UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: August ~~3, 2019~~1, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 1-10299

(Exact name of registrant as specified in its charter)


New York	13-3513936
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

330 West 34^th Street, New York, New York 10001

(Address of principal executive offices, Zip Code)

(212-720-3700)

(Registrant’s telephone number, including area code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	FL	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ◻

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


Large accelerated filerþ	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ◻
Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No þ

Number of shares of Common Stock outstanding as of ~~September 9, 2019: 107,039,179~~August 28, 2020: 104,391,265

Table of Contents

~~FOOT LOCKER, INC.~~

TABLE OF CONTENTS

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “continues,” “feels,” “forecasts,” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” These statements include statements relating to trends in or expectations relating to the expected effects of our initiatives, strategies and plans, as well as trends in or expectations regarding our financial results and long-term growth model and drivers, tax rates, business opportunities and expansion, strategic acquisitions or investments, expenses, dividends, share repurchases, and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, investments, borrowing capacity and use of proceeds, repatriation of cash to the U.S., and the effects of the coronavirus pandemic (COVID-19) and recent social unrest on our financial results. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this filing. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties, many of which are unforeseeable and beyond our control, such as the ongoing uncertainty caused by the COVID-19 pandemic and social unrest. 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.

Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and “Item 1A Risk Factors” included in this Form 10-Q. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this report or any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

~~FOOT LOCKER, INC.~~

CONDENSED CONSOLIDATED BALANCE SHEETS

~~($ in millions, except shares)~~


	August 3,		August 4,		February 2,		August 1,		August 3,		February 1,
	2019		2018		2019		2020		2019		2020
		(Unaudited)		(Unaudited)		*		(Unaudited)		(Unaudited)		*
		($ in millions)						($ in millions)
ASSETS

Current assets:
Cash and cash equivalents	$	939	$	950	$	891	$	1,373	$	939	$	907
Merchandise inventories		1,227		1,254		1,269		1,194		1,227		1,208
Other current assets		280		320		358		266		280		271
		2,446		2,524		2,518		2,833		2,446		2,386
Property and equipment, net		796		842		836		782		796		824
Operating lease right-of-use assets		2,976		—		—		2,810		2,976		2,899
Deferred taxes		92		108		87		70		92		81
Goodwill		156		158		157		158		156		156
Other intangible assets, net		21		41		24		19		21		20
Other assets		233		159		198		240		233		223
	$	6,720	$	3,832	$	3,820	$	6,912	$	6,720	$	6,589

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	420	$	408	$	387		630		420		333
Accrued and other liabilities		312		313		377		455		312		343
Current portion of lease obligations		497		—		—
Current portion of operating lease obligations								587		497		518
		1,229		721		764		1,672		1,229		1,194
Long-term debt		123		124		124
Long-term lease obligations		2,750		—		—
Long-term debt and obligations under finance leases								124		123		122
Long-term operating lease obligations								2,579		2,750		2,678
Other liabilities		106		505		426		134		106		122
Total liabilities		4,208		1,350		1,314		4,509		4,208		4,116
Shareholders’ equity:
Common stock and paid-in capital: 113,199,460; 121,497,470; and 112,932,605 shares outstanding, respectively		825		857		809
Shareholders’ equity
Common stock and paid-in capital: 104,391,691;
113,119,460; and 104,187,310 shares outstanding, respectively								774		825		764
Retained earnings		2,226		2,232		2,104		1,996		2,226		2,103
Accumulated other comprehensive loss		(384)		(340)		(370)		(367)		(384)		(394)
Less: Treasury stock at cost: 3,578,395; 5,869,122; and 711,024 shares, respectively		(155)		(267)		(37)
Less: Treasury stock at cost: 426; 3,578,395;
and -- shares, respectively								—		(155)		—
Total shareholders' equity		2,512		2,482		2,506		2,403		2,512		2,473
	$	6,720	$	3,832	$	3,820	$	6,912	$	6,720	$	6,589

The balance sheet at February ~~2, 2019~~1, 2020 has been derived from the previously reported audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended February ~~2, 2019.~~1, 2020.

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 1

Table of Contents

~~FOOT LOCKER, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

~~(in millions, except per share amounts)~~


	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,		August 1,		August 3,		August 1,		August 3,
	2019		2018		2019		2018		2020		2019		2020		2019
		(in millions, expect per share amounts)								(in millions, expect per share amounts)
Sales	$	1,774	$	1,782	$	3,852	$	3,807	$	2,077	$	1,774	$	3,253	$	3,852

Cost of sales		1,240		1,243		2,629		2,602		1,539		1,240		2,444		2,629
Selling, general and administrative expenses		393		380		809		765		387		393		703		809
Depreciation and amortization		46		44		90		89		44		46		88		90
Litigation and other charges		14		3		15		15
Income from operations		81		112		309		336
Impairment and other charges										38		14		54		15
Income (loss) from operations										69		81		(36)		309

Interest income, net		2		1		6		3
Other income		2		2		4		5
Income before income taxes		85		115		319		344
Interest (expense) income, net										(2)		2		(3)		6
Other income, net										3		2		4		4
Income (loss) before income taxes										70		85		(35)		319
Income tax expense		25		27		87		91		25		25		30		87
Net income	$	60	$	88	$	232	$	253
Net income (loss)									$	45	$	60	$	(65)	$	232

Basic earnings per share	$	0.55	$	0.76	$	2.09	$	2.15
Basic earnings (loss) per share									$	0.43	$	0.55	$	(0.62)	$	2.09
Weighted-average shares outstanding		110.8		116.6		111.6		117.7		104.5		110.8		104.4		111.6

Diluted earnings per share	$	0.55	$	0.75	$	2.08	$	2.14
Diluted earnings (loss) per share									$	0.43	$	0.55	$	(0.62)	$	2.08
Weighted-average shares outstanding, assuming dilution		111.1		117.1		112.1		118.1		105.1		111.1		104.4		112.1

See Accompanying Notes to the UnauditedCondensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 2

Table of Contents

~~FOOT LOCKER, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

~~($ in millions)~~


		Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,		August 1,		August 3,		August 1,		August 3,
	2019		2018		2019		2018		2020		2019		2020		2019
		($ in millions)								($ in millions)
Net income	$	60	$	88	$	232	$	253
Other comprehensive income, net of income tax
Net income (loss)									$	45	$	60	$	(65)	$	232
Other comprehensive income (loss), net of income tax

Foreign currency translation adjustment:
Translation adjustment arising during the period, net of income tax (benefit) of $-, $1, $1, and $(7) million, respectively		(6)		(20)		(21)		(58)
Translation adjustment arising during the period, net of income tax of $4, $-, $2, and $1, respectively										36		(6)		20		(21)

Cash flow hedges:
Change in fair value of derivatives, net of income tax		5		—		3		1
Change in fair value of derivatives, net of income tax benefit of $-, $-, $1, and $- respectively										—		5		3		3

Pension and postretirement adjustments:
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $-, $-, $1, and $1 million, respectively		1		2		4		4
Pension remeasurement and foreign currency fluctuations arising during the year, net of income tax benefit of $-, $3, $-, and $3, respectively.		—		(9)		—		(8)
Comprehensive income	$	60	$	61	$	218	$	192
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $1, $-, $2 and $-, respectively										1		1		4		4
Comprehensive income (loss)									$	82	$	60	$	(38)	$	218

See Accompanying Notes to the UnauditedCondensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 3

Table of Contents

~~FOOT LOCKER, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Additional Paid-In







Accumulated


Capital &

Other

Total
Thirteen weeks ended

Common Stock

Treasury Stock

Retained

Comprehensive

Shareholders'
(shares in thousands, amounts in millions)

Shares

Amount

Shares

Amount

Earnings

Loss

Equity
Balance at May 4, 2019

113,161

$
820

(774)

$
(41)

$
2,207

$
(384)

$
2,602
Restricted stock issued

16

—
Issued under director and stock plans

23

(1)

(1)
Share-based compensation expense

6

6
Shares of common stock used to satisfy tax withholding obligations

(1)

—

—
Share repurchases

(2,900)

(120)

(120)
Reissued - Employee Stock Purchase Plan

96

6

6
Net income

60

60
Cash dividends declared on common stock ($0.38 per share)

(41)

(41)
Translation adjustment, net of tax

(6)

(6)
Change in cash flow hedges, net of tax

5

5
Pension and postretirement adjustments, net of tax

1

1
Balance at August 3, 2019

113,200

$
825

(3,579)

$
(155)

$
2,226

$
(384)

$
2,512

Balance at May 5, 2018

121,342

$
848

(4,081)

$
(176)

$
2,184

$
(313)

$
2,543
Restricted stock issued

13

—
Issued under director and stock plans

142

6

6
Share-based compensation expense

3

3
Shares of common stock used to satisfy tax withholding obligations

(1)

—
Share repurchases

(1,835)

(93)

(93)
Reissued - Employee Stock Purchase Plan

48

2

2
Net income

88

88
Cash dividends declared on common stock ($0.345 per share)

(40)

(40)
Translation adjustment, net of tax

(20)

(20)
Pension and postretirement adjustments, net of tax

(7)

(7)
Balance at August 4, 2018

121,497

$
857

(5,869)

$
(267)

$
2,232

$
(340)

$
2,482


	Additional Paid-In								Accumulated
	Capital &								Other		Total
Thirteen weeks ended	Common Stock			Treasury Stock			Retained		Comprehensive		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at May 2, 2020	104,245	$	767	(23)	$	—	$	1,951	$	(404)	$	2,314
Restricted stock issued	13											—
Issued under director and stock plans	134		3									3
Share-based compensation expense			4									4
Reissued - Employee Stock Purchase Plan ("ESPP")				23		—						—
Net income								45				45
Translation adjustment, net of tax										36		36
Pension and postretirement adjustments, net of tax										1		1
Balance at August 1, 2020	104,392	$	774	—	$	—	$	1,996	$	(367)	$	2,403

Balance at May 4, 2019	113,161	$	820	(774)	$	(41)	$	2,207	$	(384)	$	2,602
Restricted stock issued	16											—
Issued under director and stock plans	23		(1)									(1)
Share-based compensation expense			6									6
Shares of common stock used to satisfy tax withholding obligations				(1)		—						—
Share repurchases				(2,900)		(120)						(120)
Reissued - ESPP				96		6						6
Net income								60				60
Cash dividends declared on common stock ($0.38 per share)								(41)				(41)
Translation adjustment, net of tax										(6)		(6)
Change in cash flow hedges, net of tax										5		5
Pension and postretirement adjustments, net of tax										1		1
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

Additional Paid-In







Accumulated


Capital &

Other

Total
Twenty-six weeks ended

Common Stock

Treasury Stock

Retained

Comprehensive

Shareholders'
(shares in thousands, amounts in millions)

Shares

Amount

Shares

Amount

Earnings

Loss

Equity
Balance at February 2, 2019

112,933

809

(711)

(37)

2,104

(370)

2,506
Restricted stock issued

88

—
Issued under director and stock plans

179

3

3
Share-based compensation expense

13

13
Shares of common stock used to satisfy tax withholding obligations

(32)

(2)

(2)
Share repurchases

(2,932)

(122)

(122)
Reissued - Employee Stock Purchase Plan

96

6

6
Net income

232

232
Cash dividends declared on common stock

(84)

(84)
Translation adjustment, net of tax

(21)

(21)
Change in cash flow hedges, net of tax

3

3
Pension and postretirement adjustments, net of tax

4

4
Cumulative effect of the adoption of Topic 842

(26)

(26)
Balance at August 3, 2019

113,200

$
825

(3,579)

$
(155)

$
2,226

$
(384)

$
2,512

Balance at February 3, 2018

121,262

842

(1,433)

(63)

2,019

(279)

2,519
Restricted stock issued

89

—
Issued under director and stock plans

146

6

6
Share-based compensation expense

9

9
Shares of common stock used to satisfy tax withholding obligations

(32)

(1)

(1)
Share repurchases

(4,452)

(205)

(205)
Reissued - Employee Stock Purchase Plan

48

2

2
Net income

253

253
Cash dividends declared on common stock

(81)

(81)
Translation adjustment, net of tax

(58)

(58)
Change in cash flow hedges, net of tax

1

1
Pension and postretirement adjustments, net of tax

(4)

(4)
Cumulative effect of the adoption of ASU 2014-09

4

4
Cumulative effect of the adoption of ASU 2016-16

37

37
Balance at August 4, 2018

121,497

$
857

(5,869)

$
(267)

$
2,232

$
(340)

$
2,482

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

~~($ in millions)~~

Twenty-six weeks ended

August 3,

August 4,


2019

2018

($ in millions)
From operating activities:




Net income

$
232

$
253
Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization

90

89
Share-based compensation expense

13

9
Qualified pension plan contributions

(55)

(30)
Change in assets and liabilities:

Merchandise inventories

32

3
Accounts payable

37

155
Accrued and other liabilities

(40)

—
Pension litigation accrual

—

15
Class counsel fees paid in connection with pension litigation

—

(97)
Other, net

19

30
Net cash provided by operating activities

328

427

From investing activities:




Capital expenditures

(81)

(115)
Minority investments

(45)

—
Insurance proceeds related to loss on property and equipment

—

2
Net cash used in investing activities

(126)

(113)

From financing activities:




Purchase of treasury shares

(122)

(205)
Dividends paid on common stock

(84)

(81)
Issuance of common stock

4

—
Proceeds from exercise of stock options

—

4
Treasury stock reissued under employee stock plan

3

2
Shares of common stock repurchased to satisfy tax withholding obligations

(2)

(1)
Net cash used in financing activities

(201)

(281)

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

(8)

(25)
Net change in cash, cash equivalents, and restricted cash

(7)

8
Cash, cash equivalents, and restricted cash at beginning of year

981

1,031
Cash, cash equivalents, and restricted cash at end of period

$
974

$
1,039

Cash paid during the year:




Interest

$
5

$
5
Income taxes

$
111

$
129

~~See Accompanying Notes to Condensed Consolidated Financial Statements.~~

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~1. Summary of Significant Accounting Policies~~

~~Basis of Presentation~~

The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2020 and of the fiscal year ended February 2, 2019. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended February 2, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 2, 2019.

~~Other than the changes to the~~ ~~Leases~~ ~~policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to the policies disclosed in Note 1,~~ ~~Summary of Significant Accounting Policies~~ ~~of our Annual Report on Form 10-K for the year ended February 2, 2019.~~

~~Recent Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842).~~ This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, ~~Leases (Topic 842): Targeted improvements,~~ which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.

The Company adopted Topic 842 on February 3, 2019 (the “effective date”) using the optional transition method, which applies Topic 842 at the beginning of the period in which it is adopted. Prior period amounts have not been adjusted in connection with the adoption of this standard. The Company elected the package of practical expedients under the new standard, which permits companies to not reassess lease classification, lease identification, or initial direct costs for existing or expired leases prior to the effective date. We have lease agreements with non-lease components that relate to the lease components. The Company elected the practical expedient to account for non-lease components and the lease components to which they relate, as a single lease component for all classes of underlying assets. Also, the Company elected to keep short-term leases with an initial term of twelve months or less off the balance sheet.

Upon adoption of this new standard, the Company recorded right-of-use assets and lease obligations on the Condensed Consolidated Balance Sheet for our operating leases of $3,148 million and $3,422 million, respectively, as of February 3, 2019. As part of adopting the standard, previously recognized liabilities for deferred rent and lease incentives were reclassified as a component of the right-of-use assets. Additionally upon adoption, we evaluated right-to-use assets for impairment and determined that approximately $29 million of impairment was required related to newly recognized right-of-use assets that would have been impaired in previous periods. This impairment of the right-to-use asset as of February 3, 2019 was recorded, net of related income tax effects, as a $26 million reduction of beginning retained earnings. The standard did not significantly affect our Condensed Consolidated Statements of Operations, Comprehensive Income, or Cash Flows.

~~Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.~~

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~2. Revenue~~

Store revenue is recognized at the point of sale and includes merchandise, net of returns, and excludes taxes. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment date.

Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and has paid for the merchandise as of the shipment date. Shipping and handling is accounted for as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.

~~Sales disaggregated based upon sales channel is presented below.~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

($ in millions)
Sales by Channel

Stores

$
1,521

$
1,542

$
3,279

$
3,285
Direct-to-customers

253

240

573

522
Total sales

$
1,774

$
1,782

$
3,852

$
3,807

~~Sales disaggregated based upon geographic area is presented in the below table. Sales are attributable to the geographic area in which the sales transaction is fulfilled.~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

($ in millions)
Sales by Geography

United States

$
1,209

$
1,220

$
2,761

$
2,721
International

565

562

1,091

1,086
Total sales

$
1,774

$
1,782

$
3,852

$
3,807

~~Contract Liabilities~~

The Company sells gift cards which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed by customers. Breakage income is reported as part of sales. The table below presents the activity of our gift card liability balance:

($ in millions)
Balance at February 3, 2019
$
35
Redemptions

(47)
Breakage recognized in sales

(3)
Activations

43
Balance at August 3, 2019
$
28

~~The Company elected not to disclose the information about remaining performance obligations since the amount of gift cards redeemed after 12 months is not significant.~~

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~3. Segment Information~~

The Company has integrated all available shopping channels including stores, websites, apps, social channels, and catalogs. Store sales are primarily fulfilled from the store’s inventory but may also be shipped from any of our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are primarily shipped to our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and stores depending on the availability of particular items.

Our operating segments are identified according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. During 2018, the Company expanded into Asia and launched our digital channels across Singapore, Hong Kong, and Malaysia. During the first quarter of 2019, the Company changed its organizational and internal reporting structure in order to support an accelerated growth strategy for the region. We opened an Asian headquarters in Singapore and realigned our organization into three distinct geographic regions: Europe, Middle East and Africa (“EMEA”), Asia Pacific, and North America.

In light of these changes, the Company has re-evaluated its operating segments. The Company has determined that it has 3 operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team sales. Our EMEA operating segment includes the results of the following banners operating in Europe: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of Foot Locker and Kids Foot Locker and the related e-commerce businesses operating in Australia, New Zealand, and Asia. We have further aggregated these operating segments into 1 reportable segment based upon their shared customer base and similar economic characteristics.

The Company evaluates performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, pension litigation charges, corporate expense, non-operating income, and net interest income.

~~The following table summarizes our results:~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

($ in millions)
Sales

$
1,774

$
1,782

$
3,852

$
3,807

Operating Results






Division profit

115

131

365

378
Less: Litigation and other charges ⁽¹⁾

14

3

15

15
Less: Corporate expense ⁽²⁾

20

16

41

27
Income from operations

81

112

309

336
Interest income, net

2

1

6

3
Other income

2

2

4

5
Income before income taxes

$
85

$
115

$
319

$
344

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(1)~~

The Company recorded pre-tax charges of $1 million and $3 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, related to a pension litigation matter and related plan reformation. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company recorded pre-tax charges of $2 million and $15 million, respectively. The charges in the current periods reflect professional fees in connection with the plan reformation. The prior year charges reflected adjustments to the value of the judgment and interest that continued to accrue, as required by the provisions of the required plan reformation.

~~For the thirteen weeks ended August 3, 2019, the Company incurred $13 million of lease termination costs related to the closure of certain of its SIX:02 locations.~~

~~(2)~~

Corporate expense consists of unallocated selling, 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.

~~4. Cash, Cash Equivalents, and Restricted Cash~~

The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows.

August 3,

August 4,

February 2,

2019

2018

2019

($ in millions)
Cash and cash equivalents

$
939

$
950

$
891
Restricted cash included in other current assets

5

1

59
Restricted cash included in other non-current assets

30

88

31
Cash, cash equivalents, and restricted cash

$
974

$
1,039

$
981

During 2017 in connection with the pension litigation matter, the Company deposited $150 million in a qualified settlement fund. At August 4, 2018, the amount remaining in the fund was $54 million and was classified as part of non-current assets. At February 2, 2019, the fund was classified as a current asset due to our intention to use it to contribute to the pension plan. During 2018 and in March 2019, the Company used substantially all of the fund to pay class counsel fees and to make a contribution to the pension plan.

Other amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe and deposits held in insurance trusts in order to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.

~~The Company has elected to present book overdrafts, representing checks issued but still outstanding in excess of bank balances, as part of accounts payable.~~

~~5. Goodwill~~

~~Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment.~~

In light of the change in our organizational and internal reporting structure in the first quarter of 2019, we have reassessed our reporting units and have determined that the collective omni-channel banners in North America, EMEA, and Asia Pacific are the 3 reporting units at which goodwill is tested.

Accordingly, goodwill was re-allocated between the affected reporting units based on their relative fair values. As required, we conducted the annual impairment review both before and after this change. Neither review resulted in the recognition of impairment, as the fair value of each reporting unit exceeded its carrying value.

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~


	Additional Paid-In								Accumulated
	Capital &								Other		Total
Twenty-six weeks ended	Common Stock			Treasury Stock			Retained		Comprehensive		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at February 1, 2020	104,188	$	764	—	$	—	$	2,103	$	(394)	$	2,473
Restricted stock issued	67											—
Issued under director and stock plans	137		3									3
Share-based compensation expense			7									7
Shares of common stock used to satisfy tax withholding obligations				(23)		—						—
Reissued - ESPP				23		—						—
Net loss								(65)				(65)
Cash dividends declared on common stock ($0.40 per share)								(42)				(42)
Translation adjustment, net of tax										20		20
Change in cash flow hedges, net of tax										3		3
Pension and postretirement adjustments, net of tax										4		4
Balance at August 1, 2020	104,392	$	774	—	$	—	$	1,996	$	(367)	$	2,403

Balance at February 2, 2019	112,933	$	809	(711)	$	(37)	$	2,104	$	(370)	$	2,506
Restricted stock issued	88											—
Issued under director and stock plans	179		3									3
Share-based compensation expense			13									13
Shares of common stock used to satisfy tax withholding obligations				(32)		(2)						(2)
Share repurchases				(2,932)		(122)						(122)
Reissued - ESPP				96		6						6
Net income								232				232
Cash dividends declared on common stock ($0.76 per share)								(84)				(84)
Translation adjustment, net of tax										(21)		(21)
Change in cash flow hedges, net of tax										3		3
Pension and postretirement adjustments, net of tax										4		4
Cumulative effect of the adoption of Topic 842								(26)				(26)
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

~~6. Other Intangible Assets, net~~

~~The components of finite-lived intangible assets and intangible assets not subject~~See Accompanying Notes to ~~amortization are as follows:~~

August 3, 2019

August 4, 2018

February 2, 2019

Gross

Accum.

Net

Gross

Accum.

Net

Gross

Accum.

Net
($ in millions)

value

amort.

value

value

amort.

value

value

amort.

value
Amortized intangible assets: ⁽¹⁾

Lease acquisition costs

$
116

$
(108)

$
8

$
125

$
(115)

$
10

$
120

$
(111)

$
9
Trademarks / trade names

20

(15)

5

20

(14)

6

20

(15)

5
Favorable leases

-

-

-

7

(6)

1

7

(6)

1

$
136

$
(123)

$
13

$
152

$
(135)

$
17

$
147

$
(132)

$
15

Indefinite life intangible assets: ^{(1), (2)}

Runners Point Group trademarks / trade names

$
8

$
24

$
9
Other intangible assets, net

$
21

$
41

$
24

the Unaudited Condensed Consolidated Financial Statements.

~~(1)~~

~~The change in the ending balances reflects the effect of foreign currency fluctuations due primarily to the movements of the euro in relation to the U.S. dollar.~~

~~(2)~~

~~During the fourth quarter of 2018, the Company recorded a non-cash impairment charge of $15 million related to these intangibles.~~

~~The annual review of intangible assets with indefinite lives performed during the first quarter of 2019 did not result in the recognition of impairment. Amortization expense recorded is as follows:~~

Thirteen weeks ended

Twenty-six weeks ended
($ in millions)

August 3, 2019

August 4, 2018

August 3, 2019

August 4, 2018
Amortization expense

$
1

$
1

$
2

$
2

~~Estimated future amortization expense for finite-life intangible assets is as follows:~~

($ in millions)
Remainder of 2019

$
2
2020

3
2021

2
2022

2
2023

2
2024

2

~~7. Leases~~

The Company is obligated under operating leases for almost all of its store properties. In addition, the Company leases certain warehouse distribution centers. Operating lease periods generally range from 5 to 10 years and most store leases contain rent escalation provisions. For leases beginning in 2019 and later, the Company will combine lease components (e.g. rental payments) and non-lease components (e.g. common area maintenance costs and utilities). Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these short-term leases on a straight-line basis over the lease term.

Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term for those arrangements where there is an identified asset and the contract conveys the right to control its use.

10Second Quarter 2020 Form 10-Q Page 4

Table of Contents

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Since the rates implicit in the leases are not readily determinable, the Company uses its incremental borrowing rates based on the remaining lease term to determine the present value of future lease payments. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Some of the store leases contain renewal options with varying terms and conditions. The Company’s lease term includes options to extend or terminate a lease only when it is reasonably certain that it will exercise that option.

The majority of operating lease costs relate to retail stores and distribution centers and the expenses are classified within cost of sales. Operating lease costs for non-store rents are included in SG&A.

Certain leases provide for variable lease costs, which primarily include rent payments based on a percentage of store sales, common area maintenance costs, and taxes. These costs are expensed as incurred and are included within cost of sales.

~~The components of lease cost as of August 3, 2019 were as follows:~~

Thirteen weeks ended

Twenty-six weeks ended
($ in millions)
August 3, 2019

August 3, 2019
Operating lease costs

$
165

$
331
Variable lease costs

81

165
Short-term lease costs

7

14
Net lease cost

$
253

$
510

Rent expense for the prior year comparative periods is accounted for under previous lease guidance. Rent expense for operating leases for the thirteen weeks ended August 4, 2018 amounted to $192 million and consisted of minimum and contingent rentals of $186 million and $6 million, respectively. For the twenty-six weeks ended August 4, 2018, rent expense for operating leases amounted to $377 million and consisted of minimum and contingent rentals of $365 million and $13 million, respectively, less sublease income of $1 million. Also, most of the Company’s leases require the payment of certain executory costs such as insurance, maintenance, and other costs in addition to the future minimum lease payments. These costs, including the amortization of lease rights, totaled $37 million and $74 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.

~~Amounts recognized in the Condensed Consolidated Balance Sheet related to operating leases as of August 3, 2019 were as follows:~~

($ in millions)
Assets

Operating lease right-of-use assets

$
2,976

Liabilities

Current

Operating lease liabilities

497
Noncurrent

Operating lease liabilities

2,750
Total lease liabilities

$
3,247

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE~~ CONDENSED CONSOLIDATED ~~FINANCIAL~~ STATEMENTS OF CASH FLOWS

(Unaudited)

~~Other information related to operating leases as of August 3, 2019 consisted of the following:~~


~~Weighted average remaining lease term (years)~~	~~7.3~~
~~Weighted average discount rate~~	~~5.4~~	%

~~Supplemental cash flow information related to leases for the twenty-six weeks ended August 3, 2019 was as follows:~~

($ in millions)
Cash paid for amounts included in measurement of lease liabilities:

Operating cash flows from operating leases

$
338
Right-of-use assets obtained in exchange for lease obligations:

Operating leases

114

~~Maturities of lease liabilities as of August 3, 2019 are as follows:~~

($ in millions)
Remainder of 2019

$
337
2020

637
2021

588
2022

533
2023

462
Thereafter

1,431
Total lease payments

3,988
Less: Interest

741
Total lease liabilities

$
3,247

~~As of February 2, 2019, the estimated future minimum non-cancellable lease commitments were as follows:~~

($ in millions)
2019

$
672
2020

631
2021

583
2022

527
2023

456
Thereafter

1,408
Total operating lease commitments

$
4,277


	Twenty-six weeks ended
	August 1,		August 3,
	2020		2019
		($ in millions)
From operating activities:
Net (loss) income	$	(65)	$	232
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Non-cash impairment and other charges		31		—
Depreciation and amortization		88		90
Deferred income taxes		22		(10)
Share-based compensation expense		7		13
Qualified pension plan contributions		—		(55)
Change in assets and liabilities:
Merchandise inventories		12		32
Accounts payable		291		37
Accrued and other liabilities		142		(40)
Other, net		78		29
Net cash provided by operating activities		606		328

From investing activities:
Capital expenditures		(83)		(81)
Minority investments		(8)		(45)
Net cash used in investing activities		(91)		(126)

From financing activities:
Proceeds from the revolving credit facility		330		—
Repayment of the revolving credit facility		(330)		—
Payment of revolving credit agreement costs		(4)		—
Purchase of treasury shares		—		(122)
Dividends paid on common stock		(42)		(84)
Issuance of common stock		—		4
Treasury stock reissued under employee stock plan		—		3
Proceeds from common stock issued under employee stock plans		2		—
Shares of common stock repurchased to satisfy tax withholding obligations		—		(2)
Net cash used in financing activities		(44)		(201)

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash		(3)		(8)
Net change in cash, cash equivalents, and restricted cash		468		(7)
Cash, cash equivalents, and restricted cash at beginning of year		942		981
Cash, cash equivalents, and restricted cash at end of period	$	1,410	$	974

Cash paid during the year:
Interest	$	7	$	5
Income taxes	$	11	$	111

Non-cash investing and financing activities:
Cash paid for amounts included in measurement of lease liabilities	$	279	$	338
Right-of-use assets obtained in exchange for operating lease obligations	$	135	$	114
Leases obtained in exchange for finance lease obligations	$	4	$	—

~~8. Accumulated Other Comprehensive Loss~~

~~Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of~~See Accompanying Notes to the ~~following:~~Unaudited Condensed Consolidated Financial Statements.

August 3,

August 4,

February 2,


2019

2018

2019

($ in millions)
Foreign currency translation adjustments

$
(105)

$
(67)

$
(84)
Cash flow hedges

3

1

—
Unrecognized pension cost and postretirement benefit

(282)

(274)

(286)

$
(384)

$
(340)

$
(370)

12Second Quarter 2020 Form 10-Q Page 5

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the accompanying Unaudited Condensed Consolidated Financial Statements and these Notes and related disclosures. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The results of operations for the periods ended August 1, 2020 are not necessarily indicative of the results to be expected for the full fiscal year due to the continued uncertainty of general economic conditions that may affect us for the remainder of 2020. Specifically, we are uncertain of the extent to which the coronavirus (“COVID-19”) pandemic will affect our sales, traffic to our stores, including our distribution capabilities and those of our suppliers.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in Foot Locker, Inc.’s Form 10-K for the year ended February 1, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2020.

Other than the changes to the Goodwill policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to the policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February 1, 2020.

Recent Accounting Pronouncements

On February 2, 2020, we adopted FASB guidance on the accounting for implementation costs of a cloud computing arrangement that is considered to be a service contract, that requires companies to follow the guidance for internal-use software to determine which costs to capitalize in a cloud computing arrangement that is a service contract. Under this guidance, such implementation costs will be capitalized in Other assets on the Condensed Consolidated Balance Sheet, with the related amortization presented in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations. This guidance was applied prospectively to implementation costs incurred after February 2, 2020. The adoption of this guidance did not have a significant effect on our condensed consolidated financial statements.

On February 2, 2020, we adopted FASB’s updated guidance on the accounting for performing goodwill impairment tests. This update eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. In testing goodwill for impairment, an entity may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Refer to our updated accounting policy in Note 6, Goodwill.

Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on our present or future consolidated financial statements.

Second Quarter 2020 Form 10-Q Page 6

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Revenue

The following table presents sales disaggregated based upon sales channel.


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
($ in millions)	2020		2019		2020		2019
Sales by Channel
Stores	$	1,388	$	1,521	$	2,202	$	3,279
Direct-to-customers		689		253		1,051		573
Total sales	$	2,077	$	1,774	$	3,253	$	3,852

Sales disaggregated based upon geographic area is presented in the table below. Sales are attributable to the geographic area in which the sales transaction is fulfilled.


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
($ in millions)	2020		2019		2020		2019
Sales by Geography
United States	$	1,529	$	1,209	$	2,440	$	2,761
International		548		565		813		1,091
Total sales	$	2,077	$	1,774	$	3,253	$	3,852

Contract Liabilities

We sell gift cards which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed by customers. Breakage income is recognized as revenue in proportion to the pattern of rights exercised by the customer. The table below presents the activity of our gift card liability balance:



($ in millions)	August 1, 2020		August 3, 2019
Gift card liability at beginning of year	$	35	$	35
Redemptions		(37)		(47)
Breakage recognized in sales		(3)		(3)
Activations		36		43
Gift card liability	$	31	$	28

We elected not to disclose the information about remaining performance obligations since the amount of gift cards redeemed after 12 months is not significant.

3. Segment Information

We have integrated all available shopping channels including stores, websites, apps, social channels, and catalogs. Store sales are primarily fulfilled from the store’s inventory but may also be shipped from any of our distribution centers or from a different store location if an item is not available at the original store. Direct-to-customer orders are generally shipped to our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and stores depending on the availability of particular items.

Second Quarter 2020 Form 10-Q Page 7

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We evaluate performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expense, non-operating income, and net interest (expense) income. The following table summarizes our results:


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
($ in millions)	2020		2019		2020		2019
Sales	$	2,077	$	1,774	$	3,253	$	3,852

Operating Results
Division profit		125		115	$	46	$	365
Less: Impairment and other charges ⁽¹⁾		38		14		54		15
Less: Corporate expense ⁽²⁾		18		20		28		41
Income (loss) from operations		69		81		(36)		309
Interest (expense) income, net		(2)		2		(3)		6
Other income, net		3		2		4		4
Income (loss) before income taxes	$	70	$	85	$	(35)	$	319

(1)	During the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019, we recorded pre-tax charges as detailed in Note 4, Impairment and Other Charges.

(2)

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

4. Impairment and Other Charges


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
($ in millions)	2020		2019		2020		2019
Losses related to social unrest	$	18	$	—	$	18	$	—
Runners Point shut down		16		—		16		—
Impairment of long-lived assets and right-of-use assets		—		—		15		—
Eastbay reorganization		3		—		3		—
Pension litigation related charges		1		1		2		2
Lease termination costs		—		13		—		13
Total impairment and other charges	$	38	$	14	$	54	$	15

We recorded charges of $18 million related to social unrest in the second quarter, which resulted in physical damage and inventory loss to approximately 135 stores. This charge included inventory losses of $14 million, damages to store property of $2 million, and repairs and other costs of $2 million. We are currently working with our insurers to determine the amount of our covered losses under our property insurance policy. Insurance recovery for losses in excess of our deductible will be recorded in the period in which we conclude our settlement discussions with our insurance providers.

In May 2020, we made the strategic decision to shut down our Runners Point business and to consolidate our Sidestep support staff into our other operations in Europe. Also, as part of the next phase of the Champs Sports and Eastbay strategic initiative, we restructured positions and aligned several functions across the banners and plan to consolidate certain Eastbay operations from Wausau, Wisconsin into the Champs Sports headquarters in Bradenton, Florida. We recorded charges of $16 million related to the shutdown of the Runners Point business and $3 million related to the reorganization associated with Eastbay.

Second Quarter 2020 Form 10-Q Page 8

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As part of the decision to close the Runners Point banner, certain Runners Point stores will convert to other banners and approximately 40 Runners Point and Sidestep stores will close prior to their natural lease expiration. The following table presents a rollforward of our restructuring liability, which is recorded in Accrued and other liabilities on the Condensed Consolidated Balance Sheets. The remaining restructuring liability at August 1, 2020, which primarily relates to severance payments, is expected to be substantially paid within the next twelve months.


($ in millions)	Runners Point		Eastbay		Total
Balance as of February 1, 2020	$	0	$	0	$	0
Charges		16		3		19
Payments		(2)		(2)		(4)
Foreign currency fluctuations		1		—		1
Balance as of August 1, 2020	$	15	$	1	$	16

Due to the COVID-19 pandemic and its effect on our actual and projected results, during the first quarter of 2020 we determined that a triggering event occurred for certain underperforming stores operating in Europe and, therefore, we conducted an impairment review. We evaluated the long-lived assets, including the right-of-use assets, of 70 stores and recorded non-cash charges of $15 million to write down store fixtures, leasehold improvements, and right-of-use assets.

The Company and its U.S. pension plan were involved in litigation related to the conversion of the plan to a cash balance plan. The court entered its final judgment in 2018, which required the plan to be reformed as directed by the court order. We recorded charges of $2 million for both the twenty-six weeks ended August 1, 2020 and August 3, 2019 related to administrative expenses in connection with the reformation. For the twenty-six weeks ended August 3, 2019, we incurred $13 million of lease termination costs related to the closure of our SIX:02 locations.

5. Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash and cash equivalents, as reported on our Condensed Consolidated Balance Sheets, to cash, cash equivalents, and restricted cash, as reported on our Condensed Consolidated Statements of Cash Flows.


	August 1,		August 3,		February 1,
($ in millions)	2020		2019		2020
Cash and cash equivalents	$	1,373	$	939	$	907
Restricted cash included in other current assets		7		5		6
Restricted cash included in other non-current assets		30		30		29
Cash, cash equivalents, and restricted cash	$	1,410	$	974	$	942

Amounts included in restricted cash primarily relate to amounts held in escrow in connection with various leasing arrangements in Europe and deposits held in insurance trusts to satisfy the requirement to collateralize part of the self-insured workers’ compensation and liability claims.

Second Quarter 2020 Form 10-Q Page 9

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Goodwill

We review goodwill for impairment annually during the first quarter of each fiscal year, or more frequently if impairment indicators arise. The review of impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step quantitative impairment test.

In performing the qualitative assessment, we consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in our stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative test requires that the carrying value of each reporting unit be compared with its estimated fair value. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill).

We use a discounted cash flow 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 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. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. We evaluate 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.

In addition to performing our qualitative assessment of as the beginning of the year, we performed an additional quantitative assessment during the first quarter due to the COVID-19 pandemic and its effect on our results and stock price. Neither assessment resulted in the recognition of impairment.

7. Other Intangible Assets, net

The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:


		August 1, 2020						August 3, 2019						February 1, 2020
	Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)	value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: ⁽¹⁾
Lease acquisition costs	$	119	$	(113)	$	6	$	116	$	(108)	$	8	$	115	$	(108)	$	7
Trademarks / trade names		20		(16)		4		20		(15)		5		20		(16)		4
	$	139	$	(129)	$	10	$	136	$	(123)	$	13	$	135	$	(124)	$	11

Indefinite life intangible assets: ⁽¹⁾
Trademarks / trade names					$	9					$	8					$	9
Other intangible assets, net					$	19					$	21					$	20

(1)	The change in the ending balances also reflects the effect of foreign currency fluctuations due primarily to movements of the euro in relation to the U.S. dollar.

The annual review of intangible assets with indefinite lives performed during the first quarter of 2020 did not result in the recognition of impairment.

Second Quarter 2020 Form 10-Q Page 10

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense recorded is as follows:


	Thirteen weeks ended					Twenty-six weeks ended
	August 1,		August 3,			August 1,	August 3,
($ in millions)	2020		2019			2020	2019
Amortization expense	$	1	$	1	$	2	$	2

Estimated future amortization expense for finite-life intangible assets is as follows:


	($ in millions)
Remainder of 2020	$	2
2021		2
2022		2
2023		2
2024		1
2025		1

8. Revolving Credit Facility

In the first quarter of 2020, we borrowed $330 million under our revolving credit facility. During the second quarter of 2020, we repaid the amount borrowed. On July 14, 2020, we amended to our credit agreement with the banks (as amended, “2020 Credit Agreement”). The 2020 Credit Agreement now provides for a $600 million asset-based revolving credit facility maturing on July 14, 2025.

At our option, interest is determined by either (1) the eurodollar rate, determined by reference to LIBOR, plus a margin of 1.75 percent to 2.25 percent per annum, or (2) the base rate, determined by reference to the federal funds rate, plus a margin of 0.75 percent to 1.25 percent, in each case, depending on availability under the 2020 Credit Agreement. In addition, we are paying a commitment fee of 0.50 percent per annum on the unused portion of the commitments under the 2020 Credit Agreement.

If certain specified events of default have occurred and are continuing, or if availability under the 2020 Credit Agreement is less than or equal to the greater of $60 million and 10 percent of the Loan Cap (as defined in the 2020 Credit Agreement), we are required to test compliance with a minimum consolidated fixed charge coverage ratio of 1.00 as of the end of each fiscal quarter.

9. Long-Term Debt and Obligations Under Finance Leases

The components of long-term debt and obligations under finance leases are as follows:


($ in millions)	August 1, 2020		August 3, 2019		February 1, 2020
8.5% debentures payable 2022	$	118	$	118	$	118
Unamortized gain related to interest rate swaps⁽¹⁾		3		5		4
Obligations under finance leases		3		—		—
	$	124	$	123	$	122

(1)	In 2009, we terminated an interest rate swap at a gain. This gain is being amortized as part of interest expense over the remaining term of the debt using the effective-yield method.

Thecurrent portion of obligations under finance leases was $1 million at August 1, 2020 and is included in Accrued and Other liabilities.

Second Quarter 2020 Form 10-Q Page 11

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:


	August 1,		August 3,		February 1,
($ in millions)	2020		2019		2020
Foreign currency translation adjustments	$	(84)	$	(105)	$	(104)
Cash flow hedges		—		3		(3)
Unrecognized pension cost and postretirement benefit		(283)		(282)		(287)
	$	(367)	$	(384)	$	(394)

The changes in AOCL for the twenty-six weeks ended August ~~3, 2019~~1, 2020 were as follows:


	Foreign				Items Related				Foreign				Items Related
	Currency				to Pension and				Currency				to Pension and
	Translation		Cash Flow		Postretirement				Translation		Cash Flow		Postretirement
($ in millions)	Adjustments		Hedges		Benefits		Total		Adjustments		Hedges		Benefits		Total
Balance as of February 2, 2019	$	(84)	$	—	$	(286)	$	(370)
Balance as of February 1, 2020									$	(104)	$	(3)	$	(287)	$	(394)

OCI before reclassification		(21)		3		—		(18)		20		3		—		23
Amortization of pension actuarial (gain)/loss, net of tax		—		—		4		4
Amortization of pension actuarial loss, net of tax										—		—		4		4
Other comprehensive income		(21)		3		4		(14)		20		3		4		27
Balance as of August 3, 2019	$	(105)	$	3	$	(282)	$	(384)
Balance as of August 1, 2020									$	(84)	$	—	$	(283)	$	(367)

Reclassifications from AOCL for the twenty-six weeks ended August ~~3, 2019~~1, 2020 were as follows:


	($ in millions)		($ in millions)
Amortization of actuarial (gain) loss:
Pension benefits- amortization of actuarial loss	$	6
Postretirement benefits- amortization of actuarial gain		(1)
Net periodic benefit cost (see Note 11)		5
Amortization of actuarial loss:
Pension benefits			$	6
Income tax benefit		(1)		(2)
Total, net of tax	$	4	$	4

11. Fair Value Measurements

~~The Company’s~~Our financial assets are recorded at fair value, using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are categorized as follows:

Level 1–

Quoted prices for identical instruments in active markets.

Level 2 –

Observable inputs other than quoted prices included within Level 1, including quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 –

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

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

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

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

~~The fair values of the Company’s equity investments are determined by using quoted prices for identical or similar instruments in markets that are not active and therefore are classified as Level 2.~~ The fair value of the auction rate security, classified as available-for-sale, is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument. ~~The Company’s~~

Second Quarter 2020 Form 10-Q Page 12

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and therefore are classified as Level 2 instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis


	As of August 1, 2020						As of August 3, 2019						As of February 1, 2020
($ in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Available-for-sale security		—		7		—		—		6		—		—		7		—
Foreign exchange forward contracts				1				—		4		—		—		—		—
Total Assets	$	—	$	8	$	—	$	—	$	10	$	—	$	—	$	7	$	—

Liabilities
Foreign exchange forward contracts		—		4		—		—		—		—		—		4		—
Total Liabilities	$	—	$	4	$	—	$	—	$	—	$	—	$	—	$	4	$	—

There were 0 transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, operating lease right-of-use assets, goodwill, other intangible assets, and minority investments that are not accounted for under the equity method of accounting. These assets are measured using Level 3 inputs, if determined to be impaired.

Minority interests measured using the fair value measurement alternative had a carrying value of $137 million, $133 million, and $137 million as of August 1, 2020, August 3, 2019, and February 1, 2020, respectively, and are included within Other assets. During the fourth quarter of 2019, we recorded a non-cash charge of $7 million related to the write-down of such minority investments.

Long-Term Debt

The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2. The carrying value and estimated fair value of long-term debt were as follows:


($ in millions)	August 1, 2020		August 3, 2019		February 1, 2020
Carrying value	$	121	$	123	$	122
Fair value	$	129	$	136	$	135

The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.

Second Quarter 2020 Form 10-Q Page 13

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. Earnings Per Share

We account for earnings per share (“EPS”) using the treasury stock method. Basic EPS is computed by dividing net income (loss) for the period by the weighted-average number of common shares outstanding at the end of the period. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic EPS computation plus dilutive common stock equivalents. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on EPS.

The computation of basic and diluted EPS is as follows:


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
	2020		2019		2020		2019
	(in millions, except per share data)
Net income (loss)	$	45	$	60	$	(65)	$	232

Weighted-average common shares outstanding		104.5		110.8		104.4		111.6
Dilutive effect of potential common shares		0.6		0.3		—		0.5
Weighted-average common shares outstanding assuming dilution		105.1		111.1		104.4		112.1

Earnings (loss) per share - basic	$	0.43	$	0.55	$	(0.62)	$	2.09
Earnings (loss) per share - diluted	$	0.43	$	0.55	$	(0.62)	$	2.08

Anti-dilutive share-based awards excluded from diluted calculation		2.7		2.4		2.7		1.8

Restricted stock units related to our long-term incentive programs of 0.5 million and 0.7 million have been excluded from diluted weighted-average shares for the periods ended August 1, 2020 and August 3, 2019, respectively. The issuance of these shares are contingent on our performance metrics as compared to the pre-established performance goals, which have not been achieved.

13. Pension

We have a defined benefit pension plan covering certain of our North American employees.

The components of net periodic pension benefit cost are presented in the table below. Service cost is recognized as part of SG&A expense, while the other components are recognized as part of Other income, net.


	Thirteen weeks ended				Twenty-six weeks ended
		August 1,		August 3,		August 1,		August 3,
($ in millions)		2020		2019		2020		2019
Service cost	$	3	$	5	$	7	$	10
Interest cost		6		6		11		13
Expected return on plan assets		(10)		(9)		(19)		(18)
Amortization of net loss		3		3		6		6
Net benefit expense	$	2	$	5	$	5	$	11

13Second Quarter 2020 Form 10-Q Page 14

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Share-Based Compensation

Total compensation expense, included in SG&A, and the associated tax benefits recognized related to our share-based compensation plans, were as follows:


	Thirteen weeks ended				Twenty-six weeks ended
($ in millions)	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Options and shares purchased under stock purchase plan	$	2	$	2	$	4	$	4
Restricted stock units		2		4		3		9
Total share-based compensation expense	$	4	$	6	$	7	$	13

Tax benefit recognized	$	1	$	—	$	1	$	1

Valuation Model and Assumptions

We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and subjective assumptions, including expected term and expected volatility.

The following table ~~provides a summary of~~shows assumptions used to compute share-based compensation expense for awards granted during the ~~Company’s recognized assets~~twenty-six weeks ended August 1, 2020 and ~~liabilities that are measured at fair value on a recurring basis:~~

August 3, 2019

August 4, 2018

February 2, 2019

($ in millions)


Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3
Assets


















Equity investments

$
—

$
133

$
—

$
—

$
15

$
—

$
—

$
94

$
—
Available-for-sale security

—

6

—

—

7

—

—

6

—
Foreign exchange forward contracts

—

4

—

—

2

—

—

—

—
Total Assets

$
—

$
143

$
—

$
—

$
24

$
—

$
—

$
100

$
—

Liabilities


















Foreign exchange forward contracts

—

—

—

—

1

—

—

1

—
Total Liabilities

$
—

$
—

$
—

$
—

$
1

$
—

$
—

$
1

$
—

~~There were no transfers into or out of Level 1, Level 2, or Level~~August 3, ~~assets and liabilities for any of the periods presented.~~2019:

~~The carrying value and estimated fair value of long-term debt were as follows:~~


	August 3,		August 4,		February 2,			Stock Option Plans						Stock Purchase Plan
	2019		2018		2019		August 1,			August 3,			August 1,			August 3,
	($ in millions)						2020			2019			2020			2019
Carrying value	$	123	$	124	$	124
Fair value	$	136	$	140	$	136
Weighted-average risk free rate of interest								0.6	%		2.2	%		2.0	%		2.3	%
Expected volatility								42	%		38	%		48	%		57	%
Weighted-average expected award life (in years)								5.5			5.5			1.0			1.0
Dividend yield								4.9	%		2.6	%		4.0	%		2.8	%
Weighted-average fair value							$	5.03		$	17.19		$	15.03		$	20.33

The ~~fair value of long-term debt is determined by using model-derived valuations~~information in ~~which all significant inputs or significant value drivers are observable in active markets and therefore are classified as Level 2.~~

~~The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.~~

~~10. Earnings Per Share~~

~~The Company accounts for and discloses earnings per share using~~ the ~~treasury~~following table covers option activity under our stock ~~method. Basic earnings per share is computed by dividing net income~~option plans for the period by the weighted-average number of common shares outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share.twenty-six weeks ended August 1, 2020:


		Weighted-		Weighted-
	Number	Average		Average
	of	Remaining		Exercise
	Shares	Contractual Life		Price
	(in thousands)	(in years)		(per share)
Options outstanding at the beginning of the year	2,881			$	54.21
Granted	1,069				21.61
Exercised	(4)				15.10
Expired or cancelled	(57)				48.53
Options outstanding at August 1, 2020	3,889		6.4	$	45.37
Options exercisable at August 1, 2020	2,473		4.8	$	54.67
Options available for future grant at August 1, 2020	5,655

~~Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.~~

14Second Quarter 2020 Form 10-Q Page 15

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The computation of basic and diluted earnings per share is as follows:~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

(in millions, except per share data)
Net Income

$
60

$
88

$
232

$
253

Weighted-average common shares outstanding

110.8

116.6

111.6

117.7
Dilutive effect of potential common shares

0.3

0.5

0.5

0.4
Weighted-average common shares outstanding assuming dilution

111.1

117.1

112.1

118.1

Earnings per share - basic

$
0.55

$
0.76

$
2.09

$
2.15
Earnings per share - diluted

$
0.55

$
0.75

$
2.08

$
2.14

Anti-dilutive share-based awards excluded from diluted calculation

2.4

2.0

1.8

1.7

Additionally, shares of 0.7 million and 1.1 million as of August 3, 2019 and August 4, 2018, respectively, have been excluded from diluted weighted-average shares as the number of shares that will be issued is contingent on the Company’s performance metrics as compared to the pre-established performance goals which have not been achieved as of August 3, 2019 and August 4, 2018. These shares relate to restricted stock units issued in connection with the Company’s long-term incentive program.

~~11. Pension and Postretirement Plans~~

The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. The Company also has a defined benefit pension plan covering certain employees of the Runners Point Group. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded. The table below are the components of net periodic pension benefit cost and net periodic postretirement benefit income. Service cost is recognized as part of SG&A expense, while the remaining pension and postretirement expense components are recognized as part of other income.

Pension Benefits

Postretirement Benefits

Thirteen weeks ended

Twenty-six weeks ended

Thirteen weeks ended
Twenty-six weeks ended

Aug. 3

Aug. 4

Aug. 3

Aug. 4

Aug. 3

Aug. 4

Aug. 3

Aug. 4

2019

2018

2019

2018

2019

2018

2019

2018

($ in millions)
Service cost

$
5

$
4

$
10

$
9

$
—

$
—

$
—

$
—
Interest cost

6

7

13

13

—

—

—

—
Expected return on plan assets

(9)

(9)

(18)

(19)

—

—

—

—
Amortization of net loss (gain)

3

3

6

6

(1)

(1)

(1)

(1)
Net benefit expense (income)

$
5

$
5

$
11

$
9

$
(1)

$
(1)

$
(1)

$
(1)

~~Table of Contents~~

~~FOOT LOCKER, INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The Company contributed $55 million in March 2019 to its U.S. qualified pension plan. The Company continually evaluates the amount and timing of any future contributions.~~

~~12. Share-Based Compensation~~

~~Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans, were as follows:~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

($ in millions)
Options and shares purchased under the employee stock purchase plan

$
2

$
1

$
4

$
3
Restricted stock and restricted stock units

4

3

9

6
Total share-based compensation expense

$
6

$
4

$
13

$
9

Tax benefit recognized

$
—

$
—

$
1

$
1

~~Valuation Model and Assumptions~~

The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and subjective assumptions, including expected term and expected volatility.

~~The following table shows the Company’s assumptions used to compute share-based compensation expense for awards granted during the twenty-six weeks ended August 3, 2019 and August 4, 2018:~~

Stock Option Plans

Stock Purchase Plan

August 3,

August 4,

August 3,

August 4,


2019

2018

2019

2018

Weighted-average risk free rate of interest

2.2
%

2.7
%

2.3
%

1.6
%
Expected volatility

38
%

37
%

57
%

41
%
Weighted-average expected award life (in years)

5.5

5.5

1.0

1.0

Dividend yield

2.6
%

3.1
%

2.8
%

2.3
%
Weighted-average fair value

$
17.19

$
12.37

$
20.33

$
14.89

~~Table of Contents~~

~~The information in the following table covers option activity under the Company’s stock option plans for the twenty-six weeks ended August 3, 2019:~~

Weighted-

Weighted-

Number

Average

Average

of

Remaining

Exercise

Shares

Contractual Life

Price

(in thousands)

(in years)

(per share)
Options outstanding at the beginning of the year

2,861

$
52.34
Granted

316

58.96
Exercised

(163)

27.10
Expired or cancelled

(76)

60.71
Options outstanding at August 3, 2019

2,938

6.2

$
54.23
Options exercisable at August 3, 2019

2,182

5.3

$
53.67
Options available for future grant at August 3, 2019

7,375

The total fair value of options vested ~~as of~~during the thirteen weeks ended August 1, 2020 and August 3, 2019 ~~and August 4, 2018~~ was $6$5 million and $8$6 million, respectively. The cash received and related tax benefits realized from option exercises ~~for~~during the thirteen and twenty-six weeks ended August ~~3, 2019~~1, 2020 was not significant. ~~The total tax benefit realized from option exercises was not significant and $1 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively.~~

The total intrinsic value of options exercised (the difference between the market price of ~~the Company’s~~our common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:


	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3, 2019		August 4, 2018		August 3, 2019		August 4, 2018
		($ in millions)
($ in millions)									August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Exercised	$	—	$	3	$	5	$	3	$	0	$	0	$	0	$	5

The aggregate intrinsic value for stock options outstanding, and outstanding and exercisable (the difference between ~~the Company’s~~our closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) is presented below:


	Twenty-six weeks ended				Twenty-six weeks ended
	August 3, 2019		August 4, 2018		August 1, 2020		August 3, 2019
	($ in millions)				($ in millions)
Outstanding	$	5	$	15	$	10	$	5
Outstanding and exercisable	$	5	$	13	$	1	$	5

As of August ~~3, 2019~~1, 2020 there was $6 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average period of 1.6 years.

The following table summarizes information about stock options outstanding and exercisable at August 1, 2020:


	Options Outstanding				Options Exercisable
		Weighted-
		Average	Weighted-			Weighted-
		Remaining	Average			Average
Range of Exercise	Number	Contractual	Exercise		Number	Exercise
Prices	Outstanding	Life	Price		Exercisable	Price
	(in thousands, except prices per share and contractual life)
$18.84 to $23.09	1,176	8.8	$	21.33	117	$	18.84
$24.75 to $36.51	376	2.6		32.13	333		31.77
$44.78 to $45.75	561	5.7		44.91	454		44.94
$46.64 to $62.11	904	5.8		60.00	697		60.51
$63.33 to $73.21	872	5.9		68.60	872		68.60
	3,889	6.4	$	45.37	2,473	$	54.67

Restricted Stock Units

Restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. Additionally, RSU awards are made to employees in connection with our long-term incentive program, and to nonemployee directors. Each RSU award represents the right to receive one share of our common stock provided that the applicable performance and vesting conditions are satisfied.

17Second Quarter 2020 Form 10-Q Page 16

~~Table of Contents~~

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The following table summarizes information about stock options outstanding and exercisable at August 3, 2019:~~

Options Outstanding
Options Exercisable

Weighted-

Average

Weighted-

Weighted-

Remaining

Average

Average
Range of Exercise

Number

Contractual

Exercise

Number

Exercise
Prices

Outstanding

Life

Price

Exercisable

Price

(in thousands, except prices per share and contractual life)
$9.85 to $18.84

129

1.5

$
18.53

129

$
18.53
$24.75 to $34.75

376

3.5

32.09

338

31.78
$44.78 to $45.75

582

6.9

44.91

352

44.99
$46.64 to $62.11

952

6.8

60.00

619

60.96
$63.33 to $73.21

899

6.9

68.57

744

67.75

2,938

6.2

$
54.23

2,182

$
53.67

~~Restricted Stock and Restricted Stock Units~~

Restricted shares of the Company’s common stock and restricted stock units (“RSU”) may be awarded to certain officers and key employees of the Company. Additionally, RSU awards are made to employees in connection with the Company’s long-term incentive program and to nonemployee directors. Each RSU represents the right to receive one share of the Company’s common stock provided that the performance and vesting conditions are satisfied. There were 0 outstanding restricted stock awards as of August 3, 2019 and an insignificant number of restricted stock awards were outstanding as August 4, 2018.

Generally, awards fully vest after the passage of time, typically three years. However, RSU awards made in connection with ~~the Company’s~~our performance-based long-term incentive program are earned after the attainment of certain performance metrics and, with regards to certain awards, vest after the passage of time. Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vest with the passage of time. With regard to performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met.an additional one-year period. No dividends are paid or accumulated on any RSU awards.

Compensation expense is recognized using the market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company.

~~Restricted stock and~~ RSU activity for the twenty-six weeks ended August ~~3, 2019~~1, 2020 is summarized as follows:


			Weighted-Average						Weighted-Average
	Number		Remaining		Weighted-Average		Number		Remaining		Weighted-Average
	of		Contractual		Grant Date		of		Contractual		Grant Date
	Shares		Life		Fair Value		Shares		Life		Fair Value
		(in thousands)		(in years)		(per share)		(in thousands)		(in years)		(per share)
Nonvested at beginning of year		1,022			$	47.47		936			$	49.25
Granted ⁽¹⁾		302				58.76		416				22.59
Vested		(88)				60.40		(67)				65.83
Performance adjustment ⁽²⁾		(34)
Expired or cancelled		(21)				53.09
Nonvested at August 3, 2019		1,181		2.0	$	49.22
Performance adjustment ⁽¹⁾								(132)
Forfeited								(44)				43.45
Nonvested at August 1, 2020								1,109		1.4	$	37.65

Aggregate value ($ in millions)	$	58					$	42

~~Table of Contents~~

(1)	Included in the units granted are approximately 0.2 million performance-based RSUs. The number of performance-based RSUs that are ultimately earned may vary from 0% to 200% of target depending on the achievement relative to the Company’s predefined financial performance targets.

~~(2)~~

This represents adjustments made to performance-based RSU awards and reflect changes in estimates based upon ~~the Company’s~~our current performance against predefined financial targets.

The total value of awards ~~for which restrictions lapsed~~that vested during the twenty-six weeks ended August 1, 2020 and August 3, 2019 ~~and August 4, 2018~~ was $5$4 million and $6$5 million, respectively. As of August ~~3, 2019,~~1, 2020, there was ~~$34~~$17 million of total unrecognized compensation cost related to nonvested awards.

~~13.~~

15. Income Taxes

For the thirteen and twenty-six weeks ended August 1, 2020, we recorded income tax expense of $25 million and $30 million, respectively, and represented an effective tax rate of 35.4 percent and negative 85.5 percent on a pretax income and pretax loss, respectively.The effective tax rates were adversely impacted by valuation allowances related to losses in certain foreign jurisdictions.Additionally, in the first quarter we recorded a $27 million tax charge related to the revaluation of certain intellectual property rights pursuant to a non-U.S. advance pricing agreement. Due to the improved financial outlook during the second quarter of 2020, we reversed $2 million of the revaluation charge.

We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year income, excluding unusual or infrequently occurring discrete items, for the reporting period. In accordance with the authoritative guidance, we used a discrete effective tax rate method to calculate income taxes for the first quarter of 2020 because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes in the estimated annual effective tax rate making the historical method unreliable. However, during the second quarter we returned to the historical practice of using an annual effective rate.

Second Quarter 2020 Form 10-Q Page 17

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. We are required to recognize the effects of tax law changes in the period of enactment. We have assessed the applicability of the CARES Act and changes to income tax laws or regulations in other jurisdictions and determined there is no significant affect to our income tax provision for the twenty-six weeks ended August 1, 2020. We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.

16. Legal Proceedings

Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company or businesses that have been sold or discontinued by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims. Additionally, the Company and certain officers of the Company are defendants in a purported securities law class action in New York. The directors and certain officers of the Company are also defendants in related derivative actions.

~~Management does~~We do not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, as described above, would have a material adverse effect on ~~the Company’s~~our consolidated financial position, liquidity, or results of operations, taken as a whole, based upon current knowledge and taking into consideration current accruals. Litigation is inherently unpredictable. Judgments could be rendered or settlements made that could adversely affect the Company’s operating results or cash flows in a particular period.

17. Subsequent Events

During the first quarter, we suspended our second quarter dividend as a result of the economic uncertainty as a result of the COVID-19 pandemic. On August 20, 2020, our Board of Directors approved the reinstatement of our quarterly dividend program at a rate of $0.15 per share, which will be payable on October 30, 2020 to shareholders of record on October 16, 2020. The Board will continue to evaluate the dividend program on a quarterly basis.

One of our minority investments, which is measured using the fair value measurement alternative, received additional funding in August at a higher valuation than our initial investment. This transaction is expected to generate a significant non-cash gain during the third quarter.

19Second Quarter 2020 Form 10-Q Page 18

~~Table of Contents~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Disclosure Regarding Forward-Looking Statements~~

This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the U.S. Securities and Exchange Commission.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the 2018 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

Business Overview

Foot Locker, Inc., leads the celebration of sneaker and youth culture around the globe through a portfolio of banners including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep. Foot Locker, Inc. and its subsidiaries ~~is one of~~hereafter are referred to as the ~~largest athletic footwear and apparel retailers in the world, operating 3,174~~“Company,” “we,” “our,” or “us.” We operate primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in 27 ~~countries. The Foot Locker brand is one of~~countries including the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. We operate websites and mobile apps, aligned with the brand names of our store banners. Our sites offer some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com, final-score.com, and eastbayteamsales.com.

~~With its various marketing channels and experiences across North America,~~United States, Canada, Europe, ~~Asia,~~ Australia, ~~and~~ New Zealand, ~~the Company's~~and Asia. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of the ~~sport~~global sneaker community.

We use our omni-channel capabilities to bridge the digital world and ~~sneaker communities~~physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the names of our store banners (including footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu (and related e-commerce sites in the various European countries that we operate), footlocker.com.au, runnerspoint.com, sidestep-shoes.com, footlocker.hk, footlocker.sg, and footlocker.my). These sites offer some of the largest online product selections and provide a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com, final-score.com, and eastbayteamsales.com.

Store Count

At August ~~3, 2019,~~1, 2020, we operated ~~3,174~~3,100 stores as compared with ~~3,221~~3,129 and ~~3,276~~3,174 stores at February ~~2, 2019~~1, 2020 and August ~~4, 2018,~~3, 2019, respectively.

Franchise Operations

A total of ~~133~~138 franchised stores were operating at August ~~3, 2019,~~1, 2020, as compared with ~~122~~139 and ~~117~~133 stores at February ~~2, 2019~~1, 2020 and August ~~4, 2018,~~3, 2019, respectively. Revenue from ~~the~~ franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.

COVID-19 Update

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. In March 2020, the World Health Organization designated COVID-19 a pandemic. COVID-19 is having a significant effect on overall economic conditions in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns. In March, we closed all our stores in North America, EMEA (Europe, Middle East, and Africa), and most of Asia Pacific. We also transitioned to a work-from-home environment for all our office team members and temporarily closed certain of our distribution centers. Our stores remained closed for a significant portion of the first quarter, however we adjusted our openings in accordance with local government guidelines and operated for approximately 70 percent of the operating days during the second quarter.

We have set up a special COVID-19 management committee and the committee is taking the necessary precautionary measures to protect the health and safety of our team members, as well as following the guidance provided by local health authorities. We have been highly focused on the changes we are making to operate more safely in light of the COVID-19 pandemic. We implemented newly-established health protocols, including providing personal protective equipment to our team members and implementing social distancing work- practices. Prior to reopening our stores, we implemented various protocols including: occupancy limits, installing protective shields at the registers, encouraging social distancing, providing markers in our queue lines, implementing new processes for handling merchandise returns, and instituting new cleaning regimens, including enhanced cleaning of high-touch surfaces throughout the day.

Second Quarter 2020 Form 10-Q Page 19

We have taken numerous steps to protect the health and well-being of our team members, customers, and communities, while also focusing on further strengthening our financial liquidity and flexibility. On April 21, 2020, we communicated to our United States, Canadian, and Australian employees that we were temporarily furloughing (or its equivalent under applicable local law) the majority of our hourly store and certain of our hourly distribution centers team members. We continued to pay all active employees through the week ended April 26, 2020. All team members were called back to work during the second quarter, except in California where we have temporarily closed all mall-based stores across all of our banners at the direction of the state government. Additionally, other measures to preserve our financial position were taken, such as temporarily reducing executive salaries, temporarily suspending the cash element of director compensation, temporarily suspending share repurchases and dividends, and by significantly reducing planned capital expenditures. In July 2020, we amended our credit facility and increased it to $600 million with a 5-year maturity. Due to the positive performance of the Company’s business, strong liquidity position, and more stable cash outlook, these measures were reversed during the third quarter.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law and provided opportunities for additional liquidity, emergency assistance for individuals, families and businesses affected by COVID-19. During the first quarter, we recognized benefits from the CARES Act, including federal retention tax credits of up to $5,000 per employee for the wages and health insurance we continued to provide to team members not providing services, a deferral of employer social security taxes for the remainder of 2020, 50 percent of which is payable by December 2021 and the remainder payable by December 2022. Additionally, various jurisdictions in which we operate implemented similar legislation to encourage the continued employment of team members. We intend to continue to review and consider any available potential benefits under the CARES Act or other governmental support for which we qualify. During the twenty-six weeks ended August 1, 2020, we recognized benefits of $57 million from the various governmental support programs. We also deferred $12 million of U.S. employer social security taxes through August 1, 2020.

Additionally, the CARES Act contains several significant income tax provisions, including a temporary five-year carryback of net operating losses and relaxed restrictions on business interest deductions, as well as a permanent technical correction to the depreciation method applicable to “qualified improvement property” placed in service after 2017. We are required to recognize the effect of tax law changes in the period of enactment. We have assessed the applicability of this legislation on our income tax provision and determined there is no significant effect to our 2020 income tax provision.

The continuation of the COVID-19 outbreak may cause prolonged or additional intermittent periods of store closures, modified operating schedules, and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending in our stores. We are experiencing an increase in operating costs for health and safety protocols for both our team members and customers and increased freight costs. Due to the continued effects of the COVID-19 pandemic, our results may be further negatively affected and may lead to increased asset recovery and valuation risks, such as long-lived tangible and right-of-use asset impairments and an inability to realize deferred tax assets due to sustaining losses in certain jurisdictions. The uncertainties in the global economy will likely affect the financial viability of some number of our vendors and may require other changes to our operations. Given the dynamic nature of these circumstances, the duration of business disruption, and reduced customer traffic in our stores, the related financial affect cannot be reasonably estimated at this time but are expected to materially affect our business for the remainder of 2020. Due to these unprecedented conditions, we have withdrawn our financial guidance for 2020.

Reconciliation of Non-GAAP Measures

In addition to reporting ~~the Company's~~our financial results in accordance with generally accepted accounting principles (“GAAP”), ~~the Company reports~~we report certain financial results that differ from what is reported under GAAP. We have presented certain financial measures identified as non-GAAP, such as sales changes excluding foreign currency fluctuations, adjusted income before income taxes, adjusted net income, and adjusted diluted earnings per share.

Second Quarter 2020 Form 10-Q Page 20

~~Table of Contents~~

We present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. Where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business that are not related to currency movements.

These non-GAAP measures are presented because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core business or affect comparability. In addition, these non-GAAP measures are useful in assessing our progress in achieving our long-term financial objectives. We estimate the tax effect of all non-GAAP adjustments by applying a marginal tax rate to each of the respective items. The income tax items represent the discrete amount that affected the period.

The non-GAAP financial information is provided in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Presented below is a reconciliation of GAAP and non-GAAP results for the thirteen and twenty-six weeks ended August ~~3, 2019~~1, 2020 and August ~~4, 2018, respectively.~~3, 2019.


	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,		August 1,		August 3,		August 1,		August 3,
	2019		2018		2019		2018
	($ in millions)
($ in millions)									2020		2019		2020		2019
Pre-tax income:
Income before income taxes	$	85	$	115	$	319	$	344
Income (loss) before income taxes									$	70	$	85	$	(35)	$	319
Pre-tax amounts excluded from GAAP:
Litigation and other charges		14		3		15		15
Impairment and other charges										38		14		54		15
Adjusted income before income taxes (non-GAAP)	$	99	$	118	$	334	$	359	$	108	$	99	$	19	$	334

After-tax income:
Net income	$	60	$	88	$	232	$	253
Net income (loss)									$	45	$	60	$	(65)		232
After-tax adjustments excluded from GAAP:
Litigation and other charges, net of income tax benefit of $4, $1, $4, and $4 million, respectively		10		2		11		11
Impairment and other charges, net of income tax benefit of $6, $4, $9, and $4 million, respectively										32		10		45		11
Tax (benefit) charge related to revaluation of certain intellectual property rights										(2)		—		25		—
U.S. tax reform		2		(1)		2		(1)		—		2		—		2
Tax benefit related to enacted change in foreign branch currency regulations		—		(1)		—		(1)
Adjusted net income (non-GAAP)	$	72	$	88	$	245	$	262	$	75	$	72	$	5		245

Earnings per share:
Diluted EPS	$	0.55	$	0.75	$	2.08		2.14
Diluted earnings (loss) per share									$	0.43	$	0.55	$	(0.62)		2.08
Diluted EPS amounts excluded from GAAP:
Litigation and other charges		0.09		0.02		0.10		0.09
U.S. tax reform		0.02		(0.01)		0.02		(0.01)
Tax benefit related to enacted change in foreign branch currency regulations		—		(0.01)		—		(0.01)
Adjusted diluted EPS (non-GAAP)	$	0.66	$	0.75	$	2.20	$	2.21
Impairment and other charges										0.30		0.09		0.43		0.10
Tax (benefit) charge related to revaluation of certain intellectual property rights										(0.02)		—		0.24		—
Tax reform										—		0.02		—		0.02
Adjusted diluted earnings per share (non-GAAP)									$	0.71	$	0.66	$	0.05		2.20

~~The Company~~Second Quarter 2020 Form 10-Q Page 21

During the thirteen and twenty-six weeks ended August 1, 2020, we recorded pre-tax charges of $1$38 million and $3$54 million, respectively, classified as Impairment and Other Charges. This compares with charges of $14 million and $15 million recognized for the thirteen and twenty-six weeks ended August 3, 2019, respectively. See the Impairment and Other Charges section for further information.

Related to the non-GAAP adjustments for income taxes, during the first quarter of 2020 we recorded a $27 million tax charge related to the revaluation of certain intellectual property rights, pursuant to a non-U.S. advance pricing agreement. Due to the improved financial outlook during the second quarter of 2020, we reversed $2 million of the revaluation charge. In connection with U.S. tax reform, we recorded a charge for $2 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, related to a pension litigation matter and related plan reformation. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company recorded pre-tax charges of $2 million and $15 million, respectively.2019. The charges in the current periods reflect professional fees in connection with the plan reformation. The prior year charges reflected adjustments to the value of the judgment and interest that continued to accrue, as required by the provisions of the required plan reformation.

~~Table of Contents~~

~~For the thirteen weeks ended August 3, 2019, the Company incurred $13 million of lease termination costs related to the closure of certain of its SIX:02 locations.~~

~~In connection with tax reform, the Company recorded a~~ charge ~~for $2 million and a benefit of $1 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively. The charge recorded during the second quarter of 2019~~ reflected an adjustment to U.S. tax on foreign income. ~~The benefit recorded in the prior-year period, reflected a revision to the provisional amounts recorded during the fourth quarter of 2017.~~

During the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of regulations under Internal Revenue Code Section 987. These regulations, which were promulgated in December 2016, changed our method for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date, the Company updated its calculations for the effect of these regulations, which resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $1 million.

Segment Reporting

We ~~identify our operating segments according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO.~~

Beginning in 2018, the Company changed its organizational and internal reporting structure in order to execute our omni-channel strategy. This change resulted in the combination of our stores and direct-to-customers financial results.

~~Effective as of 2019, the Company has~~have determined that ~~it has~~we have three operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, ~~Footaction,~~ and ~~SIX:02,~~Footaction, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team sales. Our EMEA operating segment includes the results of the following banners operating in Europe: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of Foot Locker and Kids Foot Locker and the related e-commerce businesses, as applicable, operating in Australia, New Zealand, and Asia. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. ~~Please see Item 1. “Financial Statements,” Note 3,~~ ~~Segment Information~~ ~~for further information on this change.~~

Results of Operations

We evaluate performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, ~~pension litigation charge,~~impairment and other charges, corporate ~~expense,~~expenses, non-operating income, and net interest (expense) income. The following table summarizes our results:

~~Table of Contents~~


	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,		August 1,		August 3,		August 1,		August 3,
	2019		2018		2019		2018
	($ in millions)
($ in millions)									2020		2019		2020		2019
Sales	$	1,774	$	1,782	$	3,852	$	3,807	$	2,077	$	1,774		3,253		3,852

Operating Results
Division profit		115		131		365		378		125		115		46		365
Less: Litigation and other charges ⁽¹⁾		14		3		15		15
Less: Impairment and other charges ⁽¹⁾										38		14		54		15
Less: Corporate expense ⁽²⁾		20		16		41		27		18		20		28		41
Income from operations		81		112		309		336
Interest income, net		2		1		6		3
Other income ⁽³⁾		2		2		4		5
Income before income taxes	$	85	$	115	$	319	$	344
Income (loss) from operations										69		81		(36)		309
Interest (expense) income, net										(2)		2		(3)		6
Other income, net ⁽³⁾										3		2		4		4
Income (loss) before income taxes									$	70	$	85	$	(35)	$	319

(1)

~~The Company recorded pre-tax~~This caption includes impairment charges, ~~of $1 million and $3 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively,~~losses related to asocial unrest, Runners Point shutdown costs, Eastbay reorganization costs, SIX:02 lease termination costs, and administrative costs related to the pension ~~litigation matter and related~~ plan reformation. ~~For~~See the ~~twenty-six weeks ended August 3, 2019~~Impairment and August 4, 2018, the Company recorded pre-tax charges of $2 million and $15 million, respectively. The charges in the current periods reflects professional fees in connection with the plan reformation. The prior year charges reflected adjustments to the value of the judgment and interest that continued to accrue, as required by the provisions of the required plan reformation.Other Charges section for further information.

~~For the thirteen weeks ended August 3, 2019, the Company incurred $13 million of lease termination costs related to the closure of certain of its SIX:02 locations.~~

(2)

(3)

Other income includes non-operating items, franchise royalty income, changes in ~~fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in~~ the market value of our available-for-sale security, ~~changes in the fair value~~our share of earnings or losses related to our equity method investments, and net benefit expense related to our pension and postretirement programs excluding the service cost component.

Second Quarter 2020 Form 10-Q Page 22

Sales

All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable sales also includes our direct-to-customers channel. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Stores that were temporarily closed due to the COVID-19 pandemic are also included in the computation of comparable-store sales. Computations exclude the effect of foreign currency fluctuations.

The information shown below represents certain sales metrics by sales channel:


	Thirteen weeks ended						Twenty-six weeks ended
	August 1,			August 3,			August 1,			August 1,
($ in millions)	2020			2019			2020			2019
Stores
Sales	$	1,388		$	1,521		$	2,202		$	3,279
$ Change	$	(133)					$	(1,077)
% Change		(8.7)	%					(32.9)	%
% of total sales		66.8	%		85.7	%		67.7	%		85.1	%
Comparable sales (decrease) increase		(7.6)	%		(0.1)	%		(32.1)	%		1.5	%

Direct-to-customers
Sales	$	689			253		$	1,051		$	573
$ Change	$	436					$	478		$
% Change		172.3	%					83.4	%
% of total sales		33.2	%		14.3	%		32.3	%		14.9	%
Comparable sales increase		172.8	%		6.5	%		84.3	%		10.9	%

Thirteen weeks ended

Twenty-six weeks ended


August 3,

August 4,


August 3,

August 4,

2019

2018

2019

2018

($ in millions)

Stores









Sales

$
1,521

$
1,542

$
3,279

$
3,285

$ Change

$
(21)

$
(6)

% Change

(1.4)
%

(0.2)
%

% of total sales

85.7
%

86.5
%

85.1
%

86.3
%
Comparable sales change

(0.1)
%

(0.8)
%

1.5
%

(2.0)
%

Direct-to-customers



Sales

$
253

$
240

$
573

$
522

$ Change

$
13

$
51

% Change

5.4
%

9.8
%

% of total sales

14.3
%

13.5
%

14.9
%

13.7
%
Comparable sales change

6.5
%

9.3
%

10.9
%

3.8
%

~~Table of Contents~~

~~Sales decreased by $8 million, or 0.4 percent, to $1,774 million for~~For the thirteen weeks ended August ~~3, 2019, from $1,782~~1, 2020, total sales increased by $303 million, ~~for~~or 17.1 percent, to $2,077 million, compared with the ~~thirteen weeks~~comparable period ended August ~~4, 2018.~~3, 2019. For the twenty-six weeks ended August ~~3, 2019,~~1, 2020, total sales decreased by $599 million, or 15.6 percent, to $3,253 million, as compared with the comparable period of ~~$3,852 million increased by 1.2 percent from sales of $3,807 million in~~ the ~~corresponding prior-year period.~~prior year. Excluding the effect of foreign currency fluctuations, total sales increased by ~~0.8 percent and 2.9~~$308 million, or 17.3 percent, for the thirteen weeks ended August 1, 2020 and decreased by $583 million, or 15.1 percent, for the twenty-six weeks ended August ~~3, 2019, respectively.~~1, 2020.

Total comparable sales increased by ~~0.8 percent and 2.8~~18.6 percent for the thirteen weeks ending August 1, 2020 and twenty-six weeks ended August 3, 2019, respectively. For both the thirteen and twenty-six weeks ended August 3, 2019, our direct-to-customers channel generated positive comparable sales results as compared with the corresponding prior-year periods. The penetration of our direct-to-customer channel increaseddecreased by ~~80 basis points to 14.3 percent. For~~14.5 percent for the twenty-six weeks ended August ~~3, 2019,~~1, 2020, as compared with the ~~stores channel generated positive~~ comparable ~~sales results, however the stores channel had a 0.1 percent decline during the thirteen-weeks ended August 3, 2019. The improvement in~~prior-year periods. For both periods, our direct-to-customers channel ~~is due~~generated significant increases and was offset by sales declines in ~~part to continued positive~~the stores channel. Our previous investments in our omnichannel ecosystem, including supply chain capabilities, have been instrumental in delivering a seamless customer ~~satisfaction as~~experience resulting in our digital business representing approximately a ~~result~~third of our ~~various e-commerce enhancements.~~

~~Each of our operating segments generated a comparable~~ sales ~~increase during~~for both the second quarter and year-to-date periods of ~~2019.~~2020. Our investments allowed us to leverage our direct-to-customers business to continue to serve our customers achieving peak daily volume levels. Pent-up demand for classic basketball styles and key launch footwear, coupled with governmental stimulus payments, positively affected our sales during the second quarter. For the year-to-date period, the overall decrease in sales was a result of the temporary closure of our stores across all of our banners around the world beginning in mid-March, as well as reduced store traffic upon reopening due to the ongoing concerns about the COVID-19 pandemic.

For the combined channels, our operating segments in North America and Asia Pacific generated positive sales, while EMEA declined for the thirteen weeks ended August 1, 2020. In North America, all banners and Eastbay generated positive comparable sales increases. Sales were led by Foot Locker, ~~Canada and~~ Champs Sports, led the second quarter results, with increases in the low double digits and mid-single digits, respectively. Foot Locker U.S. generated a low single-digits comparable sales increase, while Eastbay’s sales declined high-single digits. Footaction, and Kids Foot ~~Locker continued to experience declines consistent~~Locker. The sales increases in Asia Pacific was led by sales in Australia and New Zealand. In EMEA, our customers were more conservative coming out of the stay at home orders and coupled with the ~~first quarter. Additionally, North America’s sales were negatively affected by the closure~~fact that our customer’s acceptance of ~~the SIX:02 banner,~~digital shopping is not as ~~substantially all stores were closed by the end of the second quarter. The~~strong, resulted in an overall decline in ~~Footaction’s~~sales.

Second Quarter 2020 Form 10-Q Page 23

Both our North American and EMEA operating segments had significant declines in the stores channel for the twenty-six weeks ended August 1, 2020, due to the temporary closures beginning in mid-March related to the pandemic, while Asia Pacific was slightly positive.

Sales of footwear and apparel increased for thirteen weeks ended August 1, 2020, as compared with the corresponding prior-year period, while sales of accessories declined primarily ~~reflected~~from decreased sales of back packs due to the ~~lack of product availability of certain key men’s~~uncertainties around the return to school since some jurisdictions are opting for remote learning. All wearer segments within the footwear styles. Management is implementing various merchandising initiatives to improve Footaction’s results and will continue to monitor this banner during the third quarter and will assess, if necessary, the effect of various initiatives on the projected performance,category experienced increases, which ~~may include an impairment review. Kids Foot Locker’s decline~~ was primarily related to ~~declines in~~lower sales of ~~apparel. The~~men’s and children’s basketball footwear styles. Our women's footwear business reflected the ongoing popularity of classic basketball and court styles. Apparel sales benefited from the athleisure trend with increased demand for comfortable clothing.

For the year-to-date period, we experienced a decline ~~in Eastbay’s sales for the second quarter was~~across all product categories and wearer segments primarily due to ~~softer demand for performance-related products.~~

Our positive EMEA operating segment sales performance was primarily related to our Foot Locker Europe e-commerce business, with Runners Point and Sidestep’s comparable sales remaining relatively flat.

The Asia Pacific operating segment continued to increase both from the store expansion in Asia and increased sales from our operations in Australia, which was primarily the result of growth in our e-commerce business.

~~The year-to-date comparable sales changes are consistent with the factors noted above.~~

From a product perspective for the combined channels, the increase in comparable sales for both the quarter and year-to-date periods was primarily driven by footwear. For both periods, the increase was partially offset by a decline in apparel sales. Within the footwear category, sales of women’s and children’s footwear contributed the most to the increase. Court and casual footwear styles continued to resonate well with our customers. Sales of men’s footwear, particularly sales of basketball styles, were negatively affectedclosures necessitated by the timing of certain product launches and declined slightly for the quarter, as compared with a low single-digit increase for the year-to-date period. Apparel sales declined for both the quarter and year-to-date period across all wearer segments.pandemic.

~~Table of Contents~~

Gross Margin

Thirteen weeks ended

Twenty-six weeks ended

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,

August 1,

August 3,

August 1,

August 3,

2019

2018

2019

2018

2020

2019

2020

2019

Gross margin rate

30.1

30.2

31.7

31.7

25.9

30.1

24.9

31.7

Basis point increase in the gross margin rate

(10)

—

Basis point decrease in the gross margin rate

(420)

(680)

Components of the change-

Merchandise margin rate decline

(20)

(40)

(700)

(20)

(510)

(40)

Lower occupancy and buyers’ compensation expense rate

Lower/(Higher) occupancy and buyers’ compensation expense rate

280

(170)

Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities.

The gross margin rate decreased ~~by 10 basis points~~ for both the thirteen weeks ~~ended August 3, 2019~~ and ~~remained unchanged for the~~ twenty-six weeks ended August ~~3, 2019,~~1, 2020, as compared with corresponding prior-year periods. The decline in the gross margin rate was due to increased promotions to remain competitive in the marketplace and to clear inventory to ensure we maintained a healthy inventory position, as well as the higher portion of direct-to-customer sales, which bear higher freight costs. Offsetting, in part, the higher promotional markdowns taken was increased vendor support, which positively affected both the second quarter and year-to-date gross margin rate by 90 basis points as compared with the corresponding prior-year periods.

The ~~merchandise margin~~occupancy rate ~~decline reflected a higher proportion~~for the second quarter and the year-to-date period was positively affected by the increase in direct-to-customer sales. Additionally, due to lease negotiations we were able to record $6 million of ~~direct-to-customer sales, which bear a higher freight cost.~~rent savings due to rent abatements during the thirteen weeks ended August 1, 2020. The occupancy and buyers’ compensation expense rate ~~decreased~~deleveraged for the ~~thirteen and~~ twenty-six weeks ended August ~~3, 2019, which was~~1, 2020 due primarily to temporary store closures in the ~~result~~first quarter. Although we withheld rent payments due to the COVID-19 pandemic, we are actively negotiating rent deferrals or abatements with our landlords for the period that our stores were closed. However, only a portion of ~~higher sales~~the abatements is reflected in the rent expense as ~~compared with a relatively fixed rent cost.~~not all the negotiations are completed.

Second Quarter 2020 Form 10-Q Page 24

Selling, General and Administrative Expenses (SG&A)


	Thirteen weeks ended						Twenty-six weeks ended						Thirteen weeks ended						Twenty-six weeks ended

	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018			August 1,			August 3,			August 1,			August 3,
	($ in millions)
($ in millions)													2020			2019			2020			2019
SG&A	$	393		$	380		$	809		$	765		$	387		$	393		$	703		$	809
$ Change	$	13					$	44					$	(6)					$	(106)
% Change		3.4	%					5.8	%					(1.5)	%					(13.1)	%
SG&A as a percentage of sales		22.2	%		21.3	%		21.0	%		20.1	%		18.6	%		22.2	%		21.6	%		21.0	%

SG&A ~~increased~~decreased by ~~$13~~$6 million ~~or by 90 basis points, to $393~~and $106 million for the thirteen weeks ~~ended August 3, 2019, as compared with the corresponding prior-year period. For~~and the twenty-six weeks ended August ~~3, 2019, SG&A increased by $44 million, or by 90 basis points, to $809 million,~~1, 2020, respectively, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, SG&A ~~increased~~decreased by ~~$18~~$6 million and ~~$60~~$102 million for the thirteen and twenty-six weeks ended August ~~3, 2019,~~1, 2020, respectively, as compared with the corresponding prior-year periods.

~~The higher~~As a percentage of sales, SG&A ~~expense rate~~decreased to 18.6 percent for the thirteen weeks ended August 1, 2020. The lower percentage is due to strong sales in the second quarter, as well as CARES Act retention credits of $17 million, partially offset by $6 million incurred for personal protective equipment and higher incentive compensation expense. For the twenty-six weeks ended August 1, 2020, SG&A, as a percentage of sales, increased to 21.6 percent. The SG&A rate reflected ~~higher wages and an increase in costs incurred~~significantly lower sales as a result of temporary store closures during the first quarter in connection with the COVID-19 pandemic. This was partially offset by CARES Act retention credits of $57 million as we continued to pay our ~~ongoing investment~~employees throughout most of the first quarter despite the temporary store closures. We carefully managed expenses by reducing spending in ~~various technology~~all areas of the business, including marketing and ~~infrastructure projects.~~ travel, among other categories.

Corporate expense (a component of SG&A) ~~increased during~~decreased for both the ~~quarter, also reflecting~~thirteen and twenty-six weeks ended August 1, 2020 which reflected a change in allocation of expense. Annually the ~~same factors noted previously and higher share-based compensation that is tied~~allocation of corporate expense to the ~~Company’s performance.~~

~~Affecting the year-to-date comparison~~operating divisions is ~~a benefit of $5 million that was recorded in the first quarter of 2018 relating to insurance recoveries for damaged inventory and fixed assets for losses incurred during Hurricane Maria in 2017.~~

~~Table of Contents~~

~~Depreciation and Amortization~~

Thirteen weeks ended

Twenty-six weeks ended

August 3,

August 4,

August 3,

August 4,


2019

2018


2019

2018


($ in millions)

Depreciation and amortization

$
46

$
44

$
90

$
89

$ Change

$
2

$
1

% Change

4.5
%

1.1
%

~~Depreciation and amortization increased~~adjusted based upon an internal study. The allocation reduced corporate expense by $2$7 million and $1$15 million for the thirteen and twenty-six weeks ended August ~~3, 2019, respectively,~~1, 2020, respectively. Excluding the change in allocation, the increase in corporate expense was related primarily to increased incentive compensation expense.

Depreciation and Amortization


	Thirteen weeks ended					Twenty-six weeks ended
	August 1,			August 3,		August 1,			August 3,
($ in millions)	2020			2019		2020			2019
Depreciation and amortization	$	44		$	46	$	88		$	90
$ Change	$	(2)				$	(2)
% Change		(4.4)	%				(2.2)	%

Depreciation and amortization expense decreased $2 million for both the thirteen and twenty-six weeks ended August 1, 2020 as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, depreciation and amortization ~~increased~~decreased $3 million and $2 million for the thirteen and twenty-six weeks ended August 1, 2020, respectively, as compared with the corresponding prior-year periods.

Impairment and Other Charges


	Thirteen weeks ended				Twenty-six weeks ended
	August 1,		August 3,		August 1,		August 3,
($ in millions)	2020		2019		2020		2019
Impairment and other charges	$	38	$	14	$	54	$	15

Second Quarter 2020 Form 10-Q Page 25

We recorded charges of $18 million related to social unrest in the second quarter of 2020, which resulted in physical damage and inventory loss to approximately 135 stores. This charge included inventory losses of $14 million, damages to store property of $2 million, and repairs and other costs of $2 million. We are currently working with our insurers to determine the amount of our covered losses under our property insurance policy. Insurance recovery for losses in excess of our deductible will be recorded in the period in which we conclude our settlement discussions with our insurance providers.

In May 2020, we made the strategic decision to shut down our Runners Point business and to consolidate our Sidestep support staff into our other operations in Europe. Also, as part of the next phase of the Champs Sports and Eastbay strategic initiative, we restructured positions and aligned several functions across the banners and plan to consolidate certain Eastbay operations into Champs Sports. We recorded charges of $16 million related to the shutdown of the Runners Point business and $3 million related to the reorganization associated with Eastbay.

The Company and its U.S. pension plan were involved in litigation related to the conversion of the plan to a cash balance plan. The court entered its final judgment in 2018, which required the plan to be reformed as directed by $3the court order. Administrative expenses in connection with the reformation were $1 million for both the ~~quarter~~thirteen weeks ended August 1, 2020 and August 3, 2019 and were $2 million for both the ~~year-to-date periods. The increase in depreciation~~twenty-six weeks ended August 1, 2020 and ~~amortization reflects ongoing capital spending.~~August 3, 2019.

~~Division Profit~~

Thirteen weeks ended

Twenty-six weeks ended


August 3,

August 4,


August 3,

August 4,

2019

2018

2019

2018

($ in millions)

Division profit

$
115

$
131

$
365

$
378

Division profit margin

6.5
%

7.4
%

9.5
%

9.9
%

~~Division profit margin decreased by 90 and 40 basis points for~~For the thirteen and twenty-six weeks ended August 3, 2019, ~~as compared with~~we incurred $13 million of lease termination costs related to the ~~corresponding prior-year periods. The decrease in division~~closure of our SIX:02 locations.

Division Profit


	Thirteen weeks ended						Twenty-six weeks ended
	August 1,			August 3,			August 1,			August 3,
($ in millions)	2020			2019			2020			2019
Division profit	$	125		$	115		$	46		$	365
Division profit margin		6.0	%		6.5	%		1.4	%		9.5	%

Division profit margin decreased to 6.0 percent and 1.4 percent for the thirteen and twenty-six weeks ended August ~~3, 2019 was primarily~~1, 2020, respectively, as compared with the corresponding prior-year periods. For both the quarter and year-to-date period, division profit reflected a significant increase in the direct-to-customers sales channel, offset by a decline in the stores channel. For the thirteen weeks ended August 1, 2020, lower gross margin decreased division profit compared with the corresponding prior-year period. For the twenty-six weeks ended August 1, 2020, lower sales due to the temporary store closures caused by the COVID-19 pandemic, along with lower gross margin and higher SG&A, ~~expenses.~~as a percentage of sales, decreased the results compared with the corresponding prior-year period. Management is continuing to monitor the results of each of the banners as the recovery from the COVID-19 pandemic continues. Due to the uncertainty surrounding the pandemic and assumptions around the continuing effects of the COVID-19 pandemic, we may be required to perform an impairment analysis over certain store long-lived tangible and right-of-use assets in future quarters.

Second Quarter 2020 Form 10-Q Page 26

Interest (Expense) Income, Net


	Thirteen weeks ended				Twenty-six weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,		August 1,		August 3,		August 1,		August 3,
	2019		2018		2019		2018
	($ in millions)
($ in millions)									2020		2019		2020		2019
Interest expense	$	(3)	$	(3)	$	(5)	$	(6)	$	(4)	$	(3)	$	(7)	$	(5)
Interest income		5		4		11		9		2		5		4		11
Interest income, net	$	2	$	1	$	6	$	3
Interest (expense) income, net									$	(2)	$	2	$	(3)	$	6

~~Net interest income increased by $1~~We recorded $2 million and $3 million of net interest expense for the thirteen and twenty-six weeks ended August ~~3, 2019,~~1, 2020, respectively, as compared with net interest income of $2 million and $6 million for the corresponding prior-year periods. Interest expense increased due to the drawdown of the revolving credit facility in March 2020. Additionally, interest income ~~for both periods increased~~decreased primarily as a result of ~~cash repatriation to the U.S., where we earned a higher~~lower average interest ~~rate.~~rates on our cash and cash equivalents.

Other Income, Net


	Thirteen weeks ended					Twenty-six weeks ended
	August 1,			August 3,		August 1,			August 3,
($ in millions)	2020			2019		2020			2019
Other income, net	$	3		$	2	$	4		$	4
$ Change	$	1				$	—
% Change		50.0	%				—	%

Other income includes non-operating items, including franchise royalty income, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investments, and net benefit expense related to our pension and postretirement programs excluding the service cost component.

Income Taxes


	Thirteen weeks ended						Twenty-six weeks ended						Thirteen weeks ended						Twenty-six weeks ended
	August 3,			August 4,			August 3,			August 4,			August 1,			August 3,			August 1,			August 3,
	2019			2018			2019			2018
	($ in millions)
($ in millions)													2020			2019			2020			2019
Provision for income taxes	$	25		$	27		$	87		$	91		$	25		$	25		$	30		$	87
Effective tax rate		29.5	%		23.6	%		27.2	%		26.4	%		35.4	%		29.5	%		(85.5)	%		27.2	%

The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The discrete items discussed below represented the main reasons for the changes in the effective tax rate.

~~Table of Contents~~

~~The Company~~We regularly ~~assesses~~assess the adequacy of ~~the Company’s~~our provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, ~~the Company~~we may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. The changes in the tax reserves were not significant for any of the periods presented.

The effective tax rates for the thirteen and twenty-six weeks ended August ~~3, 2019. The effective~~1, 2020 were adversely affected by valuation allowances related to losses in certain foreign jurisdictions. Additionally, the tax rate ~~for~~was negatively affected by a tax charge related to the revaluation of certain intellectual property rights pursuant to a non-U.S. advance pricing agreement. During the thirteen weeks ended August ~~4, 2018 included~~1, 2020, due to an improved financial outlook, we reduced the $27 million tax charge recognized in the first quarter of 2020 by $2 million. During the twenty-six weeks ended August 1, 2020, we recognized a $2 million tax benefit for the reversal of ~~$3 million from~~ a ~~reserve release due to a settlement of an international~~withholding tax ~~examination.~~accrual that is no longer required.

For the thirteen weeks ended August 3, 2019, the Company ~~recognized~~recorded a tax expense of $2 million ~~due to~~for an adjustment to ~~U.S.~~US tax on foreign income attributable to 2017 U.S. tax reform.

During the thirteen weeks ended August 3, 2019, the Company recorded charges totaling $14 million, which primarily related to the costs to terminate the SIX:02 leases, the tax benefit recorded in connection with these charges was $4 million.

For the twenty-six weeks ended August 3, 2019, the Company recognized a tax benefit of $3 million due to an adjustment to a foreign tax credit valuation allowance.

~~For~~Second Quarter 2020 Form 10-Q Page 27

Excluding the twenty-six weeks ended August 4, 2018, the Company reduced its provisional net expense related to mandatory deemed repatriation of foreign sourced net earnings by $1 million. In addition, the Company reduced its income tax provision in the amount of $1 million as a result of the delay inabove-mentioned discrete items, the effective ~~date of certain~~ tax ~~regulations.~~

The Company currently expects its full-year tax rate to approximate 27.5 percent excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending on the level and mix of income earned in the various jurisdictions in which we operate.

~~Net Income~~

~~For~~rates for the thirteen and twenty-six weeks ended August ~~3, 2019, net income decreased by $28 million, or 31.8 percent, and by $21 million, or 8.3 percent, respectively,~~1, 2020 increased, as compared with the corresponding prior-year ~~periods.~~periods, primarily due to the change in the mix of domestic and foreign earnings and losses.

We expect the full-year tax rate to be elevated relative to historical levels due to the geographic mix of income and losses, as well as the limits to tax benefits for losses in certain foreign jurisdictions.

Net Income

For the thirteen-weeks ended August 1, 2020, we reported net income of $45 million, as compared to net income of $60 million in the corresponding prior-year period. For the twenty-six weeks ended August 1, 2020, we reported a net loss of $65 million as compared to net income of $232 million in the corresponding prior-year period. Diluted earnings per share decreased by ~~26.7~~21.8 percent to ~~$0.55~~$0.43 per share ~~and by 2.8 percent to $2.08~~for the thirteen weeks ended August 1, 2020 compared with $0.55 in the thirteen-weeks ended August 3, 2019.

Diluted loss per share was $0.62 for the twenty-six weeks ended August 1, 2020 as compared with diluted earnings per share of $2.08 for the ~~corresponding prior-year period.~~twenty-six weeks ended August 3, 2019.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity continues to be cash flow from operations, while the principal uses of cash are ~~to:~~to fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of our short-term and long-term operating strategies. We also from time to time may make investments in other companies that we ~~feel can enable us to achieve~~believe support our vision of ~~serving~~inspiring and empowering youth culture. We generally finance real estate with operating leases. We believe our cash, cash equivalents, and future cash flow from operations 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. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, strategic considerations, and other factors. The amounts involved may be material.

During the first and second quarters of 2020, due to the COVID-19 pandemic, and in an effort to conserve cash, we temporarily suspended our share repurchase program. As of August ~~3, 2019, $1.08 billion~~1, 2020, $867 million remained available under the ~~Company’s~~ current 3-year share repurchase program.

~~Table~~ Also, after thoughtful consideration by our Board of ~~Contents~~Directors, we suspended our second quarter dividend distribution to preserve our balance sheet strength and flexibility. On August 20, 2020, our Board of Directors approved the reinstatement of our quarterly dividend program at a rate of $0.15 per share, which will be payable on October 30, 2020 to shareholders of record on October 16, 2020. The Board will continue to evaluate the dividend program on a quarterly basis. Additionally, our Board of Directors removed the suspension related to share repurchases effective September 1, 2020.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix, retail locations and websites, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, uncertainties caused by the COVID-19 pandemic, as well as other factors listed under the ~~heading~~headings “Disclosure Regarding Forward-Looking Statements,” and “Risk Factors” could affect our ability to continue to fund our needs from business operations.

Second Quarter 2020 Form 10-Q Page 28

Operating Activities

Twenty-six weeks ended

August 3,

August 4,

August 1,

August 3,

2019

2018

($ in millions)

2020

2019

Net cash provided by operating activities

328

427

606

328

$ Change

(99)

278

~~The amount provided by operating~~Operating activities reflects net (loss) income adjusted for non-cash items and working capital changes. Adjustments to net (loss) income for non-cash items include impairment charges, other charges, depreciation and amortization, deferred income taxes, and share-based compensation expense.

The ~~decrease~~increase in cash provided by operating activities, as compared with the same period of last year, reflected higher accounts payable and accrued and other liabilities, partially offset by a decrease in net ~~income~~income.

As of August 1, 2020, we have withheld approximately $87 million of lease and ~~lower net inflows associated~~lease related payments as we continue to negotiate rent deferrals or abatements with ~~changes in working capital. Also, during~~our landlords for the ~~thirteen~~period that our stores were closed due to the COVID-19 pandemic.

During the twenty-six weeks ended ~~May 4,~~August 3, 2019, we contributed $55 million to our U.S. qualified pension plan primarily representing the funds available in the qualified settlement fund established in connection with our pension litigation matter, which compares with $30 million contributed during the corresponding prior-year period. During the second quarter of 2018, the Company paid class counsel $97 million in connection with the pension ~~litigation~~ matter.

Investing Activities


	Twenty-six weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 1,		August 3,
	2019		2018
	($ in millions)
($ in millions)					2020		2019
Net cash used in investing activities	$	126	$	113	$	(91)	$	(126)
$ Change	$	13			$	35	$

~~Capital expenditures decreased for~~For the twenty-six weeks ended August ~~3, 2019~~1, 2020, capital expenditures increased by ~~$34~~$2 million to $83 million, as compared with the corresponding prior-year period. ~~This represented an increase in spending on store projects and technology projects partially offset by a decrease related to logistics. The Company’s~~Our full-year capital spending is expected to be ~~approximately $250~~$154 million, which is ~~approximately $25~~$117 million lower than the target that was established at the beginning of the year and reflects changes in the timing of certain ~~projects.~~projects due to the COVID-19 pandemic. The revised forecast includes ~~$155~~$85 million related to the remodeling or relocation of approximately ~~160~~60 existing stores and the opening of approximately 6595 new stores, as well as ~~$95~~$69 million for the development of information systems, websites, and infrastructure, including supply chain initiatives.

~~Additionally,~~ Cash used in investing activities ~~for~~is also lower this period as the ~~twenty-six weeks ended August 3, 2019~~current period included ~~$45~~$8 million in minority ~~investments. Investing outflows for~~investments as compared with $45 million spent in the ~~twenty-six weeks ended May 5, 2018 were partially offset by~~corresponding prior-year period.

Financing Activities


	Twenty-six weeks ended
	August 1,		August 3,
($ in millions)	2020		2019
Net cash used in financing activities	$	(44)	$	(201)
$ Change	$	157	$

In the ~~receipt~~first quarter of ~~insurance proceeds~~2020, we borrowed $330 million of $2our credit facility which was repaid in full during the second quarter of 2020. In July 2020, we entered into a new $600 million ~~for fixed assets from an insurance claim relating to Hurricane Maria.~~credit agreement and in connection with this transaction we paid fees of $4 million.

28Second Quarter 2020 Form 10-Q Page 29

~~Table of Contents~~

~~Financing Activities~~

Twenty-six weeks ended

August 3,

August 4,

2019

2018

($ in millions)
Net cash used in financing activities

$
201

$
281
$ Change

$
(80)

During the twenty-six weeks ended August ~~3, 2019,~~1, 2020, we ~~repurchased~~ did not repurchase shares of our common stock, as compared with 2,932,100 shares of our common stock ~~for $122 million, as compared with 4,452,405 shares~~ repurchased ~~for $205 million~~ in the corresponding prior-year ~~period. The Company~~period for $122 million. We also declared and paid dividends of ~~$84~~$42 million and ~~$81~~$84 million during the ~~first two quarters of~~twenty-six weeks ended August 1, 2020 and August 3, 2019, ~~and 2018,~~ respectively. This represented quarterly rates of ~~$0.38~~$0.40 for the first quarter of 2020 and ~~$0.345~~$0.38 per share for ~~2019~~both the first and ~~2018, respectively. Also, during~~second quarters of 2019. Our second quarter dividend was suspended as a result of the ~~twenty-six weeks ended August 3, 2019 and August 4, 2018, we paid $2 million and $1 million, respectively, to satisfy tax withholding obligations relating to~~COVID-19 pandemic but has been reinstated for the ~~vesting of share-based equity awards. Offsetting~~third quarter at $0.15 per share.

Partially offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with employee stock programs of $2 million and $7 million for the twenty-six weeks ended August 1, 2020 and ~~$6 million for~~August 1, 2019, respectively. Also, during the twenty-six weeks ended August 3, 2019 ~~and August 4, 2018, respectively.~~we paid $2 million to satisfy tax withholding obligations relating to the vesting of share-based equity awards.

Critical Accounting Policies and Estimates

~~There~~Other than the adoption of ASU 2017-04, Simplifying the test for Goodwill Impairment, on February 2, 2020 as discussed in Note 1, Summary of Significant Accounting Policies, and Note 6, Goodwill, to the Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February ~~2, 2019.~~1, 2020.

Recent Accounting Pronouncements

Descriptions of the recently issued and adopted accounting principles are included in Item 1. “Financial Statements” in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.

Item 4. Controls and Procedures

During the quarter, the Company’s management performed an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). 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.

We are currently migrating our ~~point-of-sale software to a new platform. Approximately 2,400 stores have been converted to~~e-commerce order management system. All North American e-commerce sites are live on the new ~~software platform~~system as of August ~~3, 2019, and we currently expect to complete the implementation during the second half of 2019.~~1, 2020. In connection with this implementation and resulting business process changes, we may make changes to the design and operation of our internal control over financial reporting.

~~Additionally,~~ Also, during ~~the fourth quarter of 2018 the Company implemented a new lease accounting system in advance of the adoption of the new leasing standard that was effective~~ the first quarter of ~~2019. We revised our controls in connection with this adoption and are continuing to refine business processes and make changes to~~2020 we substantially completed the ~~design and implementation~~rollout of our ~~internal controls as appropriate.~~new point-of-sale software.

~~Table of Contents~~

During the quarter ended August ~~3, 2019,~~1, 2020, there were no changes in the Company’s internal control over financial reporting, other than the implementation of the new ~~point-of-sale software and lease accounting~~e-commerce order management system ~~noted above,~~ (as defined in Rules 13a-15(f) of the Exchange Act), that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

Second Quarter 2020 Form 10-Q Page 30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under Item 1. “Financial Statements” in Part I.

Item 1A. Risk Factors

In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our ~~2018~~2019 Annual Report on Form 10-K filed with the SEC on ~~April 2, 2019~~March 27, 2020 should be considered as they could materially affect our business, financial condition, or future results.

There have not been any significant changes with respect to the risks described in our ~~2018~~2019 Form ~~10-K.~~ 10-K, other than the item noted below.

Riots, vandalism, and other crimes and acts of violence may affect the markets in which we operate, our customers, delivery of our products and customer service, and could have a material adverse effect on our business, results of operations, or financial condition.

Our business may be adversely affected by instability, disruption, or destruction, regardless of cause, including riots, civil insurrection or social unrest, and manmade disasters or crimes. Such events may result in property damage and loss and may also cause customers to suspend their decisions to shop in our stores, interrupt our supply chain, and cause restrictions, postponements, and cancellations of events that attract large crowds and public gatherings, such as store marketing events.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to shares of the Company’s common stock ~~that the Company repurchased during~~for the thirteen weeks ended August ~~3, 2019:~~1, 2020:


					Approximate
				Total Number of	Dollar Value of					Total Number of	Dollar Value of
	Total	Average		Shares Purchased as	Shares that may		Total	Average		Shares Purchased as	Shares that may
	Number	Price		Part of Publicly	yet be Purchased		Number	Price		Part of Publicly	yet be Purchased
	of Shares	Paid Per		Announced	Under the		of Shares	Paid Per		Announced	Under the
Date Purchased	Purchased ⁽¹⁾	Share ⁽¹⁾		Program ⁽²⁾	Program ⁽²⁾		Purchased ⁽¹⁾	Share ⁽¹⁾		Program ⁽²⁾	Program ⁽²⁾
May 5 to June 1, 2019	90	$	39.35	—	$	1,200,000,000
June 2 to July 6, 2019	2,900,085		41.37	2,900,000		1,080,032,419
July 7 to August 3, 2019	316		39.36	—		1,080,032,419
May 3 to May 30, 2020							—	$	—	—	$	867,215,222
May 31 to July 4, 2020							—		—	—		867,215,222
July 5 to August 1, 2020							426		29.42	—		867,215,222
	2,900,491	$	41.37	2,900,000			426	$	29.42	—

(1)

These columns ~~also~~ reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit awards, which vested during the quarter. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares.

(2)	~~On February 20, 2019, the Board of Directors approved a new 3-year,~~The current $1.2 billion share repurchase program ~~extending~~extends through January 2022.

30Second Quarter 2020 Form 10-Q Page 31

~~Table of Contents~~

Item 6. Exhibits


Exhibit No.		Description
10.1*10.1		Amendment ~~Number Four~~No. 1 to Credit Agreement, dated as of July 14, 2020, among Foot Locker, Inc., a New York corporation, the guarantors party thereto, the lenders party thereto, and Wells Fargo, National Association, as administrative agent, letter of credit issuer, and swing line lender (incorporated herein by reference to Exhibit 10.1 to the ~~Foot Locker Supplemental Executive Retirement Plan.~~Current Report on Form 8-K dated July 14, 2020 filed on July 16, 2020).
15*		Accountants’ Acknowledgement.
31.1*		Certification of Chief Executive Officer Pursuant to Rule ~~13a14(a)~~13a-14(a) or ~~15d14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule ~~13a14(a)~~13a-14(a) or ~~15d14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99*		Report of Independent Registered Public Accounting Firm.
101.INS*		Inline XBRL Instance Document.
101.SCH*		Inline XBRL Taxonomy Extension Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase.
104*		~~The cover page from~~Cover Page Interactive Data File (embedded within the ~~Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2019, formatted, in~~ Inline XBRL ~~(included in Exhibit 101)~~datafile).

* Filed herewith.

** Furnished herewith.

31Second Quarter 2020 Form 10-Q Page 32

~~Table of Contents~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: September ~~11, 2019~~9, 2020	FOOT LOCKER, INC.


	/s/ Lauren B. Peters
	LAUREN B. PETERS
	Executive Vice President and Chief Financial Officer

32Second Quarter 2020 Form 10-Q Page 33

			Page
PART I	FINANCIAL INFORMATION		1
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Statements of Comprehensive (Loss) Income	3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2019
	Item 4.	Controls and Procedures	2930

PART II	OTHER INFORMATION		3031
	Item 1.	Legal Proceedings	3031
	Item 1A.	Risk Factors	3031
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031
	Item 6.	Exhibits	3132

SIGNATURE			3233


		($ in millions)
Balance at February 3, 2019	$	35
Redemptions		(47)
Breakage recognized in sales		(3)
Activations		43
Balance at August 3, 2019	$	28


		August 3, 2019						August 4, 2018						February 2, 2019
	Gross		Accum.		Net		Gross		Accum.		Net		Gross		Accum.		Net
($ in millions)	value		amort.		value		value		amort.		value		value		amort.		value
Amortized intangible assets: ⁽¹⁾
Lease acquisition costs	$	116	$	(108)	$	8	$	125	$	(115)	$	10	$	120	$	(111)	$	9
Trademarks / trade names		20		(15)		5		20		(14)		6		20		(15)		5
Favorable leases		-		-		-		7		(6)		1		7		(6)		1
	$	136	$	(123)	$	13	$	152	$	(135)	$	17	$	147	$	(132)	$	15

Indefinite life intangible assets: ^{(1), (2)}
Runners Point Group trademarks / trade names					$	8					$	24					$	9
Other intangible assets, net					$	21					$	41					$	24


	($ in millions)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	338
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		114


	($ in millions)
Remainder of 2019	$	337
2020		637
2021		588
2022		533
2023		462
Thereafter		1,431
Total lease payments		3,988
Less: Interest		741
Total lease liabilities	$	3,247


	Pension Benefits								Postretirement Benefits
	Thirteen weeks ended				Twenty-six weeks ended					Thirteen weeks ended			Twenty-six weeks ended
		Aug. 3		Aug. 4		Aug. 3		Aug. 4		Aug. 3		Aug. 4		Aug. 3		Aug. 4
		2019		2018		2019		2018		2019		2018		2019		2018
	($ in millions)
Service cost	$	5	$	4	$	10	$	9	$	—	$	—	$	—	$	—
Interest cost		6		7		13		13		—		—		—		—
Expected return on plan assets		(9)		(9)		(18)		(19)		—		—		—		—
Amortization of net loss (gain)		3		3		6		6		(1)		(1)		(1)		(1)
Net benefit expense (income)	$	5	$	5	$	11	$	9	$	(1)	$	(1)	$	(1)	$	(1)