Attached files
file | filename |
---|---|
EX-12 - FOOT LOCKER, INC. | v168382_ex12.htm |
EX-99 - FOOT LOCKER, INC. | v168382_ex99.htm |
EX-15 - FOOT LOCKER, INC. | v168382_ex15.htm |
EX-31.1 - FOOT LOCKER, INC. | v168382_ex31-1.htm |
EX-31.2 - FOOT LOCKER, INC. | v168382_ex31-2.htm |
EX-32.1 - FOOT LOCKER, INC. | v168382_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10 -Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended October 31, 2009
Commission
file no. 1-10299
FOOT
LOCKER, INC.
|
||
(Exact name of registrant as
specified in its charter)
|
||
New
York
|
13-3513936
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
112 W. 34th Street, New York, New
York
|
10120
|
|
(Address of principal executive
offices)
|
(Zip
Code)
|
Registrant’s
telephone number: (212) 720-3700
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x
No 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o
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 x
|
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 x
Number
of shares of Common Stock outstanding at November 27, 2009:
156,514,695
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 (Loss)
|
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
|
18
|
|||
Item
4.
|
Controls
and Procedures
|
25
|
|||
Part
II.
|
Other
Information
|
||||
Item
1.
|
Legal
Proceedings
|
26
|
|||
Item 1A.
|
Risk
Factors
|
26
|
|||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
|||
Item
6.
|
Exhibits
|
26
|
|||
Signature
|
27
|
||||
Index
to Exhibits
|
28
|
2
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares)
October
31,
|
November
1,
|
January
31,
|
||||||||||
2009
|
2008
|
2009
|
||||||||||
|
(Unaudited)
|
|
(Unaudited)
|
|
*
|
|||||||
ASSETS
|
||||||||||||
Current
assets
|
||||||||||||
Cash
and cash equivalents
|
$
|
425
|
$
|
328
|
$
|
385
|
||||||
Short-term
investments
|
13
|
72
|
23
|
|||||||||
Merchandise
inventories
|
1,228
|
1,262
|
1,120
|
|||||||||
Other
current assets
|
216
|
238
|
236
|
|||||||||
1,882
|
1,900
|
1,764
|
||||||||||
Property
and equipment, net
|
400
|
505
|
432
|
|||||||||
Deferred
taxes
|
376
|
232
|
358
|
|||||||||
Goodwill
|
146
|
264
|
144
|
|||||||||
Other
intangibles and other assets
|
159
|
128
|
179
|
|||||||||
$
|
2,963
|
$
|
3,029
|
$
|
2,877
|
|||||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||||||
Current
liabilities
|
||||||||||||
Accounts
payable
|
$
|
276
|
$
|
271
|
$
|
187
|
||||||
Accrued
expenses and other current liabilities
|
202
|
240
|
231
|
|||||||||
478
|
511
|
418
|
||||||||||
Long-term
debt
|
138
|
128
|
142
|
|||||||||
Other
liabilities
|
365
|
228
|
393
|
|||||||||
981
|
867
|
953
|
||||||||||
Shareholders’
equity
|
||||||||||||
Common
stock and paid-in capital: 161,224,691, 159,572,066 and 159,598,233
shares, respectively
|
706
|
689
|
691
|
|||||||||
Retained
earnings
|
1,536
|
1,729
|
1,581
|
|||||||||
Accumulated
other comprehensive loss
|
(157
|
)
|
(154
|
)
|
(246
|
)
|
||||||
Less:
Treasury stock at cost: 4,723,330, 4,663,992, and
4,680,533 shares,
respectively
|
(103
|
)
|
(102
|
)
|
(102
|
)
|
||||||
Total
shareholders’ equity
|
1,982
|
2,162
|
1,924
|
|||||||||
$
|
2,963
|
$
|
3,029
|
$
|
2,877
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
|
*
The balance sheet at January 31, 2009 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 January 31, 2009.
|
3
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales
|
$ | 1,214 | $ | 1,309 | $ | 3,529 | $ | 3,920 | ||||||||
Costs
and Expenses
|
||||||||||||||||
Cost of sales
|
885 | 954 | 2,564 | 2,838 | ||||||||||||
Selling, general and administrative expenses
|
274 | 287 | 804 | 885 | ||||||||||||
Depreciation and amortization
|
29 | 32 | 85 | 97 | ||||||||||||
Impairment charge and store closing program
costs
|
36 | 3 | 36 | 23 | ||||||||||||
Interest expense, net
|
3 | 1 | 8 | 4 | ||||||||||||
Other income, net
|
— | (5 | ) | (2 | ) | (7 | ) | |||||||||
1,227 | 1,272 | 3,495 | 3,840 | |||||||||||||
(Loss)
income from continuing operations before income taxes
|
(13 | ) | 37 | 34 | 80 | |||||||||||
Income
tax (benefit) expense
|
(7 | ) | 13 | 10 | 35 | |||||||||||
(Loss)
income from continuing operations
|
(6 | ) | 24 | 24 | 45 | |||||||||||
Income
from disposal of discontinued operations, net of tax
|
— | — | 1 | — | ||||||||||||
Net
(loss) income
|
$ | (6 | ) | $ | 24 | $ | 25 | $ | 45 | |||||||
Basic
(loss) earnings per share:
|
||||||||||||||||
(Loss)
income from continuing operations
|
(0.04 | ) | 0.16 | 0.16 | 0.29 | |||||||||||
Income
from disposal of discontinued operations
|
— | — | — | — | ||||||||||||
Net (loss) income
|
$ | (0.04 | ) | $ | 0.16 | $ | 0.16 | $ | 0.29 | |||||||
Weighted-average
common shares outstanding
|
156.4 | 154.1 | 155.9 | 154.0 | ||||||||||||
Diluted
(loss) earnings per share:
|
||||||||||||||||
(Loss)
income from continuing operations
|
(0.04 | ) | 0.16 | 0.16 | 0.29 | |||||||||||
Income
from disposal of discontinued operations
|
— | — | — | — | ||||||||||||
Net (loss) income
|
$ | (0.04 | ) | $ | 0.16 | $ | 0.16 | $ | 0.29 | |||||||
Weighted-average
common shares assuming dilution
|
156.4 | 155.6 | 156.1 | 155.3 |
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
4
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in
millions)
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|||||||||
Net
(loss) income
|
$
|
(6
|
)
|
$
|
24
|
$
|
25
|
$
|
45
|
|||||||
Other
comprehensive income (loss), net of tax
|
||||||||||||||||
Foreign
currency translation adjustments arising during the
period
|
28
|
(106
|
)
|
90
|
(89
|
)
|
||||||||||
Pension
and postretirement plan adjustments
|
1
|
—
|
3
|
—
|
||||||||||||
Change
in fair value of derivatives
|
1
|
—
|
(1
|
)
|
(1
|
)
|
||||||||||
Unrealized
gain (loss) on available-for-sale security
|
—
|
—
|
2
|
(2
|
)
|
|||||||||||
Comprehensive
income (loss)
|
$
|
24
|
$
|
(82
|
)
|
$
|
119
|
$
|
(47
|
)
|
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
|
||||||||
October
31,
|
November
1,
|
|||||||
2009
|
2008
|
|||||||
From
Operating Activities:
|
||||||||
Net income
|
$ | 25 | $ | 45 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Income from disposal of discontinued operations, net of
tax
|
(1 | ) | — | |||||
Non-cash impairment charges
|
36 | 18 | ||||||
Depreciation and
amortization
|
85 | 97 | ||||||
Share-based compensation
expense
|
9 | 6 | ||||||
Change in assets and liabilities:
|
||||||||
Merchandise
inventories
|
(69 | ) | (28 | ) | ||||
Accounts
payable
|
82 | 47 | ||||||
Other
accruals
|
(41 | ) | (4 | ) | ||||
Qualified pension plan
contributions
|
(40 | ) | (6 | ) | ||||
Gain on termination of
interest rate swaps
|
19 | — | ||||||
Other, net
|
35 | 35 | ||||||
Net cash provided by operating activities of continuing
operations
|
140 | 210 | ||||||
From
Investing Activities:
|
||||||||
Gain from lease termination
|
— | 3 | ||||||
Gain from insurance recoveries
|
1 | — | ||||||
Short-term investment redemptions
|
10 | — | ||||||
Reclassification of cash equivalents to short-term
investments
|
— | (75 | ) | |||||
Capital expenditures
|
(70 | ) | (116 | ) | ||||
Net cash used in investing activities of continuing
operations
|
(59 | ) | (188 | ) | ||||
From
Financing Activities:
|
||||||||
Reduction in long-term debt
|
(3 | ) | (94 | ) | ||||
Issuance of common stock, net
|
2 | 2 | ||||||
Dividends paid
|
(70 | ) | (70 | ) | ||||
Net cash used in financing activities of continuing
operations
|
(71 | ) | (162 | ) | ||||
Net
cash used in operating activities of Discontinued
Operations
|
(1 | ) | — | |||||
Effect of exchange rate
fluctuations on Cash and Cash Equivalents
|
31 | (20 | ) | |||||
Net
change in Cash and Cash Equivalents
|
40 | (160 | ) | |||||
Cash
and Cash Equivalents at beginning of year
|
385 | 488 | ||||||
Cash
and Cash Equivalents at end of interim period
|
$ | 425 | $ | 328 | ||||
Cash
paid during the period:
|
||||||||
Interest
|
$ | 6 | $ | 10 | ||||
Income taxes
|
$ | 13 | $ | 51 |
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 January 30, 2010 and of the fiscal year ended January
31, 2009. 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 January 31, 2009, as filed with the Securities and Exchange
Commission (the “SEC”) on March 30, 2009. Subsequent events have been evaluated
through December 9, 2009, the date of issuance of the Company’s Condensed
Consolidated Financial Statements. The Company has not evaluated subsequent
events after such date.
As
disclosed in the Company’s 2008 Annual Report on Form 10-K, the Condensed
Consolidated Balance Sheet for the quarter ended November 1, 2008 has been
corrected to reflect an immaterial revision related to income taxes. This
correction did not affect the Condensed Consolidated Statement of Operations for
the period ended November 1, 2008.
Recent
Accounting Pronouncements
In April
2009, the Financial Accounting Standards Board (“FASB”) amended the
authoritative guidance for fair value measurements to provide additional
guidance on (i) estimating fair value when the volume and level of activity for
an asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may indicate
that a transaction is not orderly. This guidance, which is effective for interim
and annual reporting periods ending after June 15, 2009, also requires
additional disclosures about fair value measurements in interim and annual
reporting periods. The adoption of this guidance did not have a material effect
on the Company’s consolidated financial statements.
In April
2009, the FASB issued authoritative guidance, which amends prior guidance and
requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies, as well as in annual financial
statements, and requires those disclosures in summarized financial information
at interim reporting periods. The guidance is effective for interim reporting
periods ending after June 15, 2009. The disclosures required as a result of the
adoption of this guidance are included herein.
In April
2009, the FASB issued authoritative guidance, which amends its
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This guidance does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
guidance is effective for interim and annual reporting periods ending after June
15, 2009. The adoption of this guidance did not have a material effect on the
Company’s consolidated financial statements.
In May
2009, the FASB issued authoritative guidance on subsequent events, which
establishes the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The guidance is effective for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the guidance during the second
quarter of 2009. See Note 1, Basis of Presentation, for
the disclosure required under the guidance.
In June
2009, the FASB issued authoritative guidance, which changes various aspects of
accounting for and disclosures of interests in variable interest entities. This
guidance will be effective for interim and annual reporting periods beginning
after November 15, 2009. The adoption of this guidance is not expected to have a
material effect on the Company’s consolidated financial
statements.
7
In July
of 2009, the Company adopted the FASB Accounting Standards Codification (“ASC”
and collectively, the “Codification”), which establishes the Codification as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with Generally Accepted Accounting Principles (“GAAP”). The
historical GAAP hierarchy was eliminated and the Codification became the only
level of authoritative GAAP, other than guidance issued by the SEC. The FASB
will not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standard
Updates (“ASUs”). ASUs will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on
change(s) in the Codification. The Codification is effective for all financial
statements issued for interim and annual periods ending after September 15,
2009. Accordingly, the Company has reflected all necessary changes in this
filing.
In August
2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair
Value, which provides clarification regarding acceptable valuation
techniques for determining the fair value measurement of liabilities in
circumstances in which a quoted price in an active market for the identical
liability is not available. ASU 2009-05 is effective for interim and annual
reporting periods ending after its issuance. The adoption of ASU
2009-05 did not have a material effect on the Company’s consolidated financial
statements.
2.
Impairment Charges and
Store Closing Program Costs
The
Company recognizes an impairment loss when circumstances indicate that the
carrying value of long-lived tangible and intangible assets with finite lives
may not be recoverable. Management’s policy in determining whether an impairment
indicator, or a triggering event, exists comprises measurable operating
performance criteria at the division level as well as qualitative measures. If
an analysis is necessitated by the occurrence of a triggering event, the Company
uses assumptions, which are predominately identified from the Company’s
three-year strategic plans, in determining the impairment amount. In the
calculation of the fair value of long-lived assets, the Company compares the
carrying amount of the asset with the estimated future cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
the estimated expected undiscounted future cash flows, the Company measures the
amount of the impairment by comparing the carrying amount of the asset with its
estimated fair value. The estimation of fair value is measured by discounting
expected future cash flows at the Company’s weighted-average cost of capital.
During the third quarter of 2009, the Company recorded non-cash impairment
charges totaling $36 million. A charge of $32 million was recorded to
write-down long-lived assets such as store fixtures and leasehold improvements
at its Lady Foot
Locker, Kids Foot Locker, Footaction and Champs Sports divisions for 787 stores.
Additionally, the Company recorded a charge of $4 million to write off certain
software development costs for the Direct-to-Customers segment as a result of
management’s decision to terminate this project.
Included
in the thirteen weeks ended November 1, 2008 is a $3 million impairment charge
to reflect a decline in fair value that is other-than-temporary related to the
Company’s investment in the Reserve International Liquidity
Fund. Additionally, included in the thirty-nine weeks ended November
1, 2008 is a non-cash impairment charge of $15 million related to the Northern
Group note that was determined not to be collectible as well as $5 million in
store closing costs, primarily representing lease termination
costs.
3.
Goodwill and Other
Intangible Assets
The
Company reviews goodwill and intangible assets with indefinite lives for
impairment annually during the first quarter of its fiscal year or more
frequently if impairment indicators arise. The Company’s annual review of
goodwill and assets with indefinite lives during the first quarters of 2009 and
2008, did not result in any impairment charges. The following table provides a
summary of the Company’s goodwill by reportable segment:
October
31,
|
November
1,
|
January
31,
|
|||||||||||
Goodwill
(in millions)
|
2009
|
2008
|
2009
|
||||||||||
Athletic
Stores
|
$
|
19 |
$
|
184 |
$
|
17 | |||||||
Direct-to-Customers
|
127 | 80 | 127 | ||||||||||
$
|
146 |
$
|
264 |
$
|
144 |
The
change in goodwill from the amount reported at November 1, 2008 primarily
reflects the acquisition of CCS during the fourth quarter of 2008, which
increased goodwill by $47 million, and the fourth quarter 2008 impairment charge
of $167 million related to the Athletic Stores.
8
The
components of the Company’s finite-lived intangible assets and intangible assets
not subject to amortization are as follows:
October
31, 2009
|
November
1, 2008
|
January
31, 2009
|
|||||||||||||||||||||||||||||||||
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
Gross
|
Accum.
|
Net
|
|||||||||||||||||||||||||||
(in
millions)
|
Value
|
amort.
|
value
|
value
|
amort.
|
value
|
value
|
amort.
|
value
|
||||||||||||||||||||||||||
Finite
life intangible assets:
|
|||||||||||||||||||||||||||||||||||
Lease
acquisition costs
|
$
|
193
|
$
|
(147
|
)
|
$
|
46
|
$
|
171
|
$
|
(119
|
)
|
$
|
52
|
$
|
173
|
$
|
(124
|
)
|
$
|
49
|
||||||||||||||
Trademark
|
20
|
(6
|
)
|
14
|
21
|
(5
|
)
|
16
|
20
|
(5
|
)
|
15
|
|||||||||||||||||||||||
Loyalty
program
|
1
|
(1
|
)
|
—
|
1
|
(1
|
)
|
—
|
1
|
(1
|
)
|
—
|
|||||||||||||||||||||||
Favorable
leases
|
10
|
(8
|
)
|
2
|
9
|
(7
|
)
|
2
|
9
|
(7
|
)
|
2
|
|||||||||||||||||||||||
CCS
customer relationships
|
21
|
(4
|
)
|
17
|
—
|
—
|
—
|
21
|
(1
|
)
|
20
|
||||||||||||||||||||||||
Total
finite life intangible assets
|
245
|
(166
|
)
|
79
|
202
|
(132
|
)
|
70
|
224
|
(138
|
)
|
86
|
|||||||||||||||||||||||
Intangible
assets not subject to amortization:
|
|||||||||||||||||||||||||||||||||||
Republic
of Ireland trademark
|
2
|
—
|
2
|
3
|
—
|
3
|
2
|
—
|
2
|
||||||||||||||||||||||||||
CCS
trade-name
|
25
|
—
|
25
|
—
|
—
|
—
|
25
|
—
|
25
|
||||||||||||||||||||||||||
Total
indefinite life intangible assets
|
27
|
—
|
27
|
3
|
—
|
3
|
27
|
—
|
27
|
||||||||||||||||||||||||||
Total
other intangible assets
|
$
|
272
|
$
|
(166
|
)
|
$
|
106
|
$
|
205
|
$
|
(132
|
)
|
$
|
73
|
$
|
251
|
$
|
(138
|
)
|
$
|
113
|
The
weighted-average amortization period as of October 31, 2009 was approximately
11.9 years. Amortization expense was $5 million and $3 million for the thirteen
week periods ended October 31, 2009 and November 1, 2008, respectively.
Amortization expense was $15 million and $13 million for the thirty-nine week
periods ended October 31, 2009 and November 1, 2008, respectively. Additionally,
the net intangible activity for the thirty-nine week period ended October 31,
2009 reflects the effect of the strengthening of the euro as compared with the
U.S. dollar of $6 million and $2 million of lease acquisition costs. Estimated
amortization expense for finite life intangible assets is expected to
approximate $5 million for the remainder of 2009, $19 million for 2010, $16
million for 2011, $14 million for 2012 and $9 million for 2013.
4.
Revolving Credit
Facility
On March
20, 2009, the Company entered into a new credit agreement (the “2009 Credit
Agreement”) with its banks, providing for a $200 million asset-based revolving
credit facility maturing on March 20, 2013, which replaced the Company’s prior
credit agreement. The 2009 Credit Agreement also provides for an
incremental facility of up to $100 million under certain
circumstances. The 2009 Credit Agreement provides for a security
interest in certain of the Company’s domestic assets, including certain
inventory assets. The Company is not required to comply with any financial
covenants as long as there are no outstanding borrowings. If the
Company is borrowing, then it may not make Restricted Payments, such as
dividends or share repurchases, unless there is at least $50 million of Excess
Availability (as defined in the Credit Agreement), and the Company’s projected
fixed charge coverage ratio (Consolidated EBITDA less capital expenditures less
cash taxes divided by Debt Service Charges and Restricted Payments) is at least
1.1 to 1.0. The Company’s management does not currently expect to
borrow under the facility for the balance of 2009 or in 2010.
9
5.
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 to derivative contracts will fail to meet their contractual
obligations. To mitigate the 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 11, Fair
Value Measurements.
Derivatives
designated as hedging instruments
Cash Flow
Hedges
The
primary currencies to which the Company is exposed are the euro, the British
pound, the Canadian dollar, and the Australian dollar. For option and forward
foreign exchange 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 and is recognized as a component of cost
of sales when the related inventory is sold. When using a forward contract as a
hedging instrument, the Company excludes the time value from the assessment of
effectiveness. Generally, the Company does not hedge forecasted transactions for
more than the next twelve months, and the Company expects all derivative-related
amounts reported in accumulated other comprehensive loss to be reclassified to
earnings within twelve months.
The
amount reclassified to cost of sales related to such contracts and the
ineffective portion of gains and losses related to cash flow hedges recorded was
not significant for any of the periods presented. Net changes in the fair value
of foreign exchange derivative financial instruments designated as cash flow
hedges of the purchase of inventory was $1 million and $2 million for the
thirteen and thirty-nine weeks ended October 31, 2009, respectively. The change
for the thirteen weeks ended November 1, 2008 was not significant and was $2
million for the thirty-nine weeks ended November 1, 2008.
Net Investment
Hedges
The
Company has numerous investments in foreign subsidiaries, and the net assets of
those subsidiaries are exposed to foreign exchange-rate volatility. In 2005, the
Company hedged a portion of its net investment in its European subsidiaries by
entering into a 10-year cross currency swap, effectively creating a €100 million
long-term liability and a $122 million long-term asset. During the third quarter
of 2008, the Company terminated this hedge by amending its existing cross
currency swap and entering simultaneously into a new cross currency swap,
thereby fixing the amount owed to the counterparty in 2015 at $24 million. In
2006, the Company hedged a portion of its net investment in its Canadian
subsidiaries. The Company entered into a 10-year cross currency swap,
effectively creating a CAD $40 million liability and a $35 million long-term
asset. During the fourth quarter of 2008, the Company terminated this hedge and
received approximately $3 million.
The
Company had designated these hedging instruments as hedges of the net
investments in foreign subsidiaries, and used the spot rate method of accounting
to value changes of the hedging instruments attributable to currency rate
fluctuations. As such, adjustments in the fair market value of the hedging
instruments due to changes in the spot rate were recorded in other comprehensive
income and offset changes in the net investment. Amounts recorded to foreign
currency translation within accumulated other comprehensive loss will remain
there until the disposal of the net investment.
The
amount recorded within the foreign currency translation adjustment included in
accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet
decreased shareholders’ equity by $15 million, net of tax, at October 31, 2009
and $14 million, net of tax, at November 1, 2008. The effect on the Condensed
Consolidated Statements of Operations, recorded as part of interest expense,
related to the net investments hedges was not significant for the thirteen and
thirty-nine weeks ended October 31, 2009, and was $1 million and $3 million of
expense, respectively, for the thirteen and thirty-nine weeks ended November 1,
2008.
10
Fair Value
Hedges
The
Company has employed various interest rate swaps to minimize its exposure to
interest rate fluctuations. These swaps were designated as a fair value hedge of
the changes in fair value of $100 million of the Company’s 8.50 percent
debentures payable in 2022 attributable to changes in interest rates. The swaps
effectively converted the interest rate on the debentures from 8.50 percent to a
1-month variable rate of LIBOR plus 3.45 percent. During the first
quarter of 2009, the Company terminated these interest rate swaps for a gain of
$19 million. This gain is amortized as part of interest expense over
the remaining term of the debt, using the effective-yield method. The
effect on the Condensed Consolidated Statements of Operations, recorded as part
of interest expense, related to the interest rate swaps was not significant for
the thirteen weeks ended October 31, 2009, and was income of $1 million for the
thirteen weeks ended November 1, 2008. The effect on interest expense
related to the interest rate swaps was income of $1 million and $2 million for
the thirty-nine weeks ended October 31, 2009 and November 1, 2008,
respectively.
Derivatives
not designated as hedging instruments
The
Company mitigates the effect of fluctuating foreign exchange rates on the
reporting of foreign currency denominated earnings by entering into a variety of
derivative instruments, including option currency contracts. Changes in the fair
value of these foreign currency option contracts are recorded in earnings
immediately within other income. Mark-to-market, realized gains and premiums
paid were not significant for the thirteen and thirty-nine weeks ended October
31, 2009. For the thirteen and thirty-nine weeks ended November 1,
2008 changes in fair value, realized gains and premiums paid were $5 million and
$4 million, respectively.
The
Company also enters into forward foreign exchange contracts to hedge
foreign-currency denominated merchandise purchases and intercompany
transactions. Net changes in the fair value of foreign exchange derivative
financial instruments designated as non-hedges, recorded in selling, general and
administrative expenses were substantially offset by the changes in value of the
underlying transactions. The amounts recorded for the periods presented were not
significant.
The
Company enters into monthly 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. The notional value of
the contracts outstanding as of October 31, 2009 was $5 million and these
contracts extend through November 2010. Changes in the fair value of these
contracts are recorded in selling, general and administrative expenses
immediately. The amounts recorded for the periods presented were not
significant.
As
discussed above, the Company terminated its European net investment hedge during
the third quarter of 2008. During the remaining term of the agreement, the
Company will remit to its counterparty interest payments based on one-month U.S.
LIBOR rates on the $24 million liability. The agreement includes a
provision that may require the Company to settle this transaction in August
2010, at the option of the Company or the counterparty.
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:
October
31, 2009
|
November
1, 2008
|
||||||||||
(in millions)
|
Balance Sheet
|
Fair Value
|
Balance Sheet
|
Fair Value
|
|||||||
Hedging
Instruments:
|
|||||||||||
Forward
contracts
|
Current
assets
|
$
|
1
|
Current
assets
|
$
|
—
|
|||||
Interest
rate swaps
|
Non
current assets
|
—
|
Non
current assets
|
5
|
|||||||
Canadian
cross currency swap
|
Non
current asset
|
—
|
Non
current asset
|
1
|
|||||||
Total
|
$
|
1
|
$
|
6
|
|||||||
Non
Hedging Instruments:
|
|||||||||||
Forward
contracts
|
Current
assets
|
$
|
1
|
Current
assets
|
$
|
7
|
|||||
European
cross currency swap
|
Non
current liability
|
(24
|
)
|
Non
current liability
|
(24
|
)
|
|||||
Fuel
forwards & options
|
Non
current liability
|
—
|
Non
current liability
|
(1
|
)
|
||||||
Total
|
$
|
(23
|
)
|
$
|
(18
|
)
|
11
Fair
Value of Financial Instruments
The
carrying value and estimated fair value of long-term debt was $138 million and
$128 million, respectively, at October 31, 2009 and $142 million and $120
million, respectively, at January 31, 2009. The carrying values of cash and cash
equivalents, short-term investments and other current receivables and payables
approximate their fair value.
6.
Accumulated Other
Comprehensive Loss
Accumulated
other comprehensive loss comprised the following:
October
31,
|
November
1,
|
January
31,
|
||||||||||
(in
millions)
|
|
2009
|
|
2008
|
|
2009
|
||||||
Foreign
currency translation adjustments
|
$
|
100
|
$
|
4
|
$
|
10
|
||||||
Cash
flow hedges
|
1
|
—
|
2
|
|||||||||
Unrecognized
pension cost and postretirement benefit
|
(255
|
)
|
(154
|
)
|
(253
|
)
|
||||||
Unrealized
loss on available-for-sale security
|
(3
|
)
|
(4
|
)
|
(5
|
)
|
||||||
$
|
(157
|
)
|
$
|
(154
|
)
|
$
|
(246
|
)
|
7.
Earnings Per
Share
The
Company’s basic earnings per share is computed by dividing the Company’s
reported net income (loss) 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, such as stock options and
awards. The Company’s basic and diluted weighted-average number of common shares
outstanding as of October 31, 2009 and November 1, 2008, were as
follows:
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
(in
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Weighted-average
common shares outstanding
|
156.4 | 154.1 | 155.9 | 154.0 | ||||||||||||
Effect of
Dilution:
|
— | |||||||||||||||
Stock
options and awards
|
— | 1.5 | 0.2 | 1.3 | ||||||||||||
Weighted-average
common shares assuming dilution
|
156.4 | 155.6 | 156.1 | 155.3 |
Options
to purchase 6.6 million and 3.8 million shares of common stock were not included
in the computation for the thirteen weeks ended October 31, 2009 and November 1,
2008, respectively. Options to purchase 6.3 million and 4.0 million shares of
common stock were not included in the computation for the thirty-nine weeks
ended October 31, 2009 and November 1, 2008, 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 be antidilutive. Stock options and awards totaling 0.3 million shares were
not included in the computation of earnings per share for the thirteen weeks
ended October 31, 2009 as the effect would have been antidilutive due to a loss
from continuing operations being reported for the period.
12
8.
Segment
Information
The
Company has determined that its reportable segments are those that are based on
its method of internal reporting. As of October 31, 2009, 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 and thirty-nine
weeks ended October 31, 2009 and November 1, 2008 are presented below. Division
profit reflects (loss) income from continuing operations before income taxes,
corporate expense, non-operating income and net interest expense.
Sales
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
(in
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Athletic
Stores
|
$ | 1,111 | $ | 1,216 | $ | 3,247 | $ | 3,656 | ||||||||
Direct-to-Customers
|
103 | 93 | 282 | 264 | ||||||||||||
Total
sales
|
$ | 1,214 | $ | 1,309 | $ | 3,529 | $ | 3,920 |
Operating
Results
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
(in
millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
||||||||
Athletic
Stores (1)
|
$
|
1
|
$
|
42
|
$
|
67
|
$
|
121
|
||||||||
Direct-to-Customers
(2)
|
4
|
8
|
17
|
26
|
||||||||||||
Restructuring
reserve adjustment
|
1
|
—
|
1
|
—
|
||||||||||||
Division
profit
|
6
|
50
|
85
|
147
|
||||||||||||
Corporate
expense, net (3)
|
16
|
17
|
45
|
70
|
||||||||||||
Operating
(loss) profit
|
(10
|
)
|
33
|
40
|
77
|
|||||||||||
Other
income (4)
|
—
|
(5
|
)
|
(2
|
)
|
(7
|
)
|
|||||||||
Interest
expense, net
|
3
|
1
|
8
|
4
|
||||||||||||
(Loss)
income from continuing operations before income taxes
|
$
|
(13
|
)
|
$
|
37
|
$
|
34
|
$
|
80
|
(1)
|
Included
in the results for the thirteen and thirty-nine weeks ended October 31,
2009 are non-cash impairment charges totaling $32 million,
which were recorded to write-down long-lived assets such as
store fixtures and leasehold improvements at the Company’s Lady Foot
Locker, Kids Foot Locker, Footaction, and Champs Sports divisions.
Additionally, included in the results for the thirty-nine weeks ended
November 1, 2008 are store closing costs of $5 million, which primarily
represent lease termination costs.
|
(2)
|
Included
in the results for the thirteen and thirty-nine weeks ended October 31,
2009 is a non-cash impairment charge of $4 million to write off software
costs.
|
(3)
|
Included
in corporate expense for the thirteen-weeks ended November 1, 2008 is a $3
million other-than-temporary impairment charge related to the investment
in the Reserve International Liquidity Fund. Additionally, included in the
thirty-nine weeks ended November 1, 2008 is a $15 million impairment
charge on the Northern Group note
receivable.
|
(4)
|
Included
in other income for the thirty-nine weeks ended October 31, 2009 are gains
from insurance proceeds, gain on the purchase and retirement of bonds, and
royalty income. Included in the thirteen weeks ended November 1, 2008 are
changes in fair value, realized gains and premiums paid on foreign
currency option contracts. Additionally, included in the prior
year-to-date period was a $2 million lease termination gain related to the
sale of a leasehold interest in
Europe.
|
13
9.
Pension and
Postretirement Plans
The
Company has defined benefit pension plans covering most 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:
Pension
Benefits
|
Postretirement
Benefits
|
|||||||||||||||||||||||||||||||
Thirteen
weeks
|
Thirty-nine
weeks
|
Thirteen
weeks
|
Thirty-nine
weeks
|
|||||||||||||||||||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||||||||||||||||||
Oct.
31,
|
Nov.
1,
|
Oct.
31,
|
Nov.
1,
|
Oct.
31,
|
Nov.
1,
|
Oct.
31,
|
Nov.
1,
|
|||||||||||||||||||||||||
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|||||||||||||||||
Service
cost
|
$
|
3
|
$
|
3
|
$
|
9
|
$
|
8
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||||||
Interest
cost
|
9
|
9
|
27
|
27
|
—
|
1
|
—
|
1
|
||||||||||||||||||||||||
Expected
return on plan assets
|
(11
|
)
|
(13
|
)
|
(32
|
)
|
(40
|
)
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
Amortization
of unrecognized prior service cost
|
1
|
1
|
1
|
1
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Amortization
of net loss (gain)
|
3
|
2
|
9
|
8
|
(2
|
)
|
(2
|
)
|
(5
|
)
|
(6
|
)
|
||||||||||||||||||||
Net
benefit expense (income)
|
$
|
5
|
$
|
2
|
$
|
14
|
$
|
4
|
$
|
(2
|
)
|
$
|
(1
|
)
|
$
|
(5
|
)
|
$
|
(5
|
)
|
During
the thirty-nine weeks ended October 31, 2009 the Company made contributions of
$37 million and $3 million to its U.S. and Canadian plans,
respectively. No further pension contributions are required in 2009;
however the Company may make additional contributions to its U.S. plan depending
on the pension fund’s asset performance and other factors.
10.
Share-Based
Compensation
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.
Compensation expense related to the
Company’s stock option and stock purchase plans was $1.0 million and $0.7
million for the thirteen weeks ended October 31, 2009 and November 1, 2008,
respectively, and was $2.7 million and $2.8 million for the thirty-nine weeks
ended October 31, 2009 and November 1, 2008, respectively. The following table
shows the Company’s assumptions used to compute the share-based compensation
expense:
Stock
Option Plans
|
Stock
Purchase Plan
|
||||||||||||||||||
Thirty-nine
weeks ended
|
Thirty-nine
weeks ended
|
||||||||||||||||||
October
31,
2009
|
November
1,
2008
|
October
31,
2009
|
November
1,
2008
|
||||||||||||||||
Weighted-average
risk free rate of interest
|
1.93 | % | 2.43 | % | 1.81 | % | 4.41 | % | |||||||||||
Expected
volatility
|
53 | % | 37 | % | 39 | % | 25 | % | |||||||||||
Weighted-average
expected award life
|
4.6
years
|
4.6
years
|
1.0
years
|
1.0
years
|
|||||||||||||||
Dividend
yield
|
6.0 | % | 5.1 | % | 4.3 | % | 2.6 | % | |||||||||||
Weighted-average
fair value
|
$
|
2.89 |
$
|
2.50 |
$
|
4.42 |
$
|
8.36 |
14
The
information set forth in the following table covers options granted under the
Company’s stock option plans for the thirty-nine weeks ended October 31,
2009:
(in
thousands, except price per share)
|
Shares
|
Weighted-
Average
Term
|
Weighted-
Average
Exercise
Price
|
|||||||||
Options outstanding at the beginning of the year
|
6,080 | $ | 18.64 | |||||||||
Granted
|
1,518 | 10.02 | ||||||||||
Exercised
|
(138 | ) | 8.95 | |||||||||
Expired or cancelled
|
(371 | ) | 21.14 | |||||||||
Options outstanding at October 31, 2009
|
7,089 | 5.67 | $ | 16.85 | ||||||||
Options
exercisable at October 31, 2009
|
4,957 | 4.18 | $ | 19.11 | ||||||||
Options
available for future grant at October 31, 2009
|
2,207 |
The total
intrinsic value of options exercised (the difference between the market price of
the Company’s common stock on the exercise date and the price paid by the
optionee to exercise the option) during the thirteen and thirty-nine weeks ended
October 31, 2009 and November 1, 2008 was not significant. The aggregate
intrinsic value for stock options outstanding and exercisable (the difference
between the Company’s closing stock price on the last trading day of the period
and the exercise price of the options, multiplied by the number of in-the-money
stock options) as of October 31, 2009 was $0.9 million and $0.2 million,
respectively. The aggregate intrinsic value for stock options outstanding and
exercisable as of November 1, 2008 was $7.4 million and $5.7 million,
respectively.
The cash
received from option exercises for the thirteen and thirty-nine weeks ended
October 31, 2009 was $1.1 million and $1.2 million, respectively. The cash
received from option exercises for the thirteen weeks ended November 1, 2008 was
not significant and cash received for the thirty-nine weeks ended November 1,
2008 was $0.7 million. The tax benefit realized from option exercises for the
thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 was
not significant.
The
following table summarizes information about stock options outstanding and
exercisable at October 31, 2009:
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)
|
||||||||||||||||||||||||||
$ | 7.19 | $ | 10.10 | 1,521 | 9.32 |
$
|
9.95 | 46 |
$
|
8.25 | ||||||||||||||||
$ | 10.22 | $ | 11.91 | 1,700 | 4.32 |
$
|
11.29 | 1,304 |
$
|
11.22 | ||||||||||||||||
$ | 12.30 | $ | 23.42 | 1,880 | 4.43 |
$
|
18.09 | 1,620 |
$
|
17.65 | ||||||||||||||||
$ | 23.59 | $ | 27.01 | 1,498 | 5.25 |
$
|
24.95 | 1,497 |
$
|
24.95 | ||||||||||||||||
$ | 27.10 | $ | 28.50 | 490 | 5.09 |
$
|
28.08 | 490 |
$
|
28.08 | ||||||||||||||||
$ | 7.19 | $ | 28.50 | 7,089 | 5.67 |
$
|
16.85 | 4,957 |
$
|
19.11 |
15
Changes
in the Company’s nonvested options for the thirty-nine weeks ended October 31,
2009 are summarized as follows:
(in thousands, except price per share)
|
Number
of
shares
|
Weighted-
average
grant
date
fair value
per
share
|
||||||
Nonvested
at January 31, 2009
|
1,268 | $ | 17.71 | |||||
Granted
|
1,518 | 10.02 | ||||||
Vested
|
(283 | ) | 17.88 | |||||
Expired
or Cancelled
|
(371 | ) | 21.14 | |||||
Nonvested
at October 31, 2009
|
2,132 | $ | 11.61 |
As of
October 31, 2009, there was $3.0 million of total unrecognized compensation
cost, related to nonvested stock options, which is expected to be recognized
over a weighted-average period of 1.06 years.
Restricted
Stock and Units
Restricted
shares of the Company’s common stock may be awarded to certain officers and key
employees of the Company. For executives outside of the United States the
Company issues restricted stock units. The Company also issues restricted stock
units to its non-employee directors. Each restricted stock unit represents the
right to receive one share of the Company’s common stock provided that the
vesting conditions are satisfied. As of October 31, 2009, 227,452 restricted
stock units were outstanding. Compensation expense is recognized using the fair
market value at the date of grant and is amortized over the vesting period,
provided the recipient continues to be employed by the Company. These awards
fully vest after the passage of time, generally three years. Restricted stock is
considered outstanding at the time of grant, as the holders of restricted stock
are entitled to receive dividends and have voting rights.
Restricted
shares and units activity for the thirty-nine weeks ended October 31, 2009 and
November 1, 2008 is summarized as follows:
Number of Shares and Units
|
||||||||
(in thousands)
|
October
31, 2009
|
November
1, 2008
|
||||||
Outstanding
at beginning of period
|
844
|
810
|
||||||
Granted
|
1,115
|
233
|
||||||
Vested
|
(69
|
)
|
(79
|
)
|
||||
Cancelled
or forfeited
|
—
|
(90
|
)
|
|||||
Outstanding
at end of period
|
1,890
|
874
|
||||||
Aggregate
value (in millions)
|
$
|
26.1
|
$
|
17.5
|
||||
Weighted-average
remaining contractual life
|
1.58
years
|
1.49
years
|
The
weighted-average grant-date fair value per share was $9.90 and $11.86 for the
thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. The
total value of awards for which restrictions lapsed during the thirty-nine weeks
ended October 31, 2009 and November 1, 2008 was $1.7 million and $2.1 million,
respectively. As of October 31, 2009, there was $10.6 million of total
unrecognized compensation cost related to nonvested restricted awards. The
Company recorded compensation expense related to restricted stock awards, net of
forfeitures, of $6.3 million and $3.4 million in the thirty-nine weeks ended
October 31, 2009 and November 1, 2008, respectively.
16
11.
Fair Value
Measurements
The
Company categorizes its financial instruments into a three-level fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure fair value fall within different levels of the hierarchy,
the category level is based on the lowest priority level input that is
significant to the fair value measurement of the instrument. Fair value is
determined based upon the exit price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants exclusive of any transaction costs.
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.
|
The
following table provides a summary of the recognized assets and liabilities that
are measured at fair value on a recurring basis at October 31,
2009:
(in
millions)
|
Level
1
|
Level
2
|
Level
3
|
|||||||
Assets
|
||||||||||
Short-term
investment
|
$
|
—
|
$
|
—
|
$
|
13
|
||||
Auction
rate security
|
—
|
4
|
—
|
|||||||
Forward
foreign exchange contracts
|
—
|
2
|
—
|
|||||||
Total
Assets
|
$
|
—
|
$
|
6
|
$
|
13
|
||||
Liabilities
|
||||||||||
European
cross currency swap
|
—
|
24
|
—
|
|||||||
Total
Liabilities
|
$
|
—
|
$
|
24
|
$
|
—
|
The
Company’s auction rate security is classified as available-for-sale and,
accordingly, is reported at fair value. The fair value of the security is
determined by review of the underlying security at each reporting period. The
change in the fair value of the auction rate security for the thirty-nine weeks
ended October 31, 2009 represented an unrealized gain of $2 million. 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.
The
Company’s Level 3 assets represent the Company’s investment in the Reserve
International Liquidity Fund, Ltd. (the “Fund”), a money market fund classified
in short-term investments. The Company assesses the fair value of its investment
in the Fund, which includes an impairment evaluation, on a quarterly basis,
through a review of the underlying securities within the Fund. During the third
quarter of 2008, the Company recorded an impairment charge of $3 million,
incorporating the valuation at zero for debt securities of Lehman Brothers.
Changes in market conditions and the method and timing of the liquidation
process of the Fund could result in further adjustments to the fair value and
classification of this investment in future periods.
17
The
following table is a reconciliation of financial assets and liabilities measured
at fair value on a recurring basis classified as Level 3, for the thirty-nine
weeks ended October 31, 2009:
(in
millions)
|
Level
3
|
|||
Balance
at January 31, 2009
|
$
|
23
|
||
Redemptions
received
|
(10
|
)
|
||
Balance
at October 31, 2009
|
$
|
13
|
The
following table provides a summary of the Company’s recognized assets that are
measured at fair value on a non-recurring basis for the thirty-nine weeks ended
October 31, 2009:
(in
millions)
|
Level
1
|
Level
2
|
Level
3
|
|||||||||
Assets
|
||||||||||||
Long-lived
assets held and used
|
$ | — | $ | — | $ | 71 |
During
the third quarter of 2009, long-lived assets held and used with a carrying
amount of $107 million were written down to their fair value of $71 million,
resulting in an impairment charge of $36 million, which was included in earnings
for the period. See Note 2, Impairment Charges and Store Closing Program Costs,
for further discussion and the additional disclosures required for assets
measured at fair value on a non-recurring basis.
As the
Company did not elect the fair value option for any non-financial assets or
non-financial liabilities, the Company does not have any non-financial assets or
liabilities that require measurement at fair value.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
BUSINESS
OVERVIEW
Foot
Locker, Inc., through its subsidiaries, operates in two reportable segments –
Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of
the largest athletic footwear and apparel retailers in the world, whose formats
include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and
Footaction. The Direct-to-Customers segment reflects Footlocker.com, Inc., which
sells athletic footwear, apparel, and equipment, through its affiliates,
including Eastbay, Inc., and CCS, which sells skateboard and snowboard
equipment, apparel, footwear, and accessories. The
Direct-to-Customers segment sells to customers through catalogs and Internet
websites.
STORE
COUNT
At
October 31, 2009, the Company operated 3,601 stores as compared with 3,641 and
3,714 stores at January 31, 2009 and November 1, 2008, respectively. During the
thirty-nine weeks ended October 31, 2009, the Company opened 33 stores,
remodeled or relocated 130 stores and closed 73 stores.
A total
of 21 franchised stores were operational at October 31, 2009 as compared with 16
stores at November 1, 2008. Revenue from the franchised stores was not
significant for the thirteen and thirty-nine weeks ended October 31, 2009 or
November 1, 2008. These stores are not included in the Company’s operating store
count above.
18
SALES AND OPERATING
RESULTS
All
references to comparable-store sales for a given period relate to sales of
stores that are open at the period-end and that have been open for more than one
year. Accordingly, stores opened and closed during the period are not included.
Sales from the Direct-to-Customers segment, excluding CCS sales, are included in
the calculation of comparable-store sales for all periods presented. Sales from
acquired businesses that include the purchase of inventory are included in the
computation of comparable-store sales after 15 months of operations.
Accordingly, CCS sales have been excluded in the computation of comparable-store
sales. Division profit reflects (loss) income from continuing operations before
income taxes, corporate expense, non-operating income and net interest
expense.
The
following table summarizes results by segment:
Sales
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
||||||||||
(in
millions)
|
2009
|
2008
|
2009
|
2008
|
|||||||||
Athletic
Stores
|
$ | 1,111 | $ | 1,216 | $ | 3,247 | $ | 3,656 | |||||
Direct-to-Customers
|
103 | 93 | 282 | 264 | |||||||||
Total
sales
|
$ | 1,214 | $ | 1,309 | $ | 3,529 | $ | 3,920 |
Operating
Results
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
(in
millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
||||||||
Athletic
Stores (1)
|
$
|
1
|
$
|
42
|
$
|
67
|
$
|
121
|
||||||||
Direct-to-Customers
(2)
|
4
|
8
|
17
|
26
|
||||||||||||
Restructuring
reserve adjustment
|
1
|
—
|
1
|
—
|
||||||||||||
Division
profit
|
6
|
50
|
85
|
147
|
||||||||||||
Corporate
expense, net (3)
|
16
|
17
|
45
|
70
|
||||||||||||
Operating
(loss) profit
|
(10
|
)
|
33
|
40
|
77
|
|||||||||||
Other
income (4)
|
—
|
(5
|
)
|
(2
|
)
|
(7
|
)
|
|||||||||
Interest
expense, net
|
3
|
1
|
8
|
4
|
||||||||||||
(Loss)
income from continuing operations before income taxes
|
$
|
(13
|
)
|
$
|
37
|
$
|
34
|
$
|
80
|
(1)
|
Included
in the results for the thirteen and thirty-nine weeks ended October 31,
2009 are non-cash impairment charges totaling $32 million,
which were recorded to write-down long-lived assets such as
store fixtures and leasehold improvements at the Company’s Lady Foot
Locker, Kids Foot Locker, Footaction, and Champs Sports divisions.
Additionally, included in the results for the thirty-nine weeks ended
November 1, 2008 are store closing costs of $5 million, which primarily
represent lease termination costs.
|
(2)
|
Included
in the results for the thirteen and thirty-nine weeks ended October 31,
2009 is a non-cash impairment charge of $4 million to write off software
costs.
|
(3)
|
Included
in corporate expense for the thirteen-weeks ended November 1, 2008 is a $3
million other-than-temporary impairment charge related to the investment
in the Reserve International Liquidity Fund. Additionally, included in the
thirty-nine weeks ended November 1, 2008 is a $15 million impairment
charge on the Northern Group note
receivable.
|
(4)
|
Included
in other income for the thirty-nine weeks ended October 31, 2009 are gains
from insurance proceeds, gain on the purchase and retirement of bonds, and
royalty income. Included in the thirteen weeks ended November 1, 2008 are
changes in fair value, realized gains and premiums paid on foreign
currency option contracts. Additionally, included in the prior
year-to-date period was a $2 million lease termination gain related to the
sale of a leasehold interest in
Europe.
|
19
Sales of
$1,214 million for the thirteen weeks ended October 31, 2009 decreased 7.3
percent from sales of $1,309 million for the thirteen weeks ended November 1,
2008. For the thirty-nine weeks ended October 31, 2009 sales of $3,529 million
decreased 10.0 percent from sales of $3,920 million for the thirty-nine week
period ended November 1, 2008. Excluding the effect of foreign currency
fluctuations, total sales for the thirteen week and thirty-nine week periods
decreased 7.6 percent and 7.2 percent, respectively, as compared with the
corresponding prior-year periods. Comparable-store sales decreased by 8.2
percent and 7.6 percent, for the thirteen and thirty-nine weeks ended October
31, 2009, respectively.
Gross
margin, as a percentage of sales was 27.1 percent for the thirteen weeks ended
October 31, 2009, consistent with 27.1 percent for the corresponding prior-year
period. Gross margin, as a percentage of sales, of 27.3 percent for the
thirty-nine weeks ended October 31, 2009 decreased as compared with 27.6 percent
in the corresponding prior-year period. The merchandise margin rate for the
thirteen and thirty-nine weeks ended October 31 2009 improved by 90 and 60 basis
points, respectively, primarily reflecting lower markdowns taken as the Company
was less promotional during 2009. The effect of vendor allowances was not
significant for any of the periods presented. For the thirteen and thirty-nine
weeks ended October 31, 2009, the occupancy and buyers’ salary expense rate
increased by 90 basis points, in each respective period, as a percentage of
sales, as compared with the corresponding prior-year period due to lower
sales.
Segment
Analysis
Athletic
Stores
Athletic
Stores sales decreased by 8.6 percent and 11.2 percent for the thirteen and
thirty-nine weeks ended October 31, 2009, respectively, as compared with the
corresponding prior-year periods. Excluding the effect of foreign currency
fluctuations, primarily related to the euro, sales from athletic stores
decreased 8.9 percent and 8.2 percent for the thirteen and thirty-nine weeks
ended October 31, 2009, respectively, as compared with the corresponding
prior-year periods. Comparable-store sales decreased by 8.3 percent and 7.5
percent for the thirteen and thirty-nine weeks ended October 31, 2009,
respectively. The decline in sales for the thirteen and thirty-nine weeks ended
October 31, 2009 relates primarily to domestic operations sales, reflecting the
continued decline in mall traffic and consumer spending in
general. Excluding the effect of foreign currency fluctuations,
primarily related to the euro, sales from international operations increased by
0.2 percent and 0.5 percent for the thirteen and thirty-nine weeks ended October
31, 2009, respectively, as compared with the corresponding prior-year periods.
International results continued to benefit from improved apparel
sales.
Athletic
Stores division profit for the thirteen weeks ended October 31, 2009 decreased
to $1 million from $42 million for the thirteen weeks ended November 1, 2008.
Athletic Stores division profit for the thirty-nine weeks ended October 31, 2009
decreased to $67 million from $121 million for the thirty-nine weeks ended
November 1, 2008. Included in division profit for the thirteen weeks and
thirty-nine weeks ended October 31, 2009 are impairment charges totaling $32
million recorded to write-down long-lived assets such as store fixtures and
leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker,
Footaction, and Champs Sports divisions. Additionally, included in division
profit for the thirty-nine weeks ended November 1, 2008 are $5 million in costs
associated with the closure of underproductive stores, primarily lease
termination costs.
Direct-to-Customers
Direct-to-Customers
sales increased by 10.8 percent to $103 million and by 6.8 percent to $282
million for the thirteen and thirty-nine weeks ended October 31, 2009,
respectively, as compared with the corresponding prior-year periods of $93
million and $264 million. These increases reflects a comparable-sales
decrease of 7.5 percent and 8.7 percent for the thirteen and thirty-nine weeks
ended October 31, 2009, respectively, as compared with the corresponding
prior-year periods, offset by sales from CCS, which was acquired during the
fourth quarter of 2008. Internet sales increased by 11.7 percent to $86 million
and by 9.7 percent to $238 million for the thirteen and thirty-nine weeks ended
October 31, 2009, respectively, as compared with the corresponding prior-year
periods. Increases in Internet sales, which primarily reflects the inclusion of
CCS, were partially offset by a decline in catalog sales.
Direct-to-Customers
division profit decreased by $4 million and $9 million to $4 million and $17
million for thirteen and thirty-nine weeks ended October 31, 2009, respectively,
as compared with the corresponding prior-year periods. Division profit, as a
percentage of sales, decreased to 3.9 percent and 6.0 percent for the thirteen
and thirty-nine weeks ended October 31, 2009, respectively, as compared with 8.6
percent and 9.8 percent, respectively, in the corresponding prior-year periods.
The decrease relates primarily to a $4 million impairment charge as well as a
decline in gross margin due to the lack of close-out inventory purchases in the
current period, which enhanced the prior-year gross margin rate. The
$4 million impairment charge was recorded to write off certain software
development costs for the Direct-to-Customers segment as a result of
management’s decision to terminate this project. The effect of the CCS
acquisition on division profit was not significant.
20
Corporate
Expense
Corporate
expense consists of unallocated general and administrative expenses as well as
depreciation and amortization related to the Company’s corporate headquarters,
centrally managed departments, unallocated insurance and benefit programs,
certain foreign exchange transaction gains and losses, and other items.
Corporate expense for the thirteen weeks ended October 31, 2009 was $16 million
as compared with $17 million from the corresponding prior-year period. Corporate
expense for the thirty-nine weeks ended October 31, 2009 decreased by $25
million to $45 million from the corresponding prior-year period. Included in the
thirteen and thirty-nine weeks ended November 1, 2008 is an impairment charge of
$3 million, which was recorded to reduce the fair value of a short-term
investment. Additionally, included in the thirty-nine weeks ended
November 1, 2008 was the impairment charge of $15 million associated with a note
receivable due from the purchaser of the Company’s former Northern Group
operation in Canada. Excluding these charges, corporate expense increased by $2
million for the thirteen weeks and decreased $7 million for the thirty-nine
weeks ended October 31, 2009. The increase for the thirteen weeks primarily
represents higher share-based compensation expense and pension expense. The
decrease for the thirty-nine weeks ended October 31, 2009 primarily represents
decreased incentive compensation, offset, in part, by higher pension
expense.
Selling, General and
Administrative
Selling,
general and administrative expenses (“SG&A”) of $274 million decreased by
$13 million, or 4.5 percent, for the thirteen weeks ended October 31, 2009 as
compared with the corresponding prior-year period. SG&A of $804 million
decreased by $81 million, or 9.2 percent, for the thirty-nine weeks ended
October 31, 2009 as compared with the corresponding prior-year period. SG&A,
as a percentage of sales, increased to 22.6 percent for the thirteen weeks ended
October 31, 2009 as compared with 21.9 percent in the corresponding prior-year
period. SG&A, as a percentage of sales, was 22.8 percent for the thirty-nine
weeks ended October 31, 2009, as compared with 22.6 percent for the thirty-nine
weeks ended November 1, 2008. Excluding the effect of foreign currency
fluctuations, SG&A decreased $14 million and $58 million for the thirteen
and thirty-nine weeks ended October 31, 2009, respectively, as compared with the
corresponding prior-year periods. The decrease in the thirteen weeks ended
October 31, 2009 reflects reduced store costs offset, in part, by higher
corporate expense and pension expense. The decrease in thirty-nine weeks ended
October 31, 2009 primarily reflects reduced store costs and lower corporate
expense offset, in part, by an increase in pension expense as compared with the
corresponding prior-year periods. The decrease in store costs principally
reflects reduced store variable costs, primarily wages, related to operating
fewer stores and better expense management. Pension expense increased by $3
million and $10 million for the thirteen and thirty-nine weeks ended October 31,
2009, respectively. The inclusion of CCS, which was acquired during the
fourth quarter of 2008, did not significantly affect SG&A
comparisons.
Depreciation and
Amortization
Depreciation
and amortization decreased by $3 million in the third quarter of 2009 to $29
million as compared with $32 million for the third quarter of 2008. Depreciation
and amortization decreased by $12 million for the thirty-nine weeks ended
October 31, 2009 to $85 million as compared with $97 million for the thirty-nine
weeks ended November 1, 2008. Excluding the effect of foreign currency
fluctuations, primarily related to the euro, depreciation and amortization
decreased by $3 million and $9 million for the thirteen and thirty-nine weeks
ended October 31, 2009, respectively, as compared with the corresponding
prior-year periods. The decrease for the quarter and the year-to-date periods
primarily reflects reduced depreciation and amortization of approximately $4
million and $12 million, respectively, as a result of the impairment charges
recorded during the fourth quarter of 2008, offset by the effect of prior-year
capital spending and the amortization expense associated with the CCS customer
list intangible asset.
Interest
Expense
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
31,
|
November
1,
|
October
31,
|
November
1,
|
|||||||||||||
(in
millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
||||||||
Interest
expense
|
$
|
4
|
$
|
4
|
$
|
10
|
$
|
13
|
||||||||
Interest
income
|
(1
|
)
|
(3
|
)
|
(2
|
)
|
(9
|
)
|
||||||||
Interest
expense, net
|
$
|
3
|
$
|
1
|
$
|
8
|
$
|
4
|
Overall
interest expense increased primarily due to lower interest rates on cash, cash
equivalents, and short-term investments. Interest expense decreased as a result
of lower debt balances as the Company repaid its term loan during the second
quarter of 2008, coupled with the fact that during the past 12 months the
Company repurchased and retired a portion of its 2022
debentures.
21
Other
Income/Expense
Other
income was $2 million for the thirty-nine week periods ended October 31, 2009
and is primarily comprised of gains from insurance proceeds, gain on the
purchase and retirement of bonds, and royalty income. Other income of $5 million
and $7 million for the thirteen and thirty-nine week periods ended November 1,
2008 is primarily comprised of the changes in fair value, realized gains and
premiums paid on foreign currency contracts. The Company uses these derivatives
to mitigate the effect of fluctuating foreign exchange rates on the reporting of
foreign currency denominated earnings. Also included in the thirty-nine weeks
ended November 1, 2008 is a lease termination gain related to sale of a
leasehold interest in Europe.
Income
Taxes
The
Company’s effective tax rate for the thirteen weeks ended October 31, 2009 was a
benefit of 50.7 percent as compared with expense of 35.1 percent for the
thirteen weeks ended November 1, 2008. The effective tax rate changed
primarily due to impairment charges and lower operating income in the current
quarter, which resulted in an overall loss for the quarter, coupled with the
favorable settlement of an audit.
The
Company’s effective tax rate for the thirty-nine weeks ended October 31, 2009
was expense of 29.9 percent as compared with expense of 43.7 percent for the
corresponding prior-year period. The effective tax rate for the
current period was lower than the rate for the prior-year period primarily due
to the tax benefit of the impairment charges in the third quarter of the current
period and the establishment in the first quarter of the prior-year period of a
valuation allowance related to the impairment of the Northern Group receivable
as well as the write-down in value of a short-term investment recorded during
the third quarter of 2008, which was recorded without a tax
benefit. Excluding the effect of these charges, the effective rate
for the thirty-nine weeks ended October 31, 2009 and November 1, 2008 would have
been 34.2 percent and 35.6 percent, respectively.
If
certain Canadian provincial tax rate reductions are enacted as proposed in the
fourth quarter, the Company currently expects to record a charge of
approximately $4 million to write-down the value of its net deferred tax
assets. Excluding the effect of this anticipated tax rate change, the
Company expects its effective tax rate for the full year of 2009 to range from
35 to 36 percent. The actual tax rate will also depend in significant
part on the proportion of the Company's worldwide income that is earned in the
U.S.
Net (Loss)
Income
For the
thirteen weeks ended October 31, 2009, the Company reported a net loss from
continuing operations of $6 million or $0.04 per diluted share, which included
impairment charges totaling $22 million, after-tax, or $0.14 per diluted share.
This is compared with net income from continuing operations of $24 million for
the thirteen weeks ended November 1, 2008 or $0.16 per diluted share, which
included an impairment charge of $3 million or $0.02 per diluted share related
to the write-down of the value of a short-term investment. For the
thirty-nine weeks ended October 31, 2009, net income from continuing operations
was $24 million or $0.16 per diluted share as compared with $45 million or $0.29
per diluted share for the corresponding prior-year period. Included in the
thirty-nine weeks ended November 1, 2008 are charges totaling $21 million
(after-tax), or $0.14 per share, representing an impairment charge of $3 million
related to the write-down of the value of a short-term investment, an impairment
charge of $15 million related to the Northern Group note receivable, and
expenses of $3 million related to the store closing
program. Excluding impairment charges and store closing program
costs, diluted earnings per share on a non-GAAP basis would have been $0.10 per
diluted share and $0.30 per diluted share for the thirteen and thirty-nine weeks
ended October 31, 2009, respectively, which compares with $0.18 per diluted
share and $0.43 per diluted share for the thirteen and thirty-nine weeks ended
November 1, 2008, respectively. The Company believes this non-GAAP
measure is a useful measure to our investors as it allows for a more direct
comparison to the Company’s financial performance for the current periods to
performance in the prior periods.
Included
in the thirty-nine weeks ended October 31, 2009, is income from discontinued
operations of $1 million, as a result of a favorable state tax examination
attributable to the Company’s former Canadian businesses.
LIQUIDITY AND CAPITAL
RESOURCES
Generally,
the Company’s primary source of cash has been from operations. The Company
generally finances real estate with operating leases. The principal uses of cash
have been to finance inventory requirements, capital expenditures related to
store openings, store remodelings, information systems, and other support
facilities, retirement plan contributions, quarterly dividend payments, interest
payments, other cash requirements to support the development of its short-term
and long-term operating strategies, and to fund other working capital
requirements.
22
Management
believes its cash, cash equivalents, future cash flow from operations, and the
Company’s current revolving credit facility will be adequate to fund these
requirements. The Company may also from time to time repurchase its common stock
or seek to retire or purchase outstanding debt through open market purchases,
privately negotiated transactions or otherwise. Such repurchases, if any, will
depend on prevailing market conditions, liquidity requirements, contractual
restrictions and other factors. The amounts involved may be
material.
As of
November 23, 2009, the Company’s corporate credit rating from Standard &
Poor’s was reduced to B+. The Company’s current credit rating from
Moody’s Investors Services is Ba3.
On March
20, 2009, the Company entered into a new credit agreement (the “2009 Credit
Agreement”) with its banks, providing for a $200 million asset-based revolving
credit facility maturing on March 20, 2013, which replaced the Company’s prior
credit agreement. The 2009 Credit Agreement also provides for an
incremental facility of up to $100 million under certain
circumstances. The 2009 Credit Agreement provides for a security
interest in certain of the Company’s domestic assets, including certain
inventory assets. The Company is not required to comply with any financial
covenants as long as there are no outstanding borrowings. If the
Company is borrowing, then it may not make Restricted Payments, such as
dividends or share repurchases, unless there is at least $50 million of Excess
Availability (as defined in the Credit Agreement), and the Company’s projected
fixed charge coverage ratio (Consolidated EBITDA less capital expenditures less
cash taxes divided by Debt Service Charges and Restricted Payments) is at least
1.1 to 1.0. The Company’s management does not currently expect to borrow under
the facility for the balance of 2009 or in 2010.
Any
materially adverse change in customer demand, fashion trends, competitive market
forces, or customer acceptance of the Company’s merchandise mix and retail
locations, uncertainties related to the effect of competitive products and
pricing, the Company’s reliance on a few key vendors for a significant portion
of its merchandise purchases and risks associated with foreign global sourcing
or economic conditions worldwide, as well as other factors listed under the
heading “Disclosure Regarding Forward-Looking Statements,” could affect the
ability of the Company to continue to fund its needs from business
operations.
Net
cash provided by operating activities was $140 million and $210 million for the
thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.
These amounts reflect net income adjusted for non-cash items and working capital
changes. Included in the thirteen weeks ended October 31, 2009, are
non-cash impairment charges totaling $36 million, of which $32 million was
recorded to write-down long-lived assets such as store fixtures and leasehold
improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction and
Champs Sports divisions and $4 million to write off software development
costs. During the
thirty-nine weeks ended November 1, 2008, the Company recorded a $15 million
non-cash impairment charge related to the Northern Group note receivable and a
$3 million charge related to the write-down of a short-term investment. During
the thirty-nine weeks ended October 31, 2009, the Company terminated its
interest rate swaps for a gain of $19 million. Additionally, during the
thirty-nine weeks ended October 31, 2009, the Company contributed $40 million to
its U.S. and Canadian qualified pension plans as compared with a $6 million
contribution to the Canadian qualified pension plan in the corresponding
prior-year period. No further pension contributions are required in
2009; however the Company may make additional contributions to its U.S. plan
depending on the pension fund’s asset performance and other
factors.
Net cash
used in investing activities was $59 million and $188 million for the
thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.
During the second quarter of 2009, the Company received $10 million,
representing further redemptions from the Reserve International Liquidity
Fund. The remaining investment of $13 million is classified as a
short-term investment in the Condensed Consolidated Balance Sheet at October 31,
2009. Capital expenditures were $70 million for the thirty-nine weeks
ended October 31, 2009 as compared with $116 million in the corresponding
prior-year period reflecting the Company’s strategic decision to reduce its
capital plan for 2009 due to the uncertain external environment. Capital
expenditures for the full-year of 2009 are expected to total approximately $93
million, of which $71 million relates to modernizations of existing stores and
new store openings, and $22 million reflects the development of information
systems and other support facilities. The Company has the ability to revise and
reschedule the anticipated capital expenditure program should the Company’s
financial position require it.
Net cash
used in financing activities was $71 million and $162 million for the
thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.
During the thirty-nine weeks ended October 31, 2009 and November 1, 2008, the
Company purchased and retired $3 million and $6 million, respectively, of its
8.50 percent debentures payable in 2022. Additionally, during the
thirty-nine weeks ended November 1, 2008 the Company made payments of $88
million, which fully repaid its 5-year term loan. The Company declared and paid
dividends totaling $70 million for both the thirty-nine weeks ended October 31,
2009 and November 1, 2008, representing a quarterly rate of $0.15 per share. The
Company received proceeds from the issuance of common stock in connection with
employee stock programs of $2 million for both the thirty-nine weeks ended
October 31, 2009 and November 1, 2008.
23
Recent
Accounting Pronouncements
In April
2009, the Financial Accounting Standards Board (“FASB”) amended the
authoritative guidance for fair value measurements to provide additional
guidance on (i) estimating fair value when the volume and level of activity for
an asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may indicate
that a transaction is not orderly. This guidance, which is effective for interim
and annual reporting periods ending after June 15, 2009, also requires
additional disclosures about fair value measurements in interim and annual
reporting periods. The adoption of this guidance did not have a material effect
on the Company’s consolidated financial statements.
In April
2009, the FASB issued authoritative guidance, which amends prior guidance and
requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies, as well as in annual financial
statements, and requires those disclosures in summarized financial information
at interim reporting periods. The guidance is effective for interim reporting
periods ending after June 15, 2009. The disclosures required as a result of the
adoption of this guidance are included herein.
In April
2009, the FASB issued authoritative guidance, which amends its
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This guidance does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
guidance is effective for interim and annual reporting periods ending after June
15, 2009. The adoption of this guidance did not have a material effect on the
Company’s consolidated financial statements.
In May
2009, the FASB issued authoritative guidance on subsequent events, which
establishes the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The guidance is effective for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the guidance during the second
quarter of 2009. See Note 1, Basis of Presentation, for
the disclosure required under the guidance.
In June
2009, the FASB issued authoritative guidance, which changes various aspects of
accounting for and disclosures of interests in variable interest entities. This
guidance will be effective for interim and annual reporting periods beginning
after November 15, 2009. The adoption of this guidance is not expected to have a
material effect on the Company’s consolidated financial statements.
In July
of 2009, the Company adopted the FASB Accounting Standards Codification (“ASC”
and collectively, the “Codification”), which establishes the Codification as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with Generally Accepted Accounting Principles (“GAAP”). The
historical GAAP hierarchy was eliminated and the Codification became the only
level of authoritative GAAP, other than guidance issued by the SEC. The FASB
will not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standard
Updates (“ASUs”). ASUs will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on
change(s) in the Codification. The Codification is effective for all financial
statements issued for interim and annual periods ending after September 15,
2009. Accordingly, the Company has reflected all necessary changes in this
filing.
In August
2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair
Value, which provides clarification regarding acceptable valuation
techniques for determining the fair value measurement of liabilities in
circumstances in which a quoted price in an active market for the identical
liability is not available. ASU 2009-05 is effective for interim and annual
reporting periods ending after its issuance. The adoption of ASU
2009-05 did not have a material effect on the Company’s consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
There
have been no significant changes to the Company’s critical accounting policies
and estimates from the information provided in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” included in the
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
24
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements within the meaning of the federal
securities laws. All statements, other than statements of historical facts,
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including, but not limited to, such
things as future capital expenditures, expansion, strategic plans, dividend
payments, stock repurchases, growth of the Company’s business and operations,
including future cash flows, revenues and earnings, and other such matters are
forward-looking statements. These forward-looking statements are based on many
assumptions and factors detailed in the Company’s filings with the Securities
and Exchange Commission, including the effects of currency fluctuations,
customer demand, fashion trends, competitive market forces, uncertainties
related to the effect of competitive products and pricing, customer acceptance
of the Company’s merchandise mix and retail locations, the Company’s reliance on
a few key vendors for a majority of its merchandise purchases (including a
significant portion from one key vendor), pandemics and similar major health
concerns, unseasonable weather, further deterioration of global financial
markets, economic conditions worldwide, further deterioration of business and
economic conditions, any changes in business, political and economic conditions
due to the threat of future terrorist activities in the United States or in
other parts of the world and related U.S. military action overseas, the ability
of the Company to execute its business plans effectively with regard to each of
its business units, and risks associated with foreign global sourcing, including
political instability, changes in import regulations, and disruptions to
transportation services and distribution.
Any
changes in such assumptions or factors could produce significantly different
results. The Company undertakes no obligation to update forward-looking
statements, whether as a result of new information, future events, or
otherwise.
Item 4. Controls and
Procedures
The
Company’s management performed an evaluation under the supervision and with the
participation of the Company’s Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), and completed an evaluation of the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as
that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) in effect as of October
31, 2009. Based on that evaluation and the evaluation of the previously
identified material weakness in our internal control over financial reporting as
disclosed in our 2008 Form 10-K, the Company’s CEO and CFO concluded that the
Company’s disclosure controls and procedures were not effective to ensure that
information relating to the Company that is required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC rules and
form, and is accumulated and communicated to management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required
disclosure.
In light
of this material weakness, in preparing the condensed consolidated financial
statements as of and for the thirty-nine weeks ended October 31, 2009, the
Company performed additional reconciliations and analyses and other post-closing
procedures designed to ensure that our condensed consolidated financial
statements for the thirty-nine weeks ended October 31, 2009 have been prepared
in accordance with generally accepted accounting principles. The Company’s CEO
and CFO have certified that, based on their knowledge, the consolidated
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for each
of the periods presented in this report.
The
Company has initiated a remediation plan, as described in our 2008 Annual Report
on Form 10-K. However, because the remedial actions relate to the
implementation of a software solution, training of personnel and since many of
the controls in our system of internal controls rely extensively on manual
review and approval, the successful operation of these controls for the
Company’s fiscal year end is required prior to management being able to
conclude that the material weakness has been remediated.
During
the quarter ended October 31, 2009, there were no changes in the Company’s
internal control over financial reporting (as defined in Rules 13a-15(f) of the
Exchange Act) that materially affected or are reasonably likely to affect the
Company’s internal control over financial reporting, except for the
following.
During
the third quarter of 2009, the Company substantially completed the rollout of
its new system designed to assist in the reconciliation of Point-of-Sale
register transactions to sales and receipts to all its Canadian and domestic
formats. The Company’s international divisions were converted to this system
during 2008. The Company has a rigorous information system implementation
process that requires extensive pre-implementation planning, design and testing,
as well as post-implementation monitoring. Based upon this process, the Company
believes that the implementation of this system will not have an adverse effect
on the assessment of its internal control over financial
reporting.
25
PART II - OTHER
INFORMATION
Item 1. Legal
Proceedings
Legal
proceedings pending against the Company or its consolidated subsidiaries consist
of ordinary, routine litigation, including administrative proceedings,
incidental to the business of the Company or businesses that have been sold or
disposed of by the Company in past years. These legal proceedings include
commercial, intellectual property, customer, and labor-and-employment-related
claims. Certain of the Company’s subsidiaries are defendants in a number of
lawsuits filed in state and federal courts containing various class action
allegations under state wage and hour laws, including allegations concerning
classification of employees as exempt or nonexempt, unpaid overtime, meal and
rest breaks, and uniforms. Management does not believe that the outcome of such
proceedings would have a material adverse effect on the Company’s consolidated
financial position, liquidity, or results of operations, taken as a
whole.
Item 1A. Risk
Factors
There
were no material changes to the risk factors disclosed in the 2008 Annual Report
on Form 10-K.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
There
were no purchases made by the Company of shares of its Common Stock during the
third quarter of 2009.
Item 6.
Exhibits
(a)
|
Exhibits
|
The
exhibits that are in this report immediately follow the
index.
|
26
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
FOOT
LOCKER, INC.
|
|
Date:
December 9, 2009
|
(Company)
|
/s/
Robert W. McHugh
|
|
ROBERT
W. MCHUGH
|
|
Executive
Vice President and Chief Financial
Officer
|
27
FOOT
LOCKER, INC.
INDEX
OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN
ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. in
|
||
Item 601
|
|
Description
|
12
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
15
|
Accountants’
Acknowledgment.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley act of
2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
99
|
Report
of Independent Registered Public Accounting
Firm.
|
28