Edgar Filing: FOOT LOCKER INC

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

(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.

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