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Foot Locker 10-Q 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
For
the quarterly period ended: May 1, 2010
For
the transition period from __________ to __________
Commission
File Number: 1-10299
FOOT
LOCKER, INC.
(Exact
Name of Registrant as Specified in its Charter)
112
West 34th Street,
New York, New York, 10120
(Address
of Principal Executive Offices, Zip Code)
(212-720-3700)
(Registrant’s
Telephone Number, Including Area Code)
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 (§232.405 of this
chapter) 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, or 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.
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 May 29, 2010:
156,206,118 FOOT LOCKER,
INC.
TABLE OF
CONTENTS
2
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
millions, except shares)
3
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
See
Accompanying Notes to Condensed Consolidated Financial
Statements. 4
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in
millions)
See
Accompanying Notes to Condensed Consolidated Financial
Statements. 5
FOOT LOCKER,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
millions)
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 29, 2011 and of the fiscal year ended January
30, 2010. 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 30, 2010, as filed with the Securities and Exchange
Commission (the “SEC”) on March 29, 2010.
Recent
Accounting Pronouncements
Recently
issued accounting pronouncements did not, or are not believed by management to,
have a material effect on the Company’s present or future consolidated financial
statements.
2.
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 annual review of goodwill and
assets with indefinite lives during the first quarters of 2010 and 2009 did not
result in any impairment charges. The following table provides a summary of
goodwill by reportable segment. The change represents foreign
exchange fluctuations.
The
components of finite-lived intangible assets and intangible assets not subject
to amortization are as follows:
7
The
weighted-average amortization period as of May 1, 2010 was 11.8 years.
Amortization expense was $5 million for each of the thirteen week periods ended
May 1, 2010 and May 2, 2009. Estimated amortization expense for
finite life intangible assets is expected to approximate $13 million for the
remainder of 2010, $16 million for 2011, $13 million for 2012, $9 million for
2013 and $3 million for 2014. The change in the net value of the intangible
assets for the thirteen week period ended May 1, 2010 reflects amortization of
$5 million, the effect of the weakening euro as compared with the U.S. dollar of
$2 million, partially offset by additions of $1 million.
3.
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 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 9, Fair Value
Measurements.
Derivative
Holdings Designated as Hedges
For
a derivative to qualify as a hedge at inception and throughout the hedged
period, the Company formally documents the nature of the hedged items and the
relationships between the hedging instruments and the hedged items, as well as
its risk-management objectives, strategies for undertaking the various hedge
transactions, and the methods of assessing hedge effectiveness and hedge
ineffectiveness. In addition, for hedges of forecasted transactions, the
significant characteristics and expected terms of a forecasted transaction must
be specifically identified, and it must be probable that each forecasted
transaction will occur. If it were deemed probable that the forecasted
transaction would not occur, the gain or loss would be recognized in earnings
immediately. No such gains or losses were recognized in earnings for any of the
periods presented. Derivative financial instruments qualifying for hedge
accounting must maintain a specified level of effectiveness between the hedging
instrument and the item being hedged, both at inception and throughout the
hedged period, which management evaluates periodically.
Cash Flow
Hedges
The
primary currencies to which the Company is exposed are the euro, British pound,
Canadian dollar and 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. The amount reclassified to cost of sales related
to such contracts was not significant for any of the periods presented. The
ineffective portion of gains and losses related to cash flow hedges recorded to
earnings was not significant for any of the periods presented. When using a
forward contract as a hedging instrument, the Company excludes the time value
from the assessment of effectiveness. At each quarter-end, the Company had not
hedged 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 net
change in the fair value of foreign exchange derivative financial instruments
designated as cash flow hedges of the purchase of inventory was not significant
for the thirteen-weeks ended May 1, 2010 and was $1 million for the
thirteen-weeks ended May 2, 2009. 8
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. In 2006, the Company
hedged a portion of its net investment in its Canadian subsidiaries. In 2008,
the Company terminated its European and Canadian hedges.
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 instrument attributable to currency rate
fluctuations. As such, adjustments in the fair market value of the hedging
instrument 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 net investment is disposed of.
The
amount recorded within the foreign currency translation adjustment included in
accumulated other comprehensive loss on the Company’s Consolidated Balance Sheet
related to the euro-denominated net investment hedge decreased shareholders’
equity by $15 million, net of tax, at May 1, 2010 and May 2, 2009. The effect on
the Consolidated Statements of Operations related to the net investment hedges
was not significant for the thirteen-week periods ended May 1, 2010 and May 2,
2009.
Derivative
Holdings Designated as Non-Hedges
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, which are designated as
non-hedges, are recorded in earnings immediately within other income. The
realized gains, premiums paid and changes in the fair market value recorded in
the Consolidated Statements of Operations were not significant for the
thirteen-week periods ended May 1, 2010 and May 2, 2009.
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 were substantially offset by the
changes in value of the underlying transactions, which were recorded in selling,
general and administrative expenses. The amount recorded for all the periods
presented was not significant.
The
Company enters into 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 at May 1, 2010 was $4 million and these contracts
extend through November 2010. Changes in the fair value of these contracts are
recorded in earnings immediately. The effect was not significant for any of the
periods presented.
In 2008,
the Company terminated the European net investment 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. 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 also 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:
9
Interest
Rate Risk Management
The
Company historically has employed various interest rate swaps to minimize its
exposure to interest rate fluctuations. On March 20, 2009, the Company
terminated its 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 amount amortized during the thirteen-weeks ended
May 1, 2010 and May 2, 2009 was $1 million in each respective
period.
Fair
Value of Financial Instruments
The
carrying value and estimated fair value of long-term debt was $137 million and
$131 million, respectively, at May 1, 2010 and $138 million and $127 million,
respectively, at January 30, 2010. The carrying values of cash and cash
equivalents, short-term investments and other current receivables and payables
approximate their fair value.
4.
Accumulated Other
Comprehensive Loss
Accumulated
other comprehensive loss comprised the following:
5.
Earnings Per
Share
The
Company accounts for and discloses net earnings per share using the treasury
stock method. The Company’s basic earnings per share is computed by
dividing the Company’s reported net income 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.
The Company’s basic and diluted weighted-average number of common shares
outstanding as of May 1, 2010 and May 2, 2009, were as follows:
Options
to purchase 4.0 million and 6.4 million shares of common stock were not included
in the computation for the thirteen-weeks ended May 1, 2010 and May 2, 2009,
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. 10
6.
Segment
Information
The
Company has determined that its reportable segments are those that are based on
its method of internal reporting. As of May 1, 2010, 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-weeks ended May
1, 2010 and May 2, 2009 are presented below. Division profit reflects income
before income taxes, corporate expense, non-operating income and net interest
expense.
Sales
Operating
Results
7.
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:
During
the thirteen-weeks ended May 1, 2010 the Company made a $2 million contribution
to its Canadian qualified plan. No further pension contributions to
its U.S. or Canadian qualified plans are required in 2010; however, the Company
may make additional contributions to its U.S. qualified plan depending on the
pension fund’s asset performance and other factors. 11
8.
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 $1.5 million and $0.7
million for the thirteen-weeks ended May 1, 2010 and May 2, 2009, respectively.
The following table shows the Company’s assumptions used to compute the
share-based compensation expense:
The
information set forth in the following table covers options granted under the
Company’s stock option plans for the thirteen-weeks ended May 1,
2010:
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) for the thirteen-weeks ended May 1, 2010 was
$0.5 million and was not significant for the thirteen-weeks ended May 2, 2009.
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 May 1, 2010 was $15.3 million and $9.2
million, respectively. The aggregate intrinsic value for stock options
outstanding and exercisable as of May 2, 2009 was $3.9 million and $1.7 million,
respectively.
The cash
received from option exercises for the thirteen-weeks ended May 1, 2010 and May
2, 2009 was $1.0 million and $0.1 million, respectively. The tax benefit
realized from option exercises was not significant for any of the periods
presented. 12
The
following table summarizes information about stock options outstanding and
exercisable at May 1, 2010:
Changes
in the Company’s nonvested options for the thirteen-weeks ended May 1, 2010 are
summarized as follows:
As of May
1, 2010, there was $6.2 million of total unrecognized compensation cost, related
to nonvested stock options, which is expected to be recognized over a
weighted-average period of 1.5 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 May 1, 2010, 127,500 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 thirteen-weeks ended May 1, 2010 and May 2,
2009 is summarized as follows:
The
Company did not grant any restricted stock or unit awards during the first
quarter of 2010. The weighted-average grant-date fair value per share was $9.67
for the thirteen-weeks ended May 2, 2009. The total value of awards for which
restrictions lapsed during the thirteen-weeks ended May 1, 2010 and May 2, 2009
was $9.2 million and $0.9 million, respectively. As of May 1, 2010, there was
$6.4 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 $1.5 million and $1.7 million
for the thirteen-weeks ended May 1, 2010 and May 2, 2009,
respectively. 13
9.
Fair Value
Measurements
The
following tables provide a summary of the Company’s recognized assets and
liabilities that are measured at fair value on a recurring basis:
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
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. There was no
activity for this investment during the thirteen-weeks ended May 1,
2010. 14
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,
Footaction, and CCS.
The
Direct-to-Customers segment is multi-branded and multi-channeled. This segment
sells, through its affiliates, directly to customers through catalogs and its
Internet websites. Eastbay, one of the affiliates, is among the largest direct
marketers in the United States. This segment also operates websites
aligned with the brand names of the retail store banners (footlocker.com,
ladyfootlocker.com, kidsfootlocker.com, footaction.com, champssports.com, and
ccs.com).
STORE
COUNT
At May 1,
2010, the Company operated 3,485 stores as compared with 3,500 and 3,633 stores
at January 30, 2010 and May 2, 2009, respectively. During the thirteen-weeks
ended May 1, 2010, the Company opened 14 stores, remodeled or relocated 42
stores and closed 29 stores.
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