Unassociated Document
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 August 1, 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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date 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 September 4, 2009:
156,415,671
FOOT LOCKER,
INC.
TABLE OF
CONTENTS
|
|
Page
|
Part
I.
|
Financial
Information
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
Condensed
Consolidated Balance Sheets
|
3
|
|
|
Condensed
Consolidated Statements of Operations
|
4
|
|
|
Condensed
Consolidated Statements of Comprehensive Income
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
Item
4.
|
Controls
and Procedures
|
21
|
Part
II.
|
Other
Information
|
|
|
Item
1.
|
Legal
Proceedings
|
22
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
Item
6.
|
Exhibits
|
22
|
|
|
Signature
|
23
|
|
|
Index
to Exhibits
|
24
|
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares)
|
|
August 1,
|
|
|
August 2,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
*
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
402
|
|
|
$
|
431
|
|
|
$
|
385
|
|
Short-term
investments
|
|
|
13
|
|
|
|
—
|
|
|
|
23
|
|
Merchandise
inventories
|
|
|
1,284
|
|
|
|
1,401
|
|
|
|
1,120
|
|
Other
current assets
|
|
|
211
|
|
|
|
248
|
|
|
|
236
|
|
|
|
|
1,910
|
|
|
|
2,080
|
|
|
|
1,764
|
|
Property
and equipment, net
|
|
|
433
|
|
|
|
529
|
|
|
|
432
|
|
Deferred
taxes
|
|
|
366
|
|
|
|
243
|
|
|
|
358
|
|
Goodwill
|
|
|
145
|
|
|
|
267
|
|
|
|
144
|
|
Other
intangibles and other assets
|
|
|
161
|
|
|
|
146
|
|
|
|
179
|
|
|
|
$
|
3,015
|
|
|
$
|
3,265
|
|
|
$
|
2,877
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
322
|
|
|
$
|
363
|
|
|
$
|
187
|
|
Accrued
expenses and other current liabilities
|
|
|
191
|
|
|
|
266
|
|
|
|
231
|
|
|
|
|
513
|
|
|
|
629
|
|
|
|
418
|
|
Long-term
debt and obligations under capital leases
|
|
|
138
|
|
|
|
125
|
|
|
|
142
|
|
Other
liabilities
|
|
|
387
|
|
|
|
252
|
|
|
|
393
|
|
|
|
|
1,038
|
|
|
|
1,006
|
|
|
|
953
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and paid-in capital: 160,614,691, 159,537,759 and
|
|
|
|
|
|
|
|
|
|
|
|
|
159,598,233
shares, respectively
|
|
|
702
|
|
|
|
686
|
|
|
|
691
|
|
Retained
earnings
|
|
|
1,565
|
|
|
|
1,728
|
|
|
|
1,581
|
|
Accumulated
other comprehensive loss
|
|
|
(187
|
)
|
|
|
(55
|
)
|
|
|
(246
|
)
|
Less:
Treasury stock at cost: 4,709,020, 4,573,992, and 4,680,533 shares,
respectively
|
|
|
(103
|
)
|
|
|
(100
|
)
|
|
|
(102
|
)
|
Total
shareholders’ equity
|
|
|
1,977
|
|
|
|
2,259
|
|
|
|
1,924
|
|
|
|
$
|
3,015
|
|
|
$
|
3,265
|
|
|
$
|
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.
|
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
$
|
1,099
|
|
|
$
|
1,302
|
|
|
$
|
2,315
|
|
|
$
|
2,611
|
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
819
|
|
|
|
941
|
|
|
|
1,679
|
|
|
|
1,884
|
|
Selling,
general and administrative expenses
|
|
|
252
|
|
|
|
299
|
|
|
|
530
|
|
|
|
598
|
|
Depreciation
and amortization
|
|
|
28
|
|
|
|
33
|
|
|
|
56
|
|
|
|
65
|
|
Impairment
charge and store closing program costs
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
20
|
|
Interest
expense, net
|
|
|
3
|
|
|
|
2
|
|
|
|
5
|
|
|
|
3
|
|
Other
income
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
1,101
|
|
|
|
1,274
|
|
|
|
2,268
|
|
|
|
2,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before income
taxes
|
|
|
(2
|
)
|
|
|
28
|
|
|
|
47
|
|
|
|
43
|
|
Income
tax (benefit) expense
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
17
|
|
|
|
22
|
|
Income
from continuing operations
|
|
|
(1
|
)
|
|
|
18
|
|
|
|
30
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from disposal of discontinued operations, net of tax
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
—
|
|
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
Weighted-average
common shares outstanding
|
|
|
155.9
|
|
|
|
154.0
|
|
|
|
155.6
|
|
|
|
153.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
—
|
|
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
Weighted-average
common shares assuming dilution
|
|
|
155.9
|
|
|
|
155.4
|
|
|
|
155.8
|
|
|
|
155.2
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in
millions)
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
$
|
21
|
|
Other
comprehensive income (expense), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments arising during the period
|
|
|
47
|
|
|
|
(1
|
)
|
|
|
62
|
|
|
|
17
|
|
Pension
and postretirement plan adjustments
|
|
|
1
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
Change
in fair value of derivatives
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Unrealized
gain (loss) on available-for-sale security
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
Comprehensive
income
|
|
$
|
49
|
|
|
$
|
14
|
|
|
$
|
95
|
|
|
$
|
35
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
millions)
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
|
2009
|
|
|
2008
|
|
From
Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
31
|
|
|
$
|
21
|
|
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 charge
|
|
|
—
|
|
|
|
15
|
|
Depreciation
and amortization
|
|
|
56
|
|
|
|
65
|
|
Share-based
compensation expense
|
|
|
5
|
|
|
|
6
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
(138
|
)
|
|
|
(109
|
)
|
Accounts
payable
|
|
|
129
|
|
|
|
130
|
|
Other
accruals
|
|
|
(43
|
)
|
|
|
5
|
|
Qualified
pension plan contributions
|
|
|
(11
|
)
|
|
|
(6
|
)
|
Income
tax payable
|
|
|
(4
|
)
|
|
|
(8
|
)
|
Gain
on termination of interest rate swaps
|
|
|
19
|
|
|
|
—
|
|
Other,
net
|
|
|
40
|
|
|
|
40
|
|
Net
cash provided by operating activities of continuing
operations
|
|
|
83
|
|
|
|
159
|
|
|
From
Investing Activities:
|
|
|
|
|
|
|
|
|
Gain
from lease termination
|
|
|
—
|
|
|
|
2
|
|
Gain
from insurance recoveries
|
|
|
1
|
|
|
|
—
|
|
Short-term
investment redemptions
|
|
|
10
|
|
|
|
—
|
|
Capital
expenditures
|
|
|
(47
|
)
|
|
|
(79
|
)
|
Net
cash used in investing activities of continuing operations
|
|
|
(36
|
)
|
|
|
(77
|
)
|
|
From
Financing Activities:
|
|
|
|
|
|
|
|
|
Reduction
in long-term debt
|
|
|
(3
|
)
|
|
|
(94
|
)
|
Issuance
of common stock, net
|
|
|
1
|
|
|
|
2
|
|
Dividends
paid
|
|
|
(47
|
)
|
|
|
(47
|
)
|
Net
cash used in financing activities of continuing operations
|
|
|
(49
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities of Discontinued
Operations
|
|
|
(1
|
)
|
|
|
—
|
|
Effect
of exchange rate fluctuations on Cash and Cash Equivalents
|
|
|
20
|
|
|
|
—
|
|
Net
change in Cash and Cash Equivalents
|
|
|
17
|
|
|
|
(57
|
)
|
Cash
and Cash Equivalents at beginning of year
|
|
|
385
|
|
|
|
488
|
|
Cash
and Cash Equivalents at end of interim period
|
|
$
|
402
|
|
|
$
|
431
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6
|
|
|
$
|
8
|
|
Income
taxes
|
|
$
|
10
|
|
|
$
|
40
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
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 September 9, 2009, the date of issuance of the Company’s
Condensed Consolidated Financial Statements.
As
disclosed in the Company’s 2008 Annual Report on Form 10-K, the Condensed
Consolidated Balance Sheet for the quarter ended August 2, 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 August 2, 2008.
Recent Accounting
Pronouncements
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” (“FSP No. 157-4”).
FSP No. FAS 157-4 amends Statement No. 157 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. FSP No. FAS 157-4 also requires additional
disclosures about fair value measurements in interim and annual reporting
periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of FSP No. FAS 157-4 did not have a
material effect on the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS
124-2 amends the 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 provisions of FSP No. FAS 115-2 and FAS 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
FSP No. FAS 115-2 and FAS 124-2 did not have a material effect on the Company’s
consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which amends SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies, as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those
disclosures in summarized financial information at interim reporting periods.
FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending
after June 15, 2009. The disclosures required as a result of the adoption of FSP
FAS 107-1 and APB 28-1 are included herein.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” (“SFAS No.
165”) 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. SFAS No. 165 is effective for interim and annual
reporting periods ending after June 15, 2009. The Company adopted SFAS
No. 165 during the second quarter of 2009. See Note 1, Basis of
Presentation, for the disclosure required under SFAS No. 165.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” (“SFAS No. 167”) which changes various aspects of accounting for and
disclosures of interests in variable interest entities. SFAS No. 167 will be
effective for interim and annual reporting periods beginning after November 15,
2009. The adoption of SFAS No. 167 is not expected to have a material effect on
the Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting
Principles,” (“SFAS No. 168”) which establishes the FASB Accounting
Standards Codification as the single source of authoritative generally accepted
accounting principles in the United States, recognized by the FASB to be applied
by nongovernmental entities. SFAS No. 168 will be effective for interim and
annual reporting periods ending after September 15, 2009. SFAS No. 168 is not
intended to modify or alter prior authoritative guidance through the
Codification and, as such, its adoption is not expected to have a material
effect on the Company’s consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material effect on the Company’s present or future
consolidated financial statements.
2.
Goodwill and Other
Intangible Assets
The
Company accounts for goodwill and other intangibles in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets,” which requires that goodwill and
intangible assets with indefinite lives be reviewed for impairment if impairment
indicators arise and, at a minimum, annually. During the first quarters of 2009
and 2008, the Company completed its annual reviews of goodwill and the
indefinite lived trademark, which did not result in an impairment
charge.
|
|
August 1,
|
|
August 2,
|
|
January 31,
|
|
Goodwill (in millions)
|
|
2009
|
|
2008
|
|
2009
|
|
Athletic
Stores
|
|
$ |
18 |
|
|
$ |
187 |
|
|
$ |
17 |
|
Direct-to-Customers
|
|
|
127 |
|
|
|
80 |
|
|
|
127 |
|
|
|
$ |
145 |
|
|
$ |
267 |
|
|
$ |
144 |
|
The
change in goodwill from the amount reported at August 2, 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.
|
|
August 1, 2009
|
|
|
August 2, 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
|
|
$
|
184
|
|
|
$
|
(138
|
)
|
|
$
|
46
|
|
|
$
|
202
|
|
|
$
|
(137
|
)
|
|
$
|
65
|
|
|
$
|
173
|
|
|
$
|
(124
|
)
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
20
|
|
|
|
(5
|
)
|
|
|
15
|
|
|
|
21
|
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
20
|
|
|
|
(5
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loyalty
program
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
leases
|
|
|
9
|
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
10
|
|
|
|
(7
|
)
|
|
|
3
|
|
|
|
9
|
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCS
customer relationships
|
|
|
21
|
|
|
|
(3
|
)
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
finite life intangible assets
|
|
|
235
|
|
|
|
(155
|
)
|
|
|
80
|
|
|
|
234
|
|
|
|
(149
|
)
|
|
|
85
|
|
|
|
224
|
|
|
|
(138
|
)
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
of Ireland trademark
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
CCS
tradename
|
|
|
25
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
indefinite life intangible assets
|
|
|
27
|
|
|
|
—
|
|
|
|
27
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
27
|
|
|
|
—
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$
|
262
|
|
|
$
|
(155
|
)
|
|
$
|
107
|
|
|
$
|
237
|
|
|
$
|
(149
|
)
|
|
$
|
88
|
|
|
$
|
251
|
|
|
$
|
(138
|
) |
|
$
|
113
|
|
The
weighted-average amortization period as of August 1, 2009 was approximately 11.8
years. Amortization expense was $5 million for both the thirteen week periods
ended August 1, 2009 and August 2, 2008. Amortization expense was $10 million
and $9 million for the twenty-six week periods ended August 1, 2009 and August
2, 2008, respectively. Additionally, the net intangible activity for the
twenty-six week period ended August 1, 2009, primarily reflects the effect of
the strengthening of the euro as compared with the U.S. dollar of $4 million.
Annual estimated amortization expense for finite life intangible assets is
expected to approximate $10 million for the remainder of 2009, $18 million for
2010, $16 million for 2011, $13 million for 2012 and $9 million for
2013.
3.
Revolving Credit
Facility
On March
20, 2009, the Company entered into a new credit agreement with its banks,
providing for a $200 million revolving credit facility maturing on March 20,
2013 which replaced the prior credit agreement. The new credit
agreement also provides an incremental facility of up to $100 million under
certain circumstances. The new credit agreement provides for a
security interest in certain of the Company’s domestic assets, including certain
inventory assets. No material covenants or payment restrictions exist unless the
Company is borrowing under the agreement and, in that event, the restrictions
vary depending upon the level of borrowings.
4.
Financial
Instruments
Effective
February 1, 2009, the Company adopted SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133,” (“SFAS No. 161”). SFAS No. 161 requires enhanced
disclosures about an entity’s derivative and hedging activities. Entities will
be required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedge
items are accounted for under SFAS No. 133 and its related interpretations; and
(c) how derivative instruments and related hedge items affect an entity’s
financial position, financial performance and cash flows. Additional information
is contained within Note 10, Fair Value Measurements.
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 only entering into contracts 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.
Derivatives
designated as hedging instruments under SFAS No. 133
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 $2 million and $3 million for the
thirteen and twenty-six weeks ended August 1, 2009 and was not significant for
the thirteen and twenty-six weeks ended August 2, 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 Consolidated Balance Sheet decreased
shareholders’ equity by $15 million and $24 million, net of tax, at August 1,
2009 and August 2, 2008, respectively. The effect on the Consolidated Statements
of Operations, recorded as part of interest expense, related to the net
investments hedges was not significant for the thirteen and twenty-six weeks
ended August 1, 2009 and was $1 million and $2 million of expense, respectively,
for the thirteen and twenty-six weeks ended August 2, 2008.
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 August 1, 2009, and was income of $1 million for the
thirteen weeks ended August 2, 2008. The effect on interest expense
related to the interest rate swaps was income of $1 million for both the
twenty-six weeks ended August 1, 2009 and August 2, 2008.
Derivatives
not designated as hedging instruments under SFAS No. 133
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 twenty-six weeks ended August 1, 2009 and
August 2, 2008, 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 August 1, 2009 was $5 million and these
contracts extend through May 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:
|
|
August
1, 2009
|
|
August
2, 2008
|
|
(in millions)
|
|
Balance Sheet
Caption
|
|
Fair Value
|
|
Balance Sheet
Caption
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Hedging
Instruments:
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
Current assets
|
|
$
|
—
|
|
Current assets
|
|
$
|
1
|
|
Interest
rate swaps
|
|
Non current assets
|
|
|
—
|
|
Non current assets
|
|
|
2
|
|
Net
investment hedges
|
|
Non current liability
|
|
|
—
|
|
Non current liability
|
|
|
(38
|
)
|
Total
|
|
|
|
$
|
—
|
|
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
Current assets
|
|
$
|
1
|
|
Current assets
|
|
$
|
2
|
|
Forward
contracts
|
|
Current liability
|
|
|
(1
|
)
|
Current liability
|
|
|
(1
|
)
|
European
cross currency swap
|
|
Non current liability
|
|
|
(24
|
)
|
Non current liability
|
|
|
—
|
|
Total
|
|
|
|
$
|
(24
|
)
|
|
|
$
|
1
|
|
Fair
Value of Financial Instruments
The
carrying value and estimated fair value of long-term debt was $138 million and
$120 million, respectively, at August 1, 2009 and $142 million and $120 million,
respectively, at January 31, 2009. The carrying values of cash and cash
equivalents, other short-term investments and other current receivables and
payables approximate their fair value.
5.
Accumulated Other
Comprehensive Loss
Accumulated
other comprehensive loss comprised the following:
|
|
August 1,
|
|
|
August 2,
|
|
|
January 31,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Foreign
currency translation adjustments
|
|
$
|
72
|
|
|
$
|
110
|
|
|
$
|
10
|
|
Cash
flow hedge
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Unrecognized
pension cost and postretirement benefit
|
|
|
(256
|
)
|
|
|
(161
|
)
|
|
|
(253
|
)
|
Unrealized
loss on available-for-sale security
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
$
|
(187
|
)
|
|
$
|
(55
|
)
|
|
$
|
(246
|
)
|
6.
Earnings Per
Share
On
February 1, 2009, the provisions of FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” (“FSP EITF 03-6-1”) became effective for the
Company. The provisions of this FSP clarified that share-based
payment awards that entitle their holders to receive nonforfeitable dividends
before vesting should be considered participating securities and, as such,
should be included in the calculation of basic earnings per
share. The Company’s restricted stock awards, which contain
nonforfeitable rights to dividends, are considered participating securities. FSP
EITF 03-6-1 is effective for the financial statements included in the Company’s
quarterly report for the thirteen and twenty-six weeks ended August 1, 2009, and
application of FSP EITF 03-6-1 did not have a significant effect on the
Company’s earnings per share calculations for any of the periods presented.
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.
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted-average
common shares outstanding
|
|
|
155.9 |
|
|
|
154.0 |
|
|
|
155.6 |
|
|
|
153.9 |
|
Effect of
Dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and awards
|
|
|
— |
|
|
|
1.4 |
|
|
|
0.2 |
|
|
|
1.3 |
|
Weighted-average
common shares assuming dilution
|
|
|
155.9 |
|
|
|
155.4 |
|
|
|
155.8 |
|
|
|
155.2 |
|
Options
to purchase 6.2 million and 4.5 million shares of common stock were not included
in the computation for the thirteen weeks ended August 1, 2009 and August 2,
2008, respectively. Options to purchase 6.5 million and 4.8 million shares of
common stock were not included in the computation for the twenty-six weeks ended
August 1, 2009 and August 2, 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 option and awards totaling 0.2 million shares were not
included in the computation of earnings per share for the thirteen weeks ended
August 1, 2009 as the effect would have been antidilutive due to a loss from
continuing operations being reported for the period.
7.
Segment
Information
The
Company has determined that its reportable segments are those that are based on
its method of internal reporting. As of August 1, 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 twenty-six
weeks ended August 1, 2009 and August 2, 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
|
|
Twenty-six weeks ended
|
|
|
August 1,
|
|
August 2,
|
|
August 1,
|
|
August 2,
|
|
(in millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Athletic
Stores
|
|
$ |
1,018 |
|
|
$ |
1,223 |
|
|
$ |
2,136 |
|
|
$ |
2,440 |
|
Direct-to-Customers
|
|
|
81 |
|
|
|
79 |
|
|
|
179 |
|
|
|
171 |
|
Total
sales
|
|
$ |
1,099 |
|
|
$ |
1,302 |
|
|
$ |
2,315 |
|
|
$ |
2,611 |
|
Operating
Results
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Athletic Stores (1)
|
|
$
|
5
|
|
|
$
|
39
|
|
|
$
|
66
|
|
|
$
|
79
|
|
Direct-to-Customers
|
|
|
5
|
|
|
|
8
|
|
|
|
13
|
|
|
|
18
|
|
Division
profit
|
|
|
10
|
|
|
|
47
|
|
|
|
79
|
|
|
|
97
|
|
Corporate expense,
net (2)
|
|
|
10
|
|
|
|
19
|
|
|
|
29
|
|
|
|
53
|
|
Operating
profit
|
|
|
—
|
|
|
|
28
|
|
|
|
50
|
|
|
|
44
|
|
Other income (3)
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Interest
expense, net
|
|
|
3
|
|
|
|
2
|
|
|
|
5
|
|
|
|
3
|
|
(Loss)
income from continuing operations before income taxes
|
|
$
|
(2
|
)
|
|
$
|
28
|
|
|
$
|
47
|
|
|
$
|
43
|
|
|
Included
in the results for the thirteen and twenty-six weeks ended August 2, 2008
are store closing costs of $1 million and $5 million, respectively, which
primarily represent lease termination
costs.
|
|
Included
in corporate expense for the twenty-six weeks ended August 2, 2008 is a
$15 million impairment charge on the Northern Group note
receivable.
|
|
Included
in other income for the twenty-six weeks ended August 1, 2009 are gains
from insurance proceeds, gain on the purchase and retirement of bonds, and
royalty income. The amount included in the prior year periods represented
a lease termination gain related to the sale of a leasehold interest in
Europe.
|
8.
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
|
|
|
Twenty-six weeks
|
|
|
Thirteen weeks
|
|
|
Twenty-six weeks
|
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest
cost
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected
return on plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
(11
|
)
|
|
|
(14
|
)
|
|
|
(21
|
)
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
of net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(gain)
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Net
benefit expense (income)
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
During
the twenty-six weeks ended August 1, 2009 the Company made an $8 million
contribution to its U.S. pension plan and $3 million to its Canadian plan.
During August 2009, the Company made an additional $29 million contribution to
its U.S. pension plan. No further pension contributions are planned
for the balance of the year.
9.
Share-Based
Compensation
The
Company accounts for its share-based compensation in accordance with SFAS No.
123(R), “Share-Based Payment.” The Company uses a Black-Scholes option-pricing
model to estimate the fair value of share-based awards under SFAS No. 123(R).
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 for both the thirteen weeks ended August 1, 2009 and August 2, 2008 and
was $1.7 million and $2.1 million for the twenty-six weeks ended August 1, 2009
and August 2, 2008, respectively. The following table shows the Company’s
assumptions used to compute the share-based compensation
expense:
|
|
Stock Option Plans
|
|
|
Stock Purchase Plan
|
|
|
|
Twenty-six weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1, 2009
|
|
|
August 2, 2008
|
|
|
August 1, 2009
|
|
|
August 2, 2008
|
|
Weighted-average
risk free rate of interest
|
|
|
1.76
|
% |
|
|
2.43
|
% |
|
|
1.91
|
% |
|
|
4.73
|
% |
Expected
volatility
|
|
|
53
|
% |
|
|
37
|
% |
|
|
39
|
% |
|
|
24
|
% |
Weighted-average
expected award life
|
|
4.8
years
|
|
|
4.6
years
|
|
|
1.0 year
|
|
|
1.0
year
|
|
Dividend
yield
|
|
|
6.0
|
% |
|
|
5.1
|
% |
|
|
4.2
|
% |
|
|
2.4
|
% |
Weighted-average
fair value
|
|
$ |
2.87 |
|
|
$ |
2.47 |
|
|
$ |
4.74 |
|
|
$ |
9.05 |
|
The
information set forth in the following table covers options granted under the
Company’s stock option plans for the twenty-six weeks ended August 1,
2009:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
(in thousands, except price per share)
|
|
Shares
|
|
|
Term
|
|
|
Exercise Price
|
|
Options
outstanding at the beginning of the year
|
|
|
6,080 |
|
|
|
|
|
$ |
18.64 |
|
Granted
|
|
|
918 |
|
|
|
|
|
|
9.96 |
|
Exercised
|
|
|
(29
|
) |
|
|
|
|
|
4.53 |
|
Expired
or cancelled
|
|
|
(71
|
) |
|
|
|
|
|
21.98 |
|
Options
outstanding at August 1, 2009
|
|
|
6,898 |
|
|
|
5.23 |
|
|
$ |
17.51 |
|
Options
exercisable at August 1, 2009
|
|
|
5,334 |
|
|
|
4.09 |
|
|
$ |
19.00 |
|
Options
available for future grant at August 1, 2009
|
|
|
3,307 |
|
|
|
|
|
|
|
|
|
The total
intrinsic value of options exercised during the thirteen and twenty-six weeks
ended August 1, 2009 and August 2, 2008 was not significant. The aggregate
intrinsic value for stock options outstanding and exercisable as of August 1,
2009 was $1.7 million and $0.6 million, respectively. The aggregate intrinsic
value for stock options outstanding and exercisable as of August 2, 2008 was
$8.6 million and $6.6 million, respectively. The intrinsic value for stock
options outstanding and exercisable is calculated as the difference between the
fair market value as of the end of the period and the exercise price of the
shares.
The cash
received and the tax benefit realized from option exercises for the
thirteen and twenty-six weeks ended August 1, 2009 and August 2, 2008 was not
significant.
The
following table summarizes information about stock options outstanding and
exercisable at August 1, 2009:
|
|
Options Outstanding
|
|
|
|
Options Exercisable
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
Contractual Life
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
(in thousands, except price per share)
|
|
$
|
7.19
|
|
$
|
10.25
|
|
1,436
|
|
6.96
|
|
$
|
9.98
|
|
561
|
|
$
|
10.05
|
|
$
|
10.31
|
|
$
|
12.99
|
|
1,651
|
|
4.22
|
|
$
|
11.88
|
|
1,241
|
|
$
|
11.99
|
|
$
|
13.34
|
|
$
|
23.42
|
|
1,656
|
|
4.94
|
|
$
|
18.95
|
|
1,406
|
|
$
|
18.54
|
|
$
|
23.59
|
|
$
|
25.39
|
|
1,421
|
|
5.06
|
|
$
|
24.71
|
|
1,391
|
|
$
|
24.71
|
|
$
|
25.46
|
|
$
|
28.50
|
|
734
|
|
5.05
|
|
$
|
27.74
|
|
735
|
|
$
|
27.74
|
|
$
|
7.19
|
|
$
|
28.50
|
|
6,898
|
|
5.23
|
|
$
|
17.51
|
|
5,334
|
|
$
|
19.00
|
|
Changes
in the Company’s nonvested options for the twenty-six weeks ended August 1, 2009
are summarized as follows:
|
|
|
|
Weighted-
|
|
|
|
|
|
average grant
|
|
|
|
Number
of
|
|
date
fair value
|
|
(in thousands, except price per share)
|
|
shares
|
|
per share
|
|
Nonvested
at January 31, 2009
|
|
|
1,268 |
|
|
$ |
17.71 |
|
Granted
|
|
|
918 |
|
|
|
9.96 |
|
Vested
|
|
|
(551
|
) |
|
|
19.20 |
|
Expired
or Cancelled
|
|
|
(71
|
) |
|
|
21.98 |
|
Nonvested
at August 1, 2009
|
|
|
1,564 |
|
|
$ |
12.45 |
|
As of
August 1, 2009, there was $2.3 million of total unrecognized compensation cost,
related to nonvested stock options, which is expected to be recognized over a
weighted-average period of 1.23 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. 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 August 1, 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 twenty-six weeks ended August 1, 2009 and
August 2, 2008 is summarized as follows:
|
|
Number of Shares and Units
|
|
(in thousands)
|
|
August
1, 2009
|
|
|
August
2, 2008
|
|
Outstanding
at beginning of period
|
|
|
844
|
|
|
|
810
|
|
Granted
|
|
|
615
|
|
|
|
223
|
|
Vested
|
|
|
(39
|
)
|
|
|
(79
|
)
|
Cancelled
or forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at end of period
|
|
|
1,420
|
|
|
|
954
|
|
Aggregate
value (in millions)
|
|
$
|
21.8
|
|
|
$
|
19.5
|
|
Weighted
average remaining contractual life
|
|
1.42
years
|
|
|
1.66
years
|
|
The
weighted-average grant-date fair value per share was $9.74 and $11.66 for the
twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively. The
total value of awards for which restrictions lapsed during the twenty-six weeks
ended August 1, 2009 and August 2, 2008 was $0.9 million and $2.1 million,
respectively. As of August 1, 2009, there was $8.4 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 $3.7 million and $3.6 million in the twenty-six weeks ended
August 1, 2009 and August 2, 2008, respectively.
10.
Fair Value
Measurements
The
Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) on
February 3, 2008 for financial assets and liabilities. SFAS No. 157 provides a
single definition of fair value and a common framework for measuring fair value
as well as new disclosure requirements for fair value measurements used in
financial statements. Under SFAS No. 157, 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. SFAS No. 157 also specifies a fair value hierarchy based upon
the observability of inputs used in valuation techniques. Observable inputs
(highest level) reflect market data obtained from independent sources, while
unobservable inputs (lowest level) reflect internally developed market
assumptions. On February 1, 2009, the Company adopted SFAS No. 157,
for all non-financial assets and non-financial liabilities recognized or
disclosed in the financial statements on a nonrecurring basis. As of August 1,
2009, the Company had no non-financial assets or non-financial liabilities
requiring measurement at fair value.
In
accordance with SFAS No. 157, fair value measurements are classified under the
following hierarchy:
|
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 August 1,
2009:
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Short-term
investment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Auction
rate security
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Forward
foreign exchange contracts
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total
Assets
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
foreign exchange contracts
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
European
cross currency swap
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
Total
Liabilities
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
—
|
|
At August
1, 2009, the Company’s auction rate security was 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 twenty-six weeks ended August 1, 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 include an investment in a money market fund classified
in short-term investments. The Company assessed the fair value of its investment
in the Reserve International Liquidity Fund, Ltd. (the “Fund”) and its
underlying securities. Based on this assessment, the Company recorded an
impairment charge of $3 million during the third quarter of 2008, 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.
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 twenty-six
weeks ended August 1, 2009:
(in millions)
|
|
Level 3
|
|
Balance
at January 31, 2009
|
|
$
|
23
|
|
Redemptions
received
|
|
|
(10
|
)
|
Balance
at August 1, 2009
|
|
$
|
13
|
|
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-Customer
segment sells to customers through catalogs and Internet websites.
STORE
COUNT
At August
1, 2009, the Company operated 3,615 stores as compared with 3,641 and 3,728
stores at January 31, 2009 and August 2, 2008, respectively. During the
twenty-six weeks ended August 1, 2009, the Company opened 26 stores, remodeled
or relocated 89 stores and closed 52 stores.
A total
of 19 franchised stores were operational at August 1, 2009. Revenue from the
franchised stores was not significant for the thirteen and twenty-six weeks
ended August 1, 2009 or August 2, 2008. These stores are not included in the
Company’s operating store count above.
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-Customer 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
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
August 2,
|
|
August 1,
|
|
August 2,
|
|
(in millions)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Athletic
Stores
|
|
$ |
1,018 |
|
|
$ |
1,223 |
|
|
$ |
2,136 |
|
|
$ |
2,440 |
|
Direct-to-Customers
|
|
|
81 |
|
|
|
79 |
|
|
|
179 |
|
|
|
171 |
|
Total
sales
|
|
$ |
1,099 |
|
|
$ |
1,302 |
|
|
$ |
2,315 |
|
|
$ |
2,611 |
|
Operating
Results
|
|
Thirteen weeks ended
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Athletic Stores
(1)
|
|
$ |
5 |
|
|
$ |
39 |
|
|
$ |
66 |
|
|
$ |
79 |
|
Direct-to-Customers
|
|
|
5 |
|
|
|
8 |
|
|
|
13 |
|
|
|
18 |
|
Division
profit (loss)
|
|
|
10 |
|
|
|
47 |
|
|
|
79 |
|
|
|
97 |
|
Corporate expense,
net (2)
|
|
|
10 |
|
|
|
19 |
|
|
|
29 |
|
|
|
53 |
|
Operating
profit
|
|
|
— |
|
|
|
28 |
|
|
|
50 |
|
|
|
44 |
|
Other income (3)
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Interest
expense, net
|
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
3 |
|
(Loss)
income from continuing operations before income taxes
|
|
$ |
(2 |
) |
|
$ |
28 |
|
|
$ |
47 |
|
|
$ |
43 |
|
(1)
Included
in the results for the thirteen and twenty-six weeks ended August 2, 2008 are
store closing costs of $1 million and $5 million, respectively, which primarily
represent lease termination
costs.
(2)
Included
in corporate expense for the twenty-six weeks ended August 2, 2008 is a $15
million impairment charge on the Northern Group note
receivable.
(3) Included
in other income for the twenty-six weeks ended August 1, 2009 are gains from
insurance proceeds, gain on the purchase and retirement of bonds, and royalty
income. The amount included in the prior year periods represented a lease
termination gain related to the sale of a leasehold interest in
Europe.
Sales of
$1,099 million for the thirteen weeks ended August 1, 2009 decreased 15.6
percent from sales of $1,302 million for the thirteen weeks ended August 2,
2008. For the twenty-six weeks ended August 1, 2009 sales of $2,315 million
decreased 11.3 percent from sales of $2,611 million for the twenty-six week
period ended August 2, 2008. Excluding the effect of foreign currency
fluctuations, total sales for the thirteen week and twenty-six week periods
decreased 11.8 percent and 7.0 percent, respectively, as compared with the
corresponding prior-year periods. Comparable-store sales decreased by 12.1
percent and 7.3 percent, for the thirteen and twenty-six weeks ended August 1,
2009, respectively.
Gross
margin, as a percentage of sales, decreased to 25.5 percent for the thirteen
weeks ended August 1, 2009 as compared with 27.7 percent in the corresponding
prior-year period. Gross margin, as a percentage of sales, of 27.5 percent for
the twenty-six weeks ended August 1, 2009 decreased as compared with 27.8
percent in the corresponding prior-year period. For the thirteen and twenty-six
weeks ended August 1, 2009, the occupancy and buyers’ salary expense rate
increased by 190 and 80 basis points, respectively, as a percentage of sales, as
compared with the corresponding prior-year period due to lower
sales. The merchandise margin rate for the thirteen weeks ended
August 1, 2009 declined by 30 basis points reflecting a mix shift towards
inventory purchases with a lower initial markup. The merchandise margin
rate for the twenty-six weeks improved by 50 basis points primarily reflecting
lower markdowns taken as the Company was less promotional in the first half of
2009. The effect of vendor allowances was not significant for any of the periods
presented.
Segment
Analysis
Athletic
Stores
Athletic
Stores sales decreased by 16.8 percent and 12.5 percent for the thirteen and
twenty-six weeks ended August 1, 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 12.7 percent and 7.8 percent for the thirteen and twenty-six weeks
ended August 1, 2009, respectively, as compared with the corresponding
prior-year periods. Comparable-store sales decreased by 12.1 percent and 7.1
percent for the thirteen and twenty-six weeks ended August 1, 2009,
respectively. The decline in domestic operations sales for the thirteen and
twenty-six weeks ended August 1, 2009 was principally as a result of the
continued decline in mall traffic and consumer spending in
general. The sales decline during the thirteen week period ended
August 1, 2009 also reflected various tax-free calendar shifts in 2009 and the
effect of the stimulus checks that the U.S. government provided last
year. Excluding the effect of foreign currency fluctuations,
primarily related to the euro, sales from international operations declined by
0.8 percent and increased by 0.6 percent for the thirteen and twenty-six weeks
ended August 1, 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 August 1, 2009 decreased to
$5 million, or 0.5 percent, as a percentage of sales, from a division profit of
$39 million for the thirteen weeks ended August 2, 2008. Athletic Stores
division profit for the twenty-six weeks ended August 1, 2009 decreased to $66
million, or 3.1 percent, as a percentage of sales, from a division profit of $79
million for the twenty-six weeks ended August 2, 2008. Included in division
profit for the thirteen weeks and twenty-six weeks ended August 2, 2008 are $1
million and $5 million, respectively, in costs associated with the closure of
underproductive stores, primarily lease termination costs. The second
quarter 2009 results of the domestic operations were significantly lower than
the prior year and management’s expectations, while international operations
were essentially equal to the prior-year periods.
Direct-to-Customers
Direct-to-Customers
sales increased by 2.5 percent to $81 million and by 4.7 percent to $179 million
for the thirteen and twenty-six weeks ended August 1, 2009, respectively, as
compared with the corresponding prior-year periods of $79 million and $171
million. This reflects a comparable-sales decrease of 11.1 percent
and 9.2 percent for the thirteen and twenty-six weeks ended August 1, 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 6.2 percent to $69 million and by 8.6 percent to $152 million
for the thirteen and twenty-six weeks ended August 1, 2009, respectively, as
compared with the corresponding prior-year periods. Increases in Internet sales
were partially offset by a decline in catalog sales.
Direct-to-Customers
division profit decreased 37.5 percent and 27.8 percent to $5 million and $13
million for thirteen and twenty-six weeks ended August 1, 2009, respectively, as
compared with the corresponding prior-year periods. Division profit, as a
percentage of sales, decreased to 6.2 percent and 7.3 percent for the thirteen
and twenty-six weeks ended August 1, 2009, respectively, as compared with 10.1
percent and 10.5 percent, respectively, in the corresponding prior-year periods.
The decrease relates primarily to 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 effect of the CCS acquisition on
division profit was not significant.
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 August 1, 2009 decreased by $9
million to $10 million from the corresponding prior-year period. Corporate
expense for the twenty-six weeks ended August 1, 2009 decreased by $24 million
to $29 million from the corresponding prior-year period. Included in the
twenty-six weeks ended August 2, 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. The remaining decrease for both the thirteen
and twenty-six weeks ended August 1, 2009 represents primarily decreased
incentive compensation, offset, in part, by higher pension expense.
Selling, General and
Administrative
Selling,
general and administrative expenses (“SG&A”) of $252 million decreased by
$47 million, or 15.7 percent, for the thirteen weeks ended August 1, 2009 as
compared with the corresponding prior-year period. SG&A of $530 million
decreased by $68 million, or 11.4 percent, for the twenty-six weeks ended August
1, 2009 as compared with the corresponding prior-year period. SG&A, as a
percentage of sales, decreased to 22.9 percent for the thirteen weeks ended
August 1, 2009 as compared with 23.0 percent in the corresponding prior-year
period. SG&A, as a percentage of sales, was 22.9 percent for both the
twenty-six weeks ended August 1, 2009 and August 2, 2008. Excluding the effect
of foreign currency fluctuations, SG&A decreased $37 million and $44 million
for the thirteen and twenty-six weeks ended August 1, 2009, respectively, as
compared with the corresponding prior-year periods. The decrease in the thirteen
and twenty-six weeks ended August 1, 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 $7 million for the
thirteen and twenty-six weeks ended August 1, 2009, respectively. The
inclusion of CCS, which was acquired during the fourth quarter of 2008, did not
significantly affect SG&A.
Depreciation and
Amortization
Depreciation
and amortization decreased by $5 million in the second quarter of 2009 to $28
million as compared with $33 million for the second quarter of 2008.
Depreciation and amortization decreased by $9 million for the twenty-six weeks
ended August 1, 2009 to $56 million as compared with $65 million for the
twenty-six weeks ended August 2, 2008. Excluding the effect of foreign currency
fluctuations, primarily related to the euro, depreciation and amortization
decreased by $3 million and $6 million for the thirteen and twenty-six weeks
ended August 1, 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 $8 million, respectively, associated with 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
|
|
|
Twenty-six weeks ended
|
|
|
|
August 1,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
August 2,
|
|
(in millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
expense
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
9
|
|
Interest
income
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Interest
expense, net
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
3
|
|
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. The decrease in interest income was primarily the result of lower
interest rates on cash, cash equivalents, and short-term
investments.
Other
Income/Expense
Other
income of $1 million and $2 million for the thirteen and twenty-six week periods
ended August 1, 2009, respectively, is primarily related to gains from insurance
proceeds, gain on the purchase and retirement of bonds, and royalty
income. Other income of $2 million for the thirteen and twenty-six
week periods ended August 2, 2008 is primarily related to a lease termination
gain.
Income
Taxes
The
Company’s effective tax rate for the thirteen and twenty-six weeks ended August
1, 2009 was 72.2 percent and 35.4 percent as compared with 36.8 percent and 51.3
percent for the corresponding prior-year periods. The income tax benefit for the
second quarter of 2009 primarily reflects favorable settlements of tax
examinations and a reduced tax rate in a foreign jurisdiction. The decrease in
the rate for the twenty-six weeks is primarily attributable to the
establishment in the prior year of a valuation allowance related to the tax
benefit associated with the impairment of the Northern Group note receivable.
Excluding the effect of the valuation allowance, the effective rate for the
twenty-six weeks ended August 2, 2008 would have been 38.0 percent. If certain
Canadian provincial tax rate reductions are enacted as proposed, the Company
will record a charge of $4 million to $5 million to write-down the value of its
net deferred tax assets. Excluding this charge, the Company expects its
effective rate to range from 36 to 37 percent for the full year of 2009. The
actual rate will also depend in significant part on the proportion of the
Company's worldwide income that is earned in the U.S.
Net Income
(Loss)
For the
thirteen weeks ended August 1, 2009, net income decreased by $18 million, or
$0.11 per diluted share as compared with the thirteen weeks ended August 2,
2008. Net income for the twenty-six weeks ended August 1, 2009 was $31 million,
or $0.20 per diluted share. This compares to net income of $21 million, or $0.13
per diluted share for the twenty-six weeks ended August 2, 2008. Included in the
thirteen weeks ended August 1, 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. Included in the twenty-six weeks ended
August 2, 2008 are charges totaling $20 million (pre-tax), or $0.12 per share,
representing an impairment charge of $15 million related to the Northern Group
note receivable and expenses of $5 million related to the store closing
program.
Management
is in the process of developing various merchandising and expense initiatives in
an effort to improve performance, as well as evaluating the effect of
macroeconomic trends on the Company’s projected future earnings. In the third
quarter, once developed, the Company intends to analyze the effect of these
initiatives and trends on the projected performance of its operations, which may
include an analysis of recoverability of store long-lived assets, goodwill, and
other intangible assets pursuant to SFAS No. 144 and SFAS No.
142.
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. Management believes its cash, cash equivalents, future
operating 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.
On March
20, 2009, the Company entered into a new credit agreement with its banks,
providing for a $200 million revolving credit facility maturing on March 20,
2013 which replaced the prior credit agreement. The new credit
agreement also provides an incremental facility of up to $100 million under
certain circumstances. The new credit agreement provides for a
security interest in certain of the Company’s domestic assets, including certain
inventory assets. No material covenants or payment restrictions exist
unless the Company is borrowing under the agreement and, in that event, the
restrictions vary depending upon the level of borrowings.
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 $83 million and $159 million for the
twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively. These
amounts reflect net income adjusted for non-cash items and working capital
changes. The non-cash charge for the twenty-six weeks ended August 2, 2008
represents a $15 million impairment charge related to the Northern Group note
receivable. The change in merchandise inventories represents the normal seasonal
increase related to the back-to-school selling season. The change in other
accruals primarily represents incentive compensation payments. During the
twenty-six weeks ended August 1, 2009, the Company terminated its interest rate
swaps for a gain of $19 million. Additionally, during the twenty-six weeks ended
August 1, 2009, the Company contributed $11 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. Due to the negative pension asset performance experienced in
2008, the Company made an additional contribution of $29 million during August
2009 to its U.S. qualified pension plan. No further pension contributions are
planned for the balance of the year.
Net cash
used in investing activities was $36 million and $77 million for the twenty-six
weeks ended August 1, 2009 and August 2, 2008, respectively. Included in
investing activities for the twenty-six weeks ended August 1, 2009 is a $1
million gain from insurance recoveries. Additionally, during the second quarter
of 2009, the Company received $10 million, representing further liquidation of
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 August 1,
2009. Capital expenditures were $47 million for the twenty-six weeks
ended August 1, 2009 as compared with $79 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 $103
million, of which $79 million relates to modernizations of existing stores and
new store openings, and $24 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 $49 million and $139 million for the twenty-six
weeks ended August 1, 2009 and August 2, 2008, respectively. During the
twenty-six weeks ended August 1, 2009 and August 2, 2008, the Company purchased
and retired $3 million and $6 million, respectively, of its 8.50 percent
debentures payable in 2022. Additionally, during the twenty-six weeks
ended August 2, 2008 the Company made payments of $88 million, which fully
repaid its 5-year term loan. The Company declared and paid dividends totaling
$47 million for both the twenty-six weeks ended August 1, 2009 and August 2,
2008, representing a rate of $0.15 per share. The Company received proceeds from
the issuance of common stock in connection with employee stock programs of $1
million and $2 million for the twenty-six weeks ended August 1, 2009 and August
2, 2008, respectively.
Recent
Accounting Pronouncements
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” (“FSP No. 157-4”).
FSP No. FAS 157-4 amends Statement No. 157 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. FSP No. FAS 157-4 also requires additional
disclosures about fair value measurements in interim and annual reporting
periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of FSP No. FAS 157-4 did not have a
material effect on the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP No. FAS 115-2 and FAS
124-2 amends the 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 provisions of FSP No. FAS 115-2 and FAS 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
FSP No. FAS 115-2 and FAS 124-2 did not have a material effect on the Company’s
consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” which amends SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies, as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those
disclosures in summarized financial information at interim reporting periods.
FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending
after June 15, 2009. The disclosures required as a result of the adoption of FSP
FAS 107-1 and APB 28-1 are included herein.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” (“SFAS No.
165”) 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. SFAS No. 165 is effective for interim and annual
reporting periods ending after June 15, 2009. The Company adopted SFAS
No. 165 during the second quarter of 2009. See Note 1, Basis of
Presentation, for the disclosure required under SFAS No. 165.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” (“SFAS No. 167”) which changes various aspects of accounting for and
disclosures of interests in variable interest entities. SFAS No. 167 will be
effective for interim and annual reporting periods beginning after November 15,
2009. The adoption of SFAS No. 167 is not expected to have a material effect on
the Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting
Principles,” (“SFAS No. 168”) which establishes the FASB Accounting
Standards Codification as the single source of authoritative generally accepted
accounting principles in the United States, recognized by the FASB to be applied
by nongovernmental entities. SFAS No. 168 will be effective for interim and
annual reporting periods ending after September 15, 2009. SFAS No. 168 is not
intended to modify or alter prior authoritative guidance through the
Codification and, as such, its adoption is not expected to have a material
effect on the Company’s consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material effect on the Company’s present or future
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.
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 August 1,
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 twenty-six weeks ended August 1, 2009, the Company
performed additional reconciliations and analyses and other post-closing
procedures designed to ensure that our condensed consolidated financial
statements for the twenty-six weeks ended August 1, 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 at least
several quarters may be required prior to management being able to conclude that
the material weakness has been remediated.
During
the quarter ended August 1, 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 second quarter of 2009, the Company installed its new system designed to
assist in the reconciliation of Point-of-Sale register transactions to sales and
receipts in all its Canadian formats and one domestic format. The Company’s
international divisions were converted to this system during 2008, and we
currently plan to convert the remaining formats during the third quarter of
2009. 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.
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, uniforms, and calculation of vacation pay. 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
second quarter of 2009.
Item 4. Submission of
Matters to a Vote of Security Holders
(a)
|
The
Company’s annual meeting of shareholders was held on May 20, 2009. There
were represented at the meeting, in person or by proxy, 139,707,647 shares
of Common Stock, par value $0.01 per share, which represented 89.7 percent
of the shares outstanding on March 27, 2009, the record date for the
meeting.
|
(b)
|
Each
of Alan D. Feldman, Jarobin Gilbert Jr., and David Y. Schwartz was elected
as a director in Class III for a three-year term ending at the Annual
Meeting of Shareholders in 2012. Cheryl Nido Turpin was elected as a
director in Class II for a two-year term ending at the Annual Meeting of
Shareholders in 2011. Nicholas DiPaolo, Matthew M. McKenna, James E.
Preston, Matthew D. Serra, and Dona D. Young, having previously been
elected directors of the Company for terms continuing beyond the 2009
Annual Meeting of Shareholders, continue in office as directors of the
Company. In addition, Ken C. Hicks, who was elected a director of the
Company effective August 17, 2009 for a term expiring at the 2010 Annual
Meeting of Shareholders, continues in office as a
director.
|
(c)
|
In
addition to the election of directors, shareholders ratified the
appointment of KPMG as independent accountants and approved the amendment
to the By-Laws. The results of the voting were as
follows:
|
(1)
Election of Directors:
|
|
|
|
|
|
|
|
Abstentions
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Votes
|
|
|
Broker
|
|
Name
|
|
Votes
For
|
|
|
Withheld
|
|
|
Non-Votes
|
|
Alan
D. Feldman
|
|
|
125,556,789 |
|
|
|
14,150,858 |
|
|
|
N/A
|
|
Jarobin
Gilbert, Jr.
|
|
|
126,188,930 |
|
|
|
13,518,717 |
|
|
|
N/A
|
|
David
Y. Schwartz
|
|
|
127,410,876 |
|
|
|
12,296,771 |
|
|
|
N/A
|
|
Cheryl
Nido Turpin
|
|
|
126,146,888 |
|
|
|
13,560,759 |
|
|
|
N/A
|
|
(2)
Proposal to ratify the appointment of independent accountants:
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
138,943,185
|
|
714,556
|
|
49,906
|
|
N/A
|
(3)
Proposal to approve the amendment to the By-Laws:
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
139,080,406
|
|
542,139
|
|
85,102
|
|
N/A
|
Item 6.
Exhibits
(a)
|
Exhibits
|
|
The
exhibits that are in this report immediately follow the
index.
|
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:
September 9, 2009
|
(Company)
|
|
|
|
/s/
Robert W. McHugh
|
|
ROBERT
W. MCHUGH
|
|
Executive
Vice President and Chief Financial
Officer
|
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.
|
|
|
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.
|