UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: November 1, 2014May 2, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number:file number: 1-10299
(Exact Name of Registrant as Specified in Its Charter)
FOOT LOCKER, INC.
(Exact name of Registrant as specified in its charter)
New York | 13-3513936 |
(State or | (I.R.S. Employer Identification No.) |
112 West 34th Street, New York, New York, 10120
(Address of Principal Executive Offices)Offices, Zip Code)
(212) 720-3700(212-720-3700)
(Registrant’s telephone number, including area code)Telephone Number, Including Area Code)
Indicate by check mark whether the registrant
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filerþ | Accelerated filer | Non-accelerated filer | Smaller reporting company |
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
The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding as of November 28, 2014 was 142,086,468
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 as of May 29, 2015: 139,302,640 |
FOOT LOCKER, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except shares)
November 1, | November 2, | February 1, | May 2, | May 3, | January 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2015 | 2014 | 2015 | |||||||||||||||||||
(Unaudited) | (Unaudited) | * | (Unaudited) | (Unaudited) | * | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 916 | $ | 764 | $ | 858 | $ | 986 | $ | 1,005 | $ | 967 | ||||||||||||
Short-term investments | — | 32 | 9 | — | 2 | — | ||||||||||||||||||
Merchandise inventories | 1,324 | 1,316 | 1,220 | 1,234 | 1,268 | 1,250 | ||||||||||||||||||
Other current assets | 244 | 208 | 263 | 259 | 243 | 239 | ||||||||||||||||||
2,484 | 2,320 | 2,350 | 2,479 | 2,518 | 2,456 | |||||||||||||||||||
Property and equipment, net | 613 | 589 | 590 | 639 | 598 | 620 | ||||||||||||||||||
Deferred taxes | 237 | 257 | 241 | 226 | 245 | 221 | ||||||||||||||||||
Goodwill | 160 | 163 | 163 | 156 | 163 | 157 | ||||||||||||||||||
Other intangible assets, net | 56 | 70 | 67 | 48 | 65 | 49 | ||||||||||||||||||
Other assets | 68 | 78 | 76 | 83 | 80 | 74 | ||||||||||||||||||
$ | 3,618 | $ | 3,477 | $ | 3,487 | $ | 3,631 | $ | 3,669 | $ | 3,577 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 287 | $ | 310 | $ | 263 | $ | 303 | $ | 354 | $ | 301 | ||||||||||||
Accrued and other liabilities | 358 | 330 | 360 | 387 | 355 | 393 | ||||||||||||||||||
Current portion of capital lease obligations | 3 | 3 | 3 | 2 | 3 | 2 | ||||||||||||||||||
648 | 643 | 626 | 692 | 712 | 696 | |||||||||||||||||||
Long-term debt and obligations under capital leases | 132 | 137 | 136 | 131 | 135 | 132 | ||||||||||||||||||
Other liabilities | 236 | 231 | 229 | 253 | 229 | 253 | ||||||||||||||||||
Total liabilities | 1,016 | 1,011 | 991 | 1,076 | 1,076 | 1,081 | ||||||||||||||||||
Shareholders’ equity | ||||||||||||||||||||||||
Common stock and paid-in capital: 170,469,434; 168,675,093; and 169,039,095 shares, respectively | 971 | 905 | 921 | |||||||||||||||||||||
Common stock and paid-in capital: 171,833,686; 170,078,313 and 170,529,401 shares, respectively | 1,025 | 947 | 979 | |||||||||||||||||||||
Retained earnings | 2,665 | 2,295 | 2,387 | 2,929 | 2,517 | 2,780 | ||||||||||||||||||
Accumulated other comprehensive loss | (221 | ) | (170 | ) | (186 | ) | (318 | ) | (164 | ) | (319 | ) | ||||||||||||
Less: Treasury stock at cost: 27,323,176; 22,035,758; and 23,612,273 shares, respectively | (813 | ) | (564 | ) | (626 | ) | ||||||||||||||||||
Less: Treasury stock at cost: 32,094,240; 25,381,244 and 29,665,213 shares, respectively | (1,081 | ) | (707 | ) | (944 | ) | ||||||||||||||||||
Total shareholders’ equity | 2,602 | 2,466 | 2,496 | 2,555 | 2,593 | 2,496 | ||||||||||||||||||
$ | 3,618 | $ | 3,477 | $ | 3,487 | $ | 3,631 | $ | 3,669 | $ | 3,577 |
See Accompanying Notes to Condensed Consolidated Financial Statements. |
* The balance sheet at |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended | Thirty-nine weeks ended | Thirteen weeks ended | ||||||||||||||||||||||
November 1, | November 2, | November 1, | November 2, | May 2, | May 3, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | $ | 1,916 | $ | 1,868 | ||||||||||||
Cost of sales | 1,157 | 1,085 | 3,495 | 3,163 | 1,246 | 1,222 | ||||||||||||||||||
Selling, general and administrative expenses | 353 | 340 | 1,051 | 969 | 345 | 355 | ||||||||||||||||||
Depreciation and amortization | 34 | 35 | 106 | 97 | 35 | 36 | ||||||||||||||||||
Impairment and other charges | — | — | 3 | 2 | ||||||||||||||||||||
Impairment charge | — | 1 | ||||||||||||||||||||||
Interest expense, net | 1 | 2 | 3 | 4 | 1 | 1 | ||||||||||||||||||
Other income | (1 | ) | — | (3 | ) | (3 | ) | |||||||||||||||||
Other income, net | (1 | ) | (1 | ) | ||||||||||||||||||||
1,544 | 1,462 | 4,655 | 4,232 | 1,626 | 1,614 | |||||||||||||||||||
Income before income taxes | 187 | 160 | 585 | 482 | 290 | 254 | ||||||||||||||||||
Income tax expense | 67 | 56 | 211 | 174 | 106 | 92 | ||||||||||||||||||
Net income | $ | 120 | $ | 104 | $ | 374 | $ | 308 | $ | 184 | $ | 162 | ||||||||||||
Basic earnings per share | $ | 0.84 | $ | 0.70 | $ | 2.59 | $ | 2.06 | ||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Net income | $ | 1.31 | $ | 1.12 | ||||||||||||||||||||
Weighted-average common shares outstanding | 143.6 | 147.7 | 144.5 | 149.2 | 140.1 | 145.4 | ||||||||||||||||||
Diluted earnings per share | $ | 0.82 | $ | 0.70 | $ | 2.55 | $ | 2.04 | ||||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Net income | $ | 1.29 | $ | 1.10 | ||||||||||||||||||||
Weighted-average common shares assuming dilution | 145.7 | 149.5 | 146.6 | 151.2 | 142.1 | 147.6 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income | $ | 120 | $ | 104 | $ | 374 | $ | 308 | ||||||||
Other comprehensive income (loss), net of income tax | ||||||||||||||||
Foreign currency translation adjustment: | ||||||||||||||||
Translation adjustment arising during the period, net of income tax | (42 | ) | 22 | (42 | ) | (5 | ) | |||||||||
Cash flow hedges: | ||||||||||||||||
Change in fair value of derivatives, net of income tax | 1 | (2 | ) | 1 | (2 | ) | ||||||||||
Pension and postretirement adjustments: | ||||||||||||||||
Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $2, $1, $4, and $3 million, respectively | 2 | 3 | 6 | 7 | ||||||||||||
Comprehensive income | $ | 81 | $ | 127 | $ | 339 | $ | 308 |
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
Net income | $ | 184 | $ | 162 | ||||
Other comprehensive income (loss), net of income tax | ||||||||
Foreign currency translation adjustment: | ||||||||
Translation adjustment arising during the period, net of income tax | 1 | 19 | ||||||
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 million and $1 million, respectively | 1 | 2 | ||||||
Comprehensive income | $ | 185 | $ | 184 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirty-nine weeks ended | Thirteen weeks ended | |||||||||||||||
November 1, | November 2, | May 2, | May 3, | |||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
From Operating Activities: | ||||||||||||||||
Net income | $ | 374 | $ | 308 | $ | 184 | $ | 162 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Non-cash impairment charges | 3 | — | ||||||||||||||
Non-cash impairment charge | — | 1 | ||||||||||||||
Depreciation and amortization | 106 | 97 | 35 | 36 | ||||||||||||
Share-based compensation expense | 18 | 19 | 6 | 6 | ||||||||||||
Qualified pension plan contributions | (2 | ) | (2 | ) | — | (2 | ) | |||||||||
Excess tax benefits on share-based compensation | (11 | ) | (7 | ) | (14 | ) | (7 | ) | ||||||||
Change in assets and liabilities: | ||||||||||||||||
Merchandise inventories | (124 | ) | (108 | ) | 17 | (40 | ) | |||||||||
Accounts payable | 28 | (3 | ) | 2 | 89 | |||||||||||
Accrued and other liabilities | (7 | ) | (44 | ) | (10 | ) | 3 | |||||||||
Other, net | 54 | 67 | (7 | ) | 24 | |||||||||||
Net cash provided by operating activities | 439 | 327 | 213 | 272 | ||||||||||||
From Investing Activities: | ||||||||||||||||
Lease termination gains | — | 2 | ||||||||||||||
Capital expenditures | (60 | ) | (49 | ) | ||||||||||||
Sales and maturities of short-term investments | 9 | 38 | — | 7 | ||||||||||||
Purchases of short-term investments | — | (23 | ) | |||||||||||||
Capital expenditures | (138 | ) | (157 | ) | ||||||||||||
Purchase of business, net of cash acquired | — | (81 | ) | |||||||||||||
Net cash used in investing activities | (129 | ) | (221 | ) | (60 | ) | (42 | ) | ||||||||
From Financing Activities: | ||||||||||||||||
Repayments of obligations under capital leases | — | (1 | ) | |||||||||||||
Dividends paid on common stock | (35 | ) | (32 | ) | ||||||||||||
Issuance of common stock | 23 | 10 | ||||||||||||||
Purchase of treasury shares | (174 | ) | (167 | ) | (129 | ) | (70 | ) | ||||||||
Dividends paid | (96 | ) | (89 | ) | ||||||||||||
Issuance of common stock | 17 | 19 | ||||||||||||||
Treasury stock issued under employee stock purchase plan | 5 | 3 | ||||||||||||||
Excess tax benefits on share-based compensation | 11 | 8 | 14 | 7 | ||||||||||||
Repayments of long-term debt and obligations under capital leases | (3 | ) | — | |||||||||||||
Net cash used in financing activities | (240 | ) | (226 | ) | (127 | ) | (86 | ) | ||||||||
Effect of exchange rate fluctuations on Cash and Cash Equivalents | (12 | ) | 4 | (7 | ) | 3 | ||||||||||
Net change in Cash and Cash Equivalents | 58 | (116 | ) | 19 | 147 | |||||||||||
Cash and Cash Equivalents at beginning of year | 858 | 880 | 967 | 858 | ||||||||||||
Cash and Cash Equivalents at end of interim period | $ | 916 | $ | 764 | $ | 986 | $ | 1,005 | ||||||||
Cash paid during the period: | ||||||||||||||||
Interest | $ | 5 | $ | 5 | $ | — | $ | — | ||||||||
Income taxes | $ | 200 | $ | 123 | $ | 126 | $ | 83 |
See Accompanying Notes to Condensed Consolidated Financial Statements.Statements
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 the management, of Foot Locker, Inc. (the “Company”), 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 January 31, 201530, 2016 and of the fiscal year ended February 1, 2014.January 31, 2015. 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’sFoot Locker, Inc.’s (the “Company”) Form 10-K for the year ended February 1, 2014,January 31, 2015, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2014.30, 2015.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08,Reporting Discontinued Operations and Disclosures of Disposals of Components 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 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014, with earlier adoption permitted. The adoption of this guidance did not have a significant effect on our consolidated financial position, results of operations or cash flows.
In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification 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 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 June 2014, FASB issued ASU 2014-12,Accounting for Share-Based Payments When the Terms 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 that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value 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 consolidated financial position, results of operations or cash flows.
Other recentlyRecently 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.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.Impairment and Other Charges
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Impairment of intangibles | $ | — | $ | — | $ | 3 | $ | — | ||||||||
CCS store closure costs | — | — | — | 2 | ||||||||||||
$ | — | $ | — | $ | 3 | $ | 2 |
During the first quarter of 2014, the Company recorded a charge of $1 million to fully write down the tradename related to the Company’s stores in the Republic of Ireland, reflecting historical and projected underperformance. Additionally, 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. Accordingly, an impairment charge of $2 million was recorded to write down the value of the CCS tradename. The liquidation was substantially completed during the third quarter ended November 1, 2014. This closure does not meet the definition of a discontinued operation as it is not considered a strategic shift that will have a major effect on operations.
3.Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of November 1, 2014, theThe 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.results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense. Sales and division profit for the Company’s reportable segments for the thirteen weeks and thirty-nine weeks ended November 1, 2014 and November 2, 2013 are presented below.
Thirteen weeks ended | ||||||||||||||||||||||||
May 2, | May 3, | |||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Thirteen weeks ended | Thirty-nine weeks ended | (in millions) | ||||||||||||||||||||||
Sales | November 1, | November 2, | November 1, | November 2, | ||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||
Athletic Stores | $ | 1,521 | $ | 1,444 | $ | 4,646 | $ | 4,228 | $ | 1,681 | $ | 1,657 | ||||||||||||
Direct-to-Customers | 210 | 178 | 594 | 486 | 235 | 211 | ||||||||||||||||||
Total sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | ||||||||||||||||
$ | 1,916 | $ | 1,868 | |||||||||||||||||||||
Operating Results | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Athletic Stores(1) | $ | 181 | $ | 159 | $ | 577 | $ | 486 | $ | 267 | $ | 247 | ||||||||||||
Direct-to-Customers(2) | 25 | 20 | 67 | 53 | ||||||||||||||||||||
Direct-to-Customers | 40 | 28 | ||||||||||||||||||||||
Division profit | 206 | 179 | 644 | 539 | 307 | 275 | ||||||||||||||||||
Less: Corporate expense, net | 19 | 17 | 59 | 56 | ||||||||||||||||||||
Less: Corporate expense | 17 | 21 | ||||||||||||||||||||||
Operating profit | 187 | 162 | 585 | 483 | 290 | 254 | ||||||||||||||||||
Other income (3) | 1 | — | 3 | 3 | ||||||||||||||||||||
Interest expense, net | 1 | 2 | 3 | 4 | 1 | 1 | ||||||||||||||||||
Other income(2) | 1 | 1 | ||||||||||||||||||||||
Income before income taxes | $ | 187 | $ | 160 | $ | 585 | $ | 482 | $ | 290 | $ | 254 |
(1) | During the |
(2) |
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. |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.3. 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 review of goodwill and intangible assets with indefinite lives performed during the first quarter of 20142015 did not result in impairment charges as the fair valuerecognition of each of the reporting units substantially exceeded 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.impairment.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Goodwill – (continued)
The following table provides a summary of goodwill by reportable segment. The change represents foreign exchange fluctuations.
Goodwill | November 1, | November 2, | February 1, | |||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||||||||||||||
May 2, | May 3, | January 31, | ||||||||||||||||||||||
2015 | 2014 | 2015 | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Athletic Stores | $ | 19 | $ | 21 | $ | 21 | $ | 17 | $ | 21 | $ | 17 | ||||||||||||
Direct-to-Customers | 141 | 142 | 142 | 139 | 142 | 140 | ||||||||||||||||||
$ | 160 | $ | 163 | $ | 163 | $ | 156 | $ | 163 | $ | 157 |
4. Other Intangible Assets, net
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
November 1, 2014 | November 2, 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 | $ | 143 | $ | (129 | ) | $ | 14 | $ | 159 | $ | (140 | ) | $ | 19 | $ | 155 | $ | (137 | ) | $ | 18 | |||||||||||||||
Trademarks | 21 | (11 | ) | 10 | 21 | (10 | ) | 11 | 21 | (11 | ) | 10 | ||||||||||||||||||||||||
Favorable leases | 7 | (4 | ) | 3 | 9 | (4 | ) | 5 | 8 | (3 | ) | 5 | ||||||||||||||||||||||||
Customer relationships | 21 | (21 | ) | — | 21 | (21 | ) | — | 21 | (21 | ) | — | ||||||||||||||||||||||||
$ | 192 | $ | (165 | ) | $ | 27 | $ | 210 | $ | (175 | ) | $ | 35 | $ | 205 | $ | (172 | ) | $ | 33 | ||||||||||||||||
Indefinite life intangible assets: (1) | ||||||||||||||||||||||||||||||||||||
Runners Point Group trademarks | 28 | 30 | 30 | |||||||||||||||||||||||||||||||||
Other trademarks(2) | 1 | 5 | 4 | |||||||||||||||||||||||||||||||||
$ | 29 | $ | 35 | $ | 34 | |||||||||||||||||||||||||||||||
Other intangible assets, net | $ | 56 | $ | 70 | $ | 67 |
May 2, 2015 | May 3, 2014 | January 31, 2015 | ||||||||||||||||||||||||||||||||||
(in millions) | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort. | Net Value | Gross value | Accum. amort | Net Value | |||||||||||||||||||||||||||
Amortized intangible assets:(1), (2) | ||||||||||||||||||||||||||||||||||||
Lease acquisition costs | $ | 126 | $ | (115 | ) | $ | 11 | $ | 159 | $ | (142 | ) | $ | 17 | $ | 128 | $ | (116 | ) | $ | 12 | |||||||||||||||
Trademarks | 21 | (12 | ) | 9 | 21 | (11 | ) | 10 | 21 | (12 | ) | 9 | ||||||||||||||||||||||||
Favorable leases | 7 | (4 | ) | 3 | 8 | (4 | ) | 4 | 7 | (4 | ) | 3 | ||||||||||||||||||||||||
$ | 154 | $ | (131 | ) | $ | 23 | $ | 188 | $ | (157 | ) | $ | 31 | $ | 156 | $ | (132 | ) | $ | 24 | ||||||||||||||||
Indefinite life intangible assets(1) | ||||||||||||||||||||||||||||||||||||
Runners Point Group trademarks | 25 | 31 | 25 | |||||||||||||||||||||||||||||||||
Other trademarks(3) | — | 3 | — | |||||||||||||||||||||||||||||||||
$ | 25 | $ | 34 | $ | 25 | |||||||||||||||||||||||||||||||
Other intangible assets, net | $ | 48 | $ | 65 | $ | 49 |
(1) | Includes the effect of foreign currency translation related primarily to the movements of the euro in relation to the U.S. dollar. |
(2) | During 2014, the Company exited the CCS e-commerce business; as such, the fully amortized customer relationship intangible of $21 million was removed from the amounts presented above for all periods presented. | ||
(3) | 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 $11 million change in goodwill and other intangible assetsAmortization expense for the thirty-nine week period ended November 1, 2014, included $5 million ofintangibles subject to amortization expense, $3 million related to the impairment charges noted above, and a $4 million decrease related to foreign currency exchange fluctuations. This was offset by $1 million of lease acquisition additions related to Foot Locker Europe, which are being amortized over a weighted-average life of 9 years.
FOOT LOCKER, INC.and $2 million for thirteen weeks ended May 2, 2015 and May 3, 2014, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.Goodwill and Other Intangible Assets – (continued)
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Amortization expense | $ | 2 | $ | 3 | $ | 5 | $ | 9 |
Future expectedEstimated future amortization expense for finite life intangible assets is estimated as follows:
(in millions) | ||||
Remainder of 2014 | $ | 1 | ||
2015 | 4 | |||
2016 | 4 | |||
2017 | 4 | |||
2018 | 3 | |||
2019 | 3 |
5.Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was comprised of the following:
November 1, | November 2, | February 1, | ||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||
Foreign currency translation adjustments | $ | 15 | $ | 77 | $ | 57 | ||||||
Cash flow hedges | (1 | ) | 1 | (2 | ) | |||||||
Unrecognized pension cost and postretirement benefit | (234 | ) | (247 | ) | (240 | ) | ||||||
Unrealized loss on available-for-sale security | (1 | ) | (1 | ) | (1 | ) | ||||||
$ | (221 | ) | $ | (170 | ) | $ | (186 | ) |
The changes in accumulated other comprehensive loss for the thirty-nine weeks ended November 1, 2014 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 | (42 | ) | 1 | — | — | (41 | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | 6 | — | 6 | |||||||||||||||
Other comprehensive income | (42 | ) | 1 | 6 | — | (35 | ) | |||||||||||||
Balance as of November 1, 2014 | $ | 15 | (1 | ) | (234 | ) | (1 | ) | $ | (221 | ) |
(in millions) | ||||
Remainder of 2015 | $ | 3 | ||
2016 | 4 | |||
2017 | 3 | |||
2018 | 3 | |||
2019 | 3 | |||
2020 | 2 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.Accumulated Other Comprehensive Loss – (continued)
Accumulated other comprehensive loss (“AOCL”), net of tax, is comprised the following:
May 2, | May 3, | January 31, | ||||||||||
2015 | 2014 | 2015 | ||||||||||
(in millions) | ||||||||||||
Foreign currency translation adjustments | $ | (74 | ) | $ | 76 | $ | (75 | ) | ||||
Cash flow hedges | (4 | ) | (1 | ) | (3 | ) | ||||||
Unrecognized pension cost and postretirement benefit | (239 | ) | (238 | ) | (240 | ) | ||||||
Unrealized loss on available-for-sale security | (1 | ) | (1 | ) | (1 | ) | ||||||
$ | (318 | ) | $ | (164 | ) | $ | (319 | ) |
The changes in AOCL for the thirteen weeks ended May 2, 2015 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 January 31, 2015 | $ | (75 | ) | (3 | ) | (240 | ) | (1 | ) | $ | (319 | ) | ||||||||
OCI before reclassification | 1 | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||
Reclassified from AOCL | — | — | 2 | — | 2 | |||||||||||||||
Other comprehensive income/(loss) | 1 | (1 | ) | 1 | — | 1 | ||||||||||||||
Balance as of May 2, 2015 | $ | (74 | ) | (4 | ) | (239 | ) | (1 | ) | $ | (318 | ) |
Reclassifications from accumulated other comprehensive lossAOCL for the thirty-ninethirteen weeks ended November 1, 2014May 2, 2015 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 (seeNote 9) | 10 | |||
Income tax expense | (4 | ) | ||
Net of tax | $ | 6 |
(in millions) | ||||
Amortization of actuarial (gain) loss: | ||||
Pension benefits - amortization of actuarial loss | $ | 3 | ||
Postretirement benefits - amortization of actuarial gain | — | |||
Net periodic benefit cost (seeNote 9) | 3 | |||
Income tax benefit | (1 | ) | ||
Net of tax | $ | 2 |
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 practice 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.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Financial Instruments- (continued)
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 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 the most part, merchandise inventories are purchased by each geographic area in their respective local currency. The exception to this is the United Kingdom, whose merchandise inventory purchases are denominated in euros. 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”)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, substantially all of the Company’s hedged forecasted transactions are less than twelve months, and the Company expects substantially all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.Financial Instruments – (continued)
The net change in the fair value of the foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory resulted in a loss of $1 million during the thirteen weeks ended May 2, 2015, and therefore increased AOCL. At May 2, 2015, there was a $1$4 million loss for both the thirteen and thirty-nine weeks ended November 1, 2014. The net changeincluded in fair value was not significant for the prior-year periods.AOCL.
The notional value of the contracts outstanding at November 1, 2014May 2, 2015 was $77$89 million, and these contracts extend through JanuaryJuly 2016.
Derivative Holdings Not Designated as Non-HedgesHedges
The Company enters into foreign exchange forward contracts that are not designated as hedges in order to manage the costs of foreign currency-denominatedforeign-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 was not significantresulted in income for the thirteen weeks ended November 1, 2014 and resulted inMay 2, 2015 of $1 million of income for the thirty-nine weeks ended November 1, 2014.million. The net change in fair value was not significant for the prior-year periods.period. The notional value of the contracts outstanding at November 1, 2014May 2, 2015 was $18$97 million, and these contracts extend through December 2014.November 2015.
The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign-currency denominated earnings by entering into currency option contracts. Changes in the fair value of these foreign currency option contracts, which are not designated as non-hedges,hedges, are recorded in earnings immediately within other income. The realized gains, premiums paid, and changes in the fair market value recorded were $1 million for the thirteen and thirty-nine weeks ended November 1, 2014 and were not significant for any of the prior-year periods.periods presented. The notional value of the contract outstanding at November 1, 2014May 2, 2015 was $31$23 million, and thisthe contract extends through JanuaryJuly 2015.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Financial Instruments- (continued)
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, represents the fair value of the Company’s derivative contracts:contract:
Balance Sheet | November 1, | November 2, | February 1, | Balance Sheet | May 2, | May 3, | January 31, | |||||||||||||||||||||
(in millions) | Caption | 2014 | 2013 | 2014 | Caption | 2015 | 2014 | 2015 | ||||||||||||||||||||
Hedging Instruments: | ||||||||||||||||||||||||||||
Foreign exchange forward contracts | Current assets | $ | — | $ | 1 | $ | — | Current liabilities | $ | 5 | $ | 1 | $ | 4 | ||||||||||||||
Non-Hedging Instruments: | ||||||||||||||||||||||||||||
Foreign exchange forward contracts | Current liabilities | $ | 2 | $ | — | $ | 2 | Current liabilities | $ | — | $ | 1 | $ | 1 |
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. |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.Fair Value Measurements – (continued)
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 1, 2014 | At November 2, 2013 | At February 1, 2014 | At May 2, 2015 | At May 3, 2014 | At January 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(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 | $ | — | $ | — | $ | 9 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
Auction rate security | — | 6 | — | — | 6 | — | — | 6 | — | — | 6 | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts | — | — | — | — | 1 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | — | $ | 6 | $ | — | $ | — | $ | 39 | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | 6 | $ | — | $ | — | $ | 8 | $ | — | $ | — | $ | 6 | $ | — | ||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts | — | $ | 2 | — | — | — | — | — | 2 | — | — | 5 | — | — | 2 | — | — | 5 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | 5 | $ | — | $ | — | $ | 2 | $ | — | $ | — | $ | 5 | $ | — |
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. The Company’s short-term investments matured during the second quarter of 2014. In the prior periods presented, these investments represented corporate bonds with maturity dates within one year from the purchase date. These securities were valued using model-derived valuations in which all significant inputs or significant value-drivers were observable in active markets and, therefore, were 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.volatility and, therefore, are classified as Level 2 instruments.
There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Fair Value Measurements- (continued)
The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:
November 1, | November 2, | February 1, | May 2, | May 3, | January 31, | |||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | |||||||||||||||||||||
2015 | 2014 | 2015 | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Carrying value | $ | 135 | $ | 140 | $ | 139 | $ | 133 | $ | 138 | $ | 134 | ||||||||||||
Fair value | $ | 161 | $ | 157 | $ | 159 | $ | 158 | $ | 163 | $ | 163 |
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, isare 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.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.Earnings Per Share
The Company accounts for and discloses earnings per share using the treasury stock method. Basic earnings per share is computed by dividing reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. Restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. 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 computation of basic and diluted earnings per share is as follows:
Thirteen weeks ended | Thirty-nine weeks ended | Thirteen weeks ended | ||||||||||||||||||||||
November 1, | November 2, | November 1, | November 2, | May 2, | May 3, | |||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Weighted-average common shares outstanding | 143.6 | 147.7 | 144.5 | 149.2 | 140.1 | 145.4 | ||||||||||||||||||
Effect of Dilution: | ||||||||||||||||||||||||
Stock options and awards | 2.1 | 1.8 | 2.1 | 2.0 | 2.0 | 2.2 | ||||||||||||||||||
Weighted-average common shares assuming dilution | 145.7 | 149.5 | 146.6 | 151.2 | 142.1 | 147.6 |
The number of options excluded from the computation was not significant for the thirteen and thirty-nine weeks ended November 1, 2014. Options to purchase 1.10.4 million and 0.90.3 million shares of common stock were not included in the computation for the thirteen and thirty-nine weeks ended NovemberMay 2, 2013,2015 and May 3, 2014, 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. Contingently issuable shares of 0.3 million and 0.4 million have not been included as the vesting conditions have not been satisfied as of both November 1,May 2, 2015 and May 3, 2014, and November 2, 2013.respectively.
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, the Company has a defined benefit pension plan covering certain individuals of the Runners Point Group.
In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Pension and Postretirement Plans- (continued)
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 1, | November 2, | November 1, | November 2, | November 1, | November 2, | November 1, | November 2, | |||||||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Service cost | $ | 3 | $ | 4 | $ | 11 | $ | 11 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Interest cost | 7 | 6 | 21 | 19 | — | — | — | — | ||||||||||||||||||||||||
Expected return on | ||||||||||||||||||||||||||||||||
plan assets | (9 | ) | (10 | ) | (28 | ) | (30 | ) | — | — | — | — | ||||||||||||||||||||
Amortization of net | ||||||||||||||||||||||||||||||||
loss (gain) | 5 | 4 | 12 | 12 | (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||
Net benefit expense (income) | $ | 6 | $ | 4 | $ | 16 | $ | 12 | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (2 | ) |
FOOT LOCKER, INC.
Pension | Postretirement | |||||||||||||||
Benefits | Benefits | |||||||||||||||
May 2, | May 3, | May 2, | May 3, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost | $ | 4 | $ | 4 | $ | — | $ | — | ||||||||
Interest cost | 6 | 7 | — | — | ||||||||||||
Expected return on plan assets | (9 | ) | (10 | ) | — | — | ||||||||||
Amortization of net loss (gain) | 3 | 4 | — | (1 | ) | |||||||||||
Net benefit expense (income) | $ | 4 | $ | 5 | $ | — | $ | (1 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.Pension and Postretirement Plans – (continued)
During the first quarters of both 2014 and 2013, the CompanyNo contributions were made contributions of $2 million to the Canadian qualified plan. No pension contributions to the U.S. qualified plan were madeplans during the thirty-ninethirteen weeks ended November 1, 2014 and NovemberMay 2, 2013.2015. The Company continually evaluates the amount and timing of any future contributions. The Company currently does not expect to contribute to the U.S. or Canadian qualified plans during the current year. Additional contributions will depend on the plan asset performance and other factors.
10.Share-Based Compensation
Total compensation expense included in SG&A, and the associated tax benefits recognized related to the Company’s share-based compensation plans iswere as follows:
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Share-based compensation expense | $ | 6 | $ | 6 | $ | 18 | $ | 19 | ||||||||
Tax benefit | $ | 1 | $ | 2 | $ | 5 | $ | 6 |
Tax deductions in excess of the cumulative compensation cost recognized for share-based compensation arrangements were $11 million for the thirty-nine weeks ended November 1, 2014 and $8 million for the thirty-nine weeks ended November 2, 2013 and are classified as a financing activity within the Condensed Consolidated Statements of Cash Flows.
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Options and shares purchased under the employee stock purchase plan | $ | 3 | $ | 3 | ||||
Restricted stock and units | 3 | 3 | ||||||
Total share-based compensation expense | $ | 6 | $ | 6 | ||||
Tax benefit recognized | $ | 2 | $ | 2 | ||||
Excess income tax benefit from settled equity-classified share-based awards reported as a cash flow from financing activities | $ | 14 | $ | 7 |
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.
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 1, | November 2, | November 1, | November 2, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Weighted-average risk free rate of interest | 2.12 | % | 1.02 | % | 0.14 | % | 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 | % | 2.0 | % | 2.3 | % | ||||||||
Weighted-average fair value | $ | 14.91 | $ | 10.98 | $ | 7.11 | $ | 5.80 |
Compensation expense related to the Company’s stock option and stock purchase plans was $3 million and $9 million for both the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, there was $10 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.02 years.
Stock Option Plans | Stock Purchase Plan | |||||||||||||||
May 2, | May 3, | May 2, | May 3, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Weighted-average risk free rate of interest | 1.51 | % | 2.12 | % | 0.13 | % | 0.17 | % | ||||||||
Expected volatility | 30 | % | 39 | % | 23 | % | 25 | % | ||||||||
Weighted-average expected award life | 6.0 years | 6.1 years | 1.0 year | 1.0 year | ||||||||||||
Dividend yield | 1.6 | % | 2.0 | % | 1.82 | % | 2.3 | % | ||||||||
Weighted-average fair value | $ | 16.01 | $ | 14.91 | $ | 8.03 | $ | 5.79 |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
The information in the following table covers options granted under the Company’s stock option plans for the thirty-ninethirteen weeks ended November 1, 2014.May 2, 2015:
(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 | (769 | ) | 21.58 | |||||||||
Expired or cancelled | (62 | ) | 39.65 | |||||||||
Options outstanding at November 1, 2014 | 5,604 | 6.51 | $ | 25.69 | ||||||||
Options exercisable at November 1, 2014 | 3,798 | 5.49 | $ | 19.78 | ||||||||
Options vested and expected to vest at November 1, 2014 | 5,567 | 6.50 | $ | 25.59 | ||||||||
Options available for future grant at November 1, 2014 | 14,018 |
On May 21, 2014, the Foot Locker 2007 Stock Incentive Plan was amended to increase to 14 million shares the number of shares of the Company’s common stock reserved for all awards.
Shares | Weighted- Average Term | Weighted-Average Price | ||||||||||
(in thousands, except price per share and weighted-average term) | ||||||||||||
Options outstanding at the beginning of the year | 5,569 | $ | 25.89 | |||||||||
Granted | 682 | 62.11 | ||||||||||
Exercised | (1,000 | ) | 22.84 | |||||||||
Expired or cancelled | (49 | ) | 48.47 | |||||||||
Options outstanding at May 2, 2015 | 5,202 | 6.68 | $ | 31.01 | ||||||||
Options exercisable at May 2, 2015 | 3,685 | 5.67 | $ | 23.09 | ||||||||
Options vested and expected to vest at May 2, 2015 | 5,144 | 6.65 | $ | 30.73 | ||||||||
Options available for future grant at May 2, 2015 | 13,041 |
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 | Thirty-nine weeks ended | |||||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
Exercised | $ | 6 | $ | 2 | $ | 21 | $ | 15 |
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Exercised | $ | 36 | $ | 11 |
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:
Thirteen weeks ended | ||||||||||||||||
Thirty-nine weeks ended | May 2, | May 3, | ||||||||||||||
November 1, | November 2, | 2015 | 2014 | |||||||||||||
2014 | 2013 | (in millions) | ||||||||||||||
Outstanding | $ | 170 | $ | 74 | $ | 153 | $ | 128 | ||||||||
Outstanding and exercisable | $ | 138 | $ | 64 | $ | 137 | $ | 110 | ||||||||
Vested and expected to vest | $ | 169 | $ | 74 | $ | 153 | $ | 127 |
As of May 2, 2015, there was $14 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.79 years.
The cash received from option exercises for the thirteen and thirty-nine weeks ended November 1,May 2, 2015 and May 3, 2014 was $4$23 million and $17$10 million, respectively. 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 totalactual tax benefit realized from stock option exercises was $14 million and $4 million for the thirteen and thirty-nine weeks ended November 1,May 2, 2015 and May 3, 2014, was $2 million and $7 million respectively, and was $1 million and $5 million for the corresponding prior-year periods.respectively.
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 1, 2014:May 2, 2015:
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 | 1,470 | 4.87 | $ | 12.39 | 1,470 | $ | 12.39 | |||||||||||||
$18.80 to $24.75 | 1,460 | 5.27 | $ | 20.11 | 1,460 | $ | 20.11 | |||||||||||||
$24.76 to $34.24 | 1,906 | 7.60 | $ | 32.60 | 852 | $ | 31.64 | |||||||||||||
$34.27 to $45.08 | 768 | 9.31 | $ | 44.62 | 16 | $ | 38.72 | |||||||||||||
5,604 | 6.51 | $ | 25.69 | 3,798 | $ | 19.78 |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Exercise Price | Number Exercisable | Weighted- Exercise Price | |||||||||||||||
(in thousands, except prices per share and contractual life) | ||||||||||||||||||||
$ 9.85 to $15.10 | 1,130 | 4.34 | $ | 12.62 | 1,130 | $ | 12.62 | |||||||||||||
$18.80 to $25.19 | 1,201 | 5.09 | $ | 19.81 | 1,201 | $ | 19.81 | |||||||||||||
$30.92 to $36.59 | 1,510 | 7.31 | $ | 32.94 | 1,117 | $ | 32.47 | |||||||||||||
$45.08 to $62.11 | 1,361 | 9.33 | $ | 54.05 | 237 | $ | 45.46 | |||||||||||||
5,202 | 6.68 | $ | 31.01 | 3,685 | $ | 23.09 |
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. Awards made to executives outside of the United States and to nonemployee directors are made in the form of restricted stock units. Additionally, restricted stock unit awards are made in connection with the Company’s long-term incentive program. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. There were 734,295594,910 and 997,542793,011 restricted stock units outstanding as of November 1,May 2, 2015 and May 3, 2014, and November 2, 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 both 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 vest with the passage of time; for performance-based restricted stock, dividends will be accumulated and paid after the performance criteria are met. No dividends are paid on restricted stock units.
Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. The Company recorded compensation expense related to restricted stock awards, net of forfeitures, of $3 million
Restricted share and unit activity for both the thirteen weeks ended November 1, 2014 and NovemberMay 2, 2013, and $9 million and $10 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. As of November 1, 2014, there was $14 million of total unrecognized compensation cost related to nonvested restricted awards.
Restricted shares and units activity for the thirty-nine weeks ended November 1, 2014 are2015 is 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 | 1,369 | $ | 27.20 | |||||
Granted | 320 | 45.24 | ||||||
Vested | (649 | ) | 20.84 | |||||
Expired or cancelled | (42 | ) | 24.69 | |||||
Nonvested at November 1, 2014 | 998 | $ | 37.23 | |||||
Aggregate value (in millions) | $ | 37 | ||||||
Weighted-average remaining contractual life | 1.32 years |
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.Share-Based Compensation – (continued)
Number of Shares | Weighted-Average Grant Date Fair Value per Share | |||||||
(in thousands, except price per share) | ||||||||
Nonvested at the beginning of the year | 1,038 | $ | 37.96 | |||||
Granted | 117 | 61.46 | ||||||
Vested | (280 | ) | 31.51 | |||||
Expired or cancelled | (26 | ) | 43.57 | |||||
Nonvested at May 2, 2015 | 849 | $ | 43.14 | |||||
Aggregate value (in millions) | $ | 37 | ||||||
Weighted-average remaining contractual life (in years) | 1.47 years |
The weighted-averageweighted grant-date fair value per share was $45.24$61.46 and $34.59$45.03 for the thirty-ninethirteen weeks ended November 1,May 2, 2015 and May 3, 2014, and November 2, 2013, respectively. The total value of awards for which restrictions lapsed duringfor both the thirty-ninethirteen weeks ended November 1,May 2, 2015 and May 3, 2014 and Novemberwas $9 million. As of May 2, 20132015, there was $14 million and $9 million, respectively.
of total unrecognized compensation cost net of forfeitures related to nonvested restricted awards.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEWBusiness Overview
Foot Locker, Inc. (the “Company”), 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 divisionsformats 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.Sidestep.
The Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites,and mobile 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, eastbayteamsales.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footlocker.ca, footlocker.eu, champssports.com, footaction.com, six02.com, runnerspoint.com, and six02.com)sidestep-shoes.com). Additionally, this segment includes the direct-to-customer subsidiary of Runners Point Group, which operates the websitessp24.com, a clearance website for runnerspoint.com, sidestep-shoes.com, and sp24.com.our European e-commerce business.
STORE COUNTStore Count
At November 1, 2014,May 2, 2015, the Company operated 3,4743,419 stores as compared with 3,4733,423 and 3,5103,464 stores at February 1,January 31, 2015 and May 3, 2014, and November 2, 2013, respectively. During the thirty-ninethirteen weeks ended November 1, 2014,May 2, 2015, the Company opened 7637 stores, remodeled or relocated 22955 stores and closed 7541 stores.
A total of 7382 franchised stores were operating at November 1, 2014,May 2, 2015, as compared with 7378 and 7274 stores at February 1, 2014January 31, 2015 and November 2,May 4, 2013, respectively. Revenue 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.
SALES AND OPERATING RESULTSSales
All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and havehad 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 effect 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 were included in the computation of comparable-store sales beginning October 2014.
The following table summarizes results by segment:
(in millions) | Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
Sales | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Athletic Stores | $ | 1,521 | $ | 1,444 | $ | 4,646 | $ | 4,228 | ||||||||
Direct-to-Customers | 210 | 178 | 594 | 486 | ||||||||||||
Total sales | $ | 1,731 | $ | 1,622 | $ | 5,240 | $ | 4,714 | ||||||||
Operating Results | ||||||||||||||||
Athletic Stores(1) | $ | 181 | $ | 159 | $ | 577 | $ | 486 | ||||||||
Direct-to-Customers(2) | 25 | 20 | 67 | 53 | ||||||||||||
Division profit | 206 | 179 | 644 | 539 | ||||||||||||
Less: Corporate expense, net | 19 | 17 | 59 | 56 | ||||||||||||
Operating profit | 187 | 162 | 585 | 483 | ||||||||||||
Other income (3) | 1 | — | 3 | 3 | ||||||||||||
Interest expense, net | 1 | 2 | 3 | 4 | ||||||||||||
Income before income taxes | $ | 187 | $ | 160 | $ | 585 | $ | 482 |
Sales increased by $109$48 million, or 6.72.6 percent, to $1,731$1,916 million for the thirteen weeks ended November 1, 2014,May 2, 2015, from $1,622$1,868 million for the thirteen weeks ended November 2, 2013. For the thirty-nine weeks ended November 1, 2014, sales of $5,240 million increased 11.2 percent from sales of $4,714 million for the thirty-nine week period ended November 2, 2013. Excluding Runners Point Group, which was acquired during the second quarter of 2013, total sales for the year-to-date period increased 7.8 percent.
May 3, 2014. Excluding the effect of foreign currency fluctuations, total sales for the thirteen and thirty-nine week periodsthirteen-week period increased 7.7 percent and 10.9 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales increased by 6.9 percent and 7.1 percent for the thirteen weeks and thirty-nine weeks ended November 1, 2014, respectively.
GROSS MARGIN
Gross margin, as a percentage of sales, increased to 33.2 percent for the thirteen weeks ended November 1, 2014 as compared with 33.1 percent in the corresponding prior-year period driven by the occupancy and buyers compensation expense rate, which decreased by 50 basis points reflecting improved leverage of primarily fixed costs. This was partially offset by a 40 basis point increase in the cost of merchandise rate, which reflected the result of the liquidation of CCS merchandise. The liquidation of CCS merchandise negatively affected the gross margin rate by 20 basis points. Further, the merchandise margin rate continued to be negatively affected by lower initial markups driven by vendor and category mix, and lower shipping and handling margin, offset by lower markdowns.
For the thirty-nine weeks ended November 1, 2014, gross margin, as a percentage of sales, increased to 33.3 percent as compared with 32.9 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 30 basis point increase in the cost of merchandise rate. The increase in the cost of merchandise rate primarily reflects the continued effect of the factors noted in the paragraph above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
SG&A | $ | 353 | $ | 340 | $ | 1,051 | $ | 969 | ||||||||
SG&A, as a percentage of sales | 20.4 | % | 21.0 | % | 20.1 | % | 20.6 | % |
Selling, general and administrative expenses (“SG&A”) increased by $13 million, or 3.8 percent, for the thirteen weeks ended November 1, 2014 as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 1, 2014, SG&A increased by $82 million, or 8.57.9 percent, as compared with the corresponding prior-year period. The SG&A increaseComparable-store sales increased by 7.8 percent for the thirty-ninethirteen weeks ended November 1, 2014 isMay 2, 2015.
Gross Margin
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
Gross margin rate | 35.0 | % | 34.6 | % | ||||
Change in the gross margin rate is comprised of: | ||||||||
Occupancy and buyers’ compensation | 0.4 | |||||||
Merchandise margin | — | |||||||
Increase in gross margin rate | 0.4 | % |
The decrease in occupancy and buyers’ compensation expense rate primarily reflectivereflects improved leverage of a full nine months of Runners Point Group expensesfixed costs. Merchandise margin was unchanged as compared with only four months in the prior year.quarter, with an overall lower markdown rate offset by foreign currency fluctuations.
Selling, General and Administrative Expenses (SG&A)
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
SG&A | $ | 345 | $ | 355 | ||||
$ Change | $ | (10 | ) | |||||
% Change | (2.8 | )% | ||||||
SG&A as a percentage of sales | 18.0 | % | 19.0 | % |
Excluding the effect of foreign currency fluctuations, SG&A increased by $17$16 million or 5.0 percent, and $79 million, or 8.2 percent, for the thirteen and thirty-nine weeks ended November 1, 2014, respectively,May 2, 2015, as compared with the corresponding prior-year periods.
Theperiod. Excluding foreign currency fluctuations, the SG&A rate improvementswas 18.4 percent as a percentage of sales. The 60 basis point improvement reflected continued effective expense management, including store wages, which benefited from the utilization of hiring and scheduling tools, as well as associate training.management.
DEPRECIATION AND AMORTIZATIONDepreciation and Amortization
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Depreciation and Amortization | $ | 35 | $ | 36 | ||||
% change | (2.8 | )% |
Depreciation and amortization expenses decreased by $1 million in the thirteen weeks ended May 2, 2015, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased by $1 million for the thirteen weeks ended November 1, 2014 to $34 million,May 2, 2015, as compared with the corresponding prior-year period of $35 million. The decrease was primarilyperiod. On a constant currency basis, the result of capital accrual adjustments made during the third quarter of 2014, which reducedincrease in depreciation and amortization expense. For the thirty-nine weeks ended November 1, 2014, depreciationreflects increased capital spending.
Interest Expense, Net
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Interest expense | $ | 3 | $ | 3 | ||||
Interest income | (2 | ) | (2 | ) | ||||
Interest expense, net | $ | 1 | $ | 1 |
Interest expense and amortization increased by $9 million to $106 millioninterest income were unchanged as compared with $97 million for the thirty-nine weeks ended November 2, 2013. The increase in depreciation for the thirty-nine weeks ended November 1, 2014 reflects increased capital spending for store improvements and technology, as well as the addition of Runners Point Group for a full period in the current year as compared with a partial period in the prior year.
INTEREST EXPENSEIncome Taxes
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Interest expense | $ | 3 | $ | 3 | $ | 8 | $ | 8 | ||||||||
Interest income | (2 | ) | (1 | ) | (5 | ) | (4 | ) | ||||||||
Interest expense, net | $ | 1 | $ | 2 | $ | 3 | $ | 4 |
Interest income increased by $1 million for both the thirteen and thirty-nine weeks ended November 1, 2014 reflecting income earned on higher cash and cash equivalent balances.
INCOME TAXES
The Company recorded income tax provisions of $67 million and $211 million, which represent effective tax rates of 35.8 percent and 36.1 percent, for the thirteen weeks and thirty-nine weeks ended November 1, 2014, respectively. For the thirteen weeks and thirty-nine weeks ended NovemberMay 2, 2013,2015, the Company recorded an income tax provisionsprovision of $56 million and $174$106 million, which represented an effective tax ratesrate of 35.036.5 percent, andcompared with the prior-year income tax provision of $92 million, which represented an effective tax rate of 36.1 percent, respectively.percent. 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 itsthe Company’s 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 tax reserves for the thirteen weeks ended May 2, 2015 were not significant. The effective tax rate for the thirteen weeks ended November 1,May 3, 2014 is a tax reserve release of approximately $1 million due to the expiration of a foreign statute of limitation. Included in the thirteen weeks ended November 2, 2013 were tax reserve releases of $3 million due to foreign tax audit settlements.
The thirty-nine weeks ended November 1, 2014 includesincluded tax benefits of $2$1 million from reserve releases due to the settlements of federal, state, and foreign tax examinations and lapses of foreign statutes of limitation, as compared withduring the reserve releases of $5 million offset by state tax expense of $1 million as a result of an audit recognized in the corresponding prior-year period. Additionally, for the thirty-nine weeks ended November 2, 2013, in connection with the purchase of Runners Point Group, the Company recorded a discrete item of $1 million representing non-deductible acquisition costs.
The effective tax rate excluding the reserve releases and other discrete items, for the thirteen weeks and thirty-nine weeks ended November 1, 2014 decreasedMay 2, 2015 increased as compared with the corresponding prior-year periods,period, excluding the reserve releases, due primarily to the effecta higher proportion of full implementation of internationalincome earned in higher tax planning strategies.jurisdictions.
The Company currently expects its fourth quarter and full year tax rate to approximate 36.5 percent, excluding the effect of any nonrecurring items that may occur. The actual tax ratesrate will depend 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 November 1, 2014,May 2, 2015, net income increased by $16$22 million, or 15.413.6 percent, to $120 million as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 1, 2014, net income increased by $66 million, or 21.4 percent, to $374$184 million as compared with the corresponding prior-year period. The improved performance, representson a 24.8 percent and 19.6constant currency basis, represented a 31 percent flow-through of increased sales to pre-tax income, for the thirteen and thirty-nine week periods ended November 1, 2014, respectively, reflectingwhich reflected leveraging of fixed costs and controlling operating expenses.
RECONCILIATION OF NON-GAAP MEASURESReconciliation of Non-GAAP Measures
TheNo adjustments have been made to the 2015 results. However, during the first quarter of 2014, the Company provides non-GAAP information to assist investorsrecorded approximately $2 million, or $0.01 per diluted share, of costs associated with the comparisonintegration of Runners Point Group as a well as an impairment charge to fully write down the remaining value of the tradename related to the Company’s results period over period.stores in the Republic of Ireland.
Accordingly, the Company excluded these costs to arrive at its non-GAAP results. The non-GAAP financial measure is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP. The Company believes this non-GAAP information is a useful measure to investors because it provides for a more direct comparison of the results.
Presented below are GAAP and non-GAAP results for the thirteenthirteen-weeks ended May 2, 2015 and thirty-nine weeks ended November 1,May 3, 2014, and November 2, 2013, respectively.
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Net income, as reported | $ | 184 | $ | 162 | ||||
After-tax adjustments to arrive at non-GAAP: | ||||||||
Runners Point Group integration costs | — | 1 | ||||||
Tradename impairment | — | 1 | ||||||
Net income, non-GAAP | $ | 184 | $ | 164 | ||||
Diluted EPS, as reported | $ | 1.29 | $ | 1.10 | ||||
After-tax adjustments to arrive at non-GAAP: | ||||||||
Runners Point Group integration costs | — | — | ||||||
Tradename impairment | — | 0.01 | ||||||
Diluted EPS, non-GAAP | $ | 1.29 | $ | 1.11 |
Segment Information
The Company has excludeddetermined that its reportable segments are those that are based on its method of internal reporting. The Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company evaluates performance based on several factors, of which the following chargesprimary financial measure is division results. Division profit reflects income before income taxes, corporate expense, non-operating income, and costs to arrive at its non-GAAP results:net interest expense.
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income, as reported | $ | 120 | $ | 104 | $ | 374 | $ | 308 | ||||||||
After-tax adjustments to arrive at non-GAAP: | ||||||||||||||||
Runners Point Group acquisition and integration costs | 1 | 1 | 2 | 4 | ||||||||||||
Impairment of intangibles | — | — | 2 | — | ||||||||||||
Foreign tax audit settlements | (3 | ) | (3 | ) | ||||||||||||
CCS store closure costs | — | — | — | 1 | ||||||||||||
Net income, non-GAAP | $ | 121 | $ | 102 | $ | 378 | $ | 310 |
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Diluted EPS, as reported | $ | 0.82 | $ | 0.70 | $ | 2.55 | $ | 2.04 | ||||||||
Adjustments to arrive at non-GAAP: | ||||||||||||||||
Runners Point Group acquisition and integration costs | 0.01 | — | 0.01 | 0.02 | ||||||||||||
Impairment of intangibles | — | — | 0.02 | — | ||||||||||||
Foreign tax audit settlement | — | (0.02 | ) | — | (0.02 | ) | ||||||||||
CCS store closure costs | — | — | — | 0.01 | ||||||||||||
Diluted EPS, non-GAAP | $ | 0.83 | $ | 0.68 | $ | 2.58 | $ | 2.05 |
The Company estimates the tax effect of the non-GAAP adjustmentsfollowing table summarizes results by applying its marginal tax rate to each of the respective items.segment:
For the thirteen and thirty-nine weeks ended November 1, 2014, the Company recorded after-tax expenses of $1 million and $2 million, respectively, for costs associated with the acquisition of Runners Point Group.
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Sales | ||||||||
Athletic Stores | $ | 1,681 | $ | 1,657 | ||||
Direct-to-Customers | 235 | 211 | ||||||
$ | 1,916 | $ | 1,868 | |||||
Operating Results | ||||||||
Athletic Stores(1) | $ | 267 | $ | 247 | ||||
Direct-to-Customers | 40 | 28 | ||||||
Division profit | 307 | 275 | ||||||
Less: Corporate expense | 17 | 21 | ||||||
Operating profit | 290 | 254 | ||||||
Other income (2) | 1 | 1 | ||||||
Earnings before interest expense and income taxes | 291 | 255 | ||||||
Interest expense, net | 1 | 1 | ||||||
Income before income taxes | $ | 290 | $ | 254 |
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.
For the thirteen and thirty-nine weeks ended November 2, 2013, the Company recorded $1 million, after-tax, and $4 million, after-tax, for costs associated with the acquisition of Runners Point Group, respectively. The Company also recorded $1 million, after-tax, or $0.01 per diluted share of costs related to the CCS store closures for the thirty-nine weeks ended November 2, 2013.
During the thirteen weeks ended November 2, 2013, the Company recorded benefits of $3 million or $0.02 per diluted share, to reflect the settlement of a foreign tax audit, which resulted in a reduction in tax reserves established in prior periods.
SEGMENT ANALYSIS
(1) | 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. |
(2) | 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. |
Athletic Stores
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Sales | $ | 1,681 | $ | 1,657 | ||||
$ Change | $ | 24 | ||||||
% Change | 1.4 | % | ||||||
Division profit | $ | 267 | $ | 247 | ||||
Division profit margin | 15.9 | % | 14.9 | % |
Athletic Stores segment sales increased by 5.3 percent to $1,521 million for the thirteen weeks ended November 1, 2014, as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales increased 6.47.2 percent for the thirteen weeks ended November 1, 2014,May 2, 2015, as compared with the corresponding prior-year period. Comparable-store sales increased by 5.8 percent.6.5 percent for the thirteen weeks ended May 2, 2015.
For the thirty nine-weeks ended November 1, 2014, Athletic Stores segmentThe growth in comparable-store sales was led primarily by our international divisions, specifically Foot Locker Europe and Foot Locker Asia Pacific. Foot Locker Europe benefited from strong performances in lifestyle running and basketball footwear, while apparel sales increased by 9.9 percent to $4,646 millionmodestly. All major countries for Foot Locker Europe experienced comparable-sales gains as compared with the corresponding prior-yearprior year period. Excluding
The increase in sales in the effect of foreign currency fluctuations, Athletic Stores segmentU.S. was attributable to Foot Locker, Footaction, and Kids Foot Locker. While Lady Foot Locker’s overall sales increased 9.7 percent anddeclined during the quarter due to store closures, the banner experienced its fourth consecutive quarterly comparable-store sales increased by 6.1 percent.gain. The results forfocus on serving the year-to-date period of 2014 include incremental sales of $141 million related to the Runners Point Group stores, which were acquired in the second quarter of the prior year. As of October 2014, the sales attributable to Runners Point Group are included in the computation of comparable-store sales.
Excluding Runners Point Group which was included in comparable sales for the month of October only, all divisions within this segment experienced comparable-store sales gains for both the quarter and year-to-date periods, led by domestic Foot Locker, Kids Foot Locker, and Footaction. Champs Sports experienced a slight increase in comparable-store sales for both the quarter and year-to-date periods. This division’s results continued to be negatively affected by a decline in apparel sales and a high number of stores being closed for remodels.
Basketball,female customer’s fitness-driven lifestyle running, and children’s footwear were strong drivers of sales increases. Sales of basketball footwear were driven by Jordan and key marquee player styles, while lifestyle running shoes from Nike and Adidas had strong results. Additionally, children’s footwear continued to perform well across multiple divisions. Apparel sales were challenging primarily in Foot Locker Europe and Champs Sports, as customers have shifted away from certain lifestyle and licensed apparel programs, which had previously driven strong results.
Lady Foot Locker experienced a comparable-store sales increase for both the thirteen and thirty-nine weeks ended November 1, 2014. The shift into more performance-oriented assortments has been resonatingresonated with customers, as both footwear and apparel grew on a comparable-salescomparable-store basis. OverallChamps Sports experienced a modest comparable-store sales decline, largely reflecting a continued decline in apparel sales due primarily to a fashion shift away from licensed apparel products.
Athletic Stores division profit increased 8.1 percent for Lady Foot Locker for both the quarter and year-to-date periods declined,thirteen weeks ended May 2, 2015, as compared with the corresponding prior-year periods, primarily reflectingperiod. Division profit, as a net declinepercentage of 44 stores. The Company continues to test and evaluate merchandise assortments and store layouts focused on athletically active women.
In addition, the Athletic Stores segment continues to benefit from strong banner differentiation, which has created unique store designs and product assortments which have resonated with the customer and enhanced the shopping experience.
Athletic Stores division profitsales, was 15.9 percent for the thirteen weeks ended November 1, 2014 increased to $181 million, or 11.9 percent, as a percentage of sales,May 2, 2015 as compared with division profit of $159 million, or 11.014.9 percent as a percentage of sales, for the thirteen weeks ended November 2, 2013. For the thirty-nine weeks ended November 1, 2014 division profit increased to $577 million, or 12.4 percent, as a percentage of sales, as compared with division profit of $486 million, or 11.5 percent, as a percentage of sales, for the corresponding prior-year period.
This primarily reflects improved sales, an improved gross margin rate driven by improved leverage of fixed occupancy expenses, and diligent expense management. Included in the results of the Athletic Stores segment for the thirty-ninethirteen weeks ended November 1,May 3, 2014 wasis a $1 million impairment charge related to the tradename for our stores operating in the Republic of Ireland, reflecting historical and projected underperformance. Included in the corresponding prior-year period of 2013 was a charge of $2 million recorded in connection with the closure of all CCS stores.charge.
Direct-to-Customers
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Sales | $ | 235 | $ | 211 | ||||
$ Change | $ | 24 | $ | |||||
% Change | 11.4 | % | ||||||
Division profit | $ | 40 | $ | 28 | ||||
Division profit margin | 17.0 | % | 13.3 | % |
Overall,
Excluding the improvement for both the quarter and year-to-date periods primarily reflected higher sales and effective control over variable expenses, such as store wages.
effect of foreign currency fluctuations, Direct-to-Customers
Direct-to-Customers segment sales increased by 18.013.3 percent to $210 million for the thirteen weeks ended November 1, 2014,May 2, 2015, as compared with the corresponding prior-year period. Comparable sales increased by 15.5 percent.18.5 percent for the thirteen weeks ended May 2, 2015. Increases were primarily the result of continued strong sales performance of the Company’s domestic store-banner websites, coupled with growth from the international e-commerce businesses, particularly in Europe. Sales at each of the U.S. store-banner websites increased significantly, increasing collectively approximately 40 percent.over 47 percent, reflecting the continued success and expansion of the connectivity of store banners to the e-commerce sites. The segment was led by basketball, casual, and training styles which all posted strong comparable sales gains during the period. These increases were offset, in part, by the fact that during 2014 the CCS business was shut down.
ForDirect-to-Customers division profit for the thirty-ninethirteen weeks ended November 1, 2014, salesMay 2, 2015 increased by 22.2 percent$12 million to $594$40 million as compared with the corresponding prior-year period. Comparable sales were 15.9 percent. Direct-to-Customers sales included $19 million of incremental sales related to the e-commerce division of Runners Point Group, as the prior-year period included only a partial year. Excluding these sales, increases were primarily the result of continued strong sales performance of the Company’s U.S. store-banner websites.
Sales for both the quarter and year-to-date periods of the current year were led by sales of basketball and lifestyle running footwear.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended November 1, 2014 increased by $5 million to $25 million and increased by $14 million to $67 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, was 11.9 percent and 11.317.0 percent for the thirteen and thirty-nine weeks ended November 1, 2014, respectively,May 2, 2015 as compared with 11.2 percent and 10.913.3 percent for the corresponding prior-year periods. Includedperiod. The increase primarily reflects strong flow-through of sales to profit, resulting from improved gross margins due to more full-price selling and diligent expense management. In addition, division profit in the results of the Direct-to-Customers segment for the thirty-nine weeks ended November 1, 2014 was a $2 million impairment charge related to the CCS tradename, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner.
Gross margin for the Direct-to-Customers segment for both the quarter and year-to-date periodsprior period was negatively affected by the liquidation of CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profitbusiness which was the result of strong flow-through of sales to profits. In addition, catalog expenses were lower due to a shift in the timing of certain catalogs to the fourth quarter as compared with the prior year.shut down during 2014.
Corporate Expense
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Corporate expense | $ | 17 | $ | 21 | ||||
$ Change | $ | (4 | ) |
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. The allocation ofDepreciation and amortization included in corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million andwas $3 million for both the thirteen and thirty-nine weeks ended November 1, 2014, respectively, thus reducing corporate expense. Excluding this change, as compared with the corresponding prior year periods, corporate expense increased by $3 millionMay 2, 2015 and $6 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively.May 3, 2014.
Acquisition and integration costs related to Runners Point Group were $1 million and $2 million for the thirteen and thirty-nine weeks ended November 1, 2014, respectively. This is compared with the corresponding prior-year periods of $1 million andThe $4 million for the thirteen and thirty-nine weeks ended November 2, 2013, respectively.
Excluding the allocation change and costs associated with Runners Point Group,decrease in corporate expense increasedin the first quarter of 2015 is primarily related to increased incentive compensation and legal costs. Duringthe fact that, in the first quarter of 2014, a $2 million charge was recorded to increase legal reserves. In addition, the Companyprior year included costs related to the integration of Runners Point Group of $1 million. Based upon an annual internal study of corporate expense, the allocation of such expenses to the operating divisions was increased its legal reserves by $2 million.$1 million in the first quarter of 2015, thereby reducing corporate expense.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
Liquidity
The Company’s primary source of liquidity has been cash flow from operations,earnings, 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 will be adequate to fund these requirements.
FromThe Company may also from time to time the Company may alsorepurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Share repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of November 1, 2014,May 2, 2015, approximately $196$927 million remained onavailable under the Company’s $600 millioncurrent $1 billion 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 effects 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
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Net cash provided by operating activities | $ | 213 | $ | 272 | ||||
$ Change | $ | (59 | ) |
Net cash
The amount provided by operating activities was $439 million and $327 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. These amounts reflectreflects net income adjusted for non-cash items non-cash impairment charges, and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, share-based compensation expense and related tax benefits. The improvementdecrease from the prior year reflects the Company’s earnings strength and working capital improvements, partially offset by a $77 millionchanges and an increase in cash paid for income taxes during the thirty-ninethirteen weeks ended November 1, 2014.May 2, 2015. The increase of cash paid for taxes of $43 million reflected higher amounts paid due to the Company’s earnings strength.
Investing Activities
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Net cash used in investing activities | $ | 60 | $ | 42 | ||||
$ Change | $ | 18 |
Net cash used in investing activities was $129Capital expenditures represented an $11 million and $221 million forincrease from the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. The currentprior year reflects $138 million in capital expenditures partially offset by $9 million for the maturitiesrelated to a higher number of short-term investments. Capital expendituresstore projects in the current year, were $19 million lower as compared with the corresponding prior-year period, representing a shift in the timing ofwell as increased spending on corporate technology projects. The Company’s full year forecast for capital expenditures is $207$218 million, which includes $172 million related to the remodeling or relocation of existing stores and approximately 88100 new store openings, as well as $35$46 million for the development of information systems, websites, and infrastructure. The prior year included $81$7 million forfrom the purchasesales and maturities of Runners Point Group, net of cash acquired.short-term investments.
Financing Activities
Thirteen weeks ended | ||||||||
May 2, | May 3, | |||||||
2015 | 2014 | |||||||
(in millions) | ||||||||
Net cash used in financing activities | $ | 127 | $ | 86 | ||||
$ Change | $ | 41 |
Net cash used in financing was $240 million and $226 million forDuring the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively. Thefirst quarter of 2015, the Company repurchased 3,547,5532,300,000 shares of its common stock for $174 million during the thirty-nine weeks ended November 1, 2014, this represents an increase of $7$129 million as compared towith 1,530,253 shares for $70 million in the corresponding prior-year period. During the first three quarters of 2014 and 2013, theThe Company declared and paid dividends during the first quarters of $962015 and 2014 of $35 million and $89$32 million, respectively. These representThis represents quarterly rates of $0.22$0.25 and $0.20$0.22 per share for 20142015 and 2013,2014, respectively. Additionally, the Company received proceeds of $22 million from the issuance of common stock in connection with employee stock programs of $23 million and $10 million for both the thirty-ninethirteen weeks ended November 1,May 2, 2015 and May 3, 2014, and November 2, 2013.respectively. In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $11$14 million and $8$7 million as a financing activity for the thirty-ninethirteen weeks ended November 1,May 2, 2015 and May 3, 2014, and November 2, 2013, respectively. The increased excess tax benefit primarily reflected the high number of stock option exercises during the first quarter of 2015. The activity during 2014 also reflected payments on capital lease obligations of $1 million.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
For a description of our contractual obligationsCritical Accounting Policies and other commercial commitments as of February 1, 2014, see our 2013 Annual Report on Form 10-K. During the thirty-nine weeks ended November 1, 2014, there were no material changes outside the ordinary course of business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATESEstimates
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 2013 Annual Report on Form 10-K.10-K for the fiscal year ended January 31, 2015.
RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting Pronouncements
Descriptions of the recentlyRecently issued accounting principles, if any, andpronouncements did not, or are not believed by management to, have a material effect on the accounting principles adopted by the Company during the thirty-nine weeks ended November 1, 2014 are included in Note 1 to the Condensed Consolidated Financial Statements.Company’s present or future consolidated financial statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTSDisclosure 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 vendorssuppliers for a majority of its merchandise purchases (including a significant portion from one key vendor)supplier), pandemics and similar major health concerns, unseasonable weather, deterioration of global financial markets, economic conditions worldwide, 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 20132014 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
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 November 1, 2014May 2, 2015 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 November 1, 2014,May 2, 2015, 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.
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.
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.
into the class action.
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 ofin California, andCortes v. Foot Locker filed in federal court in 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.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 and plaintiffs have entered into a proposed settlement agreement to resolve the consolidated cases, Hill andCortes,that is subject to court approval. The court recently granted preliminary approval of the proposed settlement agreement.
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 assertedPlaintiff’s current claims for: (a)are for 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 appealed to the U.S. Court of Appeals for the Second Circuit, which issued a Summary Order on February 13, 2014 that affirmed the judgment of the District Court in part, and vacated and remanded in part. In September 2014, the District Court certified the class and reinstated the claim alleging violation. Additionally, the District Court certified a class with respect to Plaintiff’s breach of fiduciary duty claim and also reinstated the claim alleging violation of the statutory provisions governing the content of the Summary Plan Description. The district court thereafter issued a second rulingrulings certifying a class for the Summary Plan Description Claim.class. The Company is seekingsought leave to appeal boththe class certification rulings to the U.S. Court of Appeals for the Second Circuit.Circuit, but these applications were denied. Trial has been adjourned to July 13, 2015.
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, McGlothin,and Osberg,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.
There were no material changes to the risk factors disclosed in the 20132014 Annual Report on Form 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 November 1, 2014.May 2, 2015:
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 3, 2014 through August 30, 2014 | 3,000 | $ | 47.99 | 3,000 | $ | 234,266,856 | ||||||||||
August 31, 2014 through October 4, 2014 | 480,000 | $ | 56.79 | 480,000 | $ | 207,008,354 | ||||||||||
October 5, 2014 through November 1, 2014 | 200,000 | $ | 54.51 | 200,000 | $ | 196,107,226 | ||||||||||
683,000 | $ | 56.08 | 683,000 |
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) | ||||||||||||
February 1, 2015 through February 28, 2015 | 1,661,657 | $ | 54.23 | 1,660,884 | $ | 966,230,006 | ||||||||||
March 1, 2015 through April 4, 2015 | 315,970 | $ | 61.29 | 190,216 | $ | 954,731,648 | ||||||||||
April 5, 2015 through May 2, 2015 | 448,900 | $ | 60.92 | 448,900 | $ | 927,383,837 | ||||||||||
2,426,527 | $ | 56.39 | 2,300,000 |
(1) | These columns also reflect shares |
(2) | The month of February includes 1,050,784 shares purchased, at an average cost of $53.58 per share, under the Company’s previous $600 million share repurchase program. On February |
Item 6. Exhibits | |
(a) | Exhibits |
The exhibits that are in this report immediately follow the index. |
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: | (Company) | |
/s/ Lauren B. Peters | ||
LAUREN B. PETERS | ||
Executive Vice President and Chief Financial Officer |
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Description | ||||
Computation of Ratio of Earnings to Fixed Charges. | ||||
Accountants’ Acknowledgement. | ||||
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. | ||||
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. | ||||
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as | ||||
Report of Independent Registered Public Accounting Firm. | ||||
XBRL Instance Document.
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XBRL Taxonomy Extension Schema.
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XBRL Taxonomy Extension Calculation Linkbase.
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XBRL Taxonomy Extension Definition Linkbase.
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XBRL Taxonomy Extension Label Linkbase.
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XBRL Taxonomy Extension Presentation Linkbase.
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† | Management contract or compensatory plan or arrangement. | |||
* | Filed herewith. | |||
** | Furnished herewith. |