SEC Filing | Foot Locker, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: August 3, 2019


☐	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

(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.)

330 West 34^th Street, New York, New York 10001

(Address of principal executive offices, Zip Code)

(212-720-3700)

(Registrant’s telephone number, including area code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	FL	New York Stock Exchange

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 ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ◻

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


Large accelerated filer þ	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ◻
Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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

Number of shares of Common Stock outstanding as of September 9, 2019: 107,039,179

Table of Contents

FOOT LOCKER, INC.

TABLE OF CONTENTS

			Page
PART I	FINANCIAL INFORMATION		1
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Changes in Shareholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION		30
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 6.	Exhibits	31

SIGNATURE			32

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except shares)


	August 3,		August 4,		February 2,
	2019		2018		2019
		(Unaudited)		(Unaudited)		*
		($ in millions)
ASSETS

Current assets:
Cash and cash equivalents	$	939	$	950	$	891
Merchandise inventories		1,227		1,254		1,269
Other current assets		280		320		358
		2,446		2,524		2,518
Property and equipment, net		796		842		836
Operating lease right-of-use assets		2,976		—		—
Deferred taxes		92		108		87
Goodwill		156		158		157
Other intangible assets, net		21		41		24
Other assets		233		159		198
	$	6,720	$	3,832	$	3,820

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	420	$	408	$	387
Accrued and other liabilities		312		313		377
Current portion of lease obligations		497		—		—
		1,229		721		764
Long-term debt		123		124		124
Long-term lease obligations		2,750		—		—
Other liabilities		106		505		426
Total liabilities		4,208		1,350		1,314
Shareholders’ equity:
Common stock and paid-in capital: 113,199,460; 121,497,470; and 112,932,605 shares outstanding, respectively		825		857		809
Retained earnings		2,226		2,232		2,104
Accumulated other comprehensive loss		(384)		(340)		(370)
Less: Treasury stock at cost: 3,578,395; 5,869,122; and 711,024 shares, respectively		(155)		(267)		(37)
Total shareholders' equity		2,512		2,482		2,506
	$	6,720	$	3,832	$	3,820

The balance sheet at February 2, 2019 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 Foot Locker, Inc.’s Annual Report on Form 10-K for the year ended February 2, 2019.

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
		(in millions, expect per share amounts)
Sales	$	1,774	$	1,782	$	3,852	$	3,807

Cost of sales		1,240		1,243		2,629		2,602
Selling, general and administrative expenses		393		380		809		765
Depreciation and amortization		46		44		90		89
Litigation and other charges		14		3		15		15
Income from operations		81		112		309		336

Interest income, net		2		1		6		3
Other income		2		2		4		5
Income before income taxes		85		115		319		344
Income tax expense		25		27		87		91
Net income	$	60	$	88	$	232	$	253

Basic earnings per share	$	0.55	$	0.76	$	2.09	$	2.15
Weighted-average shares outstanding		110.8		116.6		111.6		117.7

Diluted earnings per share	$	0.55	$	0.75	$	2.08	$	2.14
Weighted-average shares outstanding, assuming dilution		111.1		117.1		112.1		118.1

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)


		Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
		($ in millions)
Net income	$	60	$	88	$	232	$	253
Other comprehensive income, net of income tax

Foreign currency translation adjustment:
Translation adjustment arising during the period, net of income tax (benefit) of $-, $1, $1, and $(7) million, respectively		(6)		(20)		(21)		(58)

Cash flow hedges:
Change in fair value of derivatives, net of income tax		5		—		3		1

Pension and postretirement adjustments:
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $-, $-, $1, and $1 million, respectively		1		2		4		4
Pension remeasurement and foreign currency fluctuations arising during the year, net of income tax benefit of $-, $3, $-, and $3, respectively.		—		(9)		—		(8)
Comprehensive income	$	60	$	61	$	218	$	192

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)



	Additional Paid-In								Accumulated
	Capital &								Other		Total
Thirteen weeks ended	Common Stock			Treasury Stock			Retained		Comprehensive		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at May 4, 2019	113,161	$	820	(774)	$	(41)	$	2,207	$	(384)	$	2,602
Restricted stock issued	16											—
Issued under director and stock plans	23		(1)									(1)
Share-based compensation expense			6									6
Shares of common stock used to satisfy tax withholding obligations				(1)		—						—
Share repurchases				(2,900)		(120)						(120)
Reissued - Employee Stock Purchase Plan				96		6						6
Net income								60				60
Cash dividends declared on common stock ($0.38 per share)								(41)				(41)
Translation adjustment, net of tax										(6)		(6)
Change in cash flow hedges, net of tax										5		5
Pension and postretirement adjustments, net of tax										1		1
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

Balance at May 5, 2018	121,342	$	848	(4,081)	$	(176)	$	2,184	$	(313)	$	2,543
Restricted stock issued	13											—
Issued under director and stock plans	142		6									6
Share-based compensation expense			3									3
Shares of common stock used to satisfy tax withholding obligations				(1)								—
Share repurchases				(1,835)		(93)						(93)
Reissued - Employee Stock Purchase Plan				48		2						2
Net income								88				88
Cash dividends declared on common stock ($0.345 per share)								(40)				(40)
Translation adjustment, net of tax										(20)		(20)
Pension and postretirement adjustments, net of tax										(7)		(7)
Balance at August 4, 2018	121,497	$	857	(5,869)	$	(267)	$	2,232	$	(340)	$	2,482


	Additional Paid-In								Accumulated
	Capital &								Other		Total
Twenty-six weeks ended	Common Stock			Treasury Stock			Retained		Comprehensive		Shareholders'
(shares in thousands, amounts in millions)	Shares	Amount		Shares	Amount		Earnings		Loss		Equity
Balance at February 2, 2019	112,933		809	(711)		(37)		2,104		(370)		2,506
Restricted stock issued	88											—
Issued under director and stock plans	179		3									3
Share-based compensation expense			13									13
Shares of common stock used to satisfy tax withholding obligations				(32)		(2)						(2)
Share repurchases				(2,932)		(122)						(122)
Reissued - Employee Stock Purchase Plan				96		6						6
Net income								232				232
Cash dividends declared on common stock								(84)				(84)
Translation adjustment, net of tax										(21)		(21)
Change in cash flow hedges, net of tax										3		3
Pension and postretirement adjustments, net of tax										4		4
Cumulative effect of the adoption of Topic 842								(26)				(26)
Balance at August 3, 2019	113,200	$	825	(3,579)	$	(155)	$	2,226	$	(384)	$	2,512

Balance at February 3, 2018	121,262		842	(1,433)		(63)		2,019		(279)		2,519
Restricted stock issued	89											—
Issued under director and stock plans	146		6									6
Share-based compensation expense			9									9
Shares of common stock used to satisfy tax withholding obligations				(32)		(1)						(1)
Share repurchases				(4,452)		(205)						(205)
Reissued - Employee Stock Purchase Plan				48		2						2
Net income								253				253
Cash dividends declared on common stock								(81)				(81)
Translation adjustment, net of tax										(58)		(58)
Change in cash flow hedges, net of tax										1		1
Pension and postretirement adjustments, net of tax										(4)		(4)
Cumulative effect of the adoption of ASU 2014-09								4				4
Cumulative effect of the adoption of ASU 2016-16								37				37
Balance at August 4, 2018	121,497	$	857	(5,869)	$	(267)	$	2,232	$	(340)	$	2,482

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FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)


	Twenty-six weeks ended
	August 3,		August 4,
	2019		2018
		($ in millions)
From operating activities:
Net income	$	232	$	253
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		90		89
Share-based compensation expense		13		9
Qualified pension plan contributions		(55)		(30)
Change in assets and liabilities:
Merchandise inventories		32		3
Accounts payable		37		155
Accrued and other liabilities		(40)		—
Pension litigation accrual		—		15
Class counsel fees paid in connection with pension litigation		—		(97)
Other, net		19		30
Net cash provided by operating activities		328		427

From investing activities:
Capital expenditures		(81)		(115)
Minority investments		(45)		—
Insurance proceeds related to loss on property and equipment		—		2
Net cash used in investing activities		(126)		(113)

From financing activities:
Purchase of treasury shares		(122)		(205)
Dividends paid on common stock		(84)		(81)
Issuance of common stock		4		—
Proceeds from exercise of stock options		—		4
Treasury stock reissued under employee stock plan		3		2
Shares of common stock repurchased to satisfy tax withholding obligations		(2)		(1)
Net cash used in financing activities		(201)		(281)

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash		(8)		(25)
Net change in cash, cash equivalents, and restricted cash		(7)		8
Cash, cash equivalents, and restricted cash at beginning of year		981		1,031
Cash, cash equivalents, and restricted cash at end of period	$	974	$	1,039

Cash paid during the year:
Interest	$	5	$	5
Income taxes	$	111	$	129

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FOOT LOCKER, INC.

NOTES TO THE 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 normal, recurring adjustments necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2020 and of the fiscal year ended February 2, 2019. 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 Foot Locker, Inc.’s (the “Company”) Form 10-K for the year ended February 2, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 2, 2019.

Other than the changes to the Leases policies as a result of the recently adopted accounting standards discussed below, there were no significant changes to the policies disclosed in Note 1, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the year ended February 2, 2019.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted improvements, which provides an optional transition method of applying the new lease standard. Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.

The Company adopted Topic 842 on February 3, 2019 (the “effective date”) using the optional transition method, which applies Topic 842 at the beginning of the period in which it is adopted. Prior period amounts have not been adjusted in connection with the adoption of this standard. The Company elected the package of practical expedients under the new standard, which permits companies to not reassess lease classification, lease identification, or initial direct costs for existing or expired leases prior to the effective date. We have lease agreements with non-lease components that relate to the lease components. The Company elected the practical expedient to account for non-lease components and the lease components to which they relate, as a single lease component for all classes of underlying assets. Also, the Company elected to keep short-term leases with an initial term of twelve months or less off the balance sheet.

Upon adoption of this new standard, the Company recorded right-of-use assets and lease obligations on the Condensed Consolidated Balance Sheet for our operating leases of $3,148 million and $3,422 million, respectively, as of February 3, 2019. As part of adopting the standard, previously recognized liabilities for deferred rent and lease incentives were reclassified as a component of the right-of-use assets. Additionally upon adoption, we evaluated right-to-use assets for impairment and determined that approximately $29 million of impairment was required related to newly recognized right-of-use assets that would have been impaired in previous periods. This impairment of the right-to-use asset as of February 3, 2019 was recorded, net of related income tax effects, as a $26 million reduction of beginning retained earnings. The standard did not significantly affect our Condensed Consolidated Statements of Operations, Comprehensive Income, or Cash Flows.

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

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FOOT LOCKER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Revenue

Store revenue is recognized at the point of sale and includes merchandise, net of returns, and excludes taxes. Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment date.

Total revenue recognized includes shipping and handling fees. We have determined that control of the promised good is passed to the customer upon shipment date since the customer has legal title, the rewards of ownership, and has paid for the merchandise as of the shipment date. Shipping and handling is accounted for as a fulfillment activity. The Company accrues the cost and recognized revenue for these activities upon shipment date.

Sales disaggregated based upon sales channel is presented below.


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales by Channel
Stores	$	1,521	$	1,542	$	3,279	$	3,285
Direct-to-customers		253		240		573		522
Total sales	$	1,774	$	1,782	$	3,852	$	3,807

Sales disaggregated based upon geographic area is presented in the below table. Sales are attributable to the geographic area in which the sales transaction is fulfilled.


	Thirteen weeks ended				Twenty-six weeks ended
	August 3,		August 4,		August 3,		August 4,
	2019		2018		2019		2018
	($ in millions)
Sales by Geography
United States	$	1,209	$	1,220	$	2,761	$	2,721
International		565		562		1,091		1,086
Total sales	$	1,774	$	1,782	$	3,852	$	3,807

Contract Liabilities

The Company sells gift cards which do not have expiration dates. Revenue from gift card sales is recorded when the gift cards are redeemed by customers. Breakage income is reported as part of sales. The table below presents the activity of our gift card liability balance:


		($ in millions)
Balance at February 3, 2019	$	35