Foot Locker (FL)

Merchandise Inventories and Cost of Sales

     Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out (LIFO) basis for domestic inventories and on the first-in, first-out (FIFO) basis for international inventories. The retail inventory method is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which approximates FIFO. Transportation, distribution center and sourcing costs are capitalized in merchandise inventories. In 2006, the Company adopted SFAS No. 151, “Inventory Costs- An Amendment of ARB 43, Chapter 4.” This standard amends the guidance to clarify that abnormal amount of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. With the adoption of this standard the Company no longer capitalized the freight associated with transfers between its store locations. The Company maintains an accrual for shrinkage based on historical rates.

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Merchandise Inventories and
Cost of Sales

     Merchandise inventories for the Company’s Athletic Stores are valued at
the lower of cost or market using the retail inventory method. Cost for retail
stores is determined on the last-in, first-out (LIFO) basis for domestic
inventories and on the first-in, first-out (FIFO) basis for international
inventories. The retail inventory method is commonly used by retail companies to
value inventories at cost and calculate gross margins due to its practicality.
Under the retail method, cost is determined by applying a cost-to-retail
percentage across groupings of similar items, known as departments. The
cost-to-retail percentage is applied to ending inventory at its current owned
retail valuation to determine the cost of ending inventory on a department
basis. The Company provides reserves based on current selling prices when the
inventory has not been marked down to market. Merchandise inventories of the
Direct-to-Customers business are valued at the lower of cost or market using
weighted-average cost, which approximates FIFO. Transportation, distribution
center and sourcing costs are capitalized in merchandise inventories. In 2006,
the Company adopted SFAS No. 151, “Inventory Costs- An Amendment of ARB 43,
Chapter 4.” This standard amends the guidance to clarify that abnormal amount of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges. With the adoption of this
standard the Company no longer capitalized the freight associated with transfers
between its store locations. The Company maintains an accrual for shrinkage
based on historical rates.

35

Merchandise Inventories and Cost of Sales

     Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out (LIFO) basis for domestic inventories and on the first-in, first-out (FIFO) basis for international inventories. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which approximates FIFO. Transportation, distribution center and sourcing costs are capitalized in merchandise inventories. In 2006, the Company adopted SFAS No. 151, “Inventory Costs- An Amendment of ARB 43, Chapter 4.” This standard amends the guidance to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. With the adoption of this standard the Company no longer capitalized the freight associated with transfers between its store locations.

     Cost of sales is comprised of the cost of merchandise, occupancy, buyers’ compensation and shipping and handling costs. The cost of merchandise is recorded net of amounts received from vendors for damaged product returns, markdown allowances and volume rebates, as well as cooperative advertising reimbursements received in excess of specific, incremental advertising expenses. Occupancy reflects the amortization of amounts received from landlords for tenant improvements.

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Merchandise Inventories and Cost of Sales