10-K 1 fl-20180203x10k.htm 10-K FL-2017 10-K Filing Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



  FORM 10-K 



 

 

 

(Mark One) 

   

   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the fiscal year ended February 3, 2018

  

OR

  

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from __________ to __________

  

Commission File No. 1-10299

  

FLI_logo2

(Exact name of registrant as specified in its charter)







 

 

New York

 

13-3513936

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

330 West 34th Street, New York, New York

 

10001

(Address of principal executive offices)

 

(Zip Code)



Registrant’s telephone number, including area code: (212) 720-3700

   Securities registered pursuant to Section 12(b) of the Act:



 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

New York Stock Exchange



Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesNo   



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  No



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    No 



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  No 



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 Registrant’s 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. 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

  

Large accelerated filer 

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  



Emerging growth company

 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No



 

 

The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding as of March 26, 2018:

118,115,818 

 



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 Registrant’s most recently completed second fiscal quarter, July 29, 2017, was approximately:

 

          $4,504,950,585*

 







 

 

*

  

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 Registrant’s voting stock with respect to which such persons had, on such date, voting or investment power.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrant’s definitive Proxy Statement (the “Proxy Statement”) to be filed in connection with the Annual Meeting of Shareholders to be held on May 23, 2018: Parts III and IV.


 





FOOT LOCKER, INC.

TABLE OF CONTENTS



 

 

 

PART I

   

 

 

 

Item 1.

 

Business

Item 1A.

 

Risk Factors

Item 1B.

 

Unresolved Staff Comments

Item 2.

 

Properties

Item 3.

 

Legal Proceedings

Item 4.

 

Mine Safety Disclosures

Item 4A.

 

Executive Officers of the Registrant

10 



 

 

 

PART II

 

 

 

 

Item 5.

 

Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 

11 

Item 6.

 

Selected Financial Data

13 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

35 

Item 8.

 

Consolidated Financial Statements and Supplementary Data

35 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

74 

Item 9A.

 

Controls and Procedures

74 

Item 9B.

 

Other Information

76 

 

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

76 

Item 11.

 

Executive Compensation

76 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

76 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

76 

Item 14.

 

Principal Accounting Fees and Services

76 

   

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

77 



 

SIGNATURES

78 



 

INDEX OF EXHIBITS

79 









 


 

 

PART I



Item 1. Business



General



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. As of February 3, 2018, the Company operated 3,310 primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in the United States, Canada, Europe, Australia, and New Zealand. 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



The Company maintains a website on the Internet at www.footlocker-inc.com. The Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”), 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 Company’s corporate website contains the Company’s Corporate Governance Guidelines, Committee Charters, and the Company’s 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 Company’s Corporate Secretary at 330 West 34th Street, New York, N.Y. 10001.



Information Regarding Business Segments and Geographic Areas



The financial information concerning business segments, divisions, and geographic areas is contained under the “Business Overview” and “Segment Information” sections in “Item 7. Management’s 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, trade names, and trademarks appearing in this report (except for Nike, Jordan, adidas, and Puma) are owned by Foot Locker, Inc. or its subsidiaries.



Employees



The Company and its consolidated subsidiaries had 15,141 full-time and 34,068 part-time employees as of February 3, 2018. The Company considers employee relations to be satisfactory.



Competition



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.”



Merchandise Purchases



Financial information concerning merchandise purchases is contained under the “Liquidity” section in “Item 7. Management’s 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.”



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. Management’s 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.

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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 inability to implement our long-range strategic plan may adversely affect our future results.



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. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store designs, competition, product differentiation, the ability to attract and retain qualified personnel, and our ability to successfully implement technological initiatives. 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. Additionally, failure to meet shareholder expectations, particularly with respect to sales, operating margins, and earnings per share, would likely result in volatility in the market value of our stock.



The retail athletic footwear and apparel business is highly competitive.



Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores, department stores, traditional shoe stores, mass merchandisers, and Internet retailers, 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, customer experience, reputation, store location, advertising, and price. 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 an increasing proportion of our merchandise via the Internet, a significantly faster 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 suppliers operate retail stores and distribute products directly through the Internet and others may follow. Should this continue to occur, and if our customers decide to purchase directly from our suppliers, it could have a material adverse effect on our business, financial condition, and results of operations.



The industry in which we operate is dependent upon fashion trends, customer preferences, product innovations, and other fashion-related factors.



The athletic footwear and apparel industry, especially at the premium end of the price spectrum, is subject to changing fashion trends and customer preferences. In addition, retailers in the athletic industry rely on their suppliers to maintain innovation in the products they develop. 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 suppliers. 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 apparel as a fashion statement and are frequent purchasers. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends that would make athletic footwear or athletic apparel less attractive to our customers could have a material adverse effect on our business, financial condition, and results of operations.



If we do not successfully manage our inventory levels, our operating results will be adversely affected.



We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order most 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.



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A change in the relationship with any of our key suppliers or the unavailability of key products at competitive prices could affect our financial health.



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 suppliers. In addition, we have negotiated volume discounts, cooperative advertising, and markdown allowances with our suppliers, as well as the ability to cancel orders and return excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future.



We purchased approximately 93 percent of our merchandise in 2017 from our top five suppliers and we expect to continue to obtain a significant percentage of our athletic product from these suppliers in future periods. Approximately 67 percent of all merchandise purchased in 2017 was purchased from one supplier — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike: they individually purchased 44 to 73 percent of their merchandise from Nike during the year. Merchandise that is high profile and in high demand is allocated by our suppliers 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 suppliers 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 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 the high proportion of purchases from Nike, any adverse development in Nike’s 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.



We are affected by mall traffic and our ability to secure suitable store locations.



Many of our stores, especially in North America, are located primarily in enclosed regional and neighborhood malls. Our sales are affected, in part, by the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing or continued decline 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, public health or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in such locations, 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, as well as high-traffic urban retail areas and high streets. We cannot be certain that desirable locations will continue to be available at favorable rates. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by economic conditions as well as the closure of certain mall anchor tenants.



Several large landlords dominate the ownership of prime malls 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 could negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.



We may experience fluctuations in, and cyclicality of, our comparable-store sales results.



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, product innovation, promotional events, the highly competitive retail sales environment, economic conditions, timing of income tax refunds, changes in our merchandise mix, calendar shifts of holiday periods, supply chain disruptions, and weather conditions. Many of our products represent discretionary purchases. Accordingly, customer demand for these products could decline in an economic downturn 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.



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Economic or political conditions in other countries, including fluctuations in foreign currency exchange rates and tax rates may adversely affect our operations.



A significant portion of our sales and operating income for 2017 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 local customer product preferences, political unrest, disruptions or delays in shipments, changes in economic conditions in countries in which we operate, foreign currency fluctuations, real estate costs, 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 our suppliers manufacture a substantial amount of our products in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, labor, and other conditions in the countries from which our suppliers obtain their product.



Fluctuations in the value of the euro and the British Pound may affect the value of our European earnings when translated into U.S. dollars. Similarly our earnings in Canada, Australia, and New Zealand may be affected by the value of currencies when translated into U.S. dollars. Except for our business in the United Kingdom (the “U.K”),  our international subsidiaries conduct most of their business in their local currency. Inventory purchases for our U.K. business are denominated in euros, which could result in foreign currency transaction gains or losses. 



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.



Significant developments stemming from the U.K.’s decision to withdraw from the European Union could have a material adverse effect on the Company.



The U.K. has voted in favor of leaving the European Union (“E.U.”), and such withdrawal (commonly referred to as “Brexit”) is scheduled to take effect over the next two years. This decision has created political and economic uncertainty, particularly in the U.K. and the E.U., and this uncertainty may last for several years. The pending withdrawal and its possible future consequences have caused and may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the U.K., Europe or globally, which could adversely affect the Company's operating results and growth prospects.  In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate, and those laws and regulations may be cumbersome, difficult or costly in terms of compliance. Any of these effects of Brexit, among others, could adversely affect our business, results of operations and financial condition. 



Macroeconomic developments may adversely affect our business.



Our performance is subject to global economic conditions and the related effects on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses may 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 values. These and other economic factors could adversely affect demand for our products, which could adversely affect our financial condition and operating results.



Instability in the financial markets may adversely affect our business.



Instability in the global financial markets could reduce availability of credit to our business. Although we currently have a revolving credit agreement in place until May 19, 2021, 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 Company’s securities. Other than insignificant amounts used for standby letters of credit, we do not have any borrowings under our credit facility.





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We rely on a few key suppliers for a majority of our merchandise purchases (including a significant portion from one key supplier). The inability of these 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.



Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition.



At February 3, 2018, our cash and cash equivalents totaled $849 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of February 3, 2018, $669 million of our cash and cash equivalents were held in foreign jurisdictions, almost half of which was held in U.S. dollars. 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 3, 2018, all of the investments were in investment grade institutions. Despite an investment grade rating, 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 $639 million at February 3, 2018. The fair values of these assets held in the trust are compared to the plan’s 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 affect the funded status of our pension plan and future funding requirements.



If our long-lived assets, goodwill or other intangible assets become impaired, we may need to record significant non-cash impairment charges.



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. As of February 3, 2018, we had $160 million of goodwill; this asset is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a reporting unit level, or a two-step impairment test, if necessary. The determination of impairment charges is 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 long-range strategic plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by factors such 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.



Our financial results may be adversely affected by tax rates or exposure to additional tax liabilities.



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.



Changes in tax laws and interpretations may affect our earnings negatively.



On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law. The Tax Act includes a number of changes in existing tax law affecting businesses including, among other things, a reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, disallowance of certain deductions that had previously been allowed, limitations on interest deductions, alteration of the expensing of capital expenditures, adoption of a territorial tax system, assessment of a repatriation tax or “toll-charge” on undistributed earnings and profits of U.S.-owned foreign corporations, and introduction of certain anti-base erosion provisions.

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In the fourth quarter of 2017, we recognized a provisional net tax expense of $99 million associated with the Tax Act; however, the ultimate effect on our financial condition and results of operations in 2018 and future years remains uncertain and may differ materially from our expectations due to the issuance of technical guidance regarding elements of the Tax Act and changes in interpretations and assumptions we have made with respect to the Tax Act. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. As such, there may be material adverse effects resulting from the Tax Act that we have not yet identified.



The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business.



Natural disasters, including earthquakes, hurricanes, floods, and tornadoes 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 suppliers 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, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. 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.



Manufacturer compliance with our social compliance program requirements.



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.



Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.



We operate multiple 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 United States, Canada, Australia, and New Zealand. If complications arise with any facility or if any facility is severely damaged or destroyed, our other distribution centers may be unable to support the resulting additional distribution demands. We also may be affected by disruptions in the global transportation network such as port strikes, weather conditions, work stoppages or other labor unrest. These factors may adversely affect our ability to deliver inventory on a timely basis. We depend upon third-party carriers for shipment of merchandise; any interruption in service by these carriers for any reason could cause disruptions in our business, a loss of sales and profits, and other material adverse effects.



We are subject to technology risks including failures, security breaches, and cybersecurity risks which could harm our business, damage our reputation, and increase our costs in an effort to protect against such risks.



Information technology is a critically important part of our business operations. We depend on information systems to process transactions, make operational decisions, 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.

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We invest in security technology to protect the data stored by us, including our data and business processes, against the risk of data security breaches and cyber-attacks. Our data security management program includes enforcement of standard data protection policies such as Payment Card Industry compliance. 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 follow leading practices in the prevention of security breaches and the mitigation of cybersecurity risks, given the ever-increasing abilities of those intent on breaching cybersecurity measures and given the necessity of our reliance on the security procedures of third-party vendors, the total security effort at any point in time may not be completely effective. 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 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, increase operating costs associated with remediation, and harm our business. While we carry insurance that would mitigate the losses, such insurance may be insufficient to compensate us for potentially significant losses.



Risks associated with digital operations.



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, cybersecurity risks, telecommunications failures, denial of service attacks, and similar disruptions. Also, we will require additional capital in the future to sustain or grow our digital commerce business.  Risks related to digital commerce include those associated with credit card fraud, the need to keep pace with rapid technological change, governmental regulation, and legal uncertainties with respect to Internet regulatory compliance. If any of these risks materialize, it could have a material adverse effect on our business.



Privacy and data security concerns and regulation could result in additional costs and liabilities.



The protection of customer, employee, and Company data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation or breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position and cash flows. Additionally, the E.U. adopted a comprehensive General Data Privacy Regulation (the “GDPR”), which will become fully effective in May 2018. The GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4 percent of worldwide revenue. The GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.



The technology enablement of omni-channel in our business is complex and involves the development of a new digital platform and a new order management system in order to enhance the complete customer experience.



We continue to invest in initiatives designed to deliver a high-quality, coordinated shopping experience online, in-stores, and on mobile devices, which requires substantial investment in technology, information systems, and employee training, as well as significant management time and resources. Our omni-channel retailing efforts include the integration and implementation of new technology, software, and processes to be able to fulfill orders from any point within our system of stores and distribution centers, which is extremely complex and may not meet customer expectations for timely and accurate deliveries. These efforts involve substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our omni-channel initiatives.



7

 


 

 

If our omni-channel initiatives are not successful, or we do not realize the return on our omni-channel investments that we anticipate, our financial performance and future growth could be materially adversely affected.



Our reliance on key management.



Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management teams. Our executive and senior management teams have substantial experience and expertise in our business and have made significant contributions to our success. Our future performance depends to a significant extent both upon the continued services of our current executive and senior management teams, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. While we feel that we have adequate succession planning and executive development programs, competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain and attract qualified executives.



Risks associated with attracting and retaining store and field associates.



Our success depends, in part, upon our ability to attract, develop, and retain a sufficient number of qualified store and field associates. The turnover rate in the retail industry is generally high. 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. 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, overtime regulations, and changing demographics.



Changes in employment laws or regulation could harm our performance.



Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime and sick pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act (“ACA”), unemployment tax rates, workers’ compensation rates, European works council requirements, and union organization. A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime and sick pay, paid leaves of absence and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. At this time, there is uncertainty concerning whether the ACA will be repealed or what requirements will be included in a new law, if enacted.  Complying with any new legislation and/or reversing changes implemented under the ACA could be time-intensive and expensive, and may affect our business.



Legislative or regulatory initiatives related to global warming/climate change concerns may negatively affect our business.



There has been an increasing focus and significant debate on global climate change, including increased attention from regulatory agencies and legislative bodies. This increased focus may lead to new initiatives directed at regulating an as-yet unspecified array of environmental matters. Legislative, regulatory, or other efforts 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 currently unable to predict the potential effects that any such future environmental initiatives may have on our business.



We may be adversely affected by regulatory and litigation developments.



We are exposed to the risk that federal or state legislation may negatively affect 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, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.









8

 


 

 

We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.



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 government 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 United States, including in developing countries, could increase the risk of FCPA violations in the future. Violations of these laws, or allegations of such violations, could result in a material adverse effect on our results of operations or financial condition.



Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, market confidence in our reported financial information, and the price of our common stock.



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, market confidence in our reported financial information, and the price of our common stock.



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 2017 were approximately 13.30 and 7.71 million square feet, respectively. These properties, which are primarily leased, are located in the United States and its territories, Canada, various European countries, Australia, and New Zealand.



We currently operate five distribution centers, of which two are owned and three are leased, occupying an aggregate of 2.9 million square feet. Three distribution centers are located in the United States, one in Germany, and one in the Netherlands. The location in Germany serves as the central warehouse distribution center for the Runners Point and Sidestep stores and their direct-to-customer business. We also own a cross-dock and manufacturing facility, and operate a leased warehouse in the United States, both of which support our Team Edition apparel business. The lease for our leased distribution center in Germany expires during 2019 and the Company is currently negotiating a lease extension for this facility.



We believe that all leases of properties that are material to our operations may be renewed, or that alternative properties are available, on terms not materially less favorable to us than existing leases.



Item 3. Legal Proceedings



Information regarding the Company’s 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

 


 

 

Item 4A.  Executive Officers of the Registrant



The following table provides information with respect to all persons serving as executive officers as of March 29, 2018, including business experience for the last five years.



 

Chairman, President and Chief Executive Officer 

Richard A. Johnson

Executive Vice President and Chief Executive Officer — North America

Stephen D. Jacobs

Executive Vice President and Chief Executive Officer — International

Lewis P. Kimble

Executive Vice President and Chief Financial Officer 

Lauren B. Peters 

Executive Vice President and Chief Information and

Customer Connectivity Officer

Pawan Verma

Senior Vice President and Chief Human Resources Officer

Paulette R. Alviti 

Senior Vice President and Chief Accounting Officer 

Giovanna Cipriano 

Senior Vice President, General Counsel and Secretary 

Sheilagh M. Clarke 

Senior Vice President — Strategy and Store Development

W. Scott Martin 

Vice President, Treasurer 

John A. Maurer 



Richard A. Johnson, age 60, has served as Chairman of the Board since May 2016 and President and Chief Executive Officer since December 2014. Mr. Johnson previously served as Executive Vice President and Chief Operating Officer from May 2012 through November 2014. He served as Executive Vice President and Group President from July 2011 to May 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.



Stephen D. Jacobs, age 55, has served as Executive Vice President and Chief Executive Officer-North America since February 2016. He previously served as Executive Vice President and Chief Executive Officer Foot Locker North America from December 2014 through February 2016 and President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from July 2011 to November 2014. 



Lewis P. Kimble, age 59,  has served as Executive Vice President and Chief Executive Officer-International since February 2016. Mr. Kimble previously served as President and Chief Executive Officer of Foot Locker Europe from February 2010 to February 2016.



Lauren B. Peters, age 56, has served as Executive Vice President and Chief Financial Officer since July 2011.



Pawan Verma, age 41, has served as Executive Vice President, Chief Information and Customer Connectivity Officer since October 2017 and as Senior Vice President and Chief Information Officer from August 2015 to September 2017. From February 2013 to July 2015, Mr. Verma served in various technology leadership roles at Target Corporation ranging from enterprise architecture, e-commerce, mobile and digital, with his most recent role at Target as Vice President - Digital Technology and API Platforms.



Paulette R. Alviti, age 47, has served as Senior Vice President and Chief Human Resources Officer since June 2013. From March 2010 to May 2013, Ms. Alviti served in various roles at PepsiCo, Inc., with her most recent role as Senior Vice President and Chief Human Resources Asia, Middle East, Africa.



Giovanna Cipriano, age 48, has served as Senior Vice President and Chief Accounting Officer since May 2009.



Sheilagh M. Clarke, age 58, has served as Senior Vice President, General Counsel and Secretary since June 2014. She previously served as Vice President, Associate General Counsel and Assistant Secretary from May 2007 to May 2014.



W. Scott Martin, age 50, has served as Senior Vice President - Strategy and Store Development since October 2017 and as Senior Vice President — Real Estate from June 2016 to September 2017. Mr. Martin previously served as Vice President, Store Development – Asia Pacific with Gap Inc. from June 2014 to June 2016. Prior to that role, he served in various roles at Starbucks Coffee Company: Director, Strategy Development, China, Asia Pacific and Emerging Brands (July 2013 to July 2014); Director, Global Store Development (June 2007 to July 2013).



John A. Maurer, age 58, has served as Vice President, Treasurer since September 2006.  In addition to this role, he also served as the Vice President of Investors Relations from February 2011 through March 2018.



There are no family relationships among the executive officers or directors of the Company. 

10

 


 

 

PART II





 

 

Item 5.

 

Market for the Company’s 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 3, 2018, the Company had 13,244 shareholders of record owning 119,829,023 common shares.



The following table provides the intra-day high and low sales prices for the Company’s common stock for the periods indicated below:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016



 

 

High

 

 

Low

 

 

High

 

 

Low

1st Quarter

 

$

77.86 

 

$  

65.88 

 

$

69.65 

 

$

58.17 

2nd Quarter

 

 

77.71 

 

 

44.59 

 

 

62.45 

 

 

50.90 

3rd Quarter

 

 

51.29 

 

 

29.89 

 

 

69.61 

 

 

56.80 

4th Quarter

 

 

53.17 

 

 

28.42 

 

 

79.43 

 

 

65.39 



During each of the quarters of 2017, the Company declared a dividend of $0.31 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. On February 20, 2018, the Board of Directors declared a quarterly dividend of $0.345 per share to be paid on May 4, 2018. This dividend represents an 11 percent increase over the previous quarterly per share amount.



The following table is a summary of our fourth quarter share repurchases:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Approximate



 

 

 

 

 

Total Number of

 

Dollar Value of



 

Total

 

Average

Shares Purchased as

 

Shares that may



 

Number

 

Price

Part of Publicly

 

yet be Purchased



 

of Shares

 

Paid Per

Announced

 

Under the

Date Purchased

 

Purchased (1)

 

Share (1) 

Program (2)

 

Program (2)

Oct. 29 - Nov. 25, 2017

 

1,500,000 

 

$

30.96 

 

1,500,000 

 

$

816,552,335 

Nov. 26 - Dec. 30, 2017

 

1,333,433 

 

 

43.87 

 

1,323,930 

 

 

758,463,867 

Dec. 31 - Feb. 3, 2018

 

 —

 

 

 —

 

 —

 

 

758,463,867 



 

2,833,433 

 

$

37.04 

 

2,823,930 

 

 

 





 

 

(1)

 

These columns also reflect shares acquired in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested during the quarter, and shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. 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, 2017, the Board of Directors approved a 3-year, $1.2 billion share repurchase program extending through January 2020. Through February 3, 2018, 12 million shares of common stock were purchased under this program, for an aggregate cost of $442 million.



11

 


 

 

Performance Graph



The graph below compares the cumulative five-year total return to shareholders (common stock price appreciation plus dividends, on a reinvested basis) on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 500 Specialty Retailing Index and the S&P 500 Index.



The following Performance Graph and related information shall not be deemed “soliciting material” or deemed 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.



Picture 2



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2/2/2013

 

2/1/2014

 

1/31/2015

 

1/30/2016

 

1/28/2017

 

2/3/2018

Foot Locker, Inc.

 

$

100.00 

 

$

114.24 

 

$

160.33 

 

$

206.69 

 

$

211.63 

 

$

154.65 

S&P 500 Index

 

$

100.00 

 

$

120.29 

 

$

137.39 

 

$

136.47 

 

$

164.93 

 

$

202.57 

S&P 500 Specialty Retailing Index

 

$

100.00 

 

$

118.15 

 

$

157.66 

 

$

170.76 

 

$

183.70 

 

$

226.17 







 



 



12

 


 

 

Item 6. Selected Financial Data



FIVE-YEAR SUMMARY OF 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.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

2017 (1)

 

2016

 

2015

 

2014

 

2013

Summary of Operations

(in millions, except per share amounts)

Sales

$

7,782 

 

7,766 

 

7,412 

 

7,151 

 

6,505 

Gross margin

 

2,456 

 

2,636 

 

2,505 

 

2,374 

 

2,133 

Selling, general and administrative expenses

 

1,501 

 

1,472 

 

1,415 

 

1,426 

 

1,334 

Depreciation and amortization

 

173 

 

158 

 

148 

 

139 

 

133 

Litigation and other charges

 

211 

 

 

105 

 

 

Interest (income) / expense, net 

 

(2)

 

 

 

 

Other income

 

(5)

 

(6)

 

(4)

 

(9)

 

(4)

Net income

 

284 

 

664 

 

541 

 

520 

 

429 

Per Common Share Data

 

 

 

 

 

 

 

 

 

 

  Basic earnings

 

2.23 

 

4.95 

 

3.89 

 

3.61 

 

2.89 

  Diluted earnings

 

2.22 

 

4.91 

 

3.84 

 

3.56 

 

2.85 

  Common stock dividends declared per share

 

1.24 

 

1.10 

 

1.00 

 

0.88 

 

0.80 

Weighted-average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

  Basic earnings

 

127.2 

 

134.0 

 

139.1 

 

143.9 

 

148.4 

  Diluted earnings

 

127.9 

 

135.1 

 

140.8 

 

146.0 

 

150.5 

Financial Condition

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and short-term investments

$

849 

 

1,046 

 

1,021 

 

967 

 

867 

Merchandise inventories

 

1,278 

 

1,307 

 

1,285 

 

1,250 

 

1,220 

Property and equipment, net

 

866 

 

765 

 

661 

 

620 

 

590 

Total assets

 

3,961 

 

3,840 

 

3,775 

 

3,577 

 

3,487 

Long-term debt and obligations under capital leases

 

125 

 

127 

 

130 

 

134 

 

139 

Total shareholders’ equity

 

2,519 

 

2,710 

 

2,553 

 

2,496 

 

2,496 

Financial Ratios

 

 

 

 

 

 

 

 

 

 

Sales per average gross square foot (2)

$

495 

 

515 

 

504 

 

490 

 

460 

SG&A as a percentage of sales

 

19.3 

%

19.0 

 

19.1 

 

19.9 

 

20.5 

Net income margin

 

3.6 

%

8.6 

 

7.3 

 

7.3 

 

6.6 

Adjusted net income margin (3)

 

6.6 

%

8.4 

 

8.2 

 

7.3 

 

6.6 

Earnings before interest and taxes (EBIT) (3)

$

576 

 

1,006 

 

841 

 

814 

 

668 

EBIT margin (3)

 

7.4 

%

13.0 

 

11.3 

 

11.4 

 

10.3 

Adjusted EBIT (3)

$

762 

 

1,012 

 

946 

 

816 

 

676 

Adjusted EBIT margin (3)

 

9.9 

%

13.0 

 

12.8 

 

11.4 

 

10.4 

Return on assets (ROA)

 

7.3 

%

17.4 

 

14.7 

 

14.7 

 

12.5 

Return on invested capital (ROIC) (3)

 

11.0 

%

15.1 

 

15.8 

 

15.0 

 

14.1 

Net debt capitalization percent (3), (4)

 

54.4 

%

48.5 

 

47.4 

 

43.4 

 

42.5 

Current ratio

 

4.1 

 

4.3 

 

3.7 

 

3.5 

 

3.8 

Other Data

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

274 

 

266 

 

228 

 

190 

 

206 

Number of stores at year end

 

3,310 

 

3,363 

 

3,383 

 

3,423 

 

3,473 

Total selling square footage at year end (in millions)

 

7.71 

 

7.63 

 

7.58 

 

7.48 

 

7.47 

Total gross square footage at year end (in millions)

 

13.30 

 

13.12 

 

12.92 

 

12.73 

 

12.71 







 

(1)

2017 represents the 53 weeks ended February 3, 2018.

(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 effect for such year. The 2017 amount has been calculated excluding the sales of the 53rd week.

(3)

These represent non-GAAP measures, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information and calculation.      

(4)

Represents total debt and obligations under capital leases, net of cash, cash equivalents, and short-term investments. This calculation includes the present value of operating leases and therefore is considered a non-GAAP measure.



13

 


 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Disclosure Regarding Forward-Looking Statements



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 Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the U.S. Securities and Exchange Commission. 



These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. 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.



Business Overview



Foot Locker, Inc., through its subsidiaries, operates in two reportable segments — Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international e-commerce businesses, which sell to customers through their Internet and mobile sites and catalogs.



The Foot Locker brand is one of the most widely recognized names in the markets in which we operate, epitomizing premium quality for the active lifestyle customer. This brand equity has aided our ability to successfully develop and increase our portfolio of complementary retail store formats, such as Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, part of our direct-to-customer business. Through various marketing channels and experiences, including social, digital, broadcast, and print media,  as well as various sports sponsorships and events, we reinforce our image with a consistent message namely, that we are the destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.



Store Profile



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

Square Footage



January 28,

 

 

February 3,

Relocations/

(in thousands)



2017

Opened

Closed

2018

Remodels

Selling

Gross

Foot Locker U.S.

948  42  910  44  2,430  4,225 

Foot Locker Europe

622  24  10  636  47  957  2,071 

Foot Locker Canada

119  111  264  431 

Foot Locker Asia Pacific                     

95  98  140  230 

Kids Foot Locker

411  39  14  436  25  747  1,285 

Lady Foot Locker

124 

 —

39  85 

 —

115  195 

Champs Sports

545  541  23  1,934  2,994 

Footaction

261  13  14  260  21  829  1,374 

Runners Point

122  118 

 —

150  258 

Sidestep

86 

 —

83  76  131 

SIX:02

30  32 

 —

65  109 

Total

3,363  94  147  3,310  183  7,707  13,303 









14

 


 

 

Athletic Stores



We operated 3,310 stores in the Athletic Stores segment as of the end of 2017. The following is a brief description of the Athletic Stores segment’s operating businesses:



Foot Locker — Foot Locker is a leading global youth culture brand that connects the sneaker obsessed consumer with the most innovative and culturally relevant sneakers and apparel. Across all of our consumer touchpoints (stores, websites, mobile apps, social media), Foot Locker enables consumers to fulfill their desire to be part of sneaker and youth culture. We curate special product assortments and marketing content that supports our premium position – from leading global brands such as Nike, Jordan, adidas, and Puma, as well as new and emerging brands in the athletic and lifestyle space. We connect emotionally with our consumers through a combination of global brand events and highly targeted and personalized experiences in local markets. Foot Locker’s 1,755 stores are located in 24 countries including 910 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 111 in Canada, 636 in Europe, and a combined 98 in Australia and New Zealand. Our domestic stores have an average of 2,700 selling square feet and our international stores have an average of 1,600 selling square feet.



Kids Foot Locker — Kids Foot Locker offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Our stores, websites and social media channels feature products, content and experiences geared toward youth sneaker culture. Of our 436 stores, 375 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 40 in Europe, 19 in Canada, and a combined 2 in Australia and New Zealand. These stores have an average of 1,700 selling square feet.



Lady Foot Locker — Lady Foot Locker is a U.S. retailer of athletic footwear, apparel, and accessories dedicated to sneaker-obsessed young women. Our stores provide premium sneakers and apparel, carefully selected to reflect the latest styles. Lady Foot Locker operates 85 stores that are located in the United States and Puerto Rico. These stores have an average of 1,400 selling square feet. 



Champs Sports —  Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. With a focus on the lifestyle expression of sport, Champs Sports’ product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to offer the best head-to-toe fashion stories representing the most powerful athletic brands, sports teams, and athletes in North America. Of our 541 stores, 512 are located throughout the United States, Puerto Rico, and the U.S. Virgin Islands and 29 in Canada. The Champs Sports stores have an average of 3,600 selling square feet.



Footaction — Footaction is a North American athletic footwear and apparel retailer that offers the freshest, best edited selection of athletic lifestyle brands and looks. This banner is uniquely positioned at the intersection of sport and style, with a focus on authentic, premium product. The primary consumer is a style-obsessed, confident, influential young male who is always dressed to impress. Of our 260 stores, 258 are located throughout the United States and Puerto Rico and 2 are in Canada. The Footaction stores have an average of 3,200 selling square feet.



Runners Point  Runners Point specializes in running footwear, apparel, and equipment for both performance and lifestyle purposes. This banner offers athletically inspired premium products and personalized service. Runners Point also caters to local running communities providing technical products, training tips and access to local running and group events, while also serving their lifestyle running needs. Our 118 stores are located in Germany, Austria, and Switzerland. Runners Point stores have an average of 1,300 selling square feet.    



Sidestep  Sidestep is a predominantly athletic fashion footwear banner. Our 83 stores are located in Germany, Austria, the Netherlands, and Switzerland. Sidestep caters to a more discerning, fashion forward consumer. Sidestep stores have an average of 900 selling square feet.



SIX:02  SIX:02 is for women who want to look and feel great both at the gym and in everyday life. This banner provides stylish casual and fitness looks for women on the go. SIX:02 is unique in the market place because of the ability to feature both footwear and apparel assortments across many brands – from traditional athletic brands, such as Nike, adidas and Puma – to new up-and-coming brands. Whether she is working out, going out or just hanging out, SIX:02 has an expansive selection of apparel, footwear, and accessories to choose from. SIX:02 operates 32 stores in the United States and have an average of 2,000 selling square feet.



15

 


 

 

Direct-to-Customers



Our Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, and eastbayteamsales.com. Additionally, this segment includes the websites, both desktop and mobile, aligned with the brand names of our store banners (footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, footlocker.au, runnerspoint.com, and sidestep-shoes.com). These sites offer some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between e-commerce and physical stores



Eastbay  Eastbay is among the largest direct marketers in the United States, providing serious high school and other athletes with a complete sports solution including athletic footwear, apparel, equipment, and team licensed merchandise for a broad range of sports.



Franchise Operations



The Company operates franchised Foot Locker stores located within the Middle East, as well as franchised stores in Germany under the Runners Point banner. In addition, we entered into a franchise agreement during 2017 with Fox-Wizel Ltd for franchised stores operating in Israel. Also during 2017, we terminated our franchise agreement with the third party that operated stores in the Republic of Korea. 



A total of 112 franchised stores were operating at February 3, 2018,  14 were operating in Germany and 98 were operating in the Middle East, of which 25 are in Israel.



U.S. Tax Reform



On December 22, 2017, the United States enacted tax reform legislation (“Tax Act”) that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. corporate income tax rate from 35 percent to 21 percent as well as provisions that limit or eliminate various deductions or credits. The legislation also results in certain U.S. allocated expenses (e.g. interest and general administrative expenses) to be taxed and imposes a new tax on U.S. cross-border payments. Furthermore, the legislation includes a one-time transition tax on accumulated foreign earnings and profits.



In response to the enactment of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 which provides guidance to address the complexity in accounting for this new legislation. When the initial accounting for items under the new legislation is incomplete, the guidance allows us to recognize provisional amounts when reasonable estimates can be made or to continue to apply the prior tax law if a reasonable estimate cannot be made. The SEC has provided up to a one-year window for companies to finalize the accounting for the effect of this new legislation and we anticipate finalizing our accounting during 2018. While our accounting for the new U.S. tax legislation is not complete, we have made reasonable estimates for some provisions and recognized a $99 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings and a change in our permanent reinvestment assertion.  The remeasurement of our deferred tax assets and liabilities was not significant. The 2017 charge for these provisions reflects our best estimate based on information currently available and our current interpretation of the Tax Act. 



The Tax Act includes a provision effective in 2018, to tax global intangible low-taxed income ("GILTI") of the Company’s foreign subsidiaries. Under generally accepted accounting principles (“GAAP”), we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. Due to the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act and the application of GAAP and we have not yet elected an accounting policy.



As of the date of this Form 10-K, we are continuing to evaluate the accounting for this legislation. We continue to assemble and analyze all the information required to prepare and analyze these effects and await additional guidance from the U.S. Treasury Department, the IRS or other standard-setting bodies. Additionally, we continue to analyze other information. Accordingly, we may record additional provisional amounts or adjustments to provisional amounts. Any subsequent adjustments will be recorded to tax expense in the quarter when the analysis is complete. See Critical Accounting Policies within this item and Note 17,  Income Taxes in “Item 8. Consolidated Financial Statements and Supplementary Data” for further details on U.S. tax reform.

16

 


 

 

Reconciliation of Non-GAAP Measures



In addition to reporting the Company’s financial results in accordance with GAAP, the Company reports certain financial results that differ from what is reported under GAAP. In the following tables, we have presented certain financial measures and ratios identified as non-GAAP such as sales excluding 53rd week, Earnings Before Interest and Taxes (“EBIT”), adjusted EBIT, adjusted EBIT margin, adjusted income before income taxes, adjusted net income, adjusted net income margin, adjusted diluted earnings per share, Return on Invested Capital (“ROIC”), free cash flow, and net debt capitalization. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business or which affect comparability. In addition, these non-GAAP measures are useful in assessing our progress in achieving our long-term financial objectives.



Additionally, we present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements.



Fiscal year 2017 represents the fifty-three weeks ended February 3, 2018. Accordingly, certain non-GAAP results have also been adjusted to exclude the effects of the 53rd week to assist in comparability. 



We estimate the tax effect of the non-GAAP adjustments by applying a marginal rate to each of the respective items. The income tax items represent the discrete amount that affected the period.



The non-GAAP financial information is provided in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Presented below is a reconciliation of GAAP and non-GAAP results discussed throughout this Annual Report on Form 10-K. Please see the non-GAAP reconciliations for free cash flow and net debt capitalization in the “Liquidity and Capital Resources” section.





 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2015

 



($ in millions)

 

Sales

 

$

7,782 

 

$

7,766 

 

$

7,412 

 

53rd week

 

 

95 

 

 

 —

 

 

 —

 

Sales excluding 53rd week (non-GAAP)

 

$

7,687 

 

$

7,766 

 

$

7,412 

 



 

 

 

 

 

 

 

 

 

 

Pre-tax income:

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

578 

 

$

1,004 

 

$

837 

 

Pre-tax adjustments excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

Litigation and other charges (1)

 

 

211 

 

 

 

 

105 

 

53rd week

 

 

(25)

 

 

 —

 

 

 —

 

Adjusted income before income taxes (non-GAAP)

 

$

764 

 

$

1,010 

 

$

942 

 



 

 

 

 

 

 

 

 

 

 

Calculation of Earnings Before Interest and Taxes (EBIT):

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

578 

 

$

1,004 

 

$

837 

 

Interest (income) / expense, net 

 

 

(2)

 

 

 

 

 

EBIT

 

$

576 

 

$

1,006 

 

$

841 

 



 

 

 

 

 

 

 

 

 

 

Adjusted income before income taxes

 

$

764 

 

$

1,010 

 

$

942 

 

Interest (income) / expense, net 

 

 

(2)

 

 

 

 

 

Adjusted EBIT

 

$

762 

 

$

1,012 

 

$

946 

 



 

 

 

 

 

 

 

 

 

 

EBIT margin %

 

 

7.4 

%

 

13.0 

%

 

11.3 

%

Adjusted EBIT margin %

 

 

9.9 

%

 

13.0 

%

 

12.8 

%









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

17

 


 

 



 

2017

 

2016

 

2015

 



($ in millions, except per share amounts)

 

After-tax income:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

284 

 

$

664 

 

$

541 

 

After-tax adjustments excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

Litigation and other charges, net of income tax benefit of $78, $1, and $40 million, respectively (1)

 

 

133 

 

 

 

 

65 

 

U.S. tax reform (2)

 

 

99 

 

 

 —

 

 

 —

 

Income tax valuation allowances (3)

 

 

 

 

 —

 

 

 —

 

Tax expense related to French tax rate change (4) 

 

 

 

 

 

 

 —

 

Tax benefit related to enacted change in foreign branch currency regulations (5)

 

 

 —

 

 

(9)

 

 

 —

 

Tax benefit related to intellectual property reassessment (6)

 

 

 —

 

 

(10)

 

 

 —

 

53rd week, net of income tax expense of $9 million

 

 

(16)

 

 

 —

 

 

 —

 

Adjusted net income (non-GAAP)

 

$

510 

 

$

652 

 

$

606 

 



 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

2.22 

 

$

4.91 

 

$

3.84 

 

Diluted EPS amounts excluded from GAAP:

 

 

 

 

 

 

 

 

 

 

Litigation and other charges (1)

 

 

1.02 

 

 

0.03 

 

 

0.45 

 

U.S. tax reform (2)

 

 

0.78 

 

 

 —

 

 

 —

 

Income tax valuation allowances (3)

 

 

0.07 

 

 

 —

 

 

 —

 

Tax expense related to French tax rate change (4)

 

 

0.02 

 

 

0.02 

 

 

 —

 

Tax benefit related to enacted change in foreign branch currency regulations (5)

 

 

 —

 

 

(0.07)

 

 

 —

 

Tax benefit related to intellectual property reassessment (6)

 

 

 —

 

 

(0.07)

 

 

 —

 

53rd week

 

 

(0.12)

 

 

 —

 

 

 —

 

Adjusted diluted EPS (non-GAAP)

 

$

3.99 

 

$

4.82 

 

$

4.29 

 



 

 

 

 

 

 

 

 

 

 

Net income margin %

 

 

3.6 

%

 

8.6 

%

 

7.3 

%

Adjusted net income margin %

 

 

6.6 

%

 

8.4 

%

 

8.2 

%





 

(1)

Litigation and other charges for 2017 includes a pension litigation charge ($178 million, or $111 million after-tax), severance and related costs ($13 million, or $8 million after-tax), and non-cash impairment charges ($20 million, or $14 million after-tax). The 2016 amount represents non-cash impairment charges of $6 million, or $5 million after-tax. The 2015 amount includes a charge of $100 million related to the pension litigation ($61 million after-tax) and non-cash impairment charges of $5 million ($4 million after-tax).

 

Pension litigation - The Company recorded pre-tax charges of $50 million and $128 million in connection with its U.S. retirement plan litigation during the second and fourth quarters of 2017, respectively. The Company had previously recorded a pre-tax charge for $100 million during 2015. These charges reflect the Company’s revised estimate of its exposure for this matter, bringing the total pre-tax amount accrued to $278 million. The Company has exhausted all of its legal remedies and will reform the pension plan as required by the court rulings.

 

Severance and related costs – The Company recorded a pre-tax charge of $13 million during the third quarter of 2017 associated with the reorganization and the reduction of staff taken to improve efficiency.

 

Impairment charges – The Company recognized pre-tax non-cash impairment charges totaling $20 million during the fourth quarter of 2017. These charges were associated with our SIX:02, Runners Point, and Sidestep businesses and primarily represented the write-down of store fixtures and leasehold improvements. The 2016 and 2015 amounts related to Runners Point and Sidestep.

(2)

On December 22, 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions. The recognized charge was based on current interpretation of the tax law changes and includes a $99 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings and a corresponding change in our permanent reinvestment assertion under ASC 740-30. The effect of remeasurement of our deferred tax assets and liabilities was not significant. Our accounting for the new legislation is not complete and we have made reasonable estimates for some tax provisions. We exclude the discrete U.S. tax reform effect from our Adjusted diluted EPS as it does not reflect our ongoing tax obligations under U.S. tax reform.

(3)

During the fourth quarter of 2017, the Company determined that certain valuation allowances should be established against deferred tax assets associated with the Runners Point and Sidestep stores and e-commerce businesses.

(4)

During the fourth quarters of 2017 and 2016, the Company recognized tax expense of $2 million in both periods in connection to two separate tax rate reductions in France.

(5)

In the fourth quarter of 2016, the U.S. Treasury issued regulations under Internal Revenue Code Section 987, which required us to change our method for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. This change resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $9 million.

(6)

During the third quarter of 2016, we performed a scheduled reassessment of the value of the intellectual property provided to our European business by Foot Locker in the U.S. during the fourth quarter of 2012. The new, higher valuation resulted in catch-up deductions that reduced tax expense by $10 million.

18

 


 

 

ROIC is presented below and represents a non-GAAP measure. We believe it is a meaningful measure because it quantifies how efficiently we generated operating income relative to the capital we have invested in the business. In order to calculate ROIC, we adjust our results to reflect our 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 if they were 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 U.S. GAAP measure to ROIC is Return on Assets (“ROA”) and is also represented below. ROA decreased to 7.3 percent as compared to 17.4 percent in the prior year, with the decline primarily due to litigation and other charges recorded during 2017, as well as a provisional charge of $99 million relating to tax reform as discussed earlier in this section. 



Our ROIC decreased to 11.0 percent in 2017, as compared to 15.1 percent in the prior year. Average invested capital increased compared with the prior year and earnings declined, which resulted in the overall decrease in ROIC. Average invested capital increased as a result of the effect of opening larger stores, as well as signing certain high-profile leases with longer lease terms. The earnings decline is more fully discussed on the following pages.

 



 

 

 

 

 

 

 

 

 

 

  

 

2017

 

2016

 

2015

ROA (1)

 

 

7.3 

%

 

17.4 

%

 

14.7 

%

ROIC %

 

 

11.0 

%

 

15.1 

%

 

15.8 

%





 

(1)

Represents net income of $284 million, $664 million, and $541 million divided by average total assets of $3,901 million, $3,808 million, and $3,676 million for 2017, 2016, and 2015, respectively.



 

Calculation of ROIC:





 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2015

 



 

($ in millions)

 

Adjusted EBIT

 

$

762 

 

$

1,012 

 

$

946 

 

+ Rent expense

 

 

735 

 

 

690 

 

 

640 

 

- Estimated depreciation on capitalized operating leases (1)

 

 

(593)

 

 

(552)

 

 

(498)

 

Adjusted net operating profit

 

 

904 

 

 

1,150 

 

 

1,088 

 

- Adjusted income tax expense (2)

 

 

(304)

 

 

(409)

 

 

(391)

 

= Adjusted return after taxes (3)

 

$

600 

 

$

741 

 

$

697 

 

Average total assets

 

$

3,901 

 

$

3,808 

 

$

3,676 

 

- Average cash and cash equivalents

 

 

(948)

 

 

(1,034)

 

 

(994)

 

- Average non-interest bearing current liabilities

 

 

(614)

 

 

(656)

 

 

(697)

 

- Average merchandise inventories

 

 

(1,293)

 

 

(1,296)

 

 

(1,268)

 

+ Average estimated asset base of capitalized operating leases (1)

 

 

2,978 

 

 

2,687 

 

 

2,346 

 

+ 13-month average merchandise inventories

 

 

1,413 

 

 

1,388 

 

 

1,337 

 

= Average invested capital

 

$

5,437 

 

$

4,897 

 

$

4,400 

 

ROIC %

 

 

11.0 

%

 

15.1 

%

 

15.8 

%





 

(1)

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. The present value of operating leases is discounted using various interest rates ranging from 2.5 percent to 14.5 percent, which represents our incremental borrowing rate at inception of the lease. The capitalized operating leases and related income statement amounts disclosed above do not reflect the requirements of Accounting Standards Update 2016-02, Leases.



(2)

The adjusted income tax expense represents the marginal tax rate applied to net operating profit for each of the periods presented.



(3)

The adjusted return after taxes does not include interest expense that would be recorded on a capital lease.



 





19

 


 

 

Overview of Consolidated Results



The following represents our long-term objectives and our progress towards meeting those objectives. Non-GAAP results are presented for all the periods. Please see “Reconciliation of Non-GAAP Measures” earlier in this section for further information relating to non-GAAP measures, including why we believe they are useful and how they are calculated.    



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Long-term

 

 

 

 

 

 

 

 

 

 



 

Objectives

 

2017

 

2016

 

2015

 

Sales ($ in millions)

 

$

10,000 

 

$

7,782 

 

$

7,766 

 

$

7,412 

 

Sales per gross square foot

 

$

600 

 

$

495 

 

$

515 

 

$

504 

 

Adjusted net income margin %

 

 

8.5 

%

 

6.6 

%

 

8.4 

%

 

8.2 

%

Adjusted EBIT margin %

 

 

12.5 

%

 

9.9 

%

 

13.0 

%

 

12.8 

%

ROIC %

 

 

17.0 

%

 

11.0 

%

 

15.1 

%

 

15.8 

%



Highlights of our 2017 financial performance include:

·

Despite a challenging retail year, the Company remained highly profitable and our financial position is strong. We are well positioned for the future.

·

Total sales increased 0.2 percent to a record $7,782 million, with the 53rd week contributing $95 million of sales. Footwear sales represented 82 percent of total sales for all periods presented. The overall comparable-sales gains of 6.9 percent in our Direct-to-Customer segment was not enough to offset the declines experienced by our Athletic Store Segment, which experienced a comparable-store sales decline of 4.7 percent. 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2015

 

Sales increase

 

 

0.2 

%

 

4.8 

%

 

3.6 

%

Comparable-store sales (decrease) / increase

 

 

(3.1)

%

 

4.3 

%

 

8.5 

%



·

Sales of the Direct-to-Customers segment increased by 8.5 percent to $1,109 million, compared with $1,022 million in 2016 and increased 110 basis points as a percentage of total sales to 14.3 percent. The direct business has been steadily increasing as a percentage of total sales over the last several years, led by the continued growth and expansion into new geographies of our store banners’ e-commerce businesses.

·

Gross margin, as a percentage of sales, decreased by 230 basis points to 31.6 percent in 2017. The decline was primarily driven by a decrease in our merchandise margin rate, reflecting a higher markdown rate as compared with the prior year. The 53rd week contributed an improvement to the gross margin rate of 20 basis points.

·

SG&A expenses were 19.3 percent of sales, an increase of 30 basis points as compared with the prior year, and primarily reflected store wage pressures. The 53rd week did not significantly affect the SG&A expense rate.

·

EBIT margin was 7.4 percent and our adjusted EBIT margin was 9.9 percent in 2017. As compared with the prior year, the decline in the adjusted EBIT margin from 13.0 percent to 9.9 percent reflected lower pre-tax income, which was primarily due to lower gross margin and higher SG&A expenses described above. 

·

Net income was $284 million, or $2.22 diluted earnings per share, a decrease of 54.8 percent from the prior-year period. Adjusted net income was $510 million, or $3.99 diluted earnings per share, a decline of 17.2 percent from the corresponding non-GAAP prior-year period.

·

Net income margin decreased to 3.6 percent as compared with 8.6 percent in the prior year. Our adjusted net income margin declined to 6.6 percent in 2017 as compared to 8.4 percent in the prior year.



Highlights of our financial position for the period ended February 3, 2018 include:

·

We ended the year in a strong financial position. At year end, we had $724 million of cash and cash equivalents, net of debt. Cash and cash equivalents at February 3, 2018 were $849 million.

·

Net cash provided by operating activities was $813 million, representing a $31 million decrease over last year, related to the earnings decline partially offset by substantial working capital improvements.

·

Cash capital expenditures during 2017 totaled $274 million and were primarily directed to the remodeling or relocation of 183 stores, the build-out of 94 new stores, as well as other technology and infrastructure projects.

·

During 2017 we returned significant amounts of cash to our shareholders. Dividends totaling $157 million were declared and paid during 2017, and 12.4 million shares were repurchased under our share repurchase program at a cost of $467 million.

20

 


 

 

Summary of Consolidated Statements of Operations



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2017

 

2016

 

2015



(in millions, except per share data)

Sales 

$

7,782 

 

$

7,766 

 

$

7,412 

Gross margin

 

2,456 

 

 

2,636 

 

 

2,505 

Selling, general and administrative expenses

 

1,501 

 

 

1,472 

 

 

1,415 

Depreciation and amortization

 

173 

 

 

158 

 

 

148 

Interest (income) / expense, net 

 

(2)

 

 

 

 

Net income

$

284 

 

$

664 

 

$

541 

Diluted earnings per share

$

2.22 

 

$

4.91 

 

$

3.84 



Sales



All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations. Comparable-store sales for 2017 does not include the sales from the 53rd week.



Sales of $7,782 million in 2017 increased by 0.2 percent from sales of $7,766 million in 2016. Results from 2017 include the effect of the 53rd week, which represented sales of $95 million. Excluding the effect of foreign currency fluctuations, sales declined 0.5 percent as compared with 2016.  Comparable-store sales declined 3.1 percent during 2017 as compared with 2016. Sales of $7,766 million in 2016 increased by 4.8 percent from sales of $7,412 million in 2015, this represented a comparable-store sales increase of 4.3 percent. Excluding the effect of foreign currency fluctuations, sales increased 5.2 percent as compared with 2015.  



Gross Margin



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

  

2017

 

2016

 

2015

 

Gross margin rate

 

31.6 

%

 

33.9 

%

 

33.8 

%

Basis point (decrease) / increase in the gross margin rate

 

(230)

 

 

10 

 

 

 

 

Components of the change-

 

 

 

 

 

 

 

 

 

Merchandise margin rate (decline) / improvement

 

(160)

 

 

20 

 

 

 

 

Higher occupancy and buyers' compensation expense rate

 

(70)

 

 

(10)

 

 

 

 



Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities.



The gross margin rate decreased to 31.6 percent in 2017 as compared to 33.9 percent in the prior year. The decline in the merchandise margin rate in 2017 primarily reflects a higher markdown rate in both our Athletic Stores and Direct-to-Customer segments. The higher markdowns were the result of a more promotional environment and were necessary to ensure merchandise inventory remained current and in line with the sales trend. Although to a lesser degree, a decline in our shipping and handling revenue also negatively affected the merchandise margin for the Direct-to-Customer segment. The decline in the gross margin rate also reflects an increase in the occupancy and buyers’ compensation rate as compared to 2016. Rent-related costs continued to increase while our sales were relatively flat. The increase in rent-related costs was primarily driven by recently entering into leases for high-profile locations.



Gross margin in 2016 improved 10 basis points to 33.9 percent as compared with 2015. The improvement was driven by a lower markdown rate, primarily in our Athletic Stores segment, due to an increase in full-priced selling. This improvement was partially offset by increased promotional activity within our Direct-to-Customers segment. The change in the gross margin rate also reflected an increase in the occupancy and buyers’ compensation rate compared to 2015. This pressured our gross margin rate as certain high-profile locations were closed for remodeling for all or part of 2016, which increased the occupancy expense rate since these locations were not generating sales while incurring tenancy costs. 



21

 


 

 

Selling, General and Administrative Expenses (SG&A)



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

  

2017

 

2016

 

2015

 



($ in millions)

SG&A

$

1,501 

 

$

1,472 

 

$

1,415 

 

$ Change

$

29 

 

$

57 

 

 

 

 

% Change

 

2.0 

%

 

4.0 

%

 

 

 

SG&A as a percentage of sales

 

19.3 

%

 

19.0 

%

 

19.1 

%



SG&A increased by $29 million and 2.0 percent in 2017, as compared with the prior year. As a percentage of sales, the SG&A rate increased by 30 basis points as compared with 2016. Excluding the effect of foreign currency fluctuations, SG&A increased by $16 million compared to the prior year. The 53rd week contributed $16 million of additional expenses, however as a percent of sales the SG&A rate remained unchanged at 19.3 percent.



The rise in the SG&A expense rate during 2017 primarily relates to the Athletic Stores segment, partially offset by a decline in the Direct-to-Customers segment’s SG&A rate. The Athletic Stores segment reflected an increase in store-related compensation costs as a result of increased minimum wage levels. Additionally, we incurred higher expenses related to wages, such as payroll taxes and benefits. These increases in the SG&A expense rate were partially offset by declines in incentive compensation and marketing related costs.



SG&A increased by $57 million in 2016 as compared with 2015. As a percentage of sales, the SG&A rate in 2016 decreased by 10 basis points as compared with 2015, which reflected diligent expense management specifically in store wages by our Athletic Stores segment and was partially offset by increased marketing costs incurred by our Direct-to-Customers segment in order to drive traffic to its websites.



Depreciation and Amortization





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

  

2017

 

2016

 

2015

 



($ in millions)

Depreciation and amortization

$

173 

 

$

158 

 

$

148 

 

$ Change

$

15 

 

$

10 

 

 

 

 

% Change

 

9.5 

%

 

6.8 

%

 

 

 



Depreciation and amortization increased $15 million in 2017 as compared with 2016.  Excluding the effect of foreign currency fluctuations, depreciation and amortization increased $13 million as compared with the prior year. The increases in both 2017 and 2016 reflect a rise in capital spending on store improvements, the enhancement of our digital sites, and various other technologies and infrastructure. The increase in 2016 as compared with 2015 also reflected capital spending on our relocated corporate headquarters.



Litigation and Other Charges



Litigation and other charges recorded totaled $211 million, $6 million, and $105 million for 2017, 2016, and 2015, respectively.