UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: NovemberAugust 2, 2013

2014

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

For the transition period from __________ to __________

Commission File Number: 1-10299

 

FOOT LOCKER, INC.

(Exact Name of Registrant as Specified in its Charter)

 

New York
13-3513936
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)

112 West 34th Street, New York, New York, 10120

(Address of Principal Executive Offices, Zip Code)

(212-720-3700)

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No o

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

Large accelerated filerþ
Accelerated filero
Non-accelerated filer  o
Smaller reporting companyo

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

Number of shares of Common Stock outstanding at NovemberAugust 29, 2013: 146,739,055

2014 : 143,713,597

FOOT LOCKER, INC.
TABLE OF CONTENTS
 

FOOT LOCKER, INC.

TABLE OF CONTENTS

Page
Part I.Financial Information 
 Item 1.Financial Statements 
  Condensed Consolidated Balance Sheets3
  Condensed Consolidated Statements of Operations4
  Condensed Consolidated Statements of Comprehensive Income5
  Condensed Consolidated Statements of Cash Flows6
  Notes to Condensed Consolidated Financial Statements7
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1918
 Item 4.Controls and Procedures2726
Part II.Other Information 
 Item 1.Legal Proceedings26
Item 1A.Risk Factors27
 Item 1A.Risk Factors28
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2927
 Item 6.Exhibits2927
  Signature3028
  Index of Exhibits3129

2
2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
 (in

(in millions, except shares)

  November 2, October 27, February 2, 
  2013 2012 2013 
  (Unaudited) (Unaudited) * 
ASSETS          
           
Current assets          
Cash and cash equivalents $764 $804 $880 
Short-term investments  32  49  48 
Merchandise inventories  1,316  1,240  1,167 
Other current assets  208  202  268 
   2,320  2,295  2,363 
Property and equipment, net  589  462  490 
Deferred taxes  257  285  257 
Goodwill  163  144  145 
Other intangibles and other assets  148  113  112 
  $3,477 $3,299 $3,367 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable $310 $327 $298 
Accrued expenses and other current liabilities  330  298  338 
Current portion of capital lease obligations  3  —  — 
   643  625  636 
Long-term debt and obligations under capital leases  137  133  133 
Other liabilities  231  252  221 
   1,011  1,010  990 
Shareholders’ equity          
Common stock and paid-in capital: 168,675,093, 166,510,340
    and 166,909,151 shares, respectively		  905  842  856 
Retained earnings  2,295  1,999  2,076 
Accumulated other comprehensive loss  (170)  (203)  (171) 
Less: Treasury stock at cost: 22,035,758, 15,800,222 and
    16,839,222 shares, respectively		  (564)  (349)  (384) 
Total shareholders’ equity  2,466  2,289  2,377 
  $3,477 $3,299 $3,367 
See Accompanying Notes to Condensed Consolidated Financial Statements. 
* The balance sheet at February 2, 2013 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 2, 2013.
3

FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in millions, except per share amounts)
  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
  2013 2012 2013 2012 
Sales $1,622 $1,524 $4,714 $4,469 
              
Cost of sales  1,085  1,019  3,163  2,999 
Selling, general and administrative expenses  340  319  969  931 
Depreciation and amortization  35  30  97  88 
Other charges  —  —  2  — 
Interest expense, net  2  1  4  3 
Other income  —  —  (3)  (1) 
   1,462  1,369  4,232  4,020 
Income before income taxes  160  155  482  449 
Income tax expense  56  49  174  156 
Net income $104 $106 $308 $293 
              
Basic earnings per share $0.70 $0.70 $2.06 $1.93 
              
Weighted-average common shares outstanding  147.7  151.0  149.2  151.4 
              
Diluted earnings per share $0.70 $0.69 $2.04 $1.90 
Weighted-average common shares assuming dilution  149.5  153.9  151.2  154.0 

  August 2,  August 3,  February 1, 
  2014  2013  2014 
  (Unaudited)  (Unaudited)  * 
ASSETS            
Current assets            
Cash and cash equivalents $957  $789  $858 
Short-term investments  —   47   9 
Merchandise inventories  1,335   1,306   1,220 
Other current assets  260   243   263 
   2,552   2,385   2,350 
Property and equipment, net  604   552   590 
Deferred taxes  247   265   241 
Goodwill  162   160   163 
Other intangible assets, net  61   70   67 
Other assets  72   79   76 
  $3,698  $3,511  $3,487 
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Current liabilities            
Accounts payable $392  $418  $263 
Accrued and other liabilities  356   309   360 
Current portion of capital lease obligations  3   3   3 
   751   730   626 
Long-term debt and obligations under capital leases  134   138   136 
Other liabilities  231   217   229 
Total liabilities  1,116   1,085   991 
Shareholders’ equity            
Common stock and paid-in capital: 170,311,573, 168,480,940, and 169,039,095 shares, respectively  961   895   921 
Retained earnings  2,577   2,220   2,387 
Accumulated other comprehensive loss  (182)  (192)  (186)
Less: Treasury stock at cost: 26,640,176, 20,005,809 and 23,612,273 shares, respectively  (774)  (497)  (626)
Total shareholders’ equity  2,582   2,426   2,496 
  $3,698  $3,511  $3,487 

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

* The balance sheet at February 1, 2014 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS

(Unaudited)

 (in millions)
 Thirteen weeks ended Thirty-nine weeks ended 
 November 2, October 27, November 2, October 27, 
 2013 2012 2013 2012 
Net income$104 $106 $308 $293 
             
Other comprehensive income (loss), net of income tax            
             
Foreign currency translation adjustment:            
Translation adjustment arising during the period, net of income tax 22  35  (5)  (7) 
             
Cash flow hedges:            
Change in fair value of derivatives, net of income tax (2)  2  (2)  1 
             
Available for sale securities:            
Unrealized gain —  —  —  1 
             
Pension and postretirement adjustments:            
             
Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $1 $1, $3, and $3 million, respectively 3  2  7  6 
             
Comprehensive income$127 $145 $308 $294 

(in millions, except per share amounts)

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
  2014  2013  2014  2013 
Sales $1,641  $1,454  $3,509  $3,092 
                 
Cost of sales  1,116   1,001   2,338   2,078 
Selling, general and administrative expenses  343   314   698   629 
Depreciation and amortization  36   31   72   62 
Impairment and other charges  2   2   3   2 
Interest expense, net  1   1   2   2 
Other income  (1)  (1)  (2)  (3)
   1,497   1,348   3,111   2,770 
                 
Income before income taxes  144   106   398   322 
Income tax expense  52   40   144   118 
Net income $92  $66  $254  $204 
                 
Basic earnings per share $0.63  $0.44  $1.75  $1.36 
Weighted-average common shares outstanding  144.5   149.5   145.0   149.9 
                 
Diluted earnings per share $0.63  $0.44  $1.73  $1.34 
Weighted-average common shares assuming dilution  146.4   151.4   147.0   152.1 

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME

(Unaudited)

(in millions)

  Thirty-nine weeks ended 
  November 2,  October 27, 
  2013  2012 
From Operating Activities:        
Net income $308  $293 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  97   88 
Share-based compensation expense  19   15 
Qualified pension plan contributions  (2)   — 
Excess tax benefits on share-based compensation  (7)   (8) 
Change in assets and liabilities:        
Merchandise inventories  (108)   (172) 
Accounts payable  (3)   87 
Other accruals  (44)   (18) 
Other, net  67   (26) 
Net cash provided by operating activities  327   259 
         
From Investing Activities:        
Lease termination gains  2   — 
Sales and maturities of short-term investments  38   7 
Purchases of short-term investments  (23)   (57) 
Capital expenditures  (157)   (120) 
Purchase of business, net of cash acquired  (81)   — 
Net cash used in investing activities  (221)   (170) 
         
From Financing Activities:        
Purchase of treasury shares  (167)   (94) 
Dividends paid  (89)   (82) 
Issuance of common stock  19   35 
Treasury stock issued under employee stock purchase plan  3   5 
Excess tax benefits on share-based compensation  8   9 
Reduction in long-term debt  —   (2) 
Net cash used in financing activities  (226)   (129) 
         
Effect of exchange rate fluctuations on Cash and Cash Equivalents  4   (7) 
Net change in Cash and Cash Equivalents  (116)   (47) 
Cash and Cash Equivalents at beginning of year  880   851 
Cash and Cash Equivalents at end of interim period $764  $804 
         
Cash paid during the period:        
Interest $5  $6 
Income taxes $123  $182 

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
  2014  2013  2014  2013 
Net income $92  $66  $254  $204 
                 
Other comprehensive income (loss), net of income tax                
                 
Foreign currency translation adjustment:                
Translation adjustment arising during the period, net of income tax  (19)  (6)  —   (27)
                 
Cash flow hedges:                
Change in fair value of derivatives, net of income tax  (1)  1   —   — 
                 
Pension and postretirement adjustments:                
Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $1, $2, $2, and $3 million, respectively  2   2   4   4 
                 
Available for sale securities:                
Unrealized loss  —   (1)  —   — 
                 
Comprehensive income $74  $62  $258  $181 

See Accompanying Notes to Condensed Consolidated Financial Statements.

6

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)

  Twenty-six weeks ended 
  August 2,  August 3, 
  2014  2013 
From Operating Activities:        
Net income $254  $204 
Adjustments to reconcile net income to net cash provided by operating activities:        
Non-cash impairment charges  3   — 
Depreciation and amortization  72   62 
Share-based compensation expense  12   13 
Qualified pension plan contributions  (2)  (2)
Excess tax benefits on share-based compensation  (9)  (7)
Change in assets and liabilities:        
Merchandise inventories  (115)  (109)
Accounts payable  130   100 
Accrued and other liabilities  4   (28)
Other, net  13   7 
Net cash provided by operating activities  362   240 
         
From Investing Activities:        
Lease termination gains  —   2 
Sales and maturities of short-term investments  9   23 
Purchases of short-term investments  —   (23)
Capital expenditures  (93)  (107)
Purchase of business, net of cash acquired Net cash used in investing activities  —   (84)
Net cash used in investing activities  (84)  (189)
         
From Financing Activities:        
Purchase of treasury shares  (136)  (100)
Dividends paid  (64)  (60)
Issuance of common stock  13   15 
Treasury stock issued under employee stock purchase plan  5   3 
Excess tax benefits on share-based compensation  9   7 
Repayments of long-term debt and obligations under capital leases  (2)  — 
Net cash used in financing activities  (175)  (135)
         
Effect of exchange rate fluctuations on Cash and Cash Equivalents  (4)  (7)
Net change in Cash and Cash Equivalents  99   (91)
Cash and Cash Equivalents at beginning of year  858   880 
Cash and Cash Equivalents at end of interim period $957  $789 
         
Cash paid during the period:        
Interest $5  $5 
Income taxes $155  $99 

See Accompanying Notes to Condensed Consolidated Financial Statements

6

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2014January 31, 2015 and of the fiscal year ended February 2, 2013.1, 2014. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended February 2, 2013,1, 2014, as filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2013. 

March 31, 2014.

Recent Accounting Pronouncements

During

In April 2014, the first quarter of 2013, the Company adoptedFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-02, (“ASU”) 2014-08,Comprehensive Income (Topic 220): Reporting Discontinued Operations and Disclosures of Amounts Reclassified outDisposals of Accumulated Other Comprehensive IncomeComponents of an Entity (“. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results and when the component or group of components meets the criteria to be classified as held for sale, is disposed by sale or is disposed of by other than by sale. ASU 2013-02”). ASU 2013-02 amended existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. The provisions of this new guidance were2014-08 is effective prospectively as of thefor fiscal years, and interim reporting periods within those years, beginning of 2013. Accordingly, enhanced footnote disclosure is included in Note 5.after December 15, 2014, with earlier adoption permitted. The adoption of ASU 2013-02 had nothis guidance did not have a significant effect on our consolidated financial position, results of operations or financial position.

We performed our annual goodwill impairment assessment during the first quarter of 2013, usingcash flows.

In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers, issued as a qualitative approach as permitted undernew Topic, Accounting Standards Update No. 2011-08, Testing GoodwillCodification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for Impairmentthose goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The adoption of this guidance is not expected to have a significant effect on our consolidated financial position, results of operations or cash flows.

.

In performingJune 2014, FASB issued ASU 2014-12,Accounting for Share-Based Payments When the assessment, we identifiedTerms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.ASU 2014-12 affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and consideredthat could be achieved after the significance of relevant key factors, events, and circumstances that affectedrequisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value and/or carrying amounts of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on our reporting units. These factors included external factors such as macroeconomic, industry and market conditions, as well as entity-specific factors, such as our actual and plannedconsolidated financial performance. Based on theposition, results of the impairment assessment performed, we concluded that it is more likely than not that the fair values of our reporting units substantially exceeded their respective carrying values and there are no reporting units at risk of impairment.

operations or cash flows.

 

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


2. Acquisition
Effective July 7, 2013, the Company acquired 100 percent of the shares of Runners Point Warenhandelsgesellschaft mbH, (“Runners Point Group”) a specialty athletic store and online retailer based in Recklinghausen, Germany. The aggregate purchase price paid for the acquisition was $87 million in cash, subject to adjustment for finalization of the purchase price for working capital adjustments. At the date of acquisition, Runners Point Group operated 194 stores in Germany, Austria, and the Netherlands. Additionally, there were 24 Runners Point Group franchise stores operating in Germany and Switzerland. The acquisition is intended to enhance the Company’s position in Germany and also provide additional banners to further diversify and expand the Company’s European business. Also, the addition of the strong digital capabilities of Tredex, the e-commerce subsidiary of Runners Point Group, allows for the potential of accelerated e-commerce growth in Europe. 
The results of Runners Point Group are included in our consolidated financial statements since the acquisition date.
7
7

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.Acquisition – (continued)Impairment and Other Charges

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
Impairment of intangibles $2  $—  $3  $— 
CCS store closure costs  —   2   —   2 
  $2  $2  $3  $2 

During the second quarter of 2014, the Company announced a plan to shut down its e-commerce skate business, CCS.com, and transition customers to its Eastbay brand. The following table summarizes allocationCCS digital site will continue to operate during the third quarter to liquidate the remaining inventory, at which point customers will be directed to eastbay.com, which carries many of the purchase price tosame products. This closure does not meet the fair value of assets acquired, based on the exchange rate in effect at the date of our acquisition of Runners Point Group. The Company has allocated the purchase price, in part, upon internal estimates of cash flows and considering the reportdefinition of a third-party valuation expert retaineddiscontinued operation as it is not considered a strategic shift that will have a major effect on operations. In connection with this announcement, an impairment charge of $2 million was recorded to assistwrite down the Company. The allocation of the purchase price in the table below is preliminary and subject to change based on the finalization of the purchase price.

  Allocation 
(in millions) as Revised 
Assets acquired:    
Cash and cash equivalents $6 
Inventory  41 
Other current assets  11 
Property and equipment  24 
Other long-term assets  1 
Tradenames  29
(1)
Favorable leases  5 
     
Liabilities assumed:    
Accounts payable and other accruals  (27) 
Income taxes and deferred taxes, net  (11) 
Obligations under capital leases  (9) 
Other long-term liabilities  (1) 
     
Goodwill  18 
Total purchase price $87 
(1)Due to foreign currency fluctuations, the U.S. dollar value of tradenames increased to $30 million as of November 2, 2013.
We determined that the tradenames have an indefinite life and will not be amortized. These tradenames will be tested annually for impairment, along with the goodwill recorded for the purchase. The value of the favorable leases will be amortized over the terms of the respective leases. 
The amount of goodwill expected to be tax deductible is $4 million.

CCS tradename.

3.Segment Information

The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of NovemberAugust 2, 2013,2014, the Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the primary financial measure is division profit. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense. Sales and division resultsprofit for the Company’s reportable segments for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012August 3, 2013 are presented below. Division profit reflects income before income taxes, corporate expense, net interest expense, and net non-operating income.

As discussed in Note 2, Acquisition, the Company acquired Runners Point Group during the second quarter of 2013. Sales and division results for the Runners Point Group stores, including Runners Point, Sidestep and Run2, are included in the Athletic Stores segment since the date of acquisition. Sales and division results for Tredex, a direct-to-customer subsidiary of Runners Point Group, are included in the Direct-to-Customers segment since the date of acquisition.

  Thirteen weeks ended  Twenty-six weeks ended 
Sales August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014�� 2013 
Athletic Stores $1,468  $1,313  $3,125  $2,784 
Direct-to-Customers  173   141   384   308 
Total sales $1,641  $1,454  $3,509  $3,092 
                 
Operating Results                
(in millions)                
Athletic Stores(1) $149  $116  $396  $327 
Direct-to-Customers(2)  14   10   42   33 
Division profit  163   126   438   360 
Less: Corporate expense, net  19   20   40   39 
Operating profit  144   106   398   321 
Other income (3)  1   1   2   3 
Interest expense, net  1   1   2   2 
Income before income taxes $144  $106  $398  $322 

8

FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Segment Information - (continued)
  Thirteen weeks ended Thirty-nine weeks ended 
Sales November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Athletic Stores $1,444 $1,375 $4,228 $4,060 
Direct-to-Customers  178  149  486  409 
Total sales $1,622 $1,524 $4,714 $4,469 
  Thirteen weeks ended Thirty-nine weeks ended 
Operating Results November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Athletic Stores (1)
 $159 $166 $486 $480 
Direct-to-Customers  20  18  53  47 
Division profit  179  184  539  527 
Less: Corporate expense, net  17  28  56  76 
Operating profit  162  156  483  451 
Other income (2)
  —  —  3  1 
Interest expense, net  2  1  4  3 
Income before income taxes $160 $155 $482 $449 
(1)
Included in the Athletic Stores segment for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2014 is a $1 million tradename impairment charge related to the Company’s stores in the Republic of Ireland. Included in the Athletic Stores segment for both the thirteen and twenty-six weeks ended August 3, 2013 is a $2$2 million charge recorded in connection with the closure of all CCS stores.
(2)
Included in the Direct-to-Customers segment for both the thirteen and twenty-six weeks ended August 2, 2014 is a $2 million impairment charge related to the CCS tradename.
(3)Other income includes non-operating items, such as lease termination gains, royalty income, and the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts.

8
During the second quarter of 2013 the Company closed all 22 of its CCS stores. As of November 2, 2013, 12 of these stores were converted to other store formats, 2 will be converted by the end of the year and 1 will be converted during the first quarter of 2014. The CCS store closures are not presented as part of discontinued operations as the operations and cash flows related to the majority of the closed stores are expected to continue through other store formats and the Company’s websites. The Company will continue to operate the CCS catalog and e-commerce website. 
Athletic Stores sales include $64 million and $84 million for thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to the Runners Point Group stores. Direct-to-Customers sales include $8 million and $10 million, respectively, related to the Tredex division of Runners Point Group.
Athletic Stores division profit includes $1 million and $3 million for thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to the Runners Point Group stores. The effect on Direct-to-Customers division profit was not significant. Costs associated with the acquisition and integration of $1 million and $4 million for the thirteen and thirty-nine weeks ended November 2, 2013 are included in corporate expense.

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.4. Goodwill and Other Intangible Assets

Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual assessmentreview of goodwill and assets with indefinite lives performed during the first quartersquarter of 2013 and 20122014 did not result in impairment charges. Thecharges as the fair value of each of the reporting units substantially exceedsexceeded its carrying value. During the second quarter of 2014, in connection with the shutdown of the CCS e-commerce business, the Company recorded a non-cash impairment charge of $2 million to write down the value of the CCS tradename. Additionally, during the first quarter of 2014, the Company recorded a non-cash impairment charge of $1 million to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland, reflecting historical and projected underperformance.

The balances as of August 3, 2013 have been retrospectively adjusted for both periods. the finalization of the allocation of the purchase price related to the Runners Point acquisition. Identified intangible assets were adjusted to fair value offset by a decrease in goodwill. Other adjustments to the prior year balances were not significant and therefore were not retrospectively adjusted.

The following table provides a summary of goodwill by reportable segment.

9

FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill and Other Intangible Assets - (continued)
Goodwill as of November 2, 2013 includes $18 million relating to the acquisition of Runners Point Group, which was allocated to the segments based upon their relative fair values. Other changes include foreign exchange fluctuations. Of the $18 million of goodwill relating to the acquisition of Runners Point Group, $3 million was allocated to the Athletic Stores segment related to the Runners Point Group stores and $15 million was allocated to the Direct-to-Customers segment related to the Tredex division.
  November 2, October 27, February 2, 
Goodwill (in millions) 2013 2012 2013 
Athletic Stores $21 $17 $18 
Direct-to-Customers  142  127  127 
  $163 $144 $145 
segment:

  August 2,  August 3,  February 1, 
Goodwill (in millions) 2014  2013  2014 
Athletic Stores $20  $18  $21 
Direct-to-Customers  142   142   142 
  $162  $160  $163 

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

  August 2, 2014  August 3, 2013  February 1, 2014 
  Gross  Accum.  Net  Gross  Accum.  Net  Gross  Accum.  Net 
(in millions) value  amort.  Value  value  amort.  value  value  amort.  value 
Amortized intangible assets:(1)                                    
Lease acquisition costs $152  $(136) $16  $154  $(134) $20  $155  $(137) $18 
Trademarks  21   (11)  10   21   (10)  11   21   (11)  10 
Favorable leases  8   (4)  4   9   (4)  5   8   (3)  5 
Customer relationships  21   (21)  —   21   (20)  1   21   (21)  — 
  $202  $(172) $30  $205  $(168) $37  $205  $(172) $33 
                                     
Indefinite life intangible assets:                                    
Runners Point Group trademarks          30           29           30 
Other trademarks(2)          1           4           4 
          $31          $33          $34 
Other intangible assets, net         $61          $70          $67 

(1)Includes the effect of foreign currency translation related primarily to the movements of the euro in relation to the U.S. dollar.
(2)The accumulated impairment charge related to other trademarks is $27 million. This includes $3 million of impairment charges recorded during the twenty-six weeks ended August 2, 2014.

9
  November 2, 2013 October 27, 2012 February 2, 2013 
  Gross Accum. Net Gross Accum. Net Gross Accum. Net 
(in millions) value amort. value value amort. value value amort. value 
Amortized intangible assets:                            
Lease acquisition costs $159 $(140) $19 $163 $(141) $22 $158 $(137) $21 
Trademarks  21  (10)  11  21  (9)  12  21  (9)  12 
Favorable leases  9  (4)  5  5  (5)  —  5  (5)  — 
Customer relationships  21  (21)  —  21  (17)  4  21  (18)  3 
  $210 $(175) $35 $210 $(172) $38 $205 $(169) $36 
                             
Indefinite life intangible assets:                            
                             
Tradenames:                            
Republic of Ireland        2        1        1 
CCS        3        10        3 
Runners Point Group        30        —        — 
        $35       $11       $4 
                             
Other intangible assets, net       $70       $49       $40 
As

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.Goodwill and Other Intangible Assets – (continued)

For the twenty-six week period ended August 2, 2014, activity included amortization of November 2, 2013, in connection with$3 million, $3 million related to the allocation of the purchase price of the Runners Point Group acquisition, the Company recognized $30impairment charges noted above, and a $1 million of indefinite life intangible assets for the Runners Point Group tradenames. Also as a result of the purchase price allocation, $5 milliondecrease related to foreign currency exchange fluctuations. This was recognized for favorable leases in 15 locations with rents below their fair value, which are being amortized over a weighted-average life of 6 years.

The change since year end also includes $2offset by $1 million of lease acquisition additions related to Foot Locker Europe, which are being amortized over a weighted-average life of 109 years. Foreign exchange fluctuations related to the euro increased the balance by $2 million. This was offset by amortization expense of $9 million recorded for the thirty-nine weeks ended November 2, 2013.
10

FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill and Other Intangible Assets - (continued)
  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Amortization expense $3 $3 $9 $10 

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
Amortization expense $1  $3  $3  $6 

Future expected amortization expense for finite life intangible assets is estimated as follows:

  (in millions) 
Remainder of 2013 $2 
2014  6 
2015  5 
2016  4 
2017  4 
2018  3 

  (in millions) 
Remainder of 2014 $3 
2015  5 
2016  4 
2017  4 
2018  3 
2019  3 

5.Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss comprised the following:

  November 2, October 27, February 2, 
(in millions) 2013 2012 2013 
Foreign currency translation adjustments $77 $56 $82 
Cash flow hedges  1  —  3 
Unrecognized pension cost and postretirement benefit  (247)  (258)  (255) 
Unrealized loss on available-for-sale security  (1)  (1)  (1) 
  $(170) $(203) $(171) 

  August 2,  August 3,  February 1, 
(in millions) 2014  2013  2014 
Foreign currency translation adjustments $57  $55  $57 
Cash flow hedges  (2)  3   (2)
Unrecognized pension cost and postretirement benefit  (236)  (249)  (240)
Unrealized loss on available-for-sale security  (1)  (1)  (1)
  $(182) $(192) $(186)

The changes in accumulated other comprehensive loss for the thirty-nine week periodtwenty-six weeks ended NovemberAugust 2, 20132014 were as follows:

(in millions) Foreign
currency
translation
adjustments		  Cash flow
hedges		  Items related to
pension and
postretirement
benefits		  Unrealized loss
on available-
for-sale security		  Total 
Balance as of February 1, 2014 $57   (2)  (240)  (1) $(186)
Other comprehensive income   before reclassification  —   —   —   —   — 
Amounts reclassified from   accumulated other comprehensive income  —   —   4   —   4 
                     
Other comprehensive income  —   —   4   —   4 
Balance as of August 2, 2014 $57   (2)  (236)  (1) $(182)

(in millions) Foreign 
currency
translation
adjustments		 Cash flow
hedges		 Items related to
pension and
postretirement
benefits		 Unrealized
loss on
available-
for-sale
security		 Total 
Balance as of February 2, 2013 $82 $3 $(255) $(1) $(171) 
                 
Other comprehensive income (loss) before reclassification  (5)  (2)  1  —  (6) 
                 
Amounts reclassified from accumulated other comprehensive income  —  —  7  —  7 
                 
Other comprehensive income (loss)  (5)  (2)  8  —  1 
                 
Balance as of November 2, 2013 $77 $1 $(247) $(1) $(170) 
10
11

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.Accumulated Other Comprehensive Loss-Loss – (continued)

Reclassifications from accumulated other comprehensive loss for the thirty-nine week periodtwenty-six weeks ended NovemberAugust 2, 20132014 were as follows:

(in millions)    
Amortization of actuarial (gain) loss:    
Pension benefits- amortization of actuarial loss $12 
Postretirement benefits- amortization of actuarial gain  (2) 
Net periodic benefit cost (see Note 9)  10 
Income tax expense  (3) 
Net of tax $7 

(in millions)    
Amortization of actuarial (gain) loss:    
Pension benefits -  amortization of actuarial loss $7 
Postretirement benefits -  amortization of actuarial gain  (1)
Net periodic benefit cost (seeNote 9)  6 
Income tax expense  2 
Net of tax $4 

6.Financial Instruments

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

Additional information is contained within Note 7,Fair Value Measurements.

 

Derivative Holdings Designated as Hedges

For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and hedge ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. No such gains or losses were recognized in earnings for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.

The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of Accumulated Other Comprehensive Loss (“AOCL”) and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At each quarter-end, the Company had not hedged forecasted transactions for more than the next twelve months, and the Company expects all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.

12

11

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.Financial Instruments – (continued)

The net change in the fair value of foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was a $1 million loss for the thirteen weeks ended August 2, 2014, and was not significant for anythe twenty-six weeks ended August 2, 2014. For the thirteen weeks ended August 3, 2013, the net change resulted in a gain of $1 million and was not significant for the periods presented. twenty-six weeks ended August 3, 2013.

The notional value of the contracts outstanding at NovemberAugust 2, 20132014 was $58$71 million, and these contracts extend through July 2014.

2015.

Derivative Holdings Designated as Non-Hedges

The Company enters into foreign exchange forward contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions that are not designated as hedges.hedges in order to manage the costs of foreign currency-denominated merchandise purchases and intercompany transactions. Changes in the fair value of these foreign exchange forward contracts are recorded in earnings immediately within selling, general and administrative expenses. The net change in fair value resulted in $1 million of income for the thirteen weeks ended August 2, 2014 and was not significant for the twenty-six weeks ended August 2, 2014. The net change in fair value was not significant for any of the periods presented.prior-year period. The notional value of the contracts outstanding at NovemberAugust 2, 20132014 was $33$18 million and these contracts extend through December 2013.

Additionally,2014.

The Company mitigates the Company enterseffect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into diesel fuel forward andcurrency option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers.contracts. Changes in the fair value of these foreign currency option contracts, which are designated as non-hedges, are recorded in earnings immediately.immediately within other income. The effect wasrealized gains, premiums paid, and changes in the fair market value recorded were not significant for any of the periods presented.

The notional value of the contractscontract outstanding at NovemberAugust 2, 20132014 was not significant.

$26 million and this contract extends through October 2014.

 

Fair Value of Derivative Contracts



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

  Balance Sheet November 2, October 27, February 2, 
(in millions) Caption 2013 2012 2013 
Hedging Instruments:            
Foreign exchange forward contracts Current assets $1 $1 $4 
Foreign exchange forward contracts Current liabilities $— $1 $— 
             
Non-Hedging Instruments:            
Foreign exchange forward contracts Current assets $— $— $2 

  Balance Sheet August 2,  August 3,  February 1, 
(in millions) Caption 2014  2013  2014 
Hedging Instruments:              
Foreign exchange forward contracts Current assets $—  $3  $— 
Foreign exchange forward contracts Current liabilities $3  $—  $2 
Non-Hedging Instruments:              
Foreign exchange forward contracts Current assets $—  $1  $— 

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.Fair Value Measurements

The Company’s financial assets recorded at fair value are categorized as follows:

Level 1 –

Quoted prices for identical instruments in active markets.
Level 2–
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
Level 3 –
Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
13

FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Fair Value Measurements – (continued)
 
Fair Value of Recognized AssetsQuoted prices for identical instruments in active markets.

Level 2 –  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and Liabilities

model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 –   

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

The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:

  At November 2, 2013 At October 27, 2012 At February 2, 2013 
(in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 
Assets                            
Short-term investments $— $32 $— $— $49 $— $— $48 $— 
Auction rate security  —  6  —  —  6  —  —  6  — 
Foreign exchange forward contracts  —  1  —  —  1  —  —  6  — 
                             
Total Assets $— $39 $— $— $56 $— $— $60 $— 
                             
Liabilities                            
Foreign exchange forward contracts  —  —  —  —  1  —  —  —  — 
Total Liabilities $— $— $— $— $1 $— $— $— $— 

  At August 2, 2014  At August 3, 2013  At February 1, 2014 
(in millions) Level 1  Level 2  Level 3  Level 1  Level 2  Level 3  Level 1  Level 2  Level 3 
Assets                                    
Short-term investments $—  $—  $—  $—  $47  $—  $—  $9  $— 
Auction rate security  —   6   —   —   6   —   —   6   — 
Foreign exchange forward contracts  —   —   —   —   4   —   —   —   — 
Total Assets $—  $6  $—  $—  $57  $—  $—  $15  $— 
                                     
Liabilities                                    
Foreign exchange forward contracts  —   3   —   —   —   —   —   2   — 
Total Liabilities $—  $3  $—  $—  $—  $—  $—  $2  $— 

Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. As of November 2, 2013, the Company held $38 million of available-for-sale securities, which was comprised of $32 million of

The Company’s short-term investments and a $6 million auction rate security, which is included in other assets.

Short-termmatured during the second quarter of 2014. In the prior periods presented, these investments representrepresented corporate bonds with maturity dates within one year from the purchase date. These securities arewere valued using model-derived valuations in which all significant inputs or significant value-drivers arewere observable in active markets and therefore arewere classified as Level 2 instruments.

The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.

The Company’s 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.

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

Additionally, in connection with the acquisition and purchase price allocation of Runners Point Group, the Company recognized its assets and liabilities at fair value. See Note 2, Acquisition, for further discussion and additional disclosures. All amounts are categorized as Level 3.
14

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.Fair Value Measurements – (continued)

 

Fair Value of Financial Instruments

The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:

  November 2, October 27, February 2, 
(in millions) 2013 2012 2013 
Carrying value (1)
 $140 $133 $133 
Fair value (1)
 $157 $145 $152 
(1)
In connection with the acquisition of Runners Point Group in the second quarter of 2013, the Company recognized capital lease obligations.These were existing agreements primarily related to the financing of certain store fixtures. As of November 2, 2013, $8 million is included in the total above; $3 million is classified as short-term and $5 million is classified as long-term.

  August 2,  August 3,  February 1, 
(in millions) 2014  2013  2014 
Carrying value $137  $141  $139 
Fair value $163  $165  $159 

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

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


8.Earnings Per Share

The Company accounts for and discloses net earnings per share using the treasury stock method. The Company’s basicBasic earnings per share is computed by dividing the Company’s reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. The Company’s restrictedRestricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents.

The Company’scomputation of basic and diluted weighted-average number of common shares outstanding wasearnings per share is as follows:

  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Weighted-average common shares outstanding  147.7  151.0  149.2  151.4 
Effect of Dilution:             
Stock options and awards  1.8  2.9  2.0  2.6 
Weighted-average common shares assuming dilution  149.5  153.9  151.2  154.0 

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
Weighted-average common shares outstanding  144.5   149.5   145.0   149.9 
Effect of Dilution:                
Stock options and awards  1.9   1.9   2.0   2.2 
Weighted-average common shares assuming dilution  146.4   151.4   147.0   152.1 

Options to purchase 1.10.8 million and 0.91.2 million shares of common stock were not included in the computation for the thirteen weeks ended NovemberAugust 2, 20132014 and October 27, 2012,August 3, 2013, respectively. Options to purchase 0.90.5 million and 0.70.8 million shares of common stock were not included in the computation for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012,August 3, 2013, respectively. These options were not included primarily because the exercise prices of the options were greater than the average market price of the common shares and, therefore, the effect would have been antidilutive. As of November 2, 2013, contingentlyContingently issuable shares of 0.4 million have not been included as the vesting conditions have not been satisfied.

satisfied as of both August 2, 2014 and August 3, 2013.

14
15

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.Pension and Postretirement Plans

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

The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which is recognized as part of SG&A expense:

  Pension Benefits Postretirement Benefits 
  Thirteen weeks Thirty-nine weeks Thirteen weeks Thirty-nine weeks 
  ended ended ended ended 
  November 2, October 27, November 2, October 27, November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 2013 2012 2013 2012 
Service cost $4 $3 $11 $10 $— $— $— $— 
Interest cost  6  7  19  21  —  —  —  — 
Expected return on plan assets  (10)  (10)  (30)  (30)  —  —  —  — 
Amortization of net loss (gain)  4  4  12  12  (1)  (1)  (2)  (3) 
Net benefit expense (income) $4 $4 $12 $13 $(1) $(1) $(2) $(3) 

  Pension Benefits  Postretirement Benefits 
  Thirteen weeks  Twenty-six weeks  Thirteen weeks  Twenty-six weeks 
  ended  ended  ended  ended 
  August 2,  August 3,  August 2,  August 3,  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013  2014  2013  2014  2013 
Service cost $4  $3  $8  $7  $—  $—  $—  $— 
Interest cost  7   7   14   13   —   —   —   — 
Expected return on                                
plan assets  (9)  (10)  (19)  (20)  —   —   —   — 
Amortization of net                                
loss (gain)  3   4   7   8   —   —   (1)  (1)
Net benefit expense (income) $5  $4  $10  $8  $—  $—  $(1) $(1)
                                 

During the second quarterfirst quarters of both 2014 and 2013, the Company made a $2contributions of $2 million contribution to the Canadian qualified plan. No pension contributions to the U.S. qualified plan were made during the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012.August 3, 2013. The Company continually evaluates the amount and timing of any future contributions. Additional contributions will depend on the plan asset performance and other factors.


10.Share-Based Compensation

On June 19, 2014, the Foot Locker 2007 Stock Incentive Plan was amended to increase the number of shares of the Company’s common stock reserved for all awards to 14 million shares.

Total compensation expense related to the Company’s share-based compensation plans was $6$6 million for the thirteen weeks ended NovemberAugust 2, 2013, $52014, $5 million for the thirteen weeks ended October 27, 2012,August 3, 2013, and was $19$12 million and $15$13 million for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012,August 3, 2013, respectively. The associated tax benefits recognized for the thirteen weeks ended NovemberAugust 2, 2014 and August 3, 2013 were $2 million and October 27, 2012 was $2$3 million, for both periods.respectively. The associated tax benefit recognized was $6$4 million for both the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and $5 million for the thirty-nine weeks ended October 27, 2012.

August 3, 2013.

Tax deductions in excess of the cumulative compensation cost recognized for share-based compensation arrangements were $8 million and $9$9 million for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012, respectively,$7 million for the twenty-six weeks ended August 3, 2013 and are classified as a financing activity within the Condensed Consolidated Statements of Cash Flows.

Valuation Model and Assumptions

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

16

15

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.Share-Based Compensation-Compensation – (continued)

The following table shows the Company’s assumptions used to compute the share-based compensation expense:

  Stock Option Plans
Thirty-nine weeks ended		   Stock Purchase Plan
Thirty-nine weeks ended		 
  November 2,  October 27,  November 2,  October 27, 
  2013  2012  2013  2012 
Weighted-average risk free rate of interest  1.02%  1.50%  0.17%  0.22%
Expected volatility  42%  43%  40%  38%
Weighted-average expected award life  6.0 years   5.5 years   1.0 year   1.0 year 
Dividend yield  2.3%  2.3%  2.3%  2.5%
Weighted-average fair value $10.98  $10.12  $5.80  $5.91 
The information in the following table covers options granted under the Company’s stock option plans for the thirty-nine weeks ended November 2, 2013:
(in thousands, except price per share and weighted-average term) Shares Weighted-
Average
Term		 Weighted-
Average
Exercise
Price		 
Options outstanding at the beginning of the year  5,907   $19.93 
Granted  1,154    34.25 
Exercised  (964)    19.12 
Expired or cancelled  (59)    29.56 
Options outstanding at November 2, 2013  6,038 6.59 $22.70 
Options exercisable at November 2, 2013  3,857 5.40 $18.51 
Options available for future grant at November 2, 2013  3,336      
  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
Intrinsic value of stock options (in millions) 2013 2012 2013 2012 
Exercised $2 $9 $15 $24 
Outstanding       $74 $85 
Outstanding and exercisable       $64 $61 
The cash received from option exercises for the thirteen and thirty-nine weeks ended November 2, 2013 was $4 million and $19 million, respectively. The cash received from option exercises for the thirteen and thirty-nine weeks ended October 27, 2012 was $15 million and $35 million, respectively. The total tax benefit realized from option exercises was $1 million and $5 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, and was $3 million and $8 million for the corresponding prior-year periods.
17

FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Share-Based Compensation- (continued)
The following table summarizes information about stock options outstanding and exercisable at November 2, 2013:
      Options Outstanding Options Exercisable 
Range of Exercise
Prices		 Number
Outstanding		 Weighted-
Average
Remaining
Contractual Life		 Weighted-
Average
Exercise
Price		 Number
Exercisable		 Weighted-
Average
Exercise Price		 
(in thousands, except price per share and contractual life) 
$9.85 $15.10 1,756 5.86 $12.60 1,756 $12.60 
$15.74 $23.42 1,603 6.36 $19.71 1,156 $20.04 
$23.63 $30.92 1,540 5.61 $28.77 937 $27.55 
$31.79 $36.59 1,139 9.36 $34.26 8 $34.17 
$9.85 $36.59 6,038 6.59 $22.70 3,857 $18.51 
Changes in the Company’s nonvested options for the thirty-nine weeks ended November 2, 2013 are summarized as follows:
(in thousands, except price per share)  Number of
Shares		 Weighted-
Average Grant
Date Fair Value
per Share		 
Nonvested at the beginning of the year  2,314 $23.18 
Granted  1,154  34.25 
Vested  (1,228)  20.97 
Expired or cancelled  (59)  29.56 
Nonvested at November 2, 2013  2,181 $30.11 

  Stock Option Plans
Twenty-six weeks ended		  Stock Purchase Plan
Twenty-six weeks ended		 
  August 2,  August 3,  August 2,  August 3, 
  2014  2013  2014  2013 
Weighted-average risk free rate of interest  2.11%  1.02%  0.15%  0.17%
Expected volatility  39%  42%  24%  40%
Weighted-average expected award life  6.1 years   6.0 years   1.0 year   1.0 year 
Dividend yield  2.0%  2.3%  2.2%  2.3%
Weighted-average fair value $14.88  $10.99  $6.60  $5.79 

Compensation expense related to the Company’s stock option and stock purchase plans was $3$3 million and $9$6 million for both the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013, respectively,2014 and was $2 million and $7 million for the thirteen and thirty-nine weeks ended October 27, 2012,August 3, 2013, respectively. As of NovemberAugust 2, 2013,2014, there was $11$13 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.101.27 years.

The information in the following table covers options granted under the Company’s stock option plans for the twenty-six weeks ended August 2, 2014.

(in thousands, except price per share and
weighted-average term)		 Shares  Weighted-
Average Term		  Weighted-
Average
Exercise
Price		 
Options outstanding at the beginning of the year  5,668      $22.66 
Granted  767       45.11 
Exercised  (611)      21.46 
Expired or cancelled  (34)      38.35 
Options outstanding at August 2, 2014  5,790   6.70  $25.67 
Options exercisable at August 2, 2014  3,950   5.68  $19.87 
Options available for future grant at August 2, 2014  13,970         

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

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
  2014  2013  2014  2013 
Exercised $4  $8  $15  $13 

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

  Twenty-six weeks ended 
  August 2,  August 3, 
  2014  2013 
Outstanding $130  $91 
Outstanding and exercisable $112  $75 

16

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.Share-Based Compensation – (continued)

The cash received from option exercises for the thirteen and twenty-six weeks ended August 2, 2014 was $3 million and $13 million, respectively. The cash received from option exercises for the thirteen and twenty-six weeks ended August 3, 2013 was $9 million and $15 million, respectively. The total tax benefit realized from option exercises was $1 million and $5 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, and was $2 million and $4 million for the corresponding prior-year periods.

The following table summarizes information about stock options outstanding and exercisable at August 2, 2014:

  Options Outstanding  Options Exercisable 
Range of Exercise Prices Number
Outstanding		  Weighted-
Average
Remaining
Contractual
Life		  Weighted-
Average
Exercise
Price		  Number
Exercisable		  Weighted-
Average
Exercise
Price		 
  (in thousands, except prices per share and contractual life) 
  $9.85 to $15.10  1,520   5.13  $12.46   1,520  $12.46 
$18.80 to $23.92  1,454   5.38  $19.95   1,450  $19.95 
$24.04 to $34.24  2,029   7.72  $32.29   962  $31.09 
$34.27 to $50.71  787   9.56  $44.64   18  $38.31 
   5,790   6.70  $25.67   3,950  $19.87 

Changes in the Company’s nonvested options for the twenty-six weeks ended August 2, 2014 are summarized as follows:

(in thousands, except price per share) Number of
Shares		  Weighted-
Average Grant
Date Fair Value
per Share		 
Nonvested at the beginning of the year  2,173  $30.10 
Granted  767   45.11 
Vested  (1,066)  26.82 
Expired or cancelled  (34)  38.35 
Nonvested at August 2, 2014  1,840  $38.11 

Restricted Stock and Units

Restricted shares of the Company’s common stock and restricted stock units may be awarded to certain officers and key employees of the Company. The Company also issuesAwards made to executives outside of the United States and to nonemployee directors are made in the form of restricted stock units to its non-employee directors.units. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. As of November 2, 2013, 997,542There were 742,514 and 1,008,542 restricted stock units were outstanding. Compensation expense is recognized using the fair market value at the dateoutstanding as of grantAugust 2, 2014 and is amortized over the vesting period, provided the recipient continues to be employed by the Company.

August 3, 2013 respectively.

Generally, awards fully vest after the passage of time, typically three years. However, restricted stock unit grants made in connection with the Company’s long-term incentive program vest after the attainment of certain performance metrics and the passage of time.Restricted stock is considered outstanding at the time of grant and the holders have voting rights. Dividends are paid to holders of restricted stock that vestsvest with the passage of time; for any performance-based restricted stock, granted after May 19, 2010, dividends will be accumulated and paid after the performance criteria are met.

No dividends are paid on restricted stock units.

18

17

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.Share-Based Compensation-Compensation – (continued)

Restricted share

Compensation expense is recognized using the fair market value at the date of grant and unit activity foris amortized over the thirty-nine weeks ended November 2, 2013 and October 27, 2012 is summarized as follows:

  Number of Shares and Units 
(in thousands) November 2, 2013 October 27, 2012 
Outstanding at beginning of period  1,564  2,068 
Granted  440  264 
Vested  (649)  (482) 
Cancelled or forfeited  (15)  — 
Outstanding at end of period  1,340  1,850 
Aggregate value (in millions) $36 $33 
Weighted-average remaining contractual life  1.09 years  0.95 years 
The weighted-average grant-date fair value per share was $34.59 and $30.75 forvesting period, provided the thirty-nine weeks ended   November 2, 2013 and October 27, 2012, respectively. The total value of awards for which restrictions lapsed duringrecipient continues to be employed by the thirty-nine weeks ended November 2, 2013 and October 27, 2012 was $9 million and $5 million, respectively. As of November 2, 2013, there was $13 million of total unrecognized compensation cost related to nonvested restricted awards.Company. The Company recorded compensation expense related to restricted stock awards, net of forfeitures, of $3 million for both the thirteen weeks ended November 2, 2013 and October 27, 2012, and $10$3 million and $8$2 million for the thirty-ninethirteen weeks ended NovemberAugust 2, 2014 and August 3, 2013, and October 27, 2012,$6 million and $7 million for the twenty-six weeks ended August 2, 2014 and August 3, 2013, respectively.

As of August 2, 2014, there was $16 million of total unrecognized compensation cost related to nonvested restricted awards.

Restricted shares and units activity for the twenty-six weeks ended August 2, 2014 and August 3, 2013 is summarized as follows:

  Number of Shares and Units 
(in thousands) August 2, 2014  August 3, 2013 
Outstanding at beginning of period  1,369   1,564 
Granted  320   440 
Vested  (649)  (639)
Cancelled or forfeited  (33)  (12)
Outstanding at end of period  1,007   1,353 
Aggregate value (in millions) $37  $36 
Weighted-average remaining contractual life  1.57 years   1.33 years 

The weighted-average grant-date fair value per share was $45.24 and $34.59 for the twenty-six weeks ended August 2, 2014 and August 3, 2013, respectively. The total value of awards for which restrictions lapsed during the twenty-six weeks ended August 2, 2014 and August 3, 2013 was $14 million and $9 million, respectively.

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

BUSINESS OVERVIEW

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point, Sidestep, and Run2, which was acquired during the second quarter of 2013. The Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites, mobile devices,sites, and catalogs. Eastbay, one of the affiliates, is among the largest direct marketers in the United States. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamservices.com,eastbayteamsales.com, ccs.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, and six02.com). Additionally, this segment includes Tredex, the direct-to-customer subsidiary of Runners Point Group, which operates the websites for runnerspoint.com, sidestep.com,sidestep-shoes.com, and sp24.com.

STORE COUNT

At NovemberAugust 2, 2013,2014, the Company operated 3,5103,460 stores as compared with 3,3353,473 and 3,3673,495 stores at February 2,1, 2014 and August 3, 2013, and October 27, 2012, respectively. During the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, the Company opened 77 stores, acquired 19441 stores, remodeled or relocated 271162 stores and closed 9654 stores. Store count as of November 2, 2013 includes 195 Runners Point Group stores.

A total of 7274 franchised stores were operating at NovemberAugust 2, 2013,2014, as compared with 4273 and 4069 stores at February 2,1, 2014 and August 3, 2013, and October 27, 2012, respectively. Included in the most recent number of franchised stores are 27 franchised Runners Point Group stores operating in Germany and Switzerland. Royalty incomeRevenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.

19

SALES AND OPERATING RESULTS

All references to comparable-store sales for a given period relate to sales of stores that are open at the period-end and have been open for more than one year. The computation of comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effectseffect of foreign currency fluctuations.

Sales from acquired businesses that include inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, sales of Runners Point Group have been excluded from the computation of comparable-store sales.

Runners Point Group sales will be included in the computation beginning in October 2014.

The following table summarizes results by segment:

  Thirteen weeks ended Thirty-nine weeks ended 
Sales November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Athletic Stores $1,444 $1,375 $4,228 $4,060 
Direct-to-Customers  178  149  486  409 
Total sales $1,622 $1,524 $4,714 $4,469 
  Thirteen weeks ended Thirty-nine weeks ended 
Operating Results November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Athletic Stores (1)
 $159 $166 $486 $480 
Direct-to-Customers  20  18  53  47 
Division profit  179  184  539  527 
Less: Corporate expense, net(2)
  17  28  56  76 
Operating profit  162  156  483  451 
Other income (3)
  —  —  3  1 
Interest expense, net  2  1  4  3 
Income before income taxes $160 $155 $482 $449 

(in millions) Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
Sales 2014  2013  2014  2013 
Athletic Stores $1,468  $1,313  $3,125  $2,784 
Direct-to-Customers  173   141   384   308 
Total sales $1,641  $1,454  $3,509  $3,092 
                 
Operating Results                
Athletic Stores(1) $149  $116  $396  $327 
Direct-to-Customers(2)  14   10   42   33 
Division profit  163   126   438   360 
Less: Corporate expense, net  19   20   40   39 
Operating profit  144   106   398   321 
Other income (3)  1   1   2   3 
Interest expense, net  1   1   2   2 
Income before income taxes $144  $106  $398  $322 

(1)
Included in the Athletic Stores segment for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2014 is a $1 million tradename impairment charge related to the Company’s stores in the Republic of Ireland. Included in the Athletic Stores segment for both the thirteen and twenty-six weeks ended August 3, 2013 is a $2 million charge recorded in connection with the closure of all CCS stores.
(2)
Corporate expenseIncluded in the Direct-to-Customers segment for both the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013 reflects the reallocation of expense between corporate and the operating divisions. Based upon an internal study of corporate expense, the allocation of such expenses2014 is a $2 million impairment charge related to the operating divisions was increased thereby reducing corporate expense. Corporate expense was reduced by $7 million and $20 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively.
CCS tradename.
(3)
Other income includes non-operating items, such as lease termination gains, royalty income, and the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts.

Sales increased by $98$187 million, or 6.412.9 percent, to $1,622$1,641 million for the thirteen weeks ended NovemberAugust 2, 20132014, from $1,524$1,454 million for the thirteen weeks ended October 27, 2012.August 3, 2013. For the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, sales of $4,714$3,509 million increased 5.513.5 percent from sales of $4,469$3,092 million for the thirty-ninetwenty-six week period ended October 27, 2012.

August 3, 2013.

Excluding the effectseffect of foreign currency fluctuations and sales of Runners Point Group, total sales for the thirteen weeksweek and thirty-nine weekstwenty-six week periods increased 1.37.6 percent and 3.27.8 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales increased by 4.17.0 percent and 3.77.3 percent for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, respectively.

GROSS MARGIN

Gross margin, as a percentage of sales, remained unchanged at 33.1 percent and 32.9increased to 32.0 percent for the thirteen and thirty-nine weeks ended NovemberAugust 2, 2013,2014 as compared with 31.2 percent in the corresponding prior-year period driven by the occupancy and buyers compensation expense rate, which decreased by 80 basis points reflecting improved leverage of primarily fixed costs and an unchanged merchandise margin rate. The merchandise margin rate continued to be negatively affected by lower initial markups driven by vendor mix and lower shipping and handling margin, offset by lower markdowns. For the twenty-six weeks ended August 2, 2014, gross margin, as a percentage of sales, increased to 33.4 percent as compared with 32.8 percent in the corresponding prior-year period. The occupancy and buyers compensation expense rate decreased by 70 basis points and was partially offset by a 10 basis point increase in the cost of merchandise rate.

SELLING, GENERAL AND ADMINISTRATIVE

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
SG&A $343  $314  $698  $629 
SG&A, as a percentage of sales  20.9%  21.6%  19.9%  20.3%

Selling, general and administrative expenses (“SG&A”) increased by $29 million, or 9.2 percent, for the thirteen weeks ended August 2, 2014 as compared with the corresponding prior-year periods. As a percentage of sales,period. For the cost of merchandise for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014, SG&A increased by 10 basis points$69 million, or 11.0 percent, as compared with the prior yearcorresponding prior-year period. The SG&A rate improvements reflected continued expense management, primarily related to store wages, which benefitted from the utilization of hiring and scheduling tools that have been recently implemented. Excluding Runners Point Group from all periods primarily reflecting a decreasepresented, the improvement in the initial markup rate. This increase was offsetSG&A rate would have been the same for the thirteen weeks ended August 2, 2014 and would have improved by an improvement of 10additional 20 basis points from leveraging occupancy and buying costs.

20

Segment Analysis
Athletic Stores
Athletic Stores salesfor the twenty-six weeks ended August 2, 2014. Excluding the effect of foreign currency fluctuations, SG&A increased by 5.0 percent to $1,444$25 million and 4.1 percent to $4,228$62 million for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, respectively, as compared with the corresponding prior-year periods. Athletic Stores sales include $64 million and $84 million for the thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to the Runners Point Group stores. Excluding the effects of foreign currency fluctuations and sales of Runners Point Group stores, sales from the Athletic Stores segment decreased 0.1 percent and increased 1.9 percent for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with the corresponding prior-year periods.
Comparable-store sales increased by 2.9 percent and 2.5 percent for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. These increases were primarily driven by Kids Foot Locker and Foot Locker U.S., which posted strong comparable-store gains. The children’s footwear category was a key driver across multiple banners, as basketball styles performed very well. This was offset, in part, by comparable-store sales declines in Lady Foot Locker and Champs Sports, while Footaction was essentially flat. Lady Foot Locker continued to experience sales declines, as management continues to close underperforming stores and redefine the product offerings. Test locations, including SIX:02 stores, are performing better than the balance of the chain and continue to be evaluated. Various initiatives are being implemented, including the launch of the SIX:02 e-commerce website during the third quarter, in order to optimize performance before a roll-out strategy is determined. The Company is working to improve the performance of the remaining Lady Foot Locker stores and is testing additional merchandise and store layout changes in an effort to improve future performance. Champs Sports’s comparable-store sales were negatively affected, in part, by the level of store remodel projects, which resulted in store closings for the period of time during remodeling. International sales were led by Foot Locker Europe, which experienced a mid-single digit comparable-store sales increase for both the thirteen weeks and thirty-nine weeks ended November 2, 2013. These increases were primarily related to sales of men’s basketball and running styles.
Athletic Stores division profit for the thirteen weeks ended November 2, 2013 decreased to $159 million, or 11.0 percent of sales, as compared with division profit of $166 million, or 12.1 percent of sales, for the thirteen weeks ended October 27, 2012. For the thirty-nine weeks ended November 2, 2013 division profit increased to $486 million, or 11.5 percent of sales, as compared with division profit of $480 million, or 11.8 percent of sales, for the corresponding prior-year period. Athletic Stores division profit includes $1 million and $3 million for thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to Runners Point Group stores.
The decrease in division profit for the thirteen weeks ended November 2, 2013 was mainly attributed to higher occupancy costs as a percentage of sales, reflecting the shift in sales resulting from the 53rd week in 2012. Accordingly, division profit for the thirty-nine weeks ended November 2, 2013, as a percentage of sales, was essentially flat with the corresponding prior-year period.
Direct-to-Customers
Direct-to-Customers sales increased by 19.5 percent and 18.8 percent for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with the corresponding prior-year periods. Comparable sales increased 13.7 percent and 15.7 percent for the thirteen weeks and thirty-nine weeks ended November 2, 2013, respectively. Direct-to-Customers sales include $8 million and $10 million, respectively, related to the Tredex division of Runners Point Group during the same periods in 2013. Excluding sales from Tredex, increases were primarily the result of the continued strong sales performance of the Company’s store-banner websites, which  increased approximately 40.0 percent, coupled with sales growth in the Eastbay business. These increases were offset, in part, by a decline in CCS’s sales, as that format continues to perform below expectations.
21

Direct-to-Customers division profit for the thirteen weeks ended November 2, 2013 increased to $20 million, as compared to $18 million for the corresponding prior-year period. Division profit for the thirty-nine weeks ended November 2, 2013 increased to $53 million, as compared to $47 million for the corresponding prior-year period. Division profit as a percentage of sales decreased to 11.2 percent and 10.9 percent for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with 12.1 percent and 11.5 percent for the corresponding prior-year periods. The decrease in division profit as a percentage of sales for the thirteen and thirty-nine weeks ended November 2, 2013 is primarily driven by increased advertising and publicity expense, as Eastbay launched a new marketing campaign late in the second quarter of 2013 to increase the exposure of the brand, coupled with the continued underperformance of the CCS business. The effect of the Tredex acquisition was not significant to the Direct-to-Customers segment for any of the periods presented.

Corporate ExpenseDEPRECIATION AND AMORTIZATION

Corporate expense consists of unallocated selling, general and administrative expenses (“SG&A”), as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense for the thirteen weeks ended November 2, 2013 decreased by $11 million to $17 million from the corresponding prior-year period. For the thirty-nine weeks ended November 2, 2013 corporate expense decreased by $20 million to $56 million from the corresponding prior-year period. The decline is primarily a result of a reallocation of expense between corporate and the operating divisions. Based upon an internal study of corporate expense, the allocation of such expenses to the operating divisions was increased thereby reducing corporate expense. This decrease was partially offset by $1 million and $4 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, of costs incurred related to the Company’s acquisition and integration of Runners Point Group.
Selling, General and Administrative
SG&A of $340 million increased by $21 million, or 6.6 percent, for the thirteen weeks ended November 2, 2013 as compared with the corresponding prior-year period. SG&A, as a percentage of sales, increased to 21.0 percent for the thirteen weeks ended November 2, 2013, as compared with 20.9 percent in the corresponding prior-year period.
For the thirty-nine weeks ended November 2, 2013, SG&A increased by $38 million, or 4.1 percent, as compared with the corresponding prior-year period. SG&A, as a percentage of sales, decreased to 20.6 percent for the thirty-nine weeks ended November 2, 2013, as compared with 20.8 percent in the corresponding prior-year period.
Excluding the effects of foreign currency fluctuations, SG&A increased by $18 million and $34 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with the corresponding prior-year periods.
Included in SG&A for the thirteen and thirty-nine weeks ended November 2, 2013, is $1 million and $4 million, respectively, of costs related to the Company’s acquisition and integration of Runners Point Group as noted above in the discussion of corporate expense. Additionally, Runners Point Group’s SG&A represented $22 million and $27 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. Excluding the acquisition costs, integration costs, and Runners Point Group, SG&A as a percentage of sales, would have declined 40 and 50 basis points for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared with the corresponding prior-year periods. This improvement was driven by effective expense management, specifically managing store wages and marketing costs.
22

Depreciation and Amortization

Depreciation and amortization increased by $5 million for the thirteen weeks ended NovemberAugust 2, 20132014 to $35$36 million, as compared with the corresponding prior-year period of $30$31 million. For the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, depreciation and amortization increased by $9$10 million to $97$72 million as compared with $88$62 million for the thirty-ninetwenty-six weeks ended October 27, 2012. ThisAugust 3, 2013. The increase in both periods reflects increased capital spending onfor store improvements and technology. Intechnology, as well as the addition this increase reflects the inclusion of depreciation and amortization relating to Runners Point GroupGroup. The effect of $2foreign currency fluctuations increased depreciation by $1 million for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013. The effects of foreign currency fluctuations2014.

INTEREST EXPENSE

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
Interest expense $2  $2  $5  $5 
Interest income  (1)  (1)  (3)  (3)
Interest expense, net $1  $1  $2  $2 

Interest expense and interest income were not significant.

Other Charges
Other charges consist of $2 million of lease exit costs relating to the closure of all 22 CCS stores during the second quarter of 2013. As of November 2, 2013, 12 of these stores were converted to other store formats, 2 will be converted by the end of the year and 1 will be converted during the first quarter of 2014. The CCS store closures are not presented as part of discontinued operations as the operations and cash flows related to the majority of the closed stores are expected to continue through other store formats and the Company’s websites.
Interest Expense
  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Interest expense $3 $3 $8 $8 
Interest income  (1)  (2)  (4)  (5) 
Interest expense, net $2 $1 $4 $3 
The increase in net interest expense for the thirteen and thirty-nine weeks ended November 2, 2013,unchanged as compared with the corresponding prior-year period, reflects income earned on lower cash and cash equivalents balances as well as a decrease in the corresponding interest rate.
prior year.

Income TaxesINCOME TAXES

The Company recorded income tax provisions of $56$52 million and $174$144 million, which represent effective tax rates of 35.036.3 percent and 36.136.2 percent for the thirteen weeks and thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, respectively. For the thirteen weeks and thirty-ninetwenty-six weeks ended October 27, 2012,August 3, 2013, the Company recorded income tax provisions of $49$40 million and $156$118 million, which represented effective tax rates of 31.737.7 percent and 34.836.6 percent, respectively. The Company’s interim provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented.

The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes.  As a result, the Company 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. IncludedThe changes in the effectivethe tax ratereserves for the thirteen weeks ended NovemberAugust 2, 2014 were not significant. The thirteen weeks ended August 3, 2013 had an additional state tax provision of $1 million. Included in the twenty-six weeks ended August 2, 2014, and August 3, 2013 are tax reserve releasesbenefits of $3$1 million due to foreign tax audit settlements. The effective tax rate for the thirteen weeks ended October 27, 2012 included a tax reserve release of $9and $2 million, due to a foreign tax audit settlement. The thirty-nine weeks ended November 2, 2013 included $5 million ofrespectively, from reserve releases due to settlements of federal, state, and foreign tax audits, offset by state audit expense of $1 million, as compared with reserve releases of $12 million recognized in the corresponding prior-year period.

23

examinations.

For the thirty-ninethirteen weeks ended November 2,August 3, 2013, in connection with the purchase of Runners Point Group, the Company recorded a discrete item of $1 million representing the tax expense ofnon-deductible acquisition costs for which a deduction is not allowable. costs.

The effective tax rate, for the thirty-nine weeks ended October 27, 2012 included a tax benefit related to a Canadian provincial tax rate change that resulted in a $1 million increase in the value of the Company’s net deferred tax assets.

Excludingexcluding the reserve activityreleases and other discrete items, the effective tax rate for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 decreased as compared with the corresponding prior-year period,periods, due primarily to the effect of certain recently implementedfull implementation of international tax planning initiatives.
During the third quarter of 2013 the Internal Revenue Service issued the final regulations regarding the deduction and capitalization of expenditures related to tangible property. These final regulations apply to taxable years beginning on or after January 1, 2014. Management does not believe such regulations will have a material effect on the Company’s consolidated financial statements.
strategies.

The Company currently expects the fourthits third quarter tax rate to approximate 37 percent and its full year tax rate to be in the range of 36 to 37approximate 36.5 percent, excluding the effect of any additional nonrecurring items that may occur. The actual tax rates will primarily depend on the level and mix of income earned in the United States as compared with its international operations. 

Net IncomeNET INCOME

For the thirteen weeks ended NovemberAugust 2, 2013,2014, net income decreasedincreased by $2$26 million, or 1.939.4 percent, to $92 million as compared with the corresponding prior-year period. For the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013,2014, net income increased by $15$50 million, or 5.124.5 percent, to $254 million as compared with the corresponding prior-year period.

Reconciliation The improved performance represents a 20.3 percent and 18.2 percent flow-through of Non-GAAP Measuresincreased sales to pre-tax income, for the thirteen and twenty-six week period ended August 2, 2014, respectively, reflecting leveraging of fixed costs, and controlling operating expenses.

RECONCILIATION OF NON-GAAP MEASURES

The Company provides non-GAAP information to assist investors with the comparison of the Company’s results period over period. The following represents the reconciliation of the non-GAAP measures:

  Thirteen weeks ended Thirty-nine weeks ended 
  November 2, October 27, November 2, October 27, 
(in millions) 2013 2012 2013 2012 
Net income, as reported $104 $106 $308 $293 
After-tax adjustments to arrive at non-GAAP:             
Runners Point Group acquisition and integration costs  1  —  4  — 
CCS store closure costs  —  —  1  — 
Canadian tax rate change  —  —  —  (1) 
Foreign tax audit settlements  (3)  (9)  (3)  (9) 
Net income, non-GAAP $102 $97 $310 $283 
              
Diluted EPS, as reported $0.70 $0.69 $2.04 $1.90 
Adjustments to arrive at non-GAAP:             
Runners Point Group acquisition and integration costs costs  —  —  0.02  — 
CCS store closure costs  —  —  0.01  — 
Canadian tax rate change  —  —  —  (0.01) 
Foreign tax audit settlements  (0.02)  (0.06)  (0.02)  (0.06) 
Diluted EPS, non-GAAP $0.68 $0.63 $2.05 $1.83 
The Company estimates the tax effect of the non-GAAP adjustments by applying its effective tax rate to each of the respective items.
24

In 2009, the Company excluded from its non-GAAP results the effect of a Canadian provincial tax rate change. During the second quarter of 2012, the Company recorded a benefit of $1 million, or $0.01 per diluted share, to reflect the repeal of the last two stages of certain Canadian provincial tax rate changes. This benefit was excluded from the non-GAAP results, consistent with the prior year’s presentation.
During the thirteen weeks ended November 2, 2013 and October 27, 2012, the Company recorded benefits of $3 million or $0.02 per diluted share and $9 million, or $0.06 per diluted share, respectively, to reflect the settlement of foreign tax audits, which resulted in a reduction in tax reserves established in prior periods.
The non-GAAP financial measures aremeasure is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP.
Presented below are GAAP and non-GAAP results for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013, respectively.

  Thirteen weeks ended  Twenty-six weeks ended 
  August 2,  August 3,  August 2,  August 3, 
(in millions) 2014  2013  2014  2013 
Net income, as reported $92  $66  $254  $204 
After-tax adjustments to arrive at non-GAAP:                
Impairment of intangibles  1   —   2   — 
Runners Point Group acquisition and integration costs  —   2   1   3 
CCS store closure costs  —   1   —   1 
Net income, non-GAAP $93  $69  $257  $208 
                 
Diluted EPS, as reported $0.63  $0.44  $1.73  $1.34 
Adjustments to arrive at non-GAAP:                
Impairment of intangibles  0.01   —   0.02   — 
Runners Point Group acquisition and integration costs  —   0.01   —   0.02 
CCS store closure costs  —   0.01   —   0.01 
Diluted EPS, non-GAAP $0.64  $0.46  $1.75  $1.37 

The Company has excluded the following charges and costs to arrive at its non-GAAP results. The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal tax rate to each of the respective items.

In the second quarter of 2014, the Company recorded an after-tax charge of $1 million, or $0.01 per diluted share, related to the impairment of the CCS tradename, resulting from the transition of its skate business from CCS to its Eastbay brand. During the first quarter of 2014, the Company recorded an after-tax impairment charge of $1 million to fully write down the remaining value of the tradename related to the Company’s stores in the Republic of Ireland. Additionally during the first quarter of 2014, the Company recorded charges of $1 million, after-tax, in connection with the integration of Runners Point Group.

For the thirteen and twenty-six weeks ended August 3, 2013, the Company recorded approximately $2 million, after-tax, or $0.01 per diluted share, and $3 million, after-tax, or $0.02 per diluted share for costs associated with the acquisition of Runners Point Group, respectively. The Company also recorded $1 million, or $0.01 per diluted share of costs related to the CCS store closures for both the thirteen and twenty-six weeks ended August 3, 2013.

SEGMENT ANALYSIS

Athletic Stores

Athletic Stores segment sales increased by 11.8 percent to $1,468 million and 12.2 percent to $3,125 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, as compared with the corresponding prior-year period. This segment includes $79 million and $160 million of sales related to the Runners Point Group stores for the thirteen and twenty-six weeks ended August 2, 2014, respectively, as compared with $20 million for both the thirteen and twenty-six weeks ended August 3, 2013; this business was acquired in July 2013. Excluding the effect of foreign currency fluctuations and the sales of Runners Point Group stores, Athletic Stores segment sales increased 6.4 percent and 6.6 percent for the thirteen and twenty-six weeks ended August 2, 2014, respectively, as compared with the corresponding prior-year period. Comparable-store sales increased by 6.1 percent and 6.3 percent for the thirteen and twenty-six weeks ended August 2, 2014.

Excluding Champs Sports, all divisions within this segment experienced comparable-store sales gains for both the quarter and year-to-date periods, led by domestic Foot Locker and Kids Foot Locker. Basketball and children’s footwear continued to be the biggest drivers of sales increases. Sales of basketball footwear and apparel were driven by Jordan and key marquee player styles, while the children’s business grew as the Company continues to successfully invest in this area across multiple banners. Overall, the segment continues to benefit from the continued expansion of various shop-in-shop partnerships with our key vendors. Champs Sports experienced a modest decline for the quarter, reflecting lower sales of apparel and accessories. For the year-to-date period, Champs Sports produced a positive comparable-store sales gain as the losses in apparel and accessories sales were offset by increased footwear sales.

Lady Foot Locker experienced a comparable-store sales increase for both the thirteen and twenty-six weeks ended August 2, 2014. The shift into more performance-oriented assortments has been resonating with customers as both footwear and apparel grew on a comparable-sales basis. Overall sales for Lady Foot Locker for both the quarter and year-to-date periods declined, as compared with the corresponding prior-year periods, primarily reflecting a net decline of 44 stores. The Company continues to test merchandise assortments and store formats, including SIX:02 stores, focused on athletically active women. These tests are being evaluated before a roll-out strategy is determined.

Athletic Stores division profit for the thirteen weeks ended August 2, 2014 increased to $149 million, or 10.1 percent, as a percentage of sales, as compared with division profit of $116 million, or 8.8 percent, as a percentage of sales, for the thirteen weeks ended August 3, 2013. For the twenty-six weeks ended August 2, 2014 division profit increased to $396 million, or 12.7 percent, as a percentage of sales, as compared with division profit of $327 million, or 11.7 percent, as a percentage of sales, for the corresponding prior-year period. Included in the results of the Athletic Stores segment for the twenty-six weeks ended August 2, 2014 was a $1 million impairment charge related to the tradename for our stores operating in the Republic of Ireland, reflecting historical and projected underperformance. Additionally, during the second quarter of 2013 a charge of $2 million was recorded in connection with the closure of all CCS stores. Overall, the improvement for both the quarter and year-to-date periods primarily reflected higher sales; an improved gross margin rate driven by improved leverage of occupancy expenses; control over variable expenses, such as store wages; and a marketing expense shift. Certain marketing programs will take place during the third quarter this year, whereas in the prior year they occurred in the second quarter.

Direct-to-Customers

Direct-to-Customers sales increased by 22.7 percent to $173 million and 24.7 percent to $384 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, as compared with the corresponding prior-year periods. Comparable sales increased by 14.9 percent and 16.1 percent for the thirteen and twenty-six weeks ended August 2, 2014. Direct-to-Customers sales include $9 million and $21 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, related to the e-commerce division of Runners Point Group, which was acquired in the second quarter of 2013. Excluding these sales, increases were primarily the result of continued strong sales performance of the Company’s store-banner websites. Sales at each of the store-banner websites increased significantly, increasing collectively nearly 40 percent. The performance was led by basketball and casual styles which both posted strong comparable sales gains during the periods.

Direct-to-Customers division profit for the thirteen and twenty-six weeks ended August 2, 2014 increased by $4 million to $14 million and increased by $9 million to $42 million, respectively, as compared with the corresponding prior-year period. Division profit, as a percentage of sales, was 8.1 percent and 10.9 percent for the thirteen and twenty-six weeks ended August 2, 2014, respectively, as compared with 7.1 percent and 10.7 percent for the corresponding prior-year period. Included in the results of the Direct-to-Customers segment for the thirteen weeks ended August 2, 2014 was a $2 million impairment charge related to the tradename related to the CCS e-commerce business, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner. While the e-commerce business of the Runners Point Group is profitable, its profit margin rate continues to be lower than the balance of the segment and, therefore, negatively affected the division profit rate. Division profit reflected the continued growth of the store-banners coupled with reduced marketing costs. During the second quarter of 2013, Eastbay launched a marketing campaign costing approximately $3 million.

Corporate Expense

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. The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $2 million for the thirteen and twenty-six weeks ended August 2, 2014, respectively, thus reducing corporate expense. Excluding this change, as compared with the corresponding prior year periods, corporate expense remained unchanged and increased by $3 million for the thirteen and twenty-six weeks ended August 2, 2014.

Acquisition and integration costs related to Runners Point Group were not significant for the thirteen weeks ended August 2, 2014 and were $1 million for the twenty-six weeks ended August 2, 2014. This is as compared with the corresponding prior-year periods of $3 million and $4 million for the thirteen and twenty-six weeks ended August 3, 2013, respectively. Excluding the allocation change and costs associated with Runners Point Group, corporate expense increased primarily related to increased incentive compensation and legal costs. During the first quarter of 2014, the Company increased its legal reserves by $2 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s 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, share repurchases, and interest payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents and future cash flow from operations and the Company’s current revolving credit facility will be adequate to fund these requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. SuchShare repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.

As of August 2, 2014, approximately $234 million remains on the Company’s current $600 million share repurchase program.

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

Operating Activities

Net cash provided by operating activities was $327$362 million and $259$240 million for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012,August 3, 2013, respectively. These amounts reflect net income adjusted for non-cash items, non-cash impairment charges, and seasonal working capital changes. The increase in operating cash flow is primarilyimprovement reflects the result of strong sales during the first three quarters,Company’s earnings strength and improved working capital management. Additionally,improvements, partially offset by a $56 million increase in cash paid for income taxes declined $59 million to $123 million forduring the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2013.

2014.

Investing Activities

Net cash used in investing activities was $221$84 million and $170$189 million for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2014 and August 3, 2013, and October 27, 2012. During the second quarter of 2013, the Company completed its purchase of Runners Point Group for $81respectively. The current year reflects $93 million net of cash acquired. In addition, the Company spent $157 million onin capital expenditures partially offset by $9 million for the maturities of short-term investments. Capital expenditures in the current year were $14 million lower as compared with $120 million in the corresponding prior-year period, primarily reflectingrepresenting a shift in the Company’s initiative to update its existing stores.timing of payments. The Company’s current full-yearfull year forecast for capital expenditures is $206$218 million, of which $165includes $179 million relatesrelated to the updatesremodeling or relocation of existing stores and approximately 80 new store openings, and $41as well as $39 million for the development of information systems, websites, and infrastructure. CurrentThe prior year investing activities also reflectsincluded $84 million for the purchase of Runners Point Group, net sales and maturities of short-term investments of $15 million, as compared with net purchases of $50 million of short-term investments in the corresponding prior-year period.

cash acquired.

25

Financing Activities

Net cash used in financing activities was $226$175 million and $129$135 million for the thirty-ninetwenty-six weeks ended NovemberAugust 2, 2014 and August 3, 2013, and October 27, 2012, respectively.The Company purchased 4,849,251 shares of its common stock at a cost of $167 million during the first nine months of 2013. This compares to 2,961,161 shares repurchased for $94 million in the corresponding prior-year period. The Company declared and paid dividends during the first threetwo quarters of 2014 and 2013 and 2012 of $89$64 million and $82$60 million, respectively. This represents a quarterly raterates of $0.20$0.22 and $0.18$0.20 per share for 2014 and 2013, and 2012, respectively. TheThe Company repurchased 2,864,553 shares of its common stock for $136 million during the twenty-six weeks ended August 2, 2014. Additionally, the Company received proceeds of $18 million from the issuance of common stock in connection with employee stock programs of $22 million and $40 million for both the thirty-ninetwenty-six weeks ended NovemberAugust 2, 20132014 and October 27, 2012, respectively.August 3, 2013. In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $8$9 million and $7 million as a financing activity duringfor the thirty-nine week periodtwenty-six weeks ended NovemberAugust 2, 2014 and August 3, 2013, as compared with $9 million inrespectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the corresponding prior-year period. During the prior-year period, the Company repurchased and retired $2 million of its 8.5 percent debentures payable in 2022.

RecentFinancial Accounting Pronouncements
During the first quarter of 2013, the Company adoptedStandards Board (“FASB”) issued Accounting Standards Update 2013-02, (“ASU”) 2014-08,Comprehensive Income (Topic 220): Reporting Discontinued Operations and Disclosures of Amounts Reclassified outDisposals of Accumulated Other Comprehensive IncomeComponents of an Entity (“. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results and when the component or group of components meets the criteria to be classified as held for sale, is disposed by sale or is disposed of by other than by sale. ASU 2013-02”). ASU 2013-02 amended existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. The provisions of this new guidance were2014-08 is effective prospectively as of thefor fiscal years, and interim reporting periods within those years, beginning of 2013. Accordingly, enhanced footnote disclosure is included in Note 5.after December 15, 2014 with earlier adoption permitted. The adoption of ASU 2013-02 had nothis guidance did not have a significant effect on our consolidated financial position, results of operations or financial position.
We performed our annual goodwill impairment assessment during the first quarter of 2013, usingcash flows.

In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers, issued as a qualitative approach as permitted undernew Topic, Accounting Standards Update No. 2011-08, Testing GoodwillCodification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for Impairment. those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The adoption of this guidance is not expected to have a significant effect on our consolidated financial position, results of operations or cash flows.

In performingJune 2014, FASB issued ASU 2014-12,Accounting for Share-Based Payments When the assessment, we identifiedTerms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.ASU 2014-12 affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and consideredthat could be achieved after the significance of relevant key factors, events, and circumstances that affectedrequisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value and/or carrying amounts of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on our reporting units. These factors included external factors such as macroeconomic, industry and market conditions, as well as entity-specific factors, such as our actual and plannedconsolidated financial performance. Based on theposition, results of the impairment assessment performed, we concluded that it is more likely than not that the fair values of our reporting units substantially exceeded their respective carrying values and there are no reporting units at risk of impairment.

operations or cash flows.

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

statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February 2, 2013 except for the addition of the critical accounting policy set forth below.

1, 2014.

Business Combinations

The Company accounts for acquisitions of other businesses by recording the net assets of the acquired businesses at fair value and making estimates and assumptions to determine the fair value of these acquired assets and liabilities. The Company allocated the purchase price of the acquired business based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company. Changes to the assumptions used to estimate the fair value could affect the recorded amounts of the assets acquired and the resultant goodwill.
26

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors”disclosed in the 20122013 Annual Report on Form 10-K, as well as Part II, Item 1A “Risk Factors” below.10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 4. Controls and Procedures

The Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation as of NovemberAugust 2, 20132014 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended NovemberAugust 2, 2013,2014, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) that materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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 disposed of by the Company in past years. These legal proceedings include commercial, intellectual property, customer, environmental, and employment-related claims.

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

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

The Company is a defendant in additional purported wage and hour class actions that assert claims similar to those asserted inPereira and seek similar remedies. With the exception ofHill v. Foot Locker filed in state court in Illinois,Kissinger v. Foot Locker filed in state court of California,Ghattas v. Foot Locker filed in state court of California, and Cortes v. Foot Locker filed in federal court ofin New York, andMcGlothin v. Foot Locker filed in state court in California, all of these actions were consolidated by the United States Judicial Panel on Multidistrict Litigation withPereiraunder the captionIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigation.The consolidated casesconsolidatedcases are in the discovery stages of proceedings. InHill v. Foot Locker, in May 2011, the court granted plaintiffs’ motion for certification of an opt-out class covering certain Illinois employees only. The Company's motion for leave to appeal was denied. The Company has had and may in the futurehavecontinues to have discussions with plaintiffs’ counsel in an attempt to determine whether it will be possible to resolve the consolidated cases andHill. Meanwhile, the Company is vigorously defending these class actions. In Ghattas, the court has given final approval for a settlement of the action. Due to the inherent uncertainties of such matters, and because fact and expert discovery have not been completed, the Company is currently unable to make an estimate of the range of loss.

The Company and the Company’s U.S. retirement plan are defendants in a purported class action (Osberg v. Foot Locker, filed in the U.S. District Court for the Southern District of New York) in which the plaintiff alleges that, in connection with the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula, the Company and the retirement plan failed to properly advise plan participants of the “wear-away” effect of the conversion. Plaintiff asserted claims for: (a) breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA); (b) violation of the statutory provisions governing the content of the Summary Plan Description; (c) violation of the notice provision of Section 204(h) of ERISA; and (d) violation of ERISA’s age discrimination provisions. In September 2009, the court granted the Company's motion to dismiss the Section 204(h) claim and the age discrimination claim. In December 2012, the court granted the Company’s motion for summary judgment on the remaining two claims, dismissing the action. Plaintiff has appealed to the U.S. Court of Appeals for the 2ndSecond Circuit, which appeal is currently pending. Becauseissued a Summary Order on February 13, 2014 that affirmed the judgment of the inherent uncertainties of such mattersDistrict Court in part, and the current status of this case, the Company is currently unable to make an estimate of loss or range of loss for this case.

vacated and remanded in part.

Management does not believe that the outcome of any such legal proceedings pending against the Company or its consolidated subsidiaries, includingIn re Foot Locker, Inc. Fair Labor Standards Act and Wage and Hour Litigation,Hill, Cortes, Kissinger, Ghattas,McGlothin,andOsberg,as described above, would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.

Litigation is inherently unpredictable, and judgments could be rendered or settlements entered that could adversely affect the Company’s operating results or cash flows in a particular period.

Item 1A. Risk Factors

There were no material changes to the risk factors disclosed in the 20122013 Annual Report on Form 10-K,except for the addition of the risk factor set forth below.

Risk associated with our recent acquisition.
During the second quarter of 2013, the Company acquired Runners Point Group, a specialty athletic store and online retailer based in Recklinghausen, Germany. The acquisition of Runners Point Group involves a number of risks, which could significantly and adversely affect our business, financial condition, and results of operations, including:
-failure of Runners Point Group to achieve the results that we expect;
-diversion of management’s attention from operational matters;
-difficulties integrating the operations and personnel;
-potential difficulties associated with the retention of key personnel; and
-increased business concentration in Germany.
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10-K.

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

The following table provides information with respect to shares of the Company’s common stock that the Company repurchased during the thirteen weeks ended NovemberAugust 2, 2013.

Date Purchased 
Total
Number of
Shares
Purchased
(1)
 
Average
Price Paid
per Share (1)
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program (2)
 
Approximate
Dollar Value of
Shares that may yet
be Purchased
Under the Program
(2)
 
August 4, 2013 through August 31, 2013 170,000 $32.58 170,000 $494,461,596 
September 1, 2013 through October 5, 2013 1,728,743 $33.07 1,728,743 $437,299,251 
October 6, 2013 through November 2, 2013 129,206 $32.76 124,435 $433,227,849 
  2,027,949 $33.01 2,023,178    
2014.

Date Purchased Total Number
 of Shares 
Purchased  (1)		  Average 
Price Paid 
per Share (1)		  Total Number of
 Shares Purchased 
as Part of 
Publicly 
Announced 
Program (2)		  Approximate 
Dollar Value of 
Shares that may yet
be Purchased 
Under the Program
(2)		 
May 4, 2014 through May  31, 2014  35,000  $48.00   35,000  $298,900,956 
June 1, 2014 through July 5, 2014  850,391  $49.66   764,900  $260,998,153 
July 6, 2014 through August 2, 2014  534,400  $49.75   534,400  $234,410,870 
   1,419,791  $49.65   1,334,300     

(1)
These columns also reflect shares acquired in satisfaction of the tax withholding obligation of holders of restricted stock unitsawards which vested during the quarter.quarter, as well shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares.
(2)
On February 20, 2013, the Company’s Board of Directors approved a new 3-year, $600 million share repurchase program extending through January 2016.  
Item 6. Exhibits

Item 6. Exhibits
(a)
Exhibits
 The exhibits that are in this report immediately follow the index.

SIGNATURE

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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.

 FOOT LOCKER, INC. 
Date: December 11, 2013September 10, 2014(Company) 
  
 /s/ Lauren B. Peters 
 LAUREN B. PETERS
 Executive Vice President and Chief Financial Officer 
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FOOT LOCKER, INC.

INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q

AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K

Exhibit
No. in		  
Item 601
 
Description
12 Computation of Ratio of Earnings to Fixed Charges.
   
15 Accountants’ Acknowledgement.
   
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
99 Report of Independent Registered Public Accounting Firm.
   
101 Interactive data files.

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