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Table of Contents

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

OR

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

Graphic

(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 34th 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.

1

Table of Contents

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.

2

Table of Contents

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.

3

Table of Contents

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

4

Table of Contents

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.

5

Table of Contents

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.

6

Table of Contents

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

̴