||||||||||
Other income | 14 | 6 | — | ||||||||||
Interest expense, net | 3 | 10 | 15 | ||||||||||
Income from continuing operations before income taxes | $ | 392 | $ | 405 | $ | 374 |
(1) | The restructuring charge in 2006 represents a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box distribution center. During 2004, the Company recorded a restructuring charge of $2 million related to the dispositions of non-core businesses. These charges were classified within selling, general and administrative expenses in the Consolidated Statements of Operations. |
Sales
2004 | 2003 | 2002 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | ||||||||||||||||||
Athletic Stores | $ | 4,989 | $ | 4,413 | $ | 4,160 | ||||||||||||
Direct-to-Customers | 366 | 366 | 349 | |||||||||||||||
$ | 5,355 | $ | 4,779 | $ | 4,509 |
9
Sales of 349 Footaction stores in May 2004 and the acquisition of 11 stores in the Republic of Ireland in late October 2004, which accounted for $332 million and $5$5,653 million in sales, respectively, for 2004. Comparable-store sales2005 increased by 0.9 percent. The remaining increase is a result of the Company’s continuation of the new store-opening program.
Gross Margin
Gross margin as a percentage of sales was 30.2 percent in 2005, decreasing by 30 basis points from 30.5 percent in 2004. This decline was primarily the costresult of merchandise.increased markdowns recorded by the European operation. The effect of vendor allowances on gross margin, as a percentage of sales, as compared with the corresponding prior year period was not significant.
5
Division Profit
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Athletic Stores | $ | 420 | $ | 363 | $279 | ||||||||||
Direct-to-Customers | 45 | 53 | 40 | ||||||||||||
Division profit | 465 | 416 | 319 | ||||||||||||
Restructuring (charges) income(1) | (2 | ) | (1 | ) | 2 | ||||||||||
Total division profit | 463 | 415 | 321 | ||||||||||||
Corporate expense | (74 | ) | (73 | ) | (52 | ) | |||||||||
Total operating profit | 389 | 342 | 269 | ||||||||||||
Non-operating income(2) | — | — | 3 | ||||||||||||
Interest expense, net | (15 | ) | (18 | ) | (26) | ||||||||||
Income from continuing operations before income taxes | $ | 374 | $ | 324 | $ 246 |
Segment Information
Athletic Stores
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Sales | $ | 4,989 | $ | 4,413 | $4,160 | ||||||||||
Division profit | |||||||||||||||
Stores | $ | 420 | $ | 363 | $279 | ||||||||||
Restructuring income | — | — | 1 | ||||||||||||
Total division profit | $ | 420 | $ | 363 | $ 280 | ||||||||||
Sales as a percentage of consolidated total | 93 | % | 92 | % | 92% | ||||||||||
Number of stores at year end | 3,967 | 3,610 | 3,625 | ||||||||||||
Selling square footage (in millions) | 8.89 | 7.92 | 8.04 | ||||||||||||
Gross square footage (in millions) | 14.78 | 13.14 | 13.22 |
6
2004 compared with 2003
2003 compared with 2002
7
Direct-to-Customers
2004 | 2003 | 2002 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | ||||||||||||||||||
Sales | $ | 366 | $ | 366 | $ | 349 | ||||||||||||
Division profit | $ | 45 | $ | 53 | $ | 40 | ||||||||||||
Sales as a percentage of consolidated total | 7 | % | 8 | % | 8 | % |
2004 compared with 2003
2003 compared with 2002
Corporate Expense
The increasedecrease in corporate expense in 20032005 as compared with 2002 was2004 primarily related to increased compensation costs forincluded decreased incentive bonuses of $14 million; a $3 million decrease in costs associated with the Company’s loyalty program, as 2004 represented the initial costs to launch the program; and increaseddecreased restricted stock expense of $2 million. In addition, 2004 included $5 million for the integration of the Footaction stores. Included in 2005 was also a settlement of $3 million pursuant to a class action settlement with Visa and MasterCard related to past overcharges for certain debit card transactions. These decreases were offset, in part, by a charge of $4 million due to the potential insolvency of one of the Company’s insurance carriers and legal and settlement costs of $5 million.
Other Income
During 2006, the Company terminated two of its leases for approximately $5 million, which resulted in a net gain of $4 million. In addition, the Company finalized its insurance claims related to Hurricane Katrina, which resulted in a gain of $8 million, which represents amounts in excess of losses. Also during 2006, the Company purchased and retired $38 million of long-term debt at a discount from additional grants.
8
Costs and Expenses
Selling, General and Administrative Expenses
10
SG&A increased by $82$41 million of which the acquired businesses contributed $68 million. Increased payroll and related costs primarily comprised the balance of the increase.to $1,129 million in 2005, or by 3.8 percent, as compared with 2004. SG&A as a percentage of sales decreased to 20.3 percent compared with 20.7 percent in 2003. Pension expense declined by $2 million primarily as a result of the positive market performance experienced in the prior year. Additionally, postretirement income decreased by $2 million in 2004 as compared with 2003 as the amortization of the unrecognized gains, which are amortized over the average remaining life expectancy, continues to decrease over time.
Depreciation and Amortization
Depreciation and amortization of $175 million increased by 2.3 percent in 2006 from $171 million in 2005. This increase primarily reflects additional depreciation and amortization for the Athletic Stores segment due to capital spending and the effect of foreign currency fluctuations primarily related to the euro, SG&A increased by 2.7 percent. The increases were for additional payroll costs of $16 million in Europe, primarily as a result of new store openings and $12 million related to compensation costs for incentive bonuses due to the Company’s performance. Additionally, pension expense increased by $8 million due to the decline in plan asset values experienced in prior years, partially offset by a $4 million increase in the recognition of postretirement income and foreign exchange gain recorded in 2002. During 2002, the Company recorded asset impairment charges of $6 million andapproximately $1 million related to the Kids Foot Locker and Lady Foot Locker formats, respectively. SG&A as a percentage of sales remained relatively flat compared with 2002.
Depreciation and Amortization
Interest Expense, Net
2006 | 2005 | 2004 | |||||||||||
(in millions) | |||||||||||||
Interest expense | $ | 23 | $ | 23 | $ | 22 | |||||||
Interest income | (20 | ) | (13 | ) | (7 | ) | |||||||
Interest expense, net | $ | 3 | $ | 10 | $ | 15 | |||||||
Weighted-average interest rate (excluding facility fees): | |||||||||||||
Short-term debt | — | % | — | % | — | % | |||||||
Long-term debt | 7.8 | % | 6.2 | % | 5.2 | % | |||||||
Total debt | 7.8 | % | 6.2 | % | 5.2 | % | |||||||
Short-term debt outstanding during the year: | |||||||||||||
High | $ | — | $ | — | $ | — | |||||||
Weighted-average | $ | — | $ | — | $ | — |
2004 | 2003 | 2002 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | ||||||||||||||||||
Interest expense | $ | 22 | $ | 26 | $ | 33 | ||||||||||||
Interest income | (7 | ) | (8 | ) | (7 | ) | ||||||||||||
Interest expense, net | $ | 15 | $ | 18 | $ | 26 | ||||||||||||
Weighted-average interest rate (excluding facility fees): | ||||||||||||||||||
Short-term debt | — | % | — | % | — | % | ||||||||||||
Long-term debt | 5.2 | % | 6.1 | % | 7.2 | % | ||||||||||||
Total debt | 5.2 | % | 6.1 | % | 7.2 | % | ||||||||||||
Short-term debt outstanding during the year: | ||||||||||||||||||
High | $ | — | $ | — | $ | — | ||||||||||||
Weighted-average | $ | — | $ | — | $ | — |
9
Interest expense of $23 million increased by 4.5 percent in 2005 from $22 million in 2004 primarily attributable to higher interest rates. Interest rate swap agreements reduced interest expense by approximately $1 million and 2003.$3 million in 2005 and 2004, respectively.
The increase in interest income of $6 million in 2005 as compared with 2004 was primarily related to increased interest income earned on short-term investments due to higher interest rates and increased short-term investment balances. Interest income related to cash equivalents and short-term investments was $11 million in 2005 and $5 million in 2004 and 2003.
11
Income Taxes
The effective tax rate for 2005 was 35.0 percent as compared with 31.7 percent in 2004. The increase was attributable to less benefit from non-recurring items than in 2004 and the settlement of tax examinations.
Segment Information
The Company evaluates performance based on several factors, the third quarterprimary financial measure of 2004which is division profit. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.
Athletic Stores
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Sales | $ | 5,370 | $ | 5,272 | $ | 4,989 | |||||
Division profit | $ | 405 | $ | 419 | $ | 420 | |||||
Sales as a percentage of consolidated total | 93 | % | 93 | % | 93 | % | |||||
Division profit margin | 7.5 | % | 7.9 | % | 8.4 | % | |||||
Number of stores at year end | 3,942 | 3,921 | 3,967 | ||||||||
Selling square footage (in millions) | 8.74 | 8.71 | 8.89 | ||||||||
Gross square footage (in millions) | 14.55 | 14.48 | 14.78 |
2006 compared with 2005
Athletic Stores sales of $5,370 million increased 1.9 percent in 2006, as compared with $5,272 million in 2005. Excluding the IRS completed its post-filing revieweffect of the Company’s income tax return for 2003 resulting in a $2 million reductionforeign currency fluctuations, primarily related to the income tax provision. During the fourth quarter of 2004 the Company completed an analysis ofeuro, and the effect of the completion53rd week, sales from athletic store formats decreased by 0.6 percent in 2006. Footaction and Champs Sports significantly increased sales, primarily from the sales of marquee basketball and running footwear. This was offset primarily by decreased sales in Foot Locker Europe. Foot Locker Europe’s sales declined due to the continued difficult athletic retail environment, particularly in France, the U.K and Italy. Comparable-store sales decreased by 1.1 percent in 2006.
Division profit from Athletic Stores decreased by 3.3 percent to $405 million in 2006 from $419 million in 2005. Division profit as a percentage of sales decreased to 7.5 percent. The decrease in division profit is primarily attributable to the Foot Locker Europe division due to the fashion shift from higher priced marquee footwear to lower priced low-profile footwear styles and a highly competitive retail environment, particularly for the sale of low-profile footwear styles. Included in the Athletic Stores division profit for 2006 is an impairment charge of $17 million related to the Company’s European operations, consistent with the Company’s recoverability of long-lived assets policy. The charge was comprised primarily of stores located in the U.K. and France. As previously disclosed in 2005, the Company was monitoring the progress of the IRS’s examinationEuropean operations and reviewthe possible analysis of recoverability of store long-lived assets pursuant to SFAS No. 144. Excluding the Company’s income tax returns. This analysis resulted in a reduction to the income tax provision of $3 million.
12
2005 compared with 2004
Athletic Stores sales of $5,272 million increased 5.7 percent in 2002. The increased tax rate was primarily due to the Company recording tax benefits of $52005, as compared with $4,989 million in 2003 as compared to $9 million in 2002. In addition2004. Excluding the rate increased due to a shift in taxable income from lower to higher tax jurisdictions. During 2003, the Company recorded a $1 million tax benefit related to state tax law changes, a $2 million tax benefit related to a reduction in the valuation allowance for deferred tax assets related to a multi-state tax planning strategy, a $1 million tax benefit related to a reduction in the valuation allowance foreffect of foreign tax loss carryforwards, and a tax benefit of $1 millioncurrency fluctuations, primarily related to the settlement of tax examinations.
Division profit from Athletic Stores decreased by 0.2 percent to $419 million in 2005 from $420 million in 2004. Division profit as a percentage of sales decreased to 7.9 percent in 2005 from 8.4 percent in 2004. This decline is primarily a result of the decreased profit from the European operations as compared with the prior year. The continued weak economy, the increased competitive environment and a fashion shift from higher priced marquee footwear to lower priced low-profile footwear negatively affected Europe’s operating results. In addition during 2005, Foot Locker Europe recorded significantly higher markdowns as a result of the continued promotional environment, particularly in the valuation allowanceU.K. and France, and to clear excess inventory. Despite these factors, in 2005 Foot Locker Europe achieved a double-digit division profit margin. The decline in Europe was partially offset by the improved results at the Footaction, Champs Sports and Canadian divisions. The increase in Footaction is primarily a result of the inclusion of its results for deferred tax assets relatedthe full year as compared with a partial year during 2004.
Direct-to-Customers
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Sales | $ | 380 | $ | 381 | $ | 366 | |||||
Division profit | $ | 45 | $ | 48 | $ | 45 | |||||
Sales as a percentage of consolidated total | 7 | % | 7 | % | 7 | % | |||||
Division profit margin | 11.8 | % | 12.6 | % | 12.3 | % |
2006 compared with 2005
Direct-to-Customers sales decreased to foreign tax credits$380 million in 2006, as compared with $381 million in 2005. Internet sales increased to $270 million, increasing by 11.1 percent as compared with 2005. Catalog sales decreased by 20.3 percent to $110 million in 2006 from $138 million in 2005. Management believes that the decrease in catalog sales, which was substantially offset by the increase in Internet sales, is a result of customers browsing and selecting products through its catalogs and then making their purchases via the Internet. Sales for the Direct-to-Customer business were negatively affected by the termination of a $1third party arrangement in the early part of 2006.
The Direct-to-Customers business generated division profit of $45 million benefit relatedin 2006, as compared with $48 million in 2005. Division profit, as a percentage of sales, decreased to international tax planning strategies.11.8 percent in 2006 from 12.6 percent in 2005. Several initiatives were implemented to mitigate the loss of revenue from the cancelled third party contract, such as expanding the ESPN offerings. However, these iniatitives did not fully offset the loss in profit which resulted in a decline in division profit. The combined effect of these items,the 53rd week on this segment was not significant.
2005 compared with 2004
Direct-to-Customers sales increased 4.1 percent to $381 million in addition2005, as compared with $366 million 2004. The growth of the Internet business continued to higher earningsdrive sales in lower tax jurisdictions2005. Internet sales increased by 14.6 percent to $243 million from $212 million in 2004. Catalog sales decreased by 10.4 percent to $138 million in 2005 from $154 million in 2004. Management believes that the decrease in catalog sales, which was substantially offset by the increase in Internet sales, is a result of customers browsing and selecting products through its catalogs and then making their purchases via the utilizationInternet.
The Direct-to-Customers business generated division profit of tax loss carryforwards, reduced$48 million in 2005, as compared with $45 million in 2004. Division profit, as a percentage of sales, increased to 12.6 percent in 2005 from 12.3 percent in 2004. This reflects the effective tax rate.
10
13
Liquidity and Capital Resources
Liquidity
Planned capital expenditures for 20052007 are $165approximately $170 million, of which $143$144 million relates to new store openings and modernizations of existing stores, and $22$26 million reflects the development of information systems and other support facilities. In addition, planned lease acquisition costs are $5 million and primarily relate to the Company’s operations in Europe. The Company has the ability to revise and reschedule the anticipated capital expenditure program, should the Company’s financial position require it.
Cash Flow
Net cash used in investing activities of the Company’s continuing operations was $182 million in 2005 as compared with $407 million in 2004. During 2004, the Company paid $226 million for the purchase of 349 Footaction stores from Footstar, Inc. and paid €13 million (approximately $17 million, of which $1 million remains to be paid)$16 million) for the purchase of 11 stores in the Republic of Ireland.
14
During 2005, the Company received $1 million from an escrow account upon the resolution of a Footaction lease matter relating to the 2004 acquisition. The Company’s purchase of short-term investments, net of sales, increased by $9$31 million in 20042005 as compared with an increase of $106$9 million in 2003.2004. Capital expenditures of $155 million in 2005 and $156 million in 2004 and $144 million in 2003 primarily related to store remodelings and new stores. Lease acquisition costs, primarily to secure and extend leases for prime locations in Europe, were $17 million and $15 million in 2004 and 2003, respectively.
11
Capital Structure
In 2004, the Company notified The Bank of New York, as Trustee under the indenture, that it intended to redeemredeemed its entire $150 million outstanding 5.50 percent convertible subordinated notes. Effective June 4, 2004, allAll of the convertible subordinated notes were cancelled and approximately 9.5 million new shares of the Company’s common stock were issued. The Company reclassified the remaining $3 million of unamortized deferred costs related to the original issuance of the convertible debt to equity as a result of the conversion.
Credit Rating
12
Debt Capitalization and Equity
15
2006 | 2005 | ||||||
(in millions) | |||||||
Cash, cash equivalents and short-term investments, net of debt and | |||||||
capital lease obligations | $ | 236 | $ | 261 | |||
Present value of operating leases | 2,069 | 1,934 | |||||
Total net debt | 1,833 | 1,673 | |||||
Shareholders’ equity | 2,295 | 2,027 | |||||
Total capitalization | $ | 4,128 | $ | 3,700 | |||
Net debt capitalization percent | 44.4 | % | 45.2 | % | |||
Net debt capitalization percent without operating leases | — | % | — | % |
Excluding the present value of operating leases, the Company’s cash, cash equivalents, and excludesshort-term investments, net of debt and capital lease obligations, decreased to $236 million at February 3, 2007 from $261 million at January 28, 2006. The Company reduced debt and capital lease obligations by $92 million, and decreased cash, cash equivalents, and short-term investments by $117 million. Additionally, the present value of the operating leases increased by $135 million representing the net change of lease renewals and the effect of interest rate swapsforeign currency fluctuations primarily related to the euro. Including the present value of $4operating leases, the Company’s net debt capitalization percent decreased 80 basis points in 2006. The increase in shareholders’ equity relates to net income of $251 million in 2006, $17 million related to stock plans, an increase of $27 million in the foreign exchange currency translation adjustment, primarily related to the value of the euro in relation to the U.S. dollar and a decrease of $6 million resulting from the adoption of SAB 108. The Company recorded a reduction to shareholders’ equity as permitted by SAB 108 to correct for previous misstatements. The Company declared and paid dividends totaling $61 million during 2006. The Company repurchased 334,200 million shares for approximately $8 million during the year. During 2006, the Company adopted SFAS No. 158 which resulted in the elimination of the additional minimum liability adjustment of $181 million. SFAS No.158 requires that increased long-term debt at January 29, 2005unamortized prior service cost and $1unamortized gains or losses for both the pension and postretirement plans, which totaled $133 million, that reduced long-term debt at January 31, 2004:
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Cash, cash equivalents and short-term investments, net of debt | |||||||||||
and capital lease obligations | $ | 131 | $ | 112 | |||||||
Present value of operating leases | 1,989 | 1,683 | |||||||||
Total net debt | 1,858 | 1,571 | |||||||||
Shareholders’ equity | 1,830 | 1,375 | |||||||||
Total capitalization | $ | 3,688 | $ | 2,946 | |||||||
Net debt capitalization percent | 50.4 | % | 53.3 | % | |||||||
Net debt capitalization percent without operating leases | — | % | — | % |
13
16
Contractual Obligations and Commitments
Payments Due by Period | ||||||||||||||||
Less than | 2 –3 | 3 –5 | After 5 | |||||||||||||
Contractual Cash Obligations | Total | 1Year | Years | Years | Years | |||||||||||
(in millions) | ||||||||||||||||
Long-term debt(1) | $ | 220 | $ | — | $ | 90 | $ | — | $ | 130 | ||||||
Operating leases | 2,739 | 486 | 803 | 621 | 829 | |||||||||||
Capital lease obligations | 14 | 14 | — | — | — | |||||||||||
Other long-term liabilities(2) | — | — | — | — | — | |||||||||||
Total contractual cash obligations | $ | 2,973 | $ | 500 | $ | 893 | $ | 621 | $ | 959 | ||||||
____________________ |
Payments Due by Period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Cash Obligations | Total | Less than 1 Year | 2 – 3 Years | 4 – 5 Years | After 5 Years | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Long-term debt | $ | 351 | $ | 18 | $ | 44 | $ | 113 | $ | 176 | |||||||||||||
Operating leases | 2,723 | 449 | 806 | 578 | 890 | ||||||||||||||||||
Capital lease obligations | 14 | — | 14 | — | — | ||||||||||||||||||
Other long-term liabilities(1) | — | — | — | — | — | ||||||||||||||||||
Total contractual cash obligations | $ | 3,088 | $ | 467 | $ | 864 | $ | 691 | $ | 1,066 |
(1) | The amounts presented above represent the contractual maturities of the Company’s long-term debt, excluding interest. Additional information is included in the “Long-Term Debt and Obligations under Capital Leases” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.” | |
(2) | The Company’s other liabilities in the Consolidated Balance Sheet as of | |
Total | Amount of Commitment Expiration by Period | |||||||||||||||
Amounts | Less than | 2 –3 | 3 –5 | After 5 | ||||||||||||
Other Commercial Commitments | Committed | 1Year | Years | Years | Years | |||||||||||
(in millions) | ||||||||||||||||
Line of credit | $ | 186 | $ | — | $ | 186 | $ | — | $ — | |||||||
Stand-by letters of credit | 14 | — | 14 | — | — | |||||||||||
Purchase commitments(3) | 1,676 | 1,670 | 5 | 1 | — | |||||||||||
Other(4) | 53 | 25 | 21 | 7 | — | |||||||||||
Total commercial commitments | $ | 1,929 | $ | 1,695 | $ | 226 | $ | 8 | $ — | |||||||
____________________ |
Amount of Commitment Expiration by Period | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other Commercial Commitments | Total Amounts Committed | Less than 1 Year | 2 – 3 Years | 4 – 5 Years | After 5 Years | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Line of credit | $ | 175 | $ | — | $ | — | $ | 175 | $ | — | |||||||||||||
Stand-by letters of credit | 25 | — | — | 25 | — | ||||||||||||||||||
Purchase commitments(2) | 1,696 | 1,686 | 6 | 4 | — | ||||||||||||||||||
Other(3) | 131 | 41 | 58 | 28 | 4 | ||||||||||||||||||
Total commercial commitments | $ | 2,027 | $ | 1,727 | $ | 64 | $ | 232 | $ | 4 |
Represents open purchase orders, as well as minimum required purchases under merchandise contractual agreements, at |
(4) | Represents payments required by non-merchandise purchase agreements and minimum royalty requirements. |
Critical Accounting Policies
17
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.
14
Business Combinations
Merchandise Inventories
Vendor Reimbursements
Impairment of Long-Lived Assets
18
exceeds its estimated fair value. The fair value of each of the Company’s reporting units exceeded its carrying value as of February 1, 2004.the beginning of the year. The Company used a combination of a discounted cash flow approach and market-based approach to determine the
15
During 2006, the Company recorded an impairment charge of $17 million ($12 million after-tax) to write-down long-lived assets such as store fixtures and leasehold improvements in 69 stores in the European operations to their estimated fair value.
Share-Based Compensation
The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Company estimates 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 10 to 15 percent depending if the change was an increase or decrease to the expected term. 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 have a 1 percent change to the fair value. 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. A 50 basis point change to the dividend yield would change the fair value by approximately 5 percent. The Company records stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its 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 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 in determining stock-based compensation cost and the actual factors that become known over time.
The guidance in SFAS No. 123(R) is relatively new and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models and there is a possibility that the Company will adopt different valuation models and assumptions in the future. This may result in both a lack of comparability with other companies that use different models, methods, and assumptions, and in a lack of consistency in future periods.
Pension and Postretirement Liabilities
Long-Term Rate of Return Assumption - The expected long-term rate of return on invested plan assets is a component of pension expense and the rate is based on the plans’ weighted-average target asset allocation of 64 percent equity securities and 36 percent fixed income investments, 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 based on the timing of settlements and to reduce future contributions by the Company. The Company’s common stock represented approximately 21 percent of the total pension plans’ assets at January 29, 2005.February 3, 2007. A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 20042006 pension expense by approximately $3 million. The actual return on plan assets in a given year may differ from the expected long-term rate of return and the resulting gain or loss is deferred and amortized into the plans’ performance over time.
19
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 discount rate selected to measure the present value of the Company’s benefit obligations as of February 3, 2007 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve. The cash flows are then discounted to their present value and an overall discount rate is selected with reference to the Aa long-term corporate bond yield.determined. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation as of January 29, 2005February 3, 2007 of the pension and postretirement plansplan by approximately $30$28 million and approximately $1 million, respectively.the effect on the postretirement plan would not be significant. Such a decrease would not have significantly changed 20042006 pension expense or postretirement income.
There is limited risk to the Company for increases in healthcare costs related to the postretirement plan as, beginning in 2001, new retirees have assumed the full expected costs and then existing retirees and future retirees have assumed all increases in such costs since the beginning of fiscal year 2001. The additional minimum liability included in shareholders’ equity at January 29, 2005 for the pension plans represented the amount by which the accumulated benefit obligation exceeded the fair market value of the plan assets. The Company contributed $44 million to the U.S. qualified pension plan and contributed $6 million to the Canadian qualified pension plan in February 2004. In addition, $56 million was contributed to the U.S. qualified pension plan in September 2004.
Income Taxes
16
Discontinued, Repositioning and Restructuring Reserves
20
Disclosure Regarding Forward-Looking Statements
Information regarding interest rate risk management and foreign exchange risk management is included in the “Financial Instruments and Risk Management” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”
17
21
Item 8. Consolidated Financial Statements and Supplementary Data
|
MANAGEMENT’S REPORT
![]() ![]() | ![]() ![]() | |||||||||
MATTHEW D. SERRA, | ROBERT W. MCHUGH, | |||||||||
Chairman of the Board, | Senior Vice President and | |||||||||
President and Chief Executive Officer | Chief Financial Officer |
March 28, 2005
18
April 2, 2007
22
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
![]() ![]() | ![]() ![]() | |||||||||
MATTHEW D. SERRA, | ROBERT W. MCHUGH, | |||||||||
Chairman of the Board, | Senior Vice President and | |||||||||
President and Chief Executive Officer | Chief Financial Officer |
March 28, 2005
19
April 2, 2007
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 29, 2005February 3, 2007 and January 31, 2004,28, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 2005,February 3, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective January 29, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” and SFAS No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” as well as changed their method for quantifying errors based on SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” Also as discussed in the notes to the consolidated financial statements, effective February 3, 2007, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R).”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Foot Locker,Locker. Inc.’s internal control over financial reporting as of January 29, 2005,February 3, 2007, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 28, 2005April 2, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New YorkMarch 28, 2005
20
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and 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 U.S. 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 U.S. 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, management’s assessment that Foot Locker, Inc. maintained effective internal control over financial reporting as of January 29, 2005,February 3, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Foot Locker, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005,February 3, 2007, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 29, 2005February 3, 2007 and January 31, 2004,28, 2006, 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 29, 2005,February 3, 2007, and our report dated March 28, 2005April 2, 2007 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New YorkMarch 28, 2005
21
25
CONSOLIDATED STATEMENTS OF OPERATIONS
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions, except per share amounts) | |||||||||||||||
Sales | $ | 5,355 | $ | 4,779 | $ | 4,509 | |||||||||
Costs and expenses | |||||||||||||||
Cost of sales | 3,722 | 3,297 | 3,161 | ||||||||||||
Selling, general and administrative expenses | 1,088 | 987 | 928 | ||||||||||||
Depreciation and amortization | 154 | 152 | 153 | ||||||||||||
Restructuring charges (income) | 2 | 1 | (2 | ) | |||||||||||
Interest expense, net | 15 | 18 | 26 | ||||||||||||
4,981 | 4,455 | 4,266 | |||||||||||||
Other income (expense) | — | — | (3 | ) | |||||||||||
4,981 | 4,455 | 4,263 | |||||||||||||
Income from continuing operations before income taxes | 374 | 324 | 246 | ||||||||||||
Income tax expense | 119 | 115 | 84 | ||||||||||||
Income from continuing operations | 255 | 209 | 162 | ||||||||||||
Income (loss) on disposal of discontinued operations, net of income tax benefit of $37, $4, and $2, respectively | 38 | (1 | ) | (9 | ) | ||||||||||
Cumulative effect of accounting change, net of income tax benefit of $ — | — | (1 | ) | — | |||||||||||
Net income | $ | 293 | $ | 207 | $ | 153 | |||||||||
Basic earnings per share: | |||||||||||||||
Income from continuing operations | $ | 1.69 | $ | 1.47 | $ | 1.15 | |||||||||
Income (loss) from discontinued operations | 0.25 | (0.01 | ) | (0.06 | ) | ||||||||||
Cumulative effect of accounting change | — | — | — | ||||||||||||
Net income | $ | 1.94 | $ | 1.46 | $ | 1.09 | |||||||||
Diluted earnings per share: | |||||||||||||||
Income from continuing operations | $ | 1.64 | $ | 1.40 | $ | 1.10 | |||||||||
Income (loss) from discontinued operations | 0.24 | (0.01 | ) | (0.05 | ) | ||||||||||
Cumulative effect of accounting change | — | — | — | ||||||||||||
Net income | $ | 1.88 | $ | 1.39 | $ | 1.05 |
2006 | 2005 | 2004 | ||||||||
(in millions, except per share amounts) | ||||||||||
Sales | $ | 5,750 | $ | 5,653 | $ | 5,355 | ||||
Costs and expenses | ||||||||||
Cost of sales | 4,014 | 3,944 | 3,722 | |||||||
Selling, general and administrative expenses | 1,163 | 1,129 | 1,090 | |||||||
Depreciation and amortization | 175 | 171 | 154 | |||||||
Impairment charge | 17 | — | — | |||||||
Interest expense, net | 3 | 10 | 15 | |||||||
5,372 | 5,254 | 4,981 | ||||||||
Other income | (14 | ) | (6 | ) | — | |||||
5,358 | 5,248 | 4,981 | ||||||||
Income from continuing operations before income taxes | 392 | 405 | 374 | |||||||
Income tax expense | 145 | 142 | 119 | |||||||
Income from continuing operations | 247 | 263 | 255 | |||||||
Income on disposal of discontinued operations, | ||||||||||
net of income tax benefit of $1, $3, and $37, respectively | 3 | 1 | 38 | |||||||
Cumulative effect of accounting change, | ||||||||||
net of income tax benefit of $ — | 1 | — | — | |||||||
Net income | $ | 251 | $ | 264 | $ | 293 | ||||
Basic earnings per share: | ||||||||||
Income from continuing operations | $ | 1.59 | $ | 1.70 | $ | 1.69 | ||||
Income from discontinued operations | 0.02 | 0.01 | 0.25 | |||||||
Cumulative effect of accounting change | 0.01 | — | — | |||||||
Net income | $ | 1.62 | $ | 1.71 | $ | 1.94 | ||||
Diluted earnings per share: | ||||||||||
Income from continuing operations | $ | 1.58 | $ | 1.67 | $ | 1.64 | ||||
Income from discontinued operations | 0.02 | 0.01 | 0.24 | |||||||
Cumulative effect of accounting change | — | — | — | |||||||
Net income | $ | 1.60 | $ | 1.68 | $ | 1.88 |
See Accompanying Notes to Consolidated Financial Statements.
22
26
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Net income | $ | 293 | $ | 207 | $ | 153 | |||||||||
Other comprehensive income, net of tax | |||||||||||||||
Foreign currency translation adjustment: | |||||||||||||||
Translation adjustment arising during the period | 19 | 31 | 38 | ||||||||||||
Cash flow hedges: | |||||||||||||||
Change in fair value of derivatives, net of income tax | (1 | ) | — | — | |||||||||||
Reclassification adjustments, net of income tax expense (benefit) of $1, ($1), and $—, respectively | 1 | (1 | ) | — | |||||||||||
Net change in cash flow hedges | — | (1 | ) | — | |||||||||||
Minimum pension liability adjustment: | |||||||||||||||
Minimum pension liability adjustment, net of deferred tax expense (benefit) of $(9), $10 and $(56), respectively | (14 | ) | 16 | (83 | ) | ||||||||||
Comprehensive income | $ | 298 | $ | 253 | $ | 108 |
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Net income | $ | 251 | $ | 264 | $ | 293 | |||||
Other comprehensive income, net of tax | |||||||||||
Foreign currency translation adjustment: | |||||||||||
Translation adjustment arising during the period, net of tax | 27 | (25 | ) | 19 | |||||||
Cash flow hedges: | |||||||||||
Change in fair value of derivatives, net of income tax | — | 2 | (1 | ) | |||||||
Reclassification adjustments, net of income tax | — | (1 | ) | 1 | |||||||
Net change in cash flow hedges | — | 1 | — | ||||||||
Minimum pension liability adjustment: | |||||||||||
Minimum pension liability adjustment, net of deferred tax expense | |||||||||||
(benefit) of $120, $10 and $(9) million, respectively | 181 | 15 | (14 | ) | |||||||
Comprehensive income | $ | 459 | $ | 255 | $ | 298 |
See Accompanying Notes to Consolidated Financial Statements.
23
27
CONSOLIDATED BALANCE SHEETS
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
ASSETS | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 225 | $ | 190 | |||||||
Short-term investments | 267 | 258 | |||||||||
Total cash, cash equivalents and short-term investments | 492 | 448 | |||||||||
Merchandise inventories | 1,151 | 920 | |||||||||
Assets of discontinued operations | 1 | 2 | |||||||||
Other current assets | 188 | 149 | |||||||||
1,832 | 1,519 | ||||||||||
Property and equipment, net | 715 | 668 | |||||||||
Deferred taxes | 180 | 194 | |||||||||
Goodwill | 271 | 136 | |||||||||
Intangible assets, net | 135 | 96 | |||||||||
Other assets | 104 | 100 | |||||||||
$ | 3,237 | $ | 2,713 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
Current liabilities | |||||||||||
Accounts payable | $ | 381 | $ | 234 | |||||||
Accrued liabilities | 275 | 300 | |||||||||
Liabilities of discontinued operations | 2 | 2 | |||||||||
Current portion of repositioning and restructuring reserves | 1 | 1 | |||||||||
Current portion of reserve for discontinued operations | 7 | 8 | |||||||||
Current portion of long-term debt and obligations under capital leases | 18 | — | |||||||||
684 | 545 | ||||||||||
Long-term debt and obligations under capital leases | 347 | 335 | |||||||||
Other liabilities | 376 | 458 | |||||||||
Total liabilities | 1,407 | 1,338 | |||||||||
Shareholders’ equity | 1,830 | 1,375 | |||||||||
$ | 3,237 | $ | 2,713 |
2006 | 2005 | ||||
(in millions) | |||||
ASSETS | |||||
Current assets | |||||
Cash and cash equivalents | $ | 221 | $ | 289 | |
Short-term investments | 249 | 298 | |||
Total cash, cash equivalents and short-term investments | 470 | 587 | |||
Merchandise inventories | 1,303 | 1,254 | |||
Other current assets | 261 | 173 | |||
2,034 | 2,014 | ||||
Property and equipment, net | 654 | 675 | |||
Deferred taxes | 109 | 147 | |||
Goodwill | 264 | 263 | |||
Intangible assets, net | 105 | 117 | |||
Other assets | 83 | 96 | |||
$ | 3,249 | $ | 3,312 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current liabilities | |||||
Accounts payable | $ | 256 | $ | 361 | |
Accrued and other liabilities | 246 | 305 | |||
Current portion of long-term debt and obligations under capital leases | 14 | 51 | |||
516 | 717 | ||||
Long-term debt and obligations under capital leases | 220 | 275 | |||
Other liabilities | 218 | 293 | |||
Total liabilities | 954 | 1,285 | |||
Shareholders’ equity | 2,295 | 2,027 | |||
$ | 3,249 | $ | 3,312 |
See Accompanying Notes to Consolidated Financial Statements.
24
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
2004 | 2003 | 2002 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||
(shares in thousands, amounts in millions) | |||||||||||||||||||||||||||
Common Stock and Paid-In Capital | |||||||||||||||||||||||||||
Par value $0.01 per share, 500 million shares authorized | |||||||||||||||||||||||||||
Issued at beginning of year | 144,009 | $ | 411 | 141,180 | $ | 378 | 139,981 | $ | 363 | ||||||||||||||||||
Restricted stock issued under stock option and award plans | 400 | — | 845 | — | 60 | — | |||||||||||||||||||||
Forfeitures of restricted stock | — | 2 | — | 1 | — | 1 | |||||||||||||||||||||
Amortization of stock issued under restricted stock option plans | — | 8 | — | 4 | — | 2 | |||||||||||||||||||||
Conversion of convertible debt | 9,490 | 150 | — | — | — | — | |||||||||||||||||||||
Reclassification of convertible debt issuance costs | — | (3 | ) | — | — | — | — | ||||||||||||||||||||
Issued under director and employee stock plans, net of tax | 2,256 | 40 | 1,984 | 28 | 1,139 | 12 | |||||||||||||||||||||
Issued at end of year | 156,155 | 608 | 144,009 | 411 | 141,180 | 378 | |||||||||||||||||||||
Common stock in treasury at beginning of year | (57 | ) | (1 | ) | (105 | ) | (1 | ) | (70 | ) | — | ||||||||||||||||
Reissued under employee stock plans | 260 | 5 | 152 | 1 | — | — | |||||||||||||||||||||
Restricted stock issued under stock option and award plans | — | — | — | — | 30 | — | |||||||||||||||||||||
Forfeitures/cancellations of restricted stock | (100 | ) | (2 | ) | (80 | ) | (1 | ) | (60 | ) | (1 | ) | |||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | (137 | ) | (3 | ) | — | — | — | — | |||||||||||||||||||
Exchange of options | (30 | ) | (1 | ) | (24 | ) | — | (5 | ) | — | |||||||||||||||||
Common stock in treasury at end of year | (64 | ) | (2 | ) | (57 | ) | (1 | ) | (105 | ) | (1 | ) | |||||||||||||||
156,091 | 606 | 143,952 | 410 | 141,075 | 377 | ||||||||||||||||||||||
Retained Earnings | |||||||||||||||||||||||||||
Balance at beginning of year | 1,132 | 946 | 797 | ||||||||||||||||||||||||
Net income | 293 | 207 | 153 | ||||||||||||||||||||||||
Cash dividends declared on common stock $0.26, $0.15 and $0.03 per share, respectively | (39 | ) | (21 | ) | (4 | ) | |||||||||||||||||||||
Balance at end of year | 1,386 | 1,132 | 946 | ||||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | |||||||||||||||||||||||||||
Balance at beginning of year | 16 | (15 | ) | (53 | ) | ||||||||||||||||||||||
Translation adjustment arising during the period | 19 | 31 | 38 | ||||||||||||||||||||||||
Balance at end of year | 35 | 16 | (15 | ) | |||||||||||||||||||||||
Cash Flow Hedges | |||||||||||||||||||||||||||
Balance at beginning of year | (1 | ) | — | — | |||||||||||||||||||||||
Change during year, net of tax | — | (1 | ) | — | |||||||||||||||||||||||
Balance at end of year | (1 | ) | (1 | ) | — | ||||||||||||||||||||||
Minimum Pension Liability Adjustment | |||||||||||||||||||||||||||
Balance at beginning of year | (182 | ) | (198 | ) | (115 | ) | |||||||||||||||||||||
Change during year, net of tax | (14 | ) | 16 | (83 | ) | ||||||||||||||||||||||
Balance at end of year | (196 | ) | (182 | ) | (198 | ) | |||||||||||||||||||||
Total Accumulated Other Comprehensive Loss | (162 | ) | (167 | ) | (213 | ) | |||||||||||||||||||||
Total Shareholders’ Equity | $ | 1,830 | $ | 1,375 | $ | 1,110 |
2006 | 2005 | 2004 | ||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||
(shares in thousands, amounts in millions) | ||||||||||||||||||||
Common Stock and Paid-In Capital | ||||||||||||||||||||
Par value $0.01 per share, 500 million shares authorized | ||||||||||||||||||||
Issued at beginning of year | 157,280 | $ | 635 | 156,155 | $ | 608 | 144,009 | $ | 411 | |||||||||||
Restricted stock issued under stock option and award plans | — | (3 | ) | 225 | — | 400 | — | |||||||||||||
Forfeitures of restricted stock | — | — | — | 2 | — | 2 | ||||||||||||||
Share-based compensation expense | — | 10 | — | 6 | — | 8 | ||||||||||||||
Conversion of convertible debt | — | — | — | — | 9,490 | 150 | ||||||||||||||
Reclassification of convertible debt issuance costs | — | — | — | — | — | (3 | ) | |||||||||||||
Issued under director and employee stock plans, net of tax | 530 | 11 | 900 | 19 | 2,256 | 40 | ||||||||||||||
Issued at end of year | 157,810 | 653 | 157,280 | 635 | 156,155 | 608 | ||||||||||||||
Common stock in treasury at beginning of year | (1,776 | ) | (38 | ) | (64 | ) | (2 | ) | (57 | ) | (1 | ) | ||||||||
Reissued under employee stock plans | 122 | 3 | 90 | 2 | 260 | 5 | ||||||||||||||
Restricted stock issued under stock option and award plans | 157 | 3 | — | — | — | — | ||||||||||||||
Forfeitures/cancellations of restricted stock | (30 | ) | (1 | ) | (135 | ) | (2 | ) | (100 | ) | (2 | ) | ||||||||
Shares of common stock used to satisfy tax | ||||||||||||||||||||
withholding obligations | (241 | ) | (6 | ) | (49 | ) | (1 | ) | (137 | ) | (3 | ) | ||||||||
Stock repurchases | (334 | ) | (8 | ) | (1,590 | ) | (35 | ) | — | — | ||||||||||
Exchange of options | (5 | ) | — | (28 | ) | — | (30 | ) | (1 | ) | ||||||||||
Common stock in treasury at end of year | (2,107 | ) | (47 | ) | (1,776 | ) | (38 | ) | (64 | ) | (2 | ) | ||||||||
155,703 | 606 | 155,504 | 597 | 156,091 | 606 | |||||||||||||||
Retained Earnings | ||||||||||||||||||||
Balance at beginning of year | 1,601 | 1,386 | 1,132 | |||||||||||||||||
Cumulative effect of adjustments resulting from | ||||||||||||||||||||
the adoption of SAB 108, net of tax (see note 2) | (6 | ) | — | — | ||||||||||||||||
Adjusted balance at beginning of year | 1,595 | 1,386 | 1,132 | |||||||||||||||||
Net income | 251 | 264 | 293 | |||||||||||||||||
Cash dividends declared on common stock | ||||||||||||||||||||
$0.40, $0.32 and $0.26 per share, respectively | (61 | ) | (49 | ) | (39 | ) | ||||||||||||||
Balance at end of year | 1,785 | 1,601 | 1,386 | |||||||||||||||||
Accumulated Other Comprehensive Loss | ||||||||||||||||||||
Foreign Currency Translation Adjustment | ||||||||||||||||||||
Balance at beginning of year | 10 | 35 | 16 | |||||||||||||||||
Translation adjustment arising during the period, net of tax | 27 | (25 | ) | 19 | ||||||||||||||||
Balance at end of year | 37 | 10 | 35 | |||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||
Balance at beginning of year | — | (1 | ) | (1 | ) | |||||||||||||||
Change during year, net of tax | — | 1 | — | |||||||||||||||||
Balance at end of year | — | — | (1 | ) | ||||||||||||||||
Minimum Pension Liability Adjustment | ||||||||||||||||||||
Balance at beginning of year | (181 | ) | (196 | ) | (182 | ) | ||||||||||||||
Change during year, net of tax | 181 | 15 | (14 | ) | ||||||||||||||||
Balance at end of year | — | (181 | ) | (196 | ) | |||||||||||||||
Adjustment related to initial application of | ||||||||||||||||||||
SFAS No. 158, net of tax (see note 21) | (133 | ) | — | — | ||||||||||||||||
Total Accumulated Other Comprehensive Loss | (96 | ) | (171 | ) | (162 | ) | ||||||||||||||
Total Shareholders’ Equity | $ | 2,295 | $ | 2,027 | $ | 1,830 |
See Accompanying Notes to Consolidated Financial Statements.
25
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
From Operating Activities | |||||||||||||||
Net income | $ | 293 | $ | 207 | $ | 153 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: | |||||||||||||||
(Income) loss on disposal of discontinued operations, net of tax | (38 | ) | 1 | 9 | |||||||||||
Restructuring charges (income) | 2 | 1 | (2 | ) | |||||||||||
Cumulative effect of accounting change, net of tax | — | 1 | — | ||||||||||||
Depreciation and amortization | 154 | 152 | 153 | ||||||||||||
Impairment of long-lived assets | — | — | 7 | ||||||||||||
Restricted stock compensation expense | 8 | 4 | 2 | ||||||||||||
Tax benefit on stock compensation | 10 | 2 | 2 | ||||||||||||
Gains on sales of real estate and assets | — | — | (3 | ) | |||||||||||
Deferred income taxes | 50 | (5 | ) | 38 | |||||||||||
Change in assets and liabilities, net of dispositions: | |||||||||||||||
Merchandise inventories | (183 | ) | (63 | ) | (22 | ) | |||||||||
Accounts payable and other accruals | 157 | (17 | ) | (22 | ) | ||||||||||
Repositioning and restructuring reserves | (1 | ) | (1 | ) | (3 | ) | |||||||||
Pension contribution | (106 | ) | (50 | ) | — | ||||||||||
Income taxes | — | 9 | 42 | ||||||||||||
Other, net | (57 | ) | 23 | (7 | ) | ||||||||||
Net cash provided by operating activities of continuing operations | 289 | 264 | 347 | ||||||||||||
From Investing Activities | |||||||||||||||
Acquisitions | (242 | ) | — | — | |||||||||||
Purchases of short-term investments | (2,884 | ) | (1,546 | ) | (536 | ) | |||||||||
Sales of short-term investments | 2,875 | 1,440 | 384 | ||||||||||||
Lease acquisition costs | (17 | ) | (15 | ) | (18 | ) | |||||||||
Capital expenditures | (156 | ) | (144 | ) | (150 | ) | |||||||||
Proceeds from sales of real estate and assets | — | — | 6 | ||||||||||||
Net cash used in investing activities of continuing operations | (424 | ) | (265 | ) | (314 | ) | |||||||||
From Financing Activities | |||||||||||||||
Debt issuance costs | (2 | ) | — | — | |||||||||||
Increase (reduction) in long-term debt | 175 | (19 | ) | (41 | ) | ||||||||||
Reduction in capital lease obligations | — | — | (1 | ) | |||||||||||
Dividends paid on common stock | (39 | ) | (21 | ) | (4 | ) | |||||||||
Issuance of common stock | 33 | 27 | 10 | ||||||||||||
Net cash provided by (used in) financing activities of continuing operations | 167 | (13 | ) | (36 | ) | ||||||||||
Net Cash Provided by (Used in) Discontinued Operations | 1 | 7 | (10 | ) | |||||||||||
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents | 2 | (8 | ) | 3 | |||||||||||
Net Change in Cash and Cash Equivalents | 35 | (15 | ) | (10 | ) | ||||||||||
Cash and Cash Equivalents at Beginning of Year | 190 | 205 | 215 | ||||||||||||
Cash and Cash Equivalents at End of Year | $ | 225 | $ | 190 | $ | 205 | |||||||||
Cash Paid During the Year: | |||||||||||||||
Interest | $ | 23 | $ | 25 | $ | 27 | |||||||||
Income taxes | $ | 121 | $ | 77 | $ | 39 | |||||||||
Non-cash Financing Activities: | |||||||||||||||
Common stock issued upon conversion of convertible debt | $ | 150 | $ | — | $ | — | |||||||||
Debt issuance costs reclassified to equity upon conversion of convertible debt | $ | 3 | $ | — | $ | — |
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
From Operating Activities | |||||||||||
Net income | $ | 251 | $ | 264 | $ | 293 | |||||
Adjustments to reconcile net income to net cash provided by operating | |||||||||||
activities of continuing operations: | |||||||||||
Income on disposal of discontinued operations, net of tax | (3 | ) | (1 | ) | (38 | ) | |||||
Impairment charge | 17 | — | — | ||||||||
Cumulative effect of accounting change, net of tax | (1 | ) | — | — | |||||||
Depreciation and amortization | 175 | 171 | 154 | ||||||||
Share-based compensation expense | 10 | 6 | 8 | ||||||||
Deferred income taxes | 21 | 24 | 50 | ||||||||
Change in assets and liabilities: | |||||||||||
Merchandise inventories | (38 | ) | (111 | ) | (183 | ) | |||||
Accounts payable and other accruals | (103 | ) | 14 | 157 | |||||||
Qualified pension plan contributions | (68 | ) | (26 | ) | (106 | ) | |||||
Income taxes | (3 | ) | (8 | ) | — | ||||||
Other, net | (69 | ) | 16 | (63 | ) | ||||||
Net cash provided by operating activities of continuing operations | 189 | 349 | 272 | ||||||||
From Investing Activities | |||||||||||
Acquisitions | — | 1 | (242 | ) | |||||||
Gain from lease termination | 4 | — | — | ||||||||
Gain from insurance recoveries | 4 | 3 | — | ||||||||
Purchases of short-term investments | (1,992 | ) | (2,798 | ) | (2,884 | ) | |||||
Sales of short-term investments | 2,041 | 2,767 | 2,875 | ||||||||
Capital expenditures | (165 | ) | (155 | ) | (156 | ) | |||||
Net cash used in investing activities of continuing operations | (108 | ) | (182 | ) | (407 | ) | |||||
From Financing Activities | |||||||||||
Debt issuance costs | — | — | (2 | ) | |||||||
(Reduction) increase in long-term debt | (86 | ) | (35 | ) | 175 | ||||||
Repayment of capital lease | (1 | ) | — | — | |||||||
Dividends paid on common stock | (61 | ) | (49 | ) | (39 | ) | |||||
Issuance of common stock | 9 | 12 | 28 | ||||||||
Treasury stock reissued under employee stock plans | 3 | 2 | 5 | ||||||||
Purchase of treasury shares | (8 | ) | (35 | ) | — | ||||||
Tax benefit on stock compensation | 2 | — | — | ||||||||
Net cash (used in) provided by financing activities of continuing operations | (142 | ) | (105 | ) | 167 | ||||||
Net Cash (Used In) Provided by operating activities of Discontinued Operations | (8 | ) | — | 1 | |||||||
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents | 1 | 2 | 2 | ||||||||
Net Change in Cash and Cash Equivalents | (68 | ) | 64 | 35 | |||||||
Cash and Cash Equivalents at Beginning of Year | 289 | 225 | 190 | ||||||||
Cash and Cash Equivalents at End of Year | $ | 221 | $ | 289 | $ | 225 | |||||
Cash Paid During the Year: | |||||||||||
Interest | $ | 20 | $ | 21 | $ | 23 | |||||
Income taxes | $ | 133 | $ | 93 | $ | 121 | |||||
Non-cash Financing Activities: | |||||||||||
Common stock issued upon conversion of convertible debt | $ | — | $ | — | $ | 150 | |||||
Debt issuance costs reclassified to equity upon conversion of convertible debt | $ | — | $ | — | $ | 3 |
See Accompanying Notes to Consolidated Financial Statements.
26
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
|
Basis of Presentation
Reporting Year
Revenue Recognition
Gift Cards
The Company sells gift cards to its customers; the cards do not have expiration dates. Revenue from Internet and cataloggift card sales is recognizedrecorded when the productgift cards are redeemed or when the likelihood of the gift card being redeemed by the customer is shippedremote and there is no legal obligation to customers. Sales include shippingremit the value of unredeemed gift cards to the relevant jurisdictions. 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 handling feesadministrative expenses and totaled $7 million in 2006 and $2 million, for both 2005 and 2004. Unredeemed gift cards are recorded as a current liability.
Statement of Cash Flows
The Company has selected to present the operations of the discontinued business as one line in the Consolidated Statements of Cash Flows. For all the periods presented.
Store Pre-Opening and Closing Costs
Advertising Costs and Sales Promotion
31
expense is incurred. In accordance with EITF 02-16, “Accounting by a Reseller for Cash Consideration from a Vendor,” the Company accounts for reimbursements received in excess of expenses incurred related to specific, incremental advertising, as a reduction to the cost of merchandise and is reflected in cost of sales as the merchandise is sold.
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Advertising expenses | $ | 92.5 | $ | 99.0 | $ | 102.5 | |||||
Cooperative advertising reimbursements | (23.0 | ) | (21.2 | ) | (24.8 | ) | |||||
Net advertising expense | $ | 69.5 | $ | 77.8 | $ | 77.7 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Advertising expenses | $ | 102.5 | $ | 97.5 | $ | 89.2 | |||||||||
Cooperative advertising reimbursements | (24.8 | ) | (23.4 | ) | (15.4 | ) | |||||||||
Net advertising expense | $ | 77.7 | $ | 74.1 | $ | 73.8 |
27
Catalog Costs
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Catalog costs | $ | 47.0 | $ | 48.2 | $ | 50.3 | |||||
Cooperative reimbursements | (3.5 | ) | (3.0 | ) | (2.9 | ) | |||||
Net catalog expense | $ | 43.5 | $ | 45.2 | $ | 47.4 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Catalog costs | $ | 50.3 | $ | 42.4 | $ | 41.9 | |||||||||
Cooperative reimbursements | (2.9 | ) | (3.5 | ) | (2.9 | ) | |||||||||
Net catalog expense | $ | 47.4 | $ | 38.9 | $ | 39.0 |
Earnings Per Share
2006 | 2005 | 2004 | ||||||
(in millions) | ||||||||
Income from continuing operations | $ | 247 | $ | 263 | $ | 255 | ||
Effect of Dilution: | ||||||||
Convertible debt(1) | — | — | 2 | |||||
Income from continuing operations assuming dilution | $ | 247 | $ | 263 | $ | 257 | ||
Weighted-average common shares outstanding | 155.0 | 155.1 | 150.9 | |||||
Effect of Dilution: | ||||||||
Stock options and awards | 1.8 | 2.5 | 3.0 | |||||
Convertible debt(1) | — | — | 3.2 | |||||
Weighted-average common shares outstanding | ||||||||
assuming dilution | 156.8 | 157.6 | 157.1 |
(1) | In 2001, the Company issued $150 million of subordinated convertible notes due 2008. Effective June 4, 2004, all of the convertible subordinated notes were cancelled and approximately 9.5 million new shares of the Company’s common stock were issued. |
32
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Income from continuing operations | $ | 255 | $ | 209 | $ | 162 | |||||||||
Effect of Dilution: | |||||||||||||||
Convertible debt | 2 | 5 | 5 | ||||||||||||
Income from continuing operations assuming dilution | $ | 257 | $ | 214 | $ | 167 | |||||||||
Weighted-average common shares outstanding | 150.9 | 141.6 | 140.7 | ||||||||||||
Effect of Dilution: | |||||||||||||||
Stock options and awards | 3.0 | 1.8 | 0.6 | ||||||||||||
Convertible debt | 3.2 | 9.5 | 9.5 | ||||||||||||
Weighted-average common shares outstanding assuming dilution | 157.1 | 152.9 | 150.8 |
Stock-BasedShare-Based Compensation
Prior to January 29, 2006, the Company accounted for these stock-based compensation plans in accordance with APB No. 25 and related interpretations. This method did not resultedresult in compensation cost for stock options and shares purchased under employee stock purchase plans. No compensation expense for employee stock options is reflected in net income,was recorded, as all stock options granted under thosethe stock option plans had an exercise price that was not less than the quoted market price at the date of grant. Compensation expense was also not recorded for employee purchases of stock under the employee stock purchase plans as it was considered non-compensatory under APB No. 25. Prior to the Company’s adoption of SFAS No. 123(R), as required under the disclosure provisions of SFAS No. 123, as amended, the Company provided pro forma net income and earnings per common share for each period as if it had applied the fair value method to measure stock-based compensation expense.
The market value at dateCompany has recorded an additional $6 million of grantstock-based compensation expense, net of estimated forfeitures, during 2006 as a result of its adoption of SFAS No. 123(R). During 2006, the Company recorded a cumulative effect of a change in accounting of $1 million to reflect estimated forfeitures for prior periods related to the Company’s nonvested restricted stock awards. Prior to the adoption of SFAS No. 123(R), the Company recognized compensation cost of restricted stock isawards over the vesting term based upon the fair value of the Company’s common stock at the date of grant. Forfeitures were recorded as they occurred, however under SFAS No. 123(R) an estimate of forfeitures is required to be included over the vesting term. Under SFAS No. 123(R), the Company will continue to recognize compensation expense over the periodvesting term, net of vesting.
28
SFAS No. 123(R) requires the benefits associated with tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. For 2006, the Company recorded an excess tax benefit of $2 million as a financing cash flow as required by the standard.
Upon exercise of stock options, issuance of restricted stock or issuance of shares under the employee 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.
33
2005 | 2004 | ||||||
Net income: | |||||||
As reported | $ | 264 | $ | 293 | |||
Compensation expense included in reported net income, | |||||||
net of income tax benefit | 4 | 5 | |||||
Total compensation expense under fair value method for | |||||||
all awards, net of income tax benefit | (9 | ) | (13 | ) | |||
Pro forma | $ | 259 | $ | 285 | |||
Basic earnings per share: | |||||||
As reported | $ | 1.71 | $ | 1.94 | |||
Pro forma | $ | 1.67 | $ | 1.89 | |||
Diluted earnings per share: | |||||||
As reported | $ | 1.68 | $ | 1.88 | |||
Pro forma | $ | 1.64 | $ | 1.83 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions, except per share amounts) | |||||||||||||||
Net income: | |||||||||||||||
As reported | $ | 293 | $ | 207 | $ | 153 | |||||||||
Compensation expense included in reported net income, net of income tax benefit | 5 | 2 | 1 | ||||||||||||
Total compensation expense under fair value method for all awards, net of income tax benefit | (13 | ) | (7 | ) | (6 | ) | |||||||||
Pro forma | $ | 285 | $ | 202 | $ | 148 | |||||||||
Basic earnings per share: | |||||||||||||||
As reported | $ | 1.94 | $ | 1.46 | $ | 1.09 | |||||||||
Pro forma | $ | 1.89 | $ | 1.43 | $ | 1.05 | |||||||||
Diluted earnings per share: | |||||||||||||||
As reported | $ | 1.88 | $ | 1.39 | $ | 1.05 | |||||||||
Pro forma | $ | 1.83 | $ | 1.36 | $ | 1.02 |
Cash and Cash Equivalents
Short-Term Investments
Merchandise Inventories and Cost of Sales
34
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Significant additions and improvements to property and equipment are capitalized. 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 and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets: maximum of 50 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Property and equipment
29
Recoverability of Long-Lived Assets
During 2006, the Company recorded an impairment charge of $17 million ($12 million after-tax) to write-down long-lived assets such as store fixtures and leasehold improvements in 69 stores in the European operations to their estimated fair value.
Goodwill and Intangible Assets
The Company performs its annual impairment review as of the beginning of each fiscal year. The fair value of each reporting unit is evaluated as of the beginning of each year, determined using a combination of market and discounted cash flow approaches, exceeded the carrying value of each respective reporting unit.
Derivative Financial Instruments
35
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 as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject the Company to increased earnings volatility.
Fair Value of Financial Instruments
30
Income Taxes
Pension and Postretirement Obligations
The discount rate selected to measure the present value of the Company’s benefit obligations as of February 3, 2007 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve. The cash flows are then discounted to their present value and an overall discount rate is determined.
Insurance Liabilities
Accounting for Leases
36
Foreign Currency Translation
Reclassifications
31
Recent Accounting Pronouncements Not Previously Discussed Herein
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure requirements for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if that position is more likely than not of being sustained on audit based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods, and disclosure requirements for uncertain tax positions. The provisions of FIN 48 will be effective as of the beginning of 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the effect of FIN 48. However, the Company does not expect the adoption of this interpretation will significantly affect the Company’s financial position or results of operations.
In September 2006, the FASB issued SFAS No. 151, “Inventory Costs — an amendment157, “Fair Value Measurements,” (“SFAS No. 157”). This statement provides a single definition of ARB 43, Chapter 4.”fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This Statement amends the guidance to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversions be based on the normal capacity of the production facilities. The Statementpronouncement is effective for inventory costs incurred during fiscal years beginning after JuneNovember 15, 2005. Management2007. The Company does not believe that this standard will significantly affect the effect of the adoption of this Statement will have a material effect on itsCompany’s financial position andor results of operations.
2 Staff Accounting Bulletin No. 108
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” that provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. There are two widely recognized methods for quantifying the effects of financial statement misstatements: the “rollover” or income statement method and the “iron curtain” or balance sheet method. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income
37
statement approach (“dual method”) and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The Company had historically evaluated uncorrected misstatements using the “rollover” method. SAB 108 permits companies to apply its provisions initially by either (i) restating prior financial statements as if the provisions had always been applied or (ii) recording the cumulative effect of initially applying SAB 108 as adjustments to the carrying value of assets and liabilities as of the beginning of 2006 with an offsetting adjustment recorded to the opening balance of shareholders’ equity.
The Company believes its prior period assessments of uncorrected misstatements and the conclusions reached regarding its quantitative and qualitative assessments of materiality of such items, both individually and in the aggregate, were appropriate. These items did not significantly affect 2005 or 2004 as these items originated in earlier periods. In accordance with SAB 108, the Company has adjusted its opening retained earnings for 2006 for the items described below.
Adjustment | ||||
at Jan. 29, | ||||
(in millions) | 2006 | |||
Accrued liabilities(1) | $ | 3.4 | ||
Revenue recognition(2) | 2.8 | |||
Inventory valuation(3) | 4.2 | |||
10.4 | ||||
Provision for income taxes | 4.1 | |||
Decrease to shareholders’ equity | $ | 6.3 |
(1) | Accrued liabilities – The Company understated its accrued liabilities for certain items, such as telecommunications, utilities and property taxes in years prior to 2003. These items originated when the Company was accruing for these items on a calendar year rather than a fiscal year basis. | |
(2) | Revenue recognition – The Company had historically recorded revenue from its catalog and Internet operations when the product was shipped to the customer, rather than upon the actual receipt of the product by the customer. | |
(3) | Inventory valuation – The Company did not properly recognize the permanent reduction of the retail value of its inventory upon the transfer to clearance stores. The Company provided a reserve for the value of this inventory that had not been marked down to current selling prices. |
In addition, the Company had historically included its lease acquisition costs of $8 million in 2005 and $17 million in 2004 within the investing section of the Statement will have a material effectof Cash Flows. In 2005, the Company classified the premiums paid and proceeds received ($3 million, net) associated with its option currency contracts as an investing activity. The Company has determined that these activities would be more appropriately classified as an operating activity. Accordingly, the Company reclassified $5 million and $17 million for 2005 and 2004, respectively, to operating activities.
3 Segment Information
The Company has determined that its reportable segments are those that are based on its financial position and resultsmethod of operations asinternal reporting. As of February 3, 2007, the Company does not currently have any exchanges of nonmonetary assets.
Footaction
The Company’s consolidated resultsaccounting policies of operations includeboth segments are the same as those described in the “Summary of Footaction beginning with the date that the acquisition was consummated.
Sales | |||||||||
2006 | 2005 | 2004 | |||||||
(in millions) | |||||||||
Athletic Stores | $ | 5,370 | $ | 5,272 | $ | 4,989 | |||
Direct-to-Customers | 380 | 381 | 366 | ||||||
Total sales | $ | 5,750 | $ | 5,653 | $ | 5,355 |
38
Operating Results | |||||||||
2006 | 2005 | 2004 | |||||||
(in millions) | |||||||||
Athletic Stores | $ | 405 | $ | 419 | $ | 420 | |||
Direct-to-Customers | 45 | 48 | 45 | ||||||
450 | 467 | 465 | |||||||
Restructuring charges(1) | (1 | ) | — | (2 | ) | ||||
Division profit | 449 | 467 | 463 | ||||||
Corporate expense(2) | (68 | ) | (58 | ) | (74 | ) | |||
Operating profit | 381 | 409 | 389 | ||||||
Other income(3) | 14 | 6 | — | ||||||
Interest expense, net | 3 | 10 | 15 | ||||||
Income from continuing operations before income taxes | $ | 392 | $ | 405 | $ | 374 |
(1) |
32
The Republic of Ireland
Jan. 31, 2004 | Acquisitions(1) | Additions | Other(2) | Jan. 29, 2005 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||||||||||
Goodwill | $ | 136 | 134 | — | 1 | $ | 271 |
(3) | 2006 includes $4 million gain on lease terminations; $8 million of insurance proceeds related to the 2005 hurricane; and $2 million gain on debt repurchase. | |
2005 includes a $3 million gain from insurance recoveries associated with Hurricane Katrina. Additionally, $3 million represents a net gain on foreign currency option contracts that were entered into by the Company to mitigate the effect of fluctuating foreign exchange rates on the reporting of euro dominated earnings. | ||
Depreciation and | |||||||||||||||||||||||||||
Amortization | Capital Expenditures | Total Assets | |||||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||
Athletic Stores | $ | 147 | $ | 141 | $ | 126 | $ | 135 | $ | 137 | $ | 139 | $ | 2,374 | $ | 2,322 | $ | 2,335 | |||||||||
Direct-to-Customers | 6 | 6 | 5 | 4 | 6 | 8 | 195 | 196 | 190 | ||||||||||||||||||
153 | 147 | 131 | 139 | 143 | 147 | 2,569 | 2,518 | 2,525 | |||||||||||||||||||
Corporate | 22 | 24 | 23 | 26 | 12 | 9 | 680 | 794 | 711 | ||||||||||||||||||
Discontinued operations | — | — | — | — | — | — | — | — | 1 | ||||||||||||||||||
Total Company | $ | 175 | $ | 171 | $ | 154 | $ | 165 | $ | 155 | $ | 156 | $ | 3,249 | $ | 3,312 | $ | 3,237 |
Sales and long-lived asset information by geographic area as of and for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005 are presented below. Sales are attributed to the country in which the sales originate, which is where the legal subsidiary is domiciled. Long-lived assets reflect property and equipment. The Company’s sales in Italy and France represent approximately 36, 39 and 40 percent of the International category’s sales for the three-year period ended February 3, 2007. No other individual country included in the International category is significant.
Sales | |||||||||
2006 | 2005 | 2004 | |||||||
(in millions) | |||||||||
United States | $ | 4,356 | $ | 4,257 | $ | 3,982 | |||
International | 1,394 | 1,396 | 1,373 | ||||||
Total sales | $ | 5,750 | $ | 5,653 | $ | 5,355 |
39
Long-Lived Assets | |||||||||
2006 | 2005 | 2004 | |||||||
(in millions) | |||||||||
United States | $ | 504 | $ | 523 | $ | 547 | |||
International | 150 | 152 | 168 | ||||||
Total long-lived assets | $ | 654 | $ | 675 | $ | 715 |
4 Other Income
In 2006, other income includes a gain of $8 million related to a final settlement with the Company’s insurance carriers of claims related to Hurricane Katrina. In 2005, the Company recorded a gain of $3 million of insurance recoveries in excess of losses associated with Hurricane Katrina.
During 2006, the Company purchased and retired $38 million of the $200 million 8.50 percent debentures payable in 2022, at a $2 million discount from face value. Also during 2006, the Company terminated two of its leases and recorded a net gain of $4 million.
In 2005, the Company recorded a net gain of $3 million related to foreign currency option contracts that were entered into by the Company to mitigate the effect of fluctuating foreign exchange rates on the reporting of euro denominated earnings.
5 Short-Term Investments
The Company’s auction rate security investments are accounted for as available-for-sale securities. The fair value of all investments approximate their carrying cost as the investments are generally not held for more than 49 days and they are traded at par value. The following represents the composition of the Company’s auction rate securities by underlying investment.
2006 | 2005 | |||||
(in millions) | ||||||
Tax exempt municipal bonds | $ | 44 | $ | 41 | ||
Equity securities | 205 | 257 | ||||
$ | 249 | $ | 298 |
Contractual maturities of the bonds outstanding at February 3, 2007 range from 2026 to 2042.
6 Merchandise Inventories
2006 | 2005 | |||||
(in millions) | ||||||
LIFO inventories | $ | 967 | $ | 939 | ||
FIFO inventories | 336 | 315 | ||||
Total merchandise inventories | $ | 1,303 | $ | 1,254 |
The value of the Company’s LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.
40
7 Other Current Assets | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Net receivables | $ 59 | $ 49 | ||||||
Prepaid expenses and other current assets | 36 | 31 | ||||||
Prepaid rent | 62 | 15 | ||||||
Prepaid income taxes | 67 | 49 | ||||||
Deferred taxes | 21 | 28 | ||||||
Investments | 14 | — | ||||||
Current portion of Northern Group note receivable | 1 | 1 | ||||||
Fair value of derivative contracts | 1 | — | ||||||
$261 | $173 | |||||||
8 Property and Equipment, net | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Land | $ | 3 | $ | 3 | ||||
Buildings: | ||||||||
Owned | 30 | 31 | ||||||
Furniture, fixtures and equipment: | ||||||||
Owned | 1,139 | 1,087 | ||||||
Leased | 14 | 15 | ||||||
1,186 | 1,136 | |||||||
Less: accumulated depreciation | (870 | ) | (800 | ) | ||||
316 | 336 | |||||||
Alterations to leased and owned buildings, | ||||||||
net of accumulated amortization | 338 | 339 | ||||||
$ | 654 | $ | 675 | |||||
9 Goodwill | ||||||||
2006 | 2005 | |||||||
(in millions) | ||||||||
Athletic Stores | $184 | $183 | ||||||
Direct-to-Customers | 80 | 80 | ||||||
$264 | $263 |
The effect of foreign exchange fluctuations for the fiscal year ended February 3, 2007 increased goodwill by $1 million, resulting from the strengthening of the euro in relation to the U.S. dollar.
41
10 Intangible Assets, net
February 3, 2007 | January 28, 2006 | ||||||||||||||||||||||
Net | Wtd. Avg. | Net | |||||||||||||||||||||
Gross | Accum. | Value | Useful Life | Gross | Accum. | Value | |||||||||||||||||
(in millions) | value | amort. | (1) | in Years | value | amort. | (1) | ||||||||||||||||
Finite life intangible assets | |||||||||||||||||||||||
Lease acquisition costs | $ | 178 | $ | (98 | ) | $ | 80 | 11.9 | $ | 165 | $ | (77 | ) | $ | 88 | ||||||||
Trademark | 21 | (3 | ) | 18 | 20.0 | 21 | (2 | ) | 19 | ||||||||||||||
Loyalty program | 1 | (1 | ) | — | 2.0 | 1 | (1 | ) | — | ||||||||||||||
Favorable leases | 9 | (5 | ) | 4 | 3.9 | 10 | (4 | ) | 6 | ||||||||||||||
Total finite life intangible assets | 209 | (107 | ) | 102 | 12.3 | 197 | (84 | ) | 113 | ||||||||||||||
Intangible assets not subject to | |||||||||||||||||||||||
amortization | 3 | — | 3 | 4 | — | 4 | |||||||||||||||||
Total intangible assets | $ | 212 | $ | (107 | ) | $ | 105 | $ | 201 | $ | (84 | ) | $ | 117 |
Includes effect of foreign currency |
4 Intangible Assets, net
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Intangible assets not subject to amortization | $ | 4 | $ | 2 | |||||||
Intangible assets subject to amortization (net of accumulated amortization of $70 and $51, respectively) | 131 | 94 | |||||||||
$ | 135 | $ | 96 |
33
2003 | Acquisitions(1) | Additions | Amortization / Other(2) | 2004 | Wtd. Avg. Useful Life in Years | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||||||||||||||
Finite life intangible assets | |||||||||||||||||||||||||||
Lease acquisition costs | $ | 94 | $ | — | $ | 17 | $ | (9 | ) | $ | 102 | 12.2 | |||||||||||||||
Trademark | — | 21 | — | (1 | ) | 20 | 20.0 | ||||||||||||||||||||
Loyalty program | — | �� | 1 | — | — | 1 | 2.0 | ||||||||||||||||||||
Favorable leases | — | 9 | — | (1 | ) | 8 | 4.1 | ||||||||||||||||||||
Total | $ | 94 | $ | 31 | $ | 17 | $ | (11 | ) | $ | 131 | 12.6 |
11 Other Assets
2006 | 2005 | ||
(in millions) | |||
Deferred tax costs | $21 | $24 | |
Investments and note receivable | 7 | 22 | |
Northern Group note receivable, net of current portion | 10 | 9 | |
Fair value of derivative contracts | — | 1 | |
Pension benefits | 8 | — | |
Other | 37 | 40 | |
$83 | $96 |
42
12 Accrued and Other Liabilities
2006 | 2005 | ||||
(in millions) | |||||
Pension and postretirement benefits | $ | 4 | $ | 72 | |
Incentive bonuses | 12 | 20 | |||
Other payroll and payroll related costs, excluding taxes | 46 | 52 | |||
Taxes other than income taxes | 46 | 43 | |||
Property and equipment | 24 | 16 | |||
Customer deposits1 | 33 | 31 | |||
Income taxes payable | 2 | 3 | |||
Fair value of derivative contracts | 2 | 1 | |||
Current deferred tax liabilities | 4 | 3 | |||
Sales return reserve | 4 | 4 | |||
Liabilities of discontinued operations | — | 2 | |||
Current portion of repositioning and restructuring reserves | 1 | 1 | |||
Current portion of reserve for discontinued operations | 3 | 8 | |||
Other operating costs | 65 | 49 | |||
$ | 246 | $ | 305 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Athletic Stores | $ | 4,989 | $ | 4,413 | $ | 4,160 | |||||||||
Direct-to-Customers | 366 | 366 | 349 | ||||||||||||
Total sales | $ | 5,355 | $ | 4,779 | $ | 4,509 |
34
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Athletic Stores(1) | $ | 420 | $ | 363 | $ | 280 | |||||||||
Direct-to-Customers | 45 | 53 | 40 | ||||||||||||
465 | 416 | 320 | |||||||||||||
All Other(2) | (2 | ) | (1 | ) | 1 | ||||||||||
Division profit | 463 | 415 | 321 | ||||||||||||
Corporate expense(3) | (74 | ) | (73 | ) | (52 | ) | |||||||||
Operating profit | 389 | 342 | 269 | ||||||||||||
Non-operating income(4) | — | — | 3 | ||||||||||||
Interest expense, net | (15 | ) | (18 | ) | (26 | ) | |||||||||
Income from continuing operations before income taxes | $ | 374 | $ | 324 | $ | 246 |
Depreciation and Amortization | Capital Expenditures | Total Assets | |||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||
Athletic Stores | $ | 126 | $ | 123 | $ | 123 | $ | 139 | $ | 126 | $ | 124 | $ | 2,335 | $ | 1,739 | $ | 1,591 | |||||||||||||||||||||
Direct-to-Customers | 5 | 4 | 4 | 8 | 6 | 8 | 190 | 183 | 177 | ||||||||||||||||||||||||||||||
131 | 127 | 127 | 147 | 132 | 132 | 2,525 | 1,922 | 1,768 | |||||||||||||||||||||||||||||||
Corporate | 23 | 25 | 26 | 9 | 12 | 18 | 711 | 789 | 744 | ||||||||||||||||||||||||||||||
Discontinued operations | 1 | 2 | 2 | ||||||||||||||||||||||||||||||||||||
Total Company | $ | 154 | $ | 152 | $ | 153 | $ | 156 | $ | 144 | $ | 150 | $ | 3,237 | $ | 2,713 | $ | 2,514 |
At February 1, 2003 are presented below. Sales are attributed to the country in which the sales originate, which is where the legal subsidiary is domiciled. Long-lived assets reflect property and equipment. No individual country included in the International category is significant.
Sales
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
United States | $ | 3,982 | $ | 3,597 | $ | 3,639 | |||||||||
International | 1,373 | 1,182 | 870 | ||||||||||||
Total sales | $ | 5,355 | $ | 4,779 | $ | 4,509 |
Long-Lived Assets
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
United States | $ | 547 | $ | 525 | $ | 544 | |||||||||
International | 168 | 143 | 120 | ||||||||||||
Total long-lived assets | $ | 715 | $ | 668 | $ | 664 |
35
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Tax exempt municipal bonds | $ | 50 | $ | 44 | |||||||
Taxable bonds | 40 | — | |||||||||
Equity securities | 177 | 214 | |||||||||
$ | 267 | $ | 258 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
LIFO inventories | $ | 856 | $ | 651 | |||||||
FIFO inventories | 295 | 269 | |||||||||
Total merchandise inventories | $ | 1,151 | $ | 920 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Net receivables | $ | 47 | $ | 41 | |||||||
Prepaid expenses and other current assets | 47 | 45 | |||||||||
Prepaid income taxes | 40 | — | |||||||||
Deferred taxes | 53 | 60 | |||||||||
Current portion of Northern Group note receivable | 1 | 2 | |||||||||
Fair value of derivative contracts | — | 1 | |||||||||
$ | 188 | $ | 149 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Land | $ | 3 | $ | 3 | |||||||
Buildings: | |||||||||||
Owned | 31 | 32 | |||||||||
Furniture, fixtures and equipment: | |||||||||||
Owned | 1,072 | 1,015 | |||||||||
Leased | 14 | 14 | |||||||||
1,120 | 1,064 | ||||||||||
Less: accumulated depreciation | (755 | ) | (706 | ) | |||||||
365 | 358 | ||||||||||
Alterations to leased and owned buildings, net of accumulated amortization | 350 | 310 | |||||||||
$ | 715 | $ | 668 |
36
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Deferred tax costs | $ | 25 | $ | 35 | |||||||
Investments and notes receivable | 22 | 23 | |||||||||
Northern Group note receivable, net of current portion | 8 | 6 | |||||||||
Income taxes receivable | — | 1 | |||||||||
Fair value of derivative contracts | 2 | — | |||||||||
Other | 47 | 35 | |||||||||
$ | 104 | $ | 100 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Pension and postretirement benefits | $ | 30 | $ | 57 | |||||||
Incentive bonuses | 34 | 38 | |||||||||
Other payroll and payroll related costs, excluding taxes | 51 | 44 | |||||||||
Taxes other than income taxes | 45 | 44 | |||||||||
Property and equipment | 22 | 32 | |||||||||
Gift cards and certificates | 22 | 16 | |||||||||
Income taxes payable | 9 | 9 | |||||||||
Fair value of derivative contracts | 3 | 3 | |||||||||
Current deferred tax liabilities | 1 | — | |||||||||
Other operating costs | 58 | 57 | |||||||||
$ | 275 | $ | 300 |
14 Long-Term Debt and 2002.
37
During 2006, the Company purchased and retired $38 million of the $200 million 8.50 percent debentures payable in 2022 at a $2 million discount from face value bringing the outstanding amount to $134 million as of February 3, 2007. The Company has various interest rate swap agreements, which convert $100 million of the 8.50 percent debentures from a fixed interest rate to a variable interest rate, which are collectively classified as a fair value hedge. The net fair value of the interest rate swaps at February 3, 2007 was a liability of $4 million, which was included in other liabilities, the carrying value of the 8.50 percent debentures was decreased by the corresponding amount. The net fair value of the interest rate swaps at January 28, 2006 was a liability $1 million, of which $1 million was included in other assets and $2 million was included in other liabilities. Accordingly, the fair value of the interest rate swaps decreased the carrying value of the 8.50 percent debentures at January 28, 2006 by $1 million.
Following is a summary of long-term debt and obligations under capital leases:
2006 | 2005 | ||||
(in millions) | |||||
8.50% debentures payable 2022 | $ | 130 | $ | 171 | |
$175 million term loan | 90 | 140 | |||
Total long-term debt | 220 | 311 | |||
Obligations under capital leases | 14 | 15 | |||
234 | 326 | ||||
Less: Current portion | 14 | 51 | |||
$ | 220 | $ | 275 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
8.50% debentures payable 2022 | $ | 176 | $ | 171 | |||||||
$175 million term loan | 175 | — | |||||||||
5.50% convertible notes | — | 150 | |||||||||
Total long-term debt | 351 | 321 | |||||||||
Obligations under capital leases | 14 | 14 | |||||||||
365 | 335 | ||||||||||
Less: Current portion | 18 | — | |||||||||
$ | 347 | $ | 335 |
38
Long-Term | Capital | ||||||||||
Debt | Leases | Total | |||||||||
(in millions) | |||||||||||
2007 | $ | — | $ | 14 | $ | 14 | |||||
2008 | 2 | — | 2 | ||||||||
2009 | 88 | — | 88 | ||||||||
2010 | — | — | — | ||||||||
2011 | — | — | — | ||||||||
Thereafter | 130 | — | 130 | ||||||||
220 | 14 | 234 | |||||||||
Less: Current portion | — | 14 | 14 | ||||||||
$ | 220 | $ | — | $ | 220 |
Long-Term Debt | Capital Leases | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
2005 | $ | 18 | $ | — | $ | 18 | |||||||||
2006 | 18 | — | 18 | ||||||||||||
2007 | 26 | 14 | 40 | ||||||||||||
2008 | 26 | — | 26 | ||||||||||||
2009 | 87 | — | 87 | ||||||||||||
Thereafter | 176 | — | 176 | ||||||||||||
351 | 14 | 365 | |||||||||||||
Less: Current portion | 18 | — | 18 | ||||||||||||
$ | 333 | $ | 14 | $ | 347 |
1415 Leases
44
Rent expense consists of the following: | |||||||||||
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Minimum rent | $ | 496 | $ | 489 | $ | 470 | |||||
Other occupancy expenses | 145 | 141 | 135 | ||||||||
Contingent rent based on sales | 21 | 13 | 11 | ||||||||
Sublease income | (1 | ) | (1 | ) | (1 | ) | |||||
Total rent expense | $ | 661 | $ | 642 | $ | 615 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Rent | $ | 605 | $ | 532 | $ | 491 | |||||||||
Contingent rent based on sales | 11 | 11 | 11 | ||||||||||||
Sublease income | (1 | ) | (1 | ) | (1 | ) | |||||||||
Total rent expense | $ | 615 | $ | 542 | $ | 501 |
(in millions) | |||
2007 | $ | 486 | |
2008 | 432 | ||
2009 | 371 | ||
2010 | 332 | ||
2011 | 289 | ||
Thereafter | 829 | ||
Total operating lease commitments | $ | 2,739 | |
Present value of operating lease commitments | $ | 2,069 |
(in millions) | ||||||
---|---|---|---|---|---|---|
2005 | $ | 449 | ||||
2006 | 423 | |||||
2007 | 383 | |||||
2008 | 322 | |||||
2009 | 256 | |||||
Thereafter | 890 | |||||
Total operating lease commitments | $ | 2,723 | ||||
Present value of operating lease commitments | $ | 1,989 |
39
16 Other Liabilities
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Pension benefits | $ | 130 | $ | 175 | |||||||
Postretirement benefits | 95 | 113 | |||||||||
Straight-line rent liability | 77 | 67 | |||||||||
Income taxes | 29 | 62 | |||||||||
Workers’ compensation / general liability reserves | 11 | 12 | |||||||||
Reserve for discontinued operations | 11 | 11 | |||||||||
Repositioning and restructuring reserves | 3 | 2 | |||||||||
Fair value of derivatives | — | 1 | |||||||||
Unfavorable leases | 3 | — | |||||||||
Other | 17 | 15 | |||||||||
$ | 376 | $ | 458 |
2006 | 2005 | ||||
(in millions) | |||||
Pension benefits | $ | 21 | $ | 42 | |
Postretirement benefits | 11 | 84 | |||
Straight-line rent liability | 91 | 83 | |||
Income taxes | 45 | 35 | |||
Workers’ compensation / general liability reserves | 12 | 12 | |||
Reserve for discontinued operations | 12 | 14 | |||
Repositioning and restructuring reserves | 3 | 3 | |||
Fair value of derivatives | 12 | 2 | |||
Unfavorable leases | 2 | 3 | |||
Other | 9 | 15 | |||
$ | 218 | $ | 293 |
On January 23, 2001, the Company announced that it was exiting its 694-store Northern Group segment. During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States. On September 28, 2001, the Company completed the stock transfer of the 370 Northern Group stores in Canada, through one of its wholly owned subsidiaries for approximately CAD$59 million, (approximately US$38 million), which was paid in the form of a note. Over the last several years, the note (the “Note”). Another wholly owned subsidiaryhas been amended and payments have been received, however the interest and payment terms remained unchanged. The note is required to be repaid upon the occurrence of the Company was the assignor of the store leases involved“payment events,” as defined in the transaction and therefore retains potential liability for such leases.purchase agreement, but no later than September 28, 2008. As of February 3, 2007, CAD$15.5 million remains outstanding on the note. The net amount of the assets and liabilities of the former operations was written down to the estimated fair value of the Note. The transaction was accounted for pursuant to SEC Staff Accounting Bulletin Topic 5:E “Accounting for Divestiture of a Subsidiary or Other Business Operation,”note at February 3, 2007 and January 28, 2006, is $11 million and $1 million is classified as a “transfer ofcurrent receivable, with the remainder classified as long term within other assets and liabilities under contractual arrangement” as no cash proceeds were received and the consideration comprised the Note, the repayment of which was dependent on the future successful operations of the business.
Future adjustments, if any, to the carrying value of the Notenote will be recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, “Accounting and Disclosure Regarding Discontinued Operations,” which requires changes in the carrying value of assets received as consideration from the disposal of a discontinued operation to be classified within continuing operations. Interest income will also be recorded within continuing operations. The Company will recognize an impairment loss when, and if, circumstances indicate that the carrying value of the Notenote may not be recoverable. Such circumstances would include deterioration in the business, as evidenced by significant operating losses incurred by the purchaser or nonpayment of an amount due under the terms of the Note.note. The purchaser has made all payments required under the terms of the Note, however the business has sustained unexpected operating losses during the past fiscal year.note. The Company has evaluated the projected performance of the business and will continue to monitor its results during the coming year.
40
41
Northern Group
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance | Charge/ (Income) | Net Usage* | Balance | Charge/ (Income) | Net Usage* | Balance | Charge/ (Income) | Net Usage* | Balance | ||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||
Asset write-offs & impairments | $ | — | $ | 18 | $ | (18) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Recognition of note receivable | — | (10) | 10 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Real estate & lease liabilities | 6 | 1 | (1 | ) | 6 | 1 | (7 | ) | — | — | — | — | |||||||||||||||||||||||||||||||
Severance & personnel | 2 | — | (2 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Operating losses & other costs | 3 | — | (2 | ) | 1 | — | 1 | 2 | — | 1 | 3 | ||||||||||||||||||||||||||||||||
Total | $ | 11 | $ | 9 | $ | (13 | ) | $ | 7 | $ | 1 | $ | (6 | ) | $ | 2 | $ | — | $ | 1 | $ | 3 |
2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||||||||||||||
Charge/ | Net | Charge/ | Net | Charge/ | Net | |||||||||||||||||||||||||||||||||||
Balance | (Income) | Usage* | Balance | (Income) | Usage* | Balance | (Income) | Usage* | Balance | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Northern Group | $ | 2 | $ | — | $ | 1 | $ | 3 | $ | — | $ | 2 | $ | 5 | $ | (2 | ) | $ | (1 | ) | $ | 2 | ||||||||||||||||||
International General Merchandise | 5 | — | — | 5 | 2 | 1 | 8 | (2 | ) | — | 6 | |||||||||||||||||||||||||||||
Specialty Footwear | 2 | (1 | ) | 1 | 2 | — | (1 | ) | 1 | — | — | 1 | ||||||||||||||||||||||||||||
Domestic General Merchandise | 10 | — | (2 | ) | 8 | — | — | 8 | — | (2 | ) | 6 | ||||||||||||||||||||||||||||
Total | $ | 19 | $ | (1 | ) | $ | — | $ | 18 | $ | 2 | $ | 2 | $ | 22 | $ | (4 | ) | $ | (3 | ) | $ | 15 |
International General Merchandise
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance | Charge/ (Income) | Net Usage* | Balance | Charge/ (Income) | Net Usage* | Balance | Charge/ (Income) | Net Usage* | Balance | ||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||
Woolco | $ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
The Bargain! Shop | 6 | — | — | 6 | — | (1 | ) | 5 | — | — | 5 | ||||||||||||||||||||||||||||||||
Total | $ | 6 | $ | 1 | $ | — | $ | 7 | $ | — | $ | (2 | ) | $ | 5 | $ | — | $ | — | $ | 5 |
Specialty Footwear
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | ||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||
Lease liabilities | $ | 7 | $ | (4) | $ | (1) | $ | 2 | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | 2 | |||||||||||||||||||||||
Operating losses & other costs | 2 | — | (1 | ) | 1 | — | (1 | ) | — | (1 | ) | 1 | — | ||||||||||||||||||||||||||||||
Total | $ | 9 | $ | (4 | ) | $ | (2 | ) | $ | 3 | $ | — | $ | (1 | ) | $ | 2 | $ | (1 | ) | $ | 1 | $ | 2 |
Domestic General Merchandise
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | ||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||
Lease liabilities | $ | 10 | $ | — | $ | (3 | ) | $ | 7 | $ | — | $ | (1 | ) | $ | 6 | $ | — | $ | — | $ | 6 | |||||||||||||||||||||
Legal and other costs | 2 | 5 | (4 | ) | 3 | 4 | (3 | ) | 4 | — | (2 | ) | 2 | ||||||||||||||||||||||||||||||
Total | $ | 12 | $ | 5 | $ | (7 | ) | $ | 10 | $ | 4 | $ | (4 | ) | $ | 10 | $ | — | $ | (2 | ) | $ | 8 |
* | Net usage includes effect of foreign exchange translation |
42
1718 Repositioning and Restructuring Reserves
1999 Restructuring
46
1993 Repositioning and 1991 Restructuring
19 Income Taxes
Total Repositioning and Restructuring Reserves
2001 | 2002 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | Charge/ (Income) | Net Usage | Balance | ||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||
Real estate | $ | 3 | $ | — | $ | (1 | ) | $ | 2 | $ | 1 | $ | (1 | ) | $ | 2 | $ | 2 | $ | (1 | ) | $ | 3 | ||||||||||||||||||||
Other disposition costs | 5 | (2 | ) | (2 | ) | 1 | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||
Total | $ | 8 | $ | (2 | ) | $ | (3 | ) | $ | 3 | $ | 1 | $ | (1 | ) | $ | 3 | $ | 2 | $ | (1 | ) | $ | 4 |
2006 | 2005 | 2004 | |||||||
(in millions) | |||||||||
Domestic | $ | 320 | $ | 309 | $ | 222 | |||
International | 72 | 96 | 152 | ||||||
Total pre-tax income | $ | 392 | $ | 405 | $ | 374 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Domestic | $ | 222 | $ | 186 | $ | 160 | |||||||||
International | 152 | 138 | 86 | ||||||||||||
Total pre-tax income | $ | 374 | $ | 324 | $ | 246 |
43
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Current: | |||||||||||
Federal | $ | 93 | $ | 72 | $ | 11 | |||||
State and local | 14 | 11 | 6 | ||||||||
International | 17 | 35 | 52 | ||||||||
Total current tax provision | 124 | 118 | 69 | ||||||||
Deferred: | |||||||||||
Federal | 10 | 22 | 43 | ||||||||
State and local | 6 | 7 | 8 | ||||||||
International | 5 | (5 | ) | (1 | ) | ||||||
Total deferred tax provision | 21 | 24 | 50 | ||||||||
Total income tax provision | $ | 145 | $ | 142 | $ | 119 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||||||
Current: | |||||||||||||||
Federal | $ | 11 | $ | 48 | $ | 16 | |||||||||
State and local | 6 | 14 | 5 | ||||||||||||
International | 52 | 58 | 25 | ||||||||||||
Total current tax provision | 69 | 120 | 46 | ||||||||||||
Deferred: | |||||||||||||||
Federal | 43 | 11 | 31 | ||||||||||||
State and local | 8 | (6 | ) | — | |||||||||||
International | (1 | ) | (10 | ) | 7 | ||||||||||
Total deferred tax provision | 50 | (5 | ) | 38 | |||||||||||
Total income tax provision | $ | 119 | $ | 115 | $ | 84 |
2006 | 2005 | 2004 | ||||||
Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
State and local income taxes, net of federal tax benefit | 3.3 | 2.8 | 2.3 | |||||
International income taxed at varying rates | (0.9 | ) | 0.8 | (0.6 | ) | |||
Foreign tax credit utilization | (1.2 | ) | (3.1 | ) | (2.5 | ) | ||
Increase (decrease) in valuation allowance | 0.1 | (1.5 | ) | 0.1 | ||||
Federal/foreign tax settlements | (0.1 | ) | 0.4 | (3.3 | ) | |||
Tax exempt obligations | (0.5 | ) | (0.4 | ) | (0.2 | ) | ||
Federal tax credits | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||
Other, net | 1.4 | 1.2 | 1.1 | |||||
Effective income tax rate | 36.9 | % | 35.0 | % | 31.7 | % |
2004 | 2003 | 2002 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
State and local income taxes, net of federal tax benefit | 2.3 | 2.4 | 2.0 | |||||||||||
International income taxed at varying rates | (0.6 | ) | 0.5 | 1.0 | ||||||||||
Foreign tax credit utilization | (2.5 | ) | (1.0 | ) | (1.2 | ) | ||||||||
Increase (decrease) in valuation allowance | 0.1 | (1.5 | ) | (2.0 | ) | |||||||||
Federal/foreign tax settlements | (3.3 | ) | — | — | ||||||||||
State and local tax settlements | — | (0.2 | ) | (0.3 | ) | |||||||||
Tax exempt obligations | (0.2 | ) | (0.2 | ) | (0.1 | ) | ||||||||
Work opportunity tax credit | (0.2 | ) | (0.1 | ) | (0.3 | ) | ||||||||
Other, net | 1.1 | 0.6 | 0.1 | |||||||||||
Effective income tax rate | 31.7 | % | 35.5 | % | 34.2 | % |
Items that gave rise to significant portions of the deferred tax accounts are as follows:
2006 | 2005 | ||||||
(in millions) | |||||||
Deferred tax assets: | |||||||
Tax loss/credit carryforwards | $ | 56 | $ | 71 | |||
Employee benefits | 26 | 75 | |||||
Reserve for discontinued operations | 6 | 8 | |||||
Repositioning and restructuring reserves | 2 | 3 | |||||
Property and equipment | 116 | 108 | |||||
Allowance for returns and doubtful accounts | 4 | 4 | |||||
Straight-line rent | 24 | 22 | |||||
Other | 21 | 19 | |||||
Total deferred tax assets | 255 | 310 | |||||
Valuation allowance | (105 | ) | (123 | ) | |||
Total deferred tax assets, net | $ | 150 | $ | 187 |
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Deferred tax assets: | |||||||||||
Tax loss/credit carryforwards | $ | 89 | $ | 99 | |||||||
Employee benefits | 116 | 135 | |||||||||
Reserve for discontinued operations | 5 | 8 | |||||||||
Repositioning and restructuring reserves | 3 | 2 | |||||||||
Property and equipment | 89 | 81 | |||||||||
Allowance for returns and doubtful accounts | 7 | 10 | |||||||||
Straight-line rent | 19 | 17 | |||||||||
Goodwill | — | 1 | |||||||||
Other | 17 | 22 | |||||||||
Total deferred tax assets | 345 | 375 | |||||||||
Valuation allowance | (124 | ) | (122 | ) | |||||||
Total deferred tax assets, net | $ | 221 | $ | 253 |
44
2004 | 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
Deferred tax liabilities: | |||||||||||
Inventories | $ | 8 | $ | 13 | |||||||
Goodwill | 2 | — | |||||||||
Other | 1 | 1 | |||||||||
Total deferred tax liabilities | 11 | 14 | |||||||||
Net deferred tax asset | $ | 210 | $ | 239 | |||||||
Balance Sheet caption reported in: | |||||||||||
Deferred taxes | $ | 180 | $ | 194 | |||||||
Other current assets | 53 | 60 | |||||||||
Other current liabilities | (1 | ) | — | ||||||||
Other liabilities | (22 | ) | (15 | ) | |||||||
$ | 210 | $ | 239 |
2006 | 2005 | ||||||
(in millions) | |||||||
Deferred tax liabilities: | |||||||
Inventories | $ | 24 | $ | 18 | |||
Goodwill | 13 | 12 | |||||
Other | 8 | 10 | |||||
Total deferred tax liabilities | 45 | 40 | |||||
Net deferred tax asset | $ | 105 | $ | 147 | |||
Balance Sheet caption reported in: | |||||||
Deferred taxes | $ | 109 | $ | 147 | |||
Other current assets | 21 | 28 | |||||
Other current liabilities | (4 | ) | (3 | ) | |||
Other liabilities | (21 | ) | (25 | ) | |||
$ | 105 | $ | 147 |
Based upon the level of historical taxable income and projections for future taxable income 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 29, 2005.February 3, 2007. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
45
20 Financial Instruments and Risk Management
|
Foreign Exchange Risk Management — Derivative Holdings Designated as Hedges
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and hedge ineffectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately. No such gains or losses were recognized in earnings during 20042006 or 2003.
49
The Company has designated these hedging instruments as hedges of the net investments in foreign subsidiaries, and will use the spot rate method of accounting to value changes of the hedging instrument attributable to currency rate fluctuations. As such, adjustments in the fair market value of the hedging instrument due to changes in the spot rate will be recorded in other comprehensive income and are expected to offset changes in the euro-denominated net investment. Amounts recorded to foreign currency translation within accumulated other comprehensive loss will remain there until the net investment is disposed of. The amount recorded within the foreign currency translation adjustment included in accumulated other comprehensive loss on the Consolidated Balance Sheet at February 3, 2007 decreased shareholders’ equity by $5 million, net of tax. At January 28, 2006, the amount recorded to foreign currency translation was not significant. The effect on the Consolidated Statements of Operations related to the net investments hedges was income of $3 million for 2006 and was not significant for 2005.
Foreign Exchange Risk Management — Derivative Holdings Designated as Non-Hedges
The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings by entering into a variety of derivative instruments including option currency contracts. These contracts are not designated as hedges and as a result, the changes in the fair value of these financial instruments are charged to the statement of operations immediately. The changes in fair valuevalues recorded in the Consolidated Statement of forward contractsOperations for the year ended February 3, 2007 was not significant and optionwas a net gain of approximately $3 million for contracts that do not qualify as hedges are recordedsettled in earnings. In 2004, the second quarter of 2005.
The Company enteredalso enters into certain forward foreign exchange contracts to hedge intercompany foreign-currency denominated firm commitments andtransactions. In 2005, the Company recorded lossesgains of approximately $2$3 million in selling, general and administrative expenses to reflect theirthe fair value.value of these contracts. These lossesgains were offset by the foreign exchange gainslosses on the revaluation of the underlying commitments, which were expected to be settled in 2004 and 2005.
46
Foreign Currency Exchange Rates
Fair Value | Contract Value | Weighted-Average | |||||||||
(US in millions) | (US in millions) | Exchange Rate | |||||||||
Inventory | |||||||||||
Buy €/Sell British £ | $ | (1 | ) | $ | 63 | .6799 | |||||
Buy $US/Sell € | — | 4 | 1.3108 | ||||||||
Buy $US/Sell CAD$ | — | 2 | .9088 | ||||||||
Earnings | |||||||||||
Sell €/Buy $US | $ | — | $ | 29 | 1.2962 | ||||||
Sell CAD$/ Buy $US | — | 7 | .8739 | ||||||||
Intercompany | |||||||||||
Buy €/ Sell British £ | $ | — | $ | 25 | .6762 | ||||||
Buy British £/Sell € | — | 25 | .6668 | ||||||||
Buy SEK/Sell € | — | 1 | .7456 | ||||||||
Buy €/Sell $US | — | 1 | 1.3078 | ||||||||
Buy US/Sell NZD | — | 2 | .5985 | ||||||||
Buy US/Sell AUD | — | 2 | .7456 | ||||||||
Buy US/Sell CAD | — | 1 | .8727 |
Fair Value (US in millions) | Contract Value (US in millions) | Weighted-Average Exchange Rate | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Inventory | ||||||||||||||
Buy €/Sell British £ | $ | — | $ | 59 | 0.6996 | |||||||||
Intercompany | ||||||||||||||
Buy €/Sell $US | $ | — | $ | 6 | 1.2290 | |||||||||
Buy $US/Sell € | (3 | ) | 69 | 1.2432 | ||||||||||
Buy €/Sell British £ | — | 17 | 0.7187 | |||||||||||
$ | (3 | ) | $ | 151 |
50
Interest Rate Risk Management
2006 | 2005 | 2004 | |||||||||
(in millions) | |||||||||||
Interest Rate Swaps: | |||||||||||
Fixed to Variable ($US) — notional amount | $ | 100 | $ | 100 | $ | 100 | |||||
Average pay rate | 8.53 | % | 8.00 | % | 6.46 | % | |||||
Average receive rate | 8.50 | % | 8.50 | % | 8.50 | % | |||||
Variable to variable ($US) — notional amount | $ | 100 | $ | 100 | $ | 100 | |||||
Average pay rate | 5.57 | % | 4.82 | % | 2.73 | % | |||||
Average receive rate | 5.32 | % | 4.79 | % | 3.25 | % |
Fair Value
The following represents the fair value of foreign exchange derivative contracts and interest rate swaps:
2006 | 2005 | ||
(in millions) | |||
Current assets | $ 1 | $ — | |
Non-current assets | — | 1 | |
Current liabilities | 2 | 1 | |
Non-current liabilities | 12 | 2 |
2004 | 2003 | 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) | |||||||||||||||
Interest Rate Swaps: | |||||||||||||||
Fixed to Variable ($US) | $ | 100 | $ | 100 | $ | 50 | |||||||||
Average pay rate | 6.46 | % | 5.07 | % | 4.53 | % | |||||||||
Average receive rate | 8.50 | % | 8.50 | % | 8.50 | % | |||||||||
Variable to variable ($US) | $ | 100 | $ | — | $ | — | |||||||||
Average pay rate | 2.73 | % | — | % | — | % | |||||||||
Average receive rate | 3.25 | % | — | % | — | % |
Interest Rates
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Jan. 29, 2005 Total | Jan. 31, 2004 Total | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) | |||||||||||||||||||||||||||||||||||
Long-term debt | $ | 18 | 18 | 26 | 26 | 87 | 193 | $ | 368 | $ | 435 | ||||||||||||||||||||||||
Weighted-average interest rate | 5.2 | % | 5.3 | % | 5.4 | % | 5.6 | % | 6.6 | % | 6.9 | % |
Feb. 3, | Jan. 28, | ||||||||||||||||||||
2007 | 2006 | ||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Total | ||||||||||||||
($ in millions) | |||||||||||||||||||||
Long-term debt | $ — | 2 | 88 | — | — | 132 | $222 | $330 | |||||||||||||
Weighted-average interest rate | 7.8 | % | 7.8 | % | 7.8 | % | 8.7 | % | 8.7 | % | 8.7 | % |
47
Fair Value of Financial Instruments
51
Business Risk
21 Retirement Plans and Other Benefits
|
Pension and Other Postretirement Plans
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 29, 2005February 3, 2007 and January 31, 2004:28, 2006:
Postretirement | ||||||||||||
Pension Benefits | Benefits | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
(in millions) | ||||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation at beginning of year | $ 689 | $ 703 | $ 17 | $ 24 | ||||||||
Service cost | 10 | 9 | — | — | ||||||||
Interest cost | 36 | 36 | 1 | 1 | ||||||||
Plan participants’ contributions | — | — | 5 | 5 | ||||||||
Actuarial gain | (12 | ) | — | (3 | ) | (5 | ) | |||||
Foreign currency translation adjustments | (2 | ) | 7 | — | — | |||||||
Plan amendment | 1 | — | — | — | ||||||||
Benefits paid | (60 | ) | (66 | ) | (7 | ) | (8 | ) | ||||
Benefit obligation at end of year | $ 662 | $ 689 | $ 13 | $ 17 |
Pension Benefits | Postretirement Benefits | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | |||||||||||||||||||
Change in benefit obligation | |||||||||||||||||||
Benefit obligation at beginning of year | $ | 697 | $ | 685 | $ | 27 | $ | 30 | |||||||||||
Service cost | 9 | 8 | — | — | |||||||||||||||
Interest cost | 39 | 43 | 1 | 1 | |||||||||||||||
Plan participants’ contributions | — | — | 5 | 5 | |||||||||||||||
Actuarial loss | 16 | 18 | — | 1 | |||||||||||||||
Foreign currency translation adjustments | 5 | 11 | — | — | |||||||||||||||
Benefits paid | (63 | ) | (68 | ) | (9 | ) | (10 | ) | |||||||||||
Benefit obligation at end of year | $ | 703 | $ | 697 | $ | 24 | $ | 27 | |||||||||||
Change in plan assets | |||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 474 | $ | 380 | |||||||||||||||
Actual return on plan assets | 28 | 101 | |||||||||||||||||
Employer contribution | 108 | 54 | |||||||||||||||||
Foreign currency translation adjustments | 4 | 7 | |||||||||||||||||
Benefits paid | (63 | ) | (68 | ) | |||||||||||||||
Fair value of plan assets at end of year | $ | 551 | $ | 474 |
48
52
Pension Benefits | Postretirement Benefits | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | |||||||||||||||||||
Funded status | |||||||||||||||||||
Funded status | $ | (152 | ) | $ | (223 | ) | $ | (24 | ) | $ | (27 | ) | |||||||
Unrecognized prior service cost (benefit) | 4 | 5 | (10 | ) | (11 | ) | |||||||||||||
Unrecognized net (gain) loss | 324 | 296 | (67 | ) | (80 | ) | |||||||||||||
Prepaid asset (accrued liability) | $ | 176 | $ | 78 | $ | (101 | ) | $ | (118 | ) | |||||||||
Balance Sheet caption reported in: | |||||||||||||||||||
Intangible assets | $ | 1 | $ | 2 | $ | — | $ | — | |||||||||||
Accrued liabilities | (24 | ) | (52 | ) | (6 | ) | (5 | ) | |||||||||||
Other liabilities | (130 | ) | (175 | ) | (95 | ) | (113 | ) | |||||||||||
Accumulated other comprehensive loss, pre-tax | 329 | 303 | — | — | |||||||||||||||
$ | 176 | $ | 78 | $ | (101 | ) | $ | (118 | ) |
Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in millions) | ||||||||||||||||
Change in plan assets | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 579 | $ | 551 | ||||||||||||
Actual return on plan assets | 60 | 60 | ||||||||||||||
Employer contribution | 70 | 29 | ||||||||||||||
Foreign currency translation adjustments | (2 | ) | 5 | |||||||||||||
Benefits paid | (60 | ) | (66 | ) | ||||||||||||
Fair value of plan assets at end of year | $ | 647 | $ | 579 | ||||||||||||
Funded status | ||||||||||||||||
Funded status | $ | (15 | ) | $ | (110 | ) | $ | (13 | ) | $ | (17 | ) | ||||
Unrecognized prior service cost (benefit) | 3 | (9 | ) | |||||||||||||
Unrecognized net (gain) loss | 303 | (60 | ) | |||||||||||||
Prepaid asset (accrued liability) | $ | 196 | $ | (86 | ) | |||||||||||
Balance Sheet caption reported in: | ||||||||||||||||
Intangible assets | $ | — | $ | 1 | $ | — | $ | — | ||||||||
Other assets | 8 | — | — | — | ||||||||||||
Accrued and other liabilities | (2 | ) | (70 | ) | (2 | ) | (2 | ) | ||||||||
Other liabilities | (21 | ) | (42 | ) | (11 | ) | (84 | ) | ||||||||
Accumulated other comprehensive loss, pre-tax | — | 307 | — | — | ||||||||||||
$ | (15 | ) | $ | 196 | $ | (13 | ) | $ | (86 | ) |
Amounts recognized in the additional minimum liability in 2004 was an increase of $14 million after-tax and a decrease of $16 million after-tax in 2003 to accumulated other comprehensive loss.loss (pre-tax) at February 3, 2007 consists of:
Pension | Postretirement | |||||
Benefits | Benefits | |||||
Prior service cost (benefit) | $ | 4 | $ | (7 | ) | |
Net actuarial (gain) loss | 274 | (53 | ) | |||
Total amount recognized | $ | 278 | $ | (60 | ) |
Prior to | ||||||||||||
AML and | Effect of | Post AML and | ||||||||||
Statement | Adoption | Statement | ||||||||||
No. 158 | AML | Statement | No. 158 | |||||||||
Adjustments | Adjustment | No. 158 | Adjustments | |||||||||
(in millions) | ||||||||||||
Current assets | 2,034 | — | — | 2,034 | ||||||||
Deferred taxes | 144 | (120 | ) | 85 | 109 | |||||||
Intangible assets | 106 | (1 | ) | — | 105 | |||||||
Other assets | 75 | — | 8 | 83 | ||||||||
Total assets | $ 3,277 | (121 | ) | 93 | $ 3,249 |
Prior to | ||||||||||||
AML and | Effect of | Post AML and | ||||||||||
Statement | Adoption | Statement | ||||||||||
No. 158 | AML | Statement | No. 158 | |||||||||
Adjustments | Adjustment | No. 158 | Adjustments | |||||||||
(in millions) | ||||||||||||
Accrued and other liabilities | 246 | — | — | 246 | ||||||||
Total current liabilities | 516 | — | — | 516 | ||||||||
Other liabilities | 300 | (308 | ) | 226 | 218 | |||||||
Other comprehensive loss | (150 | ) | 187 | (133 | ) | (96 | ) | |||||
Total shareholders’ equity | 2,323 | (121 | ) | 93 | 2,295 | |||||||
Total liabilities and shareholders’ equity | $ 3,277 | (121 | ) | 93 | $ 3,249 |
The following weighted-average assumptions were used to determine the benefit obligations under the plans:
Pension Benefits | Postretirement Benefits | ||||||
2006 | 2005 | 2006 | 2005 | ||||
Discount rate | 5.68% | 5.43% | 5.80% | 5.50% | |||
Rate of compensation increase | 3.76% | 3.77% |
Pension Benefits | Postretirement Benefits | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2004 | 2003 | ||||||||||||||||
Discount rate | 5.50 | % | 5.90 | % | 5.50 | % | 5.90 | % | |||||||||||
Rate of compensation increase | 3.79 | % | 3.72 | % |
Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||
Service cost | $ | 9 | $ | 8 | $ | 8 | $ | — | $ | — | $ | — | |||||||||||||||
Interest cost | 39 | 43 | 44 | 1 | 2 | 2 | |||||||||||||||||||||
Expected return on plan assets | (48 | ) | (46 | ) | (50 | ) | — | — | — | ||||||||||||||||||
Amortization of prior service cost (benefit) | 1 | — | 1 | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||
Amortization of net (gain) loss | 11 | 9 | 3 | (13 | ) | (16 | ) | (12 | ) | ||||||||||||||||||
Net benefit expense (income) | $ | 12 | $ | 14 | $ | 6 | $ | (13 | ) | $ | (15 | ) | $ | (11 | ) |
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Service cost | $ | 10 | $ | 9 | $ | 9 | $ | — | $ | — | $ | — | ||||||||||||
Interest cost | 36 | 36 | 39 | 1 | 1 | 1 | ||||||||||||||||||
Expected return on plan assets | (56 | ) | (49 | ) | (48 | ) | — | — | — | |||||||||||||||
Amortization of prior service cost (benefit) | 1 | 1 | 1 | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
Amortization of net (gain) loss | 12 | 13 | 11 | (10 | ) | (12 | ) | (13 | ) | |||||||||||||||
Net benefit expense (income) | $ | 3 | $ | 10 | $ | 12 | $ | (10 | ) | $ | (12 | ) | $ | (13 | ) |
Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Discount rate | 5.90 | % | 6.50 | % | 7.00 | % | 5.90 | % | 6.50 | % | 7.00 | % | |||||||||||||||
Rate of compensation increase | 3.79 | % | 3.72 | % | 3.53 | % | |||||||||||||||||||||
Expected long-term rate of return on assets | 8.89 | % | 8.88 | % | 8.87 | % | �� |
Pension Benefits | Postretirement Benefits | |||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||
Discount rate | 5.44% | 5.50% | 5.90% | 5.50% | 5.50% | 5.90% | ||||||
Rate of compensation increase | 3.76% | 3.77% | 3.79% | |||||||||
Expected long-term rate of return on assets | 8.87% | 8.88% | 8.89% |
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 as follows:
Pension | Postretirement Benefits | Total | ||||||||
(in millions) | ||||||||||
Amortization of prior service cost (benefit) | $ | 1 | $ | (1 | ) | $ | — | |||
Amortization of net loss (gain) | $ | 11 | $ | (8 | ) | $ | 3 |
The expected long-term rate of return on invested plan assets is based on historical long-term performance and future expected performance of those assets based upon current asset allocations.
54
Beginning with 2001, new retirees were charged the expected full cost of the medical plan and existing retirees will incur 100 percent of the expected future increase in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increases. In 2002, based on historical experience, the drop out rate assumption was increased for the medical plan, thereby shortening the expected amortization period, which decreased the accumulated postretirement benefit obligation at February 1, 2003 by approximately $6 million, and increased postretirement benefit income by approximately $3 million in 2002.
49
In August 2006, the Pension Protection Act of 2006 was signed into law. The major provisions of the service cost componentstatute will take effect January 1, 2008. Among other things, the statute is designed to ensure timely and adequate funding of net postretirement health care costs for amounts attributable to current service,pension plans by shortening the time period within which employers must fully fund pension benefits. The Company is currently evaluating the effect, if the benefit provided is at least actuarially equivalent to Medicare Part D. Management has concludedany, that the health care benefits that it provides to retireesPension Protection Act of 2006 will have on funding requirements. The effect on net periodic benefit cost is not actuarially equivalentexpected to Medicare Part D and, therefore, the Company will not be eligible to receive the Federal subsidy.
2006 | 2005 | ||||
Asset Category | |||||
Equity securities | 64 | % | 62 | % | |
Foot Locker, Inc. common stock | 1 | % | 2 | % | |
Debt securities | 33 | % | 34 | % | |
Real estate | 1 | % | 1 | % | |
Other | 1 | % | 1 | % | |
Total | 100 | % | 100 | % |
2004 | 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Asset Category | ||||||||||
Equity securities | 63 | % | 63 | % | ||||||
Foot Locker, Inc. common stock | 2 | % | 2 | % | ||||||
Debt securities | 33 | % | 33 | % | ||||||
Real estate | 1 | % | 1 | % | ||||||
Other | 1 | % | 1 | % | ||||||
Total | 100 | % | 100 | % |
Pension | Postretirement | |||||
Benefits | Benefits | |||||
(in millions) | ||||||
2007 | $ | 64 | $ | 2 | ||
2008 | 62 | 2 | ||||
2009 | 61 | 2 | ||||
2010 | 58 | 2 | ||||
2011 | 56 | 1 | ||||
2012–2015 | 259 | 5 |
Pension Benefits | Postretirement Benefits | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) | |||||||||||
2005 | $63 | $5 | |||||||||
2006 | 62 | 4 | |||||||||
2007 | 60 | 3 | |||||||||
2008 | 58 | 3 | |||||||||
2009 | 58 | 2 | |||||||||
2010–2014 | 266 | 8 |
In the fourth quarter of 2006, 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 Illinois. The Complaint alleged that the Company’s pension plan violated the Employee Retirement Income Security Act of 1974 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. In March 2007, the class action was dismissed without prejudice. In February 2007, the same plaintiff filed a class action in federal court in New York against the Company and its U.S. pension plan, the Foot Locker Retirement Plan. The Complaint alleged that the
55
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 plans to defend the action vigorously.
Savings Plans
The Company has two qualified savings plans, a 401(k) Plan that is available to employees whose primary place of employment is the U.S., and an 1165 (e) Plan, which began during 2004 that is available to employees whose primary place of employment is in Puerto Rico. Both plans require that the employees have attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. The savings plans allow eligible employees to contribute up to 25 percent and 10 percent, for the U.S. and Puerto Rico plans, respectively, of their compensation on a pre-tax basis. The Company matches 25 percent of the first 4 percent of the employees’ contributions with Company stock and such matching Company contributions are vested incrementally over 5 years for both plans. The charge to operations for the Company’s matching contribution for the U.S. plan was $1.3$1.9 million, $1.6 million, and $1.4$1.3 million in 2004, 20032006, 2005 and 2002,2004, respectively.
50
22 Share-Based Compensation
21 Stock PlansOptions
Under the 2003 Stock Purchase Plan, 3,000,000 shares of common stock will be available for purchase beginning June 2005.
The Company’s 2003 Employees Stock Purchase Plan (the “2003 Employee Stock Purchase Plan”) terms are substantially the same as the 1994 Employees Stock Purchase Plan (the “1994 Employee Stock Purchase Plan”), which expired in June 2004. Under the Company’s 19942003 Employee Stock Purchase Plan participating employees wereare able to contribute up to 10 percent of their annual compensation through payroll deductions to acquire shares of the Company’s
56
common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Under the 2003 Employee Stock Purchase Plan, 3,000,000 shares of common stock are authorized for purchase beginning June 2005. Of the 8,000,0003,000,000 shares of common stock authorized for purchase under this plan, 1,552806 participating employees purchased 593,913105,123 shares in 2004. A total2006 and 1,191 participating employees purchased 237,353 shares in 2005.
Valuation Model and Assumptions
The Company uses a Black-Scholes option-pricing model to estimate the fair value of 2,222,089 shares were purchasedshare-based awards under this plan. No further shares may be issuedSFAS No. 123(R), which is the same valuation technique it previously used for pro forma disclosures under thisSFAS No. 123. 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 Company’s employee stock purchase plan after June 1, 2004.
Stock Option Plans | Stock Purchase Plan | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
Weighted-average risk free rate of interest | 2.57 | % | 2.26 | % | 4.17 | % | 1.33 | % | 1.11 | % | 2.59 | % | |||||||||||||||
Expected volatility | 33 | % | 37 | % | 42 | % | 32 | % | 31 | % | 35 | % | |||||||||||||||
Weighted-average expected award life | 3.7 | years | 3.4 | years | 3.5 | years | .7 | years | .7 | years | .7 | years | |||||||||||||||
Dividend yield | 1.1 | % | 1.2 | % | 1.2 | % | — | — | — | ||||||||||||||||||
Weighted-average fair value | $ | 6.51 | $ | 2.90 | $ | 5.11 | $ | 11.44 | $ | 14.15 | $ | 4.23 |
51
Additionally, SFAS No. 123(R) requires the characteristicsCompany to estimate pre-vesting option forfeitures at the time of traded options,grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company records stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data. Previously, the option valuation models do not necessarily provide a reliable measureCompany accounted for forfeitures as they occurred under the pro forma disclosure provisions of SFAS No. 123 for periods prior to 2006.
The following table shows the fair value of its options.Company’s assumptions used to compute the stock-based compensation expense and pro forma information:
Stock Option Plans | Stock Purchase Plan | |||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||
Weighted-average risk free rate | ||||||||||||||||||
of interest | 4.68 | % | 3.99 | % | 2.57 | % | 4.39 | % | 4.19 | % | 1.33 | % | ||||||
Expected volatility | 30 | % | 28 | % | 33 | % | 22 | % | 25 | % | 32 | % | ||||||
Weighted-average expected | ||||||||||||||||||
award life | 4.0 years | 3.8 years | 3.7 years | 1.0 years | .7 years | .7 years | ||||||||||||
Dividend yield | 1.5 | % | 1.1 | % | 1.1 | % | 1.4 | % | — | — | ||||||||
Weighted-average fair value | $6.36 | $6.69 | $6.51 | $4.71 | $5.54 | $11.44 |
The information set forth in the following table covers options granted under the Company’s stock option plans:
2006 | 2005 | 2004 | ||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||
of | Exercise | of | Exercise | of | Exercise | |||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||
(in thousands, except prices per share) | ||||||||||||||||||
Options outstanding at beginning | ||||||||||||||||||
of year | 5,962 | $ | 18.45 | 5,909 | $ | 16.69 | 6,886 | $ | 14.73 | |||||||||
Granted | 858 | $ | 23.98 | 1,014 | $ | 27.42 | 1,183 | $ | 25.20 | |||||||||
Exercised | (459 | ) | $ | 15.12 | (682 | ) | $ | 15.03 | (1,853 | ) | $ | 14.43 | ||||||
Expired or cancelled | (313 | ) | $ | 24.83 | (279 | ) | $ | 22.11 | (307 | ) | $ | 19.13 | ||||||
Options outstanding at end of year | 6,048 | $ | 19.15 | 5,962 | $ | 18.45 | 5,909 | $ | 16.69 | |||||||||
Options exercisable at end of year | 4,455 | $ | 16.94 | 4,042 | $ | 16.00 | 3,441 | $ | 15.34 | |||||||||
Options available for future grant at end | ||||||||||||||||||
of year | 4,931 | 5,768 | 7,464 |
2004 | 2003 | 2002 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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) | |||||||||||||||||||||||||||
Options outstanding at beginning of year | 6,886 | $ | 14.73 | 7,676 | $ | 15.18 | 7,557 | $ | 14.63 | ||||||||||||||||||
Granted | 1,183 | $ | 25.20 | 1,439 | $ | 10.81 | 1,640 | $ | 15.72 | ||||||||||||||||||
Exercised | 1,853 | $ | 14.43 | 1,830 | $ | 12.50 | 783 | $ | 6.67 | ||||||||||||||||||
Expired or canceled | 307 | $ | 19.13 | 399 | $ | 19.55 | 738 | $ | 19.80 | ||||||||||||||||||
Options outstanding at end of year | 5,909 | $ | 16.69 | 6,886 | $ | 14.73 | 7,676 | $ | 15.18 | ||||||||||||||||||
Options exercisable at end of year | 3,441 | $ | 15.34 | 4,075 | $ | 15.99 | 4,481 | $ | 15.94 | ||||||||||||||||||
Options available for future grant at end of year | 7,464 | 8,780 | 6,739 |
Options Outstanding | Options Exercisable | ||||||||||
Weighted- | |||||||||||
Average | Weighted- | Weighted- | |||||||||
Remaining | Average | Average | |||||||||
Contractual | Exercise | Exercise | |||||||||
Range of Exercise Prices | Shares | Life | Price | Shares | Price | ||||||
(in thousands, except prices per share) | |||||||||||
$ 4.53 to $11.91 | 1,540 | 4.8 | $ 10.64 | 1,540 | $ 10.64 | ||||||
$12.31 to $16.02 | 1,306 | 4.6 | 14.90 | 1,306 | 14.90 | ||||||
$16.19 to $25.19 | 1,241 | 7.4 | 22.80 | 399 | 20.52 | ||||||
$25.28 to $26.66 | 1,211 | 5.3 | 25.42 | 920 | 25.39 | ||||||
$26.87 to $28.50 | 750 | 7.9 | 27.86 | 290 | 27.80 | ||||||
$ 4.53 to $28.50 | 6,048 | 5.8 | $ 19.15 | 4,455 | $ 16.94 |
Options Outstanding | Options Exercisable | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||||||||||
(in thousands, except prices per share) | |||||||||||||||||||||||
$ 4.53 to $10.75 | 1,230 | 7.7 | $ | 9.85 | 483 | $ | 9.25 | ||||||||||||||||
$10.78 to $15.75 | 1,529 | 5.9 | 12.53 | 1,487 | 12.51 | ||||||||||||||||||
$15.85 to $21.88 | 1,318 | 7.0 | 16.55 | 772 | 16.70 | ||||||||||||||||||
$22.19 to $28.13 | 1,832 | 6.7 | 24.84 | 699 | 24.09 | ||||||||||||||||||
$ 4.53 to $28.13 | 5,909 | 6.8 | $ | 16.69 | 3,441 | $ | 15.34 |
Changes in the Company’s nonvested options at February 3, 2007 are summarized as follows:
Weighted- | ||||
average grant | ||||
Number of | date fair value | |||
shares | per share | |||
(in thousands) | ||||
Nonvested at January 29, 2006 | 1,920 | $ 23.59 | ||
Granted | 858 | 23.98 | ||
Vested | (872 | ) | 20.35 | |
Cancelled | (313 | ) | 24.83 | |
Nonvested at February 3, 2007 | 1,593 | 25.33 |
58
As of February 3, 2007 there was $3.3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 0.86 years.
Restricted Stock
Restricted shares of the Company’s common stock may be awarded to certain officers and key employees of the Company. There were 330,000, 845,000 and 90,000 restricted shares of common stock granted in 2004, 2003 and 2002, respectively. In 2004, 72,005 restricted stock units were granted to certainFor executives located outside of the United States; eachStates the Company issues restricted stock 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. TheIn 2005 and 2004, 20,000 and 72,005 restricted stock units were awarded, respectively. Compensation expense is recognized using the fair market values of the shares and unitsvalue at the date of grant amounted to $10.2 million in 2004, $9.8 million in 2003 and $1.3 million in 2002. The market values are recorded within shareholders’ equity and areis amortized as compensation expense over the related vesting periods.period. These awards fully vest after the passage of a restriction period,time, generally three years, except for certain grants in 2004 and 2003. The Company granted 75,000 sharesyears. Restricted stock is considered outstanding at the time of grant, as the holders of restricted stock in 2004, which vest over 13 monthsare entitled to receive dividends and in 2003 granted 200,000have voting rights.
Restricted shares of restricted stock that vested 50 percent one year followingand units activity for the date of grantyear-ended February 3, 2007, January 28, 2006 and 50 percent will vest two years from the date of grant. During 2004, 2003 and 2002, respectively, 30,000, 80,000 and 60,000 restricted shares were forfeited. The deferred compensation balance, reflected as a reduction to shareholders’ equity, was $9.0 million, $7.1 million and $2.4 million as of January 29, 2005 is summarized as follows:
2006 | 2005 | 2004 | |||||||
(in thousands) | |||||||||
Outstanding at beginning of the year | 1,041 | 1,177 | 1,150 | ||||||
Granted | 157 | 245 | 402 | ||||||
Vested | (600 | ) | (205 | ) | (345 | ) | |||
Cancelled or forfeited | (61 | ) | (176 | ) | (30 | ) | |||
Outstanding at end of year | 537 | 1,041 | 1,177 | ||||||
Aggregate value (in millions) | $ 13.6 | $ 18.0 | $ 18.8 | ||||||
Weighted average remaining contractual life | 0.93 | 0.69 | 1.25 |
The weighted average grant-date fair value per share was $24.08, $26.55 and $25.34 for 2006, 2005 and 2004, respectively. The total value of awards for which restrictions lapsed during the year-ended February 3, 2007, January 31, 200428, 2006 and January 29, 2005 was $6.7 million, $4.0 million and $3.0 million, respectively. As of February 1, 2003, respectively.3, 2007, there was $4.0 million of total unrecognized compensation cost, related to nonvested restricted stock awards. The Company recorded compensation expense related to restricted shares, net of forfeitures, of $4.0 million in 2006, $6.1 million in 2005 and $8.0 million in 2004, $4.1 million in 2003 and $1.9 million in 2002.
52
23 Legal Proceedings
24 Commitments
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 have a material effect on the Company’s consolidated financial position, liquidity, or results of operations. The Company
59
is also operating certain stores and making rental payments 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 a lease will be executed.
Foot Locker, Inc. common stock is listed on The New York Stock Exchange as well as on the böerse-stuttgart stock exchange in Germany and the Elektronische Börse Schweiz (EBS) stock exchange in Switzerland. In addition, the stock is traded on the Cincinnati stock exchange. Effective March 31, 2003, the ticker symbol for the Company’s common stock was changed to “FL” from “Z.”
2006 | 2005 | |||||||
High | Low | High | Low | |||||
Common Stock | ||||||||
Quarter | ||||||||
1stQ | $ 24.39 | $ 22.26 | $ 29.95 | $ 25.88 | ||||
2ndQ | 28.00 | 21.50 | 27.65 | 24.31 | ||||
3rdQ | 27.80 | 22.34 | 25.37 | 18.75 | ||||
4thQ | 24.92 | 21.10 | 24.07 | 18.74 |
2004 | 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
High | Low | High | Low | ||||||||||||||||
Common Stock | |||||||||||||||||||
Quarter | |||||||||||||||||||
1st Q | $ | 27.59 | $ | 21.75 | $ | 11.40 | $ | 9.28 | |||||||||||
2nd Q | 25.03 | 19.97 | 15.20 | 10.10 | |||||||||||||||
3rd Q | 24.80 | �� | 19.98 | 18.20 | 13.85 | ||||||||||||||
4th Q | 27.26 | 22.75 | 25.97 | 18.01 |
53
60
26 Quarterly Results (Unaudited)
1stQ | 2ndQ | 3rdQ | 4thQ | Year | ||||||||
(in millions, except per share amounts) | ||||||||||||
Sales | ||||||||||||
2006(a) | $ | 1,365 | 1,303 | 1,430 | 1,652 | 5,750 | ||||||
2005 | 1,377 | 1,304 | 1,408 | 1,564 | 5,653 | |||||||
Gross margin(b) | ||||||||||||
2006(a) | $ | 419 | 361 | 422 | 534 | 1,736 | ||||||
2005 | 418 | 377 | 430 | 484 | (d) | 1,709 | ||||||
Operating profit(c) | ||||||||||||
2006(a) | $ | 93 | 27 | 94 | 167 | 381 | ||||||
2005 | 94 | 71 | 104 | 140 | 409 | |||||||
Income from continuing operations | ||||||||||||
2006(a) | $ | 58 | 14 | 65 | 110 | 247 | ||||||
2005 | 58 | 44 | 65 | 96 | 263 | |||||||
Net income | ||||||||||||
2006(a) | $ | 59 | 14 | 65 | 113 | 251 | ||||||
2005 | 58 | 44 | 66 | 96 | 264 | |||||||
Basic earnings per share: | ||||||||||||
2006(a) | ||||||||||||
Income from continuing operations | $ | 0.37 | 0.09 | 0.42 | 0.71 | 1.59 | ||||||
Income from discontinued operations | — | — | — | 0.02 | 0.02 | |||||||
Cumulative effect of accounting change | 0.01 | — | — | — | 0.01 | |||||||
Net income | 0.38 | 0.09 | 0.42 | 0.73 | 1.62 | |||||||
2005 | ||||||||||||
Income from continuing operations | $ | 0.37 | 0.29 | 0.42 | 0.62 | 1.70 | ||||||
Income from discontinued operations | — | — | 0.01 | — | 0.01 | |||||||
Net income | 0.37 | 0.29 | 0.43 | 0.62 | 1.71 | |||||||
Diluted earnings per share: | ||||||||||||
2006(a) | ||||||||||||
Income from continuing operations | $ | 0.37 | 0.09 | 0.42 | 0.70 | 1.58 | ||||||
Income from discontinued operations | — | — | — | 0.02 | 0.02 | |||||||
Cumulative effect of accounting change | 0.01 | — | — | — | — | |||||||
�� Net income | 0.38 | 0.09 | 0.42 | 0.72 | 1.60 | |||||||
2005 | ||||||||||||
Income from continuing operations | $ | 0.37 | 0.28 | 0.41 | 0.61 | 1.67 | ||||||
Income from discontinued operations | — | — | 0.01 | — | 0.01 | |||||||
Net income | 0.37 | 0.28 | 0.42 | 0.61 | 1.68 |
____________________
1st Q | 2nd Q | 3rd Q | 4th Q | Year | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions, except per share amounts) | |||||||||||||||||||||||
Sales | |||||||||||||||||||||||
2004 | $ | 1,186 | 1,268 | 1,366 | 1,535 | 5,355 | |||||||||||||||||
2003 | 1,128 | 1,123 | 1,194 | 1,334 | 4,779 | ||||||||||||||||||
Gross margin(a) | |||||||||||||||||||||||
2004 | $ | 361 | 369 | 426 | 477 | 1,633 | |||||||||||||||||
2003 | 346 | 332 | 390 | 414 | 1,482 | ||||||||||||||||||
Operating profit(b) | |||||||||||||||||||||||
2004 | $ | 78 | 61 | 117 | 133 | 389 | |||||||||||||||||
2003 | 67 | 59 | 102 | 114 | 342 | ||||||||||||||||||
Income from continuing operations | |||||||||||||||||||||||
2004 | $ | 47 | 45 | 74 | 89 | 255 | |||||||||||||||||
2003 | 39 | 37 | 62 | 71 | 209 | ||||||||||||||||||
Net income | |||||||||||||||||||||||
2004 | $ | 48 | 82 | 74 | 89 | 293 | |||||||||||||||||
2003 | 38 | 36 | 62 | 71 | 207 | ||||||||||||||||||
Basic earnings per share: | |||||||||||||||||||||||
2004 | |||||||||||||||||||||||
Income from continuing operations | $ | 0.33 | 0.30 | 0.47 | 0.58 | 1.69 | |||||||||||||||||
Income from discontinued operations | — | 0.25 | — | — | 0.25 | ||||||||||||||||||
Net income | 0.33 | 0.55 | 0.47 | 0.58 | 1.94 | ||||||||||||||||||
2003 | |||||||||||||||||||||||
Income from continuing operations | $ | 0.28 | 0.26 | 0.43 | 0.50 | 1.47 | |||||||||||||||||
Loss from discontinued operations | — | (0.01 | ) | — | — | (0.01 | ) | ||||||||||||||||
Cumulative effect of accounting change(c) | (0.01 | ) | — | — | — | — | |||||||||||||||||
Net income | 0.27 | 0.25 | 0.43 | 0.50 | 1.46 | ||||||||||||||||||
Diluted earnings per share: | |||||||||||||||||||||||
2004 | |||||||||||||||||||||||
Income from continuing operations | $ | 0.31 | 0.29 | 0.47 | 0.57 | 1.64 | |||||||||||||||||
Income from discontinued operations | — | 0.24 | — | — | 0.24 | ||||||||||||||||||
Net income | 0.31 | 0.53 | 0.47 | 0.57 | 1.88 | ||||||||||||||||||
2003 | |||||||||||||||||||||||
Income from continuing operations | $ | 0.27 | 0.25 | 0.41 | 0.47 | 1.40 | |||||||||||||||||
Loss from discontinued operations | — | (0.01 | ) | — | — | (0.01 | ) | ||||||||||||||||
Cumulative effect of accounting change(c) | (0.01 | ) | — | — | — | — | |||||||||||||||||
Net income | 0.26 | 0.24 | 0.41 | 0.47 | 1.39 |
(a) | The fourth quarter of 2006 represents the 14 weeks ended February 3, 2007. |
(b) | Gross margin represents sales less cost of sales. |
(c) | Operating profit represents income from continuing operations before income taxes, interest expense, net and non-operating income. |
The fourth quarter of |
54
61
FIVE YEARFIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2006(1) | 2005 | 2004 | 2003 | 2002 | ||||||||
($ in millions, except per share amounts) | ||||||||||||
Summary of Continuing Operations | ||||||||||||
Sales | $ | 5,750 | 5,653 | 5,355 | 4,779 | 4,509 | ||||||
Gross margin(2) | 1,736 | 1,709 | 1,633 | 1,482 | 1,348 | |||||||
Selling, general and administrative expenses | 1,163 | 1,129 | 1,090 | 988 | 926 | |||||||
Impairment charge | 17 | — | — | — | — | |||||||
Depreciation and amortization(2) | 175 | 171 | 154 | 152 | 153 | |||||||
Interest expense, net | 3 | 10 | 15 | 18 | 26 | |||||||
Other income | (14 | ) | (6 | ) | — | — | (3 | ) | ||||
Income from continuing operations | 247 | 263 | 255 | 209 | 162 | |||||||
Cumulative effect of accounting change(3) | 1 | — | — | (1 | ) | — | ||||||
Basic earnings per share from continuing operations | 1.59 | 1.70 | 1.69 | 1.47 | 1.15 | |||||||
Basic earnings per share from cumulative effect of accounting change | 0.01 | — | — | — | — | |||||||
Diluted earnings per share from continuing operations | 1.58 | 1.67 | 1.64 | 1.40 | 1.10 | |||||||
Diluted earnings per share from cumulative effect of accounting change | — | — | — | — | — | |||||||
Common stock dividends declared | 0.40 | 0.32 | 0.26 | 0.15 | 0.03 | |||||||
Weighted-average common shares outstanding (in millions) | 155.0 | 155.1 | 150.9 | 141.6 | 140.7 | |||||||
Weighted-average common shares outstanding assuming dilution (in millions) | 156.8 | 157.6 | 157.1 | 152.9 | 150.8 | |||||||
Financial Condition | ||||||||||||
Cash, cash equivalents and short-term investments | $ | 470 | 587 | 492 | 448 | 357 | ||||||
Merchandise inventories | 1,303 | 1,254 | 1,151 | 920 | 835 | |||||||
Property and equipment, net(4) | 654 | 675 | 715 | 668 | 664 | |||||||
Total assets(4) | 3,249 | 3,312 | 3,237 | 2,713 | 2,514 | |||||||
Short-term debt | — | — | — | — | — | |||||||
Long-term debt and obligations under capital leases | 234 | 326 | 365 | 335 | 357 | |||||||
Total shareholders’ equity | 2,295 | 2,027 | 1,830 | 1,375 | 1,110 | |||||||
Financial Ratios | ||||||||||||
Return on equity (ROE) | 11.5 | % | 13.6 | 15.9 | 16.8 | 15.4 | ||||||
Operating profit margin | 6.8 | % | 7.2 | 7.3 | 7.2 | 6.0 | ||||||
Income from continuing operations as a percentage of sales | 4.3 | % | 4.7 | 4.8 | 4.4 | 3.6 | ||||||
Net debt capitalization percent(5) | 44.4 | % | 45.2 | 50.4 | 53.3 | 58.6 | ||||||
Net debt capitalization percent (without present value of operating leases)(5) | — | — | — | — | — | |||||||
Current ratio | 3.9 | 2.8 | 2.7 | 2.8 | 2.2 | |||||||
Other Data | ||||||||||||
Capital expenditures | $ | 165 | 155 | 156 | 144 | 150 | ||||||
Number of stores at year end | 3,942 | 3,921 | 3,967 | 3,610 | 3,625 | |||||||
Total selling square footage at year end (in millions) | 8.74 | 8.71 | 8.89 | 7.92 | 8.04 | |||||||
Total gross square footage at year end (in millions) | 14.55 | 14.48 | 14.78 | 13.14 | 13.22 |
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions, except per share amounts) | | | | | | |||||||||||||||||
Summary of Continuing Operations | ||||||||||||||||||||||
Sales | $ | 5,355 | 4,779 | 4,509 | 4,379 | 4,356 | ||||||||||||||||
Gross margin(1) | 1,633 | 1,482 | 1,348 | 1,312 | 1,312 | |||||||||||||||||
Selling, general and administrative expenses | 1,088 | 987 | 928 | 923 | 975 | |||||||||||||||||
Restructuring charges (income) | 2 | 1 | (2 | ) | 34 | 1 | ||||||||||||||||
Depreciation and amortization(1) | 154 | 152 | 153 | 158 | 154 | |||||||||||||||||
Interest expense, net | 15 | 18 | 26 | 24 | 22 | |||||||||||||||||
Other (income) expense | — | — | (3 | ) | (2 | ) | (16 | ) | ||||||||||||||
Income from continuing operations | 255 | 209 | 162 | 111 | (3) | 107 | (3) | |||||||||||||||
Cumulative effect of accounting change(2) | — | (1 | ) | — | — | (1 | ) | |||||||||||||||
Basic earnings per share from continuing operations | 1.69 | 1.47 | 1.15 | 0.79 | (3) | 0.78 | (3) | |||||||||||||||
Basic earnings per share from cumulative effect of accounting change | — | — | — | — | (0.01 | ) | ||||||||||||||||
Diluted earnings per share from continuing operations | 1.64 | 1.40 | 1.10 | 0.77 | (3) | 0.77 | (3) | |||||||||||||||
Diluted earnings per share from cumulative effect of accounting change | — | — | — | — | (0.01 | ) | ||||||||||||||||
Common stock dividends declared | 0.26 | 0.15 | 0.03 | — | — | |||||||||||||||||
Weighted-average common shares outstanding (in millions) | 150.9 | 141.6 | 140.7 | 139.4 | 137.9 | |||||||||||||||||
Weighted-average common shares outstanding assuming dilution (in millions) | 157.1 | 152.9 | 150.8 | 146.9 | 139.1 | |||||||||||||||||
Financial Condition | ||||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 492 | 448 | 357 | 215 | 109 | ||||||||||||||||
Merchandise inventories | 1,151 | 920 | 835 | 793 | 730 | |||||||||||||||||
Property and equipment, net(4) | 715 | 668 | 664 | 665 | 712 | |||||||||||||||||
Total assets(4) | 3,237 | 2,713 | 2,514 | 2,328 | 2,306 | |||||||||||||||||
Short-term debt | — | — | — | — | — | |||||||||||||||||
Long-term debt and obligations under capital leases | 365 | 335 | 357 | 399 | 313 | |||||||||||||||||
Total shareholders’ equity | 1,830 | 1,375 | 1,110 | 992 | 1,013 | |||||||||||||||||
Financial Ratios | ||||||||||||||||||||||
Return on equity (ROE) | 15.9 | % | 16.8 | 15.4 | 11.1 | 10.0 | ||||||||||||||||
Operating profit margin | 7.3 | % | 7.2 | 6.0 | 4.5 | 4.2 | ||||||||||||||||
Income from continuing operations as a percentage of sales | 4.8 | % | 4.4 | 3.6 | 2.5 | (3) | 2.5 | (3) | ||||||||||||||
Net debt capitalization percent(5) | 50.4 | % | 53.3 | 58.6 | 61.1 | 60.9 | ||||||||||||||||
Net debt capitalization percent (without present value of operating leases)(5) | — | — | — | 15.6 | 16.8 | |||||||||||||||||
Current ratio | 2.7 | 2.8 | 2.2 | 2.0 | 1.5 | |||||||||||||||||
Other Data | ||||||||||||||||||||||
Capital expenditures | $ | 156 | 144 | 150 | 116 | 94 | ||||||||||||||||
Number of stores at year end | 3,967 | 3,610 | 3,625 | 3,590 | 3,752 | |||||||||||||||||
Total selling square footage at year end (in millions) | 8.89 | 7.92 | 8.04 | 7.94 | 8.09 | |||||||||||||||||
Total gross square footage at year end (in millions) | 14.78 | 13.14 | 13.22 | 13.14 | 13.32 |
____________________
(1) | 2006 represents the 53 weeks ended February 3, 2007. |
(2) | Gross margin and depreciation expense include the effects of the reclassification of tenant allowances as deferred credits, which are amortized as a reduction of rent expense as a component of costs of sales. Gross margin was reduced by $5 million in 2004 and 2003 and $4 million in 2002 |
(3) | 2006 relates to the adoption of SFAS No. 123(R), “Share-Based Payment.” 2003 relates to adoption of SFAS No. 143, “Accounting for Asset Retirement |
(4) | Property and equipment, net and total assets include the reclassification of tenant allowances as deferred credits, which were previously recorded as a reduction to the cost of property and equipment, and are now classified as part of the deferred rent liability. Property and equipment, net and total assets were increased by $22 million in 2004, $24 million in 2003 and $28 million in |
(5) | Represents total debt, net of cash, cash equivalents and short-term investments and |
55
62
There were no disagreements between the Company and its independent registered public accounting firm on matters of accounting principles or practices.
Item 9A. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures. |
The Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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 February 3, 2007. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of February 3, 2007 in alerting them in a timely manner to all material information required to be disclosed in this report. | |
(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 issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Using the COSO Framework, the Company’s management, including the CEO and CFO, evaluated the Company’s internal control over financial reporting and concluded that the Company’s internal control over financial reporting was effective as of February 3, 2007. 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 assessment of and effectiveness of internal control over financial reporting, which is included herein under the caption “Management’s Report on Internal Control over Financial Reporting” in “Item 8. Consolidated Financial Statements and Supplementary Data.” | |
(c) | Attestation Report of the Independent Registered Public Accounting Firm. |
KPMG's attestation report on management's assessment and the effectiveness of our internal control over financial reporting is included in "Item 8. Consolidated Financial Statements and Supplementary Data." | |
(d) | 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 is reasonably likely to materially affect, the Company’s internal control over financial reporting. |
Item 9B. Other Information
None.
63
PART III
Item 10 Directors, Executive Officers and Corporate Governance
(a) | Directors of the Company |
Information relative to directors of the Company is set forth under the section captioned “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. |
56
Item 11. Executive Compensation
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 “Transactions with Management“Related Person Transactions” and Others”under the section captioned "Independence" is incorporated herein by reference.
Information about the principal accountant 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.
64
PART IV
(a)(1)(a)(2) Financial Statements
57
65
SIGNATURES
FOOT LOCKER, INC. | |
![]() | |
By: | |
Matthew D. Serra | |
Chairman of the Board, President and | |
Chief Executive Officer | |
Date: April 2, 2007 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 2005,April 2, 2007, by the following persons on behalf of the Company and in the capacities indicated.
![]() | ![]() | |||||||||
![]() Matthew D. Serra Chairman of the Board, President and Chief Executive Officer | Robert W. McHugh Senior Vice President and Chief Financial Officer | |||||||||
/s/ GIOVANNA CIPRIANO | / ![]() s | / MATTHEW M. MCKENNA | ||||||||
Vice President and Chief Accounting Officer | Matthew M. McKenna Director | |||||||||
/s/ | /s/ JAMES E. PRESTON | |||||||||
Purdy Crawford Director | James E. Preston Director | |||||||||
/s/ | /s/ DAVID Y. SCHWARTZ | |||||||||
Nicholas DiPaolo Director | David Y. Schwartz Director | |||||||||
/s/ | /s/ CHRISTOPHER A. SINCLAIR | |||||||||
Alan D. Feldman Director | Christopher A. Sinclair Director | |||||||||
/s/ | /s/ CHERYL NIDO TURPIN | |||||||||
Philip H. Geier Jr. Director | Cheryl Nido Turpin Director | |||||||||
/s/ JAROBIN GILBERT JR. | /s/ DONA D. YOUNG | |||||||||
Jarobin Gilbert Jr. Director | Dona D. Young Director |
58
66
FOOT LOCKER, INC.
INDEX OF EXHIBITS REQUIRED
BY ITEM 15 OF FORM 10-K
AND FURNISHED IN ACCORDANCE
WITH ITEM 601 OF REGULATION S-K
Exhibit No. in Item 601 of Regulation S-K | 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 by the Registrant with the SEC on September 4, 1997 (the “July 26, 1997 Form 10-Q”)). | ||||||||
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) of the Registration Statement on Form S-8 (Registration No. 333-62425), and (e) November 1, 2001 (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC). | ||||||||
3(ii) | By-laws of the Registrant, as amended (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2001 (the “May 5, 2001 Form 10-Q”), filed by the Registrant with the SEC on June 13, 2001). | ||||||||
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 Registration Statement on Form S-8 (Registration No. 333-62425) previously filed by the Registrant with the SEC, and Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC). | ||||||||
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) previously filed by the Registrant with the SEC). | ||||||||
4.3 | Form of | ||||||||
10.1 | 1986 Foot Locker Stock Option Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant’s Annual Report on Form 10-K for the year ended January 28, 1995, filed by the Registrant with the SEC on April 24, 1995 (the “1994 Form 10-K”)). | ||||||||
10.2 | Amendment to the 1986 Foot Locker Stock Option Plan (incorporated herein by reference to Exhibit 10(a) to the Registrant’s Annual Report on Form 10-K for the year ended January 27, 1996, filed by the Registrant with the SEC on April 26, 1996 (the “1995 Form 10-K”)). | ||||||||
10.3 | Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) to the 1994 Form 10-K). | ||||||||
10.4 | Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 1998, filed by the Registrant with the SEC on April 21, |
59
10.5 | Amendment to the Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended July 29, 2000, filed by the Registrant with the SEC on September 7, 2000 (the “July 29, 2000 Form 10-Q”)). | ||||||||
10.6 | Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d) to the Registration Statement on Form 8-B filed by the Registrant with the SEC on August 7, 1989 (Registration No. 1-10299) (the “8-B Registration Statement”)). |
67
Exhibit No. in Item 601 of Regulation S-K | Description | ||||
10.7 | Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K ). | ||||
10.8 | Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the 1995 Form 10-K). | ||||
10.9 | Supplemental Executive Retirement Plan, as amended (incorporated herein by reference to Exhibit | ||||
10.10 | Long-Term Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K). | ||||
10.11 | Annual Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003 filed by the Registrant with the SEC on September 15, 2003 (the “August 2, 2003 Form 10-Q”)). | ||||
10.12 | Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement). | ||||
10.13 | 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 by the Registrant with the SEC on June 13, 2001 (the “May 5, 2001 Form 10-Q”)). | ||||
10.14 | Foot Locker Voluntary Deferred Compensation Plan (incorporated herein by reference to Exhibit 10(i) to the 1995 Form 10-K). | ||||
10.15 | Foot Locker Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the July 29, 2000 Form 10-Q). | ||||
10.16 | 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). | ||||
10.17 | Amendment to Trust Agreement made as of April 11, 2001 (incorporated herein by reference to Exhibit 10.4 to May 5, 2001 Form 10-Q). | ||||
10.18 | Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement). | ||||
10.19 | Amendments to the Foot Locker Directors’ Retirement Plan (incorporated herein by reference to Exhibit 10(c) to the Registrant’s Quarterly Report on Form 10-Q for the period ended October 28, 1995, filed by the Registrant with the SEC on December 11, | ||||
10.20 | Employment Agreement with Matthew D. Serra dated as of |
60
10.21 | Amendment of Restricted Stock Agreement | ||||||||
10.22 | Amendments to the Credit Agreement (incorporated herein by reference to Exhibits 10.1 to the Current Reports on Form | ||||||||
68
in Item 601 of Regulation S-K | Description | |||
10.23 | Restricted Stock Agreement with Matthew D. Serra dated as of February 9, 2005 (incorporated herein by reference to Exhibit 10.2 to the February 9, 2005 Form 8-K). | |||
10.24 | Foot Locker Executive Severance Pay Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended October 31, 1998 (the “October 31, | |||
10.25 | Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2000 filed by the Registrant with the SEC on April 21, 2000 (the “1999 Form 10-K”)). | |||
10.26 | Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.24 to the 1999 Form 10-K). | |||
10.27 | ||||
Foot Locker, Inc. Excess Cash Balance Plan (incorporated herein by reference to Exhibit 10(c) to the 1995 Form 10-K). | ||||
10.28 | Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the | |||
10.29 | Fifth Amended and Restated Credit Agreement dated as of April 9, 1997, amended and restated as of May 19, 2004 (“Credit Agreement”) (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended July 31, 2004, filed by the Registrant with the SEC on September 8, | |||
10.30 | Amendment No. 1 to the Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Form | |||
10.31 | Letter of Credit Agreement dated as of March 19, 1999 (incorporated herein by reference to Exhibit 10.35 to the 1998 Form 10-K). | |||
10.32 | Foot Locker 2002 Directors Stock Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February | |||
10.33 | Foot Locker 2003 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the August 2, 2003 Form 10-Q). | |||
10.34 | ||||
Automobile Expense Reimbursement Program for Senior Executives (incorporated herein by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the year ended January 29, 2005 filed by the Registrant on March 29, 2005 (the “2004 Form 10-K”). | ||||
10.35 | Executive Medical Expense Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.37 to the 2004 Form 10-K). | |||
10.36 | Financial Planning Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.38 to the 2004 Form 10-K). | |||
10.37 | 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 year ended January 28, 2006 filed by the Registrant with the SEC on March 27, 2006 (the “2005 Form 10-K”)). |
61
10.38 | Form of Incentive Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.41 to the 2005 Form 10-K). | |||||
10.39 | Form of Nonstatutory Stock Option Award Agreement for Non-employee Directors (incorporated herein by reference to Exhibit 10.2 to the July 31, 2004 Form 10-Q). | |||||
10.40 | Long-term Disability Program for Senior Executives (incorporated herein by reference to Exhibit 10.42 to the 2004 Form 10-K). |
69
Exhibit No. in Item 601 of Regulation S-K | Description | |||
12 | Computation of Ratio of Earnings to Fixed Charges. | |||
18 | Letter on Change in Accounting Principle (incorporated herein by reference to Exhibit 18 to the 1999 Form 10-K). | |||
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. |
62
70
Exhibits filed with this Form 10-K:
Exhibit No. in Item 601 of Regulation S-K | |||||||
Description | |||||||
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. |
63
71