SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2002
Commission file no. 1-10299
FOOT LOCKER, INC.
-----------------
(Exact name of registrant as specified in its charter)
New York 13-3513936
- --------------------------------------------- --------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
112 W. 34th Street, New York, New York 10120
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 720-3700
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 [X] NO [ ]
Number of shares of Common Stock outstanding at June 1, 2002: 140,403,482
FOOT LOCKER, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................................1
Condensed Consolidated Statements
of Operations..........................................................2
Condensed Consolidated Statements
of Comprehensive Income................................................3
Condensed Consolidated Statements
of Cash Flows..........................................................4
Notes to Condensed Consolidated
Financial Statements................................................5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................10-14
Part II. Other Information
Item 1. Legal Proceedings..........................................................15
Item 6. Exhibits and Reports on Form 8-K...........................................15
Signature..................................................................16
Index to Exhibits..........................................................17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in millions, except shares)
May 4, May 5, February 2,
2002 2001 2002
--------- --------- ---------
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ................................... $ 278 $ 29 $ 215
Merchandise inventories ..................................... 839 786 793
Assets of discontinued operations ........................... 3 31 5
Assets held for sale ........................................ -- 86 --
Other current assets ........................................ 86 109 102
--------- --------- ---------
1,206 1,041 1,115
Property and equipment, net .................................... 626 656 637
Deferred taxes ................................................. 253 229 251
Goodwill and intangible assets ................................. 194 189 191
Assets of business transferred under
contractual arrangement (note receivable) ................ 12 -- 30
Other assets ................................................... 74 128 73
--------- --------- ---------
$ 2,365 $ 2,243 $ 2,297
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................ $ 353 $ 279 $ 272
Accrued liabilities ......................................... 183 187 211
Current portion of repositioning and restructuring reserves . 6 11 6
Current portion of reserve for discontinued operations ...... 11 55 16
Liabilities of discontinued operations ...................... 5 20 7
Liabilities of businesses held for sale ..................... -- 17 --
Current portion of long-term debt and obligations
under capital leases ...................................... 32 54 34
--------- --------- ---------
590 623 546
Long-term debt and obligations
under capital leases ........................................ 365 258 365
Liabilities of business transferred under
contractual arrangement ..................................... 12 -- 12
Other liabilities .............................................. 372 314 382
Shareholders' equity
Common stock and paid-in capital: 140,428,144;
139,231,072 and 139,980,630 shares, respectively .......... 367 354 363
Retained earnings ........................................... 817 742 797
Accumulated other comprehensive loss ........................ (158) (47) (168)
Less: Treasury stock at cost: 70,220; 214,625 and
70,220 shares, respectively ............................... -- (1) --
--------- --------- ---------
Total shareholders' equity ..................................... 1,026 1,048 992
--------- --------- ---------
$ 2,365 $ 2,243 $ 2,297
========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended
---------------------------------
May 4, May 5,
2002 2001
---------- ----------
Sales ...................................................... $ 1,090 $ 1,072
Costs and Expenses
Cost of sales ............................................ 770 746
Selling, general and administrative expenses ............. 220 231
Depreciation and amortization ............................ 36 38
Interest expense, net .................................... 7 4
---------- ----------
1,033 1,019
---------- ----------
Income from continuing operations before
income taxes .......................................... 57 53
Income tax expense ......................................... 19 21
---------- ----------
Income from continuing operations .......................... 38 32
Income (loss) on disposal of discontinued operations, net of
income tax benefit of $- and $5 ....................... (18) 5
---------- ----------
Net income ................................................. $ 20 $ 37
========== ==========
Basic earnings per share:
Income from continuing operations ..................... $ 0.26 $ 0.23
Income (loss) from discontinued operations ............ (0.12) 0.04
---------- ----------
Net income ............................................ $ 0.14 $ 0.27
========== ==========
Weighted-average common shares outstanding ................. 140.1 138.6
Diluted earnings per share:
Income from continuing operations ..................... $ 0.26 $ 0.23
Income (loss) from discontinued operations ............ (0.12) 0.04
---------- ----------
Net income ............................................ $ 0.14 $ 0.27
========== ==========
Weighted-average common shares assuming dilution ........... 150.9 139.7
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------------------
May 4, May 5,
2002 2001
-------- --------
Net income ......................................................... $ 20 $ 37
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments arising during the period 10 (7)
Change in fair value of derivatives, net of tax of $- ............ -- 1
-------- --------
Comprehensive income ............................................... $ 30 $ 31
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
FOOT LOCKER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirteen weeks ended
---------------------------------
May 4, May 5,
2002 2001
---------- ----------
From Operating Activities:
Net income ................................................................. $ 20 $ 37
Adjustments to reconcile net income to net cash provided by (used in)
operating activities of continuing operations:
(Income) loss on disposal of discontinued operations, net of tax ......... 18 (5)
Depreciation and amortization ............................................ 36 38
Deferred income taxes .................................................... 13 (8)
Change in assets and liabilities:
Merchandise inventories ................................................ (42) (59)
Accounts payable and other accruals .................................... 46 (20)
Other, net ............................................................. 2 (13)
---------- ----------
Net cash provided by (used in) operating activities of continuing operations 93 (30)
---------- ----------
From Investing Activities:
Lease acquisition costs .................................................... (3) (4)
Capital expenditures ....................................................... (25) (12)
---------- ----------
Net cash used in investing activities of continuing operations ............. (28) (16)
---------- ----------
From Financing Activities:
Reduction in long-term debt and capital lease obligations .................. (1) (2)
Issuance of common stock ................................................... 3 3
---------- ----------
Net cash provided by financing activities of continuing operations ......... 2 1
---------- ----------
Net Cash used in Discontinued Operations ...................................... (4) (38)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ............................................... -- 3
---------- ----------
Net change in Cash and Cash Equivalents ....................................... 63 (80)
Cash and Cash Equivalents at beginning of year ................................ 215 109
---------- ----------
Cash and Cash Equivalents at end of interim period ............................ $ 278 $ 29
========== ==========
Cash paid during the period:
Interest ................................................................... $ -- $ 1
Income taxes ............................................................... $ 5 $ 6
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
FOOT LOCKER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Registrant's Form 10-K for the year ended February
2, 2002, as filed with the Securities and Exchange Commission (the "SEC") on
April 29, 2002. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature, necessary for a fair presentation of the
results for the interim periods have been included. The results for the thirteen
weeks ended May 4, 2002 are not necessarily indicative of the results expected
for the year.
Goodwill and Intangible Assets
The Registrant adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" effective February 3, 2002. Accordingly, the Registrant
stopped amortizing goodwill in the first quarter of 2002. All intangible assets
have finite lives and will continue to be amortized over their useful lives. The
Registrant is required to test for potential impairment of goodwill and
intangible assets at least on an annual basis. The Registrant completed its
transitional review, which did not result in an impairment charge.
The following would have resulted had the provisions of the new
standards been applied as of February 4, 2001:
May 5,
2001
------
Income from continuing operations (in millions)
As reported ....................................... $ 32
Pro forma ......................................... $ 33
Basic earnings per share
As reported ....................................... $ 0.23
Pro forma ......................................... $ 0.24
Diluted earnings per share
As reported ....................................... $ 0.23
Pro forma ......................................... $ 0.24
There were no material changes in the carrying value of
goodwill during the first quarter of 2002. The carrying value of goodwill by
operating segment as of May 4, 2002 was as follows:
May 4,
2002
----
(in millions)
Athletic Stores ........................... $ 55
Direct to Customers ....................... 80
----
Total Goodwill ............................ $135
====
Finite life intangible assets comprise lease acquisition costs, which
are required to secure prime lease locations and other lease rights, primarily
in Europe. The weighted-average amortization period as of May 4, 2002 was
approximately 12 years. Amortization expense for lease acquisition costs was
approximately $2 million for the first quarter of 2002 and 2001. Annual
estimated amortization expense is expected to be $8 million for 2002 and
approximately $7 million for each of the succeeding four years.
-5-
Finite life intangible assets subject to amortization, were as
follows:
Gross
Carrying Accumulated
Lease Acquisition Costs (in millions) Amount Amortization Net
---- ---- ----
May 4, 2002 $ 94 $(35) $ 59
May 5, 2001 $ 81 $(33) $ 48
February 2, 2002 $ 90 $(34) $ 56
Impairment or Disposal of Long-Lived Assets
Effective as of February 3, 2002, the Registrant adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
retains the basic provisions of APB No. 30 for the presentation of discontinued
operations in the income statement but broadens that presentation to apply to a
component of an entity rather than a segment of a business. The pronouncement
now provides for a single accounting model for reporting long-lived assets to be
disposed of by sale. Certain balances in prior periods have been reclassified in
the Condensed Consolidated Balance Sheets to conform to the presentation
required by the pronouncement. The adoption of SFAS No. 144 did not have a
material impact on the Registrant's financial position or results of operations.
Derivative Financial Instruments
In the first quarter of 2001, the Registrant recorded other
comprehensive income of approximately $1 million, reflecting the impact of
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." During the quarters ended May 4, 2002 and May 5, 2001, the
ineffectiveness related to cash flow hedges and the change in fair value of
derivative financial instruments designated as hedges was not material. The
Registrant is hedging forecasted transactions for no more than the next twelve
months and expects all derivative-related amounts reported in accumulated other
comprehensive loss to be reclassified to earnings within twelve months.
During the quarter ended May 4, 2002, the change in fair value of
derivative instruments not designated as hedges was not material. During the
quarter ended May 5, 2001, the Registrant recorded a loss of approximately $1
million for the change in fair value of derivative instruments not designated as
hedges, which was offset by a foreign exchange gain related to the underlying
transactions.
Discontinued Operations
On September 28, 2001, the Registrant completed the stock transfer of
the 370 Northern Group stores in Canada, through one of its wholly-owned
subsidiaries for approximately CAD$59 million (approximately US$38 million),
which was paid in the form of a note (the "Note"). The purchaser operates the
Northern Group stores, from which the repayment of the Note will be made. The
transaction has been accounted for as a "transfer of assets and liabilities
under contractual arrangement" as no cash proceeds were received and the
consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations have been presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement." The net
amount of the assets and liabilities of the former operations were written down
to the estimated fair value of the Note in the second quarter of 2001. Due to
the poor performance of the Northern Group stores in Canada since the
transaction, the Registrant recorded a charge of $18 million in the first
quarter of 2002. The charge comprised a valuation allowance in the amount of the
operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note.
In the first quarter of 2001, the Registrant recorded a tax benefit of
$5 million as a result of the implementation of tax planning strategies related
to the discontinuance of the Northern Group.
-6-
Net disposition activity of $21 million for the first quarter of 2002
included the $18 million reduction in the carrying value of the net assets and
liabilities, real estate disposition activity of $2 million and severance of $1
million. Of the remaining reserve balance of $8 million at May 4, 2002, $3
million is expected to be utilized within twelve months and the remaining $5
million thereafter.
In 1998, the Registrant exited both its International General
Merchandise and Specialty Footwear segments. In 1997, the Registrant announced
that it was exiting its Domestic General Merchandise segment. The remaining
reserve balances totaled $24 million as of May 4, 2002, $8 million of which is
expected to be utilized within twelve months. Disposition activity related to
the reserves is presented below:
NORTHERN GROUP (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
---- ---- ---- ----
Real estate & lease liabilities $ 6 $ (2) $ -- $ 4
Severance & personnel 2 (1) -- 1
Asset impairments -- (18) 18 --
Other costs 3 -- -- 3
---- ---- ---- ----
Total $ 11 $(21) $ 18 $ 8
==== ==== ==== ====
INTERNATIONAL GENERAL MERCHANDISE (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
---- ---- ---- ----
The Bargain! Shop $ 6 $(1) $-- $ 5
=== === === ===
SPECIALTY FOOTWEAR (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
--- ---- --- ---
Real estate & lease liabilities $ 7 $-- $-- $ 7
Other costs 2 (1) -- 1
--- --- --- ---
Total $ 9 $(1) $-- $ 8
=== === === ===
DOMESTIC GENERAL MERCHANDISE (in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
---- ---- ---- ----
Real estate & lease liabilities $10 $(1) $-- $ 9
Legal and other costs 2 -- -- 2
--- --- --- ---
Total $12 $(1) $-- $11
=== === === ===
The following is a summary of the assets and liabilities of
discontinued operations:
DOMESTIC
NORTHERN SPECIALTY GENERAL
(in millions) GROUP FOOTWEAR MERCHANDISE TOTAL
------ ------ ------ ------
5/4/2002
Assets $ -- $ 1 $ 2 $ 3
Liabilities 2 1 2 5
------ ------ ------ ------
Net assets (liabilities) of discontinued operations $ (2) $ -- $ -- $ (2)
====== ====== ====== ======
5/5/2001
Assets $ 27 $ 2 $ 2 $ 31
Liabilities 17 1 2 20
------ ------ ------ ------
Net assets of discontinued operations $ 10 $ 1 $ -- $ 11
====== ====== ====== ======
2/2/2002
Assets $ 1 $ 2 $ 2 $ 5
Liabilities 3 1 3 7
------ ------ ------ ------
Net assets (liabilities) of discontinued operations $ (2) $ 1 $ (1) $ (2)
====== ====== ====== ======
-7-
The Northern Group assets and liabilities of discontinued operations
primarily comprised the Northern Group stores in the U.S. The assets at May 5,
2001 comprised inventory, fixed assets and other current assets and liabilities
comprised accounts payable, restructuring reserves and other accrued
liabilities. The assets and liabilities of the Northern Group stores in Canada
to be sold were reclassified as "Assets held for sale" ($50 million) and
"Liabilities of businesses held for sale" ($13 million) as of May 5, 2001. As
previously mentioned, subsequent to the Northern Group Canada transaction, those
assets and liabilities have been presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement." The net
assets of the Specialty Footwear and Domestic General Merchandise segments
consist primarily of fixed assets and accrued liabilities.
Restructuring Programs
1999 Restructuring
Total restructuring charges of $96 million before-tax were recorded in
1999 for the Registrant's restructuring program to sell or liquidate non-core
businesses. The restructuring plan also included an accelerated store-closing
program in the United States and Asia, corporate headcount reduction and a
distribution center shutdown. The disposition of all non-core businesses was
completed by November 2001.
The net assets of The San Francisco Music Box Company and the assets
related to the Burger King and Popeye's franchises as of May 5, 2001 have been
valued at the lower of cost or net realizable value. These assets, totaling $36
million, and liabilities, totaling $4 million, have been reclassified as "Assets
held for sale" and "Liabilities of businesses held for sale", respectively, in
the Condensed Consolidated Balance Sheet as of May 5, 2001.
Disposition activity related to the reserves is presented below. The
remaining reserve balance at May 4, 2002 totaled $6 million, $5 million of which
is expected to be utilized within twelve months.
NON-CORE BUSINESSES
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
-------------------------------------------
Real estate $ 1 $ -- $ -- $ 1
Other disposition costs 3 -- -- 3
-------------------------------------------
Total $ 4 $ -- $ -- $ 4
===========================================
CORPORATE OVERHEAD AND LOGISTICS
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
-------------------------------------------
Real estate $ 1 $ 1 $ -- $ 2
===========================================
TOTAL RESTRUCTURING RESERVES
(in millions)
Balance Net Charge/ Balance
2/2/2002 Usage (Income) 5/4/2002
-------------------------------------------
Real estate $ 2 $ 1 $-- $ 3
Other disposition costs 3 -- -- 3
------------------------------------------
Total $ 5 $ 1 $-- $ 6
==========================================
1993 Repositioning and 1991 Restructuring
In the first quarter of 2002, disposition activity reduced the reserve
balance by approximately $1 million. The remaining reserve balance of $2 million
comprised future lease obligations.
-8-
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options and the
conversion of convertible long-term debt. The following table reconciles the
numerator and denominator used to compute basic and diluted earnings per share
for continuing operations.
Thirteen weeks ended
-------------------
(in millions) May 4, May 5,
2002 2001
------ ------
Numerator:
Income from continuing operations ................. $ 38 $ 32
Effect of Dilution:
Convertible debt .................................. 1 --
------ ------
Income from continuing operations assuming dilution $ 39 $ 32
====== ======
Denominator:
Weighted-average common shares outstanding ........ 140.1 138.6
Effect of Dilution:
Stock options and awards .......................... 1.3 1.1
Convertible debt .................................. 9.5 --
------ ------
Weighted-average common shares assuming dilution .. 150.9 139.7
====== ======
Options to purchase 1.8 million and 3.9 million shares of common stock
were not included in the computation for the thirteen weeks ended May 4, 2002
and May 5, 2001, respectively, because the exercise price of the options was
greater than the average market price of the common shares and, therefore, the
effect would be antidilutive.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss comprised foreign currency
translation adjustments of $43 million, $47 million, and $53 million at May 4,
2002, May 5, 2001 and February 2, 2002, respectively. Accumulated other
comprehensive loss included a minimum pension liability adjustment of $115
million at May 4, 2002 and February 2, 2002.
Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen weeks ended May 4, 2002 and May 5, 2001, respectively, are
presented below. Operating results reflect income from continuing operations
before income taxes, net corporate expense and net interest expense.
Sales:
(in millions) Thirteen weeks ended
-------------------------
May 4, 2002 May 5, 2001
------ ------
Athletic Stores .................. $1,006 $ 977
Direct to Customers .............. 84 78
------ ------
1,090 1,055
All Other (1) .................... -- 17
------ ------
$1,090 $1,072
====== ======
(1) Reflects The San Francisco Music Box Company and the Burger King and
Popeye's franchises.
-9-
Operating Results:
(in millions) Thirteen weeks ended
----------------------------
May 4, 2002 May 5, 2001
-------- --------
Athletic Stores ................. $ 69 $ 73
Direct to Customers ............. 8 4
-------- --------
77 77
All Other (1) ................... -- (3)
-------- --------
Operating profit .......... 77 74
Corporate expense ......... 13 17
Interest expense, net ..... 7 4
-------- --------
Income from continuing operations
before income taxes .......... $ 57 $ 53
======== ========
(1) Reflects The San Francisco Music Box Company and the Burger King and
Popeye's franchises.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which will be effective for fiscal years beginning
after June 15, 2002, and the Registrant will adopt it as of the beginning of
fiscal year 2003. The statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate can be made. The carrying amount of the
related long-lived asset shall be increased by the same amount as the liability
and that amount will be depreciated or amortized consistent with the underlying
long-lived asset. The difference between the fair value and the value of the
ultimate liability will be accreted over time using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
The Registrant is currently evaluating the impact of the adoption of SFAS No.
143 on its financial position and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References included herein to businesses disposed and held for disposal
relate to The San Francisco Music Box Company and the Burger King and Popeye's
franchises.
RESULTS OF OPERATIONS
Sales of $1,090 million for the first quarter of 2002 increased 1.7
percent from sales of $1,072 million for the first quarter of 2001. Excluding
the impact of foreign currency fluctuations and sales from businesses disposed
and held for disposal in the prior year, sales increased 3.7 percent as compared
with the corresponding prior-year period. The increase reflected an increase of
1.4 percent in comparable-store sales and the Registrant's successful new store
opening program. Sales in the first quarter of 2002 were negatively impacted by
certain higher-priced marquee footwear that did not sell as well as anticipated.
Gross margin, as a percentage of sales, of 29.4 percent in the first
quarter of 2002 declined by 100 basis points as compared with 30.4 percent in
the corresponding prior-year period. This decline primarily reflected additional
markdowns that were required to sell certain slow-moving higher-priced marquee
footwear and the continuing promotional environment. Management's aggressive
initiatives with regard to effective merchandising have enabled inventory levels
at May 4, 2002 to remain in line with plan. Buyers' salaries and occupancy
costs, as a percentage of sales, for the thirteen weeks ended May 4, 2002,
improved slightly from the corresponding prior-year period.
-10-
Selling, general and administrative expenses ("SG&A") of $220 million
improved by 130 basis points, as a percentage of sales, to 20.2 percent in the
first quarter of 2002 as compared with 21.5 percent in the corresponding
prior-year period. This improvement reflected the Registrant's continued
cost-reduction efforts in all areas in 2002, particularly in payroll and
logistics. The completion of the sales of The San Francisco Music Box Company
and the Burger King and Popeye's franchises in 2001 also contributed to the
reduction in SG&A, as a percentage of sales.
Depreciation and amortization declined by $2 million for the first
quarter of 2002, which reflected the impact of no longer amortizing goodwill as
required by SFAS No. 142, which was adopted by the Registrant effective February
3, 2002.
Interest expense of $8 million was flat for the thirteen weeks ended
May 4, 2002 as compared with the corresponding prior-year period. The increase
in interest expense in 2002 associated with the issuance of $150 million 5.50%
convertible notes in June 2001 was offset by the impact of the retirement of the
$50 million 7.00% medium-term notes in October 2001 and reduced amortization of
deferred financing costs related to the revolving credit facility. Interest
income declined to $1 million for the thirteen weeks ended May 4, 2002 from $4
million for the thirteen weeks ended May 5, 2001. The thirteen weeks ended May
5, 2001 included intercompany interest income related to the Northern Group
segment of $3 million. The offsetting interest expense was charged to the
reserve for discontinued operations in 2001.
During the first quarter of 2002, the Registrant recorded a $3 million
tax benefit related to a multi-state tax planning strategy, which reduced the
effective tax rate for the thirteen weeks ended May 4, 2002 to 34.2 percent, as
compared with 39.0 percent for the corresponding prior-year period. This tax
planning strategy resulted in a reduction in the valuation allowance. The
Registrant expects the effective tax rate to approximate 37.5 percent for the
remainder of 2002.
Income from continuing operations of $38 million, or $0.26 per diluted
share, for the thirteen weeks ended May 4, 2002, improved by $0.03 per diluted
share from $32 million for the thirteen weeks ended May 5, 2001. For the quarter
ended May 4, 2002, the Registrant reported net income of $20 million, or $0.14
per diluted share, compared with net income of $37 million, or $0.27 per diluted
share for the corresponding prior-year period. The first quarter of 2002
included a loss on the disposal of discontinued operations of $18 million, or
$0.12 per diluted share, due to the poor performance of the Northern Group
Canada business. During the quarter ended May 5, 2001, the Registrant recorded a
$5 million tax benefit, or $0.04 per diluted share, as a result of the
implementation of tax planning strategies related to the disposal of the
Northern Group segment.
STORE COUNT
The following table summarizes store count. During the thirteen weeks
ended May 4, 2002, the Registrant remodeled or relocated 60 stores.
February 2, May 4, May 5,
2002 Opened Closed 2002 2001
----- ----- ----- ----- -----
Athletic Stores ................... 3,590 25 33 3,582 3,559
Disposed and held for disposal..... -- -- -- -- 179
----- ----- ----- ----- -----
Total ............................. 3,590 25 33 3,582 3,738
----- ----- ----- ----- -----
SALES
The following table summarizes sales by segment.
Thirteen weeks ended
----------------------------------
May 4, 2002 May 5, 2001
---------- ----------
(in millions)
Athletic Stores .............. $ 1,006 $ 977
Direct to Customers .......... 84 78
---------- ----------
1,090 1,055
Disposed and held for disposal -- 17
---------- ----------
Total sales .................. $ 1,090 $ 1,072
========== ==========
-11-
Athletic Stores sales increased by 3.0 percent, reflecting a
comparable-store sales increase of 1.0 percent and the Registrant's successful
new store opening program. Footwear, basketball in particular, continued to
drive the sales growth across most formats, as the number of launches of marquee
and exclusive footwear products was increased throughout the thirteen weeks
ended May 4, 2002, compared with the corresponding prior-year period. Sales in
the United States were negatively impacted by certain higher-priced marquee
footwear that did not sell as well as anticipated, which required incremental
markdowns in order to maintain inventory levels in line with plan. The
international formats, Foot Locker Europe in particular, continued to achieve
strong sales growth in the first quarter of 2002.
Direct to Customers sales increased by 7.7 percent for the thirteen
weeks ended May 4, 2002 as compared with the corresponding prior-year period.
Internet sales increased by 57.1 percent for the thirteen weeks ended May 4,
2002 to $33 million as compared with the corresponding period in the prior year.
This increase in Internet sales was partially offset by a decline in catalog
sales, reflecting the growing trend of the Registrant's customers to browse and
select products through its catalogs and then make their purchases via the
Internet.
The Registrant expects to meet its sales plan for the second quarter of
2002 by continuing to promote its products aggressively in what it expects will
be a highly competitive retail environment. In addition, management expects that
it can meet customer demand for a lower-priced range of marquee footwear without
negatively impacting gross margin.
OPERATING RESULTS
Operating results reflect income from continuing operations before
income taxes, net corporate expense and net interest expense. The following
table summarizes operating profit by segment.
Thirteen weeks ended
May 4, May 5,
2002 2001
-------- --------
(in millions)
Athletic Stores ....................... $ 69 $ 73
Direct to Customers ................... 8 4
-------- --------
77 77
Disposed and held for disposal ........ -- (3)
-------- --------
Total operating profit ................ $ 77 $ 74
======== ========
Athletic Stores operating profit decreased by 5.5 percent for the first
quarter of 2002 as compared with the corresponding prior-year period. The
decrease in the first quarter of 2002 is primarily a result of the reduced gross
margin rate performances due to the markdowns taken to sell slow-moving marquee
product, which were offset, in part, by operating expense reductions. Operating
profit, as a percentage of sales, decreased to 6.9 percent in the first quarter
of 2002 from 7.5 percent in the corresponding prior-year period.
Direct to Customers operating results doubled for the thirteen weeks
ended May 4, 2002, as compared with the corresponding period ended May 5, 2001.
Operating profit, as a percentage of sales, increased to 9.5 percent in the
first quarter of 2002 from 5.1 percent in the corresponding prior-year period.
The improved operating performance in 2002 was driven primarily by increased
sales in the Internet business.
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STRATEGIC DISPOSITIONS AND REPOSITIONING
On September 28, 2001, the Registrant completed the stock transfer of
the 370 Northern Group stores in Canada, through one of its wholly-owned
subsidiaries for approximately CAD$59 million (approximately US$38 million),
which was paid in the form of a note (the "Note"). The purchaser operates the
Northern Group stores, from which the repayment of the Note will be made. The
transaction has been accounted for as a "transfer of assets and liabilities
under contractual arrangement" as no cash proceeds were received and the
consideration comprised the Note, the repayment of which is dependent on the
future successful operations of the business. The assets and liabilities related
to the former operations have been presented under the balance sheet captions as
"Assets of business transferred under contractual arrangement (note receivable)"
and "Liabilities of business transferred under contractual arrangement." The net
amount of the assets and liabilities of the former operations were written down
to the estimated fair value of the Note in the second quarter of 2001. Due to
the poor performance of the Northern Group stores in Canada since the
transaction, the Registrant recorded a charge of $18 million in the first
quarter of 2002. The charge comprised a valuation allowance in the amount of the
operating losses incurred by the purchaser and a further reduction in the
carrying value of the net amount of the assets and liabilities of the former
operations to zero, due to greater uncertainty with respect to the
collectibility of the Note.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Registrant's primary sources of cash have been from
operations, borrowings under the revolving credit agreement and proceeds from
the sale of non-strategic assets. During the second quarter of 2001, the
Registrant raised $150 million in cash through the issuance of subordinated
convertible notes. The Registrant generally finances real estate with operating
leases. The principal use of cash has been to finance inventory requirements,
capital expenditures related to store openings, store remodelings and management
information systems, and to fund other general working capital requirements.
Operating activities of continuing operations provided cash of $87
million for the thirteen weeks ended May 4, 2002 compared with $30 million cash
used in operations for the thirteen weeks ended May 5, 2001. These amounts
reflect the income from continuing operations adjusted for non-cash items and
working capital changes. The increase in cash from operations in 2002 was due to
working capital changes. The increase in merchandise inventories for the first
quarter of 2002 was more than offset by the increase in accounts payable and
accrued liabilities, whereas the first quarter of 2001 resulted in net cash
outflows for both merchandise inventories and accounts payable and accrued
liabilities.
Net cash used in investing activities of continuing operations of $28
million and $16 million for the first quarter of 2002 and 2001, respectively,
reflected capital expenditures and lease acquisition costs. Total planned
capital expenditures of $165 million for 2002 comprise $116 million for new
store openings and modernizations of existing stores, $25 million for the
development of information systems and other support facilities and lease
acquisition costs of $24 million, primarily related to the Registrant's European
operations. The Registrant has the ability to revise and reschedule the
anticipated capital expenditure program should the Registrant's financial
position require it.
Financing activities for the Registrant's continuing operations
provided cash of $2 million for the thirteen weeks ended May 4, 2002 compared
with cash provided by financing activities of $1 million for the corresponding
prior-year period. There were no short-term borrowings outstanding during the
first thirteen weeks of 2002 or 2001. Management believes operating cash flows
and current credit facilities will be adequate to finance its working capital
requirements, fund the repayment of the medium-term notes due in October 2002,
and support the development of its short-term and long-term strategies. On March
29, 2002, Standard & Poor's increased the Registrant's credit rating to BB+ and
on May 28, 2002, Moody's Investors Service upgraded its rating to Ba2.
Net cash used in discontinued operations includes the change in assets
and liabilities of the discontinued segments and disposition activity charged to
the reserves for both periods presented.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which will be effective for fiscal years beginning
after June 15, 2002, and the Registrant will adopt it as of the beginning of
fiscal year 2003. The statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate can be made. The carrying amount of the
related long-lived asset shall be increased by the same amount as the liability
and that amount will be depreciated or amortized consistent with the underlying
long-lived asset. The difference between the fair value and the value of the
ultimate liability will be accreted over time using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
The Registrant is currently evaluating the impact of the adoption of SFAS No.
143 on its results of operations and financial position.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations 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 Registrant
expects or anticipates will or may occur in the future, including, but not
limited to, such things as future capital expenditures, expansion, strategic
plans, growth of the Registrant'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 including, but not limited to, 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 Registrant's merchandise mix and retail locations, unseasonable weather,
risks associated with foreign global sourcing, including political instability
and changes in import regulations, economic conditions worldwide, and the
ability of the Registrant to execute its business plans effectively with regard
to each of its business units. Any changes in such assumptions or factors could
produce significantly different results. The Registrant undertakes no obligation
to publicly update forward-looking statements, whether as a result of new
information, future events or otherwise.
-14-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation,
including administrative proceedings, incident to the businesses of the
Registrant, as well as litigation incident to the sale and disposition
of businesses that have occurred in the past several years. Management
does not believe that the outcome of such proceedings will have a
material effect on the Registrant's consolidated financial position,
liquidity, or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits that are in this report immediately follow the index.
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended
May 4, 2002.
-15-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOOT LOCKER, INC.
-----------------
(Registrant)
Date: June 14, 2002 /s/ Bruce L. Hartman
------------------------------
BRUCE L. HARTMAN
Executive Vice President
and Chief Financial Officer
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FOOT LOCKER, INC.
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
10 Nonstatutory Stock Option Grant Agreement
with J. Carter Bacot dated as of February 4,
2002.
12 Computation of Ratio of Earnings to Fixed
Charges.
15 Letter re: Unaudited Interim Financial
Statements.
99 Independent Accountants' Review Report.
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