FOOT LOCKER, INC.Large Accelerated 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Table of Contents

s

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 1, 2020

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 August 28, 2020: 104,391,265

Table of Contents

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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 (Loss) Income

3

Condensed Consolidated Statements of Changes in Shareholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 4.

Controls and Procedures

30

PART II

OTHER INFORMATION

31

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 6.

Exhibits

32

SIGNATURE

33

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “continues,” “feels,” “forecasts,” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” These statements include statements relating to trends in or expectations relating to the expected effects of our initiatives, strategies and plans, as well as trends in or expectations regarding our financial results and long-term growth model and drivers, tax rates, business opportunities and expansion, strategic acquisitions or investments, expenses, dividends, share repurchases, and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, investments, borrowing capacity and use of proceeds, repatriation of cash to the U.S., and the effects of the coronavirus pandemic (COVID-19) and recent social unrest on our financial results. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak to our views only as of the date of this filing. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties, many of which are unforeseeable and beyond our control, such as the ongoing uncertainty caused by the COVID-19 pandemic and social unrest. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.

Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and “Item 1A Risk Factors” included in this Form 10-Q. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this report or any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Graphic

CONDENSED CONSOLIDATED BALANCE SHEETS

August 1,

August 3,

February 1,

    

2020

    

2019

    

2020

    

(Unaudited)

(Unaudited)

*

 

 ($ in millions)

 

ASSETS

 

  

 

  

 

  

 

Current assets:

 

  

 

  

 

  

 

Cash and cash equivalents

$

1,373

$

939

$

907

Merchandise inventories

 

1,194

 

1,227

 

1,208

Other current assets

 

266

 

280

 

271

 

2,833

 

2,446

 

2,386

Property and equipment, net

 

782

 

796

 

824

Operating lease right-of-use assets

2,810

2,976

2,899

Deferred taxes

 

70

 

92

 

81

Goodwill

 

158

 

156

 

156

Other intangible assets, net

 

19

 

21

 

20

Other assets

 

240

 

233

 

223

$

6,912

$

6,720

$

6,589

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

 

  

Current liabilities:

 

  

 

  

 

  

Accounts payable

630

420

333

Accrued and other liabilities

 

455

 

312

 

343

Current portion of operating lease obligations

587

497

518

 

1,672

 

1,229

 

1,194

Long-term debt and obligations under finance leases

 

124

 

123

 

122

Long-term operating lease obligations

2,579

2,750

2,678

Other liabilities

 

134

 

106

 

122

Total liabilities

 

4,509

 

4,208

 

4,116

Shareholders’ equity

 

Common stock and paid-in capital: 104,391,691;

113,119,460; and 104,187,310 shares outstanding, respectively

774

825

764

Retained earnings

1,996

2,226

2,103

Accumulated other comprehensive loss

(367)

(384)

(394)

Less: Treasury stock at cost: 426; 3,578,395;

and -- shares, respectively

(155)

Total shareholders' equity

2,403

2,512

2,473

$

6,912

$

6,720

$

6,589

*

The balance sheet at February 1, 2020 has been derived from the previously reported audited consolidated 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 1, 2020.

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 1

Table of Contents

Graphic

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Thirteen weeks ended

Twenty-six weeks ended

August 1,

August 3,

August 1,

August 3,

    

2020

    

2019

    

2020

    

2019

    

 

(in millions, expect per share amounts)

 

Sales

$

2,077

$

1,774

$

3,253

$

3,852

Cost of sales

 

1,539

 

1,240

 

2,444

 

2,629

Selling, general and administrative expenses

 

387

 

393

 

703

 

809

Depreciation and amortization

 

44

 

46

 

88

 

90

Impairment and other charges

 

38

 

14

 

54

 

15

Income (loss) from operations

 

69

 

81

 

(36)

 

309

Interest (expense) income, net

 

(2)

 

2

 

(3)

 

6

Other income, net

 

3

 

2

 

4

 

4

Income (loss) before income taxes

 

70

 

85

 

(35)

 

319

Income tax expense

 

25

 

25

 

30

 

87

Net income (loss)

$

45

$

60

$

(65)

$

232

Basic earnings (loss) per share

$

0.43

$

0.55

$

(0.62)

$

2.09

Weighted-average shares outstanding

 

104.5

 

110.8

 

104.4

 

111.6

Diluted earnings (loss) per share

$

0.43

$

0.55

$

(0.62)

$

2.08

Weighted-average shares outstanding, assuming dilution

 

105.1

 

111.1

 

104.4

 

112.1

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 2

Table of Contents

Graphic

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

Thirteen weeks ended

Twenty-six weeks ended

August 1,

August 3,

August 1,

August 3,

    

2020

    

2019

    

2020

    

2019

    

 

($ in millions)

 

Net income (loss)

$

45

$

60

$

(65)

$

232

Other comprehensive income (loss), net of income tax

 

  

 

  

 

  

 

Foreign currency translation adjustment:

 

  

 

  

 

  

 

  

Translation adjustment arising during the period, net of income tax of $4, $-, $2, and $1, respectively

 

36

 

(6)

 

20

 

(21)

Cash flow hedges:

 

  

 

  

 

  

 

  

Change in fair value of derivatives, net of income tax benefit of $-, $-, $1, and $- respectively

 

 

5

 

3

 

3

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, $-, $2 and $-, respectively

 

1

 

1

 

4

4

Comprehensive income (loss)

$

82

$

60

$

(38)

$

218

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 3

Table of Contents

Graphic

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 2, 2020

 

104,245

$

767

 

(23)

$

$

1,951

$

(404)

$

2,314

Restricted stock issued

 

13

Issued under director and stock plans

 

134

3

3

Share-based compensation expense

 

4

4

Reissued ­- Employee Stock Purchase Plan ("ESPP")

 

23

Net income

 

45

45

Translation adjustment, net of tax

 

36

36

Pension and postretirement adjustments, net of tax

 

1

1

Balance at August 1, 2020

 

104,392

$

774

 

$

$

1,996

$

(367)

$

2,403

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 ­- ESPP

 

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

    

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 1, 2020

 

104,188

$

764

 

$

$

2,103

$

(394)

$

2,473

Restricted stock issued

 

67

Issued under director and stock plans

 

137

3

3

Share-based compensation expense

 

7

7

Shares of common stock used to satisfy tax withholding obligations

 

(23)

Reissued ­- ESPP

 

23

Net loss

 

(65)

(65)

Cash dividends declared on common stock ($0.40 per share)

 

(42)

(42)

Translation adjustment, net of tax

 

20

20

Change in cash flow hedges, net of tax

 

3

3

Pension and postretirement adjustments, net of tax

 

4

4

Balance at August 1, 2020

 

104,392

$

774

 

$

$

1,996

$

(367)

$

2,403

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 ­- ESPP

 

96

6

6

Net income

 

232

232

Cash dividends declared on common stock ($0.76 per share)

 

(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

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 4

Table of Contents

Graphic

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Twenty-six weeks ended

August 1,

August 3,

    

2020

    

2019

 

($ in millions)

From operating activities:

 

  

 

  

Net (loss) income

$

(65)

$

232

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

  

Non-cash impairment and other charges

 

31

 

Depreciation and amortization

 

88

 

90

Deferred income taxes

 

22

 

(10)

Share-based compensation expense

 

7

 

13

Qualified pension plan contributions

 

 

(55)

Change in assets and liabilities:

 

 

Merchandise inventories

 

12

 

32

Accounts payable

 

291

 

37

Accrued and other liabilities

 

142

 

(40)

Other, net

 

78

 

29

Net cash provided by operating activities

 

606

 

328

From investing activities:

 

  

 

  

Capital expenditures

 

(83)

 

(81)

Minority investments

 

(8)

 

(45)

Net cash used in investing activities

 

(91)

 

(126)

From financing activities:

 

 

  

Proceeds from the revolving credit facility

330

Repayment of the revolving credit facility

(330)

Payment of revolving credit agreement costs

(4)

Purchase of treasury shares

 

 

(122)

Dividends paid on common stock

 

(42)

 

(84)

Issuance of common stock

4

Treasury stock reissued under employee stock plan

 

 

3

Proceeds from common stock issued under employee stock plans

2

Shares of common stock repurchased to satisfy tax withholding obligations

 

 

(2)

Net cash used in financing activities

 

(44)

 

(201)

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

 

(3)

 

(8)

Net change in cash, cash equivalents, and restricted cash

 

468

 

(7)

Cash, cash equivalents, and restricted cash at beginning of year

 

942

 

981

Cash, cash equivalents, and restricted cash at end of period

$

1,410

$

974

Cash paid during the year:

 

  

 

  

Interest

$

7

$

5

Income taxes

$

11

$

111

Non-cash investing and financing activities:

Cash paid for amounts included in measurement of lease liabilities

$

279

$

338

Right-of-use assets obtained in exchange for operating lease obligations

$

135

$

114

Leases obtained in exchange for finance lease obligations

$

4

$

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Second Quarter 2020 Form 10-Q Page 5

Graphic

NOTES TO THE UNAUDITED 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 presented. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) the terms “Foot Locker,” “Company,” “we,” “our,” and “us” refer to Foot Locker, Inc. and its consolidated subsidiaries.

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the accompanying Unaudited Condensed Consolidated Financial Statements and these Notes and related disclosures. 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 results of operations for the periods ended August 1, 2020 are not necessarily indicative of the results to be expected for the full fiscal year due to the continued uncertainty of general economic conditions that may affect us for the remainder of 2020. Specifically, we are uncertain of the extent to which the coronavirus (“COVID-19”) pandemic will affect our sales, traffic to our stores, including our distribution capabilities and those of our suppliers.  

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 Form 10-K for the year ended February 1, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2020.

Other than the changes to the Goodwill 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 1, 2020.

Recent Accounting Pronouncements

On February 2, 2020, we adopted FASB guidance on the accounting for implementation costs of a cloud computing arrangement that is considered to be a service contract, that requires companies to follow the guidance for internal-use software to determine which costs to capitalize in a cloud computing arrangement that is a service contract. Under this guidance, such implementation costs will be capitalized in Other assets on the Condensed Consolidated Balance Sheet, with the related amortization presented in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations. This guidance was applied prospectively to implementation costs incurred after February 2, 2020. The adoption of this guidance did not have a significant effect on our condensed consolidated financial statements.

On February 2, 2020, we adopted FASB’s updated guidance on the accounting for performing goodwill impairment tests. This update eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. In testing goodwill for impairment, an entity may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Refer to our updated accounting policy in Note 6, Goodwill.  

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

Second Quarter 2020 Form 10-Q Page 6

Graphic

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Revenue

The following table presents sales disaggregated based upon sales channel.

Thirteen weeks ended

Twenty-six weeks ended

August 1,

August 3,

August 1,

August 3,

($ in millions)

    

2020

    

2019

    

2020

    

2019

Sales by Channel

Stores

$

1,388

$

1,521

$

2,202

$

3,279