UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


___________________
 

FORM 10-K


___________________

(MarkOne)    
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 29, 2011

OR

o
For the fiscal year ended January 31, 2009
 
OR
cTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to 

Commission File No. 1-10299

FOOT LOCKER, INC.

(Exact name of Registrant as specified in its charter)

New York13-3513936
For the transition period from __________to __________
Commission File No.1-10299

FOOT LOCKER, INC.
(Exact name of Registrant as specified in its charter)

New York13-3513936
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer Identification No.)

incorporation or organization)
112 West 34th Street, New York, New York10120
(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: (212) 720-3700

Securities registered pursuant to Section 12(b) of the Act:

Title of each className of each exchange on which registered
Common Stock, par value $0.01New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx NoNoco

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yesoc Nox

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoco

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x

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

 
Large accelerated filer xAccelerated filerocNon-accelerated filerocSmaller reporting companyoc

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yesoc Nox

Number of shares of Common Stock outstanding at March 24, 2009:21, 2011:154,947,095154,717,295

The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, August 2, 2008,July 30, 2010, was approximately:

$ 1,738,151,003*

* 

$

1,617,588,691*
*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 August 2, 2008 include only outstanding shares of the Registrant’s voting stock with respect to which such persons had, on such date, voting or investment power.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement (the “Proxy Statement”) to be filed in connection with the Annual Meeting of Shareholders to be held on May 20, 2009:18, 2011: Parts III and IV.

TABLE OF CONTENTS

PART I

Item 1

Business

  1
 
Item 1Business1

Item 1A

Risk Factors

2
Item 1BUnresolved Staff Comments6
Item 2Properties6
Item 3Legal Proceedings7
Item 4Submission of Matters to a Vote of Security Holders7
PART II

  2
 

Item 1B

Unresolved Staff Comments

9

Item 2

Properties

9

Item 3

Legal Proceedings

9

Item 4

[Removed and Reserved]

10
PART II

Item 5

Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11 
Purchases of Equity Securities8

Item 6

Selected Financial Data

812

Item 7

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

813

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

2630

Item 8

Consolidated Financial Statements and Supplementary Data

26
Item 9

 30

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

66
Item 9AControls and Procedures66
Item 9BOther Information69
PART III

  65
 

Item 9A

Controls and Procedures

65

Item 9B

Other Information

67
PART III

Item 10

Directors, Executive Officers and Corporate Governance

6967

Item 11

Executive Compensation

6967

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

67 
Stockholder Matters69

Item 13

Certain Relationships and Related Transactions, and Director Independence

69
Item 14Principal Accountant Fees and Services69
PART IV

  67
 

Item 14

Principal Accounting Fees and Services

67
PART IV

Item 15

Exhibits and Financial Statement Schedules

7068

PART I

Item 1.Business

General

Item 1. Business

General

Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailer of athletic footwear and apparel, operating 3,6413,426 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of January 31, 2009.29, 2011. Foot Locker, Inc. and its subsidiaries hereafter are referred to as the “Registrant,” “Company”“Company,” “we,” “our,” or “we.“us.” Information regarding the business is contained under the “Business Overview” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company maintains a website on the Internet atwww.footlocker-inc.com. The Company’s filings with the Securities and Exchange Commission, including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through this website as soon as reasonably practicable after they are filed with or furnished to the SEC by clicking on the “SEC Filings” link. The Corporate Governance section of the Company’s corporate website contains the Company’s Corporate Governance Guidelines, Committee Charters, and the Company’s Code of Business Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request to the Company’s Corporate Secretary at 112 West 34th Street, New York, NY 10120. The Company intends to promptly disclose promptly amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the Corporate Governance section of the Company’s corporate website.

     The Certification of the Chief Executive Officer required by Section 303A.12(a) of The New York Stock Exchange Listing Standards relating to the Company’s compliance with The New York Stock Exchange Corporate Governance Listing Standards was submitted to The New York Stock Exchange on June 6, 2008.

Information Regarding Business Segments and Geographic Areas

The financial information concerning business segments, divisions and geographic areas is contained under the “Business Overview” and “Segment Information” sections in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information regarding sales, operating results and identifiable assets of the Company by business segment and by geographic area is contained under the “Segment Information”Segment Information note in “Item 8. Consolidated Financial Statements and Supplementary Data.”

The service marks and trademarks appearing on this page and elsewhere in this report (except for dELiA*s,Nike, Inc., Alshaya Trading Co. W.L.L., and Northern Group, ESPN, Nike, The San Francisco Music Box Company, and U.S. Olympic Committee)Group) are owned by Foot Locker, Inc. or its subsidiaries.

Employees

Employees

The Company and its consolidated subsidiaries had 15,95212,688 full-time and 23,80625,319 part-time employees at January 31, 2009.29, 2011. The Company considers employee relations to be satisfactory.

Competition

Competition

Financial information concerning competition is contained under the “Business Risk” section in the “FinancialFinancial Instruments and Risk Management”Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”

Merchandise Purchases

Financial information concerning merchandise purchases is contained under the “Liquidity” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under the “Business Risk” section in the “FinancialFinancial Instruments and Risk Management”Management note in “Item 8. Consolidated Financial Statements and Supplementary Data.”


1

Item 1A.Risk Factors

Item 1A. Risk Factors

The statements contained in this Annual Report on Form 10-K (“Annual Report”) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please also see “Disclosure Regarding Forward-Looking Statements.”Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.

Our inability to implement our strategic long range plan may have an adverse affect on our future results.

We reported a material weaknessOur ability to successfully implement and execute our long range plan is dependent on many factors. Our strategies may require significant capital investment and management attention, which may result in the diversion of these resources from our internal control over financial reporting,core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance, competition, product differentiation, and the ability to attract and retain qualified personnel. If we cannot successfully execute our strategic growth initiatives or if the long range plan does not adequately address the challenges or opportunities we are unable to improve our internal controls,face, our financial condition and results of operations may not be accurately reported.adversely affected.

     Management’s assessment of the effectiveness of our internal control over financial reporting as of January 31, 2009 identified a material weakness in its internal control over financial reporting designed to ensure proper accounting for income taxes, as described in “Item 9A. Controls and Procedures.” This material weakness, or difficulties encountered in implementing new or improved controls or remediation, could prevent us from accurately reporting our financial results, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock and market confidence in our reported financial information.

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 the bulk of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess, 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 athletic and licensed apparel as a fashion statement and are frequent purchasers of athletic footwear.purchasers. 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. Both the NFL and NBA have collective bargaining agreements that are due to expire in the current year. The possibility of a strike of either one or both of these leagues may result in a decline of sales of licensed product as well as player endorsed footwear.

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. Our success also depends on our ability to differentiate ourselves from our competitors with respect to shopping convenience, a quality assortment of available merchandise and superior customer service. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition, and results of operations.

Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results.

In addition, someall of our significant 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

If we do not successfully manage our inventory levels, our operating results will be adversely affected.

We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order the bulk of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.

We depend on mall traffic and our ability to identify suitable store locations.

Our sales, particularlystores 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. Our sales are dependent, in part, on the volume of mall traffic. 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. Aand a decline in the popularity of mall shopping among our target customerscustomers. Further, any terrorist act, natural disaster, or public health concern that decreases the level of mall traffic, which affects our ability to open and operate stores in affected areas, could have a material adverse effect on us.our business.

To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by the overall poor economic conditions, as well as the closure of certain mall anchor tenants.

Several large landlords dominate the ownership of prime malls, particularly in the United States, and because of our dependence upon these landlords for a substantial number of our locations, any significant erosion of their financial condition or our relationships with these landlords would negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.

The effects of natural disasters, terrorism, acts of war, and retail industry conditionspublic health issues may adversely affect our business.

Natural disasters, including earthquakes, hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt the operations of our suppliers, our operations, our customers, or have an adverse effect on customer demand. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in 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 obtain exclusive product and the ability to purchase brand-name merchandise at competitive prices, including the receipt ofprices. In addition, our vendors provide volume discounts, cooperative advertising, and markdown allowances, as well as the ability to negotiate returns of excess or unneeded merchandise. We cannot be certain that such assistance from our vendors. vendors will continue in the future.


The Company purchased approximately 8082 percent of its merchandise in 20082010 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 6463 percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchase 4446 to 7881 percent of their merchandise from Nike. 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. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nike’s reputation, financial condition andor 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.

Significant increases in costs associated with the production of promotional materials may adversely affect our operating income.

We advertise and promote our merchandise through print catalogs and other promotional materials mailed to consumers or displayed in our stores. As a result, significant increases in paper, printing, and postage costs could increase the cost of producing promotional and other materials and, as a result, may have a material adverse effect on our operating income.

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.

Legislative or regulatory initiatives related to global warming/climate change concerns may negatively affect our business.

3There has been an increasing focus and continuous debate on global climate change recently, including increased attention from regulatory agencies and legislative bodies globally. This increased focus may lead to new initiatives directed at regulating an as yet unspecified array of environmental matters. Legislative, regulatory or other efforts in the United States to combat climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business.

Our operations may be adversely affected by economic or political conditions in other countries.

     Approximately 28 percentA significant portion of our sales and a significant portion of our operating resultsincome for 20082010 were attributable to our salesoperations 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.

We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.

The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, which it is anticipated will become effective in 2011 and is broader in scope than the FCPA, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents. Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business is subject to economic cycles and retail industry conditions. Purchasesresult in a material adverse effect on our results 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.operations or financial condition.

The effect of deterioratingcurrent global economic conditions have adversely affected, and financial markets may continue to adversely affect our business.

business and results of operations.

The Company’s performance is subject to global economic conditions and the related impact on consumer spending levels, which have declined recently due to the current economic slowdown.levels. Some of the factors affecting consumer spending are employment, levels of consumer debt, reductions in net worth as a result of recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, and consumer confidence, as well as other macroeconomic factors. Consumer purchases of discretionary items, including merchandise we sell, generally decline during recessionary periods and other periods where disposable income is adversely affected.affected and customers may be hesitant to use available credit. The downturn in the global economy may continue to affect customer purchases for the foreseeable future and may adversely impact our business, financial condition, and results of operations. In addition, declines in our profitability could result in a charge to earnings for the impairment of long-lived assets, goodwill and other intangible assets, which would not affect our cash flow but could decrease our earnings, and our stock price could be adversely affected.

     The recent distress

Instability in the financial markets has resulted in extreme volatility in security pricesmay adversely affect our business.

Uncertain economic conditions may constrain our ability to obtain credit. Domestic and diminished liquidityglobal credit and credit availability. There can be no assurance that our liquidity will not be affected by changes in the financialequity markets and the global economy.have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. Although we currently have a revolving credit agreement in place until 2013 and do not have any borrowings under our revolving credit facilityit (other than amounts used for standby letters of credits)credit), tightening of the credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of the Company’s securities. Additionally, our borrowing costs can be affected by independent rating agencies’ ratings, which are based largely on our performance as measured by credit metrics, including lease-adjusted leverage ratios.

In addition, instability in the current credit situation is havingfinancial markets may have a significant negative impacteffect on businesses around the world, and the impact of this situation on our major suppliers cannot be predicted. The Company relies on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor). The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver our merchandise. Our inability to obtain merchandise in a timely manner from major suppliers could have a material adverse effect on our business, financial condition, and results of operations.


If our long-lived assets, goodwill or other intangible assets become impaired, we may need to record significant non-cash impairment charges.

We review our long-lived assets, goodwill and other intangible assets when events indicate that the carrying value of such assets may be impaired. Goodwill and other indefinite lived intangible assets are reviewed for impairment if impairment indicators arise and, at a minimum, annually. We determine fair value based on a combination of a discounted cash flow approach and market-based approach. If an impairment trigger is identified, the carrying value is compared to its estimated fair value and provisions for impairment are recorded as appropriate. Impairment losses are significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our three-year plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by such factors as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict.

4

Similar to others in our industry, the recent macroeconomic conditions have affected both ourperformance, as well as our stock price and market capitalization,performance and it is difficult to predict how long these economic conditions will continue whether they will continue to deteriorate, and which aspects of our business may be adversely affected. These conditions and theThe continuation of these conditions could affect the fair value of our long-lived assets, goodwill and other intangible assets and could result in future impairment charges, which would adversely affect our results of operations.

Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition.

     As ofAt January 31, 2009,29, 2011, our cash and cash equivalents and short-term investments totaled $408 million, of which $380 million was invested in a diversified portfolio of short-term securities. Substantially all$696 million. The majority of our investments were short-term deposits in highly ratedhighly-rated banking institutions. We retain a substantial portion of our cash in foreign jurisdictions for future reinvestment. We regularly monitor our counterparty credit risk and mitigate our exposure by making short-term investments only in highly-rated institutions and by limiting the amount we invest in any one institution. The Company continually monitors the creditworthiness of its counterparties. At January 31, 2009,29, 2011, most of the investments were in institutions rated “AA-”A or better from a major credit rating agency. Despite those ratings, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues. We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. With the current uncertain financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits.

The master trust which holds the assets of our U.S. pension plan has assets totaling approximately $346$511 million as ofat January 31, 2009.29, 2011. The fair values of these assets held in the master trust are compared to the plan’s projected benefit obligation to determine the pension funding liability. We attempt to mitigate risk through diversification, and we regularly monitor investment risk on our portfolio through quarterly investment portfolio reviews and periodic asset and liability studies. Despite these measures, it is possible that the value of our portfolio may decline in the future due to any number of factors, including general market conditions and credit issues. Such declines could have an impact on the funded status of our pension plans and future funding requirements.

Our financial results may be adversely impacted by higher-than-expected tax rates or exposure to additional tax liabilities.

We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our provision for income taxes is based on a jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. Our effective tax rate could be adversely affected by a number of factors, including shifts in the mix of pretax profits and losses by tax jurisdiction, our ability to use tax credits, changes in tax laws or related interpretations in the jurisdictions in which we operate, and tax assessments and related interest and penalties resulting from income tax audits.

A substantial portion of our cash and investments is invested outside of the U.S. As we plan to permanently reinvest our foreign earnings, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. Recent proposals to reform U.S. tax rules may result in a reduction or elimination of the deferral of U.S. income tax on our foreign earnings, which could adversely affect our effective tax rate. Any of these changes could have an adverse effect on our results of operations and financial condition.


In addition, the declineour products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties and changes in tax legislation or regulation could have a material adverse effect on our pension assets will adversely affect pension expense in 2009.results of operations and financial condition.

Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.

We operate four distribution centers worldwide to support our athletic business.businesses. In addition to the distribution centers that we operate, we have third-party arrangements to support our operations in the U.S., Canada, Australia, and New Zealand. If complications arise with any facility or any facility is severely damaged or destroyed, the Company’s 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 UPSthird-party carriers for shipment of a significant amount of merchandise. An interruption in service by UPSthese carriers for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.

Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of sales. We enter into diesel fuel forward and option contracts to mitigate a portion of the risk associated with the variability caused by these surcharges.

A major failure of our information systems could harm our business.

We depend on information systems to process transactions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. 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.

Risks associated with Internet operations.

Our Internet operations are subject to numerous risks, including risks related to the failure of the computer systems that operate our websites and their related support systems, including computer viruses, telecommunications failures and similar disruptions. Also, we may require additional capital in the future to sustain or grow our online commerce.

5

Business risks related to online commerce include risks associated with the need to keep pace withrapid technological change, Internet security risks, risks of system failure or inadequacy, governmentgovernmental regulation and legal uncertainties with respect to the Internet, and collection of sales or other taxes by one or moreadditional states or foreign jurisdictions. If any of these risks materializes, it could have a material adverse effect on the Company’s business.

Risk associated with our recent acquisition.

     During the fourth quarter of 2008, we acquired CCS, a leading direct-to-customer retailer that sells skateboard equipment, apparel, footwear and accessories though catalogs and the Internet. We have substantially completed the integration of CCS during the fourth quarter 2008, including moving all personnel and distribution activities to our corporate office and distribution center, respectively. The acquisition of CCS involves a number of risks, which could significantly and adversely affect our business, financial condition, and results of operations, including:

  • failure of CCS to achieve the results that we expect;
  • diversion of management’s attention from operational matters;
  • difficulties integrating the operations and personnel; and
  • potential difficulties associated with the retention of key personnel.

Unauthorized disclosure of sensitive or confidential customer information, whether through a breach of the Company’s computer systemsystems or otherwise, could severely harm our business.

As part of the Company’s normal course of business, it collects, processes, and retains sensitive and confidential customer information. Despite the security measures the Company has in place, its facilities and systems, and those of its third party providers may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human error, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information by the Company could severely damage its reputation, expose it to the risks of litigation and liability, disrupt its operations and harm its business.


Our reliance on key management, store and field associates.

Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management team, as well as store personnel and field management. Our success depends to a significant extent both upon the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. Competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot attract and retain qualified associates. Many of the store and field associates are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, and changing demographics. If we are unable to attract and retain quality associates, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. In addition, a large number of our retail employees are paid the prevailing minimum wage, which if increased would negatively affect our profitability.

We face risks arising from possible union legislation in the United States.

Item 1B. Unresolved Staff CommentsThere is a possibility that regulations or legislation may be enacted in the United States along the lines of the proposed Employee Free Choice Act, which, if adopted or enacted, could significantly change the nature of labor relations in the United States, specifically, how union elections and contract negotiations are conducted. It would be easier for unions to win elections and we could face arbitrator-imposed labor scheduling, costs, and standards. Therefore, this legislation or regulations could impose more labor relations requirements and union activity on our business, thereby potentially increasing our costs, and could have a material adverse effect on our overall competitive position.

Health care reform could adversely affect our business.

In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health reform legislation, the current lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall effect of the statute and related regulations on our business over the coming years. Possible adverse effects of the health reform legislation include increased costs, exposure to expanded liability and requirements for us to revise ways in which we conduct business.

We may be adversely affected by regulatory and litigation developments.

We are exposed to the risk that federal or state legislation may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax rates could increase our cost of doing business or otherwise adversely affect our operations. Additionally, we are regularly involved in various litigation matters, including class actions and patent infringement claims, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.

Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock and market confidence in our reported financial information.

We must continue to document, test, monitor, and enhance our internal controls over financial reporting in order to satisfy all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal controls over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be completely adequate in the future. Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock, and market confidence in our reported financial information.


Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

Item 2. Properties

The properties of the Company and its consolidated subsidiaries consist of land, leased and owned stores, and administrative facilities, and distribution facilities.centers. Gross square footage and total selling area for the Athletic Stores segment at the end of 20082010 were approximately 13.5012.64 and 8.097.54 million square feet, respectively. These properties, which are primarily leased, are located in the United States, Canada, various European countries, Australia, and New Zealand.

The Company currently operates four distribution centers, of which two are owned and two are leased, occupying an aggregate of 2.552.4 million square feet. Three of the four distribution centers are located in the United States and one is in Europe.the Netherlands.

Item 3.Legal Proceedings

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Item 3. Legal Proceedings

Information regarding the Company’s legal proceedings areis contained in the “Legal Proceedings” note under “Item 8. Consolidated Financial Statements and Supplementary Data.”


Item 4. Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of security holders during the fourth quarter of the year ended January 31, 2009.

Item 4.[Removed and Reserved]

Executive Officers of the Company

Registrant

Information with respect to Executive Officers of the Company, as of March 30, 2009,28, 2011, is set forth below:

Chairman of the Board, President and Chief Executive OfficerMatthew D. Serra Ken C. Hicks
President and Chief Executive Officer -— Foot Locker, Inc. — International Ronald J. Halls
President and Chief Executive Officer —  Foot Locker U.S., Lady Foot Locker, Kids Foot Locker and FootactionRichard A. Johnson
Executive Vice President and Chief Financial OfficerRobert W. McHugh
Senior Vice President, General Counsel and Secretary Gary M. Bahler
Senior Vice President — Real Estate Jeffrey L. Berk
Senior Vice President — Chief Information Officer and Investor Relations Peter D. Brown
Senior Vice President and Chief FinancialAccounting OfficerRobert W. McHugh Giovanna Cipriano
Senior Vice President — Strategic Planning Lauren B. Peters
Senior Vice President — Human Resources Laurie J. Petrucci
Vice President, Treasurer and Chief Accounting Officer Investor RelationsGiovanna Cipriano 
Vice President and Treasurer John A. Maurer

Matthew D. Serra,Ken C. Hicks, age 64,58, has served as Chairman of the Board since February 2004,January 31, 2010 and President since April 2000 and Chief Executive Officer since March 2001.August 17, 2009. Mr. SerraHicks served as Chief Operating Officer from February 2000 to March 2001 and as President and Chief ExecutiveMerchandising Officer of Foot Locker WorldwideJ.C. Penney Company, Inc. (“JC Penney”) from September 19982005 through 2009. He was President and Chief Operating Officer of Stores and Merchandise Operations of JC Penney from 2002 through 2004, and he served as President of Payless ShoeSource, Inc. from 1999 to February 2000.2002. Mr. Hicks is also a director of Avery Dennison Corporation.

Ronald J. Halls, age 55,57, has served as President and Chief Executive Officer of Foot Locker, Inc. —  International since October 2006. He served as President and Chief Executive Officer of Champs Sports, an operating division of the Company, from February 2003 to October 2006 and as Chief Operating Officer of Champs Sports from February 2000 to February 2003.

Richard A. Johnson, age 53, has served as President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction since January 2010. He served as President and Chief Executive Officer of Foot Locker Europe, an operating division of the Company, from August 2007 to January 2010; President and Chief Executive Officer of Footlocker.com/Eastbay, an operating division of the Company, from April 2003 to August 2007 and President and Chief Operating Officer of Footlocker.com/Eastbay from July 2000 to April 2003.

Robert W. McHugh, age 52, has served as Executive Vice President and Chief Financial Officer since May 2009. He served as Senior Vice President and Chief Financial Officer from November 2005 through April 2009. He served as Vice President and Chief Accounting Officer from January 2000 to November 2005.

Gary M. Bahler, age 57,59, has served as Senior Vice President since August 1998, General Counsel since February 1993 and Secretary since February 1990.

Jeffrey L. Berk, age 53,55, has served as Senior Vice President — Real Estate since February 2000.

Peter D. Brown, age 54,56, has served as Senior Vice President — Chief Information Officer since February 2011. He served as Senior Vice President, Chief Information Officer and Investor Relations sincefrom September 2006. Mr. Brown served2006 to February 2011; and as Vice President — Investor Relations and Treasurer from October 2001 to September 2006, served as Vice President — Investor Relations and Corporate Development from April 2001 to October 2001 and as Assistant Treasurer — Investor Relations and Corporate Development from August 2000 to April 2001.2006.

Robert W. McHugh,Giovanna Cipriano, age 50,41, has served as Senior Vice President and Chief FinancialAccounting Officer since November 2005. HeMay 2009. Ms. Cipriano served as Vice President and Chief Accounting Officer from January 2000November 2005 through April 2009. She served as Divisional Vice President, Financial Controller from June 2002 to November 2005.

Lauren B. Peters, age 47,49, 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 50,52, has served as Senior Vice President — Human Resources since May 2001. Ms. Petrucci served as Senior Vice President — Human Resources of the Foot Locker Worldwide division from March 2000 to May 2001.

Giovanna Cipriano,John A. Maurer, age 39,51, has served as Vice President, Treasurer and Chief Accounting OfficerInvestor Relations since November 2005. She served as Divisional Vice President, Financial Controller from June 2002 to November 2005.

JohnFebruary 2011. Mr. Maurer age 49, has served as Vice President and Treasurer sincefrom September 2006. Mr. Maurer2006 to February 2011. He served as Divisional Vice President and Assistant Treasurer from April 2006 to September 2006 and as Assistant Treasurer from April 2002 to SeptemberApril 2006.

There are no family relationships among the executive officers or directors of the Company.


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PART II

Item 5.Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Information regardingFoot Locker, Inc. common stock is listed on The New York Stock Exchange as well as on the Company’s market forBörse Stuttgart stock exchange listings,in Germany. In addition, the stock is traded on the Cincinnati stock exchange. At January 29, 2011, the Company had 19,286 shareholders of record owning 154,620,118 common equity, quarterlyshares. During each of the quarters of 2010 and 2009, the Company declared dividends of $0.15 per share. The following table sets forth, for the period indicated, the intra-day high and low sales prices and dividend policy are contained infor the “Shareholder Information and Market Prices” note under “Item 8. Consolidated Financial Statements and Supplementary Data.”Company’s common stock:

    
 2010 2009
   High Low High Low
1st Quarter $16.76  $11.30  $12.29  $7.09 
2nd Quarter  15.79   12.27   12.95   9.38 
3rd Quarter  16.09   11.59   12.31   9.91 
4th Quarter  20.08   15.63   12.55   9.46 

The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended January 29, 2011.

    
Date Purchased Total
Number of
Shares
Purchased		 Average
Price Paid
per Share		 Total Number of Shares Purchased as Part of Publicly Announced Program(1) Approximate
Dollar Value of Shares that may
yet be Purchased Under the Program(1)
Oct. 31, 2010 through Nov. 27, 2010  —  $—   —  $214,406,176 
Nov. 28, 2010 through Jan. 1, 2011  615,000   19.38   615,000  $202,484,858 
Jan. 2, 2011 through Jan. 29, 2011  90,000   19.75   90,000  $200,707,001 
    705,000  $19.43   705,000      

(1)On February 16, 2010, the Company’s Board of Directors approved the extension of the Company’s 2007 common share repurchase program for an additional three years in the amount of $250 million. During 2010, the Company repurchased 3,215,000 shares of common stock at a cost of approximately $50 million. The Company repurchased 705,000 shares of common stock during the fourth quarter at a cost of approximately $14 million.

Performance Graph

The following graph compares the cumulative five-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell 2000 Index.

Indexed Share Price Performance


Item 6.Selected Financial Data

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

Item 6. Selected Financial Data

     SelectedThe selected financial data is includedbelow should be read in conjunction with the “Five Year Summary of Selected Financial Data” note in “Item 8. Consolidated Financial Statements and Supplementary Data.”the Notes thereto and other information contained elsewhere in this report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     
($ in millions, except per share amounts) 2010 2009 2008 2007 2006(1)
Summary of Continuing Operations
                         
Sales $5,049   4,854   5,237   5,437   5,750 
Gross margin  1,516   1,332   1,460   1,420   1,736 
Selling, general, and administrative expenses  1,138   1,099   1,174   1,176   1,163 
Impairment and other charges  10   41   259   128   17 
Depreciation and amortization  106   112   130   166   175 
Interest expense, net  9   10   5   1   3 
Other income  (4)   (3)   (8)   (1)   (14) 
Income (loss) from continuing operations  169   47   (79)   43   247 
Cumulative effect of accounting change(2)  —   —   —   —   1 
Basic earnings per share from continuing operations  1.08   0.30   (0.52)   0.29   1.59 
Basic earnings per share from cumulative effect of accounting change(2)  —   —   —   —   0.01 
Diluted earnings per share from continuing operations  1.07   0.30   (0.52)   0.28   1.58 
Diluted earnings per share from cumulative effect of accounting change(2)  —   —   —   —   — 
Common stock dividends declared per share  0.60   0.60   0.60   0.50   0.40 
Weighted-average common shares outstanding (in millions)  155.7   156.0   154.0   154.0   155.0 
Weighted-average common shares outstanding assuming dilution (in millions)  156.7   156.3   154.0   155.6   156.8 
Financial Condition
                         
Cash, cash equivalents, and short-term investments $696   589   408   493   470 
Merchandise inventories  1,059   1,037   1,120   1,281   1,303 
Property and equipment, net  386   387   432   521   654 
Total assets  2,896   2,816   2,877   3,243   3,249 
Long-term debt and obligations under capital leases  137   138   142   221   234 
Total shareholders’ equity  2,025   1,948   1,924   2,261   2,295 
Financial Ratios
                         
Operating profit (loss) as a % of sales  5.2%   1.6   (2.0)   (0.9)   6.6 
Earnings before interest and taxes $266   83   (95)   (49)   395 
Income (loss) from continuing operations as a % of sales  3.3%   1.0   (1.5)   0.8   4.3 
Return on assets (ROA)  5.9%   1.7   (2.6)   1.3   7.5 
Net debt capitalization percent(3)  39.0%   43.0   46.7   45.1   44.4 
Current ratio  4.0   4.1   4.2   4.0   3.9 
Sales per average gross square foot(4) $360   333   350   352   372 
Other Data
                         
Capital expenditures $97   89   146   148   165 
Number of stores at year end  3,426   3,500   3,641   3,785   3,942 
Total selling square footage at year end (in millions)  7.54   7.74   8.09   8.50   8.74 
Total gross square footage at year end (in millions)  12.64   12.96   13.50   14.12   14.55 

(1)2006 represents the 53 weeks ended February 3, 2007.
(2)2006 relates to the adoption of authoritative accounting guidance for share-based compensation.
(3)Represents total debt, net of cash, cash equivalents, and short-term investments and includes the effect of interest rate swaps. The effect of interest rate swaps increased/(decreased) debt by $17 million, $18 million, $19 million, $4 million, and $(4) million, at January 29, 2011, January 30, 2010, January 31, 2009, February 2, 2008, and February 3, 2007, respectively. Additionally, this calculation includes the present value of operating leases, and accordingly is considered a non-GAAP measure.
(4)Calculated as Athletic Store sales divided by the average monthly ending gross square footage of the last thirteen months.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments — Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and Footaction.CCS. The Direct-to-Customers segment reflects CCS and Footlocker.com, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs, mobile devices, and Internet websites.

The Foot Locker brand is one of the most widely recognized names in the market segments in which the Company operates, epitomizing high quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, specifically Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, Inc., its direct-to-customers business. Through various marketing channels, including television campaignsbroadcast, digital, print, and sponsorships of various sporting events, Foot Locker, Inc.the Company reinforces its image with a consistent message;message- namely, that it is the destination store for athletic footwearathletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment.

Store Profile

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 At
January 30, 2010		 Opened Closed At
January 29, 2011
Foot Locker  1,911   27   43   1,895 
Lady Foot Locker  415   —   37   378 
Kids Foot Locker  301   5   12   294 
Champs Sports  552   1   13   540 
Footaction  319   —   12   307 
CCS  2   10   —   12 
Total Athletic Stores  3,500   43   117   3,426 

Athletic Stores

The Company operates 3,6413,426 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segment’s operating businesses:

Foot Locker — “Sneaker Central” — Foot Locker is a leading global athletic footwear and apparel retailer. Its stores offer the latest in athletic-inspired performance products, manufactured primarily by the leading athletic brands. Foot Locker offers products for a wide variety of activities including basketball, running, and training. Its 1,9501,895 stores are located in 21 countries including 1,2181,144 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 130129 in Canada, 512529 in Europe, and a combined 9093 in Australia and New Zealand. The domestic stores have an average of 2,400 selling square feet and the international stores have an average of 1,500 selling square feet.

Lady Foot Locker — “The Place for Her” — Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel and accessories for active women. Its stores carry major athletic footwear and apparel brands, as well as casual wear and an assortment of apparel designed for a variety of activities, including running, walking, training, and fitness. Its 378 stores are located in the United States, Puerto Rico, and the U.S. Virgin Islands, and have an average of 1,300 selling square feet.

Kids Foot Locker — “Where Kids Come First” — Kids Foot Locker is a national children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Its 294 stores are located in the United States, Puerto Rico, and the U.S. Virgin Islands and have an average of 1,400 selling square feet.

Champs Sports —“Official Providers of Game” — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in the United States.North America. Its product categories include athletic footwear, apparel and accessories, and a focused assortment of equipment. This combination allows Champs Sports to differentiate itself from other mall-based stores by presenting complete product assortments in a select number of sporting activities. Its 565540 stores are located throughout the United States, Canada, Puerto Rico, and the U.S. Virgin Islands. The Champs Sports stores have an average of 3,6003,500 selling square feet.


Footaction —“Head to Toe Sport Inspired Style” — Footaction is a national athletic footwear and apparel retailer. The primary customers are young urban males that seek street-inspired fashionathletic styles. Its 335307 stores are located throughout the United States and Puerto Rico and focus on marquee allocated footwear and branded apparel. The Footaction stores have an average of 2,900 selling square feet.

Lady Foot LockerCCS — Lady Foot Locker is a leading U.S. retailer“Largest Deck Selection” — CCS serves the needs of athletic footwear, apparelthe 10-18 year old skateboard enthusiast while maintaining credibility with core skaters of all ages. This format complements the CCS catalog and accessories for women. Itsinternet business, which was acquired in November 2008. During 2009, the Company opened two stores carry major athletic footwear and apparel brands, as well as casual wear and an assortmentunder the banner of proprietary merchandise designed for a varietyCCS. This concept was expanded to 12 stores in 2010, all of activities, including running, basketball, walking, and fitness. Its 486 storeswhich are located in the United States Puerto Rico, the U.S. Virgin Islands, and Guam, and have an average of 1,3001,700 selling square feet.

Direct-to-Customers

Kids Foot Locker — Kids Foot LockerThe Company’s Direct-to-Customers segment is a national children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparelmulti-branded and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Its 305 stores are located in the United States, Puerto Rico and the U.S. Virgin Islands and have an average of 1,400 selling square feet.

Store Profile

     AtAt
     February 2, 2008     Opened     Closed     January 31, 2009
Foot Locker2,00629851,950
 Champs Sports5761728565
Footaction 356  122  335
Lady Foot Locker5265  45 486 
Kids Foot Locker321 1228305
Total Athletic Stores3,785642083,641

Direct-to-Customers

Footlocker.com — Footlocker.com, Inc.,multi-channeled. This segment sells, through its affiliates, directly to customers through catalogs and its Internet websites. Eastbay, Inc., one of itsthe affiliates, is one ofamong the largest direct marketers ofin the United States, providing the high school athlete with a complete sports solution including athletic footwear, apparel, equipment, team licensed, and private-label merchandise in the United States and provides the Company’s eight full-service e-commerce sites access to an integrated fulfillment and distribution system. The Company has a marketing agreement with the U.S. Olympic Committee (USOC) providing the Company with the exclusive rights to sell USOC licensed products through catalogs and via an e-commerce site.

9

     The Company has an agreement with ESPN for ESPN Shop — an ESPN-branded direct mail catalog and e-commerce site linked towww.ESPNshop.com, where consumers can purchase athletic footwear, apparel and equipment, which will be managed by Footlocker.com. Both the catalog and the e-commerce site feature a variety of ESPN-branded and non-ESPN-branded athletically inspired merchandise.

     On November 5, In 2008, the Company purchased CCS, from dELiA*s, Inc. CCS is a direct marketeran Internet and catalog retailer of skateboard and snowboard equipment, apparel, footwear, and accessories targeted primarily targeting teenageto teenaged boys. The retail store operations of CCS are included in the Athletic Stores segment. The Direct-to-Customers segment operates through catalogsthe website for eastbay.com, final-score.com, and teamsales.eastbay.com. Additionally this segment operates websites aligned with the brand names of its Internet website.store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footaction.com, champssports.com, and ccs.com).

Franchise 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 Foot Locker stores subject to certain restrictions, located within the Middle East.East, subject to certain restrictions. Additionally, in March 2007, the Company entered into a ten-year agreement with another third party for the exclusive right to open and operate Foot Locker stores in the Republic of Korea. A total of 1726 franchised stores were operationaloperating at January 31, 2009. Revenue29, 2011. Royalty income from the franchised stores was not significant for the any of the periods presented. These stores are not included in the Company’s operating store count above.

2007 Results

     The 2007 results as presented in this Annual Report have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The income tax benefit of $99 million related to continuing operations, as reported for the full year of 2007 within the Form 10-K, was overstated by $6 million. This overstatement comprises primarily five items. First, the Company understated its income taxes payable by $9 million due to incorrectly accounting for foreign dividend withholding taxes. Second, the Company noted that certain foreign currency fluctuations related to the tax assets and liabilities, totaling $5 million, should have been reflected as part of the foreign currency translation adjustment within accumulated other comprehensive loss. The Company had incorrectly reflected these foreign exchange movements within the income tax provision, thereby increasing the income tax provision erroneously. Third, the Company overstated the value of a portion of its Canadian deferred tax assets by $3 million as a result of using incorrect tax rates. Fourth, the Company understated a deferred tax liability of $2 million related to goodwill. Finally, various state and international depreciation corrections totaling $3 million were overstated in the income tax provision.

Overview of Consolidated Results

     2008 was a very challenging year for the overall retail industry. The severe recession, which began in the latter part of 2007 in the United States, worsened and spread to other countries throughout the year. This past year has been defined by historically low consumer confidence, rising unemployment levels, and declining consumer spending. We had anticipated that consumer spending would continue to slow during 2008 and we therefore planned our business strategy, accordingly. In 2007, we initiated a program to close underperforming stores to improve the overall profitability of our store fleet. Another significant area of focus was inventory management. We began the year with inventory levels in line with anticipated sales. This improved inventory position allowed us to reduce promotional markdowns and improve our gross margin rate in 2008.

The Company reported a net loss from continuing operations of $79 million or $0.52 per share for the year ended January 31, 2009, which compares with $43 million or $0.28 per share for the year ended February 2, 2008. Several factors affect the comparability of these two years, specifically:

  • The overall decline in current business trends, as well as lower projected earnings, resulted in our recognizingnon-cash charges for goodwill and other intangible assets impairments in 2008 totaling $169 million, or $123million after-tax.
  • In addition to the above impairment charges, during 2008 the following charges were recorded:
  • $15 million impairment charge, with no tax benefit, related to the write-off of a note due from thepurchasers of the Northern Group, a previously discontinued business,

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  • $3 million charge, with no tax benefit, related to an other-than-temporary impairment of our investment in a money-market fund,
  • Impairment of store long-lived assets related to the U.S. retail divisions totaling $67 million or $41 million, after-tax, and
  • Exit costs related to the store closing program, primarily representing lease termination costs, totaling $5 million, or $3 million after-tax.
  • Included in the results for 2007 are impairment charges and store closing expenses totaling $128 million, or $81 million after-tax. In addition, the 2007 results include a $62 million benefit related to a Canadian income tax valuation adjustment.
  • Excluding the impairment charges, store closing costs, and the income tax valuation adjustments for both 2008 and 2007,recorded net income from continuing operations would have been $106of $169 million in 2008or $1.07 per diluted share for 2010; this compares with $47 million or $0.30 per diluted share for the prior-year period. Other highlights include:

    Sales increased by 4.0 percent and comparable-store sales increased by 5.8 percent as compared with $62the corresponding prior-year period.
    Gross margin increased 260 basis points in 2010 as compared with 2009. Included in cost of sales for 2009 is a $14 million in 2007. This primarily reflects a $40 million improvement in gross margincharge to reserve for inventory as the Company was significantly less promotional during 2008.

began its transition to a new apparel strategy.

The following table providesCompany recorded a reconciliationcharge of reported GAAP results$10 million in 2010 to income from continuing operations excludingimpair the CCS tradename intangible asset due to the lower projected revenues for this division. Included in 2009 are impairment charges totaling $36 million, of which $32 million was recorded to impair store closing programlong-lived assets within the Athletic Stores segment and $4 million related to a write-off of certain software development costs within the Direct-to-Customers segment.
The Company recorded a $2 million gain in 2010 on the settlement on its money-market investment in the Reserve International Liquidity Fund, Ltd. (the “Fund”). During 2008, the Company had recognized an impairment loss of $3 million representing the decreased value of the underlying securities of Lehman Brothers held in the Fund. These amounts were recorded with no tax expense or benefit.

Other highlights include:

Cash and cash equivalents at January 29, 2011 were $696 million, representing an increase of $114 million.
Cash flow provided from operations was $326 million, which included the payment on the settlement of the net investment hedge of $24 million and qualified pension contribution totaling $32 million. The funded status of the qualified plans improved to 93 percent as compared with 87 percent in 2009.
Dividends totaling $93 million were declared and paid. Effective with the first quarter 2011 dividend payment, the dividend was increased by 10 percent to $0.165 per share.

In March 2010, the Company announced a new strategic plan, which includes a series of operating initiatives and long-term financial objectives. We consider the following financial objectives in assessing our performance pursuant to the strategic plan:

Sales of $6 billion
Sales per gross square foot of $400
EBIT margin of 8 percent
Net income tax valuation adjustment in 2007, which is considered a non-GAAPmargin of 5 percent
Return on Invested Capital of 10 percent

In the following tables, the Company has presented certain financial measure.measures and ratios identified as non-GAAP. The Company believes this non-GAAP information is a useful measure to investors because it allows for a more direct comparison of the Company’s performance for the year with the Company’s performance in prior periods.

          2008     2007     2006
(in millions)
(Loss) income from continuing operations - GAAP$(79)$43$247
 
Impairment Charges, after-tax:
       Goodwill and other intangibles123——
       Northern Group note15——
       Money-market fund3—   —
       Store long-lived assets  41 78 12
Total impairment charges1827812
 
Store closing program costs, after-tax33—
Canadian valuation allowance adjustment—(62)—
      
Income from continuing operations - Non-GAAP $106$62$259
 
Diluted Earnings per Share:
(Loss) income from continuing operations - GAAP$(0.52)$0.28$1.58
Total impairment charges 1.18 0.500.08
Store closing program costs 0.02 0.02—
Canadian valuation allowance adjustment —  (0.40) —
Income from continuing operations - Non-GAAP$0.68$0.40$1.66

Key highlights of the year:


Reconciliation of the non-GAAP measures, continued:

   
 2010 2009 2008
   (in millions, except per share amounts)
After-tax income:
               
Income (loss) from continuing operations – Reported $169  $47  $(79) 
After-tax amounts excluded  4   34   185 
Canadian tax rate changes excluded  —   4   — 
Income (loss) from continuing operations after-tax – Adjusted $173  $85  $106 
Net income margin %  3.3%   1.0%   (1.5%) 
Adjusted Net income margin %  3.4%   1.8%   2.0% 
Diluted earnings per share:
               
Income (loss) from continuing operations – Reported $1.07  $0.30  $(0.52) 
Impairment and other charges  0.04   0.16   1.20 
Inventory reserve  —   0.06   — 
Money-market realized gain  (0.01)   —   — 
Canadian tax rate changes  —   0.02   — 
Income from continuing operations – Adjusted $1.10  $0.54  $0.68 

When assessing Return on Invested Capital (“ROIC”), the Company adjusts its results to reflect its operating leases as if they qualified for capital lease treatment. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the presentation of these leases as capital leases is appropriate. Accordingly, the asset base and net income amounts in the calculation of ROIC are adjusted to reflect this. ROIC, subject to certain adjustments, is also used as a measure in executive long-term incentive compensation. The closest GAAP measure is Return on Assets (“ROA”) and is also represented below. ROA increased to 5.9 percent as compared with 1.7 percent in the prior year.

11


  • Merchandise inventories at January 31, 2009 were $1,120 million, which represents a reduction of $161 million.Excludingyear reflecting the effect of foreign currency fluctuations and the additional inventory associated with our recentacquisition, inventories declined by approximately 10 percent.
  • Repaid the remaining $88 million of our outstanding balance on the 5-year term loan.
  • Purchased and retired $6 million of the $200 million 8.50 percent debentures payableCompany’s overall strong performance in 2022, bringing theoutstanding amount to $123 million as of January 31, 2009.
  • Dividends totaling $93 million were declared and paid.

     Looking ahead to 2009, we are focused on ensuring our balance sheet and cash position remain strong; continuing to manage our cost structure and inventory levels aggressively; strengthening and enhancing our brands to ensure they are relevant; and positioning our Company for long-term success.2010.

   
 2010 2009 2008
ROA(1)  5.9%   1.7%   (2.6%) 
ROIC %(2)  8.3%   5.3%   5.4% 

(1)Represents income (loss) from continuing operations of $169 million, $47 million, and $(79) million divided by average total assets of $2,856 million, $2,847 million, and $3,060 million for 2010, 2009, and 2008, respectively.
(2)See below for the calculation of ROIC.

   
 2010 2009 2008
   (in millions)
Adjusted EBIT $274  $138  $164 
+ Rent expense less depreciation on capitalized operating leases(3)  156   156   162 
- Adjusted income tax expense(3)  (153)   (104)   (114) 
= Adjusted return after taxes $277  $190  $212 
Average total assets $2,856  $2,847  $3,060 
- Average cash, cash equivalents and short-term investments  (642)   (499)   (451) 
- Average non-interest bearing current liabilities  (461)   (425)   (464) 
- Average merchandise inventories  (1,048)   (1,079)   (1,201) 
+ Average estimated asset base of capitalized operating leases(3)  1,443   1,500   1,580 
+ 13-month average merchandise inventories  1,177   1,268   1,378 
= Average invested capital $3,325  $3,612  $3,902 
ROIC %  8.3%   5.3%   5.4% 
(3)The determination of the capitalized assets and the adjustments to income have been calculated on a lease-by-lease basis and have been consistently calculated in each of the years presented above. The adjusted income tax expense represents the tax on adjusted pre-tax return.

The following table represents a summary of sales and operating results, reconciled to income (loss) income from continuing operations before income taxes.

           2008     2007     2006
 (in millions)
Sales       
Athletic Stores $4,847 $5,071 $5,370 
Direct-to-Customers  390  364  380 
Family Footwear  —  2  — 
 $5,237 $5,437 $5,750 
 Operating Results       
Athletic Stores(1) $(59) $(27) $405 
Direct-to-Customers  43  40  45 
Family Footwear(2) —   (6)  — 
Division (loss) profit  (16)  7  450 
Restructuring income (charge)(3)  —  2   (1) 
     Total division (loss) profit  (16)  9  449 
Corporate expense  (87)  (59)  (68) 
Total operating (loss) profit  (103)  (50)  381 
Other income  8  1  14 
Interest expense, net  5  1  3 
(Loss) income from continuing operations before income taxes $(100) $(50) $392 
____________________

   
 2010 2009 2008
   (in millions)
Sales
               
Athletic Stores $4,617  $4,448  $4,847 
Direct-to-Customers  432   406   390 
   $5,049  $4,854  $5,237 
Operating Results
               
Athletic Stores(1) $329  $114  $(59) 
Direct-to-Customers(2)  30   32   43 
    359   146   (16) 
Restructuring income(3)  —   1   — 
Division profit (loss)  359   147   (16) 
Less: Corporate expense(4)  97   67   87 
Operating profit (loss)  262   80   (103) 
Other income(5)  4   3   8 
Earnings before interest expense and income taxes  266   83   (95) 
Interest expense, net  9   10   5 
Income (loss) from continuing operations before income taxes $257  $73  $(100) 

(1)

The year ended January 30, 2010 includes non-cash impairment charges totaling $32 million, which were recorded to write-down long-lived assets such as store fixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions. The year ended January 31, 2009 includes a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment, and store closing costs related to the Company’s U.S. operations. The

(2)Included in the results for the year ended February 2, 2008 includesJanuary 29, 2011 is a $128non-cash impairment charge of $10 million charge representing impairment and store closing costs related to write-down the Company’s U.S. operations. TheCCS tradename intangible asset. Included in the results for the year ended February 3, 2007 includedJanuary 30, 2010 is a $17non-cash impairment charge of $4 million non-cashto write off software development costs.
(3)During the year ended January 30, 2010, the Company adjusted its 1999 restructuring reserves to reflect a favorable lease termination.
(4)During the fourth quarter of 2009, the Company restructured its organization by consolidating the Lady Foot Locker, Foot Locker U.S., Kids Foot Locker, and Footaction businesses in addition to reducing corporate staff, resulting in a $5 million charge. Included in corporate expense for the year ended January 31, 2009 is a $3 million other-than-temporary impairment charge related to the Company’s European operations.

(2)

During the first quarter of 2007, the Company launched a new family footwear concept, Footquarters. The concept’s results did not meet the Company’s expectations and, therefore, the Company decided not to invest further in this business. These stores were converted to the Company’s other formats. Includedinvestment in the operating loss of $6 million was approximately $2 million of costs associated withReserve International Liquidity Fund. Additionally, for the removal of signage and the write-off of unusable fixtures.

(3)

During 2007, the Company adjusted its 1993 Repositioning and 1991 Restructuring reserve by $2 million primarily due to favorable lease terminations. During 2006,year ended January 31, 2009 the Company recorded a restructuring$15 million impairment charge on the Northern Group note receivable.

(5)Other income includes non-operating items, such as gains from insurance recoveries, gains on the repurchase and retirement of $1 million, which represented a revision tobonds, royalty income, the original estimate of the lease liabilitychanges in fair value, premiums paid and realized gains associated with the guarantee of The San Francisco Music Box Company distribution center. These amounts are included in selling, general and administrative expensesforeign currency option contracts. Included in the Consolidated Statementsyear ended January 29, 2011 is a $2 million gain to reflect the Company’s settlement of Operations.

its investment in the Reserve International Liquidity Fund.

Sales

All references to comparable-store sales for a given period relate to sales from stores that are open at the period-end, that have been open for more than one year, and exclude the effect of foreign currency fluctuations. Accordingly, stores opened and closed during the period are not included. Sales from the Direct-to-CustomerDirect-to-Customers segment excluding CCS sales, are included in the calculation of comparable-store sales for all periods presented. Sales from acquired businesses that include the purchase of inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, effective with the first quarter of 2010, CCS internet and catalog sales have been excludedincluded in the computation of comparable-store sales.

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Sales decreasedincreased to $5,237$5,049 million, or by 3.74.0 percent as compared with 2007.2009. Excluding the effect of foreign currency fluctuations, sales increased 4.6 percent as compared with 2009. Comparable-store sales increased by 5.8 percent.

Sales of $4,854 million in 2009 decreased by 7.3 percent from sales of $5,237 million in 2008. Excluding the effect of foreign currency fluctuations, sales declined 4.06.1 percent as compared with 2007. Comparable-store sales decreased by 3.2 percent.

     Sales of $5,437 million in 2007 decreased by 5.4 percent from sales of $5,750 million in 2006. Excluding the effect of foreign currency fluctuations, sales declined 7.6 percent as compared with 2006.2008. Comparable-store sales decreased by 6.3 percent.


Gross Margin

Gross margin as a percentage of sales was 27.930.0 percent in 20082010 increasing 180260 basis points as compared with 2007. The increase in2009. In 2009, the Company recorded a $14 million inventory reserve on certain aged apparel as part of its new apparel strategy. Excluding this charge, gross margin representedwould have increased by 230 basis points as compared with 2009. This increase reflected an increase of 230150 basis points in the merchandise margin rate reflecting lower markdowns.markdowns as the Company was less promotional during the year as compared with the prior year. Lower salesvendor allowances during the current year, reflecting the overall lower promotional activity, negatively affected gross margin by 10 basis points. The increase in 2008 resultedthe gross margin also reflected a decrease of 80 basis points in the occupancy and buyers salary expense rate increasing by 50 basis points, as a percentage of sales. The effect of reduced vendor allowances was not significant as compared with 2007.reflecting improved leverage and expense reductions.

Gross margin as a percentage of sales was 26.127.4 percent in 2007 declining 4102009 decreasing 50 basis points as compared with 2006. Gross2008. The decrease in the gross margin as a percentagereflected an increase of sales, was negatively affected primarily by incremental markdowns, of 18030 basis points takenin the merchandise margin rate due to liquidate slow-movinglower markdowns, offset by an 80 basis point increase in the occupancy rate due to lower sales. Vendor allowances were essentially the same as compared with 2008 and excess inventory anddid not significantly affect the effect of reduced vendor allowances, which negatively affected gross margin rate. Excluding the $14 million inventory reserve recorded in 2009, gross margin would have declined by approximately 6020 basis points as compared with 2006. Lower sales in 2007 resulted in the occupancy rate increasing by 160 basis points, as a percentage of sales.2008.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses decreasedincreased by $2$39 million to $1,174$1,138 million in 2008,2010, or by 0.23.5 percent, as compared with 2007.2009. SG&A as a percentage of sales decreased to 22.5 percent as compared with 22.6 percent in 2009, due to expense management and the increase in sales. Excluding the effect of foreign currency fluctuations in 2010, SG&A increased by $47 million. This increase primarily reflects higher incentive compensation costs totaling $45 million, partially offset by expense management efforts.

SG&A expenses decreased by $75 million to $1,099 million in 2009, or by 6.4 percent, as compared with 2008. SG&A as a percentage of sales increased to 22.422.6 percent as compared with 21.622.4 percent in 2007. The increase in SG&A as a percentage of sales is2008, due to the decline in sales. Excluding the effect of foreign currency fluctuations in 2008,2009, SG&A decreased by $9$64 million. This decrease reflects lower divisional expenses reflectingprimarily due to operating fewer stores and compensation expense, offset, in part, by an increase in corporate expenses primarily related to increased incentive compensation.

     SG&A expenses increased bypension expense of $13 million to $1,176 million in 2007, or by 1.1 percent, as compared with 2006. SG&A as a percentage of sales increased to 21.6 percent as compared with 20.2 percent in 2006. The increase in SG&A as a percentage of sales is due to the decline in sales. Excluding the effect of foreign currency fluctuations and the 53rd week in 2006, SG&A decreased by $2 million. This decrease primarily reflected savings associated with operating fewer stores, as well as controlling variable expenses as compared with the prior-year period.

Corporate Expense

Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.

Corporate expense increased by $28$30 million to $87$97 million in 20082010 as compared with 2007.2009. Depreciation and amortization included in corporate expense amounted towas $12 million in 2010 and $13 million in 20082009. Incentive compensation costs included within corporate expense represent an increase of $29 million as a result of the Company’s outperformance as compared with plan. Additionally, 2009 included a $5 million charge related to the reorganization of its operations and $14corporate staff reductions.

Corporate expense decreased by $20 million to $67 million in 2007. Corporate2009 as compared with 2008. Depreciation and amortization included in corporate expense forwas $13 million in both 2009 and 2008. Included in 2008 includescorporate expense were charges that totaled $18 million, which represented a $3 million other-than-temporary impairment charge related to a short-term investment and a $15 million impairment charge related to the Northern Group note receivable. During the first quarter of 2008, the principal ownersThe balance of the Northern Group requested an extension onchange represents lower incentive compensation costs as well as income of $3 million related to the repaymentfinal settlement of the note, which was scheduled to be repaid on September 28, 2008. The Company determined, based on the Northern Group’s current financial condition and projected performance, that repayment of the note pursuant to the original terms of the purchase agreement was not likely. Excluding these charges, corporate expense increased by $10 million, which is primarily related to increased incentive compensation.

     Corporate expense decreased by $9 million to $59 million in 2007 as compared with 2006. Depreciation and amortization includedVisa/MasterCard litigation. These reductions in corporate expense amounted to $14 millionwere offset, in 2007 and $22 million in 2006, the decrease reflecting certain software assets, which were fully depreciated. Excluding the change in corporate expense related to depreciation and amortization, corporate expense declined primarily due to reduced incentive compensationpart, by higher pension expense.

13

Depreciation and Amortization

Depreciation and amortization of $130$106 million decreased by 21.75.4 percent in 20082010 from $166$112 million in 2007.2009. This decrease primarily reflects reduced depreciation and amortization resulting from store long-lived asset impairment charges recorded in 2009. Additionally, foreign currency fluctuations reduced depreciation and amortization expense by $1 million.


Depreciation and amortization of $112 million decreased by 13.8 percent in 2009 from $130 million in 2008. This decrease primarily reflects the effect of the 2007 impairment charges offset, in part, by increased depreciation and amortization related to the Company’s capital spending.spending, as well as the amortization expense associated with the CCS customer list intangible. The effect of foreign currency fluctuations was not significant. Due to the 2008 impairment charges, the Company expects that its 2009 depreciation and amortization expense will be approximately $15 million lower than 2008.

     Depreciation and amortization of $166 million decreased by 5.1 percent in 2007 from $175 million in 2006. This decrease primarily reflects reduced software amortization of $8 million as assets became fully depreciated and reduced depreciation and amortization associated with the third quarter 2007 impairment charge. These decreases were offset, in part, by the effect of foreign currency fluctuations, which increased depreciation and amortization expense by $3 million, and increased depreciation and amortization related to the Company’s capital spending.

Interest Expense, Net

           2008     2007     2006
 (in millions)
Interest expense $16 $21 $23 
 Interest income  (11)  (20)  (20) 
     Interest expense, net $5 $1 $3 
Weighted-average interest rate (excluding facility fees):           
     Long-term debt  6.2% 8.0% 7.8%

   
 2010 2009 2008
   (in millions)
Interest expense $14  $13  $16 
Interest income  (5)   (3)   (11) 
Interest expense, net $9  $10  $5 
Weighted-average interest rate (excluding fees):
               
Long-term debt  7.6%   7.3%   6.2% 

Interest expense of $16$14 million decreasedincreased by 23.8 percent in 2008$1 million as compared to $21 million in 2007.with 2009. The reductionincrease in interest expense primarily relates to higher fees associated with the repaymentrevolving credit facility. Interest expense in 2010 includes $1 million in amortization of the term loan in May 2008 andgain realized from the purchases and retirements of $6 million and $5 million in 2008 and 2007, respectively,termination of the Company’s 8.50 percent debentures.interest rate swap. The Company did not have any short-term borrowings for any of the periods presented. Interest rate swap agreements reduced interest expense in 2008 by approximately $2 million, while the cross currency swaps increased interest expense by $3 million. Interest income of $11$5 million declinedincreased from $20$3 million in 2007. Interest2009 primarily reflecting income is generated through the investment ofearned on higher cash equivalents and short-term investments. The decline in interest income reflects the lower interest income on cash cash equivalents and short-term investments, which totaled $10 million in 2008 and $16 million in 2007. Additionally, the Company did not record accretion income related to the Northern Group note, which in the prior year totaled $2 million.equivalent balances.

Interest expense of $21$13 million in 2009 decreased by 8.7 percent in 2007$3 million as compared with $23 million in 2006.2008. The reductiondecrease in interest expense primarily relates to the purchases and retirementstermination of $5 million and $38the cross currency swaps, which represented expense of $3 million in 2007 and 2006, respectively,2008, as well as lower average debt outstanding during 2009. Interest expense in 2009 was also reduced by $1 million, reflecting the effect of the Company’s 8.50 percent debentures. Interestamortization of the gain realized from the termination of the interest rate swap agreements did not significantly affect interest expenseswap. This was offset, in 2007.part, by higher fees associated with the revolving credit facility. Interest income of $20$3 million remained unchangedin 2009 declined from 2006. Interest income related$11 million in 2008 primarily due to lower interest rates received on its cash, cash equivalents and short-term investmentsinvestments.

Other Income

Other income was $16$4 million, $3 million, and $8 million for 2010, 2009, and 2008, respectively. For 2010, other income includes a $2 million gain to reflect the settlement of the Reserve International Liquidity Fund money-market investment, as well as royalty income from the Company’s franchising agreements and gains on lease terminations related to certain lease interests in 2007 and $14Europe. For 2009, other income includes $4 million in 2006. Interest incomerelated to gains from insurance recoveries, gains on the Northern Group note amounted to $2 million in both 2007purchase and 2006. Income from the crossretirement of bonds, and royalty income partially offset by foreign currency swaps totaledoption contract premiums of $1 million in 2007 as compared with $3 million in 2006.

Other Income

million. Other income of $8 million in 2008 includesprimarily reflects a $4 million net gain of $4 million, which is comprised ofrelated to the changes in fair value, realized gains and premiums paid onCompany’s foreign currency contracts. The Company uses these derivatives to mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Additionally, 2008 includesoptions contracts and a $3 million gain on lease terminations related to two lease interests in Europe.

     In 2007, other income included a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by a fire in 2006. Additionally, the Company sold two of its lease interests in Europe for a gain of $1 million. These gains were offset primarily by premiums paid for foreign currency option contracts. The 2006 amounts included a net gain of $4 million from the termination of two of the Company’s leases for approximately $5 million and insurance claims related to Hurricane Katrina that resulted in a gain of $8 million, which represented amounts in excess of losses. Also during 2006, the Company purchased and retired $38 million of long-term debt at a discount from face value of $2 million.

14

Income Taxes

The effective tax rate for 20082010 was 34.3 percent, as compared with 36.0 percent in 2009. The effective tax rate decreased primarily due to a benefit of 20.8$7 million from a favorable tax settlement. This benefit was offset in part by a $4 million charge recorded in the fourth quarter to correct a historical error in the calculation of income taxes on amounts included in accumulated other comprehensive loss pertaining to the Company’s Canadian pension plans. The Company determined that this amount was not material to any previously issued financial statements or to the current period; accordingly it was corrected in 2010. Additionally, the 2009 effective rate included Canadian provincial tax rate changes that resulted in a $4 million expense arising from a reduction in the value of the Company’s net deferred tax assets. Excluding these items, the effective rate increased as compared with the prior year reflecting a higher proportion of income earned in higher tax jurisdictions.

The effective tax rate for 2009 was an expense of 36.0 percent, as compared with a benefit of 187.020.8 percent in the prior year.2008. The effective income tax rate changed primarily due to impairment charges in 2008, which created an overall book loss, coupled with the effect of an impairment of goodwill, impairment, a portion of which iswas not deductible for tax purposes, the prior year valuation allowance adjustment, and to a lesser extent, the mix of U.S. and international profits.

     The effectiveas well as 2009 Canadian provincial tax rate changes that resulted in a $4 million charge for 2007 was a benefit of 187.0 percent as compared with expense of 36.9 percentreduction in the prior year. The change in the rate is primarily due to the $62 million valuation allowance adjustment (netvalue of deferred costs) relating to Canadian tax depreciation and tax loss carryforwards, the change in the mix of U.S. and international profits, and the impairment charges relating to the Company’s U.S. operations.net deferred tax assets.


Segment Information

The Company has seven reporting units, as defined under SFAS No. 142, “GoodwillCompany’s two reportable segments, Athletic Stores and Other Intangible Assets.” A reporting unit is defined as an operating segment or one level below an operating segment. Although we have seven reporting units, they have been aggregated into two operating segments for segment reporting purposes, in accordance with SFAS No. 131, “Disclosures about SegmentsDirect-to-Customers, are based on its method of an Enterprise and Related Information.”

internal reporting. The Company evaluates performance based on several factors, the primary financial measure of which is division profit.results. Division profit (loss) profit reflects income (loss) income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense. Sales and division results for the Company’s reportable segments for the years ended January 29, 2011, January 30, 2010, and January 31, 2009 are presented below.

Athletic Stores

   
2008     2007     2006 2010 2009 2008
(in millions) (in millions)
Sales$4,847$5,071$5,370 $4,617  $4,448  $4,847 
Division (loss) profit$(59)$(27)$405
Division (loss) profit margin(1.2)%(0.5)%7.5%
Division profit (loss) $329  $114  $(59) 
Division profit (loss) margin  7.1%   2.6%   (1.2)% 
Number of stores at year end3,641 3,785 3,942  3,426   3,500   3,641 
Selling square footage (in millions)8.098.508.74  7.54   7.74   8.09 
Gross square footage (in millions)13.5014.1214.55  12.64   12.96   13.50 
Sales per average gross square foot $360  $333  $350 

2008

2010 compared with 2007

2009

Athletic Stores sales of $4,847$4,617 million decreased 4.4increased 3.8 percent in 2008,2010, as compared with $5,071$4,448 million in 2007.2009. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athleticthe Athletic Stores segment increased by 4.4 percent in 2010. Comparable-store sales for the Athletic Stores segment increased 5.7 percent as compared with the prior year. The Company’s U.S. operations sales increased 3.9 percent reflecting meaningful increases in all formats, except for Lady Foot Locker. Lady Foot Locker was negatively affected by the lower demand for certain styles, in particular toning. Excluding the effect of foreign currency fluctuations, international sales increased 5.5 percent in 2010 as compared with 2009. Foot Locker Europe’s sales reflected strong increases in men’s footwear and apparel.

Athletic Stores reported a division profit of $329 million in 2010 as compared with $114 million in 2009. The 2009 results included impairment charges totaling $32 million, which were recorded to write down long-lived assets such as store formatsfixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions for 787 stores. Additionally, in 2009 the Company recorded a $14 million inventory reserve on certain aged apparel. Excluding these charges, division profit increased by $169 million as compared with the corresponding prior-year period. This increase reflects division profit gains in both the Company’s domestic and international operations. Foreign currency fluctuations negatively affected division profit by approximately $4 million as compared with the corresponding prior-year period.

2009 compared with 2008

Athletic Stores sales of $4,448 million decreased 8.2 percent in 2009, as compared with $4,847 million in 2008. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from the Athletic Stores segment decreased by 4.87.0 percent in 2008.2009. Comparable-store sales for the Athletic Stores segment declined 3.66.2 percent as compared with prior year.2008. The decline in sales for the year ended January 31, 200930, 2010 was primarily related to the domestic operations as the result of a decline in mall traffic and consumer spending in general. Excluding the effect of foreign currency fluctuations, sales in Europe decreasedincreased low single digits in 20082009 as compared with 2007. The sales of low profile styles negatively affected the first three quarters of 2008. However, during the fourth quarter of 2008 sales of higher-priced marquee footwear and apparel increased, which more than offset the sales decline related to the low profile footwear styles.


Athletic Stores reported a division profit of $114 million in 2009 as compared with a loss of $59 million in 2008 as compared with a loss of $27 million in 2007 which was primarily attributable to the U.S. operations.2008. Included in the results for 2008 and 2007 are impairment and other charges of $46 million and $241 million in 2009 and 2008, respectively. The 2009 results included impairment charges totaling $32 million and a $14 million inventory reserve on certain aged apparel. The 2008 results included a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment, and store closing costs totaling $241 million and $128 million, respectively. Athletic Stores division loss for 2008 includes a $167 million goodwill impairment charge, a $67 million write-down of long-lived assets such as store fixtures and leasehold improvements for 868 stores atrelated to the Company’s U.S. store operations pursuant to SFAS No. 144, $5 million of exit costs related to the closure of underperforming stores comprising primarily lease terminations in accordance with SFAS No. 146, and $2operations. Excluding these charges, division profit decreased $22 million in other intangible impairment charges related to its tradenames. The Company performs its annual impairment test2009 as ofcompared with the beginning of each year, however due to the macroeconomic conditions affecting retail and the significant decline in the Company’s common stock and market capitalization, plus a reasonable control premium, in relation to the book value, the Company determined that a triggering event had occurred and, therefore, performed an interim impairment test. The fair value of the four reporting units containing goodwill was determined under step 1 of the goodwill impairment test based on a weighting of a discounted cash flow analysis

15

using forward-looking projections of estimated future operating results and a guideline company methodology under the market approach. Based on this testing, the Company determined that the fair values, as determined under step 1 as described above, was less than the carrying values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit. Accordingly, the Company performed a step 2 analysis to determine the extent of the goodwill impairment and concluded that the goodwill of these two reporting units was fully impaired, resulting in a non-cash impairment charge of $167 million. There were no goodwill impairment charges in 2007 or 2006. Excluding the impairment charges and store exit costs from both 2008 and 2007, division profit would have increased to $182 million in 2008 from $101 million in 2007. This increase in division profitcorresponding prior-year period, which relates primarily related to the domestic divisions as a result of lower promotional markdowns and reduced depreciation and amortization expense.

2007 compared with 2006

     Athletic Stores sales of $5,071 million decreased 5.6 percent in 2007, as compared with $5,370 million in 2006.businesses. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats decreased by 7.8 percent in 2007. The decline in sales for the year ended February 2, 2008division profit of international operations was primarily related to the domestic operations. Sales in the U.S. were negatively affected by a continuing weakening in consumer spending, unseasonable warmer weather, and a lack of clear fashion trend in athletic footwear and apparel. Internationally, comparable-store sales declined mid-single digits. In Europe, sales of low-profile footwear styles declined, while the sales trend of higher priced technical footwear was higher than the prior year. Comparable-store sales for the Athletic Stores segment decreased by 6.6 percent in 2007.

     Athletic Stores reported a loss of $27 million in 2007essentially flat as compared with the corresponding prior-year period.

Direct-to-Customers

   
 2010 2009 2008
   (in millions)
Sales $432  $406  $390 
Division profit $30  $32  $43 
Division profit margin  6.9%   7.9%   11.0% 

2010 compared with 2009

Direct-to-Customers sales increased 6.4 percent to $432 million in 2010, as compared with $406 million in 2009. Effective with the first quarter of 2010, CCS internet and catalog sales have been included in the computation of comparable-store sales. Internet sales increased by 9.0 percent to $375 million, as compared with 2009 reflecting a strong sales performance through the Company’s store banner websites, which benefited from improved functionality and more compelling product assortments. Catalog sales decreased by 8.1 percent to $57 million in 2010 from $62 million in 2009. Management believes that the decrease in catalog sales is the result of the continuing trend of customers browsing and selecting products through its catalogs and then making their purchases via the Internet.

The Direct-to-Customers business generated division profit of $405$30 million in 2006. The decrease2010, as compared with $32 million in division2009. Division profit, as a percentage of sales, was attributable to the U.S. operations. The decline6.9 percent in the U.S. operations was offset,2010 and 7.9 percent in part, by increases in most international formats.2009. Included in the Athletic Stores2010 division results for 2007 are non-cash impairment charges of $117profit is a $10 million to write-down long-lived assets such as store fixtures and leasehold improvements for 1,395 stores at the Company’s U.S. store operations pursuant to SFAS No. 144, consistent with the Company’s recoverability of long-lived assets policy. Additionally, in 2007, the Company identified unproductive stores for closure; accordingly, the Company evaluated the recoverability of long-lived assets considering the revised estimated future cash flows. The Company recorded an additional non-cash impairment charge, which was recorded to write down CCS intangible assets, specifically the non-amortizing tradename. The impairment was primarily the result of $7reduced revenue projections. Included in 2009 division profit is a $4 million impairment charge, which was recorded to write off certain software development costs as a result of this analysis. Exit costs relatedmanagement’s decision to 33 stores that closed during 2007, comprising primarily lease termination costs ofterminate the project. Excluding these charges, division profit increased by $4 million were recognized in accordance with SFAS No. 146.

Direct-to-Customers

2008     2007     2006
(in millions)
Sales$390$364$380
Division profit$43 $40 $45
Division profit margin11.0%11.0%11.8%

2008as compared with 2007the prior year.

2009 compared with 2008

Direct-to-Customers sales increased 7.14.1 percent to $406 million in 2009, as compared with $390 million in 2008, as compared with $364 million in 2007, reflecting a comparable-sales increasecomparable-store sales decrease of 1.06.8 percent, andoffset by additional sales from CCS, which was acquired during the fourth quarter of 2008. Internet sales increased by 12.26.8 percent to $322$344 million, as compared with 2007.2008 reflecting continued growth in the store brands’ websites. Catalog sales decreased by 11.78.8 percent to $62 million in 2009 from $68 million in 2008 from $77 million in 2007. 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.2008.

The Direct-to-Customers business generated division profit of $32 million in 2009, as compared with $43 million in 2008, as compared with $40 million in 2007.2008. Division profit, as a percentage of sales, was 7.9 percent in 2009 and 11.0 percent in 2008 and 2007. The increase in division profit reflects the accretive effect of the acquisition of CCS.

2007 compared with 2006

     Direct-to-Customers sales decreased 4.2 percent to $364 million in 2007, as compared with $380 million in 2006. Internet sales increased by 6.3 percent to $287 million, as compared with 2006. Catalog sales decreased by 30.0 percent to $77 million in 2007 from $110 million in 2006. Management believes that the decrease in catalog sales, which was

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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 were negatively affected by reduced sales from third party arrangements, as well as weakened consumer spending for athletic footwear and apparel.

     The Direct-to-Customers business generated division profit of $40 million in 2007, as compared with $45 million in 2006. Division profit, as a percentage of sales, decreased to 11.0 percent in 2007 from 11.8 percent in 2006. The decline2008. Included in division profit is a $4 million impairment charge, which was recorded to write off certain software development costs as a result of lower sales.management’s decision to terminate the project. Gross margin was negatively affected by the lack of close-out inventory purchases during the year. Additionally, division profit, as compared with the corresponding prior-year period, was negatively affected by $3 million in additional amortization expense related to the CCS customer list intangible asset.


Liquidity and Capital Resources

Liquidity

     Generally, theThe Company’s primary source of cashliquidity has been cash flow from operations. The Company generally finances real estate with operating leases. Theoperations, while the principal uses of cash have been toto: fund inventory and other working capital requirements; finance inventory requirements, capital expenditures related to store openings, store remodelings, management information systems, and other support facilities, and to fund general working capital requirements.

     Management believes its cash, cash equivalents and future operating cash flow from operations will be adequate to fund its working capital requirements, capital expenditures,facilities; make retirement plan contributions, anticipated quarterly dividend payments, and interest payments, potential share repurchases,payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases.

Management believes its cash, cash equivalents, future cash flow from operations, and the Company’s current revolving credit facility will be adequate to fund these requirements. The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.

     During 2008 the Company had $75 million of cash from its international operations invested in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”). This surplus cash was not required or used for daily operations. The Company requested a full redemption on September 16, 2008. At that time, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the redemption trades would be honored at a $1.00 per share net asset value. Although the Company received a partial distribution of $49 million in the fourth quarter of 2008, the Company has not received information as to when the remaining amount of its redemption request will be paid. Litigation, to which the Company is not a party, exists that involves how the remaining assets of the Fund should be distributed. Therefore, there is a risk that the Company could receive less than the $1.00 per share net asset value. As a result, during the third quarter of 2008, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. Based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the Company reclassified $23 million (net of the impairment charge of $3 million) from “Cash and cash equivalents” to “Short-term investments” in the Consolidated Balance Sheet as of January 31, 2009. We believe that we have adequate liquidity to meet our business needs through our existing cash balances, our ability to generate cash flows through operations, and the amounts available to borrow under our revolving credit facility.

     Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key vendors. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key vendors. The Company purchased approximately 80 percent in 2008 and 77 percent in 2007 of its merchandise 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 64 percent in 2008 and 56 percent in 2007 was purchased from one vendor — Nike, Inc.

     Planned capital expenditures for 2009 are approximately $100 million,of which $77 million relates to modernizations of existing stores and new store openings, and $23 million reflects the development of information systems and other support facilities. The Company has the ability to revise and reschedule the anticipated capital expenditure program, should the Company’s financial position require it.

     The Company has contributed $8 million to its U.S. pension plan in February 2009. Due to the pension plan asset performance experienced for the year ended January 31, 2009, the Company may make additional contributions during 2009 to its U.S. qualified pension plan. The Company is in the process of evaluating the amount and timing of the contribution. The contribution amount will depend on the plan asset performance for the balance of the year and any statutory or regulatory changes that may occur.

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Any material adverse change in customer demand, fashion trends, competitive market forces or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases, and risks associated with foreign global sourcing or economic conditions worldwide could affect the ability of the Company to continue to fund its needs from business operations.

Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key vendors. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key vendors. In 2010 and 2009, the Company purchased approximately 82 percent of its merchandise 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 63 percent in 2010 and 68 percent in 2009 was purchased from one vendor — Nike, Inc.

Planned capital expenditures for 2011 are approximately $153 million, of which $116 million relates to modernizations of existing stores and the planned opening of 60 new stores, and $37 million is allocated for the development of information systems and other support facilities. In addition, planned lease acquisition costs related to the Company’s operations in Europe are $7 million. The Company has the ability to revise and reschedule much of the anticipated capital expenditure program, should the Company’s financial position require it.

Cash Flow

Operating activities from continuing operations provided cash of $326 million in 2010 as compared with $346 million in 2009. These amounts reflect income from continuing operations adjusted for non-cash items and working capital changes. Non-cash impairment and other charges were $10 million and $36 million for the years ending January 29, 2011 and January 30, 2010, respectively. The Company recorded a $10 million impairment charge in 2010 related to its CCS tradename. The 2009 charges totaled $36 million, comprised of $32 million to write-down long-lived assets such as store fixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions and $4 million to write off software development costs. During 2010, the Company contributed $32 million to its U.S. and Canadian qualified pension plans as compared with $100 million contributed in 2009. The change in merchandise inventory, net of the change in accounts payable, as compared with the prior-year period, represents inventory required to support the favorable sales trend. During 2010, the Company paid $24 million to settle the liability associated with the terminated European net investment hedge, whereas in the prior-year period the Company terminated its interest rate swaps and received $19 million.


Operating activities from continuing operations provided cash of $346 million in 2009 as compared with $383 million in 2008 as compared with $283 million in 2007.2008. These amounts reflect income from continuing operations adjusted for non-cash items and working capital changes. During 2008,2009, the Company recorded non-cash impairment and other charges and store closing program costs of $259$36 million primarily related to itsimpairment of store-level assets in the domestic operations. Merchandise inventories represented a $128$111 million source of cash in 20082009 as inventory purchases were reduced to keep inventory levels in line with sales. Additionally,sales as well as reflecting the effect of the store closings. During 2009, the Company contributed $6$100 million to its U.S. and Canadian qualified pension plan.

     Operating activities from continuing operations provided cash of $283 million in 2007plans as compared with $189 million in 2006. During 2007, the Company recorded non-cash impairment charges and store closing program costs of $124 million related to its domestic operations. Merchandise inventories represented a $55 million source of cash in 2007 as inventory purchases were reduced to keep inventory levels in line with sales. Additionally, the Company did not contribute to its pension plans in 2007, as no contributions were required, compared with $68$6 million contributed in 2006.2008. Additionally, during 2009 the Company terminated its interest rate swaps for a gain of $19 million. The other changes primarily reflect the timing of February 2010 rent payments, which totaled $34 million and were due and paid in 2010 as compared with the February 2009 rent payments that were due and paid in 2008, as well as income tax refunds of $32 million.

Net cash used byin investing activities of the Company’s continuing operations was $272$87 million in 20082010 as compared with $117$72 million provided byused in investing activities in 2007. The net cash used by investing activities for 2008 reflects2009. During 2010, the asset purchase from dELiA*s, Inc. of CCS for $106 million (including capitalized acquisition costs). Investing activities in 2008 also included a $3 million gain related to the sale of two lease interests in Europe. The Company did not purchase or sell short-term investments during 2008. However, reflected in investing activities is the reclassification of $23received $9 million from cash and cash equivalents to short-term investmentsthe Reserve International Liquidity Fund representing the remaining money market investment.further redemptions. Capital expenditures of $146were $97 million in 2008 and $148 million in 2007 primarily related to store remodeling and new stores.to the development of information systems and other support facilities, representing an increase of $8 million as compared with the prior year.

Net cash provided byused in investing activities of the Company’s continuing operations was $117$72 million in 20072009 as compared with $108$272 million used in investing activities in 2006.2008. During 2007,2009, the Company liquidated most of its short-term investments, which represented auction rate securities, due to issues inreceived $16 million from the global credit and capital markets.Reserve International Liquidity Fund representing further redemptions. Capital expenditures of $148were $89 million, in 2007 and $165 million in 2006 primarily related to store remodeling and new stores. During 2007,to the development of information systems and other support facilities, representing a decrease of $57 million as compared with the prior year. The Company received $21 million representingmade a strategic decision to conserve cash in 2009 and, therefore, reduced capital spending, focusing on projects that improved the maturitycustomer experience. The net cash used in investing activities in 2008 reflected the acquisition of an investment of $14 million and the repayment of a note of $7CCS for $106 million.

Net cash used in financing activities of continuing operations was $127 million in 2010 as compared with $94 million in 2009. During 2010, the Company repurchased 3,215,000 shares of its common stock under its common share repurchase program for $50 million. Additionally, the Company declared and paid dividends totaling $93 million and $94 million in 2010 and 2009, respectively, representing a quarterly rate of $0.15 per share in both 2010 and 2009. On February 15, 2011, the Company’s Board of Directors declared a quarterly cash dividend on the Company’s common stock of $0.165 per share, which represents an increase of 10 percent. During 2010 and 2009, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $10 million and $3 million, respectively. During 2010, in connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $3 million as a financing activity.

Net cash used in financing activities of continuing operations was $94 million in 2009 as compared with $185 million in 2008. During 2009 and 2008, as compared with $138the Company purchased and retired $3 million in 2007.and $6 million, respectively, of its 8.50 percent debentures. During 2008, the Company reduced its long-term debt by repaying the balance of its term loan of $88 million. Additionally, the Company purchased and retired $6 million of its $200 million 8.50 percent debentures payable in 2022. The Company declared and paid dividends totaling $94 million and $93 million in 2009 and 2008, respectively, representing a quarterly rate of $0.15 per share in both 2009 and $77 million in 2007.2008. During 20082009 and 2007,2008, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $3 million and $2 million, and $9 million, respectively.


     Net cash used in financing activities of continuing operations was $138 million in 2007 as compared with $142 million in 2006. During 2007, the Company repaid $2 million of its term loan, purchased and retired $5 million of its 8.50 percent debentures payable in 2022, and repaid and retired its $14 million Industrial Revenue Bond, which was accounted for as capital lease. The Company recorded an excess tax benefit related to stock-based compensation of $1 million as a financing activity. The Company declared and paid dividends totaling $77 million in 2007 and $61 million in 2006. During 2007 and 2006, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $9 million and $12 million, respectively. During 2007, the Company purchased 2,283,254 shares of its common stock for approximately $50 million.

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Capital Structure

May 2008 Amended Credit Agreement

     On May 16, 2008, the Company entered into an amended credit agreement with its banks, providing for a $175 million revolving credit facility and extending the maturity date to May 16, 2011 (the “Credit Agreement”). The Credit Agreement also provides an incremental facility of up to $100 million under certain circumstances. Simultaneously with entering into the Credit Agreement, the Company repaid the $88 million that was outstanding on its term loan with the banks, which was scheduled to mature in May 2009.

     The Credit Agreement provides that the Company comply with certain financial covenants, including (i) a fixed charge coverage ratio of 1.25:1 for the 2008 fiscal year, 1.50:1 for the 2009 fiscal year, and 1.75:1 for each year thereafter and (ii) a minimum liquidity/excess cash flow covenant, which provides that if at the end of any fiscal quarter minimum liquidity, as defined in the Credit Agreement, is less than $350 million, the excess cash flow for the four consecutive fiscal quarters ended on such date must be at least $25 million. The amount permitted to be paid by the Company as dividends in any fiscal year is $105 million under the terms of the Credit Agreement. With regard to stock purchases, the Credit Agreement provides that not more than $50 million in the aggregate may be expended unless the fixed charge coverage ratio is at least 2.0:1 for the period of four consecutive fiscal quarters most recently ended prior to any stock repurchase. Additionally, the Credit Agreement provides for a security interest in certain of the Company’s intellectual property and certain other non-inventory assets. The Company was in compliance with all covenants on January 31, 2009.

     During 2008, the Company purchased and retired $6 million of the $200 million 8.50 percent debentures payable in 2022, bringing the outstanding balance to $123 million, excluding the fair value of the interest rate swap, for the year ended January 31, 2009. The fair value of the interest rate swaps, included in other assets, was approximately $19 million and the carrying value of the 8.50 debentures was increased by the corresponding amount.

March 2009 New Credit Agreement

On March 20, 2009, the Company entered into a new credit agreement (the “2009 Credit Agreement”) with its banks, providing for a $200 million asset-based revolving credit facility maturing on March 20, 2013 (the “New Credit Agreement”), which replaces the existing Credit Agreement.2013. The New2009 Credit Agreement also provides for an incremental facility of up to $100 million under certain circumstances. The New2009 Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets. However,The Company is not required to comply with any financial covenants as long as there are no material covenants or payment restrictions exist untiloutstanding borrowings. If the Company is borrowing, then it may not make Restricted Payments, such as dividends or share repurchases, unless there is at least $50 million of Excess Availability (as defined in the 2009 Credit Agreement), and the Company’s projected fixed charge coverage ratio, which is a Non-GAAP financial ratio determined pursuant to the 2009 Credit Agreement designed as a measure of the Company’s ability to meet current and future obligations (Consolidated EBITDA less capital expenditures less cash taxes divided by Debt Service Charges and Restricted Payments), is at least 1.1 to 1.0. The Company’s management does not currently expect to borrow under the agreement and,facility in that event, the restrictions may vary depending upon the level of borrowings.2011.

Credit Rating

As of March 30, 2009,28, 2011, the Company’s corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BB- and Ba3, respectively. Additionally, as of March 30, 2009, Moody’s Investor ServicesInvestors Service has rated the Company’s senior unsecured notes B1.

Debt Capitalization and Equity

For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases is considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 4 percent to 1315 percent, which represent the Company’s incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the inclusion of the present value of operating leases in total debt is useful to our investors, credit constituencies, and rating agencies.

The following table sets forth the components of the Company’s capitalization, both with and without the present value of operating leases:

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2008     2007 2010 2009
(in millions) (in millions)
Long-term debt$142$221 $137  $138 
Present value of operating leases 1,952 2,126  1,852   1,923 
Total debt including the present value of operating leases2,0942,347  1,989   2,061 
Less:          
Cash and cash equivalents385488  696   582 
Short-term investments 23 5  —   7 
Total net debt including the present value of operating leases1,6861,854  1,293   1,472 
Shareholders’ equity 1,924 2,261  2,025   1,948 
Total capitalization$3,610$4,115 $3,318  $3,420 
Total net debt capitalization percent including the present value of 
operating leases46.7%45.1%
Net debt capitalization percent—%—%
Total net debt capitalization percent  —%   —% 
Total net debt capitalization percent including the present value of operating leases  39.0%   43.0% 

The Company reduced debt by $94 million (this reduction was offset by a $15 million increase in the fair value of the interest rate swaps), and decreasedincreased cash, cash equivalents, and short-term investments by $85$107 million during 2008.2010 reflecting strong cash flow generation from operating activities. Additionally, the present value of the operating leases decreased by $174$71 million representingas compared with the prior year. This decrease represents the effect of the store closures, offset, in part, by lease renewals and the effect of foreign currency fluctuations primarily related to the euro.translation. Including the present value of operating leases, the Company’s net debt capitalization percent increased 160decreased 400 basis points in 2008. The decrease in shareholders’ equity of $337 million in 2008 relates to the following: net loss of $80 million, $93 million in dividends paid, $12 million related to stock plans, and a decrease of $83 million in the foreign exchange currency translation adjustment, primarily related to the value of the euro in relation to the U.S. dollar. In addition, as required by SFAS No. 158, during 2008 the Company recognized, within accumulated other comprehensive loss, amortization of prior service costs and net actuarial gains and losses, as well as an additional charge representing the change in the funded status of the pension and postretirement plans, which totaled $91 million after-tax.2010.


Contractual Obligations and Commitments

The following tables represent the scheduled maturities of the Company’s contractual cash obligations and other commercial commitments as ofat January 31, 2009:29, 2011:

Payments Due by Period
Less than2 – 33 – 5After 5
Contractual Cash Obligations Total         1 Year         Years         Years         Years
(in millions)
Long-term debt(1)$142$— $—$— $142
Operating leases(2)2,567456805587719
Other long-term liabilities(3) 35 11  — — 24
Total contractual cash obligations$2,744  $467$805 $587$885
____________________

     
  Payments Due by Period
Contractual Cash Obligations Total Less than
1 Year		 2 – 3
Years		 3 – 5
Years		 After 5
Years
   (in millions)
Long-term debt(1) $241  $11  $22  $22  $186 
Operating leases(2)  2,418   481   781   560   596 
Other long-term liabilities(3)  1   1   —   —   — 
Total contractual cash obligations $2,660  $493  $803  $582  $782 

(1)The amounts presented above represent the contractual maturities of the Company’s long-term debt, excluding interest.including interest; however it excludes the unamortized gain of the interest rate swap of $17 million. Additional information is included in the “Long-Term Debt”Long-Term Debt note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
(2)The amounts presented represent the future minimum lease payments under non-cancelable operating leases. In addition to minimum rent, certain of the Company’s leases require the payment of additional costs for insurance, maintenance, and other costs. These costs have historically represented approximately 25 to 30 percent of the minimum rent amount. These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are unknown.
(3)The Company’s other liabilities in the Consolidated Balance Sheet as ofat January 31, 200929, 2011 primarily comprise pension and postretirement benefits, deferred rent liability, income taxes, workers’ compensation and general liability reserves, and various other accruals. The amountsamount presented in the table comprisesrepresents the Company’s February 2009 pension2011 Canadian qualified plan contributions of $11 million and the liability related to the European net investment hedge of $24$1 million. Other than these liabilities,this liability, other amounts (including the Company’s unrecognized tax benefits of $62 million) have been excluded from the above table as the timing and/or amount of any cash payment is uncertain. The timing of the remaining amounts that are known havehas not been included as theyare minimal and not useful to the presentation. Additional information is included in the “OtherOther Liabilities,” “Financial Financial Instruments and Risk Management”, and “RetirementRetirement Plans and Other Benefits”Benefits notes under “Item 8. Consolidated Financial Statements and Supplementary Data.”

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TotalAmount of Commitment Expiration by Period
AmountsLess than2 – 33 – 5After 5
Other Commercial Commitments Committed         1 Year         Years         Years         Years
(in millions)
Line of credit$166$—$166$—$—
Standby letters of credit9—9— —
Purchase commitments(4) 1,462 1,462— — —
Other(5) 69  26  34 9 —
Total commercial commitments$1,706 $1,488 $209$9$—
____________________

     
  Amount of Commitment Expiration by Period
Other Commercial Commitments Total Amounts Committed Less than
1 Year		 2 – 3
Years		 3 – 5
Years		 After 5
Years
   (in millions)
Unused line of credit(4) $199  $—  $199  $—  $— 
Standby letters of credit  1   —   1   —   — 
Purchase commitments(5)  1,660   1,660   —   —   — 
Other(6)  32   15   15   2   — 
Total commercial commitments $1,892  $1,675  $215  $2  $— 

(4)Represents the unused domestic lines of credit pursuant to the Company’s $200 million revolving credit agreement. The Company’s management currently does not expect to borrow under the facility in 2011.
(5)Represents open purchase orders, as well as other commitments for merchandise purchases, at January 31, 2009.29, 2011. The Company is obligated under the terms of purchase orders; however, the Company is generally able to renegotiate the timing and quantity of these orders with certain vendors in response to shifts in consumer preferences.
(5)(6)Represents payments required by non-merchandise purchase agreements and minimum royalty requirements.agreements.

The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business as disclosed above, or unconsolidated special purpose entities. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities. The Company’s policy prohibits the use of derivatives for which there is no underlying exposure.

In connection with the sale of various businesses and assets, the Company may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not significantly affect the Company’s consolidated financial position, liquidity, or results of operations. The Company is also operating certain stores for which lease agreements are in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that leases will be executed.


Critical Accounting Policies

Management’s responsibility for integrity and objectivity in the preparation and presentation of the Company’s financial statements requires diligent application of appropriate accounting policies. Generally, the Company’s accounting policies and methods are those specifically required by U.S. generally accepted accounting principles. Included in the “SummarySummary of Significant Accounting Policies” Policiesnote in “Item 8. Consolidated Financial Statements and Supplementary Data” is a summary of the Company’s most significant accounting policies. In some cases, management is required to calculate amounts based on estimates for matters that are inherently uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate subjective judgments.

Business Combinations

     The Company accounts for acquisitions of other businesses in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). SFAS No. 141 requires that the Company record the net assets of acquired businesses at fair value, and make estimates and assumptions to determine the fair value of these acquired assets and liabilities. The Company allocates the purchase price of acquired businesses based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company. Changes to the assumptions used to estimate the fair value could affect the recorded amounts of the assets acquired and the resultant goodwill.

Merchandise Inventories

Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method (“RIM”). The RIM is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The RIM is a system of averages that requires management’s estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts.

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Significant judgment is required for these estimates and assumptions, as well as to differentiate between promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost or market. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. The failure to take permanent markdowns on a timely basis may result in an overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes many factors, including the current environment, inventory levels, and the age of the item. Management believes this method and its related assumptions, which have been consistently applied, to be reasonable.

Vendor Reimbursements

In the normal course of business, the Company receives allowances from its vendors for markdowns taken. Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Vendor allowances contributed 3020 basis points to the 20082010 gross margin rate. The Company also has volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and they contributed 10 basis pointswere not significant to the 20082010 gross margin rate.

The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors for specific advertising campaigns and catalogs. Cooperative income, to the extent that it reimburses specific, incremental and identifiable costs incurred to date, is recorded in SG&A in the same period as the associated expenses are incurred. Cooperative reimbursements amounted to approximately 24 percent and 11 percent of total advertising and catalog costs, respectively, in 2010. Reimbursements received that are in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the cost of merchandise and are reflected in cost of sales as the merchandise is sold. Cooperative reimbursements amounted to approximately 38 percent of total advertising costssold and were not significant in 2008 and approximately 12 percent of catalog costs in 2008.2010.


Impairment of Long-Lived Assets, Goodwill and Other Intangibles

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), theThe Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s three-year strategic plans, in determining the impairment amount. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results. During 2008, the

The Company recorded non-cash impairment charges totaling $67 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for the Company’s U.S. store operations pursuant to SFAS No. 144.

     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to performperforms an impairment review of its goodwill and intangible assets with indefinite lives if impairment indicators arise and, at a minimum, annually. We consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. The Company has chosen to perform this review at the beginning of each fiscal year, and it is done in a two-step approach. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of that reporting unit exceeds its estimated fair value. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests or securities that have been sold. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.

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     The Company assigned discount rates ranging from 12 to 14 percent for the four reporting units. The Company evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations.

Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment in accordance with SFAS No. 142, as mentioned above.impairment. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

     We consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. In the last few months of 2008 and into 2009, the capital markets experienced substantial volatility and the Company’s stock price declined substantially, causing the Company’s book value to exceed its market capitalization. Accordingly, we concluded that a triggering event had occurred. During the fourth quarter of 2008, the Company performed an analysis of its goodwill and other intangibles.

     Based on the results of step one, the fair values of the Direct-to-Customers and Foot Locker Europe reporting units exceeded their carrying values, indicating that there was no impairment of goodwill at these reporting units. The discount rates would have to be increased to over 17 percent before the fair values of these reporting units would be less than their carrying values. The Company does not believe the resulting discount rates would be reasonable relative to the risks associated with the future cash flows of these reporting units. The results of both the income and market approaches indicated that the fair values were in excess of the carrying values. The Company has applied these approaches consistent with prior valuations.

     However, the fair values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit indicated a potential impairment. The decline in the fair values of these reporting units reflected lower expected sales and cash flows as a result of the macroeconomic environment and uncertainty around future cash flows. The Company completed the second step where the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. Accordingly, the Company determined that the goodwill assigned to these reporting units were fully impaired. Additionally, the Company performed a reconciliation of its market capitalization to the total fair value. The principal reconciling item was ascribed to a control premium associated with the consolidated businesses that would not be reflected in public market trading prices.

The Company’s review of goodwill and other intangibles resulteddid not result in any impairment charges totaling $169 million.for the years ended January 29, 2011 and January 30, 2010 as the fair value of each of the reporting units substantially exceeds its carrying value. In 2010, the Company recorded a $10 million impairment charge related to its CCS tradename, primarily as a result of reduced revenue projections for this business.


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 36 to 58 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 21 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.

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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 54 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 pricing valuation model requires the use of subjective assumptions. Changes in these assumptions can materially affect the fair value of the options. The Company may elect to use different assumptions under the Black-Scholes option pricing model in the future if there is a difference between the assumptions used in determining stock-based compensation cost and the actual factors that become known over time.

Pension and Postretirement Liabilities

The Company determines its obligations for pension and postretirement liabilities based upon assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, and mortality, among others. Management reviews all assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with regard to the plans. Management believes that its estimates for 2008, as disclosed in the “Retirement Plans and Other Benefits” note in “Item 8. Consolidated Financial Statements and Supplementary Data,” to be reasonable.

Long-Term Rate of Return Assumption -— The expected rate of return on plan assets is the long-term rate of return expected to be earned on invested pension planthe plans’ assets and is recognized as a component of pension expense. The rate is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the Company. The Company’s common stock represented approximately one percentexpected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the total pension plans’ assets at January 31, 2009.

financial markets and our investment strategy. The weighted-average long-term rate of return used to determine 20082010 pension expense was 8.177.22 percent. A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 20082010 pension expense by approximately $3 million. The actual return on plan assets in a given year typically differs from the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into the plans’ expense over time.the average life expectancy of its inactive participants.

Discount Rate -— An assumed discount rate is used to measure the present value of future cash flow obligations of the plans and the interest cost component of pension expense and postretirement income. The discount rate selected to measure the present value of the Company’s U.S. benefit obligations as ofat January 31, 200929, 2011 was derived using a cash flow matching method whereby the Company comparesmatches 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. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations as ofat January 31, 200929, 2011 was developed by using the plan’s bond portfolio indices, which match the benefit obligations.

The weighted-average discount rates used to determine the 20082010 benefit obligations related to the Company’s pension and postretirement plans were 6.224.98 percent and 6.204.60 percent, respectively. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation as of January 31, 2009 of the pension plans at January 29, 2011 by approximately $24$29 million, andwhile the effect on the postretirement plan would not behave been significant. Such a decrease would not have significantly changed 20082010 pension expense or postretirement income.


There is limited risk to the Company for increases in health care costs related to the postretirement plan as, beginning in 2001, new retirees have assumed the full expected costs and then-existing retirees have assumed all increases in such costs. A one percent change in the assumed health care cost trend rate would change the SERP Medical Plan’s accumulated benefit obligation by approximately $1 million.

The Company expects to record postretirement income of approximately $6$5 million and pension expense of approximately $18$20 million in 2009.2011.

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Income Taxes

In accordance with GAAP, deferred tax assets are recognized for tax credit and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. Estimates of taxable income are based upon the Company’s three-year strategic plans. A one percent change in the Company’s overall statutory tax rate for 20082010 would have resulted in a $10an $8 million change in the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense depending on whether such tax rate change was a decrease or an increase.

The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.

The Company expects its 20092011 effective tax rate to range from 36 toapproximate 37 percent. The actual rate will primarily depend upon the percentage of the Company’s income earned in the United States as compared with international operations.

Recent Accounting Pronouncements

     In December 2007, the FASBRecently issued SFAS No. 141 (Revised 2007), “Business Combinations,” (“SFAS No. 141(R)”). This standard will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is onpronouncements did not, or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company doesare not expect the adoption of SFAS No. 141(R)believed by management to, have an affect on its Consolidated Financial Statements.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This standard does not currently affect the Company.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of this standard will have a significantmaterial effect on its financial statement disclosures.

     In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect that the adoption of FSP 142-3 will have a significant effect on its financial statements.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The Company adopted SFAS No. 162 on the effective date of November 13, 2008 and it did not have any impact on the Company’s Consolidated Financial Statements.

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     In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividendspresent or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP EITF 03-6-1 is effective forfuture consolidated financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently assessing the potential effect of FSP EITF 03-6-1 on its reporting of earnings per share.statements.

In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), which amends SFAS No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an Amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132(R)”). FSP FAS No. 132(R)-1 requires more detailed disclosures about the assets of a defined benefit pensionor other postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company is in the process of evaluating FSP FAS No. 132(R)-1 and does not expect it will have a significant impact on its Consolidated Financial Statements.

Disclosure Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. All statements, otherOther than statements of historical facts, all statements which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues and earnings, and other such matters are forward-looking statements. These forward-looking statements are based on many assumptions and factors detailed in the Company’s filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor), pandemics and similar major health concerns, unseasonable weather, further deterioration of global financial markets, economic conditions worldwide, further deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute effectively its strategic plan and its business plans effectively with regard to each of its business units, and risks associated with foreign global sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.

Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Information regarding interest rate risk management and foreign exchange risk management is included in the “FinancialFinancial Instruments and Risk Management” Managementnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

Item 8.Consolidated Financial Statements and Supplementary Data

Item 8. Consolidated Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Foot Locker, Inc.:

We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 31, 200929, 2011 and February 2, 2008,January 30, 2010, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2009.29, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of January 31, 200929, 2011 and February 2, 2008,January 30, 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2009,29, 2011, in conformity with U.S. generally accepted accounting principles.

As discussed in the Notes to the Consolidated Financial Statements, effective February 4, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” In addition, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” as of February 3, 2008, for the fair value measurements of all financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Foot Locker, Inc.’s internal control over financial reporting as of January 31, 2009,29, 2011, based on criteria established in Internal Control –— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 30, 200928, 2011 expressed an adverseunqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


New York, New York
March 30, 200928, 2011


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CONSOLIDATED STATEMENTS OF OPERATIONS

          2008         2007         2006
 (in millions, except per share amounts)
Sales  $5,237  $5,437  $5,750 
Costs and expenses     
Cost of sales  3,777   4,017   4,014 
Selling, general and administrative expenses1,174  1,176  1,163 
Depreciation and amortization  130   166   175 
Impairment charges and store closing program costs259  128  17 
Interest expense, net  5   1   3 
 5,345  5,488  5,372 
Other income  (8)  (1)  (14)
  5,337  5,487  5,358 
(Loss) income from continuing operations before income taxes  (100)  (50)  392 
Income tax (benefit) expense (21) (93) 145 
(Loss) income from continuing operations   (79)  43   247 
 
(Loss) income on disposal of discontinued operations,            
    net of income tax expense (benefit) of $—, $1, and $1, respectively  (1)  2   3 
Cumulative effect of accounting change,     
    net of income tax benefit of $— —  —  1 
Net (loss) income  $(80) $45  $251 
 
Basic earnings per share:            
    (Loss) income from continuing operations$(0.52)$0.29 $1.59 
    Income from discontinued operations  —   0.01   0.02 
    Cumulative effect of accounting change —  —  0.01 
    Net (loss) income $(0.52) $0.30  $1.62 
 
Diluted earnings per share:     
    (Loss) income from continuing operations $(0.52) $0.28  $1.58 
    Income from discontinued operations—  0.01  0.02 
    Cumulative effect of accounting change  —   —   — 
    Net (loss) income$(0.52)$0.29 $1.60 
   
 2010 2009 2008
   (in millions, except per share amounts)
Sales $5,049  $4,854  $5,237 
Cost of sales  3,533   3,522   3,777 
Selling, general and administrative expenses  1,138   1,099   1,174 
Depreciation and amortization  106   112   130 
Impairment and other charges  10   41   259 
Interest expense, net  9   10   5 
Other income  (4)   (3)   (8) 
    4,792   4,781   5,337 
Income (loss) from continuing operations before income taxes  257   73   (100) 
Income tax expense (benefit)  88   26   (21) 
Income (loss) from continuing operations  169   47   (79) 
Income (loss) on disposal of discontinued operations, net of income tax expense (benefit) of $—, $(1), and $—, respectively  —   1   (1) 
Net income (loss) $169  $48  $(80) 
Basic earnings per share:
               
Income (loss) from continuing operations $1.08  $0.30  $(0.52) 
Income from discontinued operations  —   —   — 
Net income (loss) $1.08  $0.30  $(0.52) 
Diluted earnings per share:
               
Income (loss) from continuing operations $1.07  $0.30  $(0.52) 
Income from discontinued operations  —   —   — 
Net income (loss) $1.07  $0.30  $(0.52) 



See Accompanying Notes to Consolidated Financial Statements.


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

          2008         2007         2006
 (in millions)
Net (loss) income $(80)$45 $251
Other comprehensive (loss) income, net of tax     
 
Foreign currency translation adjustment:     
Translation adjustment arising during the period, net of tax(83) 56 27
 
Cash flow hedges:     
Change in fair value of derivatives, net of income tax1  1 —
 
Minimum pension liability adjustment:     
Minimum pension liability adjustment, net of deferred tax expense    
    of $—, $— and $120 million, respectively—  — 181
Pension and postretirement plan adjustments, net of income tax    
    benefit of $62, $11, and $— million, respectively(99) (20)—
Unrealized loss on available-for-sale securities (3) (2)—
 
Comprehensive (loss) income $(264)$80 $459
   
 2010 2009 2008
   (in millions)
Net income (loss) $169  $48  $(80) 
Other comprehensive income (loss), net of tax
               
Foreign currency translation adjustment:
               
Translation adjustment arising during the period, net of tax  11   65   (83) 
Cash flow hedges:
               
Change in fair value of derivatives, net of income tax  1   (2)   1 
Pension and postretirement adjustments:
               
Net actuarial gain (loss) and prior service cost arising during the year, net of income tax benefit of $1, $4, and $62 million, respectively  7   (12)   (100) 
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $3, $2, and $— million, respectively  8   4   1 
Available for sale securities:
               
Unrealized gain (loss)  —   3   (3) 
Comprehensive income (loss) $196  $106  $(264) 



See Accompanying Notes to Consolidated Financial Statements.


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CONSOLIDATED BALANCE SHEETS

  
    2008         2007 2010 2009
(in millions) (in millions)
ASSETS          
Current assets          
Cash and cash equivalents$385$488 $696  $582 
Short-term investments235  —   7 
Merchandise inventories1,1201,281  1,059   1,037 
Other current assets236289  179   146 
1,7642,063  1,934   1,772 
Property and equipment, net432521  386   387 
Deferred taxes358239  296   362 
Goodwill144266  145   145 
Other intangible assets, net11396  72   99 
Other assets 66 58  63   51 
$2,877 $3,243 $2,896  $2,816 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities          
Accounts payable$187$233 $223  $215 
Accrued and other liabilities 231278  266   218 
 418511  489   433 
Long-term debt142221  137   138 
Other liabilities393250  245   297 
Total liabilities953982  871   868 
Shareholders’ equity1,9242,261  2,025   1,948 
$2,877$3,243 $2,896  $2,816 



See Accompanying Notes to Consolidated Financial Statements.


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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

      
200820072006 2010 2009 2008
    Shares    Amount    Shares    Amount    Shares    Amount Shares Amount Shares Amount Shares Amount
(shares in thousands, amounts in millions) (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 year158,997$676157,810$653157,280 $635  161,267  $709   159,599  $691   158,997  $676 
Restricted stock issued under stock option and award plans245—513——(3)  205   —   1,004   —   245   — 
Forfeitures of restricted stock—2————  —   1   —   —   —   2 
Share-based compensation expense—9—10—10       13        12        9 
Issued under director and employee stock plans, net of tax35746741353011  1,187   12   664   6   357   4 
Issued at end of year159,599691158,997676 157,810653  162,659   735   161,267   709   159,599   691 
Common stock in treasury at beginning of year(4,523) (99)(2,107)(47)(1,776)(38)  (4,726)   (103)   (4,681)   (102)   (4,523)   (99) 
Reissued under employee stock plans————1223
Restricted stock issued under stock option and award plans——— —1573
Reissued under employee stock purchase plan  278   6   —   —   —   — 
Forfeitures/cancellations of restricted stock(90)(2)(25)—(30)(1)  (50)   —   (10)   —   (90)   (2) 
Shares of common stock used to satisfy tax
withholding obligations(65)(1) (95)(2)(241)(6)
Shares of common stock used to satisfy tax withholding obligations  (292)   (4)   (32)   (1)   (65)   (1) 
Stock repurchases——(2,283) (50)(334)(8)  (3,215)   (50)   —   —   —   — 
Exchange of options(3)— (13)—(5)—  (34)   (1)   (3)   —   (3)   — 
Common stock in treasury at end of year (4,681)(102)(4,523)(99)(2,107)(47)  (8,039)   (152)   (4,726)   (103)   (4,681)   (102) 
154,918 589154,474577155,703606  154,620   583   156,541   606   154,918   589 
Retained Earnings                              
Balance at beginning of year1,7541,7851,601       1,535        1,581        1,754 
Cumulative effect of adjustments resulting from
the adoption of SAB 108——(6)
Cumulative effect of adjustments resulting from
the adoption of FIN 48, net of tax (see note 1)—1—
Adjusted balance at beginning of year1,7541,7861,595
Net (loss) income(80)45251
Cash dividends declared on common stock
$0.60, $0.50 and $0.40 per share, respectively(93)(77)(61)
Net income (loss)       169        48        (80) 
Cash dividends declared on common stock $0.60 per share in each period presented     (93)      (94)      (93) 
Balance at end of year1,5811,7541,785     1,611      1,535      1,581 
Accumulated Other Comprehensive Loss                              
Foreign Currency Translation Adjustment                              
Balance at beginning of year933710       75        10        93 
Translation adjustment arising during the period, net of tax(83)5627
Translation adjustment arising during the year, net of tax     11      65      (83) 
Balance at end of year109337     86      75      10 
Cash Flow Hedges                              
Balance at beginning of year1——       —        2        1 
Change during year, net of tax11—
Change during the year, net of tax     1      (2)      1 
Balance at end of year21—     1      —      2 
Minimum Pension Liability Adjustment
Pension and Postretirement Adjustments
                              
Balance at beginning of year——(181)       (266)        (253)        (162) 
Change during year, net of tax——181
Balance at end of year———
Pension Adjustments
Balance at beginning of year(162)(133)—
Adoption of SFAS No. 158——(133)
Change during year, net of tax(91)(29)—
Change during the year, net of tax     12      (13)      (91) 
Balance at end of year(253)(162)(133)     (254)      (266)      (253) 
Available-for-Sale Securities                              
Balance at beginning of year(2)——       (2)        (5)        (2) 
Change during the year, without tax benefit(3)(2)—
Change during the year, without tax     —      3      (3) 
Balance at end of year(5)(2)—     (2)      (2)      (5) 
Total Accumulated Other Comprehensive Loss(246)(70)(96)     (169)      (193)      (246) 
Total Shareholders’ Equity$1,924$2,261$2,295    $2,025     $1,948     $1,924 



See Accompanying Notes to Consolidated Financial Statements.


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CONSOLIDATED STATEMENTS OF CASH FLOWS

   
    2008    2007    2006 2010 2009 2008
(in millions) (in millions)
From Operating Activities               
Net (loss) income$(80)$45$251
Adjustments to reconcile net (loss) income to net cash provided by
operating activities of continuing operations: 
Net income (loss) $169  $48  $(80) 
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:
               
Discontinued operations, net of tax(1)(2)(3)  —   (1)   1 
Non-cash impairment charges and store closing program costs25912417
Cumulative effect of accounting change, net of tax——(1)
Non-cash impairment and other charges  10   36   259 
Depreciation and amortization130166175  106   112   130 
Share-based compensation expense91010  13   12   9 
Deferred income taxes(44) (129)21
Deferred tax provision (benefit)  84   2   (44) 
Qualified pension plan contributions  (32)   (100)   (6) 
Change in assets and liabilities:               
Merchandise inventories12855(38)  (19)   111   128 
Accounts payable and other accruals(43)(36)(103)
Qualified pension plan contributions(6)—(68)
Accounts payable  7   23   (39) 
Other accruals  35   (30)   (4) 
Income taxes(7)14(3)  (9)   9   (7) 
Payment on the settlement of the net investment hedge  (24)   —   — 
Proceeds from the termination of interest rate swaps  —   19   — 
Other, net 3636(69)  (14)   105   36 
Net cash provided by operating activities of continuing operations383283189  326   346   383 
From Investing Activities               
Business acquisition(106)——  —   —   (106) 
Gain from lease termination3 14
Gain from lease terminations  1   —   3 
Gain from insurance recoveries—14  —   1   — 
Reclassification of cash equivalents to short-term investments(23)——  —   —   (23) 
Purchases of short-term investments—(1,378)(1,992)
Sales of short-term investments—1,6202,041  9   16   — 
Capital expenditures(146)(148)(165)  (97)   (89)   (146) 
Proceeds from investment and note—21—
Net cash (used in) provided by investing activities of continuing operations(272)117(108)
Net cash used in investing activities of continuing operations  (87)   (72)   (272) 
From Financing Activities               
Reduction in long-term debt(94)(7)(86)  —   (3)   (94) 
Repayment of capital lease—(14)(1)
Dividends paid on common stock(93)(77)(61)  (93)   (94)   (93) 
Issuance of common stock299  10   3   2 
Treasury stock reissued under employee stock plans——3
Purchase of treasury shares—(50)(8)  (50)   —   — 
Tax benefit on stock compensation—12
Treasury stock reissued under employee stock plan  3   —   — 
Excess tax benefits on share-based compensation  3   —   — 
Net cash used in financing activities of continuing operations(185)(138)(142)  (127)   (94)   (185) 
Net Cash Used In operating activities of Discontinued Operations——(8)
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents(29)51  2   18   (29) 
Net Cash used by Discontinued Operations  —   (1)   — 
Net Change in Cash and Cash Equivalents(103)267(68)  114   197   (103) 
Cash and Cash Equivalents at Beginning of Year488221289  582   385   488 
Cash and Cash Equivalents at End of Year$385$488$221 $696  $582  $385 
Cash Paid During the Year:               
Interest$11$18$20 $12  $12  $11 
Income taxes$64$52$133 $53  $19  $64 



See Accompanying Notes to Consolidated Financial Statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

1.Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Foot Locker, Inc. and its domestic and international subsidiaries (the “Company”), all of which are wholly owned. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Reporting Year

The reporting period for the Company is the Saturday closest to the last day in January. Fiscal years 2010, 2009, and 2008 representsrepresent the 52 weeksweek periods ending January 29, 2011, January 30, 2010, and January 31, 2009. Fiscal year 2007 represents the 52 weeks ended February 2, 2008. Fiscal year 2006 represented the 53 weeks ended February 3, 2007.2009, respectively. References to years in this annual report relate to fiscal years rather than calendar years.

Revenue Recognition

Revenue from retail stores is recognized at the point of sale when the product is delivered to customers. Internet and catalog sales revenue is recognized upon estimated receipt by the customer. Sales include shipping and handling fees for all periods presented. Sales include merchandise, net of returns, and exclude all taxes as permitted by EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).”taxes. The Company provides for estimated returns based on return history and sales levels. The Company recognizes revenue, including gift card sales and layaway sales, in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid.

Gift Cards

The Company sells gift cards to its customers; the cardscustomers, which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed or when the likelihood of the gift card being redeemed by the customer is remote and there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company has determined its gift card breakage rate based upon historical redemption patterns. Historical experience indicates that after 12 months the likelihood of redemption is deemed to be remote. Gift card breakage income is included in selling, general and administrative expenses and totaled $2 million, $4 million, and $5 million in 2010, 2009, and 2008, $4 million in 2007, and $7 million in 2006.respectively. Unredeemed gift cards are recorded as a current liability.

Statement of Cash Flows

The Company has selected to present the operations of the discontinued businesses as one line in the Consolidated Statements of Cash Flows. For all the periods presented this caption includes only operating activities.

Store Pre-Opening and Closing Costs

Store pre-opening costs are charged to expense as incurred. In the event a store is closed before its lease has expired, the estimated post-closing lease exit costs, less the sublease rental income, is provided for once the store ceases to be used, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”used.

Advertising Costs and Sales Promotion

Advertising and sales promotion costs are expensed at the time the advertising or promotion takes place, net of reimbursements for cooperative advertising. Advertising expenses also include advertising costs as required by some of the Company’s mall-based leases. Cooperative advertising reimbursements earned for the launch and promotion of certain products is agreed upon with vendors and is recorded in the same period as the associated expense

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isexpenses are incurred. In accordance with EITF Issue No. 02-16, “Accounting by a Reseller for Cash Consideration from a Vendor,” the Company accounts for reimbursementsReimbursement received in excess of expenses incurred related to specific, incremental, and identifiable advertising costs, is accounted for as a reduction to the cost of merchandise, andwhich is reflected in cost of sales as the merchandise is sold.


Advertising costs, which are included as a component of selling, general and administrative expenses, were as follows:

   
    2008         2007         2006 2010 2009 2008
(in millions) (in millions)
Advertising expenses $106.8 $105.9$92.5 $97  $94  $107 
Cooperative advertising reimbursements(40.2)(34.8)(23.0)  (23)   (25)   (40) 
Net advertising expense$66.6$71.1 $69.5 $74  $69  $67 

Catalog Costs

Catalog costs, which primarily comprise paper, printing, and postage, are capitalized and amortized over the expected customer response period related to each catalog, which is generally 90 days. Cooperative reimbursements earned for the promotion of certain products are agreed upon with vendors and isare recorded in the same period as the associated catalog expenses are amortized. Prepaid catalog costs totaled $3.1 million and $4.0$4 million at January 31, 200929, 2011 and February 2, 2008, respectively.January 30, 2010.

Catalog costs, which are included as a component of selling, general and administrative expenses, were as follows:

   
    2008         2007         2006 2010 2009 2008
(in millions) (in millions)
Catalog costs$48.0 $45.6 $47.0 $45  $48  $48 
Cooperative reimbursements (4.1) (3.8) (3.5)  (5)   (4)   (4) 
Net catalog expense$43.9$41.8$43.5 $40  $44  $44 

Earnings Per Share

     BasicThe Company accounts for and discloses net earnings (loss) per share using the treasury stock method. The Company’s basic earnings per share is computed usingby dividing the Company’s reported net income (loss) for the period by the weighted-average number of common shares outstanding forat the end of the period. The Company’s restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share usesreflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents, such as stock options and awards.equivalents. The computation of basic and diluted earnings per share is as follows:

   
    2008         2007         2006 2010 2009 2008
(in millions) (in millions)
Net income (loss) from continuing operations$(79)$43$247 $169  $47  $(79) 
Weighted-average common shares outstanding154.0 154.0155.0  155.7   156.0   154.0 
Basic Earnings per share$(0.52)$0.29 $1.59
Basic Earnings per share from continuing operations $1.08  $0.30  $(0.52) 
Weighted-average common shares outstanding 154.0154.0155.0  155.7   156.0   154.0 
Stock options and awards— 1.61.8
Weighted-average common shares outstanding
assuming dilution154.0155.6156.8
Diluted earnings per share$(0.52)$0.28$1.58
Dilutive effect of potential common shares  1.0   0.3   — 
Weighted-average common shares outstanding assuming dilution  156.7   156.3   154.0 
Diluted earnings per share from continuing operations $1.07  $0.30  $(0.52) 

Potential common shares include the dilutive effect of stock options and restricted stock units. Options to purchase 4.84.5 million, 3.46.3 million, and 2.84.8 million shares of common stock as ofat January 29, 2011, January 30, 2010, and January 31, 2009, February 2, 2008, and February 3, 2007, respectively, were not included in the computations because the exercise price of the options was greater than the average market price of the common shares and, therefore, the effect of their inclusion would be antidilutive. Contingently issuable shares of 0.5 million have not been included as the vesting conditions have not been satisfied. Additionally, due to a loss reported for the year ended January 31, 2009, options and awards of 1.2 million shares of common stock were excluded from the calculation of diluted earnings per share as the effect would be antidilutive.


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Share-Based Compensation

     Effective January 29, 2006, theThe Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” and related interpretations, (“SFAS No. 123(R)”) to account for stock-based compensation. Among other things, SFAS No. 123(R) requires thatrecognizes compensation expense be recognized in the financial statements for share-based awards based on the grant date fair value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards. 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 awards 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 vesting term, net of estimated forfeitures. See note 25Note 21,Share-Based Compensation, for information on the assumptions the Company used to calculate the fair value of stock-basedshare-based compensation.

Upon exercise of stock options, issuance of restricted stock or units, or issuance of shares under the employeeemployees stock purchase plan, the Company will issue authorized but unissued common stock or use common stock held in treasury. The Company may make repurchases of its common stock from time to time, subject to legal and contractual restrictions, market conditions, and other factors.

Cash and Cash Equivalents

Cash equivalents at January 29, 2011 and January 30, 2010 were $675 million and $501 million, respectively. Included in these amounts are $165 million and $207 million of short-term deposits as of January 29, 2011 and January 30, 2010, respectively. The Company considers all highly liquid investments with original maturities of three months or less, including commercial paper and money market funds, to be cash equivalents. AmountsAdditionally, amounts due from third party credit card processors for the settlement of debit and credit cardscard transactions are included as cash equivalents as they are generally collected within three business days. Cash equivalents at January 31, 2009

Investments

Changes in the fair value of available-for-sale securities are reported as a component of accumulated other comprehensive loss in the Consolidated Statements of Shareholders’ Equity and February 2, 2008 were $331 million and $472 million, respectively.

Short-Term Investments

are not reflected in the Consolidated Statements of Operations until a sale transaction occurs or when declines in fair value are deemed to be other-than-temporary. The Company accountsroutinely reviews available-for-sale securities for its short-term investmentsother-than-temporary declines in accordance with SFAS No. 115, “Accounting for Certain Investmentsfair value below the cost basis, and when events or changes in Debt and Equity Securities.” At January 31, 2009,circumstances indicate the carrying value of a security may not be recoverable, the security is written down to fair value. The Company’s short-term investment was $23valued at $7 million which represents the fair value of its investment in the Reserve International Liquidity Fund, Ltd.at January 30, 2010; this amount was received during 2010. The Company’s auction rate security was valued at $5 million at both January 29, 2011 and January 30, 2010. See Note 19, a money market fund. See note 4Fair Value Measurements, for further discussion on this investment.of these investments.

Merchandise Inventories and Cost of Sales

Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out (LIFO)(“LIFO”) basis for domestic inventories and on the first-in, first-out (FIFO)(“FIFO”) basis for international inventories. The retail inventory method is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail inventory method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which approximates FIFO. Transportation, distribution center, and sourcing costs are capitalized in merchandise inventories. In accordance with SFAS No. 151, “Inventory Costs- An Amendment of ARB 43, Chapter 4,” theThe Company expenses in the period incurred, the freight associated with transfers between its store locations.locations in the period incurred. The Company maintains an accrual for shrinkage based on historical rates.

Cost of sales is comprised of the cost of merchandise, occupancy, buyers’ compensation and shipping and handling costs. The cost of merchandise is recorded net of amounts received from vendors for damaged product returns, markdown allowances and volume rebates, as well as cooperative advertising reimbursements received in excess of specific, incremental advertising expenses. Occupancy includes the amortization of amounts received from landlords for tenant improvements.


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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 isare 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 under capital leases and improvements to leased premises are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term. Capitalized software reflects certain costs related to software developed for internal use that are capitalized and amortized. After substantial completion of thea project, the costs are amortized on a straight-line basis over a 2 to 7 year period. Capitalized software, net of accumulated amortization, is included inas a component of property and equipment and was $23$27 million and $24 million at January 31, 200929, 2011 and $22 million at February 2, 2008.January 30, 2010, respectively.

Recoverability of Long-Lived Assets

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), anThe Company recognizes impairment loss is recognizedlosses whenever events or changes in circumstances indicate that the carrying amounts of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level, as well as qualitative measures. The Company considers historical performance and future estimated results, which are predominately identified from the Company’s three-year strategic plans, in its evaluation of potential store-level impairment and then compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. The Company estimates fair value based on the best information available using estimates, judgments, and projections as considered necessary.

Goodwill and Other Intangible Assets

The Company accounts forreviews goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and other intangible assets with indefinite lives be reviewed for impairment annually during the first quarter of its fiscal year or more frequently if impairment indicators arise and, at a minimum, annually. The Company performs its annual impairment review as of the beginning of each fiscal year.arise. The fair value of each reporting unit is determined using a combination of market and discounted cash flow approaches.

Derivative Financial Instruments

All derivative financial instruments are recorded in the Company’s Consolidated Balance Sheets at their fair values. Changes in fair values ofFor derivatives are recorded each period in earnings, other comprehensive gain or loss, ordesignated as a basis adjustment to the underlying hedged item, depending on whether a derivative is designatedhedge, and effective as part of a hedge transaction. Thetransaction, the effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive income/loss or as a basis adjustment to the underlying hedged item and reclassified to earnings in the period in which the hedged item affects earnings.

The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is disposed of.

To the extent derivatives do not qualify or are not designated as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject the Company to increased earnings volatility.

Fair Value

The changesCompany categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs.


The Company’s hedges of net investments in various foreign subsidiaries is computed using the spot method.

Fair Value of Financial Instruments

     Thefinancial assets recorded at fair value of financialare categorized as follows:

Level 1 – Quoted prices for identical instruments is determined by reference to various market data and other valuation techniques as appropriate. The carrying value of cash and cash equivalents, and other current receivables and payables, approximates fair value due to the short-term nature of these assets and liabilities.in active markets.

36

Level 2 – Quoted market prices of the samefor similar instruments in active markets; quoted prices for identical or similar instruments in markets that are used to determine fair value of long-term debtnot active; and forward foreign exchange contracts. Discounted cash flowsmodel-derived valuations in which all significant inputs or significant value-drivers are used to determine the fair value of long-term investments and notes receivable if quoted market prices on these instrumentsobservable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unavailable.unobservable.

Income Taxes

     On February 4, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Upon the adoption of FIN 48, the Company recognized a $1 million increase to retained earnings to reflect the change of its liability for the unrecognized income tax benefits as required. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

The Company determines its deferred tax provision under the liability method, whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basesbasis of assets and liabilities and their reported amounts using presently enacted tax rates. Deferred tax assets are recognized for tax credits and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income induring the period that includes the enactment date.

A taxing authority may challenge positions that the Company adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax positionpositions for such transactions and records reserves for those differences when considered necessary. Tax positions are recognized only when it is more likely than not, based on technical merits, that the positions will be sustained upon examination. Tax positions that meet the more-likely-than-not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position is a matter of judgment based on the individual facts and circumstances of that position, evaluated in light of all available evidence. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries is made only on those amounts in excess of the funds considered to be permanently reinvested.

Pension and Postretirement Obligations

The discount rate selected to measure the present value of the Company’s U.S. benefit obligations as of January 31, 2009 was derived using a cash flow matching method whereby the Company comparesmatches 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. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations as of January 31, 2009 was developed by using the plan’s bond portfolio indices, which match the benefit obligations.

Insurance Liabilities

The Company is primarily self-insured for health care, workers’ compensation and general liability costs. Accordingly, provisions are made for the Company’s actuarially determined estimates of discounted future claim costs for such risks, for the aggregate of claims reported and claims incurred but not yet reported. Self-insured liabilities totaled $16$15 million for both January 29, 2011 and $17 million at January 31, 2009 and February 2, 2008, respectively.30, 2010. The Company discounts its workers’ compensation and general liability reserves using a risk-free interest rate. Imputed interest expense related to these liabilities was not significant for the year ended January 31,2010, 2009, and was $1 million in both 2007 and 2006.2008.

Accounting for Leases

The Company recognizes rent expense for operating leases as of the possession date for store leases or the commencement of the agreement for a non-store lease. Rental expense, inclusive of rent holidays, concessions and tenant allowances are recognized over the lease term on a straight-line basis. Contingent payments based upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the lease and accordingly, are charged to operations as incurred.


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Foreign Currency Translation

The functional currency of the Company’s international operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted-average rates of exchange prevailing during the year. The unearned gains and losses resulting from such translation are included as a separate component of accumulated other comprehensive loss within shareholders’ equity.

Recent Accounting Pronouncements Not Previously Discussed Herein

     In December 2007, the FASBRecently issued SFAS No. 141 (Revised 2007), “Business Combinations,” (“SFAS No. 141(R)”). This standard will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is onpronouncements did not, or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company doesare not expect the adoption of SFAS No. 141(R)believed by management to, have an affect on its Consolidated Financial Statements.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This standard does not currently affect the Company.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of this standard will have a significantmaterial effect on its financial statement disclosures.

     In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect that the adoption of FSP 142-3 will have a significant effect on its financial statements.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The Company adopted SFAS No. 162 on the effective date of November 13, 2008 and it did not have any impact on the Company’s Consolidated Financial Statements.

     In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividendspresent or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP EITF 03-6-1 is effective forfuture consolidated financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently assessing the potential effect of FSP EITF 03-6-1 on its reporting of earnings per share.statements.

2.Segment Information

38

     In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), which amends SFAS No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an Amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132(R)”). FSP FAS No. 132(R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company is in the process of evaluating FSP FAS No. 132(R)-1 and does not expect it will have a significant impact on its Consolidated Financial Statements.

2. Immaterial Revision of Previously Issued Financial Statements

     The 2007 results as presented in this Annual Report have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The income tax benefit of $99 million related to continuing operations, as reported for the full year of 2007 within the Form 10-K, was overstated by $6 million. This overstatement comprises primarily five items. First, the Company understated its income taxes payable by $9 million due to incorrectly accounting for foreign dividend withholding taxes. Second, the Company noted that certain foreign currency fluctuations related to the tax assets and liabilities, totaling $5 million, should have been reflected as part of the foreign currency translation adjustment within accumulated other comprehensive loss. The Company had incorrectly reflected these foreign exchange movements within the income tax provision, thereby increasing the income tax provision erroneously. Third, the Company overstated the value of a portion of its Canadian deferred tax assets by $3 million as a result of using incorrect tax rates. Fourth, the Company understated a deferred tax liability of $2 million related to goodwill. Finally, various state and international depreciation corrections totaling $3 million were overstated in the income tax provision.

     The table below reflects these adjustments on each financial statement line item and per-share amounts affected:

Year ended February 2, 2008
As
Originally
(in millions)    Reported         Revision         As Adjusted
Other current assets$290$(1)$289
Deferred taxes243(4)239
Total assets 3,248(5)3,243
Accrued expenses and other current liabilities26810278
Other liabilities255(5) 250
Retained earnings1,760  (6)1,754
Accumulated other comprehensive loss(66)(4)(70)
Total shareholders’ equity 2,271(10)2,261
Total liabilities and shareholders’ equity$3,248$(5)$     3,243
 
Year ended February 2, 2008
As
Originally
(in millions)ReportedRevisionAs Adjusted
Loss from continuing operations before
       income taxes$(50)$—$(50)
Income tax benefit(99)6(93)
Income from continuing operations$49$(6)$43
Basic earnings per share:
       Income from continuing operations$0.32$ (0.03)$0.29
Diluted earnings per share:
       Income from continuing operations$0.32$(0.04)$0.28

39

3. Acquisition

     The Company consummated its purchase of CCS from dELiA*s, Inc. on November 5, 2008. CCS is the leading direct-to-consumer retailer in the United States that sells skateboard and snowboard equipment, apparel, footwear and accessories through catalogs and the Internet. The Company’s consolidated results of operations include those of CCS beginning with the date that the acquisition was consummated. The Company believes that this acquisition will provide the Company with a unique growth opportunity, which supplements its current direct-to-customers operations.

     The Company integrated the CCS business into the Direct-to-Customers segment. The purchase price was $106 million and consisted of $103 million in cash consideration and $3 million of direct transaction costs. Direct costs include investment banking, legal and accounting fees, and other costs. The Company has allocated the purchase price based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company, with the remainder allocated to tax deductible goodwill. The purchase price allocation may be revised as more definitive facts and evidence become available. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of operations. The allocation of the purchase price is detailed below:

    (in millions)
Inventory    $13    
Intangible assets 
       Tradenames – non-amortizing 25
       Customer relationship – amortizing 21
Goodwill47
       Total purchase price$106

4. Impairment Charges and Store Closing Program

Northern Group Note Impairment

     On January 23, 2001, the Company announceddetermined that it was exiting its 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, which was paid in the form of a note. Over the last several years, the note has been amended and payments have been received; however, the interest and payment terms remained unchanged. The CAD$15.5 million note was required to be repaid upon the occurrence of “payment events,” as defined in the purchase agreement, but no later than September 28, 2008. During the first quarter of 2008, the principal owners of the Northern Group requested an extension on the repayment of the note. The Company determined,reportable segments are those that are based on the Northern Group’s current financial condition and projected performance, that repaymentits method of the note pursuant to the original terms of the purchase agreement was not likely. Accordingly, a non-cash impairment charge of $15 million was recorded during the first quarter of 2008 in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” This charge has been recorded with no tax benefit. The tax benefit is a capital loss that can only be used to offset capital gains. The Company does not anticipate recognizing sufficient capital gains to utilize these losses. Therefore, the Company determined that a full valuation allowance was required.

     Another wholly owned subsidiary of the Company was the assignor of the store leases involved in the Northern Group transaction and, therefore, retains potential liability for such leases. As the assignor of the Northern Canada leases, the Company remained secondarily liable under these leases.internal reporting. As of January 31, 2009,29, 2011, the Company estimates that its gross contingent lease liability is CAD$2 million.has two reportable segments, Athletic Stores and Direct-to-Customers. The Company currently estimates the expected value of the lease liability to be insignificant. The Company believes that, because it is secondarily liable on the leases, it is unlikely that it would be required to make such contingent payments.

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Money Market Impairment

     On September 16, 2008, the Company requested redemption of its shares in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”), totaling $75 million. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the Company’s redemption trades would be honored at a $1.00 per share net asset value. Although the Company received a partial distribution of $49 million inacquired CCS during the fourth quarter of 2008, and its operations are presented within the Direct-to-Customers segment.

The accounting policies of both segments are the same as those described in theSummary of Significant Accounting Policiesnote. The Company has not received information as to when the remaining amountevaluates performance based on several factors, of its redemption request will be paid. Litigation, to which the Companyprimary financial measure is not a party, exists that involves howdivision results. Division profit (loss) reflects income (loss) from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.

   
 2010 2009 2008
   (in millions)
Sales
               
Athletic Stores $4,617  $4,448  $4,847 
Direct-to-Customers  432   406   390 
Total sales $5,049  $4,854  $5,237 
Operating Results
               
Athletic Stores(1) $329  $114  $(59) 
Direct-to-Customers(2)  30   32   43 
    359   146   (16) 
Restructuring income(3)  —   1   — 
Division profit (loss)  359   147   (16) 
Less: Corporate expense(4)  97   67   87 
Operating profit (loss)  262   80   (103) 
Other income(5)  4   3   8 
Interest expense, net  9   10   5 
Income (loss) from continuing operations before income taxes $257  $73  $(100) 

(1)The year ended January 30, 2010 includes non-cash impairment charges totaling $32 million, which were recorded to write-down long-lived assets such as store fixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions. The year ended January 31, 2009 includes a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment, and store closing costs related to the Company’s U.S. operations.
(2)Included in the results for the year ended January 29, 2011 is a non-cash impairment charge of $10 million to write down the CCS tradename intangible asset. Included in the results for the year ended January 30, 2010 is a non-cash impairment charge of $4 million to write off software development costs.
(3)During the year ended January 30, 2010, the Company adjusted its 1999 restructuring reserves to reflect a favorable lease termination.
(4)During the fourth quarter of 2009, the Company restructured its organization by consolidating the Lady Foot Locker, Foot Locker U.S., Kids Foot Locker, and Footaction businesses in addition to reducing corporate staff, resulting in a $5 million charge. Included in corporate expense for the year ended January 31, 2009 is a $3 million other-than-temporary impairment charge related to the investment in the Reserve International Liquidity Fund. Additionally, for the year ended January 31, 2009 the Company recorded a $15 million impairment charge on the Northern Group note receivable.
(5)Other income includes non-operating items, such as gains from insurance recoveries, gains on the repurchase and retirement of bonds, royalty income, the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts. Included in the year ended January 29, 2011 is a $2 million gain to reflect the Company’s settlement of its investment in the Reserve International Liquidity Fund.

         
 Depreciation and
Amortization		 Capital Expenditures Total Assets
   2010 2009 2008 2010 2009 2008 2010 2009 2008
   (in millions)
Athletic Stores $85  $90  $111  $72  $70  $122  $1,983  $1,873  $1,879 
Direct-to-Customers  9   9   6   4   5   6   290   291   297 
    94   99   117   76   75   128   2,273   2,164   2,176 
Corporate  12   13   13   21   14   18   623   652   701 
Total Company $106  $112  $130  $97  $89  $146  $2,896  $2,816  $2,877 

Sales and long-lived asset information by geographic area as of and for the remainingfiscal years ended January 29, 2011, January 30, 2010, and January 31, 2009 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, Canada, and France represent approximately 24, 19, and 14 percent, respectively, of the Fund should be distributed. Therefore, there is a risk thatInternational category’s sales for the Company could receive less than the $1.00 per share net asset value. As a result during the third quarter of 2008, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. This charge was recorded with no tax benefit. This impairment is primarily related to the underlying securities of Lehman Brothers Holdings Inc. heldperiod ended January 29, 2011. No other individual country included in the Fund. Based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the Company has reclassified $23 million (net of the impairment charge of $3 million) from “Cash and cash equivalents” to “Short-term investments” in the Consolidated Balance Sheet as of January 31, 2009.International category is significant.

   
 2010 2009 2008
   (in millions)
Sales
               
United States $3,568  $3,425  $3,768 
International  1,481   1,429   1,469 
Total sales $5,049  $4,854  $5,237 

   
 2010 2009 2008
   (in millions)
Long-Lived Assets
               
United States $257  $266  $311 
International  129   121   121 
Total long-lived assets $386  $387  $432 
3.Impairment and Other Charges

   
 2010 2009 2008
   (in millions)
Impairment of goodwill and other intangible assets $10  $—  $169 
Impairment of assets  —   36   67 
Reorganization costs  —   5   — 
Store closing program  —   —   5 
Money market impairment  —   —   3 
Northern Group note impairment  —   —   15 
Total impairment and other charges $10  $41  $259 

Impairment of Goodwill and Other Intangible Assets

The Company has seven reporting units,2010 and 2009 annual goodwill impairment tests did not result in an impairment charge as defined under SFAS No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is defined as an operating segment or one level below an operating segment. Only four of the reporting units contain goodwill, $118 million was allocated to the Foot Locker, Kids Foot Locker and Footaction reporting unit, $49 million was allocated to the Champs Sports reporting unit, $17 million was allocated to the Foot Locker Europe reporting unit, and $127 million was allocated to the Direct-to-Customers reporting unit. Although we have seven reporting units, they have been aggregated into two operating segments for segment reporting purposes, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

     The Company performs its annual impairment test as of the beginning of each year; however, due to the significant decline in the Company’s common stock and market capitalization, in relation to the book value during the fourth quarter of 2008, the Company determined that a triggering event had occurred and performed an interim impairment test. The first step in this process compares the fair value of theeach reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. The fair value of the four reporting units containing goodwill was determined under step 1 of the goodwill impairment test based on an equal weighting of a discounted cash flow analysis using forward-looking projections of estimated future operating results and a guideline company methodology under the market approach. Based on this testing, the Company determined that the fair values, as determined under step 1 as described above, was less thanexceeded the carrying values of the Foot Locker, Kids Foot Locker and Footactioneach respective reporting unit and the Champs Sports reporting unit. Accordingly, the Company performed a step 2 analysis to determine the extent of the goodwill impairment and concluded that the carrying value of these two reporting units was fully impaired, resulting in a non-cash impairment charge of $167 million. There were no goodwill impairment charges in 2007 or 2006.

Intangible assets that are determined to have finite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate that the carrying value may be impaired. Intangible assets with indefinite lives are tested for impairment if impairment indicators arise and, at a minimum, annually. During the fourth quarter of 2010, the Company determined that a triggering event had occurred related to its CCS intangible assets, which is part of the Direct-to-Customers segment, reflecting decreases in projected revenues. Accordingly, a charge of $10 million was recorded to write-down the CCS tradename. The fair value was determined using an income approach using the relief-from-royalty method.


During 2008, the Company determined that the fair values of goodwill were less than the carrying values of the Foot Locker, Kids Foot Locker, and Footaction reporting unit and the Champs Sports reporting unit, resulting in a non-cash impairment charge of $167 million. As a result of the impairment review related to long-lived assets and goodwill, the Company performed a review of its other intangible assets and recorded an impairment charges in 2008 totalingcharge of $2 million related to trademarks of Footaction in the U.S. and Foot Locker in the Republic of Ireland, reflecting decreases in projected revenues.which are part of the Athletic Stores segment.

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Impairment of Assets and Store Closing Program

No impairment charges related to long-lived assets were recorded during 2010. In connection with the review of goodwill and other intangibles,2009, the Company performed a storerecorded non-cash impairment charges totaling $36 million; $32 million was recorded to write-down long-lived impairment test pursuant to SFAS No. 144 forassets at its Lady Foot Locker, Kids Foot Locker, and Footaction, divisions. Additionally, in accordance with the Company’s store long-lived assets policy, the Company determined that triggering events had occurred during the fourth quarter of 2008 at its Lady Foot Locker and Champs Sports divisions. Accordingly,divisions and a $4 million charge was recorded to write off certain software development costs for the Company evaluatedDirect-to-Customers segment as a result of management’s decision to terminate this project. During 2008, the long-lived assets of those operations for impairment andCompany recorded non-cash impairment charges of $67 million primarilyrelated to write-down long-lived assets such as store fixturesFoot Locker U.S., Kids Foot Locker, Footaction, and leasehold improvements for 868 stores at the Company’s U.S. store operations.Champs Sports.

Reorganization Costs

     During the year endedOn January 31, 2009,8, 2010, the Company closed 21 unproductive storesannounced that it would change its organizational structure by consolidating the management team that oversees its Lady Foot Locker business with the team that manages the Foot Locker U.S., Kids Foot Locker, and Footaction businesses. As a result of this divisional reorganization, as well as certain corporate staff reductions taken to improve corporate efficiency, the Company recorded a charge of $5 million. This charge was comprised primarily of severance costs to eliminate approximately 120 positions.

Store Closing Program

As part of the Company’s store closing program announced in 2007. Exit2007, the Company recognized exit costs of $5 million for the year ended January 31, 2009, comprising primarily lease termination costs were recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

     During 2007, the Company concluded that triggering events had occurred at its U.S. retail store divisions, comprising Foot Locker, Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports. Accordingly, the Company evaluated the long-lived assets of those operations for impairment and recorded non-cash impairment charges of $117 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for 1,395 stores at the Company’s U.S. store operations pursuant to SFAS No. 144. The Company recorded an additional non-cash impairment charge of $7 million in 2007 as a result of the decision to close 66 unproductive stores as part of a store closing program. Exit costs related to 33 stores, which closed during 2007, comprising primarily lease termination costs of $4 million, were recognized in accordance with SFAS No. 146.

     Under SFAS No. 144, store closings may constitute discontinued operations if migration of customers and cash flows are not expected.21 stores. The Company has concluded that no store closings have met the criteria for discontinued operations treatment.

Money Market Impairment

5. Segment Information

In 2008, the Company recognized an impairment loss of $3 million to reflect an other-than-temporary decline in fair value, which was related to the value of the underlying securities of Lehman Brothers held in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”). During 2010, a settlement agreement was reached between investors and the Fund. The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of January 31, 2009,received $0.98 per share net asset value through this agreement. Pursuant to the settlement, the Company has two reportable segments, Athletic Stores and Direct-to-Customers.received a payment of $9 million during 2010 for the remaining portion of its investment in the Fund, which had a carrying amount of $7 million. The Company acquired CCS duringtotal amount received was $74 million of its original $75 million investment in the fourth quarter of 2008, the operations are presented within the Direct-to-Customers segment. The Company also operated the Family Footwear segment, which included the retail format under the Footquarters brand name through the second quarter of 2007. During the third quarter,Fund. As the Company convertedhad recognized an impairment loss of $3 million during 2008, a $2 million gain was recorded in 2010 to reflect the Footquarters stores, which were the only stores reported under the Family Footwear segment, to Foot Locker and Champs Sports outlet stores. The Company has concluded that the Footquarters store closings are not discontinued operations pursuant to SFAS No. 144.

     The accounting policiesCompany’s realized loss of both segments are the same as those described$1 million in the “SummaryFund. These amounts were recorded with no tax expense or benefit. The $2 million gain is recorded within other income.

Northern Group Note Impairment

In 2008, a non-cash impairment charge of Significant Accounting Policies.” The Company evaluates performance based on several factors,$15 million was recorded to fully write off the Northern Group note, which represented a note received in connection with the disposition of which the primary financial measure is division results. Division (loss) profitCompany’s former Northern Group operations.

4.Other Income

Other income reflects (loss) income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

Sales

    2008         2007         2006
(in millions)
Athletic Stores $4,847$5,071 $5,370
Direct-to-Customers390 364380
Family Footwear — 2 —
       Total sales$5,237$5,437$5,750

42


Operating Results

    2008         2007         2006
(in millions)
Athletic Stores(1)$(59)$(27)$405
Direct-to-Customers434045
Family Footwear(2)—(6)—
(16) 7450
Restructuring income (charge)(3)—2(1)
Division (loss) profit(16)9 449 
Corporate expense(4) (87)(59)(68)
Operating (loss) profit(103)(50)381
Other income(5)8114
Interest expense, net513
(Loss) income from continuing operations before income taxes$(100)$(50)$392
____________________

(1)The year ended January 31, 2009 includes a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment and store closing costs related to the Company’s U.S. operations. The year ended February 2, 2008 includes a $128 million charge representing impairment and store closing costs related to the Company’s U.S. operations. The year ended February 3, 2007 included a $17 million non-cash impairment charge related to the Company’s European operations.
(2)During the first quarter of 2007, the Company launched a new family footwear concept, Footquarters. The concept’s results did not meet the Company’s expectations and, therefore, the Company decided not to invest further in this business. These stores were converted to the Company’s other formats. Included in the operating loss of $6 million was approximately $2 million of costs associated with the removal of signage and the write-off of unusable fixtures.
(3)During 2007, the Company adjusted its 1993 Repositioning and 1991 Restructuring reserve by $2 million primarily due to favorable lease terminations. During 2006, the Company recorded a restructuring charge of $1 million, which represented a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box Company distribution center. These amounts are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
(4)Corporate expense for the year ended January 31, 2009 includes a $3 million other-than-temporary impairment charge related to a short-term investment and a $15 million impairment charge related to the Northern Group note receivable.
(5)Other income in 2008 primarily reflects a $4 million net gain related to the Company’s foreign currency options contracts and $3 million gain on lease terminations related to two lease interests in Europe.
2007 includes a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by fire in 2006 and a $1 million gain on the sale of two of its lease interests in Europe. These gains were offset primarily by premiums paid for foreign currency option contracts.
2006 includes a $4 million gain on lease terminations, a $8 million of insurance proceeds related to the 2005 hurricane, and a $2 million gain on debt repurchases.

Depreciation and
AmortizationCapital ExpendituresTotal Assets
    2008    2007    2006    2008    2007    2006    2008    2007    2006
(in millions)
Athletic Stores$111$146$147$122$125$135$1,889$2,300$2,374
Direct-to-Customers6666  74297197195
 117 152 153128132 139 2,186 2,4972,569
Corporate 131422 181626 691 746 680
Total Company$130$166$175$146$148$165$2,877$3,243$3,249

     Sales and long-lived asset information by geographic area as of and for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007 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, Canada, and France represent approximately 22, 18, and 14 percent, respectively, of the International category’s sales for the period ended January 31, 2009. No other individual country included in the International category is significant.

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Sales

    2008         2007         2006
(in millions)
United States$3,768$3,991$4,356
International  1,469 1,446  1,394
Total sales$5,237$5,437$5,750

Long-Lived Assets

    2008         2007         2006
(in millions)
United States$311$368 $504
International  121 153 150
Total long-lived assets$432$521$654

6. Other Income

     Other income was $8 million, $1 million and $14 million for 2008, 2007 and 2006, respectively. Included in other income are non-operating items such as royalty income from the effect ofCompany’s franchising agreements, lease termination gains, realized gains/losses and premiums associated with foreign currency option contracts, salesgains on the purchase and retirement of bonds, and other non-operating items.

For 2010, other income includes a $2 million gain on its money-market investment, as well as royalty income, and gains on lease terminations related to certain lease interests in Europe. For 2009, other income includes $4 million related to gains from insurance recoveries, gains on the purchase and insurance proceeds.retirement of bonds, and royalty income partially offset by foreign currency option contract premiums of $1 million. Other income in 2008 primarily reflects a $4 million net gain related to the Company’s foreign currency options contracts and a $3 million gain on lease terminations related to two lease interests in Europe.


     In 2007, other income includes a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by fire in 2006. Additionally, the Company sold two of its lease interests in Europe for a gain of $1 million. These gains were offset primarily by premiums paid for foreign currency option contracts.

5.Merchandise Inventories

     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, income of $2 million related to the purchase and retirement of debt and lease termination income of $4 million. The Company purchased and retired $38 million of its $200 million 8.50 percent debentures payable in 2022, at a $2 million discount from face value. During 2006, the Company terminated two of its leases and recorded a net gain of $4 million.

7. Short-Term Investments

    2008         2007
(in millions)
Money market investment $23$—
Auction rate security — 5
$23$5
  
 2010 2009
   (in millions)
LIFO inventories $694  $682 
FIFO inventories  365   355 
Total merchandise inventories $1,059  $1,037 

     The Company has classified its remaining investment in the Reserve International Liquidity Fund as a short-term investment as of January 31, 2009. The determination to classify the investment as short-term was based upon a review of the underlying assets and maturities of the Fund. With the liquidity issues experienced in the global credit and capital markets, the Company’s preferred stock auction rate security, having a face value of $7 million, has experienced failed auctions. For the years ended January 31, 2009 and February 2, 2008, the Company determined that a temporary impairment occurred and recorded charges of $3 million and $2 million, respectively, with no tax benefit, to accumulated other comprehensive loss. In the second quarter of 2008, the Company determined that due to the illiquid nature of this investment it should be classified as a non-current asset. Accordingly, the fair value of $2 million is recorded within other assets as of January 31, 2009.

     Based on the relatively small size of these investments and its ability to access cash and other short-term investments, and expected operating cash flows, the Company does not anticipate the lack of liquidity on these investments will affect its ability to operate its business as usual.

44

8. Merchandise Inventories

    2008         2007
(in millions)
LIFO inventories $788$907
FIFO inventories 332 374
Total merchandise inventories$1,120$1,281

The value of the Company’s LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.

6.Other Current Assets

9. Other Current Assets

    2008         2007  
 (in millions) 2010 2009
 (in millions)
Income tax receivable $47  $5 
Net receivables$53$50  41   37 
Prepaid expenses and other current assets3334  31   33 
Prepaid rent6265  27   28 
Prepaid income taxes4769  18   25 
Deferred taxes2953
Northern Group note receivable—14
Current tax asset— 1
Income tax receivable7—
Deferred taxes and costs  13   17 
Fair value of derivative contracts 5 3  2   1 
$236$289 $179  $146 

7.Property and Equipment, Net

10. Property and Equipment, Net

  
    2008         2007 2010 2009
(in millions) (in millions)
Land$3$3 $3  $3 
Buildings:          
Owned3130  31   31 
Furniture, fixtures and equipment:          
Owned1,0181,117  778   792 
1,0521,150  812   826 
Less: accumulated depreciation (829)(903)  (624)   (641) 
223 247  188   185 
Alterations to leased and owned buildings            
Cost724799  713   701 
Less: accumulated amortization(515)(525)  (515)   (499) 
209274  198   202 
$432$521 $386  $387 

8.Goodwill

11. Goodwill

    2008         2007
(in millions)
Athletic Stores$17$186
Direct-to-Customers 127 80
$144$266
   
 Athletic
Stores(1)		 Direct-to-
Customers		 Total
   (in millions)
Goodwill at January 31, 2009 $17  $127  $144 
Foreign currency translation adjustment  1   —   1 
Goodwill at January 30, 2010  18   127   145 
Foreign currency translation adjustment  —   —   — 
Goodwill at January 29, 2011 $18  $127  $145 

     Goodwill for the Direct-to-Customers segment increased by $47 million due to the Company’s purchase of CCS from dELiA*s, Inc. during the fourth quarter of 2008. The effect of foreign exchange fluctuations for the year ended January 31, 2009 decreased goodwill by $2 million, resulting from the strengthening of the U.S. dollar in relation to the euro. During the fourth quarter of 2008, the Company recorded impairment charges of $167 million, as more fully described in note 4.

45

12. Other Intangible Assets, net

January 31, 2009February 2, 2008
Wtd. Avg.
NetUsefulNet
GrossAccum.ValueLife inGrossAccum.Value
(in millions)    value    amort.    (1)    Years (2)    value    amort.    (1)
Finite life intangible assets:
       Lease acquisition costs$173$(124)$4912.1 $198$(125)$73
       Trademark 20(5)1520.021(4)17
       Loyalty program1(1)——1(1)—
       Favorable leases9(7)23.7 10 (7)3
       CCS customer relationships21(1)205.0———
Total finite life intangible assets224(138) 86 11.9 230(137)93
Intangible assets not subject to amortization:  
       Republic of Ireland trademark2—23— 3
       CCS tradename25 — 25———
Total finite life intangible assets27— 273—3
Total other intangible assets$251$(138)$113$233$(137)$96
____________________

(1)The Athletic Stores segment’s goodwill is net of accumulated impairment charges of $167 million for all periods presented.

9.Other Intangible Assets, net

       
 January 29, 2011 January 30, 2010
($ in millions) Gross
value		 Accum.
amort.		 Net
Value
(1)		 Wtd. Avg.
Useful
Life in
Years(2)		 Gross
value		 Accum.
amort.		 Net
Value
Finite life intangible assets:
                                   
Lease acquisition costs $178  $(150)  $28   12.1  $184  $(143)  $41 
Trademark  21   (7)   14   19.6   20   (6)   14 
Loyalty program  1   (1)   —   —   1   (1)   — 
Favorable leases  9   (8)   1   4.1   9   (8)   1 
CCS customer relationships  21   (9)   12   5.0   21   (5)   16 
Total finite life intangible assets  230   (175)   55   11.8   235   (163)   72 
Intangible assets not subject to amortization:
                                   
Republic of Ireland trademark  2   —   2        2   —   2 
CCS tradename  15   —   15      25   —   25 
Total indefinite life intangible assets  17   —   17      27   —   27 
Total other intangible assets $247  $(175)  $72     $262  $(163)  $99 

(1)Includes the effect of foreign currency translation, which represents a reductiondecrease of $8$1 million in 20082010 and an increase of $10$3 million in 20072009, primarily related to the movements of the euro in relation to the U.S. dollar. Additionally, the net value at January 31, 200929, 2011 includes a $2$10 million impairment charge related to the Footaction trademark and the Republic of Ireland trademark,CCS tradename, described more fully in note 4.Note 3.
(2)The weighted-average useful life disclosed excludes those assets that are fully amortized.

Lease acquisition costs represent amounts that are required to secure prime lease locations and other lease rights, primarily in Europe. Included in finite life intangibles are the CCS customer relationship intangible, associated with the purchase of CCS, trademark for the Footaction name, favorable leases associated with acquisitions, and amounts paid to obtain names of members of the Footaction loyalty program. The CCS customer relationship intangible will beis amortized on a straight-line basis over 5 years, which represents the pattern in which the economic benefits are expected to be realized.

Amortization expense for the intangibles subject to amortization was approximately$17 million, $19 million, and $18 million for 2010, 2009, and 2008, and $19 million for both 2007 and 2006.respectively. Annual estimated amortization expense for finite life intangible assets is expected to approximate $20 million for 2009, $17 million for 2010, $15$16 million for 2011, $12$14 million for 2012, and $8$9 million for 2013.2013, $4 million for 2014, and $2 million for 2015.

10.Other Assets

13. Other Assets

    2008         2007  
(in millions) 2010 2009
 (in millions)
Funds deposited in insurance trust(1) $10  $— 
Prepaid income taxes  5   6 
Auction rate security  5   5 
Deferred tax costs$ 7$ 9  3   5 
Prepaid income taxes66
Pension asset  2   — 
Income tax asset2 2  1   2 
Long-term investment in auction rate security 2—
Fair value of derivative contracts194
Other30 37  37   33 
$ 66$ 58 $63  $51 

46

14. Accrued and Other Liabilities

          2008    2007
 (in millions)
Pension and postretirement benefits$4$4
Incentive bonuses235
Other payroll and payroll related costs, excluding taxes5052
Taxes other than income taxes3644
Property and equipment1323
Customer deposits(1)  3234
Income taxes payable417
Current deferred tax liabilities1013
Sales return reserve 44
 Current portion of reserve for discontinued operations214
Other operating costs 53 68
 $231 $278
____________________

(1)The Company is required by its insurers to collateralize part of the self-insured workers’ compensation and liability claims. The Company has chosen to satisfy these collateral requirements by depositing funds in an insurance trust.

11.Accrued and Other Liabilities

  
 2010 2009
   (in millions)
Incentive bonuses $48  $9 
Other payroll and payroll related costs, excluding taxes  43   46 
Taxes other than income taxes  37   41 
Customer deposits(1)  29   29 
Current deferred tax liabilities  20   5 
Property and equipment  19   13 
Income taxes payable  8   7 
Pension and postretirement benefits  4   5 
Sales return reserve  4   3 
Income taxes  1   10 
Reserve for discontinued operations  1   2 
Other operating costs  52   48 
   $266  $218 

(1)Customer deposits include unredeemed gift cards and certificates, merchandise credits, and deferred revenue related to undelivered merchandise, including layaway sales.

12.Revolving Credit Facility

15. Revolving Credit Facility

     On May 16, 2008,In 2009, the Company entered into an amendeda credit agreement (the “2009 Credit Agreement”) with its banks, providing for a $175$200 million asset-based revolving credit facility and extending the maturity date to May 16, 2011 (the “Credit Agreement”).maturing on March 20, 2013. The 2009 Credit Agreement also provides for an incremental facility of up to $100 million under certain circumstances. The Credit Agreement provides that the Company comply with certain financial covenants, including (i) a fixed charge coverage ratio of 1.25:1 for the 2008 fiscal year, 1.50:1 for the 2009 fiscal year, and 1.75:1 for each year thereafter and (ii) a minimum liquidity/excess cash flow covenant, as defined in the Credit Agreement, which provides that if at the end of any fiscal quarter minimum liquidity is less than $350 million, the excess cash flow for the four consecutive fiscal quarters ended on such date must be at least $25 million. The amount permitted to be paid by the Company as dividends in any fiscal year is $105 million under the terms of the Credit Agreement. With regard to stock purchases, the Credit Agreement provides that not more than $50 million in the aggregate may be expended unless the fixed charge coverage ratio is at least 2.0:1 for the period of four consecutive fiscal quarters most recently ended prior to any stock repurchase. Additionally, the Credit Agreement provides for a security interest in certain of the Company’s intellectual propertydomestic assets, including certain inventory assets. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. If the Company is borrowing, then it may not make Restricted Payments, such as dividends or share repurchases, unless there is at least $50 million of Excess Availability (as defined in the 2009 Credit Agreement), and certain other non-inventory assets.the Company’s projected fixed charge coverage ratio, which is a Non-GAAP financial ratio determined pursuant to the 2009 Credit Agreement designed as a measure of the Company’s ability to meet current and future obligations (Consolidated EBITDA less capital expenditures less cash taxes divided by Debt Service Charges and Restricted Payments), is at least 1.1 to 1.0. The Company’s management does not currently expect to borrow under the facility in 2011.

At January 31, 2009,29, 2011, the Company had unused domestic lines of credit of $166$199 million pursuant to its $175the 2009 Credit Agreement, of which $1 million revolving credit agreement. $9 million of the line of credit was committed to support standby letters of credit. TheseThe letters of credit are primarily used for insurance programs.

Deferred financing fees are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method. The unamortized balance at January 31, 200929, 2011 is approximately $2.6$4 million. Interest is determinedbased on the LIBOR rate in effect at the time of the borrowing based on variable rates and the Company’s fixed charge coverage ratio,plus a 3.25 to 3.75 percent applicable margin, as defined in the agreement. The rates range from LIBOR plus 1.50 percent to LIBOR plus 2.50 percent.2009 Credit Agreement. The quarterly facility fees paid on the unused portion which are also based in the Company’s fixed charge coverage ratio, ranged from 0.1250were 0.75 percent to 0.8750for 2010, and ranged from 0.1750.40 percent to 0.5000.75 percent for 2008 and 2007 respectively.2009. There were no short-term borrowings during 20082010 or 2007.2009. Interest expense, including facility fees, related to the revolving credit facility was $2$4 million and $3 million in 2008, 2007,2010 and 2006.

     On March 20, 2009, the Company entered into a new credit agreement with its banks, providing for a $200 million revolving credit facility maturing on March 20, 2013 (the “New Credit Agreement”), which replaces the existing Credit Agreement. respectively.

13.Long-Term Debt

The New Credit Agreement also provides an incremental facility of up to $100 million under certain circumstances. The New Credit Agreement provides for a security interest in certain ofCompany’s long-term debt reflects the Company’s domestic assets, including certain inventory assets. However, no material covenants or payment restrictions exist until the Company is borrowing under the agreement and, in that event, the restrictions may vary depending upon the level of borrowings.

47

16. Long-Term Debt

     During 2008, simultaneously with entering the Credit Agreement, the Company repaid the $88 million balance that was outstanding on its term loan, which was scheduled to mature in May 2009.

     During 2007, the Company purchased and retired $5 million of its 8.50 percent debentures payable in 2022. During 2008,2022, and was $137 million and $138 million for the Company purchasedyears ended January 29, 2011 and retired an additional $6 million, bringing the outstanding amount to $123 million as of January 31, 2009.30, 2010, respectively. The Company has historically employed various interest rate swap agreements, which effectively convert $100 millionswaps to minimize its exposure to interest rate fluctuations. In 2009, the Company terminated the interest rate swaps for a gain of $19 million. The gain is being amortized as part of interest expense over the remaining term 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 valuedebt, using the effective-yield method. This gain amortization totaled $1 million in each of 2010 and 2009. Excluding the unamortized gain of the interest rate swaps, at January 31, 2009 and February 2, 2008 was an asset of $19 million and $4 million, respectively, which was included in other assets. The carrying value of the 8.50 percent debentures was increased by the corresponding amounts.principal outstanding is $120 million.

     Following is a summary of long-term debt:

          2008    2007
 (in millions)
8.50% debentures payable 2022$142$133
$175 million term loan  —88
        Total long-term debt142221
       Less: Current portion — —
 $142 $221

Interest expense related to long-term debt, including the effect of the interest rate swaps and the amortization of the associated debt issuance costs, was $9 million in 2008, $18 million in 2007each of 2010, 2009, and $20 million in 2006. The effect of the interest rate swaps for the year ended January 31, 2009 was a benefit of $2 million and was not significant for the years ended February 2, 2008 and February 3, 2007.2008.


17. Leases

14.Leases

The Company is obligated under operating leases for almost all of its store properties. Some of the store leases contain renewal options with varying terms and conditions. Management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases on other premises. Operating lease periods generally range from 5 to 10 years. Certain leases provide for additional rent payments based on a percentage of store sales. Rent expense includesMost of the Company’s leases require the payment of certain executory costs such as insurance, maintenance, and other costs as required by somein addition to the future minimum lease payments. These costs, including the amortization of lease rights, totaled $131 million, $138 million, and $147 million in 2010, 2009, and 2008, respectively. Included in the Company’s leases.amounts below, are non-store expenses that totaled $15 million in 2010, 2009, and 2008.

     Rent expense consists of the following:

          2008    2007    2006
 (in millions)
Minimum rent$527 $521 $496 
Other occupancy expenses 147 151 145 
 Contingent rent based on sales14 17 21 
Sublease income (2)  (1)  (1)
Total rent expense$686 $688 $661 

   
 2010 2009 2008
   (in millions)
Minimum rent $507  $514  $527 
Contingent rent based on sales  16   14   14 
Sublease income  (1)   (2)   (2) 
   $522  $526  $539 

Future minimum lease payments under non-cancelable operating leases, net of future non-cancelable operating sublease payments, are:

          (in millions)
2009$456
2010424
 2011381
2012325
2013  262
Thereafter 719 
Total operating lease commitments   $2,567   

48

18. Other Liabilities

          2008    2007
 (in millions)
Pension benefits$183$35
Postretirement benefits119
Straight-line rent liability9899
Income taxes3029
Deferred taxes1210
Workers’ compensation and general liability reserves1313
Reserve for discontinued operations109
 Repositioning and restructuring reserves  12
Fair value of derivatives2432
Other 11 12
 $393 $250

19. Discontinued Operations

 
 (in millions)
2011 $481 
2012  425 
2013  356 
2014  303 
2015  257 
Thereafter  596 
Total operating lease commitments $2,418 
15.Other Liabilities

  
 2010 2009
   (in millions)
Straight-line rent liability $100  $101 
Pension benefits  67   101 
Income taxes  28   29 
Workers’ compensation and general liability reserves  11   12 
Postretirement benefits  11   11 
Reserve for discontinued operations  8   8 
Fair value of derivatives  —   24 
Other  20   11 
   $245  $297 
16.Discontinued Operations

In 1997, the Company exited its Domestic General Merchandise segment. In 1998, the Company exited both its International General Merchandise and Specialty Footwear segments. In 2001, the Company discontinued its Northern Group segment.

     During 2008, the Company adjusted its Northern Group reserve by $1 million and recorded a charge of $2 million related to the Domestic General Merchandise reserve representing revisions to the lease liability. During 2007, the Company adjusted the International General Merchandise reserve by $3 million, reflecting favorable lease terminations and to revise estimates on its lease liability. During 2006, the Company adjusted its Northern Group and International General Merchandise reserve by $4 million, primarily reflecting favorable lease terminations.

     The major components of the pre-tax losses (gains) on disposal and disposition activity related to the reserves are presented below. The remaining reserve balances as ofat January 31, 200929, 2011 primarily represent lease obligations; $2obligations, of which $1 million is expected to be utilized within twelve months and the remaining $8 million thereafter. The balance at January 30, 2010 totaled $10 million, thereafter.of which $2 million was classified as current and $8 million was classified as non current. The majority of the reserve balance relates to the Domestic General Merchandise segment as the leases extend many years.

 2005200620072008
  Charge/Net Charge/Net Charge/Net 
   Balance   (Income)   Usage(1)   Balance   (Income)   Usage(1)   Balance   (Income)   Usage(1)   Balance
 (in millions)
Northern Group    $5        $(2)    $(1)    $2        $—        $10        $12        $(1)$(11)$—
International General Merchandise8(2)—    6(3)1 4—    (1)3
Specialty Footwear1—    — 1— (1) —  —     —        —    
Domestic General Merchandise  8 —    (2)  6   —  1   7  2   —    9 
Total $22  $(4)$(3) $15 $(3)  $11 $23 $1 $(12)$12
____________________


(1)17.

Net usage includes the effect of foreign exchange translation adjustments.

Income Taxes

20. Repositioning and Restructuring Reserves

     The Company recorded charges in 1993 and in 1991 to reflect the anticipated costs to sell or close under-performing specialty and general merchandise stores in the United States and Canada. During 2007, the Company adjusted the reserve by $2 million primarily due to favorable lease terminations. The Company recorded restructuring charges in 1999 for programs to sell or liquidate eight non-core businesses. The restructuring plan also included an accelerated store-closing program in North America and Asia, corporate headcount reduction, and a distribution center shutdown. For both reserves the balance was $1 million as of January 31, 2009 and $2 million as of February 2, 2008, classified as a non current liability.

49

21. Income Taxes

Following are the domestic and international components of pre-tax income (loss) income from continuing operations:

          2008    2007    2006
 (in millions)
 Domestic $(174)$(131)$320
International 74   81  72
Total pre-tax (loss) income$(100) $(50)  $392

   
 2010 2009 2008
   (in millions)
Domestic $158  $(23)  $(174) 
International  99   96   74 
Total pre-tax income (loss) $257  $73  $(100) 

The 2007 income tax provision presented below has been restated to reflect an immaterial correction, see note 2.The income tax (benefit) provision consists of the following:

          2008    2007    2006
 (in millions)
Current:     
     Federal$2 $(3)$93
     State and local3  (4)14
     International 18  43  17
      Total current tax provision 23  36  124
Deferred:     
     Federal(42) (52)10
     State and local(6) 1 6
     International 4  (78) 5
Total deferred tax (benefit) provision (44) (129)  21
Total income tax (benefit) provision $(21) $(93)$145

   
 2010 2009 2008
   (in millions)
Current:
               
Federal $(28)  $(6)  $2 
State and local  4   —   3 
International  28   30   18 
Total current tax provision  4   24   23 
Deferred:
               
Federal  79   (3)   (42) 
State and local  4   —   (6) 
International  1   5   4 
Total deferred tax provision (benefit)  84   2   (44) 
Total income tax provision (benefit) $88  $26  $(21) 

Provision has been made in the accompanying Consolidated Statements of Operations for additional income taxes applicable to dividends received or expected to be received from international subsidiaries. The amount of unremitted earnings of international subsidiaries for which no such tax is provided and which is considered to be permanently reinvested in the subsidiaries totaled $511$679 million and $476$599 million at January 31, 2009,29, 2011 and February 2, 2008,January 30, 2010, respectively. Determination of the amount of the deferred tax liability, if any, related to permanently reinvested earnings is not practicable.

A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income (loss) income from continuing operations is as follows:

          2008    2007    2006
Federal statutory income tax rate(35.0)%(35.0)%35.0%
State and local income taxes, net of federal tax benefit(6.6)(11.0)3.3 
International income taxed at varying rates(1.7)7.5 (0.9)
Foreign tax credit utilization(5.3)(53.1)(1.2)
(Decrease) increase in valuation allowance0.2 (120.0)0.1 
 Federal/foreign tax settlements(2.2)— (0.1)
Tax exempt obligations— (3.7)(0.5)
Federal tax credits(1.2)(1.6)(0.2)
Foreign dividends and gross-up— 25.4 — 
Non-deductible impairment charges 26.9 — — 
Other, net4.1  4.5 1.4 
Effective income tax rate(20.8)%(187.0)% 36.9%

   
 2010 2009 2008
Federal statutory income tax rate  35.0%   35.0%   (35.0)% 
State and local income taxes, net of federal tax benefit  2.3   0.2   (6.6) 
International income taxed at varying rates  1.0   1.3   (2.1) 
Foreign tax credits  (2.0)   (7.4)   (5.3) 
Increase (decrease) in valuation allowance  (0.4)   —   0.2 
Domestic/foreign tax settlements  (2.3)   (2.8)   (2.2) 
Federal tax credits  (0.7)   (2.0)   (1.2) 
Non-deductible impairment charges  —   —   26.9 
Canadian tax rate changes  —   6.0   0.4 
Other, net  1.4   5.7   4.1 
Effective income tax rate  34.3%   36.0%   (20.8)% 

50

Items that gave rise to significant portions of the deferred tax accounts are as follows:

          2008    2007
 (in millions)
Deferred tax assets:   
     Tax loss/credit carryforwards and capital loss $37 $64 
     Employee benefits 102 33 
     Reserve for discontinued operations 5 5 
     Repositioning and restructuring reserves 1 1 
     Property and equipment 184 167 
     Allowance for returns and doubtful accounts 1 3 
     Straight-line rent 25 24 
     Goodwill 25 — 
     Other  28  16 
Total deferred tax assets 408 313 
     Valuation allowance  (13)  (14) 
          Total deferred tax assets, net $395 $299 
Deferred tax liabilities:   
     Inventories $22 $13 
      Goodwill — 13 
     Other  8  4 
Total deferred tax liabilities $30 $30 
Net deferred tax asset $365 $269 
Balance Sheet caption reported in:   
     Deferred taxes $358 $239 
     Other current assets 29 53 
     Other current liabilities  (10)  (13) 
     Other liabilities  (12)  (10) 
 $365  $269 

  
 2010 2009
   (in millions)
Deferred tax assets:
          
Tax loss/credit carryforwards and capital loss $31  $106 
Employee benefits  67   66 
Reserve for discontinued operations  4   4 
Repositioning and restructuring reserves  1   1 
Property and equipment  173   177 
Straight-line rent  27   27 
Goodwill and other intangible assets  23   23 
Other  27   33 
Total deferred tax assets  353   437 
Valuation allowance  (6)   (12) 
Total deferred tax assets, net  347   425 
Deferred tax liabilities:
          
Inventories  63   46 
Other  6   5 
Total deferred tax liabilities  69   51 
Net deferred tax asset $278  $374 
Balance Sheet caption reported in:
          
Deferred taxes $296  $362 
Other current assets  2   17 
Other current liabilities  (20)   (5) 
   $278  $374 

The Company operates in multiple taxing jurisdictions and is subject to audit. Audits can involve complex issues that may require an extended period of time to resolve. A taxing authority may challenge positions that the Company has adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax positions for such transactions and records reserves for those differences.

The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service (the “IRS”) through 2007.2009. The Company is participating in the IRS’s Compliance Assurance Process (“CAP”) for 2008,2010, which is expected to conclude during 2009.2011. The Company has started the CAP for 2009.2011. Due to the recent utilization of net operating loss carryforwards, the Company is subject to state and local tax examinations effectively including years from 1996 to the present. To date, no adjustments have been proposed in any audits that will have a material effect on the Company’s financial position or results of operations.

As of January 31, 2009,29, 2011, the Company has a valuation allowance of $13$6 million to reduce its deferred tax assets to an amount that is more likely than not to be realized. The valuation allowance primarily relates to the deferred tax assets arising from a capital loss associated with the 2008 impairment of the Northern Group note receivable, state tax loss carryforwards, and state tax credits. A full valuation allowance was establishedis required for the capital loss because the Company does not anticipate recognizingrealizing sufficient capital gains to utilize this loss. The valuation allowance for state tax loss and credit carryforwards decreased principally due to anticipated expirations of those losses.attributes.

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Based upon the level of historical taxable income and projections for future taxable income, which are based upon the Company’s three-year strategic plans, over the periods in which the temporary differences are anticipated to reverse, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances at January 31, 2009.29, 2011. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.


At January 31, 2009,29, 2011, the Company’sCompany has foreign tax loss/credit carryforwards includetotaling $9 million that expire between 2018 and 2019. The Company also has state operating loss carryforwards with a potential tax benefit of $16 million that expire between 2011 and 2030. The Company will have, when realized, a capital loss with a potential benefit of $3 million arising from a note receivable. This loss will carryforward for 5 years after realization. The Company has U.S. state and Canadian provincial credit carryforwards that total $2 million, expiring between 2011 and 2020. The Company has international operating loss carryforwards with a potential tax benefit of $2$1 million, expiring between 20092011 and 2017. The Company has a $5 million capital loss arising from a note receivable that expires 5 years from recognition. The Company also has state net operating loss carryforwards with a potential tax benefit of $15 million, which principally relate to the 15 states where the Company does not file combined or consolidated returns. These loss carryforwards expire between 2009 and 2029. The Company has state and Canadian provincial credit carryforwards that total approximately $3 million, expiring between 2010 and 2018. The Company also has federal foreign tax credits totaling $16 million, $4 million of which can be carried back to 2006 and $12 million of which can be carried forward, expiring in 2017.2030.

     The Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes” effective February 4, 2007, that resulted in the recognition of an additional $1 million of previously unrecognized tax benefits, which was reflected as an adjustment to opening retained earnings. The Company had $71$70 million of gross unrecognized tax benefits and $68 million of net unrecognized tax benefits, as of February 3, 2008.the beginning of the year. The Company has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. During the year ended January 31, 2009, theThe Company recognized $1 million of interest expense.expense in each of 2010, 2009, and 2008. The total amount of accrued interest and penalties was $4$3 million in 20082010 and accrued interest$5 million in 2007 was $5 million.2009.

The following table summarizes the activity related to unrecognized tax benefits:

(in millions)
Balance as of February 3, 2008$ 71
Increases related to current year tax positions4
Increases related to prior period tax positions1
Decreases related to prior period tax positions(15)
Settlements(2)
Lapse of statute of limitations(1)
Balance as of January 31, 2009$ 58

 
(in millions) 
Balance as of January 30, 2010 $70 
Foreign currency translation adjustments  3 
Increases related to current year tax positions  4 
Increases related to prior period tax positions  3 
Decreases related to prior period tax positions  (7) 
Settlements  (9) 
Lapse of statute of limitations  (2) 
Balance as of January 29, 2011 $62 

Of the unrecognized tax benefits, $55$61 million would, if recognized, affect the Company’s annual effective tax rate. It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits or the expiration of statutes of limitations. Settlements could increase earnings in an amount ranging from $0 to $10$5 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution of these issues could have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings. Due to the uncertainty of amounts and in accordance with its accounting policies, the Company has not recorded any potential impact of these settlements.

18.Financial Instruments and Risk Management

22. Financial Instruments and Risk Management

Derivative Holdings Designated as Hedges

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 19,Fair Value Measurements.


Derivative Holdings Designated as Hedges

For a derivative to qualify as a hedge at inception and throughout the hedged period, the 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,In addition, for hedges of forecasted

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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 2008.for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.

The primary currencies to which the Company is exposed are the euro, the British Pound,pound, the Canadian dollar, and the Canadian Dollar.Australian dollar. For option and forward foreign exchange contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. The net changes in the fair value of foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was a reduction to accumulated other comprehensive loss of $1 million for the year ended January 29, 2011 and an increase to accumulated other comprehensive loss of $3 million for the year ended January 30, 2010. The amount classifiedreclassified to cost of sales related to such contracts was not significant in 2008.for any of the periods presented. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings in 2008 was not significant.significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. At each year-end, the Company had not hedged forecasted transactions for more than the next twelve months, and the Company expects all derivative-related amounts reported in accumulated other comprehensive loss to be reclassified to earnings within twelve months.

     The Company has numerous investments in foreign subsidiaries, and the net assets of those subsidiaries are exposed to foreign exchange-rate volatility. In 2005, the Company hedged a portion of its net investment in its European subsidiaries. The Company entered into a 10-year cross currency swap, effectively creating a €100 million long-term liability and a $122 million long-term asset. During the third quarter of 2008, the Company entered into an offset to its European net investment hedge, fixing the amount recorded within the foreign currency translation adjustment at $24 million, or $15 million after-tax. During the term of the amended transaction, the Company will remit to its counterparty interest payments based on one-month U.S. LIBOR rates. In 2006, the Company hedged a portion of its net investment in its Canadian subsidiaries. The Company entered into a 10-year cross currency swap, creating a CAD $40 million liability and a $35 million long-term asset. During the fourth quarter of 2008, the Company terminated this hedge and received approximately $3 million.

     The Company had designated these hedging instruments as hedges of the net investments in foreign subsidiaries, and used 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 were recorded in other comprehensive income and 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 decreased shareholders’ equity by $15 million, $20 million and $5 million net of tax at January 31, 2009, February 2, 2008 and February 3, 2007, respectively. The effect on the Consolidated Statements of Operations related to the net investments hedges was $3 million of expense for 2008, $1 million of income for 2007, and $3 million of income for 2006.

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 includingcurrency option currency contracts. Changes in the fair value of these foreign currency option contracts, which are designated as non-hedges, are recorded in earnings immediately.immediately within other income. The realized gains, premiums paid and changes in the fair market value recorded in the Consolidated Statements of Operations waswere not significant for the years ended January 29, 2011 and January 30, 2010, and resulted in $4 million of income for the year ended January 31, 2009 and was not significant for the years ended February 2, 2008 and February 3, 2007.2009.

The Company also enters into forward foreign exchange contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions.transactions that are not designated as hedges. Net changes in the fair value of foreign exchange derivative financial instruments designated as non-hedges were substantially offset by the changes in value of the underlying transactions, which were recorded in selling, general and administrative expenses. The amount recorded for all the periods presented was not significant.

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     During 2008, theThe Company enteredenters into a series of monthly diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. The notional value of the contracts outstanding as of January 31, 2009 was $2 million and these contracts extend through November 2009. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the year ended January 31, 2009.periods presented.

In 2008, the Company terminated its European net investment hedge by amending its existing cross currency swap and entering simultaneously into a new cross currency swap, thereby fixing the amount owed to the counterparty at $24 million. The agreement included an option, which was exercised by the counterparty that required the Company to settle this transaction in August 2010.


Fair Value of Derivative Contracts

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

    
 2010 2009
(in millions) Balance Sheet Caption Fair Value Balance Sheet Caption Fair Value
Hedging Instruments:
                    
Forward foreign exchange contracts  Current assets  $2   Current assets  $— 
Total    $2     $— 
Non Hedging Instruments:
                    
Forward foreign exchange contracts  Current assets  $—   Current assets  $1 
European cross currency swap  Non current liability   —   Non current liability   (24) 
Total    $—     $(23) 

Notional Values and Foreign Currency Exchange Rates

The table below presents the fair value, notional amounts for all outstanding derivatives and the weighted-average exchange rates of foreign exchange forward and option contracts outstanding at January 31, 2009.

Fair ValueContract ValueWeighted-Average
(U.S. in millions)     (U.S. in millions)     Exchange Rate
Inventory  
Buy €/Sell British £ $3 $33 0.8296
Buy US/Sell €—90.7424
 
Intercompany   
Buy US/Sell €$— $40.7092
Buy €/Sell British £117 0.8311
Buy €/Sell SEK—110.6350
Buy US/Sell CAD$—4 1.2161 

Interest Rate Risk Management29, 2011:

     The Company has employed various interest rate swaps to minimize its exposure to interest rate fluctuations. These swaps have been designated as a fair value hedge of the changes in fair value of $100 million of the Company’s 8.50 percent debentures payable in 2022 attributable to changes in interest rates and effectively converted the interest rate on the debentures from 8.50 percent to a 1-month variable rate of LIBOR plus 3.45 percent. On March 20, 2009, the Company terminated its interest rate swaps for a gain of approximately $20 million. This gain will be amortized as part of interest expense over the remaining term of the debt using the effective-yield method.

     The following table presents the Company’s interest rate derivatives outstanding as of each of the respective years:

2008     2007     2006
(in millions)
Interest Rate Swaps:
     Fixed to Variable ($US) — notional amount$100$100$100
          Average pay rate4.87%6.22%8.53%
          Average receive rate8.50%8.50%8.50%
     Variable to variable ($US) — notional amount$100 $100$100
          Average pay rate0.67%3.39%5.57%
          Average receive rate 1.66% 3.02% 5.32%

Interest Rates

     The Company’s major exposure to interest rate risk relates to changes in short-term investment interest rates, both in the United States and Europe. The Company’s 8.50 percent debentures are payable in 2022.

Fair Value of Financial Instruments

     The carrying value and estimated fair value of long-term debt was $142 million and $120 million, respectively, at January 31, 2009 and $221 million and $216 million, respectively, at February 2, 2008. The carrying value and estimated fair value of the Northern Group note was $14 million at February 2, 2008. The Northern Group note was fully impaired during 2008. The carrying values of cash and cash equivalents, other short-term investments and other current receivables and payables approximate their fair value.

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 Contract Value
(U.S. in millions)		 Weighted- Average
Exchange Rate
Inventory
          
Buy €/Sell British £ $66   .8439 
Buy US/Sell €  9   .7497 
Intercompany
          
Buy €/Sell British £ $16   .8445 
Buy US/Sell CAD$  9   1.0034 
Buy US/Sell €  2   .7463 
Buy €/Sell Swiss ƒ  2   1.2909 
Diesel fuel forwards $2   — 

Business Risk

The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising, and customer service are important competitive factors in the Company’s business. The Company operates in 21 countries and purchased approximately 8082 percent of its merchandise in 20082010 from its top 5 vendors. In 2008,2010, the Company purchased approximately 6463 percent of its athletic merchandise from one major vendor, Nike, Inc., (“Nike”) and approximately 913 percent from another major vendor. Each of our operating divisions is highly dependent on Nike; they individually purchase 4446 to 7881 percent of their merchandise from Nike. The Company generally considers all vendor relations to be satisfactory.

Included in the Company’s Consolidated Balance Sheet as ofat January 31, 2009,29, 2011, are the net assets of the Company’s European operations, which total $545$736 million and which are located in 17 countries, 11 of which have adopted the euro as their functional currency.

23.

Fair Value Measurements

of Financial Instruments

     On February 3, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”). SFAS No. 157 provides a single definition ofThe carrying value and estimated fair value of long-term debt was $137 million and a common framework for measuring$139 million, respectively, at January 29, 2011 and $138 million and $127 million, respectively, at January 30, 2010. The carrying values of cash and cash equivalents and other current receivables and payables approximate their fair value as well as new disclosure requirements for fair value measurements used in financial statements. Under SFAS No. 157, fair value is determined based upondue to the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusiveshort-term nature of any transaction costs. SFAS No. 157 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

     In February 2008, the FASB issued FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 amended SFAS No. 157 to exclude from its scope SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. Also in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 amended SFAS No. 157 to defer the effective date of SFAS No. 157 for non-financialthese assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually until fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS No. 157 on its non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis.liabilities.


In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:

19.Fair Value Measurements

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

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The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2009:basis:

     (in millions)     Level 1     Level 2    ��Level 3
Assets 
 Cash equivalents$307$— $—
Short-term investment——23
Auction rate security—2—
Forward foreign exchange contracts—5—
Interest rate swaps —  19 —
Total Assets$307 $26$23
 
Liabilities
Forward foreign exchange contracts $—$1$—
European net investment hedge — 24 —
Total Liabilities $— $25$—

     As of January 31, 2009, the Company had $385 million of cash and cash equivalents. Cash equivalents, excluding amounts due from third-party credit card processors, total $307 million and their carrying values approximates their fair value due to their short-term nature. At January 31, 2009, the Company’s auction rate security was classified as available-for-sale, and accordingly is reported at fair value. The fair value of the security is determined by review of the underlying security at each reporting period.

    
 As of January 29, 2011
(in millions) Level 1 Level 2 Level 3 Total
Assets
                    
Auction rate security $—  $5  $—  $5 
Forward foreign exchange contracts  —   2   —   2 
Total Assets $—  $7  $—  $7 

    
 As of January 30, 2010
(in millions) Level 1 Level 2 Level 3 Total
Assets
                    
Short-term investment $—  $—  $7  $7 
Auction rate security  —   5   —   5 
Forward foreign exchange contracts  —   1   —   1 
Total Assets $—  $6  $7  $13 
Liabilities
                    
European cross currency swap  —   24   —   24 
Total Liabilities $—  $24  $—  $24 

The Company’s derivative financial instruments are valued using observable market-based inputs to industry valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.volatility obtained from various market sources.

At January 29, 2011, the Company held a preferred stock auction rate security with a face value of $7 million, which has experienced failed auctions due to the liquidity issues experienced in the global credit and capital markets. The security continues to earn and pay interest based on the stated terms. The Company classifies the security as long-term available-for-sale and reports the security at fair value as a component of other assets on the Company’s Consolidated Balance Sheets. The Company evaluates the security for other-than-temporary impairments at each reporting period. The security is considered temporarily impaired at January 29, 2011 with a cumulative unrealized loss of $2 million reflected in accumulated other comprehensive loss in the Company’s Consolidated Statement of Comprehensive Loss. The Company has the intent and the ability to hold the security.

The Company’s Level 3 asset as of January 30, 2010 represented the Company’s investment in the Reserve International Liquidity Fund, Ltd. (the “Fund”), a money market fund. In 2008, the Company recorded an other-than-temporary impairment charge of $3 million, incorporating the valuation at zero for the Lehman Brothers debt securities held by the Fund. During December 2010, based on a settlement agreement with the Fund, a payment in the amount of $9 million was received. As the net carrying amount of the investment was $7 million at the time of the settlement, a $2 million gain was recorded in 2010 to reflect the Company’s realized loss of $1 million in the Fund.

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3, for the year ended January 31, 2009:3:

     (in millions)     Level 3
 Balance at February 3, 2008$15
    Total balance of Reserve International Liquidity Fund reclassified
         from Level 1 to Level 3, net of redemptions received26
    Total impairment charges included in the statements of operations  (18)
Balance at January 31, 2009 $23

 
(in millions) Level 3
Balance at January 31, 2009 $23 
Redemptions received from the Fund  (16) 
Balance at January 30, 2010 $7 
Redemptions received from the Fund  (9) 
Redemptions received in excess of carrying value  2 
Balance at January 29, 2011 $— 

The Company has determinedfollowing table provides a summary of recognized assets that its note receivable from the Northern Group should be classified within Level 3 of theare measured at fair value hierarchy. During the first quarter of 2008, the Company determined that the value of the Northern Group note receivable was impaired; accordingly,on a charge of $15 million was recorded reducing the fair value to zero. This assessment was based upon management’s review of Northern Group’s financial condition.non-recurring basis:

     Additionally, the Company’s Level

    
(in millions) Level 1 Level 2 Level 3 Loss
Recognized
Year ended January 29, 2011:
                    
Intangible assets $—  $—  $15  $10 
Year ended January 30, 2010:
                    
Long-lived assets held and used $—  $—  $71  $36 

See Note 3, assets include an investment in a money market fund, which is classified in short-term investments. The Company assessed the fair value of its investment in the Reserve International Liquidity Fund, Ltd. (the “Fund”) and their underlying securities. Based on this assessment, the Company recorded an impairment charge of $3 million, incorporating the valuation at zero for debt securities of Lehman Brothers. The Company has reclassified its investment in shares of the Fund from Level 1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Fund and their underlying securities. Changes in market conditions and the method and timing of the liquidation process of the Fund could result in further adjustments to the fair value and classifications of this investment.

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24. Retirement PlansImpairment and Other BenefitsCharges, for further discussion and additional disclosures.

20.Retirement Plans and Other Benefits

Pension and Other Postretirement Plans

The Company has defined benefit pension plans covering mostcertain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the last day of the fiscal year.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFAS No. 158”). This standard requires an employer to: recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in accumulated comprehensive loss. The initial effect of the standard, due to unrecognized prior service cost and net actuarial gains or losses, as well as subsequent changes in the funded status, is recognized as a component of accumulated comprehensive income/loss within shareholders’ equity. Additional minimum pension liabilities and related intangible assets are derecognized upon the adoption of SFAS No. 158. The Company adopted this standard as of February 3, 2007.

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 31, 200929, 2011 and February 2, 2008:January 30, 2010:

Postretirement    
Pension BenefitsBenefits Pension
Benefits		 Postretirement
Benefits
2008     2007      2008     2007 2010 2009 2010 2009
(in millions) (in millions)
Change in benefit obligation               
Benefit obligation at beginning of year$649$662$10$13 $654  $604  $13  $12 
Service cost1010——  13   11   —   — 
Interest cost36361—  33   36   —   1 
Plan participants’ contributions——44  —   —   3   3 
Actuarial gain(15)(13)(2)(2)
Actuarial loss  24   49   —   — 
Foreign currency translation adjustments(18)15——  6   12   —   — 
Plan amendment——3—  —   —   —   1 
Benefits paid (58) (61) (4) (5)  (61)   (58)   (4)   (4) 
Benefit obligation at end of year$604$649$12$10 $669  $654  $12  $13 
Change in plan assets                     
Fair value of plan assets at beginning of year$611$647 $550  $418           
Actual return on plan assets(127)9  70   76           
Employer contribution82
Employer contributions  36   103           
Foreign currency translation adjustments(16)14  6   11           
Benefits paid (58) (61)   (61)   (58)       
Fair value of plan assets at end of year$418 $611 $601  $550       
Funded status$(186)$(38)$(12)$(10) $(68)  $(104)  $(12)  $(13) 
Balance Sheet caption reported in:
Amounts recognized on the Balance Sheet:
                    
Other assets $2  $—  $—  $— 
Accrued and other liabilities(3)(3)(1)(1)  (3)   (3)   (1)   (2) 
Other liabilities (183) (35) (11) (9)  (67)   (101)   (11)   (11) 
$(186)$(38) $(12) $(10) $(68)  $(104)  $(12)  $(13) 
Amounts recognized in accumulated other comprehensive loss:
                    
Net loss (gain) $438  $457  $(28)  $(34) 
Prior service cost (credit)  1   1   (2)   (2) 
 $439  $458  $(30)  $(36) 

     At

As of January 31, 200929, 2011 and February 2, 2008,January 30, 2010, the aggregate amount ofCanadian qualified pension plan’s assets exceeded or equaled its accumulated benefit obligations, which exceedobligation. Information for pension plans with an accumulated benefit obligation in excess of plan assets totaled $603 million and $648 million, respectively, representing both the qualified and non qualified pension plans.is as follows:

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 2010 2009
   (in millions)
Projected benefit obligation $581  $569 
Accumulated benefit obligation  581   569 
Fair value of plan assets  511   465 

The following tables set forth the changes in accumulated other comprehensive loss (pre-tax) at January 31, 2009:29, 2011:

     PensionPostretirement
Benefits     Benefits
(in millions)
Net actuarial loss (gain) at beginning of year$305$(47)
 Amortization of net (loss) gain(11)8
Loss (gain) arising during the year164(2)
Translation loss (10) —
Net actuarial loss (gain) at end of year$448$(41)
Net prior service cost (benefit) at beginning of year$3$(6)
Amortization of prior service (cost) benefit (1)   3
Net prior service cost (benefit) at end of year$2 $(3)
Total amount recognized$450 $(44)

     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:

     Postretirement
     Pension     Benefits     Total
(in millions)
 Amortization of prior service cost (benefit) $1  $— $1
Amortization of net loss (gain) $13 $(7)$6

  
 Pension
Benefits		 Postretirement
Benefits
   (in millions)
Net actuarial loss (gain) at beginning of year $457  $(34) 
Amortization of net (loss) gain  (17)   6 
Gain arising during the year  (6)   — 
Foreign currency translation adjustments  4   — 
Net actuarial loss (gain) at end of year(1) $438  $(28) 
Net prior service cost (benefit) at beginning of year $1  $(2) 
Amortization of prior service cost(1)  —   — 
Loss arising during the year  —   — 
Net prior service cost (benefit) at end of year $1  $(2) 
Total amount recognized $439  $(30) 

(1)The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (income) during the next year are approximately $16 million and $(5) million related to the pension and postretirement plans, respectively. Additionally, $(1) million is expected to be recognized representing postretirement benefits prior-service costs.

The following weighted-average assumptions were used to determine the benefit obligations under the plans:

     Postretirement
Pension BenefitsBenefits
2008     2007     2008     2007
Discount rate6.22% 5.84% 6.20% 6.10%
Rate of compensation increase3.72% 3.72% 

    
 Pension Benefits Postretirement Benefits
   2010 2009 2010 2009
Discount rate  4.98%   5.25%   4.60%   4.90% 
Rate of compensation increase  3.68%   3.67%           

Pension expense is actuarially calculated annually based on data available at the beginning of each year. The expected return on plan assets is determined by multiplying the expected long-term rate of return on assets by the market-related value of plan assets for the U.S. qualified pension plan and market value for the Canadian qualified pension plan. The market-related value of plan assets is a calculated value that recognizes investment gains and losses in fair value related to equities over three or five years, depending on which computation results in a market-related value closer to market value. Market-related value for the U.S. qualified plan was $493 million and $478 million for 2010 and 2009, respectively. Assumptions used in the calculation of net benefit cost include the discount rate selected and disclosed at the end of the previous year as well as other assumptions detailed in the table below:

      
 Pension Benefits Postretirement Benefits
   2010 2009 2008 2010 2009 2008
Discount rate  5.25%   6.22%   5.88%   4.90%   6.20%   6.10% 
Rate of compensation increase  3.68%   3.67%   3.72%                
Expected long-term rate of return on assets  7.22%   7.63%   8.17%                

The expected long-term rate of return on invested plan assets is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the Company.

The components of net benefit expense (income) are:

     Pension BenefitsPostretirement Benefits
2008     2007     2006     2008     2007     2006
(in millions)
Service cost$10$10$10$      $—$—
Interest cost363636—1 
Expected return on plan assets (53) (56)(56)——
 Amortization of prior service cost (benefit)11 1 (1)(1)
Amortization of net loss (gain) 11 11 12    (8)  (10)
Net benefit expense (income)$5$2$3$$(9)$(10)

     The following weighted-average assumptions were used to determine net benefit cost:

     Pension BenefitsPostretirement Benefits
2008     2007     2006     2008     2007     2006
Discount rate5.88%5.66% 5.44% 6.10% 5.80% 5.50%
Rate of compensation increase3.72% 3.75%3.76%
Expected long-term rate of return on assets8.17%8.85%8.87%

      
 Pension Benefits Postretirement Benefits
   2010 2009 2008 2010 2009 2008
   (in millions)
Service cost $13  $11  $10  $—  $—  $— 
Interest cost  33   36   36   —   1   1 
Expected return on plan assets  (40)   (43)   (53)   —   —   — 
Amortization of prior service cost  —   1   1   —   —   — 
Amortization of net loss (gain)  17   13   11   (6)   (7)   (8) 
Net benefit expense (income) $23  $18  $5  $(6)  $(6)  $(7) 

Beginning with 2001, new retirees were charged the expected full cost of the medical plan and then-existing retirees will incur 100 percent of the expected future increases in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increases.increase.

58

In addition, the Company maintains a Supplemental Executive Retirement Plan (“SERP”), which is an unfunded plan that includes provisions for the continuation of medical and dental insurance benefits to certain executive officers and certain other key employees of the Company (“SERP Medical Plan”). The Company’s pension plan weighted-average asset allocationsSERP Medical Plan’s accumulated projected benefit obligation at January 31, 2009 and February 2, 2008 by asset category29, 2011 was approximately $6 million. The assumed health care cost trend rates related to the measurement of the Company’s SERP Medical Plan obligations for the year ended January 29, 2011 are as follows:

     2008     2007
Asset Category
Equity securities46%55%
Foot Locker, Inc. common stock1%1%
 Debt securities51%42%
Real estate2%1%
Other —%1%
Total100% 100%

     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.

Initial medical care cost trend rate8.50% 
Ultimate medical care cost trend rate5.00% 
Year that the ultimate medical care cost trend rate is reached2016
Initial dental care cost trend rate5.50% 
Ultimate dental care cost trend rate5.00% 
Year that the ultimate dental care cost trend rate is reached2012

A one percentage-point change in the assumed health care cost trend rates would have the following effects:

     The U.S. defined benefit plan held 396,000 shares of Foot Locker, Inc. common stock as of January 31, 2009 and February 2, 2008. Currently,

  
 1% Increase 1% (Decrease)
   (in millions)
Effect on total service and interest cost components $—  $— 
Effect on accumulated postretirement benefit obligation  1   (1) 

Plan Assets

During 2010, the target composition of the Company’s U.S. plan assets is 65remained at 50 percent equity and 3550 percent fixed income securities, although thesecurities. The Company may alter the targets from time to time depending on market conditions and the funding requirements of the pension plan. This current asset allocation will limit volatility with regard to the funded status of the plan, but will result in higher pension expense due to the lower long-term rate of return associated with fixed income securities. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above. The Company believes that plan assets are invested in a prudent manner with an objective of providing a total return that, over the long term, provides sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the level of risk deemed appropriate. The Company’s investment strategy isseeks to utilize asset classes with differing rates of return, volatility, and correlation in order to reduce risk by providing diversification relative to equities. Diversification within asset classes is also utilized to ensure that there are no significant concentrations of risk in plan assets and to reduce the effect that the return ofon any single investment may have on the entire portfolio.


The Company has contributed $8 million to its U.S. plan in February 2009. Due to the pension plan asset performance experienced for the year ended January 31, 2009, the Company may make additional contributions during 2009 to its U.S. qualified pension plan. The Company is in the process of evaluating the amount and timingtarget composition of the contribution. The contribution amount will depend on theCompany’s Canadian plan asset performance for the balance of the year and any statutory or regulatory changes that may occur.

     In late January 2008, the Company modified the actual asset allocations for its Canadian pension plan. Effective with the beginning of 2008, the target allocation for the Canadian planassets is 95 percent debt securities and 5 percent equity. The Company believes that plan assets are invested in a prudent manner with the same overall objective and investment strategy as noted above for the U.S. pension plan. The bond portfolio is comprised of government and corporate bonds chosen to match the duration of the pension plan’s benefit payment obligations. This changecurrent asset allocation will reducelimit future volatility with regard to the funded status of the plan. This change will, however, resultallocation has resulted in higher pension expense due to the lower long-term rate of return associated with debtfixed-income securities. In 2008,

Valuation of Investments

Significant portions of plan assets are invested in commingled trust funds. These funds are valued at the net asset value of units held by the plan at year end. Stocks traded on U.S. security exchanges are valued at closing market prices on the measurement date.

Investments in real estate are carried at their estimated fair value based on information supplied by independent appraisers whereby each property is independently appraised and adjusted accordingly at least once within a five-year period. The Company’s management reviews the fair value of each property during the intervening years to determine whether an impairment has occurred since receiving the latest independent appraisal and that no change is required to the fair value.

The fair values of the Company’s U.S. pension plan assets at January 29, 2011 and January 30, 2010 are as follows:

     
(in millions) Level 1 Level 2 Level 3 2010
Total		 2009
Total*
Cash and cash equivalents $—  $4  $—  $4  $5 
Equity securities:
                         
U.S. large-cap(1)  —   137   —   137   110 
U.S. mid-cap(1)  —   40   —   40   36 
International(2)  —   70   —   70   62 
Corporate stock(3)  7   —   —   7   17 
Fixed income securities:
                         
Long duration corporate and government bonds(4)  —   214   —   214   200 
Intermediate duration corporate and government bonds(5)  —   29   —   29   27 
Other types of investments:
                         
Real estate  —   —   9   9   7 
Insurance contracts  —   1   —   1   1 
Total assets at fair value $7  $495  $9  $511  $465 

*Each category of plan assets is classified within the same level of the fair value hierarchy for 2010 and 2009.
(1)These categories consist of various managed funds that invest primarily in common stocks, as well as other equity securities and a combination of other funds.
(2)This category comprises two managed funds that invest primarily in international common stocks, as well as other equity securities and a combination of other funds.
(3)This category consists of common and preferred stock, including $7 million and $4 million invested in the Company’s common stock for 2010 and 2009, respectively.
(4)This category consists of various fixed income funds that invest primarily in long-term bonds, as well as a combination of other funds, that together are designed to exceed the performance of related long-term market indices.
(5)This category consists of a fixed income fund that invests primarily in intermediate duration bonds, as well as a combination of other funds, that together are designed to track the performance of the Barclays Capital U.S. Intermediate Credit Index.

The following table is a reconciliation of the fair value of the U.S. pension plan’s real estate investments classified as Level 3:

 
(in millions) Level 3
Balance at January 31, 2009 $7 
Changes during the year  — 
Balance at January 30, 2010 $7 
Appreciation on appraised value of real estate  2 
Balance at January 29, 2011 $9 

The fair values of the Company’s Canadian pension plan assets at January 29, 2011 and January 30, 2010 are as follows:

     
(in millions) Level 1 Level 2 Level 3 2010
Total		 2009
Total*
Cash and cash equivalents $—  $1  $—  $1  $— 
Equity securities:
                         
Canadian and International(1)  —   6   —   6   6 
Debt securities:
                         
Cash matched bonds(2)  —   83   —   83   79 
Total assets at fair value $—  $90  $—  $90  $85 

*Each category of plan assets is classified within the same level of the fair value hierarchy for 2010 and 2009.
(1)This category comprises two mutual funds that invest primarily in a diverse portfolio of Canadian and international equity securities.
(2)This category consists of fixed income securities, including strips and coupons, issued or guaranteed by the Government of Canada, provinces or municipalities of Canada including their agencies and crown corporations, as well as other governmental bonds and corporate bonds.

No Level 3 assets were held by the Canadian pension plan during 2010.

During 2010 the Company made contributions of $30 million and $2 million to its U.S. and Canadian plans, respectively. The Company contributed $6approximately $1 million to its Canadian qualified pension plan. The amount contributed to the Canadian plan in February 2009 was approximately $3 million.2011. The Company continuously evaluates the amount and timing of any future contributions. Additional contributions will depend on the plan asset performance and other factors.

Estimated future benefit payments for each of the next five years and the five years thereafter are as follows:

     PensionPostretirement
Benefits     Benefits
(in millions)
2009  $64 $1
 201060 2
2011 58  1
201257 1
201355 1
2014–2018251 4

  
 Pension Benefits Postretirement Benefits
   (in millions)
     2011 $73  $1 
     2012  62   1 
     2013  59   1 
     2014  57   1 
     2015  56   1 
2016-2020  257   5 

In February 2007, the Company and its U.S. pension plan, the Foot Locker Retirement Plan, were named as defendants in a class action in federal court in New York. The Complaint alleged that the Company’s pension plan violated the Employee Retirement Income Security Act of 1974, including, without limitation, its age discrimination and notice provisions, as a result of the Company’s conversion of its defined benefit plan to a defined benefit pension plan with a cash balance feature in 1996. The Company is defending the action vigorously. The Company is currently unable to make an estimate of loss or range of loss. Management does not believe that the outcome of any such proceedings would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.


59

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)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 40 percent and $9,000$10,000 as of January 1, 2009,2011, 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 was $2.2$2 million, $1.8$3 million, and $1.9$2 million in 2010, 2009, and 2008, 2007, and 2006, respectively.

25. Share-Based Compensation

21.Share-Based Compensation

Stock Options

     On May 30, 2007, the Company’s shareholders approvedUnder the Company’s 2007 Stock Incentive Plan (the “2007 Stock Plan”). Upon approval of the 2007 Stock Plan, the Company stated it would no longer make stock awards under the 2003 Stock Option and Award Plan (the “2003 Stock Option Plan”), the 1998 Stock Option and Award Plan (the “1998 Plan”), and the 2002 Foot Locker Directors’ Stock Plan (the “2002 Directors’ Plan”), although awards previously made under those plans and outstanding on May 30, 2007 continue in effect governed by the provisions of those plans.

     Under the 2007 Stock Plan, stock options, restricted stock, stock appreciation rights (SARs), or other stock-based awards may be granted to officers and other employees of the Company, including ourits subsidiaries and operating divisions worldwide. Nonemployee directors are also eligible to receive awards under this plan. Options for employees become exercisable in substantially equal annual installments over a three-year period, beginning with the first anniversary of the date of grant of the option, unless a shorter or longer duration is established at the time of the option grant. Options for nonemployee directors become exercisable one year from the date of grant. TheOn May 19, 2010, the 2007 Stock Plan was amended to increase the maximum number of shares of stock reserved for all awards under the 2007 Stock Plan is 6,000,000. The number of shares reserved for issuance as restricted stock and other stock-based awards cannot exceed 1,500,000 shares.to 12,000,000. The options terminate up to ten years from the date of grant.

     UnderIn connection with the Company’soriginal approval of the 2007 Stock Plan, the Company stated it would no longer grant stock awards under the 2003 Stock Option and Award Plan, the 1998 Stock Option and Award Plan, and the 19982002 Foot Locker Directors’ Stock Plan (the “2002 Directors’ Plan”), although awards previously made under those plans and outstanding on May 30, 2007 continue in effect and are governed by the provisions of those plans. In addition, options to purchase shares of common stock were granted to officersremain outstanding under the Company’s 1995 Stock Option and other employees at not less than the market price on the date of grant. Under these plans, the Company was authorized to grant to officers and other employees, including those at the subsidiary level, stock options, SARs, restricted stock or other stock-based awards. Generally, one-third of each stock option grant becomes exercisable on each of the first three anniversary dates of the date of grant. The options terminate up to 10 years from the date of grant.Award Plan; however, no further awards may be made under this plan.

The 2002 Directors’ Plan replaced both the Directors’ Stock Plan, which was adopted in 1996, and the Directors’ Stock Option Plan, which was adopted in 2000. No further grants or awards may be made under either of the prior plans. Options granted prior to 2003 have a three-year vesting schedule. Options granted beginning in 2003 becomebecame exercisable one year from the date of grant.

     In addition, options to purchase shares of common stock remain outstanding under the Company’s 1995 Stock Option and Award Plan (the “1995 Plan”). The 1995 Plan is substantially the same as the 1998 Plan. As of March 8, 2005 no further awards may be made under the 1995 Plan.

Employee

Employees Stock Purchase Plan

Under the Company’s 2003 Employees Stock Purchase Plan (the “2003 Employee Stock Purchase(“the Plan”), participating employees are able to contribute up to 10 percent of their annual compensation, not to exceed $25,000 in any plan year, through payroll deductions to acquire shares of the Company’s common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Under the 2003 Employee Stock Purchase Plan, 3,000,000 shares of common stock are authorized for purchase beginning June 2005. Of the 3,000,000 shares of common stock authorized for purchase under this plan, 587764 participating employees purchased 96,800278,212 shares in 2008,2010, and 723604 participating employees purchased 98,449125,992 shares in 2007.2009. To date, a total of 537,725941,929 shares have been purchased under this plan.

Share-Based Compensation Expense

60Total compensation expense related to the Company’s share-based compensation plans was $13 million, $12 million, and $9 million for 2010, 2009, and 2008 respectively. The total related tax benefit realized for the year ended January 29, 2011 was $3 million and was not significant for 2009 and 2008.

Valuation Model and Assumptions

The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards under SFAS No. 123(R).awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.


The Company estimates the expected term of share-based awards granted using the Company’s historical exercise and post-vesting employment termination patterns, which it believes are representative of future behavior. The expected term for the Company’s employee stock purchase plan valuation is based on the length of each purchase period as measured at the beginning of the offering period, which is one year. The Company estimates the expected volatility of its common stock at the grant date using a weighted-average of the Company’s historical volatility and implied volatility from traded options on the Company’s common stock. The Company believes that the combination of historical volatility and implied volatility provides a better estimate of future stock price volatility. The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived from the Company’s historical experience. Additionally, SFAS No. 123(R) requires theThe Company to estimateestimates pre-vesting option forfeitures at the time of grant and periodically reviserevises 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.

     Compensation expense related to the Company’s stock option and stock purchase plans was $3.6 million, $4.5 million and $6.3 million for 2008, 2007, and 2006, respectively. The following table shows the Company’s assumptions used to compute the stock-basedshare-based compensation expense:

Stock Option PlansStock Purchase Plan
      2008      2007      2006      2008      2007      2006
       Weighted-average risk free rate
       of interest2.43%4.43%4.68%4.16%5.00%4.39%
Expected volatility37%28%30%27%22%22%
Weighted-average expected    
      award life4.6 years  4.2 years4.0 years 1.0 year1.0 year1.0 year
Dividend yield5.1%2.3% 1.5% 2.8%2.0%1.4%
Weighted-average fair value$2.49$5.28$6.36$7.80 $4.96 $4.71

      
 Stock Option Plans Stock Purchase Plan
   2010 2009 2008 2010 2009 2008
Weighted-average risk free rate of interest  2.3%   1.93%   2.43%   0.85%   1.74%   4.16% 
Expected volatility  45%   53%   37%   39%   39%   27% 
Weighted-average expected award life  5.0 years   4.6 years   4.6 years   1.0 year   1.0 year   1.0 year 
Dividend yield  4.0%   6.0%   5.1%   4.8%   4.4%   2.8% 
Weighted-average fair value $4.47  $2.89  $2.49  $2.54  $4.17  $7.80 

Compensation expense related to the Company’s stock options and employee stock purchase plan was $5 million, $4 million, and $4 million for 2010, 2009, and 2008, respectively. As of January 29, 2011, there was $3 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of approximately 1 year.

The information set forth in the following table covers options granted under the Company’s stock option plans:

200820072006
Weighted-Weighted-Weighted-
NumberAverageNumberAverageNumberAverage
ofExerciseofExerciseofExercise
      Shares      Price      Shares      Price      Shares      Price
(in thousands, except prices per share)
       Options outstanding at beginning
      of year 5,977 $19.57 6,048 $19.15 5,962 $18.45
Granted588$11.73778$22.38858$23.98
Exercised(81)$9.76(474)$15.29(459)$15.12
Expired or cancelled(404)$24.12(375)$23.99(313)$24.83
Options outstanding at end of year6,080$18.645,977$19.576,048$19.15
Options exercisable at end of year4,812$18.894,530$18.274,455$16.94
Options available for future grant at end
      of year4,8905,8044,931

201020092008
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		7,002$16.886,080$18.645,977$19.57
Granted1,311$15.101,521$10.02588$11.73
Exercised(942) $11.65(181) $8.76(81) $9.76
Expired or cancelled(151) $20.41(418) $21.03(404) $24.12
Options outstanding at end of
year		7,220$17.177,002$16.886,080$18.64
Options exercisable at end of
year		5,088$18.815,084$18.854,812$18.89
Options available for future
grant at end of year		10,3392,2144,890

The total intrinsic value of options exercised in 2008(the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) was $5 million for 2010, and was not significant for 2009 and in 2007 was $2.7 million.2008. The aggregate intrinsic value for stock options outstanding and for stock options exercisable as of January 31, 2009 was not significant. The intrinsic value for stock options outstanding and exercisable is calculated as the(the difference between the fair market value asCompany’s closing stock price on the endlast trading day of the period and the exercise price of the shares.options, multiplied by the number of in-the-money stock options) as of January 29, 2011 was $23 million and $13 million, respectively. The Company received $0.8 million and $6.9$10 million in cash from option exercises for 2008 and 2007, respectively. The tax benefit realized by the Company on the stock option exercises for 2008 was not significant.year ended January 29, 2011.

61

The following table summarizes information about stock options outstanding and exercisable at January 31, 2009:29, 2011:

Options OutstandingOptions Exercisable
Weighted-
AverageWeighted-Weighted-
RemainingAverageAverage
NumberContractualExerciseNumberExercise
       Range of Exercise Prices      Outstanding      Life      Price      Exercisable      Price
(in thousands, except prices per share)
$4.53 to $11.911,8714.54$11.051,314$10.81
 $12.30 to $23.422,019 4.98$17.991,536 $16.81
$23.59 to $26.87 1,5295.73 $24.79 1,301$24.92
$27.01 to $28.506615.62$27.90661$27.90
$4.53 to $28.506,0805.10$18.644,812$18.89

     
 Options Outstanding Options Exercisable
Range of Exercise Prices Number Outstanding Weighted- Average Remaining Contractual Life Weighted- Average Exercise
Price		 Number Exercisable Weighted- Average Exercise
Price
   (in thousands, except prices per share)
$9.85 to $11.18  1,805   6.65  $10.07   1,119  $10.12 
$11.66 to $15.10  2,094   7.37  $14.04   653  $12.44 
$15.74 to $23.92  1,985   3.65  $20.66   1,980  $20.67 
$24.04 to $28.15  1,336   3.34  $26.47   1,336  $26.47 
    7,220   5.44  $17.17   5,088  $18.81 

Changes in the Company’s nonvested options at January 31, 200929, 2011 are summarized as follows:

Weighted-
Average Grant -
Number ofDate Fair Value
      Shares      per Share
       (in thousands)
 Nonvested at February 3, 2008 1,447 $23.65 
Granted588    11.73 
Vested(363)24.57
Expired or Cancelled(404)24.12
Nonvested at January 31, 20091,26817.71

     As of January 31, 2009, there was $1.3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of approximately 1 year.

  
 Number of
Shares		 Weighted-
Average Grant
Date Fair Value
per share
   (in thousands, except prices per share)
Nonvested at January 30, 2010  1,918  $11.67 
Granted  1,311   15.10 
Vested  (946)   11.51 
Expired or cancelled  (151)   20.41 
Nonvested at January 29, 2011  2,132  $13.23 

Restricted SharesStock and Units

Restricted shares of the Company’s common stock and restricted stock units may be awarded to certain officers and key employees of the Company. For executives outside of the United States, theThe Company also issues restricted stock units.units to its non-employee directors. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. In 2008, 20072010, 2009, and 2006,2008, there were 87,500, 90,000653,535, 227,000, and 20,00087,500 restricted stock units outstanding, respectively. Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. TheseGenerally, awards fully vest after the passage of time, generallytypically three years. However, restricted stock unit grants made after May 19, 2010 in connection with the Company’s long-term incentive program vest after the attainment of certain performance metrics and the passage of time. Restricted stock is considered outstanding at the time of grant asand the holders have voting rights. Dividends are paid to holders of restricted stock are entitled to receive dividends and have voting rights.

     Restricted shares and units activitythat vest with the passage of time; for the years ended January 31, 2009, February 2, 2008, and February 3, 2007 is summarized as follows:

Number of Shares and Units
      2008      2007      2006
(in thousands)
        Outstanding at beginning of the year8105371,041
Granted243583157
Vested(109)(285)(600)
Cancelled or forfeited(100)(25)(61)
Outstanding at end of year844810 537
Aggregate value (in millions)$ 16.7$19.0 $ 13.6 
Weighted average remaining contractual life1.28 years 1.77 years0.93 years

62

     The weighted average grant-date fair value per share was $11.79, $22.95, and $24.08 for 2008, 2007, and 2006, respectively. The total value of awards for which restrictions lapsed during the year-ended January 31, 2009, February 2, 2008, and February 3, 2007 was $2.7 million, $7.3 million and $6.7 million, respectively. As of January 31, 2009, there was $6.5 million of total unrecognized compensation cost, related to nonvestedperformance-based restricted stock awards. granted after May 19, 2010, dividends will be accumulated and paid after the performance criteria are met.


The Company recorded compensation expense related to restricted shares, net of estimated forfeitures, of $5.0$8 million, in$8 million, and $5 million for 2010, 2009, and 2008, $5.6respectively. At January 29, 2011, there was $9 million in 2007of total unrecognized compensation cost net of estimated forfeitures, related to nonvested restricted stock awards. Restricted share and $4.0unit activity is summarized as follows:

   
 Number of Shares and Units
   2010 2009 2008
   (in thousands)
Outstanding at beginning of year  1,680   844   810 
Granted  189   1,115   243 
Vested  (492)   (279)   (109) 
Cancelled or forfeited  (80)   —   (100) 
Outstanding at end of year  1,297   1,680   844 
Aggregate value (in millions) $20  $23  $17 
Weighted-average remaining contractual life  1.44 years   1.50 years   1.28 years 

The weighted-average grant-date fair value per share was $13.75, $9.90, and $11.79 for 2010, 2009, and 2008, respectively. The total fair value of awards for which restrictions lapsed was $10 million, in 2006.$5 million, and $3 million for 2010, 2009, and 2008 respectively.

22.Legal Proceedings

26. Legal Proceedings

Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company as well as litigation incidental to the sale and disposition ofor businesses that have occurredbeen sold or disposed of by the Company in past years. These legal proceedings include commercial, intellectual property, customer, and labor-and-employment-related claims.

Certain of the Company’s subsidiaries are defendants in a number of lawsuits filed in state and federal courts containing various class action allegations under federal or state wage and hour laws, including allegations concerning classification of employees as exempt or nonexempt, unpaid overtime, meal and rest breaks, and uniforms.

The Company is a defendant in one such case in which plaintiff alleges that the Company permitted unpaid off-the-clock hours in violation of the Fair Labor Standards Act (“FLSA”) and state labor laws. The case,Pereira v. Foot Locker, was filed in the U.S. District Court for the Eastern District of Pennsylvania in 2007. In his complaint, in addition to unpaid wage and overtime allegations, plaintiff seeks compensatory and punitive damages, injunctive relief, and attorneys’ fees and costs. In September 2009, the Court conditionally certified a nationwide collective action. During the course of 2010, notices were sent to approximately 81,888 current and former employees of the Company offering them the opportunity to participate in the class action, and approximately 5,027 have opted in.

The Company was a defendant in an additional seven purported wage and hour class actions that assert claims similar to those asserted inPereira and seek similar remedies. With the exception of one case in state court in Illinois, all of these actions were either commenced in federal district court or the Company has subsequently removed them to federal district court. Subsequent to year-end, one of these cases was settled for an amount that was not material to the Company; three of them are in the discovery stage; and the remaining three are in preliminary stages of proceedings. The Company anticipates that, during the course of 2011, it will engage in mediation with plaintiff inPereira and his counsel in an attempt to determine whether it will be possible to resolve these cases. Meanwhile, the Company is vigorously defending them. The Company is currently unable to make an estimate of loss or range of loss for these cases.

Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, includingPereira and related cases, as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.


27. Commitments

23.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 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.

The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and disclosed above, or unconsolidated special purpose entities. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities.

24.Quarterly Results (Unaudited)

28. Shareholder Information and Market Prices (Unaudited)

     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.

     As of January 31, 2009, the Company had 21,749 shareholders of record owning 154,917,700 common shares. During 2008 and 2007, the Company declared quarterly dividends of $0.15 and $0.125 per share during each of the quarters, respectively.

     The following table sets forth, for the period indicated, the intra-day high and low sales prices for the Company’s common stock:

20082007
      High      Low      High      Low
Common Stock
              Quarter
1stQ$13.90 $10.39$24.78 $21.28
2ndQ15.4311.4024.15 17.00
3rdQ18.1910.1217.6013.70
4thQ14.793.6515.149.05
     
 1st Q 2nd Q 3rd Q 4th Q Year
   (in millions, except per share amounts)
Sales
                         
2010 $1,281   1,096   1,280   1,392   5,049 
2009  1,216   1,099   1,214   1,325   4,854 
Gross margin(a)
                         
2010 $393   305   388   430   1,516 
2009  356   280   329   367(b)   1,332 
Operating profit (loss)(c)
                         
2010 $87   11   74   90   262 
2009  50   —   (10)   40   80 
Income (loss) from continuing operations
                         
2010 $54   6   52   57(d)   169 
2009  31   (1)   (6)   23(e)   47 
Net income (loss)
                         
2010 $54   6   52   57   169 
2009  31   —   (6)   23   48 
Basic earnings (loss) per share:
                         
2010
                         
Income from continuing operations $0.35   0.04   0.33   0.36   1.08 
Income from discontinued operations  —   —   —   —   — 
Net income  0.35   0.04   0.33   0.36   1.08 
2009
                         
Income (loss) from continuing operations $0.20   —   (0.04)   0.14   0.30 
Income from discontinued operations  —   —   —   —   — 
Net income (loss)  0.20   —   (0.04)   0.14   0.30 
Diluted earnings (loss) per share:
                         
2010
                         
Income from continuing operations $0.34   0.04   0.33   0.36   1.07 
Income from discontinued operations  —   —   —   —   — 
Net income  0.34   0.04   0.33   0.36   1.07 
2009
                         
Income (loss) from continuing operations $0.20   —   (0.04)   0.14   0.30 
Income from discontinued operations  —   —   —   —   — 
Net income (loss)  0.20   —   (0.04)   0.14   0.30 

63

29. Quarterly Results (Unaudited)

      1st Q      2nd Q      3rd Q      4th Q(a)      Year(a)
(in millions, except per share amounts)
Sales
       2008$1,3091,3021,3091,317 5,237 
       20071,3161,2831,3561,4825,437
Gross margin(b)
       2008$3663613553781,460
       2007360302 3813771,420
Operating profit (loss)(c)
       2008$162833 (180)(d)(103)
       200727(28)(58)9(d)(50)
Income (loss) from continuing operations
       2008$31824(124)(79)
       200717(18)(34)78(e)43
Net income (loss) 
       2008$31824(125)(80)
       200717(18)(33)7945
Basic earnings (loss) per share:
       2008
              Income (loss) from continuing operations$0.020.110.16(0.81)(0.52)
              Income from discontinued operations—————
              Net income (loss)0.020.110.16(0.81)(0.52)
       2007
              Income (loss) from continuing operations$0.11(0.12)(0.22)0.510.29
              Income from discontinued operations———0.010.01
              Net income (loss)0.11(0.12)(0.22)0.520.30
Diluted earnings (loss) per share:
       2008
              Income (loss) from continuing operations$0.020.110.16(0.81)(0.52)
              Income from discontinued operations—————
              Net income (loss)0.020.110.16(0.81)(0.52)
       2007
              Income (loss) from continuing operations$0.11(0.12)(0.22)0.500.28
              Income from discontinued operations———0.010.01
              Net income (loss)0.11(0.12)(0.22)0.510.29
____________________

(a)

The 2007 results have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” See note 2.

(b)

Gross margin represents sales less cost of sales.

(b)Included in the results for the fourth quarter of 2009 is an inventory reserve charge of $14 million for certain aged apparel.
(c)

Operating profit (loss) represents income (loss) from continuing operations before income taxes, interest expense, net, and non-operating income.

(d)

During the fourth quarter of 2008,2010, the Company recorded $236a $10 million in impairment charges representing $67charge related to its CCS tradename. Additionally, a realized gain of $2 million of store long-lived assets and $169 million of goodwill and other intangibles. was recorded related to the Reserve International Fund, a money-market investment.

(e)During the fourth quarter of 2007,2009, the Company recognized an additional impairmentrecorded a charge of $22$4 million reflectingto reflect the continued downturnwrite-down of the U.S. formats. The projected cash flows used in the third quarter impairment analysis were significantly reduced reflecting the poor performancecertain Canadian deferred tax assets as a result of certain Canadian provincial rate reductions enacted during the fourth quarterquarter.

Item 9.Changes in and the expected continued difficult retail environment.

(e)

Net income includes an income tax benefit of $62 million representing a reduction of a Canadian income tax valuation allowance primarily related to income tax deductions that the Company now expects will be utilized.

Disagreements with Accountants on Accounting and Financial Disclosure

64

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

     The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and other information contained elsewhere in this report.

        2008    2007(1)    2006(2)    2005    2004
($ in millions, except per share amounts) 
Summary of Continuing Operations
Sales$  5,2375,4375,7505,6535,355
Gross margin(3)1,4601,4201,7361,7091,633
Selling, general and administrative expenses1,1741,1761,1631,1291,090
Impairment charges and store closing program costs25912817——
Depreciation and amortization(3)130166175171154
Interest expense, net5131015
Other income(8) (1) (14) (6) —
Income (loss) from continuing operations(79) 43247263255
Cumulative effect of accounting change(4)——1——
Basic earnings per share from continuing operations(0.52) 0.291.591.701.69
Basic earnings per share from cumulative
       effect of accounting change——0.01——
Diluted earnings per share from continuing operations(0.52) 0.281.581.671.64
Diluted earnings per share from cumulative
       effect of accounting change—————
Common stock dividends declared per share0.600.500.400.320.26
Weighted-average common shares outstanding (in millions)154.0154.0155.0155.1150.9
Weighted-average common shares outstanding
       assuming dilution (in millions)  154.0  155.6  156.8  157.6  157.1
Financial Condition
Cash, cash equivalents and short-term investments$408493470587492
Merchandise inventories1,1201,2811,3031,2541,151
Property and equipment, net(5)432521654675715
Total assets(5)2,8773,2433,2493,3123,237
Short-term debt—————
Long-term debt and obligations under capital leases142221234326365
Total shareholders’ equity  1,924  2,261  2,295  2,027  1,830
Financial Ratios 
Return on equity (ROE)(3.8)% 1.611.513.615.9
Operating (loss) profit margin(2.0)% (0.9) 6.67.27.3
Income (loss) from continuing operations as a percentage of sales(1.5)% 0.84.34.74.8
Net debt capitalization percent(6)46.7% 45.144.4 45.250.4
Net debt capitalization percent (without present  
       value of operating leases)(6)—— ———
Current ratio  4.2  4.0  3.9  2.8  2.7
Other Data
Capital expenditures $146148 165155 156
Number of stores at year end3,6413,7853,9423,9213,967
Total selling square footage at year end (in millions)8.098.508.748.718.89
Total gross square footage at year end (in millions)13.5014.1214.5514.4814.78 
____________________

(1)The 2007 results have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” See note 2.
(2)2006 represents the 53 weeks ended February 3, 2007.
(3)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 accordingly, depreciation expense was increased by the corresponding amount.
(4)2006 relates to the adoption of SFAS No. 123(R), “Share-Based Payment.”
(5)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.
(6)Represents total debt, net of cash, cash equivalents and short-term investments and includes the effect of interest rate swaps. The effect of interest rate swaps increased/ (decreased) debt by $19 million, $4 million, $(4) million, $(1) million, and $4 million, at January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006, and January 29, 2005, respectively.

65

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no disagreements between the Company and its independent registered public accounting firm on matters of accounting principles or practices.

Item 9A. Controls and Procedures

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 January 31, 2009. Based on that evaluation, the Company’s CEO and CFO concluded that, due to a material weakness in internal control over financial reporting described below in Management’s Annual Report on Internal Control over Financial Reporting, the Company’s disclosure controls and procedures were not effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and form, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
In light of this material weakness, in preparing the consolidated financial statements as of and for the fiscal year ended January 31, 2009, the Company performed additional reconciliations and analyses and other post-closing procedures designed to ensure that our consolidated financial statements included in this Annual Report for the fiscal year ended January 31, 2009 have been prepared in accordance with generally accepted accounting principles. The Company’s CEO and CFO have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented in this report.

The Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of January 29, 2011. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

(b)Management’s Annual Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company uses the framework in Internal Control-Integrated Framework 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. During this evaluation, management identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the following material weakness, management has concluded that our internal control over financial reporting was not effective as of January 31, 2009 based upon the COSO Framework.

66The 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 January 29, 2011. KPMG LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements included in this annual report, has issued an attestation report on the Company’s effectiveness of internal control over financial reporting, which is included in Item 9A(d).


The Company’s processes, procedures and controls related to financial reporting were not effective to ensure that amounts related to current taxes payable, certain deferred tax assets and liabilities, the current and deferred income tax expense were recorded in accordance with generally accepted accounting principles. Specifically, the Company did not maintain effective controls over the preparation and review of the calculations and related supporting documentation for the tax accounts noted above. As a result, there were errors in the aforementioned tax accounts in the preliminary consolidated financial statements that were corrected prior to issuance of the Company’s consolidated financial statements.
KPMG LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements included in this annual report, has issued an attestation report on the Company’s effectiveness of internal control over financial reporting, which is included in Item 9A(e).
(c)Changes in Internal Control over Financial Reporting.
During the Company’s last fiscal quarter there were no changes in internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the Company’s last fiscal quarter there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(d)Remediation Plan for Material Weakness in Internal Control Over Financial Reporting.
In response to the identified material weaknesses, management has identified several enhancements to the Company’s internal control over financial reporting to remediate the material weakness described above. These ongoing efforts include the following:
  • Enhancing procedures for quality review and analysis of the provision for income tax.
  • Accelerating certain year end tax analysis and reporting activities to periods earlier in the yearin order to provide additional analysis and reconciliation time.
  • Identifying opportunities to automate the tax provision process including software tools thatwould reduce the number of manual spreadsheets that are used to calculate the income taxprovision on a quarterly and annual basis.
  • Evaluating the need for additional resources in the preparation and review of the provision ofincome taxes.
We anticipate the actions described above and resulting improvements in controls will strengthen our internal control over financial reporting and will, over time, address the related material weakness that we identified as of January 31, 2009. However, because the remedial actions relate to the training of personnel and many of the controls in our system of internal controls rely extensively on manual review and approval, the successful operations of these controls, for at least several quarters, may be required prior to management being able to conclude that the material weakness has been remediated.
(e)Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

67

The Board of Directors and ShareholdersStockholders of
Foot Locker, Inc.:

We have audited Foot Locker, Inc.’s internal control over financial reporting as of January 31, 2009,29, 2011, based on criteria established in Internal Control –— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Foot Locker, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

AIn our opinion, Foot Locker, Inc. maintained, in all material weakness is a deficiency, or a combination of deficiencies, inrespects, effective internal control over financial reporting such that there is a reasonable possibility that a material misstatementas of January 29, 2011, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to income taxes has been identified and included in management’s assessment.Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Foot locker,Locker, Inc. and subsidiaries as of January 31, 200929, 2011 and February 2, 2008,January 30, 2010, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three yearthree-year period ended January 31, 2009. This material weakness was considered in determining the nature, timing,29, 2011, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended January 31, 2009, and this report does not affect our report dated March 30, 2009, which28, 2011, expressed an unqualified opinion on these consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


New York, New York
March 30, 200928, 2011


68

Item 9B. Other Information

     None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Item 9B.

Other Information

None.

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 “Proposal 1-Election of Directors” in the Proxy Statement and is incorporated herein by reference.

Information relative to directors of the Company is set forth under the section captioned “Proposal 1-Election of Directors” in the Proxy Statement and is incorporated herein by reference.

(b)Executive Officers of the Company
Information with respect to executive officers of the Company is set forth immediately following Item 4 in Part I.

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.
Item 11.Executive Compensation

Item 11. Executive Compensation

Information set forth in the Proxy Statement beginning with the section captioned “Directors Compensation and Benefits” through and including the section captioned “Pension Benefits” is incorporated herein by reference, and information set forth in the Proxy Statement under the heading “Compensation Committee Interlocks and Insider Participation” is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information set forth in the Proxy Statement under the sections captioned “Equity Compensation Plan Information” and “Beneficial Ownership of the Company’s Stock” is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions, and Director Independence

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information set forth in the Proxy Statement under the section captioned “Related Person Transactions” and under the section captioned “Directors’ Independence” is incorporated herein by reference.

Item 14.Principal Accounting Fees and Services

Item 14. Principal Accountant Fees and Services

Information about the principal accountantaccounting 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.


69

PART IV

Item 15.Exhibits and Financial Statement Schedules

Item 15. Exhibits and Financial Statement Schedules

(a)(1)(a)(2) Financial Statements

The list of financial statements required by this item is set forth in Item 8. “Consolidated Financial Statements and Supplementary Data.”

(a)(3) and (c) Exhibits

An index of the exhibits which are required by this item and which are included or incorporated herein by reference in this report appears on pages 7270 through 74.73. The exhibits filed with this report immediately follow the index.


70

SIGNATURES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 FOOT LOCKER, INC.
By:
/s/ KEN C. HICKS
Matthew D. Serra
Ken C. Hicks
Chairman of the Board, President and
Chief Executive Officer
 
Date: March 30, 200928, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30, 2009,28, 2011, by the following persons on behalf of the Company and in the capacities indicated.



Matthew D. Serra  Robert W. McHugh 
/s/ KEN C. HICKS
Ken C. Hicks
Chairman of the Board,
President and
Chief Executive Officer		Senior/s/ ROBERT W. MCHUGH
Robert W. McHugh
Executive Vice President and
President and 
Chief Financial Officer
Chief Executive Officer 
 
/s//s/ GIOVANNA CIPRIANO/s/ JAMES E. PRESTON 

Giovanna Cipriano		James E. Preston 

Senior Vice President and Chief Accounting Officer		 /s/ JAMES E. PRESTON
James E. Preston
Director
 /s/ NICHOLAS DIPAOLO
Nicholas DiPaolo
Director		 /s/ ALLEN QUESTROM
Allen Questrom
Director
/s/ NICHOLAS DIPAOLO  /s/ ALAN D. FELDMAN
Alan D. Feldman
Director		/s/ /s/ DAVID Y. SCHWARTZ
Nicholas DiPaolo 
David Y. Schwartz

Director		Director 
 
/s/ ALAN D. FELDMAN /s/ JAROBIN GILBERT JR.
Jarobin Gilbert Jr.
Director		/s/ /s/ CHERYL NIDO TURPIN
Alan D. Feldman 
Cheryl Nido Turpin

Director		Director 
 
/s/ JAROBIN GILBERT JR. /s/ GUILLERMO MARMOL
Guillermo Marmol
Director		/s/ /s/ DONA D. YOUNG
Jarobin Gilbert Jr. 
Dona D. Young

Director		Director 
 
/s//s/ MATTHEW M. MCKENNA

Matthew M. McKenna
Director		 
Director   

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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. 
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 3.1 to the Registrant’s Current Report on Form 8-K dated November 19, 2008May 20, 2009 filed by the Registrant with the SEC on November 25, 2008)May 27, 2009).

 
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 8-1/2% Debentures due 2022 (incorporated herein by reference to Exhibit 4 to the Registrant’s Form 8-K dated January 16, 1992).

10.1 

Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) 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 on April 24, 1995 (the “1994 Form 10-K”)).

10.2 

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, 1998).

10.3 

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”)).

10.4 

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”)).

10.5 Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K).

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Exhibit No. 
Exhibit No.
in Item 601 of

Regulation S-K		 Description
10.6 

Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the Annual Report on Form 10-K for the year ended January 27, 1996, filed by the Registrant with the SEC on April 26, 1996 (the “1995 Form 10-K”)).

10.7 

Supplemental Executive Retirement Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated August 13, 2007 filed by the Registrant with the SEC on August 17, 2007).

10.8 

Long-Term Incentive Compensation Plan, as amended and restated.*

restated (incorporated herein by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year ended January 31, 2009, filed by the Registrant with the SEC on March 30, 2009 (the “2008 Form 10-K”)).
10.9 

Annual Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated March 26, 2008 filed by the Registrant on April 1, 2008).

10.10 

Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement).

10.11 

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”)).

10.12 

Foot Locker Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the July 29, 2000 Form 10-Q).

10.13 

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).

10.14 

Amendment to Trust Agreement made as of April 11, 2001 (incorporated herein by reference to Exhibit 10.4 to the May 5, 2001 Form 10-Q).

10.15 Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement).
10.16 

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, 1995).

10.17 

Employment Agreement with Matthew D. SerraKen C. Hicks dated as of December 12, 2008June 25, 2009 (incorporated herein by reference to Exhibit 10.2 to the June 26, 2009 Form 8-K).

10.18Employment Agreement with Ronald J. Halls dated June 30, 2009 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated December 12, 2008June 30, 2009 filed by the Registrant with the SEC on December 18, 2008 (the “December 12, 2008 Form 8-K”))July 1, 2009).

10.18

Amendment of Restricted Stock Agreement for Matthew D. Serra dated October 6, 2006 (incorporated herein by reference to Exhibit 10.2 to the October 10, 2006 Form 8-K).

10.19 

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).

10.20

Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.2 to the Registrant’s December 12, 2008 Form 8-K).


Exhibit No.
in Item 601 of
Regulation S-K		 Description
10.2110.20Form of Executive Employment Agreement.*Agreement (incorporated herein by reference to Exhibit 10.21 to the 2008 Form 10-K).
10.21 
10.22Foot Locker, Inc. Excess Cash Balance Plan.*Plan (incorporated herein by reference to Exhibit 10.22 to the 2008 Form 10-K).
10.22 
10.23Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year ended January 30, 1999 filed by the Registrant on April 30, 1999 (the “1998 Form 10-K”)).

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Exhibit No.
in Item 601 of

Regulation S-K

10.23		 

Description

10.24Foot Locker 2002 Directors Stock Plan as amended.*(incorporated herein by reference to Exhibit 10.24 to the 2008 Form 10-K).
10.2510.24Foot Locker 2003 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 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).
10.2610.25Automobile Expense Reimbursement Program for Senior Executives.*Executives (incorporated herein by reference to Exhibit 10.26 to the 2008 Form 10-K).
10.2710.26Executive Medical Expense Allowance Program for Senior Executives.*Executives (incorporated herein by reference to Exhibit 10.27 to the 2008 Form 10-K).
10.2810.27Financial Planning Allowance Program for Senior Executives.*Executives (incorporated herein by reference to Exhibit 10.28 to the 2008 Form 10-K).
10.2910.28Form 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”)).
10.3010.29Form of Incentive Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.41 to the 2005 Form 10-K).
10.3110.30Form 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).
10.3210.31Long-termLong-Term Disability Program for Senior Executives.*Executives (incorporated herein by reference to Exhibit 10.32 to the 2008 Form 10-K).
10.3310.32 Foot Locker 2007 Stock Incentive Plan amended and restated as of May 19, 2010 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 30, 200719, 2010 filed by the Registrant with the SEC on June 5, 2007)May 25, 2010).
10.3410.33Credit Agreement dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A dated March 20, 2009 filed by the Registrant with the SEC on December 7, 2009).
10.34Guaranty dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated March 20, 2009 filed by the Registrant with the SEC on March 24, 2009).
10.35Security Agreement dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated March 20, 2009 filed by the Registrant with the SEC on March 24, 2009 (the “March 20, 2009and Exhibit 10.3 to the Current Report on Form 8-K”))8-K/A filed by the Registrant with the SEC on May 21, 2009).
10.3510.36Guaranty dated asForm of March 20, 2009Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.210.1 to the March 20, 2009Registrant’s Current Report on Form 8-K)8-K dated November 5, 2010 filed by the Registrant with the SEC on November 12, 2010).

Exhibit No.
in Item 601 of
Regulation S-K		Description
10.3610.37Security Agreement dated as of March 20,Bonus Waiver Letter for 2009 signed by Ken C. Hicks (incorporated herein by reference to Exhibit 10.310.1 to the Registrant’s Current Report on Form 8-K dated March 20, 2009 Form 8-K)23, 2010 filed by the Registrant with the SEC on March 29, 2010).
12Computation of Ratio of Earnings to Fixed Charges.*
21Subsidiaries of the Registrant.*
23Consent of Independent Registered Public Accounting Firm.*
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32Certification 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.*
101The following materials from Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended January 29, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statement of Shareholder’s Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.
____________________

**Exhibits filed with this Form 10-K

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