(Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(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 West 34th Street, New York, New York | 10120 | |
(Address of principal executive offices) | (Zip Code) |
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 Website, 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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 Act).Yes o No x
Number of shares of Common Stock outstanding at March 18, 2013: | 150,129,128 | |||
The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing price as of the last business day of the Registrants most recently completed second fiscal quarter, July 27, 2012, was approximately: | $ | 4,025,401,193* |
* | For purposes of this calculation only (a) all directors plus three executive officers and owners of five percent or more of the Registrant are deemed to be affiliates of the Registrant and (b) shares deemed to be held by such persons include only outstanding shares of the Registrants voting stock with respect to which such persons had, on such date, voting or investment power. |
Portions of the Registrants definitive Proxy Statement (the Proxy Statement) to be filed in connection with the Annual Meeting of Shareholders to be held on May 15, 2013: Parts III and IV.
Item 1. | Business |
Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailer of athletically inspired shoes and apparel, operating 3,335 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of February 2, 2013. Foot Locker, Inc. and its subsidiaries hereafter are referred to as the Registrant, Company, we, our, or us. Information regarding the business is contained under the Business Overview section in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The Company maintains a website on the Internet at www.footlocker-inc.com. The Companys filings with the Securities and Exchange Commission, including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through this website as soon as reasonably practicable after they are filed with or furnished to the SEC by clicking on the SEC Filings link. The Corporate Governance section of the Companys corporate website contains the Companys Corporate Governance Guidelines, Committee Charters, and the Companys Code of Business Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request to the Companys Corporate Secretary at 112 West 34th Street, New York, N.Y. 10120. The Company intends to promptly disclose amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the Corporate Governance section of the Companys corporate website.
The financial information concerning business segments, divisions and geographic areas is contained under the Business Overview and Segment Information sections in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. Information regarding sales, operating results and identifiable assets of the Company by business segment and by geographic area is contained under the Segment Information note in Item 8. Consolidated Financial Statements and Supplementary Data.
The service marks and trademarks appearing in this report (except for Nike, Inc. and Alshaya Trading Co. W.L.L.) are owned by Foot Locker, Inc. or its subsidiaries.
The Company and its consolidated subsidiaries had 13,356 full-time and 27,283 part-time employees at February 2, 2013. The Company considers employee relations to be satisfactory.
Financial information concerning competition is contained under the Business Risk section in the Financial Instruments and Risk Management note in Item 8. Consolidated Financial Statements and Supplementary Data.
Financial information concerning merchandise purchases is contained under the Liquidity section in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and under the Business Risk section in the Financial Instruments and Risk Management note in Item 8. Consolidated Financial Statements and Supplementary Data.
1
Item 1A. | Risk Factors |
The statements contained in this Annual Report on Form 10-K (Annual Report) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in Item 1. Business and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please also see Disclosure Regarding Forward-Looking Statements. Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance.
Our ability to successfully implement and execute our long range plan is dependent on many factors. Our strategies may require significant capital investment and management attention, which may result in the diversion of these resources from our core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store design, competition, product differentiation, and the ability to attract and retain qualified personnel. If we cannot successfully execute our strategic growth initiatives or if the long range plan does not adequately address the challenges or opportunities we face, our financial condition and results of operations may be adversely affected.
The retail athletic footwear and apparel business is highly competitive with relatively low barriers to entry. Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores and superstores, department stores, discount stores, traditional shoe stores, and mass merchandisers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are selection of merchandise, reputation, store location, price, quality, advertising, and customer service. Our success also depends on our ability to differentiate ourselves from our competitors with respect to shopping convenience, a quality assortment of available merchandise and superior customer service. We cannot assure that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition, and results of operations.
Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, all of our significant vendors distribute products directly through the Internet and others may follow. Some vendors operate retail stores and some have indicated that further retail stores and venues will open. Should this continue to occur, and if our customers decide to purchase directly from our vendors, it could have a material adverse effect on our business, financial condition, and results of operations.
The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from vendors. A substantial portion of our highest margin sales are to young males (ages 12 25), many of whom we believe purchase athletic footwear and athletic and licensed apparel as a fashion statement and are frequent purchasers. Any shift in fashion trends that would make athletic footwear or athletic and licensed apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.
2
We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order the bulk of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.
Our business is dependent to a significant degree upon our ability to obtain exclusive product and the ability to purchase brand-name merchandise at competitive prices from a limited number of vendors. In addition, our vendors provide volume discounts, cooperative advertising, and markdown allowances, as well as the ability to negotiate returns of excess or unneeded merchandise. We cannot be certain that such assistance from our vendors will continue in the future.
The Company purchased approximately 86 percent of its merchandise in 2012 from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 65 percent was purchased from one vendor Nike, Inc. (Nike). Each of our operating divisions is highly dependent on Nike; they individually purchased 48 to 77 percent of their merchandise from Nike. Merchandise that is high profile and in high demand is allocated by our vendors based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our vendors will continue to allocate sufficient amounts of such merchandise to us in the future. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nikes reputation, financial condition or results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future.
These risks could have a material adverse effect on our business, financial condition, and results of operations.
Our stores in the United States and Canada are located primarily in enclosed regional and neighborhood malls. Our sales are dependent, in part, on the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing of anchor department stores and/or specialty stores, and a decline in the popularity of mall shopping among our target customers. Further, any terrorist act, natural disaster, or public health concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in affected areas, could have a material adverse effect on our business.
To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by the overall poor economic conditions as well as the closure of certain mall anchor tenants.
Several large landlords dominate the ownership of prime malls, particularly in the United States and Canada, and because of our dependence upon these landlords for a substantial number of our locations, any significant erosion of their financial condition or our relationships with these landlords would negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.
3
Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, and weather conditions. Many of our products, particularly high-end athletic footwear and athletic and licensed apparel, represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.
A significant portion of our sales and operating income for 2012 was attributable to our operations in Europe, Canada, Australia, and New Zealand. As a result, our business is subject to the risks associated with doing business outside of the United States such as foreign customer preferences, political unrest, disruptions or delays in shipments, changes in economic conditions in countries in which we operate, and labor and employment practices in non-U.S. jurisdictions that may differ significantly from those that prevail in the United States.
In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.
Our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties and changes in tax legislation or regulation could have a material adverse effect on our results of operations and financial condition.
Fluctuations in the value of the euro may affect the value of our European earnings when translated into U.S. dollars. Although we enter into forward foreign exchange contracts and option contracts to reduce the effect of foreign currency exchange rate fluctuations, our operations may be adversely affected by significant changes in the foreign currencies relative to the U.S. dollar.
Our performance is subject to global economic conditions and the related impact on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset values, which could have a material negative effect on demand for our products.
As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home prices. There is also a risk that if negative economic conditions persist for a long period of time or worsen, consumers may make long-lasting reductions to their discretionary purchasing behavior. These and other economic factors could adversely affect demand for our products and services and our financial condition and operating results.
4
Past disruptions in the U.S. and global credit and equity markets made it difficult for many businesses to obtain financing on acceptable terms. Although we currently have a revolving credit agreement in place until January 27, 2017 and do not have any borrowings under it (other than amounts used for standby letters of credit), tightening of credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of the Companys securities. Additionally, our borrowing costs can be affected by independent rating agencies ratings, which are based largely on our performance as measured by credit metrics, including lease-adjusted leverage ratios.
We rely on a few key vendors for a majority of our merchandise purchases (including a significant portion from one key vendor). The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver merchandise to us. Our inability to obtain merchandise in a timely manner from major suppliers could have a material adverse effect on our business, financial condition, and results of operations.
At February 2, 2013, our cash, cash equivalents, and short-term investments totaled $928 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of February 2, 2013, we had $543 million of cash and cash equivalents held in foreign jurisdictions. We regularly monitor our counterparty credit risk and mitigate our exposure by making short-term investments only in highly-rated institutions and by limiting the amount we invest in any one institution. We continually monitor the creditworthiness of our counterparties. At February 2, 2013, almost all of the investments were in institutions rated A or better from a major credit rating agency. Despite those ratings, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues.
Our U.S. pension plan trust holds assets totaling $585 million at February 2, 2013. The fair values of these assets held in the trust are compared to the plans projected benefit obligation to determine the pension funding liability. We attempt to mitigate funding risk through asset diversification, and we regularly monitor investment risk of our portfolio through quarterly investment portfolio reviews and periodic asset and liability studies. Despite these measures, it is possible that the value of our portfolio may decline in the future due to any number of factors, including general market conditions and credit issues. Such declines could have an impact on the funded status of our pension plans and future funding requirements.
We review our long-lived assets, goodwill and other intangible assets when events indicate that the carrying value of such assets may be impaired. Goodwill and other indefinite lived intangible assets are reviewed for impairment if impairment indicators arise and, at a minimum, annually. We determine fair value based on a combination of a discounted cash flow approach and market-based approach. If an impairment trigger is identified, the carrying value is compared to its estimated fair value and provisions for impairment are recorded as appropriate. Impairment losses are significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our strategic long-range plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by such factors as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, goodwill and other intangible assets and could result in future impairment charges, which would adversely affect our results of operations.
5
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our provision for income taxes is based on a jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. Our effective tax rate could be adversely affected by a number of factors, including shifts in the mix of pretax results by tax jurisdiction, changes in tax laws or related interpretations in the jurisdictions in which we operate, and tax assessments and related interest and penalties resulting from income tax audits.
A substantial portion of our cash and investments is invested outside of the U.S. As we plan to permanently reinvest our foreign earnings outside the U.S., in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. Recent proposals to reform U.S. tax rules may result in a reduction or elimination of the deferral of U.S. income tax on our foreign earnings, which could adversely affect our effective tax rate. Any of these changes could have an adverse effect on our results of operations and financial condition.
Natural disasters, including earthquakes, hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt the operations of our suppliers, our operations, our customers, or have an adverse effect on customer demand. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.
We require our independent manufacturers to comply with our policies and procedures, which cover many areas including labor, health and safety and environmental standards. We monitor compliance with our policies and procedures using internal resources, as well as third-party monitoring firms. Although we monitor their compliance with these policies and procedures, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our policies and procedures or local laws in the country of manufacture could disrupt the shipment of merchandise to us, force us to locate alternate manufacturing sources, reduce demand for our merchandise, or damage our reputation.
We operate four distribution centers worldwide to support our businesses. In addition to the distribution centers that we operate, we have third-party arrangements to support our operations in the U.S., Canada, Australia, and New Zealand. If complications arise with any facility or any facility is severely damaged or destroyed, our other distribution centers may not be able to support the resulting additional distribution demands. This may adversely affect our ability to deliver inventory on a timely basis. We depend upon third-party carriers for shipment of a significant amount of merchandise. An interruption in service by these carriers for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.
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Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of sales. We enter into diesel fuel forward and option contracts to mitigate a portion of the risk associated with the variability caused by these surcharges.
Information technology is a critically important part of our business operations. We depend on information systems to process transactions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, or other causes.
Our business involves the storage and transmission of customers personal information, such as consumer preferences and credit card information. We invest in industry-standard security technology to protect the Companys data and business processes against the risk of data security breaches and cyber-attacks. Our data security management program includes identity, trust, vulnerability and threat management business processes, as well as enforcement of standard data protection policies such as Payment Card Industry compliance. We measure our data security effectiveness through industry accepted methods and remediate critical findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification measures. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness.
While we believe that our security technology and processes are adequate in preventing security breaches and in reducing cyber security risks, given the ever-increasing abilities of those intent on breaching cyber security measures and given our reliance on the security and other efforts of third-party vendors, the total security effort at any point in time may not be completely effective, and any such security breaches and cyber incidents could adversely affect our business. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to us, our employees, and those with whom we do business. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information by us could also severely damage our reputation, expose us to the risks of litigation and liability, and harm our business. While we carry insurance that would mitigate the losses to an extent, such insurance may be insufficient to compensate us for potentially significant losses.
Our digital operations are subject to numerous risks, including risks related to the failure of the computer systems that operate our websites and mobile sites and their related support systems, computer viruses, telecommunications failures, and similar disruptions. Also, we may require additional capital in the future to sustain or grow our digital commerce. Business risks related to digital commerce include risks associated with the need to keep pace with rapid technological change, Internet security risks, risks of system failure or inadequacy, governmental regulation and legal uncertainties with respect to the Internet, and collection of sales or other taxes by additional states or foreign jurisdictions. If any of these risks materializes, it could have a material adverse effect on our business.
7
Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management team, as well as store personnel and field management. Our success depends to a significant extent both upon the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. Competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot attract and retain qualified associates. Many of the store and field associates are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, and changing demographics. If we are unable to attract and retain quality associates, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. In addition, a large number of our retail employees are paid the prevailing minimum wage, which if increased would negatively affect our profitability.
The National Labor Relations Board continually considers changes to labor regulations, many of which could significantly affect the nature of labor relations in the U.S. and how union elections and contract negotiations are conducted. In 2011, the National Labor Relations Boards definition of a bargaining unit changed, making it possible for smaller groups of employees to organize labor unions. Furthermore, recent regulations may streamline the election process, shortening the time between the filing of a petition and an election being held. These regulations and recent decisions could impose more labor relations requirements and union activity on our business conducted in the United States, thereby potentially increasing our costs, which could negatively affect our profitability.
In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health reform legislation and the large number of eligible employees who currently choose not to participate in our plans, it is difficult to predict the overall effect of the statute and related regulations on our business over the coming years. Eligible employees who currently choose not to participate in our healthcare plans may find it more advantageous to do so when recent changes to healthcare laws in the United States become effective in 2014. Such changes include tax penalties to persons for not obtaining healthcare coverage and being ineligible for certain healthcare subsidies if an employee is eligible for healthcare coverage under an employer's plan. If a large number of current eligible employees, who currently choose not to participate in our plans, choose to enroll when, or after, the law becomes effective, it may significantly increase our healthcare coverage costs and negatively affect our financial results.
There has been an increasing focus and significant debate on global climate change recently, including increased attention from regulatory agencies and legislative bodies globally. This increased focus may lead to new initiatives directed at regulating an as-yet unspecified array of environmental matters. Legislative, regulatory or other efforts in the United States to combat climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business.
8
We are exposed to the risk that federal or state legislation may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation could increase our cost of doing business or otherwise adversely affect our operations. Additionally, we are regularly involved in various litigation matters, including class actions and patent infringement claims, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.
The U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, which is broader in scope than the FCPA, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents.
Our continued expansion outside the U.S., including in developing countries, could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition.
We continue to document, test, and monitor our internal controls over financial reporting in order to satisfy all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; however we cannot be assured that our disclosure controls and procedures and our internal controls over financial reporting will prove to be completely adequate in the future. Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock, and market confidence in our reported financial information.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
The properties of the Company and its consolidated subsidiaries consist of land, leased stores, administrative facilities, and distribution centers. Gross square footage and total selling area for the Athletic Stores segment at the end of 2012 were approximately 12.32 and 7.26 million square feet, respectively. These properties, which are primarily leased, are located in the United States, Canada, various European countries, Australia, and New Zealand.
The Company currently operates four distribution centers, of which two are owned and two are leased, occupying an aggregate of 2.5 million square feet. Three of the four distribution centers are located in the United States and one is in the Netherlands. We also own a cross-dock facility and operate a leased manufacturing facility in the U.S., both of which we operate in support of our Team Edition apparel business.
Item 3. | Legal Proceedings |
Information regarding the Companys legal proceedings is contained in the Legal Proceedings note under Item 8. Consolidated Financial Statements and Supplementary Data.
Item 4. | Mine Safety Disclosures |
Not applicable.
9
Information with respect to Executive Officers of the Company, as of April 1, 2013, is set forth below:
Chairman of the Board, President and Chief Executive Officer | Ken C. Hicks | |
Executive Vice President and Chief Operating Officer | Richard A. Johnson | |
Executive Vice President Operations Support | Robert W. McHugh | |
Executive Vice President and Chief Financial Officer | Lauren B. Peters | |
Senior Vice President, General Counsel and Secretary | Gary M. Bahler | |
Senior Vice President Real Estate | Jeffrey L. Berk | |
Senior Vice President and Chief Information Officer | Peter D. Brown | |
Senior Vice President and Chief Accounting Officer | Giovanna Cipriano | |
Senior Vice President Human Resources | Laurie J. Petrucci | |
Vice President, Treasurer and Investor Relations | John A. Maurer |
Ken C. Hicks, age 60, has served as Chairman of the Board since January 31, 2010 and President and Chief Executive Officer since August 17, 2009. Mr. Hicks served as President and Chief Merchandising Officer of J.C. Penney Company, Inc. (JC Penney) from 2005 through 2009. He was President and Chief Operating Officer of Stores and Merchandise Operations of JC Penney from 2002 through 2004, and he served as President of Payless ShoeSource, Inc. from 1999 to 2002. Mr. Hicks is also a director of Avery Dennison Corporation.
Richard A. Johnson, age 55, has served as Executive Vice President and Chief Operating Officer since May 16, 2012. He served as Executive Vice President and Group President from July 2011 to May 15, 2012; President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from January 2010 to July 2011; President and Chief Executive Officer of Foot Locker Europe from August 2007 to January 2010; and President and Chief Executive Officer of Footlocker.com/Eastbay from April 2003 to August 2007. Mr. Johnson is a director of Maidenform Brands, Inc.
Robert W. McHugh, age 54, has served as Executive Vice President Operations Support since July 2011. He served as Executive Vice President and Chief Financial Officer from May 2009 to July 2011; and Senior Vice President and Chief Financial Officer from November 2005 through April 2009.
Lauren B. Peters, age 51, has served as Executive Vice President and Chief Financial Officer since July 2011. She served as Senior Vice President Strategic Planning from April 2002 to July 2011.
Gary M. Bahler, age 61, has served as Senior Vice President since August 1998, General Counsel since February 1993 and Secretary since February 1990.
Jeffrey L. Berk, age 57, has served as Senior Vice President Real Estate since February 2000.
Peter D. Brown, age 58, has served as Senior Vice President and Chief Information Officer since February 2011. He served as Senior Vice President, Chief Information Officer and Investor Relations from September 2006 to February 2011; and as Vice President Investor Relations and Treasurer from October 2001 to September 2006.
Giovanna Cipriano, age 43, has served as Senior Vice President and Chief Accounting Officer since May 2009. Ms. Cipriano served as Vice President and Chief Accounting Officer from November 2005 through April 2009.
Laurie J. Petrucci, age 54, has served as Senior Vice President Human Resources since May 2001.
John A. Maurer, age 53, has served as Vice President, Treasurer and Investor Relations since February 2011. Mr. Maurer served as Vice President and Treasurer from September 2006 to February 2011. He served as Divisional Vice President and Assistant Treasurer from April 2006 to September 2006.
There are no family relationships among the executive officers or directors of the Company.
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Item 5. | Market for the Companys Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Foot Locker, Inc. common stock (ticker symbol FL) is listed on The New York Stock Exchange as well as on the Börse Stuttgart stock exchange in Germany. As of February 2, 2013, the Company had 17,047 shareholders of record owning 150,069,929 common shares.
The following table provides, for the period indicated, the intra-day high and low sales prices for the Companys common stock:
2012 | 2011 | |||||||||||||||
High | Low | High | Low | |||||||||||||
1st Quarter | $ | 32.27 | $ | 26.00 | $ | 22.03 | $ | 17.21 | ||||||||
2nd Quarter | 34.00 | 27.86 | 25.50 | 21.00 | ||||||||||||
3rd Quarter | 37.65 | 32.51 | 23.02 | 16.66 | ||||||||||||
4th Quarter | 36.09 | 31.07 | 26.82 | 20.82 |
During each of the quarters of 2012 the Company declared a dividend of $0.18 per share. The Board of Directors reviews the dividend policy and rate, taking into consideration the overall financial and strategic outlook for our earnings, liquidity, and cash flow projections. On February 20, 2013, the Board of Directors declared a quarterly dividend of $0.20 per share to be paid on May 3, 2013. This dividend represents an 11 percent increase over the Companys previous quarterly per share amount.
The following table is a summary of our fourth quarter share repurchases:
Date Purchased | Total Number of Shares Purchased(1) |
Average Price Paid per Share(1) |
Total Number of Shares Purchased as Part of Publicly Announced Program(2) |
Approximate Dollar Value of Shares that may yet be Purchased Under the Program(2) |
||||||||||||
Oct. 28, 2012 Nov. 24, 2012 | | | | $ | 305,735,784 | |||||||||||
Nov. 25, 2012 Dec. 29, 2012 | 1,039,000 | $ | 33.68 | 1,039,000 | $ | 270,737,739 | ||||||||||
Dec. 30, 2012 Feb. 2, 2013 | | | | $ | 270,737,739 | |||||||||||
1,039,000 | $ | 33.68 | 1,039,000 | $ | 270,739,739 |
(1) | These columns also reflect shares purchased in connection with stock swaps. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares. |
(2) | On February 14, 2012, the Companys Board of Directors approved a 3-year, $400 million share repurchase program extending through January 2015. Through February 2, 2013, 4.0 million shares of common stock were purchased under this program, for an aggregate cost of $129 million. |
On February 20, 2013, the Board of Directors approved a new 3-year, $600 million share repurchase program extending through January 2016, replacing the Companys previous $400 million program which terminated on that date.
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The following graph compares the cumulative five-year total return to shareholders on Foot Locker, Inc.s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell Midcap Index.
The following Performance Graph and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
2/2/2008 | 1/31/2009 | 1/30/2010 | 1/29/2011 | 1/28/2012 | 2/2/2013 | |||||||||||||||||||
Foot Locker, Inc. | $ | 100.00 | $ | 52.80 | $ | 80.99 | $ | 127.47 | $ | 189.67 | $ | 247.92 | ||||||||||||
S&P 400 Retailing Index | $ | 100.00 | $ | 58.94 | $ | 102.23 | $ | 144.76 | $ | 174.61 | $ | 213.90 | ||||||||||||
Russell Midcap Index | $ | 100.00 | $ | 55.58 | $ | 79.89 | $ | 103.28 | $ | 105.52 | $ | 122.85 |
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Item 6. | Selected Financial Data |
The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other information contained elsewhere in this report.
($ in millions, except per share amounts) | 2012(1) | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Summary of Continuing Operations |
||||||||||||||||||||
Sales | $ | 6,182 | 5,623 | 5,049 | 4,854 | 5,237 | ||||||||||||||
Gross margin | 2,034 | 1,796 | 1,516 | 1,332 | 1,460 | |||||||||||||||
Selling, general and administrative expenses | 1,294 | 1,244 | 1,138 | 1,099 | 1,174 | |||||||||||||||
Impairment and other charges | 12 | 5 | 10 | 41 | 259 | |||||||||||||||
Depreciation and amortization | 118 | 110 | 106 | 112 | 130 | |||||||||||||||
Interest expense, net | 5 | 6 | 9 | 10 | 5 | |||||||||||||||
Other income | (2 | ) | (4 | ) | (4 | ) | (3 | ) | (8 | ) | ||||||||||
Income (loss) from continuing operations, after-tax | 397 | 278 | 169 | 47 | (79 | ) | ||||||||||||||
Per Common Share Data |
||||||||||||||||||||
Basic earnings | 2.62 | 1.81 | 1.08 | 0.30 | (0.52 | ) | ||||||||||||||
Diluted earnings | 2.58 | 1.80 | 1.07 | 0.30 | (0.52 | ) | ||||||||||||||
Common stock dividends declared per share | 0.72 | 0.66 | 0.60 | 0.60 | 0.60 | |||||||||||||||
Weighted-average Common Shares Outstanding |
||||||||||||||||||||
Basic earnings | 151.2 | 153.0 | 155.7 | 156.0 | 154.0 | |||||||||||||||
Diluted earnings | 154.0 | 154.4 | 156.7 | 156.3 | 154.0 | |||||||||||||||
Financial Condition |
||||||||||||||||||||
Cash, cash equivalents, and short-term investments | $ | 928 | 851 | 696 | 589 | 408 | ||||||||||||||
Merchandise inventories | 1,167 | 1,069 | 1,059 | 1,037 | 1,120 | |||||||||||||||
Property and equipment, net | 490 | 427 | 386 | 387 | 432 | |||||||||||||||
Total assets | 3,367 | 3,050 | 2,896 | 2,816 | 2,877 | |||||||||||||||
Long-term debt | 133 | 135 | 137 | 138 | 142 | |||||||||||||||
Total shareholders equity | 2,377 | 2,110 | 2,025 | 1,948 | 1,924 | |||||||||||||||
Financial Ratios |
||||||||||||||||||||
Sales per average gross square foot(2) | $ | 443 | 406 | 360 | 333 | 350 | ||||||||||||||
Earnings before interest and taxes (EBIT)(3) | 612 | 441 | 266 | 83 | (95 | ) | ||||||||||||||
EBIT margin(3) | 9.9 | % | 7.8 | 5.3 | 1.7 | (1.8 | ) | |||||||||||||
Net income margin(3) | 6.4 | % | 4.9 | 3.3 | 1.0 | (1.5 | ) | |||||||||||||
Return on assets (ROA) | 12.4 | % | 9.4 | 5.9 | 1.7 | (2.6 | ) | |||||||||||||
Return on invested capital (ROIC)(4) | 14.2 | % | 11.8 | 8.3 | 5.3 | 5.4 | ||||||||||||||
Net debt capitalization percent(5) | 37.2 | % | 36.0 | 39.0 | 43.0 | 46.7 | ||||||||||||||
Current ratio | 3.7 | 3.8 | 4.0 | 4.1 | 4.2 | |||||||||||||||
Other Data |
||||||||||||||||||||
Capital expenditures | $ | 163 | 152 | 97 | 89 | 146 | ||||||||||||||
Number of stores at year end | 3,335 | 3,369 | 3,426 | 3,500 | 3,641 | |||||||||||||||
Total selling square footage at year end (in millions) | 7.26 | 7.38 | 7.54 | 7.74 | 8.09 | |||||||||||||||
Total gross square footage at year end (in millions) | 12.32 | 12.45 | 12.64 | 12.96 | 13.50 |
(1) | 2012 represents the 53 weeks ended February 2, 2013. |
(2) | Calculated as Athletic Store sales divided by the average monthly ending gross square footage of the last thirteen months. The computation for each of the years presented reflects the foreign exchange rate in affect for such year. The 2012 amount has been calculated excluding the sales of the 53rd week. |
(3) | Calculated using results from continuing operations. |
(4) | See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations Reconciliation of Non-GAAP Measures for additional information and calculation. |
(5) | Represents total debt, net of cash, cash equivalents, and short-term investments. Additionally, this calculation includes the present value of operating leases, and accordingly is considered a non-GAAP measure. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc. and CCS, which sell to customers through their Internet websites, mobile devices, and catalogs.
The Foot Locker brand is one of the most widely recognized names in the markets in which the Company operates, epitomizing high quality for the active lifestyle customer. This brand equity has aided the Companys ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker, Footaction and Kids Foot Locker, as well as Footlocker.com, its direct-to-customers business. Through various marketing channels, including broadcast, digital, print, and various sports sponsorships and events, the Company reinforces its image with a consistent message- namely, that it is the destination for athletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment.
Square Footage | ||||||||||||||||||||||||||||
January 28, 2012 | Opened | Closed | February 2, 2013 | Relocations/Remodels | (in thousands) | |||||||||||||||||||||||
Selling | Gross | |||||||||||||||||||||||||||
Foot Locker US | 1,118 | 9 | 55 | 1,072 | 58 | 2,515 | 4,311 | |||||||||||||||||||||
Foot Locker Europe | 561 | 39 | 10 | 590 | 41 | 808 | 1,770 | |||||||||||||||||||||
Foot Locker Canada | 129 | 2 | 2 | 129 | 9 | 264 | 406 | |||||||||||||||||||||
Foot Locker Asia Pacific | 91 | 3 | 2 | 92 | 5 | 128 | 206 | |||||||||||||||||||||
Lady Foot Locker | 331 | 1 | 29 | 303 | 17 | 398 | 685 | |||||||||||||||||||||
Kids Foot Locker | 291 | 18 | 4 | 305 | 13 | 421 | 727 | |||||||||||||||||||||
Footaction | 292 | 1 | 10 | 283 | 18 | 817 | 1,299 | |||||||||||||||||||||
Champs Sports | 534 | 12 | 7 | 539 | 37 | 1,876 | 2,861 | |||||||||||||||||||||
CCS | 22 | | | 22 | | 34 | 51 | |||||||||||||||||||||
Total | 3,369 | 85 | 119 | 3,335 | 198 | 7,261 | 12,316 |
The Company operates 3,335 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segments operating businesses:
Foot Locker Sneaker Central Foot Locker is a leading global athletic footwear and apparel retailer. Its stores offer the latest in athletically-inspired performance products, manufactured primarily by the leading athletic brands. Foot Locker offers products for a wide variety of activities including basketball, running, and training. Additionally, we operate 65 House of Hoops, primarily a shop-in-shop concept, which sells premier basketball inspired products. Foot Lockers 1,883 stores are located in 23 countries including 1,072 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 129 in Canada, 590 in Europe, and a combined 92 in Australia and New Zealand. The domestic stores have an average of 2,300 selling square feet and the international stores have an average of 1,500 selling square feet.
Lady Foot Locker The Place for Her Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel, and accessories for active women. Its stores carry major athletic footwear and apparel brands, as well as casual wear and an assortment of apparel designed for a variety of activities, including running, walking, training, and fitness. In November 2012, the Company announced the introduction of a new banner named SIX:02. This new banner is an elevated retail concept featuring top brands in fitness apparel and athletic footwear for women. Lady Foot Locker and SIX:02 operate 300 and 3 stores, respectively, and are located in the United States, Puerto Rico, and the U.S. Virgin Islands. These stores have an average of 1,300 selling square feet.
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Kids Foot Locker Where Kids Come First Kids Foot Locker is a national childrens athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Its 305 stores are located in the United States, Puerto Rico, the U.S. Virgin Islands, Europe, and Canada. These stores have an average of 1,400 selling square feet.
Footaction Head-to-Toe Sport Inspired Style Footaction is a national athletic footwear and apparel retailer. The primary customer is a confident, influential young male who is driven by style and is always thoughtful about his look. Its 283 stores are located throughout the United States and Puerto Rico and focus on marquee footwear and branded apparel. The Footaction stores have an average of 2,900 selling square feet.
Champs Sports We Know Game Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. Its product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to differentiate itself from other mall-based stores by presenting complete head-to-toe merchandising stories representing the most powerful athletic brands, sports teams, and athletes in North America. Its 539 stores are located throughout the United States, Canada, Puerto Rico, and the U.S. Virgin Islands. The Champs Sports stores have an average of 3,500 selling square feet.
CCS As of February 2, 2013, we operated 22 stores in the United States. During the first quarter of 2013, we expect to close all the locations. The CCS brand will be operated solely as an ecommerce business.
The Companys Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites, mobile devices, and catalogs. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamservices.com, ccs.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footaction.com, and champssports.com).
Eastbay First Choice for Athletes Eastbay is among the largest direct marketers in the United States, providing the high school athlete with a complete sports solution including athletic footwear, apparel, equipment, team licensed, and private-label merchandise.
CCS We are Board Culture In 2008, the Company purchased CCS, an Internet and catalog retailer of skateboard equipment, apparel, footwear, and accessories. CCS serves the needs of the 12-20 year old seeking an authentic board lifestyle shop. CCS is anchored in skate but appealing to the surrounding board culture. The CCS format offers board lifestyle merchandise that will fit the needs of the customer all year long and stocks the best selection of both core and lifestyle brands. The retail store operations of CCS are included in the Athletic Stores segment.
In 2006, the Company entered into a ten-year area development agreement with the Alshaya Trading Co. W.L.L., for the operation of Foot Locker stores located within the Middle East, subject to certain restrictions. Additionally, in 2007, the Company entered into a ten-year agreement with another third party for the exclusive right to open and operate Foot Locker stores in the Republic of Korea.
A total of 42 franchised stores were operating at February 2, 2013. Royalty income from the franchised stores was not significant for any of the periods presented. These stores are not included in the Companys operating store count above.
In the following tables, the Company has presented certain financial measures and ratios identified as non-GAAP. The Company believes this non-GAAP information is a useful measure to investors because it allows for a more direct comparison of the Companys performance for 2012 as compared with prior years and is useful in assessing the Companys progress in achieving its long-term financial objectives.
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The 2012 results represent the 53 weeks ended February 2, 2013 as compared with 52 weeks in the 2011 and 2010 reporting years.
The following represents a reconciliation of the non-GAAP measures discussed throughout the Overview of Consolidated Results:
2012 | 2011 | 2010 | ||||||||||
(in millions, except per share amounts) | ||||||||||||
Sales: |
||||||||||||
Sales | $ | 6,182 | $ | 5,623 | $ | 5,049 | ||||||
53rd week | 81 | | | |||||||||
Sales excluding 53rd week (non-GAAP) | $ | 6,101 | $ | 5,623 | $ | 5,049 | ||||||
Pre-tax income: |
||||||||||||
Income before income taxes | $ | 607 | $ | 435 | $ | 257 | ||||||
Pre-tax amounts excluded from GAAP: |
||||||||||||
53rd week | (22 | ) | | | ||||||||
Impairment charges | 12 | 5 | 10 | |||||||||
Money market realized gain recorded within other income | | | (2 | ) | ||||||||
Total pre-tax amounts excluded | (10 | ) | 5 | 8 | ||||||||
Income before income taxes (non-GAAP) | $ | 597 | $ | 440 | $ | 265 | ||||||
Calculation of Earnings Before Interest and Taxes (EBIT): |
||||||||||||
Income before income taxes | $ | 607 | $ | 435 | $ | 257 | ||||||
Interest expense, net | 5 | 6 | 9 | |||||||||
EBIT | $ | 612 | $ | 441 | $ | 266 | ||||||
Income before income taxes (non-GAAP) | $ | 597 | $ | 440 | $ | 265 | ||||||
Interest expense, net | 5 | 6 | 9 | |||||||||
EBIT (non-GAAP) | $ | 602 | $ | 446 | $ | 274 | ||||||
EBIT margin % | 9.9 | % | 7.8 | % | 5.3 | % | ||||||
EBIT margin % (non-GAAP) | 9.9 | % | 7.9 | % | 5.4 | % | ||||||
After-tax income: |
||||||||||||
Net income | $ | 397 | $ | 278 | $ | 169 | ||||||
After-tax amounts excluded from GAAP: | ||||||||||||
53rd week | (14 | ) | | | ||||||||
Impairment charges | 7 | 3 | 4 | |||||||||
Settlement of a foreign tax audit | (9 | ) | | | ||||||||
Canadian tax rate changes | (1 | ) | | | ||||||||
Net income (non-GAAP) | $ | 380 | $ | 281 | $ | 173 | ||||||
Net income margin % | 6.4 | % | 4.9 | % | 3.3 | % | ||||||
Net income margin % (non-GAAP) | 6.2 | % | 5.0 | % | 3.4 | % | ||||||
Diluted earnings per share: |
||||||||||||
Net income | $ | 2.58 | $ | 1.80 | $ | 1.07 | ||||||
53rd week | (0.09 | ) | | | ||||||||
Impairment charges | 0.05 | 0.02 | 0.04 | |||||||||
Settlement of a foreign tax audit | (0.06 | ) | | | ||||||||
Canadian tax rate changes | (0.01 | ) | | | ||||||||
Money-market realized gain | | | (0.01 | ) | ||||||||
Net income (non-GAAP) | $ | 2.47 | $ | 1.82 | $ | 1.10 |
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The Company estimates the tax effect of the non-GAAP adjustments by applying its effective tax rate to each of the respective items. The money-market gain recorded in 2010 with respect to The Reserve International Liquidity Fund, Ltd. was recorded with no tax expense due to the fact that the entity that held the investment has a zero statutory tax rate.
When assessing Return on Invested Capital (ROIC), the Company adjusts its results to reflect its operating leases as if they qualified for capital lease treatment. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the presentation of these leases as capital leases is appropriate. Accordingly, the asset base and net income amounts are adjusted to reflect this in the calculation of ROIC. ROIC, subject to certain adjustments, is also used as a measure in executive long-term incentive compensation.
The closest GAAP measure is Return on Assets (ROA) and is also represented below. ROA increased to 12.4 percent as compared with 9.4 percent in the prior year reflecting the Companys overall performance in 2012.
2012 | 2011 | 2010 | ||||||||||
ROA(1) | 12.4 | % | 9.4 | % | 5.9 | % | ||||||
ROIC % (non-GAAP)(2) | 14.2 | % | 11.8 | % | 8.3 | % |
(1) | Represents net income of $397 million, $278 million, and $169 million divided by average total assets of $3,209 million, $2,973 million, and $2,856 million for 2012, 2011, and 2010, respectively. |
(2) | See below for the calculation of ROIC. |
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
EBIT (non-GAAP) | $ | 602 | $ | 446 | $ | 274 | ||||||
+ Rent expense | 560 | 544 | 522 | |||||||||
- Estimated depreciation on capitalized operating leases(3) | (409 | ) | (389 | ) | (366 | ) | ||||||
Net operating profit | 753 | 601 | 430 | |||||||||
- Adjusted income tax expense(4) | (274 | ) | (218 | ) | (153 | ) | ||||||
= Adjusted return after taxes | $ | 479 | $ | 383 | $ | 277 | ||||||
Average total assets | $ | 3,209 | $ | 2,973 | $ | 2,856 | ||||||
- Average cash, cash equivalents and short-term investments |
(890 | ) | (774 | ) | (642 | ) | ||||||
- Average non-interest bearing current liabilities | (592 | ) | (519 | ) | (461 | ) | ||||||
- Average merchandise inventories | (1,118 | ) | (1,064 | ) | (1,048 | ) | ||||||
+ Average estimated asset base of capitalized operating leases(3) | 1,552 | 1,429 | 1,443 | |||||||||
+ 13-month average merchandise inventories | 1,200 | 1,192 | 1,177 | |||||||||
= Average invested capital | $ | 3,361 | $ | 3,237 | $ | 3,325 | ||||||
ROIC % | 14.2 | % | 11.8 | % | 8.3 | % |
(3) | The determination of the capitalized operating leases and the adjustments to income have been calculated on a lease-by-lease basis and have been consistently calculated in each of the years presented above. Capitalized operating leases represent the best estimate of the asset base that would be recorded for operating leases as if they had been classified as capital or as if the property were purchased. |
(4) | The adjusted income tax expense represents the marginal tax rate applied to net operating profit for each of the periods presented. |
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In March 2012, the Company updated its long-range plan and updated the long-term financial objectives in light of our progress in achieving the original objectives established in 2010. Our results and long-term objectives are presented below:
2012 | 2011 | 2010 | Long-term Objectives | |||||||||||||
Sales (in millions)(1) | $ | 6,101 | $ | 5,623 | $ | 5,049 | $ | 7,500 | ||||||||
Sales per gross square foot | $ | 443 | $ | 406 | 360 | $ | 500 | |||||||||
EBIT margin(1) | 9.9 | % | 7.9 | % | 5.4 | % | 11.0 | % | ||||||||
Net income margin(1) | 6.2 | % | 5.0 | % | 3.4 | % | 7.0 | % | ||||||||
ROIC(1) | 14.2 | % | 11.8 | % | 8.3 | % | 14.0 | % |
(1) | Represents non-GAAP results for all periods presented. |
Excluding the results of the 53rd week, highlights of our 2012 financial performance include:
| Sales and comparable-store sales, as noted in the table below, both increased reflecting the continued success of our strategic plan, coupled with the favorable athletic trend. Sales continued to benefit from new exciting assortments across various product lines. |
2012 | 2011 | 2010 | ||||||||||
Sales increase | 8.5 | % | 11.4 | % | 4.0 | % | ||||||
Comparable-store sales increase | 9.4 | % | 9.8 | % | 5.8 | % |
| Gross margin, as a percentage of sales, increased 90 basis points to 32.8 percent in 2012. Our occupancy and buyers compensation expenses improved by 90 basis points for the same period reflecting improved leverage on higher sales. In addition, our merchandise margin rate improved by 10 basis points. These improvements were offset by a 10 basis point reduction associated with shipping and handling. |
| SG&A expenses were 21.0 percent of sales, an improvement of 110 basis points as compared with the prior year, as we carefully managed expenses. |
| Net income was $380 million or $2.47 diluted earnings per share, an increase of 35.7 percent from the prior-year period. |
The following represents a summary of the activity for the 53 week period ended February 2, 2013:
| Cash, cash equivalents, and short-term investments at February 2, 2013 were $928 million, representing an increase of $77 million. |
| Cash flow provided from operations was $416 million, representing a decrease of $81 million as compared with the prior year. This decrease was primarily driven by an increase in merchandise inventories, which was planned in order to support sales for early February, which is typically a strong period for us. |
| Capital expenditures during 2012 totaled $163 million and were primarily directed to the remodeling or relocation of 198 stores, the build-out of 85 new stores, and continued improvements to the features and functionality of our websites, enhancing the cross-channel experience. |
| Dividends totaling $109 million were declared and paid during 2012, returning significant value to our shareholders. |
| A total of $129 million, or 4.0 million shares, were repurchased as part of our previously-announced share repurchase program. On February 20, 2013, we announced a new 3-year, $600 million share repurchase program, extending through January 2016. |
| ROIC increased to 14.2 percent, reflecting productivity improvements and a disciplined approach to capital spending. |
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The following table represents a summary of sales and operating results, reconciled to income before income taxes:
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Sales |
||||||||||||
Athletic Stores | $ | 5,568 | $ | 5,110 | $ | 4,617 | ||||||
Direct-to-Customers | 614 | 513 | 432 | |||||||||
$ | 6,182 | $ | 5,623 | $ | 5,049 | |||||||
Operating Results |
||||||||||||
Athletic Stores(1) | $ | 653 | $ | 495 | $ | 329 | ||||||
Direct-to-Customers(2) | 65 | 45 | 30 | |||||||||
718 | 540 | 359 | ||||||||||
Restructuring charge(3) | | (1 | ) | | ||||||||
Division profit | 718 | 539 | 359 | |||||||||
Less: Corporate expense | 108 | 102 | 97 | |||||||||
Operating profit | 610 | 437 | 262 | |||||||||
Other income(4) | 2 | 4 | 4 | |||||||||
Earnings before interest expense and income taxes | 612 | 441 | 266 | |||||||||
Interest expense, net | 5 | 6 | 9 | |||||||||
Income before income taxes | $ | 607 | $ | 435 | $ | 257 |
(1) | The results for 2012 include a non-cash impairment charge of $5 million to write down long-lived assets of the CCS stores as a result of the Companys decision to close the stores during the first quarter of 2013. |
(2) | Included in the results for 2012, 2011, and 2010 are non-cash impairment charges of $7 million, $5 million, and $10 million, respectively, to write down the CCS tradename intangible asset. |
(3) | In 2011, the Company increased its 1993 Repositioning and 1991 Restructuring reserve by $1 million for repairs necessary to one of the locations comprising this reserve. This amount is included in selling, general and administrative expenses. |
(4) | Other income includes non-operating items such as: gains from insurance recoveries; discounts/premiums paid on the repurchase and retirement of bonds; royalty income; and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts. Included in the year ended January 29, 2011 is a $2 million gain to reflect the Companys settlement of its money-market investment in The Reserve International Liquidity Fund. |
All references to comparable-store sales for a given period relate to sales from stores (including sales from stores that have been relocated or remodeled during the relevant periods) that are open at the period-end, that have been open for more than one year, and sales from the Direct-to-Customers segment. Computations exclude the effect of foreign currency fluctuations. Stores opened and closed during the period are not included. Comparable-store sales for 2012 do not include the sales from the 53rd week of 2012.
Sales of $6,182 million in 2012 increased by 9.9 percent from sales of $5,623 million in 2011. Results for 2012 include the effect of the 53rd week, which represented sales of $81 million. Excluding the effect of foreign currency fluctuations, sales increased 11.4 percent as compared with 2011. Comparable-store sales increased by 9.4 percent, which was primarily driven by higher footwear sales. Footwear sales represented 76 percent of total sales. Apparel and accessories sales, also increased during 2012 and represented 24 percent of total sales.
Sales in 2011 increased to $5,623 million, or by 11.4 percent as compared with 2010. Excluding the effect of foreign currency fluctuations, sales increased 9.7 percent as compared with 2010. Comparable-store sales increased by 9.8 percent. This increase primarily reflected higher footwear sales. Apparel and accessories sales also increased, which represented approximately 24 percent of sales, reflecting a modest increase over the corresponding prior-year period of 23 percent.
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Gross margin as a percentage of sales was 32.9 percent in 2012, representing an increase of 100 basis points as compared with the prior year. The increase in the gross margin rate included a decrease of 110 basis points in the occupancy and buyers compensation expense rate reflecting improved leverage on largely fixed costs, offset by an increase in the cost of merchandise of 10 basis points. The decline in the merchandise margin rate primarily reflects the effect of lower initial markups, higher markdowns in Europe, and the effect of lower shipping and handling income. The markdowns in Europe were necessary to ensure that merchandise inventories remained current and in line with sales trend. The Direct-to-Customers segment continued to provide free shipping offers to remain competitive with other Internet retailers. Vendor allowances had no effect on the gross margin rate, as compared with the prior year. Excluding the effect of the 53rd week in 2012, gross margin increased by 90 basis points as compared with 2011.
Gross margin as a percentage of sales was 31.9 percent in 2011, increasing by 190 basis points as compared with 2010. This increase reflected a decrease of 120 basis points in the occupancy and buyers compensation expense rate reflecting improved leverage on largely fixed costs and a 70 basis points improvement in the merchandise margin rate as the Company was less promotional during 2011. Our inventory position had improved in 2011, both in terms of the overall levels of inventory and its quality. This improvement, along with better merchandise allocations, is primarily the result of ongoing initiatives to improve our inventory productivity, which contributes to our ability to be less promotional. The effect of vendor allowances, as compared with the prior year, contributed 10 basis points to this improvement.
Selling, general and administrative (SG&A) expenses increased by $50 million, or 4.0 percent, to $1,294 million in 2012, as compared with 2011. SG&A as a percentage of sales decreased to 20.9 percent as compared with 22.1 percent in 2011. Excluding the effect of foreign currency fluctuations, SG&A increased by $69 million. This increase reflects the effect of the 53rd week, which contributed $13 million in additional expenses, as well as higher variable expenses to support sales, such as store wages and banking expenses. The Company also increased its marketing and advertising spending by $8 million during 2012 in order to support the Companys strategic objective of differentiating its formats.
SG&A expenses increased by $106 million, or 9.3 percent, to $1,244 million in 2011, as compared with prior year. SG&A as a percentage of sales decreased to 22.1 percent as compared with 22.5 percent in 2010. Excluding the effect of foreign currency fluctuations in 2011, SG&A increased by $86 million. This increase primarily reflected higher variable expenses to support sales, such as store wages and banking expenses, and $25 million of increased marketing and advertising spending.
Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Companys corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $13 million, $11 million, and $12 million in 2012, 2011, and 2010, respectively.
Corporate expense increased by $6 million to $108 million in 2012 as compared with 2011. The increase represents increased depreciation and amortization of $2 million, $2 million of increased share-based compensation expense, and a charge of $4 million related to litigation, offset, in part, by expense savings in other corporate areas. The effect of the 53rd week on corporate expense was not significant.
Corporate expense increased by $5 million to $102 million in 2011 as compared with 2010. The increase primarily represents higher share-based compensation expense and miscellaneous professional fees.
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2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Depreciation expense | $ | 118 | $ | 110 | $ | 106 | ||||||
Percentage increase (decrease) | 7.3 | % | 3.8 | % | (5.4 | )% |
Excluding the effect of foreign currency fluctuations, depreciation and amortization expense for 2012 increased by $10 million or by 9.1 percent as compared with 2011. The increases in both 2012 and 2011 reflect increased capital spending.
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Interest expense | $ | 11 | $ | 13 | $ | 14 | ||||||
Interest income | (6 | ) | (7 | ) | (5 | ) | ||||||
Interest expense, net | $ | 5 | $ | 6 | $ | 9 | ||||||
Weighted-average interest rate (excluding fees) | 7.6 | % | 7.6 | % | 7.6 | % |
The overall reduction in net interest expense in 2012 as compared with 2011 primarily reflected lower expenses associated with the Companys revolving credit facility, which was amended at the end of 2011 with lower annual fees.
The overall reduction in net interest expense in 2011 as compared with 2010 primarily reflected increased income earned on higher cash and cash equivalent balances.
The Company did not have any short-term borrowings for any of the periods presented.
The effective tax rate for 2012 was 34.6 percent, as compared with 36.0 percent in 2011. The Company regularly assesses the adequacy of the provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the reserves for unrecognized tax benefits may be adjusted as a result of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. During the third quarter of 2012, the Company settled one of its foreign tax audits resulting in a reserve release of $9 million. The effective tax rate for 2012 also includes other reserve releases totaling $4 million due to audit settlements and lapses of statutes of limitations primarily in foreign jurisdictions. Additionally, included in 2012 are one-time benefits totaling $4 million, representing foreign tax law changes of $2 million, additional U.S. tax credits of $1 million, and a $1 million benefit related to a Canadian provincial tax rate change that increased the value of the Companys net deferred tax assets. Excluding these items, as well as the prior-year adjustments discussed below, the effective tax rate increased primarily due to the higher proportion of income earned in the United States, which bears a higher tax rate.
The effective tax rate for 2011 was 36.0 percent, as compared with 34.3 percent in 2010. The effective tax rate for 2011 includes reserve releases of $3 million due to audit settlements and lapses of statutes of limitations, as well as other true-up adjustments. Also, the 2010 effective rate included a benefit of $7 million from a favorable tax settlement offset, in part, by a $4 million charge to correct the taxes included in accumulated other comprehensive loss. Excluding these items, the effective tax rate increased primarily due to the higher proportion of income earned in higher tax jurisdictions in 2011.
The Companys two reportable segments, Athletic Stores and Direct-to-Customers, are based on its method of internal reporting. The Company evaluates performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense.
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2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Sales | $ | 5,568 | $ | 5,110 | $ | 4,617 | ||||||
Division profit | $ | 653 | $ | 495 | $ | 329 | ||||||
Division profit margin | 11.7 | % | 9.7 | % | 7.1 | % |
Athletic Stores sales of $5,568 million increased 9.0 percent in 2012. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from the Athletic Stores segment increased by 10.6 percent in 2012. Comparable-store sales increased by 8.5 percent. Most divisions within this segment experienced strong increases as compared with the prior year, led by Champs Sports and domestic Foot Locker. Foot Locker Europe had a modest comparable-store sales decline for the year reflecting the macroeconomic conditions in that region. Lady Foot Lockers sales declined in 2012 reflecting losses from certain classic and lifestyle footwear, partially offset by an increase in performance footwear. Additionally, Lady Foot Locker operated 29 fewer stores as management has continued to focus on closing underperforming stores. Comparable-store sales for the division were down slightly for the year. Management has continued to review the womens business and has implemented various initiatives intended to improve future performance, such as transitioning merchandise assortments to target the active, performance-oriented woman and a new store design, which is currently being tested in 14 Lady Foot Locker locations. During 2012, the Company introduced a new banner, SIX:02, an elevated retail concept featuring top brands in fitness apparel and athletic footwear for women. The Company opened 3 SIX:02 stores during the fourth quarter of 2012 and plans to open 4 additional stores in 2013. Management currently believes that these initiatives will improve the performance of the womens category over time, as the tests are studied and the actions are refined across all stores. In total, all categories, footwear, apparel and accessories, increased during 2012. Within the footwear, the highest percentage increase came from our kids category, which had strong gains across all banners, supported by the Go Big marketing campaign. Footwear sales increased in our largest category, basketball, which benefitted from key marquee player shoes. Despite the overall decline in Lady Foot Locker sales, our overall womens business modestly increased, as some of those customers found appealing product in our other banners. Apparel sales reflected strength in domestic sales, partially offset by a slight decline in Europes apparel sales.
Athletic Stores reported a division profit of $653 million in 2012 as compared with $495 million in 2011, an increase of $158 million. During the fourth quarter of 2012 an impairment charge of $5 million was recorded to write down long-lived assets of the CCS stores, as a result of the Companys decision to close these stores during the first quarter of 2013. Foreign currency fluctuations negatively affected division profit by approximately $9 million as compared with the corresponding prior-year period. Division profit increased primarily as a result of strong sales and an improved gross margin rate driven by improved leverage of the fixed expenses within gross margin, contributing to an overall profit flow-through of 34.5 percent.
Athletic Stores sales of $5,110 million increased 10.7 percent in 2011, as compared with $4,617 million in 2010. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from the Athletic Stores segment increased by 8.9 percent in 2011. Comparable-store sales also increased 8.9 percent as compared with the prior year. The majority of the increase represented increased footwear sales reflecting the continued success of key styles of technical, light-weight running, and basketball footwear. Apparel sales continued to benefit from offerings that coordinated with key footwear styles. All formats within this segment experienced significant increases in sales as compared with the prior year, except for Lady Foot Locker. While Foot Locker Europes comparable-stores sales were positive for the fourth quarter and full-year of 2011, sales were negatively affected by the economic conditions. Lady Foot Lockers sales declined in 2011, principally due to operating 47 fewer stores. This was coupled with a decline in toning footwear sales, which negatively affected the results in the first part of the year.
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Athletic Stores reported a division profit of $495 million in 2011 as compared with $329 million in 2010, an increase of $166 million as compared with the corresponding prior-year period. Foreign currency fluctuations positively affected division profit by approximately $8 million as compared with the corresponding prior-year period. The increase primarily reflects the strong U.S. performance, led by Foot Locker and Champs Sports, however all international locations also increased. Strong sales and improved gross margin contributed to an overall profit flow-through of 33.7 percent.
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Sales | $ | 614 | $ | 513 | $ | 432 | ||||||
Division profit | $ | 65 | $ | 45 | $ | 30 | ||||||
Division profit margin | 10.6 | % | 8.8 | % | 6.9 | % |
Direct-to-Customers sales increased 19.7 percent to $614 million in 2012, as compared with $513 million in 2011. On a comparable 52 week basis, sales increased 17.7 percent. The increase was primarily a result of continued strong sales performance for the Companys store-banner websites, as well as increased Eastbay sales. Of the total increase, sales from our store-banner websites comprised approximately 60 percent of the increase. We continue to invest in our websites in order to provide excellent service in our digital channels, including easy navigation, timely shipping, helpful call center assistance, and entertaining and engaging content.
The Direct-to-Customers business generated division profit of $65 million in 2012, as compared with $45 million in 2011. Division profit, as a percentage of sales, was 10.6 percent in 2012 and 8.8 percent in 2011. During the fourth quarters of 2012 and 2011, impairment charges of $7 million and $5 million, respectively, were recorded to write down CCS intangible assets, specifically the non-amortizing tradename. The 2012 impairment was primarily the result of continued reductions in revenue projections, coupled with a decrease in the assumed royalty rate as a result of lower profitability. Excluding the impairment charges in each of the periods, division profit increased by $22 million reflecting the strong sales performance and a lower expense rate.
Direct-to-Customers sales increased 18.8 percent to $513 million in 2011, as compared with $432 million in 2010. Sales primarily reflected the strong performance of the Eastbay website, coupled with improved sales from the store-banner websites.
The Direct-to-Customers business generated division profit of $45 million in 2011, as compared with $30 million in 2010. Division profit, as a percentage of sales, was 8.8 percent in 2011 and 6.9 percent in 2010. During the fourth quarters of 2011 and 2010, impairment charges of $5 million and $10 million, respectively, were recorded to write down the CCS non-amortizing tradename. The impairments were primarily the result of reduced revenue projections. Excluding the impairment charges in each of the periods, division profit increased by $10 million reflecting the strong sales performance, partially offset by higher variable costs.
The Companys primary source of liquidity has been cash flow from operations, while the principal uses of cash have been to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, future cash flow from operations, and the Companys current revolving credit facility will be adequate to fund these requirements.
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As of February 2, 2013, the Company had $543 million of cash and cash equivalents held in foreign jurisdictions. Because we plan to permanently reinvest our foreign earnings, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from potential future remittances of undistributed earnings of foreign subsidiaries. Depending on the source, amount, and timing of a repatriation, some tax may be payable. The Company believes that its cash invested domestically, future domestic cash flows, and its current revolving credit agreement are sufficient to satisfy domestic 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 February 20, 2013, the Board of Directors approved a new 3-year, $600 million share repurchase program extending through January 2016, replacing the Companys previous $400 million program which terminated on that date.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Companys merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Companys reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, 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.
Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key vendors. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key vendors. In 2012 and 2011, the Company purchased approximately 86 percent and 82 percent, respectively, of its merchandise from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 65 percent in 2012 and 61 percent in 2011 was purchased from one vendor Nike, Inc.
The Companys 2013 planned capital expenditures and lease acquisition costs are approximately $220 million. Planned capital expenditures are $217 million and planned lease acquisition costs related to the Companys operations in Europe are $3 million. The Companys planned capital expenditures include $173 million related to modernizations of existing stores and the planned opening of 73 new stores, as well as $44 million for the development of information systems and infrastructure. The Company has the ability to revise and reschedule much of the anticipated capital expenditure program, should the Companys financial position require it.
In addition to net cash provided by operating activities, the Company uses free cash flow as a useful measure of performance and as an indication of the strength of the Company and its ability to generate cash. The Company defines free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). The Company believes the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from the Company's underlying operations in a manner similar to the method used by management.
Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP, and may not be comparable to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures.
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The following table presents a reconciliation of the Company's net cash flow provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow.
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Net cash provided by operating activities | $ | 416 | $ | 497 | $ | 326 | ||||||
Capital expenditures | (163 | ) | (152 | ) | (97 | ) | ||||||
Free cash flow (non-GAAP) | $ | 253 | $ | 345 | $ | 229 |
Operating activities provided cash of $416 million in 2012, compared with $497 million in 2011. These amounts reflect income adjusted for non-cash items and working capital changes. Non-cash impairment and other charges were $12 million, $5 million, and $10 million for the years ending February 2, 2013, January 28, 2012 and January 29, 2011, respectively. These impairment charges were related to the CCS business. During 2012, the Company contributed $26 million to its U.S. and Canadian qualified pension plans as compared with $28 million contributed in 2011. The increase in merchandise inventories for 2012 was due to the shift caused by the 53rd week, which was planned in order to support sales for February, which is typically a strong period.
Operating activities provided cash of $497 million in 2011 as compared with $326 million in 2010. Non-cash impairment and other charges were $5 million and $10 million for the years ending January 28, 2012 and January 29, 2011, respectively, reflecting the CCS tradename impairment charges. During 2011, the Company contributed $28 million to its U.S. and Canadian qualified pension plans as compared with $32 million contributed in 2010. The change in merchandise inventories, net of the change in accounts payable, as compared with the prior-year period, reflects the continued improvement in flowing merchandise. The change in income tax receivables and payables primarily reflects the receipt of a $46 million IRS refund resulting from a loss carryback.
Net cash used in investing activities was $212 million in 2012 as compared with $149 million in 2011. The increase was primarily due to the Companys net purchases of $49 million of short-term investments as well as higher capital expenditures. Capital expenditures were $163 million, primarily related to the remodeling of 198 stores, the build-out of 85 new stores, and various corporate technology upgrades and ecommerce website enhancements, representing an increase of $11 million as compared with the prior year.
In 2011, net cash used in investing activities was $149 million as compared with $87 million in 2010. Capital expenditures were $152 million, primarily related to the remodeling of 182 stores, the build-out of 70 new stores, and various corporate technology upgrades and ecommerce website enhancements, representing an increase of $55 million as compared with the prior year. During 2010, the Company received $9 million from The Reserve International Liquidity Fund representing the final distribution.
Net cash used in financing activities was $181 million in 2012 as compared with $178 million in 2011. During 2012, the Company repurchased 4,000,161 shares of its common stock under its common share repurchase program for $129 million. Additionally, the Company declared and paid dividends totaling $109 million and $101 million in 2012 and 2011, respectively, representing a quarterly rate of $0.18 and $0.165 per share in 2012 and 2011, respectively. During 2012 and 2011, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $48 million and $22 million, respectively. In connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $11 million and $5 million for 2012 and 2011, respectively.
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Net cash used in financing activities was $178 million in 2011 as compared with $127 million in 2010. During 2011, the Company repurchased 4,904,100 shares of its common stock under its common share repurchase program for $104 million. Additionally, the Company declared and paid dividends totaling $101 million and $93 million in 2011 and 2010, respectively, representing a quarterly rate of $0.165 and $0.15 per share in 2011 and 2010, respectively. During 2011 and 2010, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $22 million and $13 million, respectively. In connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $5 million and $3 million in 2011 and 2010, respectively.
On January 27, 2012, the Company entered into an amended and restated credit agreement (the 2011 Restated Credit Agreement) with its banks. The 2011 Restated Credit Agreement provides for a $200 million asset based revolving credit facility maturing on January 27, 2017. In addition, during the term of the 2011 Restated Credit Agreement, the Company may make up to four requests for additional credit commitments in an aggregate amount not to exceed $200 million. Interest is based on the LIBOR rate in effect at the time of the borrowing plus a 1.25 to 1.50 percent margin depending on certain provisions as defined in the 2011 Restated Credit Agreement.
The 2011 Restated Credit Agreement provides for a security interest in certain of the Companys domestic assets, including certain inventory assets, but excluding intellectual property. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. With regard to the payment of dividends and share repurchases, there are no restrictions if the Company is not borrowing and the payments are funded through cash on hand. If the Company is borrowing, Availability as of the end of each fiscal month during the subsequent projected six fiscal months following the payment must be at least 20 percent of the lesser of the Aggregate Commitments and the Borrowing Base (all terms as defined in the 2011 Restated Credit Agreement). The Companys management does not currently expect to borrow under the facility in 2013, other than amounts used to support standby letters of credit.
As of April 1, 2013, the Companys corporate credit ratings from Standard & Poors and Moodys Investors Service are BB+ and Ba2, respectively. In addition, Moodys Investors Service has rated the Companys senior unsecured notes Ba3.
For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases is considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 4.0 percent to 14.5 percent, which represent the Companys incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the inclusion of the present value of operating leases in total debt is useful to our investors, credit constituencies, and rating agencies.
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The following table sets forth the components of the Companys capitalization, both with and without the present value of operating leases:
2012 | 2011 | |||||||
(in millions) | ||||||||
Long-term debt | $ | 133 | $ | 135 | ||||
Present value of operating leases | 2,202 | 1,905 | ||||||
Total debt including the present value of operating leases | 2,335 | 2,040 | ||||||
Less: |
||||||||
Cash and cash equivalents | 880 | 851 | ||||||
Short-term investments | 48 | | ||||||
Total net debt including the present value of operating leases | 1,407 | 1,189 | ||||||
Shareholders equity | 2,377 | 2,110 | ||||||
Total capitalization | $ | 3,784 | $ | 3,299 | ||||
Total net debt capitalization percent | | % | | % | ||||
Total net debt capitalization percent including the present value of operating leases (non-GAAP) | 37.2 | % | 36.0 | % |
The Company increased cash, cash equivalents, and short-term investments by $77 million during 2012, the result of strong cash flow generation from operating activities. The change in total debt including the present value of the operating leases, as compared with the prior-year period, primarily reflects the effect of lease renewals and the effect of foreign currency fluctuations, offset, in part, by store closures. Including the present value of operating leases, the Companys net debt capitalization percent increased 120 basis points in 2012.
The following tables represent the scheduled maturities of the Companys contractual cash obligations and other commercial commitments at February 2, 2013:
Payments Due by Fiscal Period | ||||||||||||||||||||
Contractual Cash Obligations | Total | 2013 | 2014 2015 | 2016 2017 | 2018 and Beyond | |||||||||||||||
(in millions) | ||||||||||||||||||||
Long-term debt(1) | $ | 217 | $ | 11 | $ | 22 | $ | 22 | $ | 162 | ||||||||||
Operating leases(2) | 2,913 | 513 | 880 | 640 | 880 | |||||||||||||||
Other long-term liabilities(3) | | | | | | |||||||||||||||
Total contractual cash obligations | $ | 3,130 | $ | 524 | $ | 902 | $ | 662 | $ | 1,042 |
(1) | The amounts presented above represent the contractual maturities of the Companys long-term debt, including interest; however, it excludes the unamortized gain of the interest rate swap of $15 million. Additional information is included in the Long-Term Debt note under Item 8. Consolidated Financial Statements and Supplementary Data. |
(2) | The amounts presented represent the future minimum lease payments under non-cancelable operating leases. In addition to minimum rent, certain of the Companys leases require the payment of additional costs for insurance, maintenance, and other costs. These costs have historically represented approximately 25 to 30 percent of the minimum rent amount. These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are unknown. |
(3) | The Companys other liabilities in the Consolidated Balance Sheet at February 2, 2013 primarily comprise pension and postretirement benefits, deferred rent liability, income taxes, workers compensation and general liability reserves, and various other accruals. In addition, other amounts (including the Companys unrecognized tax benefits of $54 million, as well as penalties and interest of $3 million) have been excluded from the above table as the timing and/or amount of any cash payment is uncertain. The timing of the remaining amounts that are known has not been included as they are minimal and not useful to the presentation. Additional information is included in the Other Liabilities, Financial Instruments and Risk Management, and Retirement Plans and Other Benefits notes under Item 8. Consolidated Financial Statements and Supplementary Data. |
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Total Amounts Committed | Payments Due by Fiscal Period | |||||||||||||||||||
Other Commercial Commitments | 2013 | 2014 2015 | 2016 2017 | 2018 and Beyond | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Unused line of credit(4) | $ | 199 | $ | | $ | | $ | 199 | $ | | ||||||||||
Standby letters of credit | 1 | | | 1 | | |||||||||||||||
Purchase commitments(5) | 2,042 | 2,042 | | | | |||||||||||||||
Other(6) | 18 | 12 | 5 | 1 | | |||||||||||||||
Total commercial commitments | $ | 2,260 | $ | 2,054 | $ | 5 | $ | 201 | $ | |
(4) | Represents the unused domestic lines of credit pursuant to the Companys $200 million revolving credit agreement. The Companys management currently does not expect to borrow under the facility in 2013, other than amounts used to support standby letters of credit. |
(5) | Represents open purchase orders, as well as other commitments for merchandise purchases, at February 2, 2013. The Company is obligated under the terms of purchase orders; however, the Company is generally able to renegotiate the timing and quantity of these orders with certain vendors in response to shifts in consumer preferences. |
(6) | Represents payments required by non-merchandise purchase agreements. |
The Company does not have any off-balance sheet financing (other than operating leases entered into in the normal course of business as disclosed above) or unconsolidated special purpose entities. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities. The Companys policy prohibits the use of derivatives for which there is no underlying exposure.
In connection with the sale of various businesses and assets, the Company may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not significantly affect the Companys consolidated financial position, liquidity, or results of operations. The Company is also operating certain stores for which lease agreements are in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that leases will be executed.
Managements responsibility for integrity and objectivity in the preparation and presentation of the Companys financial statements requires diligent application of appropriate accounting policies. Generally, the Companys accounting policies and methods are those specifically required by U.S. generally accepted accounting principles. Included in the Summary of Significant Accounting Policies note in Item 8. Consolidated Financial Statements and Supplementary Data is a summary of the Companys most significant accounting policies. In some cases, management is required to calculate amounts based on estimates for matters that are inherently uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate subjective judgments.
Merchandise inventories for the Companys Athletic Stores are valued at the lower of cost or market using the retail inventory method (RIM). The RIM 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 RIM is a system of averages that requires managements estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts.
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Significant judgment is required for these estimates and assumptions, as well as to differentiate between promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost or market. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. The failure to take permanent markdowns on a timely basis may result in an overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes many factors, including the current environment, inventory levels, and the age of the item. Management believes this method and its related assumptions, which have been consistently applied, to be reasonable.
In the normal course of business, the Company receives allowances from its vendors for markdowns taken. Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Vendor allowances contributed 30 basis points to the 2012 gross margin rate. The Company also has volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and were not significant to the 2012 gross margin rate.
The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors for specific advertising campaigns and catalogs. Cooperative income, to the extent that it reimburses specific, incremental and identifiable costs incurred to date, is recorded in SG&A in the same period as the associated expenses are incurred. Cooperative reimbursements amounted to approximately 19 percent and 13 percent of total advertising and catalog costs, respectively, in 2012. Reimbursements received that are in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the cost of merchandise and are reflected in cost of sales as the merchandise is sold. Such amounts were not significant in 2012.
The Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Managements policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Companys strategic long-range plans, in determining the impairment amount. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Companys weighted-average cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results.
29
The Company performs an impairment review of its goodwill and intangible assets with indefinite lives if impairment indicators arise and, at a minimum, annually. We consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. The Company has chosen to perform this review at the beginning of each fiscal year, and it is done in a two-step approach. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step to evaluate goodwill of a reporting unit for impairment is only required if the carrying value of that reporting unit exceeds its estimated fair value. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests, or securities that have been sold. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
The Company evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations.
Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
The Companys review of goodwill did not result in any impairment charges for the years ended February 2, 2013 and January 28, 2012, as the fair value of each of the reporting units substantially exceeds its carrying value.
Related to the CCS tradename, the Company recorded impairment charges of $7 million and $5 million in 2012 and 2011, respectively, primarily as a result of reduced revenue projections for this business, coupled with a decrease in the assumed royalty rate as a result of lower profitability. Additionally in 2012, the Company recorded a long-lived asset impairment charge of $5 million related to the CCS stores, as a result of the decision to close these stores during the first quarter of 2013.
30
The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Company estimates the expected term of options granted using its historical exercise and post-vesting employment termination patterns, which the Company believes are representative of future behavior. Changing the expected term by one year changes the fair value by 8 to 10 percent depending if the change was an increase or decrease to the expected term. The Company estimates the expected volatility of its common stock at the grant date using a weighted-average of the Companys historical volatility and implied volatility from traded options on the Companys common stock. A 50 basis point change in volatility would have a 1 percent change to the fair value. The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived from the Companys historical experience. A 50 basis point change to the dividend yield would change the fair value by approximately 4 percent. The Company records stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data, which it believes are representative of future behavior, and periodically will revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Black-Scholes option pricing valuation model requires the use of subjective assumptions. Changes in these assumptions can materially affect the fair value of the options.
The Company determines its obligations for pension and postretirement liabilities based upon assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, and mortality, among others. Management reviews all assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Companys intentions with regard to the plans.
Long-Term Rate of Return Assumption The expected rate of return on plan assets is the long-term rate of return expected to be earned on the plans assets and is recognized as a component of pension expense. The rate is based on the plans weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the Company. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy. The weighted-average long-term rate of return used to determine 2012 pension expense was 6.63 percent.
A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 2012 pension expense by approximately $3 million. The actual return on plan assets in a given year typically differs from the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into expense over the average life expectancy of its inactive participants.
Discount Rate An assumed discount rate is used to measure the present value of future cash flow obligations of the plans and the interest cost component of pension expense and postretirement income. The cash flows are then discounted to their present value and an overall discount rate is determined. In 2011, the Company changed how the discount rate was selected to measure the present value of U.S. benefit obligations from the Citibank Pension Discount curve to Towers Watsons Bond:Link model. The current discount rate is determined by reference to the Bond:Link interest rate model based upon a portfolio of highly rated U.S. corporate bonds with individual bonds that are theoretically purchased to settle the plans anticipated cash outflows. The discount rate selected to measure the present value of the Companys Canadian benefit obligations was developed by using the plans bond portfolio indices, which match the benefit obligations. The weighted-average discount rates used to determine the 2012 benefit obligations related to the Companys pension and postretirement plans were 3.79 percent and 3.70 percent, respectively. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation of the pension plans at February 2, 2013 by approximately $33 million, and would have increased the accumulated benefit obligation on the postretirement plan by approximately $1 million. Such a decrease would not have significantly changed 2012 pension expense or postretirement income.
31
The Company maintains two postretirement medical plans, one covering certain executive officers and key employees of the Company, (SERP Medical Plan), and the other covering all other associates. With respect to the SERP Medical Plan, a one percent change in the assumed health care cost trend rate would change this plans accumulated benefit obligation by approximately $2 million. With respect to the postretirement medical plan covering all other associates, there is limited risk to the Company for increases in health care costs since, beginning in 2001, new retirees have assumed the full expected costs and then-existing retirees have assumed all increases in such costs.
The Company expects to record postretirement income of approximately $2 million and pension expense of approximately $17 million in 2013.
In accordance with GAAP, deferred tax assets are recognized for tax credit and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. Estimates of taxable income are based upon the Companys strategic long-range plans. A one percent change in the Companys overall statutory tax rate for 2012 would have resulted in a $7 million change in the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense depending on whether the tax rate change was a decrease or an increase.
The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.
The Company expects its 2013 effective tax rate to approximate 37 percent, excluding the effect of any nonrecurring items that may occur. The actual rate will vary depending primarily on the percentage of the Companys income earned in the United States as compared with its international operations.
During 2012, the Company adopted ASU No. 2011-08, Testing Goodwill for Impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The adoption of this ASU did not have a significant effect on our results of operations or financial position.
Also during 2012, the Company adopted ASU No. 2011-05, Presentation of Comprehensive Income, which requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The implementation of the amended reporting guidance had no effect on our disclosures.
Additionally in 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset. Entities are required to test indefinite-lived assets for impairment at least annually, and more frequently if indicators of impairment exist. This ASU was effective for the Company on February 3, 2013. The adoption of this ASU is not expected to have a significant effect on our results of operations or financial position.
Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Companys present or future consolidated financial statements.
32
This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Companys 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 which are detailed in the Companys 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 Companys merchandise mix and retail locations, the Companys 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 and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.
For additional discussion on risks and uncertainties that may affect forward-looking statements, see Risk Factors in Part I, Item 1A. 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 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Information regarding foreign exchange risk management is included in the Financial Instruments and Risk Management note under Item 8. Consolidated Financial Statements and Supplementary Data.
Item 8. | Consolidated Financial Statements and Supplementary Data |
33
The Board of Directors and Shareholders of
Foot Locker, Inc.:
We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations, comprehensive income, shareholders equity, and cash flows for each of the years in the three-year period ended February 2, 2013. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended February 2, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Foot Locker, Inc.s internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 1, 2013 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP
New York, New York
April 1, 2013
34
2012 | 2011 | 2010 | ||||||||||
(in millions, except per share amounts) | ||||||||||||
Sales | $ | 6,182 | $ | 5,623 | $ | 5,049 | ||||||
Cost of sales | 4,148 | 3,827 | 3,533 | |||||||||
Selling, general and administrative expenses | 1,294 | 1,244 | 1,138 | |||||||||
Depreciation and amortization | 118 | 110 | 106 | |||||||||
Impairment charges | 12 | 5 | 10 | |||||||||
Interest expense, net | 5 | 6 | 9 | |||||||||
Other income | (2 | ) | (4 | ) | (4 | ) | ||||||
5,575 | 5,188 | 4,792 | ||||||||||
Income before income taxes | 607 | 435 | 257 | |||||||||
Income tax expense | 210 | 157 | 88 | |||||||||
Net income | $ | 397 | $ | 278 | $ | 169 | ||||||
Basic earnings per share | $ | 2.62 | $ | 1.81 | $ | 1.08 | ||||||
Weighted-average shares outstanding | 151.2 | 153.0 | 155.7 | |||||||||
Diluted earnings per share | $ | 2.58 | $ | 1.80 | $ | 1.07 | ||||||
Weighted-average shares outstanding, assuming dilution | 154.0 | 154.4 | 156.7 |
See Accompanying Notes to Consolidated Financial Statements.
35
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Net income | $ | 397 | $ | 278 | $ | 169 | ||||||
Other comprehensive income, net of tax |
||||||||||||
Foreign currency translation adjustment: |
||||||||||||
Translation adjustment arising during the period, net of tax | 19 | (23 | ) | 11 | ||||||||
Cash flow hedges: |
||||||||||||
Change in fair value of derivatives, net of income tax | 4 | (2 | ) | 1 | ||||||||
Pension and postretirement adjustments: |
||||||||||||
Net actuarial gain (loss) and prior service cost arising during the year, net of income tax expense (benefit) of $2, ($11), and ($1) million, respectively | 1 | (16 | ) | 7 | ||||||||
Amortization of net actuarial gain/loss and prior service cost included in net periodic benefit costs, net of income tax expense of $5, $3, and $3 million, respectively | 8 | 6 | 8 | |||||||||
Available for sale securities: |
||||||||||||
Unrealized gain on available-for-sale securities | 1 | | | |||||||||
Comprehensive income | $ | 430 | $ | 243 | $ | 196 |
See Accompanying Notes to Consolidated Financial Statements.
36
2012 | 2011 | |||||||
(in millions) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents | $ | 880 | $ | 851 | ||||
Short-term investments | 48 | | ||||||
Merchandise inventories | 1,167 | 1,069 | ||||||
Other current assets | 268 | 159 | ||||||
2,363 | 2,079 | |||||||
Property and equipment, net | 490 | 427 | ||||||
Deferred taxes | 257 | 284 | ||||||
Goodwill | 145 | 144 | ||||||
Other intangible assets, net | 40 | 54 | ||||||
Other assets | 72 | 62 | ||||||
$ | 3,367 | $ | 3,050 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable | $ | 298 | $ | 240 | ||||
Accrued and other liabilities | 338 | 308 | ||||||
636 | 548 | |||||||
Long-term debt | 133 | 135 | ||||||
Other liabilities | 221 | 257 | ||||||
Total liabilities | 990 | 940 | ||||||
Shareholders equity | 2,377 | 2,110 | ||||||
$ | 3,367 | $ | 3,050 |
See Accompanying Notes to Consolidated Financial Statements.
37
Additional Paid-In Capital & Common Stock |
Treasury Stock | Retained Earnings |
Accumulated Other Comprehensive Loss |
Total Shareholders Equity |
||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
(shares in thousands, amounts in millions) | ||||||||||||||||||||||||||||
Balance at January 30, 2010 | 161,267 | $ | 709 | (4,726) | $ | (103) | $ | 1,535 | $ | (193) | $ | 1,948 | ||||||||||||||||
Restricted stock issued | 205 | | | | | |||||||||||||||||||||||
Issued under director and stock plans | 1,187 | 10 | | | 10 | |||||||||||||||||||||||
Share-based compensation expense | | 13 | | | 13 | |||||||||||||||||||||||
Total tax benefit from exercise of options | | 2 | 2 | |||||||||||||||||||||||||
Forfeitures of restricted stock | | 1 | (50 | ) | | 1 | ||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | | | (292 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||
Acquired in exchange of stock options | | | (34 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||
Share repurchases | | | (3,215 | ) | (50 | ) | (50 | ) | ||||||||||||||||||||
Reissued under employee stock purchase plan | | | 278 | 6 | 6 | |||||||||||||||||||||||
Net income | 169 | 169 | ||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.60 per share) | (93 | ) | (93 | ) | ||||||||||||||||||||||||
Translation adjustment, net of tax | 11 | 11 | ||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | 1 | 1 | ||||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | 12 | 12 | ||||||||||||||||||||||||||
Balance at January 29, 2011 | 162,659 | $ | 735 | (8,039) | $ | (152) | $ | 1,611 | $ | (169) | $ | 2,025 | ||||||||||||||||
Restricted stock issued | 242 | | | | | |||||||||||||||||||||||
Issued under director and stock plans | 1,559 | 19 | | | 19 | |||||||||||||||||||||||
Share-based compensation expense | | 18 | | | 18 | |||||||||||||||||||||||
Total tax benefit from exercise of options | | 6 | 6 | |||||||||||||||||||||||||
Forfeitures of restricted stock | | 1 | (60 | ) | | 1 | ||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | | | (140 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||
Acquired in exchange of stock options | | | (34 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||
Share repurchases | | | (4,904 | ) | (104 | ) | (104 | ) | ||||||||||||||||||||
Reissued under employee stock purchase plan | | | 336 | 7 | 7 | |||||||||||||||||||||||
Net income | 278 | 278 | ||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.66 per share) | (101 | ) | (101 | ) | ||||||||||||||||||||||||
Translation adjustment, net of tax | (23 | ) | (23 | ) | ||||||||||||||||||||||||
Change in cash flow hedges, net of tax | (2 | ) | (2 | ) | ||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | (10 | ) | (10 | ) | ||||||||||||||||||||||||
Balance at January 28, 2012 | 164,460 | $ | 779 | (12,841) | $ | (253) | $ | 1,788 | $ | (204) | $ | 2,110 | ||||||||||||||||
Restricted stock issued | 99 | | | | | |||||||||||||||||||||||
Issued under director and stock plans | 2,350 | 46 | | | 46 | |||||||||||||||||||||||
Share-based compensation expense | | 20 | | | 20 | |||||||||||||||||||||||
Total tax benefit from exercise of options | | 11 | 11 | |||||||||||||||||||||||||
Shares of common stock used to satisfy tax withholding obligations | | | (214 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||
Acquired in exchange of stock options | | | (2 | ) | | | ||||||||||||||||||||||
Share repurchases | | | (4,000 | ) | (129 | ) | (129 | ) | ||||||||||||||||||||
Reissued under employee stock purchase plan | | | 218 | 5 | 5 | |||||||||||||||||||||||
Net income | 397 | 397 | ||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.72 per share) | (109 | ) | (109 | ) | ||||||||||||||||||||||||
Translation adjustment, net of tax | 19 | 19 | ||||||||||||||||||||||||||
Change in cash flow hedges, net of tax | 4 | 4 | ||||||||||||||||||||||||||
Pension and post-retirement adjustments, net of tax | 9 | 9 | ||||||||||||||||||||||||||
Unrealized gain on available-for-securities, with no tax expense | 1 | 1 | ||||||||||||||||||||||||||
Balance at February 2, 2013 | 166,909 | $ | 856 | (16,839) | $ | (384) | $ | 2,076 | $ | (171) | $ | 2,377 |
See Accompanying Notes to Consolidated Financial Statements.
38
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
From Operating Activities |
||||||||||||
Net income | $ | 397 | $ | 278 | $ | 169 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Non-cash impairment charges | 12 | 5 | 10 | |||||||||
Depreciation and amortization | 118 | 110 | 106 | |||||||||
Share-based compensation expense | 20 | 18 | 13 | |||||||||
Deferred tax provision | 20 | 29 | 84 | |||||||||
Qualified pension plan contributions | (26 | ) | (28 | ) | (32 | ) | ||||||
Excess tax benefits on share-based compensation | 9 | 5 | 1 | |||||||||
Change in assets and liabilities: | ||||||||||||
Merchandise inventories | (91 | ) | (17 | ) | (19 | ) | ||||||
Accounts payable | 57 | 19 | 7 | |||||||||
Accrued and other liabilities | (4 | ) | 38 | 35 | ||||||||
Income tax receivables and payables | (34 | ) | 24 | (33 | ) | |||||||
Payment on the settlement of the net investment hedge | | | (24 | ) | ||||||||
Other, net | (62 | ) | 16 | 9 | ||||||||
Net cash provided by operating activities | 416 | 497 | 326 | |||||||||
From Investing Activities | ||||||||||||
Gain from lease terminations | | 2 | 1 | |||||||||
Gain from insurance recoveries | | 1 | | |||||||||
Purchases of short-term investments | (88 | ) | | | ||||||||
Sales of short-term investments | 39 | | 9 | |||||||||
Capital expenditures | (163 | ) | (152 |