UNITED STATES    
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
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 2, 2013
 
 o
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: 1-10299
______________________________________
 
FOOT LOCKER, INC.
(Exact Name of Registrant as Specified in its Charter)
______________________________________
     
New York
13-3513936
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
112 West 34th Street, New York, New York, 10120
(Address of Principal Executive Offices, Zip Code)
 
(212-720-3700)
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  þ  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer   o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o  No  þ
 
Number of shares of Common Stock outstanding at November 29, 2013: 146,739,055
 
 
 
FOOT LOCKER, INC.
 
TABLE OF CONTENTS
 
 
 
Page
Part I.
Financial Information
 
 
Item 1.
Financial Statements
 
 
 
Condensed Consolidated Balance Sheets
3
 
 
Condensed Consolidated Statements of Operations
4
 
 
Condensed Consolidated Statements of Comprehensive Income
5
 
 
Condensed Consolidated Statements of Cash Flows
6
 
 
Notes to Condensed Consolidated Financial Statements
7
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
 
Item 4.
Controls and Procedures
27
Part II.
Other Information
 
 
Item 1.
Legal Proceedings
27
 
Item 1A.
Risk Factors
28
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29
 
Item 6.
Exhibits
29
 
 
Signature
30
 
 
Index of Exhibits
31
 
 
2

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

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

 
FOOT LOCKER, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  (Unaudited)
  (in millions)
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
 
2013
 
2012
 
2013
 
2012
 
Net income
$
104
 
$
106
 
$
308
 
$
293
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of income tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment:
 
 
 
 
 
 
 
 
 
 
 
 
Translation adjustment arising during the period, net of income tax
 
22
 
 
35
 
 
(5)
 
 
(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivatives, net of income tax
 
(2)
 
 
2
 
 
(2)
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial gain/loss included in net periodic benefit costs, net of income tax expense of $1 $1, $3, and $3 million, respectively
 
3
 
 
2
 
 
7
 
 
6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
127
 
$
145
 
$
308
 
$
294
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
 
5

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

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2014 and of the fiscal year ended February 2, 2013. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended February 2, 2013, as filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2013. 
 
Recent Accounting Pronouncements
 
During the first quarter of 2013, the Company adopted Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 amended existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. The provisions of this new guidance were effective prospectively as of the beginning of 2013. Accordingly, enhanced footnote disclosure is included in Note 5. The adoption of ASU 2013-02 had no effect on our results of operations or financial position.
 
We performed our annual goodwill impairment assessment during the first quarter of 2013, using a qualitative approach as permitted under Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment. In performing the assessment, we identified and considered the significance of relevant key factors, events, and circumstances that affected the fair value and/or carrying amounts of our reporting units. These factors included external factors such as macroeconomic, industry and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. Based on the results of the impairment assessment performed, we concluded that it is more likely than not that the fair values of our reporting units substantially exceeded their respective carrying values and there are no reporting units at risk of impairment.
 
Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

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

   
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
2. Acquisition – (continued)
 
The following table summarizes allocation of the purchase price to the fair value of assets acquired, based on the exchange rate in effect at the date of our acquisition of Runners Point Group. The Company has allocated the purchase price, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company. The allocation of the purchase price in the table below is preliminary and subject to change based on the finalization of the purchase price.
 
 
 
Allocation
 
(in millions)
 
as Revised
 
Assets acquired:
 
 
 
 
Cash and cash equivalents
 
$
6
 
Inventory
 
 
41
 
Other current assets
 
 
11
 
Property and equipment
 
 
24
 
Other long-term assets
 
 
1
 
Tradenames
 
 
29
(1)
Favorable leases
 
 
5
 
 
 
 
 
 
Liabilities assumed:
 
 
 
 
Accounts payable and other accruals
 
 
(27)
 
Income taxes and deferred taxes, net
 
 
(11)
 
Obligations under capital leases
 
 
(9)
 
Other long-term liabilities
 
 
(1)
 
 
 
 
 
 
Goodwill
 
 
18
 
Total purchase price
 
$
87
 
 
(1)     Due to foreign currency fluctuations, the U.S. dollar value of tradenames increased to $30 million as of November 2, 2013.
 
We determined that the tradenames have an indefinite life and will not be amortized. These tradenames will be tested annually for impairment, along with the goodwill recorded for the purchase. The value of the favorable leases will be amortized over the terms of the respective leases. 
 
The amount of goodwill expected to be tax deductible is $4 million. 

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 2, 2013, the Company has two reportable segments, Athletic Stores and Direct-to-Customers.  Sales and division results for the Company’s reportable segments for the thirteen weeks and thirty-nine weeks ended November 2, 2013 and October 27, 2012 are presented below. Division profit reflects income before income taxes, corporate expense, net interest expense, and net non-operating income.
 
As discussed in Note 2, Acquisition, the Company acquired Runners Point Group during the second quarter of 2013.  Sales and division results for the Runners Point Group stores, including Runners Point, Sidestep and Run2, are included in the Athletic Stores segment since the date of acquisition.  Sales and division results for Tredex, a direct-to-customer subsidiary of Runners Point Group, are included in the Direct-to-Customers segment since the date of acquisition.
 
 
8

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
3. Segment Information - (continued)
 
  
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
Sales
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
(in millions)
 
2013
 
2012
 
2013
 
2012
 
Athletic Stores
 
$
1,444
 
$
1,375
 
$
4,228
 
$
4,060
 
Direct-to-Customers
 
 
178
 
 
149
 
 
486
 
 
409
 
Total sales
 
$
1,622
 
$
1,524
 
$
4,714
 
$
4,469
 
 
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
Operating Results
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
(in millions)
 
2013
 
2012
 
2013
 
2012
 
Athletic Stores (1)
 
$
159
 
$
166
 
$
486
 
$
480
 
Direct-to-Customers
 
 
20
 
 
18
 
 
53
 
 
47
 
Division profit
 
 
179
 
 
184
 
 
539
 
 
527
 
Less: Corporate expense, net
 
 
17
 
 
28
 
 
56
 
 
76
 
Operating profit
 
 
162
 
 
156
 
 
483
 
 
451
 
Other income (2)
 
 
 
 
 
 
3
 
 
1
 
Interest expense, net
 
 
2
 
 
1
 
 
4
 
 
3
 
Income before income taxes
 
$
160
 
$
155
 
$
482
 
$
449
 
 
(1)
Included in the Athletic Stores segment for the thirty-nine weeks ended November 2, 2013 is a $2 million charge recorded in connection with the closure of all CCS stores.
 
 
(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.
 
During the second quarter of 2013 the Company closed all 22 of its CCS stores. As of November 2, 2013, 12 of these stores were converted to other store formats, 2 will be converted by the end of the year and 1 will be converted during the first quarter of 2014. The CCS store closures are not presented as part of discontinued operations as the operations and cash flows related to the majority of the closed stores are expected to continue through other store formats and the Company’s websites.  The Company will continue to operate the CCS catalog and e-commerce website. 
 
Athletic Stores sales include $64 million and $84 million for thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to the Runners Point Group stores. Direct-to-Customers sales include $8 million and $10 million, respectively, related to the Tredex division of Runners Point Group.
 
Athletic Stores division profit includes $1 million and $3 million for thirteen and thirty-nine week periods ended November 2, 2013, respectively, related to the Runners Point Group stores. The effect on Direct-to-Customers division profit was not significant. Costs associated with the acquisition and integration of $1 million and $4 million for the thirteen and thirty-nine weeks ended November 2, 2013 are included in corporate expense.

4. Goodwill and Other Intangible Assets
 
Annually during the first quarter, or more frequently if impairment indicators arise, the Company reviews goodwill and intangible assets with indefinite lives for impairment. The annual assessment of goodwill and assets with indefinite lives performed during the first quarters of 2013 and 2012 did not result in impairment charges. The fair value of each of the reporting units substantially exceeds its carrying value for both periods. The following table provides a summary of goodwill by reportable segment.
 
 
9

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4. Goodwill and Other Intangible Assets - (continued)
 
Goodwill as of November 2, 2013 includes $18 million relating to the acquisition of Runners Point Group, which was allocated to the segments based upon their relative fair values. Other changes include foreign exchange fluctuations. Of the $18 million of goodwill relating to the acquisition of Runners Point Group, $3 million was allocated to the Athletic Stores segment related to the Runners Point Group stores and $15 million was allocated to the Direct-to-Customers segment related to the Tredex division.
 
 
 
November 2,
 
October 27,
 
February 2,
 
Goodwill (in millions)
 
2013
 
2012
 
2013
 
Athletic Stores
 
$
21
 
$
17
 
$
18
 
Direct-to-Customers
 
 
142
 
 
127
 
 
127
 
 
 
$
163
 
$
144
 
$
145
 
 
The components of finite-lived intangible assets and intangible assets not subject to amortization are as follows:
 
 
 
November 2, 2013
 
October 27, 2012
 
February 2, 2013
 
 
 
Gross
 
Accum.
 
Net
 
Gross
 
Accum.
 
Net
 
Gross
 
Accum.
 
Net
 
(in millions)
 
value
 
amort.
 
value
 
value
 
amort.
 
value
 
value
 
amort.
 
value
 
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease acquisition costs
 
$
159
 
$
(140)
 
$
19
 
$
163
 
$
(141)
 
$
22
 
$
158
 
$
(137)
 
$
21
 
Trademarks
 
 
21
 
 
(10)
 
 
11
 
 
21
 
 
(9)
 
 
12
 
 
21
 
 
(9)
 
 
12
 
Favorable leases
 
 
9
 
 
(4)
 
 
5
 
 
5
 
 
(5)
 
 
 
 
5
 
 
(5)
 
 
 
Customer relationships
 
 
21
 
 
(21)
 
 
 
 
21
 
 
(17)
 
 
4
 
 
21
 
 
(18)
 
 
3
 
 
 
$
210
 
$
(175)
 
$
35
 
$
210
 
$
(172)
 
$
38
 
$
205
 
$
(169)
 
$
36
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Republic of Ireland
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
1
 
CCS
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
10
 
 
 
 
 
 
 
 
3
 
Runners Point Group
 
 
 
 
 
 
 
 
30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
35
 
 
 
 
 
 
 
$
11
 
 
 
 
 
 
 
$
4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other intangible assets, net
 
 
 
 
 
 
 
$
70
 
 
 
 
 
 
 
$
49
 
 
 
 
 
 
 
$
40
 
 
As of November 2, 2013, in connection with the allocation of the purchase price of the Runners Point Group acquisition, the Company recognized $30 million of indefinite life intangible assets for the Runners Point Group tradenames. Also as a result of the purchase price allocation, $5 million was recognized for favorable leases in 15 locations with rents below their fair value, which are being amortized over a weighted-average life of 6 years.
 
The change since year end also includes $2 million of lease acquisition additions related to Foot Locker Europe, which are being amortized over a weighted-average life of 10 years. Foreign exchange fluctuations related to the euro increased the balance by $2 million.  This was offset by amortization expense of $9 million recorded for the thirty-nine weeks ended November 2, 2013.
 
 
10

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4. Goodwill and Other Intangible Assets - (continued)
 
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
(in millions)
 
2013
 
2012
 
2013
 
2012
 
Amortization expense
 
$
3
 
$
3
 
$
9
 
$
10
 
 
Future expected amortization expense for finite life intangible assets is estimated as follows:
 
 
 
(in millions)
 
Remainder of 2013
 
$
2
 
2014
 
 
6
 
2015
 
 
5
 
2016
 
 
4
 
2017
 
 
4
 
2018
 
 
3
 

5. Accumulated Other Comprehensive Loss
 
Accumulated other comprehensive loss comprised the following:
 
 
 
November 2,
 
October 27,
 
February 2,
 
(in millions)
 
2013
 
2012
 
2013
 
Foreign currency translation adjustments
 
$
77
 
$
56
 
$
82
 
Cash flow hedges
 
 
1
 
 
 
 
3
 
Unrecognized pension cost and postretirement benefit
 
 
(247)
 
 
(258)
 
 
(255)
 
Unrealized loss on available-for-sale security
 
 
(1)
 
 
(1)
 
 
(1)
 
 
 
$
(170)
 
$
(203)
 
$
(171)
 
 
The changes in accumulated other comprehensive loss for the thirty-nine week period ended November 2, 2013 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 2, 2013
 
$
82
 
$
3
 
$
(255)
 
$
(1)
 
$
(171)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification
 
 
(5)
 
 
(2)
 
 
1
 
 
 
 
(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
7
 
 
 
 
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
(5)
 
 
(2)
 
 
8
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of November 2, 2013
 
$
77
 
$
1
 
$
(247)
 
$
(1)
 
$
(170)
 
 
 
11

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
5. Accumulated Other Comprehensive Loss- (continued)
 
Reclassifications from accumulated other comprehensive loss for the thirty-nine week period ended November 2, 2013 were as follows:
 
(in millions)
 
 
 
 
Amortization of actuarial (gain) loss:
 
 
 
 
Pension benefits- amortization of actuarial loss
 
$
12
 
Postretirement benefits- amortization of actuarial gain
 
 
(2)
 
Net periodic benefit cost (see Note 9)
 
 
10
 
Income tax expense
 
 
(3)
 
Net of tax
 
$
7
 

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 policy of entering into contracts only with major financial institutions, selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument.
 
Additional information is contained within Note 7, Fair Value Measurements.
 
Derivative Holdings Designated as Hedges
 
For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions, and the methods of assessing hedge effectiveness and hedge ineffectiveness. In addition, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative instrument would be recognized in earnings immediately. No such gains or losses were recognized in earnings for any of the periods presented. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period, which management evaluates periodically.
 
The primary currencies to which the Company is exposed are the euro, British pound, Canadian dollar, and Australian dollar. For option and foreign exchange forward contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of Accumulated Other Comprehensive Loss (“AOCL”) and is recognized as a component of cost of sales when the related inventory is sold. The amount reclassified to cost of sales related to such contracts was not significant for any of the periods presented. The effective portion of gains or losses associated with other forward contracts is deferred as a component of AOCL until the underlying transaction is reported in earnings. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings was also not significant for any of the periods presented. When using a forward contract as a hedging instrument, the Company excludes the time value of the contract from the assessment of effectiveness. At each quarter-end, the Company had not hedged forecasted transactions for more than the next twelve months, and the Company expects all derivative-related amounts reported in AOCL to be reclassified to earnings within twelve months.
 
 
12

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
6. Financial Instruments – (continued)
 
The net change in the fair value of foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was not significant for any of the periods presented. The notional value of the contracts outstanding at November 2, 2013 was $58 million and these contracts extend through July 2014.
 
Derivative Holdings Designated as Non-Hedges
 
The Company enters into foreign exchange forward contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions that are not designated as hedges. The net change in fair value was not significant for any of the periods presented. The notional value of the contracts outstanding at November 2, 2013 was $33 million and these contracts extend through December 2013.
 
Additionally, the Company enters into diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for any of the periods presented. The notional value of the contracts outstanding at November 2, 2013 was not significant.
 
Fair Value of Derivative Contracts
 
The following represents the fair value of the Company’s derivative contracts.  Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:
 
 
 
Balance Sheet
 
November 2,
 
October 27,
 
February 2,
 
(in millions)
 
Caption
 
2013
 
2012
 
2013
 
Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Current assets
 
$
1
 
$
1
 
$
4
 
Foreign exchange forward contracts
 
Current liabilities
 
$
 
$
1
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Current assets
 
$
 
$
 
$
2
 

7. Fair Value Measurements
 
The Company’s financial assets recorded at fair value are categorized as follows:
 
 
Level 1 –
Quoted prices for identical instruments in active markets.
 
 
 
 
Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
 
 
 
 
Level 3 –
Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
 
   
13

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
7. Fair Value Measurements – (continued)
 
Fair Value of Recognized Assets and Liabilities
 
The following tables provide a summary of the Company’s recognized assets and liabilities that are measured at fair value on a recurring basis:
 
 
 
At November 2, 2013
 
At October 27, 2012
 
At February 2, 2013
 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
 
$
 
$
32
 
$
 
$
 
$
49
 
$
 
$
 
$
48
 
$
 
Auction rate security
 
 
 
 
6
 
 
 
 
 
 
6
 
 
 
 
 
 
6
 
 
 
Foreign exchange forward contracts
 
 
 
 
1
 
 
 
 
 
 
1
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
 
$
39
 
$
 
$
 
$
56
 
$
 
$
 
$
60
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
Total Liabilities
 
$
 
$
 
$
 
$
 
$
1
 
$
 
$
 
$
 
$
 
 
Available-for-sale securities are recorded at fair value with unrealized gains and losses reported, net of tax, in other comprehensive income, unless unrealized losses are determined to be other than temporary. As of November 2, 2013, the Company held $38 million of available-for-sale securities, which was comprised of $32 million of short-term investments and a $6 million auction rate security, which is included in other assets.
 
Short-term investments represent corporate bonds with maturity dates within one year from the purchase date. These securities are valued using model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets and therefore are classified as Level 2 instruments.
 
The fair value of the auction rate security is determined by using quoted prices for similar instruments in active markets and accordingly is classified as a Level 2 instrument.
 
The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.  There were no transfers into or out of Level 1, Level 2, or Level 3 assets and liabilities for any of the periods presented.
 
Additionally, in connection with the acquisition and purchase price allocation of Runners Point Group, the Company recognized its assets and liabilities at fair value. See Note 2, Acquisition, for further discussion and additional disclosures. All amounts are categorized as Level 3.
 
 
14

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
7. Fair Value Measurements – (continued)
 
Fair Value of Financial Instruments
 
The carrying value and estimated fair value of long-term debt and obligations under capital leases were as follows:
 
 
 
November 2,
 
October 27,
 
February 2,
 
(in millions)
 
2013
 
2012
 
2013
 
Carrying value (1)
 
$
140
 
$
133
 
$
133
 
Fair value (1)
 
$
157
 
$
145
 
$
152
 
 
(1)
In connection with the acquisition of Runners Point Group in the second quarter of 2013, the Company recognized capital lease obligations. These were existing agreements primarily related to the financing of certain store fixtures. As of November 2, 2013, $8 million is included in the total above; $3 million is classified as short-term and $5 million is classified as long-term.
 
The fair value of long-term debt is determined by using model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets and therefore is classified as Level 2.
 
The carrying values of cash and cash equivalents, short-term investments, and other current receivables and payables approximate their fair value.

8. Earnings Per Share
 
The Company accounts for and discloses net earnings per share using the treasury stock method. The Company’s basic earnings per share is computed by dividing the Company’s reported net income for the period by the weighted-average number of common shares outstanding at the end of the period. The Company’s 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 Company’s basic and diluted weighted-average number of common shares outstanding was as follows:
 
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
(in millions)
 
2013
 
2012
 
2013
 
2012
 
Weighted-average common shares outstanding
 
 
147.7
 
 
151.0
 
 
149.2
 
 
151.4
 
Effect of Dilution:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and awards
 
 
1.8
 
 
2.9
 
 
2.0
 
 
2.6
 
Weighted-average common shares assuming dilution
 
 
149.5
 
 
153.9
 
 
151.2
 
 
154.0
 
 
 
Options to purchase 1.1 million and 0.9 million shares of common stock were not included in the computation for the thirteen weeks ended November 2, 2013 and October 27, 2012, respectively. Options to purchase 0.9 million and 0.7 million shares of common stock were not included in the computation for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively. These options were not included primarily because the exercise prices of the options were greater than the average market price of the common shares and, therefore, the effect would have been antidilutive. As of November 2, 2013, contingently issuable shares of 0.4 million have not been included as the vesting conditions have not been satisfied.
 
 
15

 
FOOT LOCKER, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
9. Pension and Postretirement Plans
 
The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.
 
The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income, which is recognized as part of SG&A expense:
 
 
 
Pension Benefits
 
Postretirement Benefits
 
 
 
Thirteen weeks
 
Thirty-nine weeks
 
Thirteen weeks
 
Thirty-nine weeks
 
 
 
ended
 
ended
 
ended
 
ended
 
 
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
November 2,
 
October 27,
 
(in millions)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
Service cost
 
$
4
 
$
3
 
$
11
 
$
10
 
$
 
$
 
$
 
$
 
Interest cost
 
 
6
 
 
7
 
 
19
 
 
21
 
 
 
 
 
 
 
 
 
Expected return on plan assets
 
 
(10)
 
 
(10)
 
 
(30)
 
 
(30)
 
 
 
 
 
 
 
 
 
Amortization of net loss (gain)
 
 
4
 
 
4
 
 
12
 
 
12
 
 
(1)
 
 
(1)
 
 
(2)
 
 
(3)
 
Net benefit expense (income)
 
$
4
 
$
4
 
$
12
 
$
13
 
$
(1)
 
$
(1)
 
$
(2)
 
$
(3)
 
 
During the second quarter of 2013, the Company made a $2 million contribution to the Canadian qualified plan. No pension contributions to the U.S. qualified plan were made during the thirty-nine weeks ended November 2, 2013 and October 27, 2012. The Company continually evaluates the amount and timing of any future contributions. Additional contributions will depend on the plan asset performance and other factors.

10. Share-Based Compensation
 
Total compensation expense related to the Company’s share-based compensation plans was $6 million for the thirteen weeks ended November 2, 2013, $5 million for the thirteen weeks ended October 27, 2012, and was $19 million and $15 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively. The associated tax benefits recognized for the thirteen weeks ended November 2, 2013 and October 27, 2012 was $2 million for both periods. The associated tax benefit recognized was $6 million for the thirty-nine weeks ended November 2, 2013 and $5 million for the thirty-nine weeks ended October 27, 2012.
 
Tax deductions in excess of the cumulative compensation cost recognized for share-based compensation arrangements were $8 million and $9 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively, and are classified as a financing activity within the Condensed Consolidated Statements of Cash Flows.
 
The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.
 
 
16

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

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