Gross margin, as a percentage of sales, decreased to 27.1 percent for the thirteen weeks ended November 1, 2008 as compared with 28.1 percent in the corresponding prior-year period. Gross margin, as a percentage of sales, increased to 27.6 percent for the thirty-nine weeks ended November 1, 2008 as compared with 26.4 percent in the corresponding prior-year period. For both the thirteen and thirty-nine weeks ended November 1, 2008, the occupancy and buyers’ salary expense rate increased by 50 basis points, respectively, as a percentage of sales. The merchandise rate for the thirteen weeks ended November 1, 2008 decreased by 50 basis points, whereas for the thirty-nine weeks ended November 1, 2008 it improved by 170 basis points. The effect of vendor allowances, as a percentage of sales, improved gross margin by approximately 10 basis points for the thirteen week period ended November 1, 2008, as compared with the corresponding prior-year period. However, the effect of vendor allowances, as a percentage of sales, negatively affected gross margin by approximately 30 basis points for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year period.
Segment Analysis
Athletic Stores
Athletic Stores sales decreased by 3.8 percent and 1.2 percent for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats decreased 3.4 percent and 3.3 percent for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. The decline in sales for the thirteen and thirty-nine weeks ended November 1, 2008 was related to the domestic operations, primarily as a result of operating 182 fewer stores. Additionally, domestic footwear sales increased slightly while apparel sales declined significantly for both the thirteen and thirty-nine week periods ended November 1, 2008 as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, sales in Europe were essentially flat for the thirteen weeks ended November 1, 2008 and decreased low single digits for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year periods. While Foot Locker Europe’s footwear sales were lower than the corresponding prior-year period, sales of marquee footwear continued to increase, in particular running footwear. The declines in Foot Locker Europe’s footwear sales were offset by improved apparel sales. Athletic stores comparable-store sales decreased by 2.0 percent and 2.1 percent, for the thirteen and thirty-nine weeks ended November 1, 2008, respectively.
Athletic Stores division profit for the thirteen weeks ended November 1, 2008 increased to $42 million, or 3.5 percent, as a percentage of sales, from a division loss of $53 million for the thirteen weeks ended November 3, 2007. Athletic Stores division profit for the thirty-nine weeks ended November 1, 2008 increased to $121 million, or 3.3 percent, as a percentage of sales, from a division loss of $32 million for the thirty-nine weeks ended November 3, 2007. Included in division profit for the thirty-nine weeks ended November 1, 2008 are $5 million in costs associated with the closure of underproductive stores, primarily lease termination costs. Included in the thirteen and thirty-nine weeks ended November 3, 2007 are impairment charges totaling $102 million and store closing costs of $3 million. Excluding these charges and costs, division profit declined by $10 million and increased by $53 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. The decline for the third quarter related to the domestic operations, which had lower sales and gross margin rate. The increase in division profit for the thirty-nine weeks ended November 1, 2008 related to increased domestic division profit as a result of lower promotional markdowns and reduced depreciation and amortization expense, offset, in part, by a decrease in Foot Locker Europe’s results. While Foot Locker Europe remains profitable, with division operating profit margins for both the third quarter and year-to-date periods of 2008 in the high single digits, results for the thirty-nine weeks ended November 1, 2008 were considerably lower than the corresponding prior-year period. Additionally, management will monitor the results of the domestic operations, in particular Lady Foot Locker and Champs Sports, due to the difficult retail environment. Management will assess the impact of various initiatives on the projected performance of these divisions and, if necessary, may perform an analysis of recoverability of store long-lived assets pursuant to SFAS No. 144.
Direct-to-Customers
Direct-to-Customers sales increased by 1.1 percent to $93 million for the thirteen weeks ended November 1, 2008 and increased by 3.9 percent to $264 million for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year periods. Internet sales increased to $77 million and $217 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with $70 million and $197 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively. Increases in Internet sales were offset by a decline in catalog sales, reflecting the continuing trend of the Company’s customers to browse and select products through its catalogs, and then make their purchases via the Internet. The increase in sales primarily represented footwear, in particular in the running and lifestyles categories.
Direct-to-Customers division profit for the thirteen weeks ended November 1, 2008 remained unchanged, as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 1, 2008, division profit increased by $1 million to $26 million, as compared with the corresponding prior-year period. Division profit, as a percentage of sales, decreased to 8.6 percent for the thirteen ended November 1, 2008, as compared with 8.7 percent for the corresponding prior-year period. Division profit, as a percentage of sales, for the thirty-nine weeks ended November 1, 2008 was 9.8 percent, unchanged as compared with the corresponding prior-year period.
Corporate Expense
Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense for the thirteen weeks ended November 1, 2008 increased by $3 million to $17 million from the same period in the prior year. Corporate expense for the thirty-nine weeks ended November 1, 2008 increased by $23 million to $70 million from the same period in the prior year. Included in the thirteen and thirty-nine weeks ended November 1, 2008 is an impairment charge of $3 million, which was recorded to reduce the fair value of a short-term investment. Additionally, included in the thirty-nine weeks ended November 1, 2008 is the impairment charge of $15 million associated with a note receivable due from the purchaser of the Company’s former Northern Group operation in Canada. The remaining increase for the thirty-nine weeks ended November 1, 2008 represents primarily increased incentive compensation.
Selling, General and Administrative
Selling, general and administrative expenses (“SG&A”) of $287 million decreased by $2 million, or 0.7 percent, in the third quarter of 2008 as compared with the corresponding prior-year period. SG&A of $885 million increased by $20 million, or 2.3 percent, for the thirty-nine weeks ended November 1, 2008 as compared with the corresponding prior-year period. SG&A, as a percentage of sales, increased to 21.9 percent for the thirteen weeks ended November 1, 2008, as compared with 21.3 percent in the corresponding prior-year period. SG&A, as a percentage of sales, increased to 22.6 percent for the thirty-nine weeks ended November 1, 2008 as compared with 21.9 percent in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, SG&A decreased $1 million and increased by $1 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods.
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Depreciation and Amortization
Depreciation and amortization decreased by $13 million in the third quarter of 2008 to $32 million, as compared with $45 million for the third quarter of 2007. Depreciation and amortization decreased by $35 million for the thirty-nine weeks ending November 1, 2008 to $97 million as compared with $132 million for the thirty-nine weeks ending November 3, 2007. The decrease primarily reflects reduced depreciation and amortization associated with the impairment charges recorded during the third and fourth quarters of 2007.
Interest Expense
| | Thirteen weeks ended | | | Thirty-nine weeks ended | |
| | November 1, | | | November 3, | | | November 1, | | | November 3, | |
| (in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Interest expense | | $ | 4 | | | $ | 5 | | | $ | 13 | | | $ | 15 | |
| Interest income | | | (3 | ) | | | (5 | ) | | | (9 | ) | | | (15 | ) |
| Interest expense, net | | $ | 1 | | | $ | — | | | $ | 4 | | | $ | — | |
Interest expense decreased primarily as a result of lower debt balances. The decrease in interest income was primarily the result of lower interest rates on cash, cash equivalents and short-term investments. The decrease in interest income for the thirty-nine weeks ended November 1, 2008 also reflects approximately $1 million lower income associated with the Northern Group note as compared with the corresponding prior-year periods.
Other (Income)/Expense
Other income of $5 million and $7 million for the thirteen and thirty-nine week periods ended November 1, 2008 is primarily comprised of the changes in fair value, realized gains and premiums paid on foreign currency contracts. The Company uses these derivatives to mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Also included in the thirty-nine weeks ended November 1, 2008 is a lease termination gain related to sale of a leasehold interest in Europe. Other expense of $1 million for the thirty-nine weeks ended November 3, 2007 primarily represented foreign currency option contract premiums.
Income Taxes
The Company’s effective tax rate for the thirteen and thirty-nine weeks ended November 1, 2008 was 35.1 percent and 43.7 percent as compared with 41.3 percent and 42.2 percent for the corresponding prior-year periods. The effective rate for the thirteen weeks ended November 1, 2008 primarily reflects favorable settlement of audits, offset by the money market impairment charge, which was recorded without a tax benefit. The effective rate for the thirty-nine weeks ended November 1, 2008 reflects the items recorded during the third quarter and the establishment in the first quarter of a valuation allowance related to the tax benefit associated with the impairment of the Northern Group note receivable. The Company expects its effective rate to approximate 35.5 percent for the full year of 2008, excluding the effect of the Northern Group note valuation allowance. The actual rate will depend in significant part on the proportion of the Company's worldwide income that is earned in the U.S.
Net Income (Loss)
The Company reported net income of $24 million, or $0.16 per share, for the third quarter ended November 1, 2008 compared with a net loss of $33 million, or $0.22 per share, for the third quarter ended November 3, 2007. Net income for the thirty-nine weeks ended November 1, 2008 was $45 million, or $0.29 per share. This compares to a net loss of $34 million, or $0.22 per share, for the thirty-nine weeks ended November 3, 2007. Included in the thirty-nine weeks ended November 1, 2008 are charges totaling $21 million (after-tax), or $0.14 per share, representing an impairment charge of $3 million related to the write-down of the value of a short-term investment, an impairment charge of $15 million related to the Northern Group note receivable, and expenses of $3 million related to the store closing program. Included in the thirty-nine weeks ended November 3, 2007 are charges totaling $66 million (after-tax), or $0.43 per share, representing impairment charges totaling $64 million and store closing costs of $2 million.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company’s primary source of cash has been from operations. The Company generally finances real estate with operating leases. The principal uses of cash have been to finance inventory requirements, capital expenditures related to store openings, store remodeling, and management information systems, and to fund general working capital requirements.
Management believes operating cash flows and the Company’s current credit facility will be adequate to fund its working capital requirements, pension contributions for the Company’s retirement plans, anticipated quarterly dividend payments, potential share repurchases, and to support the development of its short-term and long-term operating strategies.
On May 16, 2008, the Company entered into an amended credit agreement with its banks, providing for a $175 million revolving credit facility and extending the maturity date to May 16, 2011 (the “Credit Agreement”). The Credit Agreement also provides an incremental facility of up to $100 million under certain circumstances. Simultaneously with entering into the Credit Agreement, the Company repaid the $88 million that was outstanding on its term loan with the banks, which was scheduled to mature in May 2009.
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The Credit Agreement provides that the Company comply with certain financial covenants, including (i) a fixed charge coverage ratio of 1.25:1 for the 2008 fiscal year, 1.50:1 for the 2009 fiscal year, and 1.75:1 for each year thereafter and (ii) a minimum liquidity/excess cash flow covenant, which provides that if at the end of any fiscal quarter minimum liquidity is less than $350 million, the excess cash flow for the four consecutive fiscal quarters ended on such date must be at least $25 million. The amount permitted to be paid by the Company as dividends in any fiscal year is $105 million under the terms of the Credit Agreement. With regard to stock purchases, the Credit Agreement provides that not more than $50 million in the aggregate may be expended unless the fixed charge coverage ratio is at least 2.0:1 for the period of four consecutive fiscal quarters most recently ended prior to any stock repurchase. Additionally, the Credit Agreement provides for a security interest in certain of the Company’s intellectual property and certain other non-inventory assets. The Company is in compliance with all of its covenants as of November 1, 2008.
During the three months ended November 1, 2008 the Company had $75 million of international cash invested in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”). This surplus cash was not required or used for daily operations. The Company requested a full redemption on September 16, 2008. At that time, the Company was informed by the Reserve Management Company, the Fund’s investment advisor (“Manager”), that the redemption trades would be honored at a $1.00 per share net asset value; however, distribution has not yet been made to the Company. In addition, litigation, to which the Company is not a party, exists that involves how the remaining assets of the Fund should be distributed. Therefore, there is a risk that the Company could receive less than the $1.00 per share net asset value. As a result, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. Based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the proceeds of the assets of the Fund may not be fully distributed until 2009. We believe that we have adequate liquidity to meet our business needs through our existing cash balances, our ability to generate cash flows through operations, and the amounts available to borrow under our revolving credit facility.
Any materially adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with foreign global sourcing or economic conditions worldwide, 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.
Net cash provided by operating activities of continuing operations was $210 million and $63 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. During the thirty-nine weeks ended November 1, 2008, the Company recorded a non-cash impairment charge of $15 million related to the Northern Group note receivable and $3 million related to the write-down of a short-term investment. The increase in operating cash flows primarily relates to the reduction in inventory purchases, net of accounts payable. The reduction in inventory purchases reflects a strategic priority designed to increase inventory turnover. Additionally, during the thirty-nine weeks ended November 1, 2008 the Company contributed $6 million to its Canadian qualified pension plan. No contributions to the U.S. or Canadian pension plans were made during the thirty-nine weeks ended November 3, 2007. Due to the pension asset performance experienced year-to-date, the Company may make a contribution during 2009 to its U.S. qualified pension plan. The Company is in the process of evaluating the amount and timing of the contribution. The contribution amount will depend on the outcome of the Company’s elections under the Pension Protection Act, as well as the plan asset performance for the balance of the year and any statutory or regulatory changes that may occur. The amount expected to be contributed to the Canadian plan during 2009 is approximately $3 million.
Net cash used in investing activities was $188 million for the thirty-nine weeks ended November 1, 2008. Net cash provided by investing activities was $6 million for the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, the Company did not purchase or sell short-term investments. However, reflected in investing activities is the reclassification of $75 million from cash and cash equivalents to short-term investments representing the Reserve International Liquidity money market fund. This compares with net sales of $123 million in the corresponding prior-year period. Capital expenditures for the thirty-nine weeks ended November 1, 2008 were $116 million, as compared with $117 million in the corresponding prior-year period. Capital expenditures forecasted for the full-year of 2008 are approximately $147 million, of which $121 million relates to modernizations of existing stores and new store openings, and $26 million reflects the development of information systems and other support facilities. The Company has the ability to revise and reschedule the anticipated capital expenditure program should the Company’s financial position require it.
Net cash used in financing activities for the Company’s operations was $162 million and $100 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. During the thirty-nine weeks ended November 1, 2008 and November 3, 2007, the Company made payments of $88 million and $2 million, respectively, related to term loan. During the thirty-nine weeks ended November 1, 2008, the Company purchased and retired $6 million of the $200 million 8.50 percent debentures payable in 2022. The Company recorded an excess tax benefit related to stock-based compensation of $1 million for the thirty-nine weeks ended November 3, 2007. The Company declared and paid dividends totaling $70 million and $58 million, for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. The Company received proceeds from the issuance of common stock in connection with employee stock programs of $2 million and $9 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. The Company purchased 2,283,254 shares of its common stock during the thirty-nine weeks ended November 3, 2007 for approximately $50 million.
Recent Accounting Pronouncements
In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently assessing the effect that the adoption of this standard will have on its financial statement disclosures.
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In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the potential effect of FSP 142-3 on its financial statements.
In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is not expected to change existing practices but rather reduce the complexity of financial reporting. This statement is effective November 15, 2008.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently assessing the potential effect of FSP EITF 03-6-1 on its financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended February 2, 2008.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues and earnings, and other such matters are forward-looking statements. These forward-looking statements are based on many assumptions and factors detailed in the Company’s filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor), unseasonable weather, further deterioration of global financial markets, economic conditions worldwide, further deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business plans effectively with regard to each of its business units, and risks associated with foreign global sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
Item 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, 2008 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 form, 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, 2008, 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, except for the following.
During the third quarter of 2008, the Company implemented a new system for the European operations designed to assist in the reconciliation of Point-of-Sale register transactions to sales and receipts. The Company has a rigorous information system implementation process that requires extensive pre-implementation planning, design and testing, as well as post-implementation monitoring. Based upon this process, the Company believes that the implementation of this system will not have an adverse effect on the assessment of its internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company, as well as litigation incidental to the sale and disposition of businesses that have occurred in past years. These legal proceedings include commercial, intellectual property, customer, and labor-and-employment-related claims. Certain of the Company’s subsidiaries are defendants in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage and hour laws, including allegations concerning classification of employees as exempt or nonexempt, unpaid overtime, meal and rest breaks, uniforms, and calculation of vacation pay. Management does not believe that the outcome of such proceedings would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.
Item 1A. Risk Factors
There were no material changes to the risk factors disclosed in the 2007 Annual Report on Form 10-K, except for the following.
Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition.
As of November 1, 2008, we held approximately $374 million of investments, classified as cash, cash equivalents, or short-term investments. As noted in Note 3, $75 million was held in the Reserve International Liquidity Fund. Substantially all of the remaining investments were short-term deposits in highly rated banking institutions. We regularly monitor our credit risk and mitigate our exposure by making only short-term investments in highly-rated institutions and by limiting the amount we invest in any one institution. At November 1, 2008, substantially all of the investments were in institutions rated “AA-” or better from a major credit rating agency. Despite those ratings, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues. We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits.
The master trust which holds the assets of our pension plans has assets totaling approximately $369 million as of November 1, 2008. The fair values of these assets held in the master trust are compared to the plans’ projected benefit obligation to determine the pension funding liability. We attempt to mitigate risk through diversification, and we regularly monitor investment risk on our portfolio through quarterly investment portfolio reviews and periodic asset and liability studies. Despite these measures, it is possible that the value of our portfolio may decline in the future due to any number of factors, including general market conditions and credit issues. Such declines could have an impact on the funded status of our pension plans and future funding requirements. In addition, the decline in our pension assets will negatively affect pension expense in 2009.
The effect of deteriorating global economic conditions and financial markets may adversely affect our business
The Company’s performance is subject to global economic conditions and the related impact on consumer spending levels, which have declined recently due to the current economic slowdown. Some of the factors affecting consumer spending are employment, levels of consumer debt, reductions in net worth as a result of recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, as well as other macroeconomic factors. Consumer purchases of discretionary items, including merchandise we sell, generally decline during recessionary periods and other periods where disposable income is adversely affected. The downturn in the global economy may continue to affect customer purchases for the foreseeable future and may adversely impact our business, financial condition and results of operations. In addition, declines in our profitability could result in a charge to earnings for the impairment of goodwill, which would not affect our cash flow but could decrease our earnings, and our stock price could be adversely affected.
The recent distress in the financial markets has resulted in extreme volatility in security prices and diminished liquidity and credit availability. There can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy. Although we currently do not have any borrowings under our revolving credit facility (other than amounts used for letter of credits), tightening of the credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of the Company’s securities. In addition, the current credit crisis is having a significant negative impact on businesses around the world, and the impact of this crisis on our major suppliers cannot be predicted. The Company relies on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor). The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver our merchandise. Our inability to obtain merchandise in a timely manner from major suppliers could have a material adverse effect on our business, financial condition, and results of operations.
| Item 6. Exhibits |
| | |
| (a) | Exhibits |
| | The exhibits that are in this report immediately follow the index. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | FOOT LOCKER, INC. |
| Date: December 10, 2008 | (Company) |
| |
| |
| | /s/ Robert W. McHugh |
| | ROBERT W. MCHUGH |
| | Senior Vice President and Chief Financial Officer |
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FOOT LOCKER, INC.
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
| Exhibit No. in Item | | |
| 601 | | |
| of Regulation S-K | | Description |
| 12 | | Computation of Ratio of Earnings to Fixed Charges. |
| |
| 15 | | Accountants’ Acknowledgment. |
| | | |
| 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002. |
| | | |
| 31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002. |
| | | |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 99 | | Report of Independent Registered Public Accounting Firm. |
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