s
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF |
For the quarterly period ended: July 30, 2022April 29, 2023
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☐ | TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 1-10299
(Exact name of registrant as specified in its charter)
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330 West 34th Street, New York,, New York10001
(Address of principal executive offices, Zip Code)
(212-720-3700)(212-720-3700)
(Registrant’s telephone number, including area code)
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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 ☒ 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 ☒ 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.
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Large accelerated filer☒ | Accelerated filer | Non-accelerated filer | Smaller reporting company |
Emerging growth company | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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 ☒
Number of shares of Common Stock outstanding as of AugustMay 26, 2022: 93,301,6462023: 93,923,900
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.” Statements may be forward looking even in the absence of these particular words.
Examples of forward-looking statements include, but are not limited to, statements regarding our financial position, business strategy, and other plans and objectives for our future operations, and generation of free cash flow. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. The forward-looking statements contained herein are largely based on our expectations for the future, which reflect certain estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions, operating trends, and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. As such, management’s assumptions about future events may prove to be inaccurate.
We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events, changes in circumstances, or otherwise. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. Management cautions you that the forward-looking statements contained herein are not guarantees of future performance, and we cannot assure you that such statements will be realized or that the events and circumstances they describe will occur. Factors that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements herein include, but are not limited to, a change in the relationship with any of our key suppliers, including the unavailability ofaccess to premium products, at competitive prices, volume discounts, cooperative advertising, markdown allowances, or the ability to cancel orders and return merchandise; our ability to fund our planned capital investments; a recession, volatility in the financial markets, orand other global economic factors; our ability to access the credit markets at competitive terms; difficulties in appropriately allocating capital and resources among our strategic opportunities; our ability to realize the expected benefits from acquisitions; business opportunities and expansion; investments; expenses; dividends; share repurchases; cash management; liquidity; cash flow from operations; use of cash and cash requirements; borrowing capacity;capacity under our credit facility; repatriation of cash to the United States; supply chain issues, including delays in merchandise receiptsissues; labor shortages and increasing cost pressure caused by higher oceanic shipping and freight costs; labor shortages;wage pressures; expectations regarding increased wages; inflation; consumer spending levels; the effect of governmental assistance programs; social unrest; continuing risks relating to the effects of the COVID-19 pandemic, including vaccines and safety protocols; expectations regarding increasing global taxes; the effect of increased government regulation, compliance, and changes in law; the effect of the adverse outcome of any material litigation against us or judicial decisions that affect us or our industry generally; the effects of weather; climate change; ESG risks; increased competition; geopolitical events; the financial effect of accounting regulations and critical accounting policies; credit risk relating to the risk of loss as a result of non-performance by our counterparties; and any other factors set forth in the section entitled “Risk Factors” of our most recent Annual Report on Form 10-K.
All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. 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. 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. The Company does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report for a discussion of certain risks relating to our business and any investment in our securities. 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.
Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.Commission for a discussion of certain risks relating to our business and any investment in our securities. Given these risks and uncertainties, you should not rely on forward-looking statements as predictions 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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| | July 30, | | July 31, | | January 29, | |||
($ in millions, except share amounts) |
| 2022 |
| 2021 |
| 2022* | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | | $ | 386 | | $ | 1,845 | | $ | 804 |
Merchandise inventories | |
| 1,644 | |
| 1,081 | |
| 1,266 |
Other current assets | |
| 285 | |
| 252 | |
| 293 |
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| 2,315 | |
| 3,178 | |
| 2,363 |
Property and equipment, net | |
| 899 | |
| 743 | |
| 917 |
Operating lease right-of-use assets | | | 2,526 | | | 2,569 | | | 2,616 |
Deferred taxes | |
| 74 | |
| 108 | |
| 86 |
Goodwill | |
| 773 | |
| 158 | |
| 797 |
Other intangible assets, net | |
| 432 | |
| 16 | |
| 454 |
Minority investments | | | 736 | | | 728 | | | 781 |
Other assets | |
| 113 | |
| 85 | |
| 121 |
| | $ | 7,868 | | $ | 7,585 | | $ | 8,135 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current liabilities: | |
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Accounts payable | | $ | 596 | | $ | 539 | | $ | 596 |
Accrued and other liabilities | |
| 435 | |
| 474 | |
| 561 |
Current portion of debt and obligations under finance leases | | | 6 | | | 102 | | | 6 |
Current portion of lease obligations | | | 548 | | | 566 | | | 572 |
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| 1,585 | |
| 1,681 | |
| 1,735 |
Long-term debt and obligations under finance leases | |
| 449 | |
| 10 | |
| 451 |
Long-term lease obligations | | | 2,287 | | | 2,363 | | | 2,363 |
Other liabilities | |
| 330 | |
| 190 | |
| 343 |
Total liabilities | |
| 4,651 | |
| 4,244 | |
| 4,892 |
Commitments and contingencies | |
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Shareholders’ equity: | | | | | | | | | |
Common stock and paid-in capital: 99,319,014; 104,515,702; and 99,070,796 shares issued, respectively | | | 788 | | | 799 | | | 770 |
Retained earnings | | | 3,051 | | | 2,916 | | | 2,900 |
Accumulated other comprehensive loss | | | (416) | | | (338) | | | (343) |
Less: Treasury stock at cost: 6,018,197; 714,490; and 2,050,000 shares, respectively | | | (213) | | | (41) | | | (88) |
Noncontrolling interest | | | 7 | | | 5 | | | 4 |
Total shareholders' equity | | | 3,217 | | | 3,341 | | | 3,243 |
| | $ | 7,868 | | $ | 7,585 | | $ | 8,135 |
| April 29, | April 30, | January 28, | |||||||||
($ in millions, except share amounts) | 2023 | 2022 | 2023* | |||||||||
ASSETS | ||||||||||||
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Current assets: | ||||||||||||
Cash and cash equivalents | $ | 313 | $ | 551 | $ | 536 | ||||||
Merchandise inventories | 1,758 | 1,401 | 1,643 | |||||||||
Other current assets | 326 | 281 | 342 | |||||||||
| 2,397 | 2,233 | 2,521 | |||||||||
Property and equipment, net | 901 | 899 | 920 | |||||||||
Operating lease right-of-use assets | 2,331 | 2,566 | 2,443 | |||||||||
Deferred taxes | 94 | 79 | 90 | |||||||||
Goodwill | 781 | 783 | 785 | |||||||||
Other intangible assets, net | 421 | 441 | 426 | |||||||||
Minority investments | 629 | 759 | 630 | |||||||||
Other assets | 89 | 118 | 92 | |||||||||
| $ | 7,643 | $ | 7,878 | $ | 7,907 | ||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
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Current liabilities: | | |||||||||||
Accounts payable | $ | 474 | $ | 565 | $ | 492 | ||||||
Accrued and other liabilities | 447 | 428 | 568 | |||||||||
Current portion of debt and obligations under finance leases | 6 | 6 | 6 | |||||||||
Current portion of lease obligations | 533 | 557 | 544 | |||||||||
| 1,460 | 1,556 | 1,610 | |||||||||
Long-term debt and obligations under finance leases | 445 | 450 | 446 | |||||||||
Long-term lease obligations | 2,132 | 2,323 | 2,230 | |||||||||
Other liabilities | 323 | 334 | 328 | |||||||||
Total liabilities | 4,360 | 4,663 | 4,614 | |||||||||
Commitments and contingencies | | | | |||||||||
Shareholders’ equity: | | | | |||||||||
Common stock and paid-in capital: 94,175,714; 99,233,112; and 93,396,901 shares issued, respectively | 766 | 779 | 760 | |||||||||
Retained earnings | 2,923 | 2,995 | 2,925 | |||||||||
Accumulated other comprehensive loss | (396 | ) | (384 | ) | (392 | ) | ||||||
Less: Treasury stock at cost: 260,870; 4,731,931; and 1,489 shares, respectively | (10 | ) | (178 | ) | — | |||||||
Noncontrolling interest | — | 3 | — | |||||||||
Total shareholders' equity | 3,283 | 3,215 | 3,293 | |||||||||
| $ | 7,643 | $ | 7,878 | $ | 7,907 |
* | The balance sheet at January |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions, except per share amounts) | 2023 | 2022 | ||||||
Sales | $ | 1,927 | $ | 2,175 | ||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | 1,931 | 2,178 | ||||||
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Cost of sales | 1,349 | 1,435 | ||||||
Selling, general and administrative expenses | 431 | 463 | ||||||
Depreciation and amortization | 51 | 54 | ||||||
Impairment and other | 39 | 6 | ||||||
Income from operations | 61 | 220 | ||||||
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Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net | (3 | ) | (25 | ) | ||||
Income before income taxes | 57 | 190 | ||||||
Income tax expense | 21 | 58 | ||||||
Net income | 36 | 132 | ||||||
Net loss attributable to noncontrolling interests | — | 1 | ||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
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Basic earnings per share | $ | 0.39 | $ | 1.38 | ||||
Weighted-average shares outstanding | 93.7 | 96.1 | ||||||
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Diluted earnings per share | $ | 0.38 | $ | 1.37 | ||||
Weighted-average shares outstanding, assuming dilution | 95.1 | 97.2 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
Second
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| | Thirteen weeks ended | | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions, except per share amounts) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales | | $ | 2,065 | | $ | 2,275 | | $ | 4,240 | | $ | 4,428 |
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Cost of sales | |
| 1,411 | | $ | 1,477 | |
| 2,846 | |
| 2,881 |
Selling, general and administrative expenses | |
| 452 | | $ | 450 | |
| 915 | |
| 868 |
Depreciation and amortization | |
| 51 | | $ | 48 | |
| 105 | |
| 93 |
Impairment and other charges | |
| 12 | | $ | 36 | |
| 18 | |
| 40 |
Income from operations | |
| 139 | |
| 264 | |
| 356 | |
| 546 |
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Interest expense, net | |
| (5) | | $ | (2) | |
| (10) | |
| (4) |
Other income / (expense), net | |
| 9 | | $ | 325 | |
| (13) | |
| 329 |
Income before income taxes | |
| 143 | |
| 587 | |
| 333 | |
| 871 |
Income tax expense | |
| 49 | | $ | 157 | |
| 107 | |
| 239 |
Net income | | | 94 | | | 430 | | | 226 | | | 632 |
Net loss attributable to noncontrolling interests | | | — | | | — | | | 1 | | | — |
Net income attributable to Foot Locker, Inc. | | $ | 94 | | $ | 430 | | $ | 227 | | $ | 632 |
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Basic earnings per share | | $ | 1.00 | | $ | 4.14 | | $ | 2.39 | | $ | 6.10 |
Weighted-average shares outstanding | |
| 94.1 | | | 103.8 | |
| 95.1 | |
| 103.7 |
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Diluted earnings per share | | $ | 0.99 | | $ | 4.09 | | $ | 2.36 | | $ | 6.02 |
Weighted-average shares outstanding, assuming dilution | |
| 95.1 | | | 105.2 | |
| 96.1 | |
| 105.1 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
Second Quarter 2022 Form 10-Q Page 2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | Thirteen weeks ended | | | Twenty-six weeks ended | Thirteen weeks ended | |||||||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | April 29, | April 30, | ||||||||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | 2023 | 2022 | ||||||||||
Net income attributable to Foot Locker, Inc. | | $ | 94 | | $ | 430 | | $ | 227 | | $ | 632 | $ | 36 | $ | 133 | ||||
Other comprehensive income (loss), net of income tax | |
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Foreign currency translation adjustment: | |
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Translation adjustment arising during the period, net of income tax (benefit)/expense of $-, $-, $(1) and $1, respectively | |
| (31) | |
| (14) | |
| (75) | |
| (10) | ||||||||
Translation adjustment arising during the period, net of income tax (benefit)/expense of $- and $(1), respectively | (7 | ) | (44 | ) | ||||||||||||||||
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Hedges contracts: | |
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Change in fair value of derivatives, net of income tax benefit of $-, $-, $-, and $-, respectively | |
| (3) | |
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| (2) | |
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Change in fair value of derivatives, net of income tax benefit of $-, and $-, respectively | 1 | 1 | ||||||||||||||||||
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Pension and postretirement adjustments: | |
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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, respectively | |
| 2 | |
| 2 | |
| 4 | | | 3 | ||||||||
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, respectively | 2 | 2 | ||||||||||||||||||
Comprehensive income | | $ | 62 | | $ | 418 | | $ | 154 | | $ | 625 | $ | 32 | $ | 92 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
Second Quarter 2022 Form 10-Q Page 3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
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| Additional Paid-In |
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| | | | Accumulated | | | | | | | ||||
| | Capital & | | | | | | | | | | Other | | | | Total | ||||||
Thirteen weeks ended | | Common Stock | | Treasury Stock | | Retained | | Comprehensive | | Noncontrolling | | Shareholders' | ||||||||||
(shares in thousands, amounts in millions) | | Shares | | Amount | | Shares | | Amount | | Earnings | | Loss | | interests | | Equity | ||||||
Balance at April 30, 2022 |
| 99,233 | | $ | 779 | | (4,732) | | $ | (178) | | $ | 2,995 | | $ | (384) | | $ | 3 | | $ | 3,215 |
Restricted stock issued |
| 23 | | | | | | | | | | | | | | | | | | | | — |
Issued under director and stock plans |
| 63 | | | 2 | | | | | | | | | | | | | | | | | 2 |
Share-based compensation expense |
| | | | 9 | | | | | | | | | | | | | | | | | 9 |
Shares of common stock used to satisfy tax withholding obligations |
| | | | | | (6) | | | | | | | | | | | | | | | — |
Share repurchases |
| | | | | | (1,400) | | | (40) | | | | | | | | | | | | (40) |
Reissued for Employee Stock Purchase Plan ("ESPP") |
| | | | (2) | | 120 | | | 5 | | | | | | | | | | | | 3 |
Noncontrolling interest capital contribution | | | | | | | | | | | | | | | | | | | 4 | | | 4 |
Net income |
| | | | | | | | | | | | 94 | | | | | | | | | 94 |
Cash dividends on common stock ($0.40 per share) |
| | | | | | | | | | | | (38) | | | | | | | | | (38) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (31) | | | | | | (31) |
Change in hedges, net of tax |
| | | | | | | | | | | | | | | (3) | | | | | | (3) |
Pension and postretirement adjustments, net of tax |
| | | | | | | | | | | | | | | 2 | | | | | | 2 |
Balance at July 30, 2022 |
| 99,319 | | $ | 788 |
| (6,018) | | $ | (213) | | $ | 3,051 | | $ | (416) | | $ | 7 | | $ | 3,217 |
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Balance at May 1, 2021 |
| 104,286 | | $ | 791 | | (887) | | $ | (47) | | $ | 2,507 | | $ | (326) | | $ | 5 | | $ | 2,930 |
Restricted stock issued |
| 11 | | | | | | | | | | | | | | | | | | | | — |
Issued under director and stock plans |
| 219 | | | 7 | | | | | | | | | | | | | | | | | 7 |
Share-based compensation expense |
| | | | 8 | | | | | | | | | | | | | | | | | 8 |
Shares of common stock used to satisfy tax withholding obligations |
| | | | | | (3) | | | (1) | | | | | | | | | | | | (1) |
Share repurchases |
| | | | | | (125) | | | (7) | | | | | | | | | | | | (7) |
Reissued for ESPP |
| | | | (7) | | 301 | | | 14 | | | | | | | | | | | | 7 |
Net income |
| | | | | | | | | | | | 430 | | | | | | | | | 430 |
Cash dividends on common stock ($0.20 per share) |
| | | | | | | | | | | | (21) | | | | | | | | | (21) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (14) | | | | | | (14) |
Pension and postretirement adjustments, net of tax | | | | | | | | | | | | | | | | 2 | | | | | | 2 |
Balance at July 31, 2021 |
| 104,516 | | $ | 799 | | (714) | | $ | (41) | | $ | 2,916 | | $ | (338) | | $ | 5 | | $ | 3,341 |
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| Additional Paid-In |
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| | | | Accumulated | | | | | | | ||||
| | Capital & | | | | | | | | | | Other | | | | Total | ||||||
Twenty-six weeks ended | | Common Stock | | Treasury Stock | | Retained | | Comprehensive | | Noncontrolling | | Shareholders' | ||||||||||
(shares in thousands, amounts in millions) | | Shares | | Amount | | Shares | | Amount | | Earnings | | Loss | | interests | | Equity | ||||||
Balance at January 29, 2022 |
| 99,071 | | $ | 770 | | (2,050) | | $ | (88) | | $ | 2,900 | | $ | (343) | | $ | 4 | | $ | 3,243 |
Restricted stock issued |
| 111 | | | | | | | | | | | | | | | | | | | | — |
Issued under director and stock plans |
| 137 | | | 4 | | | | | | | | | | | | | | | | | 4 |
Share-based compensation expense |
| | | | 16 | | | | | | | | | | | | | | | | | 16 |
Shares of common stock used to satisfy tax withholding obligations |
| | | | | | (38) | | | (1) | | | | | | | | | | | | (1) |
Share repurchases |
| | | | | | (4,050) | | | (129) | | | | | | | | | | | | (129) |
Reissued for ESPP |
| | | | (2) | | 120 | | | 5 | | | | | | | | | | | | 3 |
Noncontrolling interest capital contribution | | | | | | | | | | | | | | | | | | | 4 | | | 4 |
Net income |
| | | | | | | | | | | | 227 | | | | | | (1) | | | 226 |
Cash dividends on common stock ($0.80 per share) |
| | | | | | | | | | | | (76) | | | | | | | | | (76) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (75) | | | | | | (75) |
Change in hedges, net of tax |
| | | | | | | | | | | | | | | (2) | | | | | | (2) |
Pension and postretirement adjustments, net of tax |
| | | | | | | | | | | | | | | 4 | | | | | | 4 |
Balance at July 30, 2022 |
| 99,319 | | $ | 788 | | (6,018) | | $ | (213) | | $ | 3,051 | | $ | (416) | | $ | 7 | | $ | 3,217 |
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Balance at January 30, 2021 |
| 103,693 | | $ | 779 | | (74) | | $ | (3) | | $ | 2,326 | | $ | (331) | | $ | 5 | | $ | 2,776 |
Restricted stock issued |
| 479 | | | | | | | | | | | | | | | | | | | | — |
Issued under director and stock plans |
| 344 | | | 11 | | | | | | | | | | | | | | | | | 11 |
Share-based compensation expense |
| | | | 16 | | | | | | | | | | | | | | | | | 16 |
Shares of common stock used to satisfy tax withholding obligations |
| | | | | | (195) | | | (11) | | | | | | | | | | | | (11) |
Share repurchases | | | | | | | (746) | | | (41) | | | | | | | | | | | | (41) |
Reissued for ESPP | | | | | (7) | | 301 | | | 14 | | | | | | | | | | | | 7 |
Net income |
| | | | | | | | | | | | 632 | | | | | | | | | 632 |
Cash dividends on common stock ($0.40 per share) |
| | | | | | | | | | | | (42) | | | | | | | | | (42) |
Translation adjustment, net of tax |
| | | | | | | | | | | | | | | (10) | | | | | | (10) |
Pension and postretirement adjustments, net of tax |
| | | | | | | | | | | | | | | 3 | | | | | | 3 |
Balance at July 31, 2021 |
| 104,516 | | $ | 799 | | (714) | | $ | (41) | | $ | 2,916 | | $ | (338) | | $ | 5 | | $ | 3,341 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
Second
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| | | | | | |
| | Twenty-six weeks ended | ||||
| | July 30, | | July 31, | ||
($ in millions) |
| 2022 |
| 2021 | ||
From operating activities: |
| |
|
| |
|
Net income | | $ | 226 | | $ | 632 |
Adjustments to reconcile net income to net cash from operating activities: | |
| | |
| |
Non-cash impairment and other charges | |
| 5 | |
| 45 |
Fair value adjustments to minority investments | | | 38 | | | (314) |
Depreciation and amortization | |
| 105 | |
| 93 |
Deferred income taxes | |
| 8 | |
| 67 |
Share-based compensation expense | |
| 16 | |
| 16 |
Gain on disposal of business | | | (18) | | | — |
Change in assets and liabilities: | |
| | |
| |
Merchandise inventories | |
| (413) | |
| (163) |
Accounts payable | |
| 10 | |
| 139 |
Accrued and other liabilities | |
| (69) | |
| (12) |
Insurance recovery received for inventory loss | |
| — | |
| 8 |
Other, net | |
| (10) | |
| (109) |
Net cash (used in) provided by operating activities | |
| (102) | |
| 402 |
From investing activities: | |
|
| |
|
|
Capital expenditures | |
| (156) | |
| (87) |
Purchase of business, net of cash acquired | |
| (12) | |
| — |
Minority investments | |
| (4) | |
| (78) |
Proceeds from sale of business | | | 47 | | | — |
Proceeds from minority investments | | | 12 | | | — |
Proceeds from sale of property | | | — | | | 3 |
Insurance proceeds related to loss on property and equipment | |
| — | |
| 3 |
Net cash used in investing activities | |
| (113) | |
| (159) |
From financing activities: | |
|
| |
|
|
Purchase of treasury shares | | | (129) | |
| (41) |
Dividends paid on common stock | | | (76) | |
| (42) |
Payment of obligations under finance leases | | | (3) | | | (1) |
Shares of common stock repurchased to satisfy tax withholding obligations | | | (1) | |
| (11) |
Treasury stock reissued under employee stock plan | |
| 3 | |
| 7 |
Proceeds from exercise of stock options | | | 3 | |
| 10 |
Contribution from non-controlling interest | | | 4 | | | — |
Payment of revolving credit agreement costs | | | — | | | (1) |
Net cash used in financing activities | |
| (199) | |
| (79) |
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash | |
| (5) | |
| (1) |
Net change in cash, cash equivalents, and restricted cash | |
| (419) | |
| 163 |
Cash, cash equivalents, and restricted cash at beginning of year | |
| 850 | |
| 1,718 |
Cash, cash equivalents, and restricted cash at end of period | | $ | 431 | | $ | 1,881 |
| | | | | | |
Cash paid during the year: | |
|
| |
|
|
Interest | | $ | 8 | | $ | 6 |
Income taxes | | $ | 103 | | $ | 229 |
Cash paid for amounts included in measurement of operating lease liabilities | | $ | 354 | | $ | 358 |
| | | | | | |
Non-cash investing activities: | | | | | | |
Right-of-use assets obtained in exchange for operating lease obligations | | $ | 277 | | $ | 171 |
Assets obtained in exchange for finance lease obligations | | $ | 1 | | $ | 4 |
| Additional Paid-In | | | | Accumulated | | | |||||||||||||||||||||||||
| Capital & | | | | Other | | Total | |||||||||||||||||||||||||
Thirteen weeks ended | Common Stock | Treasury Stock | Retained | Comprehensive | Noncontrolling | Shareholders' | ||||||||||||||||||||||||||
(shares in thousands, $ in millions) | Shares | Amount | Shares | Amount | Earnings | Loss | interests | Equity | ||||||||||||||||||||||||
Balance at January 28, 2023 | 93,397 | $ | 760 | (1 | ) | $ | — | $ | 2,925 | $ | (392 | ) | $ | — | $ | 3,293 | ||||||||||||||||
Restricted stock issued | 628 | — | ||||||||||||||||||||||||||||||
Issued under director and stock plans | 151 | 4 | 4 | |||||||||||||||||||||||||||||
Share-based compensation expense | 2 | 2 | ||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | (260 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||||
Net income | 36 | 36 | ||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.40 per share) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||
Translation adjustment, net of tax | (7 | ) | (7 | ) | ||||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | 1 | 1 | ||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 2 | 2 | ||||||||||||||||||||||||||||||
Balance at April 29, 2023 | 94,176 | $ | 766 | (261 | ) | $ | (10 | ) | $ | 2,923 | $ | (396 | ) | $ | — | $ | 3,283 |
| Additional Paid-In | | | | Accumulated | | | |||||||||||||||||||||||||
| Capital & | | | | Other | | Total | |||||||||||||||||||||||||
Thirteen weeks ended | Common Stock | Treasury Stock | Retained | Comprehensive | Noncontrolling | Shareholders' | ||||||||||||||||||||||||||
(shares in thousands, $ in millions) | Shares | Amount | Shares | Amount | Earnings | Loss | interests | Equity | ||||||||||||||||||||||||
Balance at January 29, 2022 | 99,071 | $ | 770 | (2,050 | ) | $ | (88 | ) | $ | 2,900 | $ | (343 | ) | $ | 4 | $ | 3,243 | |||||||||||||||
Restricted stock issued | 88 | — | ||||||||||||||||||||||||||||||
Issued under director and stock plans | 74 | 2 | 2 | |||||||||||||||||||||||||||||
Share-based compensation expense | 7 | 7 | ||||||||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | (32 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||
Share repurchases | (2,650 | ) | (89 | ) | (89 | ) | ||||||||||||||||||||||||||
Net income | 133 | (1 | ) | 132 | ||||||||||||||||||||||||||||
Cash dividends on common stock ($0.40 per share) | (38 | ) | (38 | ) | ||||||||||||||||||||||||||||
Translation adjustment, net of tax | (44 | ) | (44 | ) | ||||||||||||||||||||||||||||
Change in hedges, net of tax | 1 | 1 | ||||||||||||||||||||||||||||||
Pension and postretirement adjustments, net of tax | 2 | 2 | ||||||||||||||||||||||||||||||
Balance at April 30, 2022 | 99,233 | $ | 779 | (4,732 | ) | $ | (178 | ) | $ | 2,995 | $ | (384 | ) | $ | 3 | $ | 3,215 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.Statements.
Second
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
From operating activities: | ||||||||
Net income | $ | 36 | $ | 132 | ||||
Adjustments to reconcile net income to net cash from operating activities: | | | ||||||
Non-cash impairment and other | 18 | 3 | ||||||
Fair value adjustments to minority investments | — | 25 | ||||||
Depreciation and amortization | 51 | 54 | ||||||
Deferred income taxes | (4 | ) | 3 | |||||
Share-based compensation expense | 2 | 7 | ||||||
Change in assets and liabilities: | | |||||||
Merchandise inventories | (117 | ) | (150 | ) | ||||
Accounts payable | (16 | ) | (25 | ) | ||||
Accrued and other liabilities | (87 | ) | (80 | ) | ||||
Other, net | (1 | ) | 10 | |||||
Net cash used in operating activities | (118 | ) | (21 | ) | ||||
From investing activities: | ||||||||
Capital expenditures | (59 | ) | (95 | ) | ||||
Purchase of business, net of cash acquired | — | (7 | ) | |||||
Minority investments | — | (3 | ) | |||||
Net cash used in investing activities | (59 | ) | (105 | ) | ||||
From financing activities: | ||||||||
Dividends paid on common stock | (38 | ) | (38 | ) | ||||
Purchase of treasury shares | — | (89 | ) | |||||
Payment of obligations under finance leases | (2 | ) | (2 | ) | ||||
Shares of common stock repurchased to satisfy tax withholding obligations | (10 | ) | (1 | ) | ||||
Proceeds from exercise of stock options | 4 | 2 | ||||||
Net cash used in financing activities | (46 | ) | (128 | ) | ||||
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash | — | (1 | ) | |||||
Net change in cash, cash equivalents, and restricted cash | (223 | ) | (255 | ) | ||||
Cash, cash equivalents, and restricted cash at beginning of year | 582 | 850 | ||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 359 | $ | 595 | ||||
| | | ||||||
Supplemental information: | ||||||||
Interest paid | $ | 8 | $ | 8 | ||||
Income taxes paid | 23 | 18 | ||||||
Cash paid for amounts included in measurement of operating lease liabilities | 170 | 174 | ||||||
Cash paid for amounts included in measurement of finance lease liabilities | 2 | 2 | ||||||
Right-of-use assets obtained in exchange for operating lease obligations | 34 | 138 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensedBusiness
Foot Locker, Inc., together with its 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 presented. As used in these Notes to the Unaudited Condensed Consolidated Financial Statements, the terms “Footsubsidiaries (“Foot Locker,” “Company,” “we,” “our,” and “us” refer), is a leading footwear and apparel retailer. We have integrated all available shopping channels including stores, websites, apps, and social channels. 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 Foot Locker, Inc.our customers through our distribution centers but may also be shipped from any store or a combination of our distribution centers and its consolidated subsidiaries.stores depending on availability of particular items. We operate in North America, Europe, and Asia Pacific, representing our operating segments. We aggregate these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Basis of Presentation
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the accompanying interim Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and these Notesthe rules and related disclosures. Actual results may differ from those estimates.regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of the results expected for the year.
The Additionally, the results of operations for the period ended July 30, 2022April 29, 2023 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 2022.the year. Fiscal year 2023 will include the 53-week period that ends on February 3, 2024.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in our 20212022 Form 10-K.10-K. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. In 2023, we separately present licensing revenue as a component of total revenue in the Condensed Consolidated Statements of Operations, as previously licensing revenue was presented within other income / (expense), net.
There were no significant changes to the policies disclosed in Note 1, Summary of Significant Accounting Policiesof our 20212022 Form 10-K.10-K.
Recent Accounting Pronouncements
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.
2. Acquisitions
In 2021, we acquired WSS and atmos, two businesses that will allow us to further differentiate our product offerings, as well as our customer base, and diversify our retail store and omnichannel portfolio.
WSS
During the twenty-six weeks ended July 30, 2022, we paid an additional $4 million upon the finalization of the value of net assets acquired, with a corresponding increase to goodwill as compared with the amounts presented in the most recent annual report. The aggregate purchase price for the acquisition has increased to $811 million ($741 million, net of cash acquired). There were no additional payments or changes to the value of net assets acquired in the thirteen weeks ended July 30, 2022.
Second Quarter 2022 Form 10-Q Page 6
2. Acquisitions (continued)
The following table represents the final allocation of the purchase price for WSS.
| | | |
($ in millions) |
| | |
Assets acquired: |
| |
|
Cash and cash equivalents | | $ | 70 |
Merchandise inventories | |
| 82 |
Other current assets | |
| 10 |
Property and equipment, net | |
| 133 |
Operating lease right-of-use assets | | | 143 |
Tradenames | |
| 296 |
Customer relationships | | | 13 |
Other assets | |
| 4 |
Liabilities assumed: | |
|
|
Accounts payable | | $ | (58) |
Current portion of obligations under finance leases | | | (3) |
Current portion of lease obligations | | | (19) |
Long-term portion of obligations under finance leases | | | (50) |
Long-term lease obligations | | | (127) |
Deferred taxes | | | (84) |
Other liabilities | |
| (4) |
| | | |
Goodwill | | | 405 |
Total purchase price | | $ | 811 |
atmos
During the thirteen and twenty-six weeks ended July 30, 2022, we paid an additional $5 million and $8 million, respectively, in connection with the finalization of certain post-closing conditions. The aggregate purchase price for the acquisition has increased to $368 million, subject to adjustment for the finalization of the value of net assets acquired and other post-closing matters. The preliminary purchase price includes contingent consideration initially measured at $35 million, which can reach up to $111 million based on achieving certain revenue growth and EBITDA performance targets. The fair value of the contingent consideration has not changed from the initial measurement. The preliminary purchase price does not yet reflect the finalization of the net working capital provisions and other post-closing adjustments. At closing, we placed $30 million in escrow, and an additional $6 million will be payable if certain post-closing conditions are satisfied. We expect to finalize the remaining amounts by the end of this fiscal year.
The following table represents the preliminary allocation of the purchase price for atmos and includes fair value adjustments to certain assets and liabilities since our most recent annual report. Changes to amounts reported at year end and the previous quarter included an $8 million increase in goodwill due to the additional purchase price, revised downward valuation of the tradenames and the addition of the customer list intangible. The adjustments did not have a significant effect on the consolidated results of operations. We determined that the atmos tradenames will have an indefinite life and will not be amortized.
We are assessing the tax deductibility of the goodwill related to the acquisition.
Second Quarter 2022 Form 10-Q Page 7
2. Acquisitions (continued)
The following table represents the preliminary allocation of the purchase price for atmos.
| | | |
($ in millions) |
| | |
Assets acquired: |
| |
|
Cash and cash equivalents | | $ | 6 |
Merchandise inventories | |
| 22 |
Other current assets | |
| 12 |
Property and equipment, net | |
| 7 |
Operating lease right-of-use assets | | | 44 |
Tradenames | |
| 130 |
Customer relationships | | | 9 |
Other assets | |
| 6 |
Liabilities assumed: | |
| |
Accounts payable | | $ | (10) |
Current portion of lease obligations | | | (10) |
Other current liabilities | | | (8) |
Long-term lease obligations | | | (35) |
Deferred taxes | | | (44) |
Other liabilities | |
| (8) |
| | | |
Goodwill (1) | | | 247 |
Total purchase price (2) | | $ | 368 |
3. Revenue
The table below presents sales disaggregated based uponby sales channel.channel, as well as licensing revenue earned from our various franchised arrangements. Sales are attributable to the channel in which the sales transaction is initiated.
| | | | | | | | | | | | |
| | | Thirteen weeks ended | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales by Channel | | | | | | | | | | | | |
Stores | | $ | 1,716 | | $ | 1,817 | | $ | 3,492 | | $ | 3,437 |
Direct-to-customers | |
| 349 | |
| 458 | |
| 748 | |
| 991 |
Total sales | | $ | 2,065 | | $ | 2,275 | | $ | 4,240 | | $ | 4,428 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Sales by Channel | ||||||||
Stores | $ | 1,613 | $ | 1,776 | ||||
Direct-to-customers | 314 | 399 | ||||||
Total sales | 1,927 | 2,175 | ||||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | $ | 1,931 | $ | 2,178 |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Revenue (continued)
Revenue is attributed to the country in which the transaction is fulfilled, and revenue by geographic area is presented in the following table.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Revenue by Geography | ||||||||
United States | $ | 1,287 | $ | 1,544 | ||||
International | 644 | 634 | ||||||
Total revenue | $ | 1,931 | $ | 2,178 |
Sales disaggregated based upon geographic areaby banner and operating segment are 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 | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales by Geography | | | | | | | | | | | | |
United States | | $ | 1,383 | | $ | 1,623 | | $ | 2,923 | | $ | 3,336 |
International | |
| 682 | |
| 652 | |
| 1,317 | |
| 1,092 |
Total sales | | $ | 2,065 | | $ | 2,275 | | $ | 4,240 | | $ | 4,428 |
Second Quarter 2022 Form 10-Q Page 8
Table of Contentsfollowing table.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Foot Locker | $ | 744 | $ | 807 | ||||
Champs Sports | 328 | 454 | ||||||
Kids Foot Locker | 167 | 180 | ||||||
WSS | 150 | 138 | ||||||
Other (1) | — | 53 | ||||||
North America | 1,389 | 1,632 | ||||||
Foot Locker | 379 | 377 | ||||||
Sidestep | 14 | 24 | ||||||
EMEA | 393 | 401 | ||||||
Foot Locker | 98 | 93 | ||||||
atmos | 47 | 49 | ||||||
Asia Pacific | 145 | 142 | ||||||
Total sales | $ | 1,927 | $ | 2,175 |
(1) | Other includes sales from banners that we no longer operate and primarily represented Eastbay in the prior-year period. |
NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
3. Revenue (continued)
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.customer. The table below presents the activity of our gift card liability balance.
| | | | | | |
| | July 30, | | July 31, | ||
($ in millions) | | 2022 | | 2021 | ||
Gift card liability at beginning of year | | $ | 46 | | $ | 41 |
Redemptions | | | (120) | | | (122) |
Breakage recognized in sales | | | (8) | | | (9) |
Activations | | | 115 | | | 128 |
Foreign currency fluctuations | | | (1) | | | — |
Gift card liability | | $ | 32 | | $ | 38 |
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Gift card liability at beginning of year | $ | 36 | $ | 46 | ||||
Redemptions | (61 | ) | (65 | ) | ||||
Breakage recognized in sales | (4 | ) | (4 | ) | ||||
Activations | 56 | 60 | ||||||
Gift card liability | $ | 27 | $ | 37 |
We elected not to disclose the information about remaining performance obligations since the amount of gift cards redeemed after 12 months is not significant.
4.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Segment Information
We have integrated all available shopping channels including stores, websites, apps, and social channels. 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 availability.
We evaluate performance based on several factors, primarily the banner’s financial results, referred to as division profit.Foot Locker operates one reportable segment. Division profit reflects income before income taxes, impairment and other, charges, corporate expense, non-operatingother income / (expense), net, and net interest expense.
| | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales | | $ | 2,065 | | $ | 2,275 | | $ | 4,240 | | $ | 4,428 |
| | | | | | | | | | | | |
Operating Results | |
|
| |
|
| |
|
| |
|
|
Division profit | | | 184 | | | 332 | | $ | 444 | | $ | 647 |
Less: Impairment and other charges (1) | |
| 12 | |
| 36 | |
| 18 | |
| 40 |
Less: Corporate expense (2) | |
| 33 | |
| 32 | |
| 70 | |
| 61 |
Income from operations | |
| 139 | |
| 264 | |
| 356 | |
| 546 |
Interest expense, net | |
| (5) | |
| (2) | |
| (10) | |
| (4) |
Other income / (expense), net (3) | |
| 9 | |
| 325 | |
| (13) | |
| 329 |
Income before income taxes | | $ | 143 | | $ | 587 | | $ | 333 | | $ | 871 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Division profit | $ | 104 | $ | 263 | ||||
Less: Impairment and other (1) | 39 | 6 | ||||||
Less: Corporate expense (2) | 4 | 37 | ||||||
Income from operations | 61 | 220 | ||||||
Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net (3) | (3 | ) | (25 | ) | ||||
Income before income taxes | $ | 57 | $ | 190 |
(1) | See Note |
(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. |
(3) | See Note |
Second Quarter 2022 Form 10-Q Page 9
5.4. Impairment and Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | ||||||||||
| | Thirteen weeks ended | | Twenty-six weeks ended | | Thirteen weeks ended | |||||||||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | | April 29, | April 30, | ||||||||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | 2023 | 2022 | ||||||||||
Transformation consulting | | $ | 9 | | $ | — | | $ | 10 | | $ | — | | $ | 19 | $ | — | ||||
Impairment of long-lived assets and right-of-use assets | | 2 | | | 39 | | | 5 | | | 39 | | 18 | 3 | |||||||
Reorganization costs | 2 | — | |||||||||||||||||||
Acquisition and integration costs | | 1 | | | — | | | 3 | | | — | | — | 2 | |||||||
Lease termination costs | | | — | | | 4 | | — | | | 4 | | |||||||||
Impairment of investments | | — | | | — | | | — | | | 2 | | |||||||||
Reorganization costs | | — | | | — | | | — | | | 2 | | |||||||||
Insurance recovery | | — | | | (7) | | | — | | | (7) | | |||||||||
Total impairment and other charges | | $ | 12 | | $ | 36 | | $ | 18 | | $ | 40 | | ||||||||
Other | — | 1 | |||||||||||||||||||
Total impairment and other | $ | 39 | $ | 6 |
For the thirteen and twenty-six weeks ended July 30, 2022,April 29, 2023, we incurred $9 million and $10$19 million of transformation consulting expense, respectively.expense. We recorded impairment charges of $2$18 million, and $5 million related to long-lived assets and right-of-use assets, as well asprimarily accelerated tenancy charges on right-of-use assets for the thirteenclosures of the Sidestep banner and twenty-six weeks ended July 30, 2022, respectively.certain Foot Locker Asia stores. Additionally, we recorded $1 million and $3 million in acquisition and integrationreorganization costs related to WSS and atmos for the thirteen and twenty-six weeks ended July 30, 2022, respectively.
For the thirteen and twenty-six weeks ended July 31, 2021, we recorded impairment charges of $39 million, related to the decision to exit the Footaction banner. For the thirteen and twenty-six weeks ended July 31, 2021, we recorded charges of $4 million in lease-related termination costs, offset by $7 million of insurance recovery income related to 2020 social unrest losses. For the twenty-six weeks ended July 31, 2021, we recorded an impairment charge of $2 million related to the underperformanceannounced closure of one of our minority investments,a North American distribution center and a severance charge of $2 million in connectioncosts associated with the reorganizationclosure of the Sidestep banner and certain support functions.Foot Locker Asia stores.
6.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Other Income / (Expense), net
Effective June 27, 2022, the Company reached a definitive agreement to sell all assets related to the Eastbay Team Sales business, consisting primarily of inventory and accounts receivable. We received proceeds of $47 million from the transaction, resulting in a gain of $18 million, reported in other income / (expense), net.
| Thirteen weeks ended | |||||||
April 29, | April 30, | |||||||
($ in millions) | 2023 | 2022 | ||||||
Pension and postretirement net benefit expense, excluding service cost | $ | (2 | ) | $ | — | |||
Share of losses related to minority investments | (1 | ) | — | |||||
Minority investment in Retailors, Ltd. | — | (25 | ) | |||||
Total other income / (expense), net | $ | (3 | ) | $ | (25 | ) |
7.6. Cash, Cash Equivalents, and Restricted Cash
The table below 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.
| | | | | | |
| | July 30, | | July 31, | ||
($ in millions) |
| 2022 |
| 2021 | ||
Cash and cash equivalents | | $ | 386 | | $ | 1,845 |
Restricted cash included in other current assets | | | 7 | | | 7 |
Restricted cash included in other non-current assets | | | 38 | | | 29 |
Cash, cash equivalents, and restricted cash | | $ | 431 | | $ | 1,881 |
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Cash and cash equivalents | $ | 313 | $ | 551 | ||||
Restricted cash included in other current assets | 13 | 8 | ||||||
Restricted cash included in other non-current assets | 33 | 36 | ||||||
Cash, cash equivalents, and restricted cash | $ | 359 | $ | 595 |
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 2022 Form 10-Q Page 10
8. Goodwill
See footnote 2, Acquisitions, for additional information on our recent acquisitions.
In conjunction with the sale of the Eastbay Team Sales business, we allocated $6 million of goodwill to the assets sold, representing the allocable share of the fair value of the reporting unit disposed of.
We review goodwill for impairment annually during the first quarter of each fiscal year, or more frequently if impairment indicators arise. The review of impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step quantitative impairment test. The results of the first quarter analysis did not result in an impairment since the fair value of each reporting unit exceeded its carrying value.
9. Other Intangible Assets, net
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
| | | | | | | | | | | | | | | | | | |
| | | July 30, 2022 | | | July 31, 2021 | ||||||||||||
| | Gross | | Accum. | | Net | | Gross | | Accum. | | Net | ||||||
($ in millions) | | value | | amort. | | value | | value | | amort. | | value | ||||||
Amortized intangible assets: (1) |
| | | | | | | | | | | | | | | | | |
Lease acquisition costs | | $ | 97 | | $ | (95) | | $ | 2 | | $ | 116 | | $ | (112) | | $ | 4 |
Trademarks/tradenames (2) | | | 18 | | | (18) | | | — | | | 20 | | | (17) | | | 3 |
Customer lists | | | 20 | | | (5) | | | 15 | | | — | | | — | | | — |
| | $ | 135 | | $ | (118) | | $ | 17 | | $ | 136 | | $ | (129) | | $ | 7 |
| | | | | | | | | | | | | | | | | | |
Indefinite life intangible assets: (1) | | | | | | | | | | | | | | | | | | |
Trademarks/tradenames | | | | | | | | $ | 415 | | | | | | | | $ | 9 |
Other intangible assets, net | | | | | | | | $ | 432 | | | | | | | | $ | 16 |
In connection with the acquisitions of WSS and atmos, we recognized indefinite life intangible assets of $296 million for WSS related tradenames and $130 million for atmos related tradenames. Additionally, we recognized customer list intangible assets of $13 million for WSS and $9 million for atmos, both of which will be amortized over 3 years. The intangibles related to atmos were originally recorded at the exchange rate in effect as of the date of acquisition and are presented in the above table at current period exchange rates. Amortizing intangible assets primarily represent the WSS and atmos customer lists, and lease acquisition costs, which are amounts that are required to secure prime lease locations and other lease rights, primarily in Europe.
Amortization expense recorded is as follows:
| | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | | ||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Amortization expense | | $ | 2 | | $ | 1 | | $ | 5 | | $ | 2 | |
Second Quarter 2022 Form 10-Q Page 11
9. Other Intangible Assets, net (continued)
Estimated future amortization expense for finite-life intangible assets is as follows:
| | | |
($ in millions) |
| | |
Remainder of 2022 | | $ | 4 |
2023 | | | 7 |
2024 | |
| 5 |
2025 | | | 1 |
10.7. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised of the following:
| | | | | | | | | |
| | July 30, | | July 31, | | January 29, | |||
($ in millions) |
| 2022 |
| 2021 |
| 2022 | |||
Foreign currency translation adjustments | | $ | (182) | | $ | (74) | | $ | (107) |
Hedge contracts | |
| (2) | |
| (1) | | | — |
Unrecognized pension cost and postretirement benefit | |
| (232) | |
| (263) | | | (236) |
| | $ | (416) | | $ | (338) | | $ | (343) |
| April 29, | April 30, | January 28, | |||||||||
($ in millions) | 2023 | 2022 | 2023 | |||||||||
Foreign currency translation adjustments | $ | (155 | ) | $ | (151 | ) | $ | (148 | ) | |||
Hedge contracts | (2 | ) | 1 | (3 | ) | |||||||
Unrecognized pension cost and postretirement benefit | (239 | ) | (234 | ) | (241 | ) | ||||||
| $ | (396 | ) | $ | (384 | ) | $ | (392 | ) |
The changes in AOCL for the twenty-sixthirteen weeks ended July 30, 2022April 29, 2023 were as follows:
| | | | | | | | | | | | |
| | Foreign | | | | | Items Related | | | | ||
| | Currency | | | | | to Pension and | | | | ||
| | Translation | | | | Postretirement | | | | |||
($ in millions) |
| Adjustments |
| Hedges |
| Benefits |
| Total | ||||
Balance as of January 29, 2022 | | $ | (107) | | | — | | $ | (236) | | $ | (343) |
| | | | | | | | | | | | |
OCI before reclassification | |
| (75) | | | 2 | | | — | |
| (73) |
Reclassification of hedges, net of tax | | | — | | | (4) | | | — | | | (4) |
Amortization of pension actuarial loss, net of tax | |
| — | | | — | | | 4 | |
| 4 |
Other comprehensive income | |
| (75) | |
| (2) | |
| 4 | |
| (73) |
Balance as of July 30, 2022 | | $ | (182) | | $ | (2) | | $ | (232) | | $ | (416) |
| Foreign | | Items Related | | ||||||||||||
| Currency | | to Pension and | | ||||||||||||
| Translation | Hedge | Postretirement | | ||||||||||||
($ in millions) | Adjustments | Contracts | Benefits | Total | ||||||||||||
Balance as of January 28, 2023 | $ | (148 | ) | (3 | ) | $ | (241 | ) | $ | (392 | ) | |||||
| | | | | ||||||||||||
OCI before reclassification | (7 | ) | 3 | — | (4 | ) | ||||||||||
Reclassification of hedges, net of tax | — | (2 | ) | — | (2 | ) | ||||||||||
Amortization of pension actuarial loss, net of tax | — | — | 2 | 2 | ||||||||||||
Other comprehensive income | (7 | ) | 1 | 2 | (4 | ) | ||||||||||
Balance as of April 29, 2023 | $ | (155 | ) | $ | (2 | ) | $ | (239 | ) | $ | (396 | ) |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Accumulated Other Comprehensive Loss (continued)
Reclassifications from AOCL for the twenty-sixthirteen weeks ended July 30, 2022April 29, 2023 were as follows:
| | | |
($ in millions) |
| | |
Reclassification of hedge loss: |
| |
|
Cross-currency swap | | $ | (4) |
Income tax | | | — |
Reclassification of hedges, net of tax | | $ | (4) |
| | | |
Amortization of actuarial loss: | | | |
Pension benefits | | $ | 5 |
Income tax benefit | |
| (1) |
Amortization of actuarial loss, net of tax | | $ | 4 |
Total, net of tax | | $ | — |
($ in millions) | | |||
Reclassification of hedge loss: | ||||
Cross-currency swap | $ | (2 | ) | |
Income tax | — | |||
Reclassification of hedges, net of tax | $ | (2 | ) | |
| | |||
Amortization of actuarial loss: | | |||
Pension benefits | $ | 3 | ||
Income tax benefit | (1 | ) | ||
Amortization of actuarial loss, net of tax | $ | 2 | ||
Total, net of tax | $ | — |
Second Quarter 2022 Form 10-Q Page 12
11. Financial Instruments and Risk Management
Fair Value Hedge
On May 6, 2022, we entered into a cross-currency swap contract to reduce the effect of the fluctuating U.S. Dollar (“USD”) to Japanese Yen (“JPY”) foreign exchange rate on our foreign currency-denominated intercompany loan between our Japanese and U.S. subsidiary. We expect the gains and losses on this contract to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from the remeasurement of the principal and interest accrued on the loan. Though the intercompany loan eliminates in consolidation, the foreign currency remeasurement of the loan and interest by the U.S. subsidiary is reflected in the consolidated financial statements.
The cross-currency swap contract has a notional amount of JPY 11 billion and final receipt of $85 million. The cross-currency swap contract, which matures on November 2, 2031, swaps Yen-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting the JPY 11 billion fixed-rate 3.51% intercompany loan to a fixed-rate 6.77% USD-denominated receivable for our U.S. subsidiary.
We designated the cross-currency swap contract to hedge the changes in value of the intercompany loan and its variability on earnings. We will apply fair value hedge accounting, and we will consider market factors other than the change in the spot exchange rate on the notional amount of the swap to be excluded components. The foreign currency spot rate fluctuations on the cross-currency swap notional amount and interest accruals are reported in earnings each period, while all other changes are reported in other comprehensive income. Because the terms of the hedged item and the hedging instrument match and the likelihood of swap counterparty default is not probable, the hedge is expected to exactly offset changes in the fair value of the foreign currency debt resulting from to foreign currency fluctuations over the term of the swap.
As of July 30, 2022, the cross-currency swap had a fair value of $1 million and was included in other assets. We record the changes in the fair value of the contract to AOCL. Each period, we reclassify an amount out of AOCL equal to the remeasurement gain or loss on the hedged intercompany loan that is recorded in selling, general and administrative expenses. As of July 30, 2022, there was $3 million in AOCL, net of tax, related to the cross-currency swap. In addition, we recognize swap interest income based on the differential in fixed interest rates per the contract. For the thirteen and twenty-six weeks ended July 30, 2022, we recorded $1 million of income in interest expense, net. Refer to Note 10 for further information regarding amounts recorded in AOCL.
12.8. Fair Value Measurements
Our financial assets and liabilities are recorded at fair value, using a three-levelthree-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:
|
|
|
|
|
|
Second Quarter 2022 Form 10-Q Page 13
12. Fair Value Measurements (continued)
In 2021, we invested $68 million to take a common stock minority stake in a public entity, Retailors, Ltd, which is traded on the Tel Aviv stock exchange. This investment is classified as a Level 1 instrument since the fair value is readily available in an active market.
The fair value of the auction rate security, classified as available-for-sale, is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.
The fair value of the contingent consideration liability associated with the atmos acquisition is estimated using an option pricing model simulation that determines an average projected payment value across numerous iterations.
Our derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility and, therefore, are classified as Level 2 instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| | | | | | | | | | | | | | | | | | |
($ in millions) | | As of July 30, 2022 | | As of July 31, 2021 | ||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Minority investment in common stock | | $ | 107 | | $ | — | | $ | — | | $ | 92 | | $ | — | | $ | — |
Available-for-sale security | | | — | | | 6 | | | — | | | — | | | 7 | | | — |
Foreign exchange forward contracts | |
| — | |
| 1 | |
| — | |
| — | |
| 1 | |
| — |
Cross-currency swap contract | | | — | | | 1 | | | — | | | — | | | — | | | — |
Total assets | | $ | 107 | | $ | 8 | | $ | — | | $ | 92 | | $ | 8 | | $ | — |
Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Contingent consideration | |
| — | |
| — | |
| 35 | |
| — | |
| — | |
| — |
Foreign exchange forward contracts | |
| — | |
| — | |
| — | |
| — | |
| 2 | |
| — |
Total liabilities | | $ | — | | $ | — | | $ | 35 | | $ | — | | $ | 2 | | $ | — |
($ in millions) | As of April 29, 2023 | As of April 30, 2022 | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Minority investment in common stock | $ | — | $ | — | $ | — | $ | 120 | $ | — | $ | — | ||||||||||||
Available-for-sale security | — | 6 | — | — | 6 | — | ||||||||||||||||||
Foreign exchange forward contracts | — | — | — | — | 2 | — | ||||||||||||||||||
Total assets | $ | — | $ | 6 | $ | — | $ | 120 | $ | 8 | $ | — | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | 35 | ||||||||||||
Foreign exchange forward contracts | — | 1 | — | — | — | — | ||||||||||||||||||
Total liabilities | $ | — | $ | 1 | $ | 4 | $ | — | $ | — | $ | 35 |
There were no 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 investments measured using the fair value measurement alternative had a carrying value of $579 million and $612 million as of July 30, 2022 and July 31, 2021, respectively.
Second Quarter 2022 Form 10-Q Page 14
12. Fair Value Measurements (continued)
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 balance as of July 30, 2022 includes the $400 million 4% Notes. The carrying value and estimated fair value of long-term debt were as follows:
| | | | | | |
($ in millions) |
| July 30, 2022 |
| July 31, 2021 | ||
Carrying value (1) | | $ | 394 | | $ | 99 |
Fair value | | $ | 313 | | $ | 102 |
($ in millions) | April 29, 2023 | April 30, 2022 | ||||||
Carrying value (1) | $ | 395 | $ | 394 | ||||
Fair value | $ | 339 | $ | 332 |
The carrying value of debt as of |
The carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value.
13.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share
We account for earnings per share (“EPS”) using the treasury stock method. Basic EPS is computed by dividing net income 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 | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
(in millions, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income attributable to Foot Locker, Inc. | | $ | 94 | | $ | 430 | | $ | 227 | | $ | 632 |
| | | | | | | | | | | | |
Weighted-average common shares outstanding | |
| 94.1 | |
| 103.8 | |
| 95.1 | |
| 103.7 |
Dilutive effect of potential common shares | |
| 1.0 | |
| 1.4 | |
| 1.0 | |
| 1.4 |
Weighted-average common shares outstanding assuming dilution | |
| 95.1 | |
| 105.2 | |
| 96.1 | |
| 105.1 |
| | | | | | | | | | | | |
Earnings per share - basic | | $ | 1.00 | | $ | 4.14 | | $ | 2.39 | | $ | 6.10 |
Earnings per share - diluted | | $ | 0.99 | | $ | 4.09 | | $ | 2.36 | | $ | 6.02 |
| | | | | | | | | | | | |
Anti-dilutive share-based awards excluded from diluted calculation | |
| 2.8 | |
| 1.5 | |
| 2.7 | |
| 1.7 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
(in millions, except per share data) | 2023 | 2022 | ||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
Weighted-average common shares outstanding | 93.7 | 96.1 | ||||||
Dilutive effect of potential common shares | 1.4 | 1.1 | ||||||
Weighted-average common shares outstanding assuming dilution | 95.1 | 97.2 | ||||||
| | | ||||||
Earnings per share - basic | $ | 0.39 | $ | 1.38 | ||||
Earnings per share - diluted | $ | 0.38 | $ | 1.37 | ||||
| | | ||||||
Anti-dilutive share-based awards excluded from diluted calculation | 2.3 | 2.5 |
Performance stock units related to our long-term incentive programs of 0.80.9 million and 0.6 million have been excluded from diluted weighted-average shares for each of the periods ended JulyApril 29, 2023 and April 30, 2022 and July 31, 2021, respectively.. The issuance of these shares is contingent on our performance metrics as compared to the pre-established performance goals, which have not been achieved.
Second Quarter 2022 Form 10-Q Page 15
14.10. Pension
The components of net periodic pension benefit expense 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 / (expense), net.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Service cost | $ | 1 | $ | 4 | ||||
Interest cost | 6 | 5 | ||||||
Expected return on plan assets | (7 | ) | (8 | ) | ||||
Amortization of net loss | 3 | 2 | ||||||
Net benefit expense | $ | 3 | $ | 3 |
| | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | ||||||||
| | | July 30, | | | July 31, | | | July 30, | | | July 31, |
($ in millions) | | | 2022 | | | 2021 | | | 2022 | | | 2021 |
Service cost | | $ | 3 | | $ | 4 | | $ | 7 | | $ | 8 |
Interest cost | | | 5 | |
| 5 | | | 10 | | | 9 |
Expected return on plan assets | | | (7) | |
| (8) | | | (15) | | | (17) |
Amortization of net loss | | | 3 | |
| 2 | | | 5 | | | 5 |
Net benefit expense | | $ | 4 | | $ | 3 | | $ | 7 | | $ | 5 |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15.11. 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 | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions) | | 2022 | | 2021 | | 2022 | | 2021 | ||||
Options and employee stock purchase plan | | $ | 2 | | $ | 2 | | $ | 3 | | $ | 4 |
Restricted stock units and performance stock units | |
| 7 | |
| 6 | |
| 13 | |
| 12 |
Total share-based compensation expense | | $ | 9 | | $ | 8 | | $ | 16 | | $ | 16 |
| | | | | | | | | | | | |
Tax benefit recognized | | $ | 1 | | $ | 1 | | $ | 2 | | $ | 2 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Options and employee stock purchase plan | $ | 1 | $ | 1 | ||||
Restricted stock units and performance stock units | 1 | 6 | ||||||
Total share-based compensation expense | $ | 2 | $ | 7 | ||||
| | | ||||||
Tax benefit recognized | $ | — | $ | 1 |
Valuation Model and Assumptions
We use the Black-Scholes option-pricing model to estimate the fair value of options and the stock purchase plan. The Black-Scholes option-pricing model incorporates various and subjective assumptions, including expected term and expected volatility.
The table below shows assumptions used to compute share-based compensation expense for awards granted during the twenty-sixthirteen weeks ended JulyApril 29, 2023 and April 30, 2022 and July 31, 2021.
| | | | | | | | | | | | | |
| | | Stock Option Plans | | | Stock Purchase Plan | | ||||||
| | July 30, | | July 31, | | July 30, | | July 31, | | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Weighted-average risk free rate of interest |
| | 2.3 | % | | 0.9 | % | | 0.4 | % | | 0.2 | % |
Expected volatility |
| | 48.2 | % | | 47 | % | | 40 | % | | 48 | % |
Weighted-average expected award life (in years) |
| | 5.3 |
| | 5.5 |
| | 1.0 |
| | 1.0 |
|
Dividend yield |
| | 3.7 | % | | 1.5 | % | | 2.0 | % | | 5.0 | % |
Weighted-average fair value | | $ | 10.5 | | $ | 20.22 | | $ | 23.47 | | $ | 7.84 | |
Second Quarter 2022 Form 10-Q Page 16
| Stock Option Plans | Stock Purchase Plan | ||||||||||||||
| April 29, | April 30, | April 29, | April 30, | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
Weighted-average risk free rate of interest | 3.5 | % | 2.3 | % | 2.2 | % | 0.1 | % | ||||||||
Expected volatility | 49 | % | 50 | % | 40 | % | 40 | % | ||||||||
Weighted-average expected award life (in years) | 5.4 | 5.5 | 1.0 | 1.0 | ||||||||||||
Dividend yield | 3.6 | % | 3.9 | % | 3.7 | % | 1.8 | % | ||||||||
Weighted-average fair value | $ | 14.09 | $ | 10.42 | $ | 7.16 | $ | 29.46 |
NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
15. Share-Based Compensation (continued)
The information in the table below provides activity under our stock option plans for the twenty-sixthirteen weeks ended July 30, 2022.April 29, 2023.
| | 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 | 3,256 | | $ | 47.85 | ||||||||
Granted | 294 | | 39.08 | |||||||||
Exercised | (151 | ) | | 24.60 | ||||||||
Expired or cancelled | (148 | ) | | 36.71 | ||||||||
Options outstanding at April 29, 2023 | 3,251 | 3.8 | $ | 48.64 | ||||||||
Options exercisable at April 29, 2023 | 2,783 | 2.9 | $ | 50.48 | ||||||||
Shares available for future grant at April 29, 2023 under the 2007 Stock Incentive Plan | 888 | | | |||||||||
Shares available for future grant at April 29, 2023 under the employment inducement award plan (1) | 409 | | |
(1) | On August 24, 2022, the Company granted options and other awards to its new President and Chief Executive Officer, Mary N. Dillon. These awards were granted outside of the 2007 Stock Incentive Plan as employment inducement awards and do not require shareholder approval under the rules of the New York Stock Exchange or otherwise. Shares available for future grant under this plan are reserved for the sole purpose to issue shares pursuant to her employment inducement awards. |
| | | | | | | | |
|
| |
| 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 |
| 3,211 | | | |
| $ | 48.84 |
Granted |
| 522 | |
| |
| | 31.02 |
Exercised |
| (116) | |
| |
| | 26.15 |
Expired or cancelled |
| (148) | |
| |
| | 51.29 |
Options outstanding at July 30, 2022 |
| 3,469 | |
| 5.1 | | $ | 46.82 |
Options exercisable at July 30, 2022 |
| 2,635 | |
| 3.9 | | $ | 51.67 |
Options available for future grant at July 30, 2022 | | 1,837 | | | | | | |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation (continued)
The total fair value of options vested Julythirteen weeks ended April 29, 2023 and April 30, 2022 and July 31, 2021 was $4 million for both periods. The cash received from option exercises during the thirteen and twenty-six weeks ended July 30, 2022 were $1April 29, 2023 was $4 million, and $3 million, respectively. Thethe related tax benefits realized from option exercises during the thirteen and twenty-six weeks ended July 30, 2022 were not significant. The cash received from option exercises during the thirteen and twenty-six weeks ended July 31, 2021 were $6April 30, 2022 was $2 million, and $10 million, respectively. Thethe related tax benefits realized from option exercises during the thirteen and twenty-six weeks ended July 31, 2021 were $1 million and $2 million, respectively.not significant.
The total intrinsic value of options exercised (the difference between the market price of our common stock on the exercise date and the price paid by the optionee to exercise the option) is presented below:
| | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Exercised | | $ | — | | $ | 5 | | $ | — | | $ | 8 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Exercised | $ | 3 | $ | — |
The aggregate intrinsic value for stock options outstanding, and outstanding and exercisable (the difference between 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 | ||||
| | July 30, | | July 31, | ||
($ in millions) | | 2022 | | 2021 | ||
Outstanding | | $ | 5 | | $ | 40 |
Outstanding and exercisable | | $ | 3 | | $ | 20 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Outstanding | $ | 15 | $ | 6 | ||||
Outstanding and exercisable | $ | 13 | $ | 4 |
As of July 30, 2022,April 29, 2023, there was $5 million of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a remaining weighted-average period of 1.61.8 years.
Second Quarter 2022 Form 10-Q Page 17
15. Share-Based Compensation (continued)
The table below summarizes information about stock options outstanding and exercisable at July 30, 2022.April 29, 2023
| | | | | | | | | | | | |
| | 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) | ||||||||||
$21.60 - $36.51 |
| 1,326 | | 7.4 | | $ | 26.37 |
| 601 | | $ | 24.21 |
$44.78 - $48.98 |
| 449 | | 3.3 | |
| 45.02 |
| 448 | |
| 45.02 |
$53.61 - $58.94 |
| 506 | | 5.8 | |
| 56.68 |
| 398 | |
| 57.44 |
$62.02 - $72.83 | | 1,188 | | 3.0 | |
| 66.13 |
| 1,188 | |
| 66.13 |
|
| 3,469 |
| 5.1 | | $ | 46.82 |
| 2,635 | | $ | 51.67 |
| 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) | |||||||||||||||||||
$21.60 - $36.51 | 855 | 5.2 | $ | 25.40 | 708 | $ | 23.82 | |||||||||||||
$38.94 - $48.98 | 743 | 5.2 | 42.58 | 439 | 45.00 | |||||||||||||||
$53.61 - $58.94 | 482 | 3.3 | 56.73 | 465 | 56.84 | |||||||||||||||
$62.02 - $72.83 | 1,171 | 2.1 | 66.14 | 1,171 | 66.14 | |||||||||||||||
| 3,251 | 3.8 | $ | 48.64 | 2,783 | $ | 50.48 |
Restricted Stock Units and Performance Stock Units
Restricted stock units (“RSU”) are awarded to certain officers, key employees of the Company, and nonemployee directors. Additionally, performance stock units (“PSU”) are awarded to officers and certain key employees in connection with our long-term incentive program. Each RSU and PSU represents the right to receive one share of our common stock provided that the applicable performance and vesting conditions are satisfied. PSU awards granted in 2022 and 2023 also include a performance objective based on our relative total shareholder return over the performance period to a pre-determined peer group, assuming the reinvestment of dividends. The fair value of these awards is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Share-Based Compensation (continued)
Generally, RSU awards fully vest after the passage of time, typically three years for employees and one year for nonemployee directors, provided there is continued service with the Company until the vesting date, subject to the terms of the award. PSU awards are earned only after the attainment of performance goals in connection with the relevant performance period and vest after an additional one-yearone-year period. No dividends are paid or accumulated on any RSU or PSU awards. Compensation expense is recognized over the vesting period.
RSU and PSU activity for the twenty-sixthirteen weeks ended July 30, 2022April 29, 2023 is summarized as follows:
| | | | | | | | | |
| | | | | Weighted-Average | | | ||
| | Number | Remaining | Weighted-Average | |||||
| | of | Contractual | Grant Date | |||||
| | Shares | Life | Fair Value | |||||
|
| | (in thousands) |
| | (in years) |
| | (per share) |
Nonvested at beginning of year |
| | 1,391 | |
| | | $ | 43.95 |
Granted |
| | 1,026 | |
| |
| | 30.22 |
Vested |
| | (110) | |
| |
| | 55.58 |
Performance adjustment (1) | | | (60) | | | | | | |
Forfeited |
| | (92) | |
| |
| | 34.41 |
Nonvested at July 30, 2022 |
| | 2,155 | |
| 1.8 | | $ | 36.95 |
| | | | | | | | | |
Aggregate value ($ in millions) | | $ | 80 | |
|
| |
| |
| | Weighted- | ||||||||||
Average | Weighted- | |||||||||||
| Number | Remaining | Average | |||||||||
| of | Contractual | Grant Date | |||||||||
| Shares | Life | Fair Value | |||||||||
| (in thousands) | (in years) | (per share) | |||||||||
Nonvested at beginning of year | 1,992 | | $ | 37.58 | ||||||||
Granted | 741 | | 39.69 | |||||||||
Vested | (628 | ) | | 34.12 | ||||||||
Performance adjustment (1) | (600 | ) | | |||||||||
Forfeited | (99 | ) | | 39.79 | ||||||||
Nonvested at April 29, 2023 | 1,406 | 1.8 | $ | 40.80 | ||||||||
| | | | |||||||||
Aggregate value ($ in millions) | $ | 57 | |
(1) | This represents adjustments made to PSUs reflecting changes in estimates based upon our current performance against predefined financial targets. |
Second Quarter 2022 Form 10-Q Page 18
15. Share-Based Compensation (continued)
The total value of RSU and PSU awards that vested during the twenty-sixthirteen weeks ended JulyApril 29, 2023 and April 30, 2022 and July 31, 2021 was $6$21 million and $22$5 million, respectively. As of July 30, 2022,April 29, 2023, there was $44$35 million of total unrecognized compensation cost related to nonvested awards.
16.12. 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 is a defendant in two purported class actions alleging wage/hour and wage statement violations in California.
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 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.
Second
Item2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Foot Locker, Inc. leadsis a leading footwear and apparel retailer that unlocks the celebration"inner sneakerhead" in all of us. We have a strong history of sneaker authority that sparks discovery and youthignites the power of sneaker culture around the globe through aour portfolio of brands, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, atmos, WSS, Footaction, and Sidestep. As of July 30, 2022, we operated 2,799 primarily mall-basedatmos.
Ensuring that our customers can engage with us in the most convenient manner for them whether in our stores, as well as stores in high-traffic urban retail areas andon our website, or on our mobile application, is a high streets, in 28 countries across the United States, Canada, Europe, Australia, New Zealand, and Asia, as well as websites and mobile apps. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passionpriority for self-expression and creating unrivaled experiences at the heart of the global sneaker community.
us. We use our omni-channel capabilities to bridge the digital world and physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners including footlocker.com, kidsfootlocker.com, champssports.com, atmosusa.com, shopwss.com and related e-commerce sites in the various international countries that we operate.banners. 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 website for eastbay.com.
Store Count
At July 30, 2022,April 29, 2023, we operated 2,7992,692 stores as compared with 2,8582,714 and 2,9112,815 stores at January 29,28, 2023 and April 30, 2022, and July 31, 2021, respectively.
Franchise Operations
A total of 148163 franchised stores were operating at July 30, 2022,April 29, 2023, as compared with 142159 and 134148 stores at January 29,28, 2023 and April 30, 2022, and July 31, 2021, respectively, operating in the Middle East and Asia. Revenue from 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
Results of Operations
We continueevaluate performance based on several factors, primarily the banner’s financial results, referred to monitor outbreaksas division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expenses, non-operating income, and net interest expense.
The table below summarizes our results for the period.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Sales | $ | 1,927 | $ | 2,175 | ||||
Licensing revenue | 4 | 3 | ||||||
Total revenue | 1,931 | 2,178 | ||||||
| | | ||||||
Operating Results | | | ||||||
Division profit | 104 | 263 | ||||||
Less: Impairment and other (1) | 39 | 6 | ||||||
Less: Corporate expense (2) | 4 | 37 | ||||||
Income from operations | 61 | 220 | ||||||
Interest expense, net | (1 | ) | (5 | ) | ||||
Other income / (expense), net (3) | (3 | ) | (25 | ) | ||||
Income before income taxes | $ | 57 | $ | 190 |
(1) | See the Impairment and Other Charges section for further information. |
(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. |
(3) | Other income / (expense), net includes non-operating items, changes in fair value of minority interests measured at fair value or using the fair value measurement alternative, 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. See the Other income / (expense), net section for further information. |
Reconciliation of Non-GAAP Measures
In addition to reporting our financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), 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.
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.
Second Quarter 2022 Form 10-Q Page 20
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.item. 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.
Effective with the first quarter of 2022, the calculation for non-GAAP earnings excludes gains and losses from all minority investments, including the adjustments related to the investment in Retailors, Ltd. We believe this is a more representative measure of our recurring earnings, assists in the comparability of results, and is consistent with how management reviews performance. The non-GAAP results for 2021 have been recast, as applicable, to conform to the current year’s presentation. As we report quarterly results through 2022, we will provide updated non-GAAP reconciliations for the corresponding prior year’s quarter under this revised definition.
Presented below is a reconciliation of GAAP and non-GAAP.
| | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | ||||
($ in millions, except per share amounts) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Pre-tax income: |
| |
|
| |
|
| |
|
| |
|
Income before income taxes | | $ | 143 | | $ | 587 | | $ | 333 | | $ | 871 |
Pre-tax amounts excluded from GAAP: | |
| | |
|
| |
|
| |
|
|
Impairment and other charges | |
| 12 | |
| 36 |
|
| 18 | |
| 40 |
Other income / expense, net | | | (6) | | | (320) | | | 18 | | | (320) |
Adjusted income before income taxes (non-GAAP) | | $ | 149 | | $ | 303 | | $ | 369 | | $ | 591 |
| | | | | | | | | | | | |
After-tax income: | |
|
| |
|
| |
|
| |
|
|
Net income attributable to Foot Locker, Inc. | | $ | 94 | | $ | 430 | | $ | 227 | |
| 632 |
After-tax adjustments excluded from GAAP: | |
| | |
|
| |
|
| |
|
|
Impairment and other charges, net of income tax benefit of $3, $9, $5, and $10, respectively | | | 9 | | | 27 | | | 13 | | | 30 |
Other income / expense, net of (expense)/income tax benefit of $(3), $(84), $3, and $(84), respectively | | | (3) | | | (236) | | | 15 | | | (236) |
Tax reserves charge | | | 5 | | | — | | | 5 | | | — |
Adjusted net income (non-GAAP) | | $ | 105 | | $ | 221 | | $ | 260 | |
| 426 |
| | | | | | | | | | | | |
Earnings per share: | |
| | |
|
| |
|
| |
|
|
Diluted earnings per share | | $ | 0.99 | | $ | 4.09 | | $ | 2.36 | |
| 6.02 |
Diluted EPS amounts excluded from GAAP: | |
| | |
| | |
| | |
| |
Impairment and other charges | | | 0.09 | | | 0.25 | | | 0.14 | | | 0.28 |
Other income / expense, net | | | (0.03) | | | (2.25) | | | 0.16 | | | (2.25) |
Tax reserves charge | | | 0.05 | | | — | | | 0.05 | | | — |
Adjusted diluted earnings per share (non-GAAP) | | $ | 1.10 | | $ | 2.09 | | $ | 2.71 | |
| 4.05 |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions, except per share amounts) | 2023 | 2022 | ||||||
Pre-tax income: | ||||||||
Income before income taxes | $ | 57 | $ | 190 | ||||
Pre-tax amounts excluded from GAAP: | | |||||||
Impairment and other | 39 | 6 | ||||||
Other income / expense, net | 1 | 24 | ||||||
Adjusted income before income taxes (non-GAAP) | $ | 97 | $ | 220 | ||||
| | | ||||||
After-tax income: | ||||||||
Net income attributable to Foot Locker, Inc. | $ | 36 | $ | 133 | ||||
After-tax adjustments excluded from GAAP: | | |||||||
Impairment and other, net of income tax benefit of $6, and $2 million, respectively | 33 | 4 | ||||||
Other income / expense, net of income tax benefit/(expense) of $-, and $6 million, respectively | 1 | 18 | ||||||
Tax reserves benefit | (4 | ) | — | |||||
Adjusted net income (non-GAAP) | $ | 66 | $ | 155 | ||||
| | | ||||||
Earnings per share: | | |||||||
Diluted earnings per share | $ | 0.38 | $ | 1.37 | ||||
Diluted EPS amounts excluded from GAAP: | | | ||||||
Impairment and other | 0.36 | 0.05 | ||||||
Other income / expense, net | — | 0.18 | ||||||
Tax reserves benefit | (0.04 | ) | — | |||||
Adjusted diluted earnings per share (non-GAAP) | $ | 0.70 | $ | 1.60 |
During the thirteen and twenty-six weeks ended July 30, 2022,April 29, 2023, we recorded pre-tax charges of $12$39 million and $18$6 million, respectively, classified as Impairment and Other. See the Impairment and Other Charges section for further information.
The adjustments made to other income / (expense), net reflectreflected gains or losses primarily associated with our minority investments. See the Other Income / (Expense), net section for further information.
In
During the second quarter of 2022,thirteen weeks ended April 29, 2023, we recorded a $5$4 million chargebenefit related to ouran income tax reserves due to the resolutionrelease from a statute of a foreign tax settlement.limitations expiration.
Segment Reporting and Results of Operations
We have determined that 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, Champs Sports, Kids Foot Locker, Lady Foot Locker, Champs Sports,and WSS, and Footaction, including each of their related e-commerce businesses, as well as our Eastbay business.businesses. Our EMEA operating segment includes the results of the following banners operating in Europe: Foot Locker, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of the Foot Locker banner and its related e-commerce business operating in Australia, New Zealand, and Asia, as well as atmos, which operates primarily in Asia. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Results
As reported in our Annual Report on Form 10-K, we announced the closure of Operationsthe Sidestep banner and the wind down of our stores operating in Hong Kong and Macau. We currently expect to wind down the majority of operations by the end of the second quarter. Additionally during the second quarter, we will be transitioning our Singapore and Malaysian business to a licensed store model.
We evaluate performance based on several factors, primarily the banner’s financial results, referred to as division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expenses, non-operating income, and net interest expense.
The table below summarizes our results.
| | | | | | | | | | | | |
| Thirteen weeks ended | | Twenty-six weeks ended | |||||||||
| July 30, | | July 31, | | July 30, | | July 31, | |||||
($ in millions) | 2022 |
| 2021 | | 2022 |
| 2021 | |||||
Sales | | $ | 2,065 | | $ | 2,275 | | $ | 4,240 | | $ | 4,428 |
| | | | | | | | | | | | |
Operating Results | | | | | | | | | | | | |
Division profit | | | 184 | | | 332 | | | 444 | | | 647 |
Less: Impairment and other charges (1) | | | 12 | | | 36 | | | 18 | | | 40 |
Less: Corporate expense (2) | | | 33 | | | 32 | | | 70 | | | 61 |
Income from operations | | | 139 | | | 264 | | | 356 | | | 546 |
Interest expense, net | | | (5) | | | (2) | | | (10) | | | (4) |
Other income / (expense), net (3) | | | 9 | | | 325 | | | (13) | | | 329 |
Income before income taxes | | $ | 143 | | $ | 587 | | $ | 333 | | $ | 871 |
Second Quarter 2022 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.
Sales from acquired businesses that include inventory are included in the computation of comparable-store sales after 15 monthsthe 15th month of operations. Accordingly, WSS comparable-store sales are included in the first quarter of WSS and2023, while sales from the atmos have been excluded frombanner only include two months in the computation of comparable-store sales. As a result of the Eastbay Team Sales divestiture, sales from this business were removed for the computation of comparable sales for all periods.
The information shown below represents certain sales metrics by sales channel.
| | | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | | ||||||||
| | July 30, | July 31, | | July 30, | July 31, | | ||||||
($ in millions) | | 2022 | 2021 | | 2022 | 2021 | | ||||||
Stores | | | | | | | | | | | | | |
Sales | | $ | 1,716 | | $ | 1,817 | | $ | 3,492 | | $ | 3,437 | |
$ Change | | $ | (101) | | | | | $ | 55 | | | | |
% Change | | | (5.6) | % | | | | | 1.6 | % | | | |
% of total sales | | | 83.1 | % | | 79.9 | % | | 82.4 | % | | 77.6 | % |
Comparable sales (decrease) increase | | | (6.0) | % | | 28.4 | % | | 0.5 | % | | 54.0 | % |
| | | | | | | | | | | | | |
Direct-to-customers | | | | | | | | | | | | | |
Sales | | $ | 349 | | $ | 458 | | $ | 748 | | $ | 991 | |
$ Change | | $ | (109) | | | | | $ | (243) | | | | |
% Change | | | (23.8) | % | | | | | (24.5) | % | | | |
% of total sales | | | 16.9 | % | | 20.1 | | | 17.6 | % | | 22.4 | % |
Comparable sales decrease | | | (26.7) | % | | (35.1) | | | (28.3) | % | | (8.2) | % |
For the thirteen weeks ended July 30, 2022,April 29, 2023, total sales decreased by $210$248 million, or 9.2%11.4%, to $2,065 million, as compared with the corresponding prior-year period. For the twenty-six weeks ended July 30, 2022, total sales decreased by $188 million, or 4.2%, to $4,240$1,927 million, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales decreased by $139$217 million, or 6.1%10.0%, for the thirteen weeks ended July 30, 2022, and decreasedApril 29, 2023. The information shown below represents certain sales metrics by $76 million, or 1.7%, for the twenty-six weeks ended July 30, 2022. Sales from our acquired WSS and atmos banners were $137 million and $48 million, respectively, for the thirteen weeks ended July 30, 2022, and $275 million and $101 million, respectively for the twenty-six weeks ended July 30, 2022. sales channel.
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Store sales | $ | 1,613 | $ | 1,776 | ||||
$ Change | $ | (163 | ) | | ||||
% Change | (9.2 | )% | | |||||
% of total sales | 83.7 | % | 81.7 | % | ||||
Comparable sales (decrease) / increase | (7.4 | )% | 7.9 | % | ||||
Direct-to-customers sales | $ | 314 | $ | 399 | ||||
$ Change | $ | (85 | ) | | ||||
% Change | (21.3 | )% | | |||||
% of total sales | 16.3 | % | 18.3 | % | ||||
Comparable sales decrease | (16.8 | )% | (29.0 | )% | ||||
Total sales | $ | 1,927 | $ | 2,175 | ||||
$ Change | $ | (248 | ) | |||||
% Change | (11.4 | )% | ||||||
Comparable sales decrease | (9.1 | )% | (1.9 | )% |
The information shown below represents certain combined stores and direct-to-customers sales metrics excluding the sales from WSS and atmos.
| | | | | | | | | | |
| | Thirteen weeks | | | Twenty-six weeks | | ||||
| | Constant Currencies | | Comparable Sales | | | Constant Currencies | | Comparable Sales | |
North America | | (21.5) | % | (16.1) | % | | (19.2) | % | (13.9) | % |
EMEA | | 6.7 | % | 4.5 | % | | 26.7 | % | 23.6 | % |
Asia Pacific | | 21.5 | % | 17.7 | % | | 18.1 | % | 14.0 | % |
| | (14.1) | % | (10.3) | % | | (10.1) | % | (6.2) | % |
Second Quarter 2022 Form 10-Q Page 23
Despite the decline in sales as compared with our record levels in 2021, sales exceeded the results of 2019. Excluding the effect of foreign exchange rate fluctuations and our acquisitions, sales increased by 7.4% and by 1.1% for the quarter and year-to-date periods, respectively,thirteen weeks ended April 29, 2023 as compared with the corresponding periods of 2019.prior-year period.
| Thirteen weeks ended | |||||||
Constant Currencies | Comparable Sales | |||||||
Foot Locker | (7.2 | )% | (5.5 | )% | ||||
Champs Sports | (27.3 | )% | (24.6 | )% | ||||
Kids Foot Locker | (7.2 | )% | (7.7 | )% | ||||
WSS | 8.7 | % | (3.4 | )% | ||||
Other | n.m. | n.m. | ||||||
North America | (14.5 | )% | (12.8 | )% | ||||
Foot Locker | 3.7 | % | 2.1 | % | ||||
Sidestep | (41.7 | )% | (37.8 | )% | ||||
EMEA | 1.0 | % | (0.1 | )% | ||||
Foot Locker | 12.9 | % | 11.2 | % | ||||
atmos | 6.1 | % | 2.7 | % | ||||
Asia Pacific | 10.6 | % | 8.9 | % | ||||
Total Foot Locker, Inc. | (10.0 | )% | (9.1 | )% |
Comparable sales fordecreased both in our stores and in our direct-to-customer channels decreased forthis quarter due to changing vendor mix, coupled with macroeconomic headwinds, including inflation and lower income tax refunds in the quarter. Our direct-to-customer channel saw significant decreases as shoppers navigated back to physical locations. For the year-to-date period, comparableUnited States. In addition, North America sales were slightly up for our stores, while direct-to-customer decreased when compared with the prior year.
Our North American operating segment’s sales, excluding WSS, and comparable-store sales for the current year were negatively affected by the significant fiscal stimulus,closure of Eastbay business, which contributedceased operating in late 2022. Eastbay's sales primarily represent the other category in the above table, and excluding those sales the decline would have been 11.6% on a constant currency basis. Additionally, we are repositioning the Champs Sports banner to last year’s growth,serve the active athlete, which is resulting in expected comparable sales declines due to the transition. Within EMEA, sales for the Foot Locker banners increased, led by our operations in Italy, Spain, and France as well as the effects of inflation on customer demand. Additionally, the wind down of the Footaction business negatively affected sales, last year we operated 211 storestourism has increased as compared with 14 this quarter.last year. Within EMEA,Asia Pacific, sales fromfor the Foot Locker banner increased across many of the regions that we operate, led by Australia, New Zealand, and Sidestep banners increased as tourism returned to more historical levels coupled with an increase in operating days resulting from COVID-19 related store closuresSouth Korea. As previously announced, we are in the prior year. Asia Pacific, excludingprocess of closing our operations in Hong Kong and Macau and converting our business in Singapore and Malaysia to a licensing arrangement. Our sales from our atmos generated increases from both strong performance in Australia and New Zealand, coupled with growth in Asia, basedbanner increased by 2.7% on expansion in that region. Asia Pacific’s increases were alsoa comparable basis, this banner was affected negatively by the increaselack of certain key styles from Adidas that were available in operating days, the current year was essentially open for all days as compared with approximately 80%marketplace last year.
From a product perspective for the combined channels, the sales declined for bothdecline in the quarter and year-to-date periods and was related to decreased salesacross all categories of footwear, apparel and apparel, partially offset by increased sales of accessories. The decline in footwear for the second quarter was primarily due to men’s and kids’ basketball footwear, and the decline in sales of apparel represented a decline in sales of men’s and performance apparel, however sales of women’s apparel generated an increase. For the year-to-date period, all wearer segments within the footwear category experienced declines, with the largest decreases coming from men’s and children’s basketball footwear styles. Apparel sales decreased in the men’s and children’s categories, while women’s increased.
Gross Margin
| | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | | ||||
| | July 30, | | July 31, | | | July 30, | | July 31, | |
|
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
|
Gross margin rate |
| 31.7 | % | 35.1 | % |
| 32.9 | % | 34.9 | % |
Basis point decrease in the gross margin rate |
| (340) |
| |
|
| (200) |
| |
|
Components of the change: |
|
|
| |
|
| |
| |
|
Merchandise margin rate decline |
| (260) |
| |
|
| (160) |
| |
|
Occupancy and buyers’ compensation expense rate |
| (80) |
| |
|
| (40) |
| |
|
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
| 2023 | 2022 | ||||||
Gross margin rate | 30.0 | % | 34.0 | % | ||||
Basis point decrease in the gross margin rate | (400 | ) | | |||||
Components of the change: | | |||||||
Merchandise margin rate decline | (250 | ) | | |||||
Occupancy and buyers’ compensation expense rate | (150 | ) | |
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 to 31.7%30.0% for the thirteen weeks ended July 30, 2022,April 29, 2023, as compared with the corresponding prior-year period, reflecting a 260-basis point decrease in the merchandise margin rate, and an 80-basis point deleverage in the occupancy and buyers’ compensation rate. For the twenty-six weeks ended July 30, 2022, the gross margin rate declined by 200 basis points, reflecting a 160-basis250-basis point decrease in the merchandise margin rate, and a 40-basis150-basis point deleverage in the occupancy and buyers’buyers' compensation rate.
Second Quarter 2022 Form 10-Q Page 24
The declinesdecline in merchandise margin rate reflected higher markdowns versus historically-low levels last year, higher costs of merchandise and higher supply chain costs. Additionally, merchandise margin is negatively affected byincreased shrink. The deleverage in the recent acquisitions that generate a loweroccupancy and buyers' compensation rate which is offset by lower occupancy costs and therefore not significantly affecting the overall gross margin rate. The occupancy rate deleverage also reflected the effect of prior year rent abatementswas primarily related to COVID-19 that represented $6 million and $11 million for the thirteen and twenty-six weeksfixed nature of last year, respectively, as comparedthese costs coupled with insignificant amounts this year.the decline in sales.
Selling, General and Administrative Expenses (SG&A)
| | | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | | ||||||||
| | July 30, | | July 31, | | | July 30, | | July 31, |
| ||||
($ in millions) |
| 2022 |
| 2021 |
|
| 2022 |
| 2021 | | ||||
SG&A | | $ | 452 | | $ | 450 | | | $ | 915 | | $ | 868 | |
$ Change | | $ | 2 | | | | | | $ | 47 | | | | |
% Change | |
| 0.4 | % |
| | | |
| 5.4 | % | | | |
SG&A as a percentage of sales | |
| 21.9 | % |
| 19.8 | % | |
| 21.6 | % |
| 19.6 | % |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
SG&A | $ | 431 | $ | 463 | ||||
$ Change | $ | (32 | ) | | ||||
% Change | (6.9 | )% | | |||||
SG&A as a percentage of sales | 22.4 | % | 21.3 | % |
SG&A increaseddecreased by $2$32 million, or $22$25 million excluding the effect of foreign currency fluctuations, for the thirteen weeks ended July 30, 2022,April 29, 2023, as compared with the corresponding prior-year period. For the year-to-date period SG&A increased by $47 million, or $77 million excluding the effect of foreign currency fluctuations. Our newly acquired businesses contributed $38 million and $72 million for the quarter and year-to-date periods, respectively, to the overall increase. As a percentage of sales, SG&A increased by 210 basis points and 200110 basis points for the thirteen and twenty-six weeks ended July 30, 2022, respectively,April 29, 2023, driven primarily by higher labor costs, information technologydeleverage from the decline in sales, coupled with pressures from inflation and support expenses, as well asinvestments in store wages. Partially offsetting these increases was lower incentive compensation due to the effect of COVID-19 related matters in the prior year.Company's underperformance relative to targets and savings from our cost optimization program.
SG&A for the thirteen and twenty-six weeks ended July 30, 2022 included nominal payroll subsidies from local governments, compared with $4 million and $14 million for the corresponding prior-year periods, respectively.
Depreciation and Amortization
| | | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | | ||||||||
| | July 30, | | July 31, | | | July 30, | | July 31, | | ||||
($ in millions) |
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| ||||
Depreciation and amortization | | $ | 51 | | $ | 48 | | | $ | 105 | | $ | 93 | |
$ Change | | $ | 3 | | | | | | $ | 12 | | | | |
% Change | |
| 6.3 | % | | | | |
| 12.9 | % |
| | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Depreciation and amortization | $ | 51 | $ | 54 | ||||
$ Change | $ | (3 | ) | | ||||
% Change | (5.6 | )% | |
Depreciation and amortization expense increaseddecreased by $3 million and $12 million for the thirteen weeks and twenty-six weeks ended July 30, 2022, respectively,April 29, 2023, as compared with the corresponding prior-year periods.period. Excluding the effect of foreign currency fluctuations, depreciation and amortization increaseddecreased by $5 million and $15$2 million for the thirteen weeks and twenty-six weeks ended July 30, 2022, respectively, as compared with the corresponding prior-year periods. The increase wasApril 29, 2023, primarily related to operating fewer stores and the acquisitions of WSS and atmos.effect from impairments recorded in the prior year.
Impairment and Other Charges
Transformation
During the first quarter of 2023, we incurred $19 million of transformation consulting expense, $18 million of impairment charges were $9 million and $10 millionrelated to accelerated tenancy charges on right-of-use assets for the thirteenclosures of the Sidestep banner and twenty-six weeks ended July 30, 2022, respectively. Impairmentcertain Foot Locker Asia stores, and $2 million of reorganization costs related to the closure of a North American Distribution center and costs associated with the closure of the Sidestep banner and certain Foot Locker Asia stores. In the corresponding prior-year period, we recorded impairment charges of $3 million related to long-lived assets and right-of-use assets wasas well as accelerated tenancy charges, $2 million and $5 million for the thirteen and twenty-six weeks ended July 30, 2022, respectively, and $39 million for both the thirteen and twenty-six weeks ended July 31, 2021. Acquisitionof acquisition and integration costs related to WSS and atmos wereacquisitions, and $1 million and $3 million for the thirteen and twenty-six weeks ended July 30, 2022, respectively.of other expenses.
Second Quarter 2022 Form 10-Q Page 25
For the thirteen and twenty-six weeks ended July 31, 2021, we recorded charges of $4 million in lease-related termination costs, offset by $7 million of insurance recovery income related to 2020 social unrest losses. For the twenty-six weeks ended July 31, 2021, we recorded an impairment charge of $2 million related to the underperformance of one of our minority investments, and a severance charge of $2 million in connection with the reorganization of certain support functions.
Corporate Expense
| | | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | | ||||||||
| | July 30, | | July 31, | | | July 30, | | July 31, | | ||||
($ in millions) |
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| ||||
Corporate expense | | $ | 33 | | $ | 32 | | | $ | 70 | | $ | 61 | |
$ Change | | $ | 1 | | | | | | $ | 9 | | | | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Corporate expense | $ | 4 | $ | 37 | ||||
$ Change | $ | (33 | ) | |
Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.
Corporate expense increaseddecreased by $1 million and $9$33 million for the thirteen and twenty-six weeks ended July 30, 2022, respectively,April 29, 2023, as compared with the corresponding prior-year periods.period. Depreciation and amortization included in corporate expense was $10 million and $9 million for each of the thirteen weeks ended JulyApril 29, 2023 and April 30, 2022 and July 31, 2021, respectively, and $19 million and $16 million for the twenty-six weeks ended July 30, 2022 and July 31, 2021, respectively. These increases were2022. Corporate expense decreased primarily due to higheran increase in the allocation of corporate expense to the banners in 2023 and lower incentive compensation, partially offset by our ongoing investments in information technology and support expenses.technology.
Operating Results
| | | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended |
| ||||||||
|
| July 30, |
| July 31, |
| | July 30, |
| July 31, |
| ||||
($ in millions) | | 2022 | | 2021 | | | 2022 | | 2021 |
| ||||
Division profit | | $ | 184 | | $ | 332 | | | $ | 444 | | $ | 647 | |
Division profit margin | |
| 8.9 | % |
| 14.6 | % | |
| 10.5 | % |
| 14.6 | % |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Division profit | $ | 104 | $ | 263 | ||||
Division profit margin | 5.4 | % | 12.1 | % |
Division profit margin as a percentage of sales decreased to 8.9% and 10.5% of sales5.4% for the thirteen weeks and twenty-six weeks ended July 30, 2022, respectively,April 29, 2023, with both sales channels experiencing declines in sales and gross margin and deleveraging expenses. WSS and atmos generated division profit of $6 million and $8 million, respectively for the second quarter, and $19 million and $16 million for the year-to-date period.
Interest Expense, Net
| | | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended |
| ||||||||
| | July 30, | | July 31, | | July 30, | | July 31, | | ||||
($ in millions) | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Interest expense | | $ | (6) | | $ | (3) | | $ | (12) | | $ | (6) | |
Interest income | |
| 1 | |
| 1 | |
| 2 | |
| 2 | |
Interest (expense) income, net | | $ | (5) | | $ | (2) | | $ | (10) | | $ | (4) | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Interest expense | $ | (5 | ) | $ | (6 | ) | ||
Interest income | 4 | 1 | ||||||
Interest (expense) income, net | $ | (1 | ) | $ | (5 | ) |
We recorded $5 million and $10$1 million of net interest expense for the thirteen and twenty-six weeks ended July 30, 2022, respectivelyApril 29, 2023, as compared with net interest expense of $2 million and $4$5 million for the corresponding prior-year periods.period. Interest expense increaseddecreased primarily due to the issuance of the 4% Notes.an increase in interest income earned on our cash and cash equivalents related to higher interest rates and income from our cross-currency swap.
Second Quarter 2022 Form 10-Q Page 26
Other Income / (Expense), Net
| | | | | | | | | | | | | | |
| | Thirteen weeks ended | | | Twenty-six weeks ended | | ||||||||
| | July 30, | | July 31, | | | July 30, | | July 31, | | ||||
($ in millions) | | 2022 |
| 2021 | | | 2022 | | 2021 | | ||||
Other income / (expense), net | | $ | 9 | | $ | 325 | | | $ | (13) | | $ | 329 | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Other income / (expense), net | $ | (3 | ) | $ | (25 | ) |
This caption includes non-operating items, including franchise royalty income, changes in fair value of minority investments measured at fair value or using the fair value measurement alternative, 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.
The thirteen weeks ended July 30, 2022April 29, 2023 reflected expense of $2 million related to our pension and postretirement programs, and a gain of $18 million from the divestiture of Eastbay Team Sales, $13$1 million loss related toon our equity method investments. Other income / (expense) for the corresponding prior-year period primarily represented a declinedecrease in the fair value of our former investment in Retailors, Ltd. investment, partially offset by $1 millionresulting in a non-cash loss of income associated with our other minority investments. The twenty-six weeks ended July 30, 2022 reflected the gain from the divestiture$25 million.
Other income / (expense), net also includes $3 million and $6 million of franchise income for the thirteen and twenty-six weeks ended July 30, 2022, respectively. The year-to-date period also includes a charge of $1 million related to our auction rate security.
Income Taxes
| | | | | | | | | | | | | |
| | Thirteen weeks ended | | Twenty-six weeks ended | |||||||||
|
| July 30, |
| July 31, |
| July 30, |
| July 31, | | ||||
($ in millions) | | 2022 | | 2021 | | 2022 | | 2021 | | ||||
Provision for income taxes | | $ | 49 | | $ | 157 | | $ | 107 | | $ | 239 | |
Effective tax rate | |
| 34.5 | % |
| 26.8 | % |
| 32.1 | % |
| 27.4 | % |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Provision for income taxes | $ | 21 | $ | 58 | ||||
Effective tax rate | 36.3 | % | 30.3 | % |
Our current year interim provision for income taxes was measured using an estimated annual effective tax rate, which represented a blend of federal, state, and foreign taxes and included the effect of certain nondeductible items as well as changes in our mix of domestic and foreign earnings or losses, adjusted for discrete items that occurred within the periods presented.
We regularly assess the adequacy of our provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, 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 tax reserves were not significant for any of
During the periods presented.
In the second quarter of 2022,thirteen weeks ended April 29, 2023, we recorded a $5$4 million charge related toreserve release from a statute of limitations expiration on our foreign income tax reserves due to the resolution of a foreign tax settlement. Partially offsettingtaxes. Excluding this charge were tax benefits totaling $2 million from reservesitem, and other insignificant reserve releases due to various statutesettlements of limitation lapses. The changes ininternational tax reserves were not significant for any of the prior-year periods.
During the quarter ended July 30, 2022, we also recorded a tax expense of $6 million in connection with Eastbay Team Sales divestiture, including the effect of a non-deductible goodwill write-off.
Second Quarter 2022 Form 10-Q Page 27
During the twenty-six weeks ended July 30, 2022, we recorded $1 million of expense related to tax deficiencies from share-based compensation, as compared with excess tax benefits of $1 million and $2 million in the first and second quarters of the corresponding prior-year periods, respectively.
Excluding the above-mentioned discrete items,examinations, the effective tax ratesrate for the current year periodsperiod increased, as compared with the corresponding prior-year periods,period, primarily due to the decline in income before tax and a change in the mix of domestic and foreign earnings.
Our effective tax rate will vary due to numerous factors, such as level and geographic mix of income and losses, acquisitions, investments, intercompany transactions, foreign currency exchange rates, our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.earnings.
On August 16, 2022, President Biden signed the Inflation Reduction Act (“IRA”) of 2022 into law. The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. We do not currently expect the IRA tax provisions will have a significant effect on our overall effective tax rate.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity has been cash flow from operations, while the principal uses of cash have been to fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of our short-term and long-term operating strategies, including strategic investments.
We generally finance real estate with operating leases. We believe our cash, cash equivalents, future cash flow from operations, and amounts available under our credit agreement will be adequate to fund these requirements.
The Company may also 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. As of July 30, 2022,April 29, 2023, approximately $1,103 million remained available under our current $1.2 billion share repurchase program, which was approvedprogram.
Our full-year capital spending is expected to be $275 million. The forecast includes $210 million related to the remodeling or relocation of approximately 170 existing stores and the opening of approximately 90 new stores, including 25 WSS stores. Additionally, we expect to spend $65 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. We also expect to spend an additional $30 million in February 2022. The new program does not have an expiration date.software-as-a-service contracts related to our technology initiatives.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix, retail locations and websites, uncertainties related to the effect of competitive products and pricing, our reliance on a few key suppliers for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, continued uncertainties caused by the COVID-19 pandemic, as well as other factors listed under the headings “Disclosure Regarding Forward-Looking Statements,” and “Risk Factors” could affect our ability to continue to fund our needs from business operations.
Operating Activities
| | | | | | | |
| | Twenty-six weeks ended |
| ||||
| | July 30, | | July 31, | | ||
($ in millions) |
| 2022 |
| 2021 |
| ||
Net cash (used in) provided by operating activities | | $ | (102) | | $ | 402 | |
$ Change | | $ | (504) | | | | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in operating activities | $ | (118 | ) | $ | (21 | ) | ||
$ Change | $ | (97 | ) | |
Operating activities reflects net income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include gains, losses, impairment charges, other charges, fair value adjustments to minority investments, depreciation and amortization, deferred income taxes, and share-based compensation expense.
The decrease in cash from operating activities reflected higherlower net income, partially offset by timing of merchandise purchases and payments of accounts payable and accrued and other liabilities, as well as lower net income, as compared with the same period last year. HigherThe prior-year merchandise purchases were necessary as our year-end inventory levels were affected by the COVID-19 pandemic and the associated supply chain challenges.disruptions that occurred in the preceding year.
As of July 30, 2022, we have withheld approximately $7 million of lease and lease-related payments as we continue to negotiate rent deferrals or abatements with our landlords for the period that our stores were closed due to the COVID-19 pandemic.
Investing Activities
| | | | | | | |
| | Twenty-six weeks ended |
| ||||
| | July 30, | | July 31, | | ||
($ in millions) |
| 2022 |
| 2021 |
| ||
Net cash used in investing activities | | $ | (113) | | $ | (159) | |
$ Change | | $ | 46 | | | | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in investing activities | $ | (59 | ) | $ | (105 | ) | ||
$ Change | $ | 46 | |
The change in investing activities primarily reflected higherlower capital expenditures partially offset by divestiturein the current year, as compared with the prior-year period, as several large projects related to 2021 were paid in the first quarter of certain assets.2022.
For the twenty-sixthirteen weeks ended July 30, 2022,April 29, 2023, capital expenditures increaseddecreased by $69$36 million to $156$59 million, as compared with the corresponding prior-year period. Our full-year capital spending is expected to be $275 million. The forecast includes $191 million related to the remodeling or relocation of approximately 140 existing stores and the opening of approximately 110 new stores, as well as $84 million for the development of information systems, websites, and infrastructure, including supply chain initiatives.
During the twenty-six weeks ended July 30, 2022, we paid an additional $12 million for the WSS and atmos acquisitions upon the satisfaction of certain post-closing conditions.
We have invested $4 million in minority investments during the current year, including various limited partner venture capital funds managed by Black fund managers, who are committed to advancing diverse-led businesses as part of our Leading in Education and Economic Development (LEED) initiative. During the second quarter of 2022, we sold our position in one of our minority investments receiving proceeds of $12 million. In the prior-year period, we invested $68 million in a public entity, Retailors Ltd., and $10 million in minority investments primarily related to LEED.
Also during the second quarter of 2022, we sold our Eastbay Team Sales business receiving proceeds of $47 million and resulting in a gain of $18 million.
We sold the former Runners Point headquarters in the first quarter of 2021, generating proceeds of $3 million. Also last year, we received insurance proceeds of $3 million related to property and equipment claims from the social unrest losses in 2020.
Second Quarter 2022 Form 10-Q Page 29
Financing Activities
| | | | | | | |
| | Twenty-six weeks ended |
| ||||
| | July 30, | | July 31, | | ||
($ in millions) |
| 2022 |
| 2021 |
| ||
Net cash used in financing activities | | $ | (199) | | $ | (79) | |
$ Change | | $ | (120) | | | | |
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Net cash used in financing activities | $ | (46 | ) | $ | (128 | ) | ||
$ Change | $ | 82 | |
Cash used in financing activities was driven byprimarily related to our return to shareholders initiatives includingas follows:
| Thirteen weeks ended | |||||||
| April 29, | April 30, | ||||||
($ in millions) | 2023 | 2022 | ||||||
Share repurchases | $ | — | $ | (89 | ) | |||
Dividends paid on common stock | (38 | ) | (38 | ) | ||||
Total returned to shareholders | $ | (38 | ) | $ | (127 | ) |
During the thirteen weeks ended April 29, 2023, we did not repurchase any shares under our share repurchase program, and cash dividends, as follows:
| | | | | | | |
| | Twenty-six weeks ended |
| ||||
| | July 30, | | July 31, | | ||
($ in millions) |
| 2022 |
| 2021 |
| ||
Share repurchases | | $ | 129 | | $ | 41 | |
Dividends paid on common stock | | | 76 | | | 42 | |
Total returned to shareholders | | $ | 205 | | $ | 83 | |
During the twenty-six weeks ended July 30, 2022, we repurchased 4,050,000 shares of common stock for $129 million under our share repurchase programs, whereas in the prior year we spent $41$89 million to repurchase shares. We also declared and paid $76$38 million in dividends representing a quarterly rate of $0.40 per share in 2022, as compared with a quarterly rate of $0.20 per share in the prior-year period.
both 2023 and 2022. We paid $10 million and $1 million during the first quarters of 2023 and 2022, respectively, to satisfy tax withholding obligations relatingrelated to the vesting of share-based equity awards during the twenty-six weeks ended July 30, 2022, as compared with $11 million in 2021. Offsetting this amount were proceeds received in connection with employee stock programs of $6 million in the current year, as compared with $17 million in the prior-year period.awards.
Additionally, we paid $3 million of principal on our finance lease obligations, mainly related to certain WSS stores.
Critical Accounting Policies and Estimates
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 inwithin the 20212022 Form 10-K.10‑K.
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 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our primary risk exposures or management of market risks from the information provided in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk within the 2022 Form 10-K.
Item4. Controls and Procedures
Evaluation of Disclosure 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 Interim 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 disclosureThe term "disclosure controls and procedures" means controls and other procedures were effectiveof a company that are designed to ensure that information relating to the Company that is required to be disclosed by a company in the reports that we fileit files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECSEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the CEOits principal executive and CFO,principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Second Quarter 2022
Based on that evaluation, our CEO and CFO concluded that as of April 29, 2023, our disclosure controls and procedures were not effective due to the un-remediated material weaknesses in internal control over financial reporting related to certain ineffective general information technology controls over logical access and change management at our WSS business, which was previously disclosed in the Company's Annual Report on Form 10-Q Page 30
During the Company's Annual Report on Form 10-K for the year ended January 28, 2023.
Remediation
Management is in the process of implementing measures designed to ensure that the control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) designing and implementing controls related to deprovisioning, privileged access, and user access reviews, (ii) developing an enhanced risk assessment process to evaluate logical access, and (iii) improving the existing training program associated with control design and implementation. We believe that these actions will remediate the material weaknesses. Management began to implement certain of these remedial steps during the first quarter ended July 30, 2022,of 2023. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of 2023.
Changes in Internal Control Over Financial Reporting
Other than the ongoing remediation efforts described above, there were no changes other than process changes that may be necessary related to the newly acquired businesses, in the Company’sour internal control over financial reporting (as defined in Rules 13a-15(f) ofand 15d-15(f) under the Exchange Act), during the quarter ended April 29, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Because of its inherent limitations, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PARTII- OTHER INFORMATION
Item1. Legal Proceedings
Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under Item 1. “Financial Statements” in Part I.
Item1A. Risk Factors
In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our 20212022 Annual Report on Form 10-K filed with the SEC on March 24, 202227, 2023 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 20212022 Form 10-K.
Item2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information with respect to shares of the Company’s common stock for the thirteen weeks ended July 30, 2022.April 29, 2023.
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| | | | | | | Total Number of | | | Dollar Value of |
| | Total | | Average | | Shares Purchased as | | | Shares that may | |
| | Number | | Price | | Part of Publicly | | | yet be Purchased | |
| | of Shares | | Paid Per | | Announced | | | Under the | |
Date Purchased |
| Purchased (1) |
| Share (1) | | Program (2) |
| | Program (2) | |
May 1 to May 28, 2022 |
| — | | $ | — |
| — | | $ | 1,143,322,902 |
May 29 to July 2, 2022 |
| 1,405,235 | |
| 28.22 |
| 1,400,000 | |
| 1,103,814,042 |
July 3 to July 30, 2022 |
| 549 | |
| 26.97 |
| — | |
| 1,103,814,042 |
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| 1,405,784 | | $ | 28.22 |
| 1,400,000 | |
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| | | Total Number of | Dollar Value of | ||||||||||||
| Total | Average | Shares Purchased as | Shares that may | ||||||||||||
| Number | Price | Part of Publicly | yet be Purchased | ||||||||||||
| of Shares | Paid Per | Announced | Under the | ||||||||||||
Date Purchased | Purchased (1) | Share (1) | Program | Program | ||||||||||||
January 29 to February 25, 2023 | — | $ | — | — | $ | 1,103,814,042 | ||||||||||
February 26 to April 1, 2023 | 239,806 | 37.99 | — | 1,103,814,042 | ||||||||||||
April 2 to April 29, 2023 | 19,575 | 39.85 | — | 1,103,814,042 | ||||||||||||
| 259,381 | $ | 38.13 | — |
(1) | These columns include shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit and performance-based awards, which vested during the quarter. |
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
Second
Item6. Exhibits
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10.3 † | 2023 Foot Locker Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.2 | |||
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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* | | Cover Page Interactive Data File (embedded within the Inline XBRL datafile). |
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† Management contract or compensatory plan or arrangement
* Filed herewith
** Furnished herewith
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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.
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Date: | FOOT LOCKER, INC. |
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Second