10-K 1 v403865_10k.htm FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended January 31, 2015

OR

o 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

[GRAPHIC MISSING]

(Exact name of Registrant as specified in its charter)

 
New York   13-3513936
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

 
112 West 34th Street, New York, New York   10120
(Address of principal executive offices)   (Zip Code)

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.Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. o

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

     
Large accelerated filer x   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

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

 
The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding at March 16, 2015:     139,649,989  
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, August 2, 2014, was approximately:   $ 5,363,852,719

* 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 20, 2015: Parts III and IV.


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

 
PART I
 

Item 1.

Business

    1  

Item 1A.

Risk Factors

    2  

Item 1B.

Unresolved Staff Comments

    9  

Item 2.

Properties

    9  

Item 3.

Legal Proceedings

    9  

Item 4.

Mine Safety Disclosures

    9  
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

    33  

Item 8.

Consolidated Financial Statements and Supplementary Data

    33  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    72  

Item 9A.

Controls and Procedures

    72  

Item 9B.

Other Information

    74  
PART III
 

Item 10.

Directors, Executive Officers and Corporate Governance

    74  

Item 11.

Executive Compensation

    74  

Item 12.

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

    74  

Item 13.

Certain Relationships and Related Transactions, and Director Independence

    74  

Item 14.

Principal Accounting Fees and Services

    74  
PART IV
 

Item 15.

Exhibits and Financial Statement Schedules

    75  


 
 

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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, operating 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of January 31, 2015. 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 112 West 34th Street, New York, N.Y. 10120. The Company intends to promptly disclose amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the Corporate Governance section of the Company’s corporate website.

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 and trademarks appearing in this report (except for Nike, Inc.) are owned by Foot Locker, Inc. or its subsidiaries.

Employees

The Company and its consolidated subsidiaries had 14,567 full-time and 30,001 part-time employees at January 31, 2015. 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.”

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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. 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 strategic long range 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, which may result in the diversion of these resources from our core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store designs, competition, product differentiation, and the ability to attract and retain qualified personnel. If we cannot successfully execute our strategic growth initiatives or if the long-range plan does not adequately address the challenges or opportunities we face, our financial condition and results of operations may be adversely affected. Additionally, failure to meet market 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, discount 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, reputation, store location, quality, advertising, price, and customer service. Our success also depends on our ability to differentiate ourselves from our competitors with respect to a quality merchandise assortment and superior customer service. We cannot assure that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors, and entry of new competitors or expansion of existing competitors, into our markets could have a material adverse effect on our business, financial condition, and results of operations.

Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, all of our significant suppliers distribute products directly through the Internet and others may follow. Some of our suppliers currently operate retail stores and some have indicated that they intend to open additional retail stores. 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 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 these customers could have a material adverse effect on our business, financial condition, and results of operations.

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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.

A change in the relationship with any of our key suppliers or the unavailability of our 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, our suppliers provide volume discounts, cooperative advertising, and markdown allowances, as well as the ability to negotiate returns of excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future.

The Company purchased approximately 89 percent of its merchandise in 2014 from its top five suppliers and expects to continue to obtain a significant percentage of its athletic product from these suppliers in future periods. Approximately 73 percent was purchased from one supplier — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchased 47 to 84 percent of their merchandise from Nike. 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 (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in 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 depend on mall traffic and our ability to secure suitable store locations.

Our stores are located primarily in enclosed regional and neighborhood malls. Our sales are dependent, in part, on the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing of anchor department stores and/or specialty stores, and a decline in the popularity of mall shopping among our target customers. Further, any terrorist act, natural disaster, or public health or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in affected areas, could have a material adverse effect on our business.

To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available 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, particularly in the United States, Canada, and Australia, and because of our dependence upon these landlords for a substantial number of our locations, any significant erosion of their financial condition or our relationships with these landlords would negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.

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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, the highly competitive retail sales environment, economic conditions, timing of promotional events, 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 a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.

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 2014 was attributable to our operations in Europe, Canada, Australia, and New Zealand. As a result, our business is subject to the risks associated with doing business outside of the United States such as foreign customer preferences, political unrest, disruptions or delays in shipments, changes in economic conditions in countries in which we operate, 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 we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.

Fluctuations in the value of the euro 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. Our operating results may be adversely affected by significant changes in these foreign currencies relative to the U.S. dollar. For the most part, our international subsidiaries transact in their functional currency, other than in the U.K., whose inventory purchases are denominated in euro, 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.

Macroeconomic developments may adversely affect our business.

Our performance is subject to global economic conditions and the related impact on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset values, which could have a material negative effect on demand for our products.

As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home prices. There is also a risk that if negative economic conditions persist for a long period of time or worsen, consumers may make long-lasting reductions to their discretionary purchasing behavior. These and other economic factors could adversely affect demand for our products and our financial condition and operating results.

Instability in the financial markets may adversely affect our business.

Any instability in the global financial markets could result in diminished credit availability. Although we currently have a revolving credit agreement in place until January 27, 2017, and other than amounts used for standby letters of credit, do not have any borrowings under it, 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.

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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 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 January 31, 2015, our cash and cash equivalents totaled $967 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of January 31, 2015, we had $537 million of cash and cash equivalents held in foreign jurisdictions. We regularly monitor our counterparty credit risk and mitigate our exposure by making short-term investments only in highly-rated institutions and by limiting the amount we invest in any one institution. We continually monitor the creditworthiness of our counterparties. At January 31, 2015, almost all of the investments were in institutions rated A or better from a major credit rating agency. Despite those ratings, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues.

Our U.S. pension plan trust holds assets totaling $613 million at January 31, 2015. 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 have an impact on 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 January 31, 2015, we had $157 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 losses are significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our strategic long-range plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by such factors as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, goodwill, and other intangible assets and could result in future impairment charges, which would adversely affect our results of operations.

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.

A substantial portion of our cash and investments is invested outside of the United States. As we plan to permanently reinvest our foreign earnings outside the United States, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. Recent proposals to reform U.S. tax rules may result in a reduction or elimination of the deferral of U.S. income tax on our foreign earnings, which could adversely affect our effective tax rate. Any of these changes could have an adverse effect on our results of operations and financial condition.

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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 tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from 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 impact 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 may be affected by disruptions in the global transportation network such as a port strike, 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 a significant amount of merchandise. An interruption in service by these carriers for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.

Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges, among and other factors, may increase freight costs and thereby increase our cost of sales. We enter into diesel fuel forward and option contracts to mitigate a portion of the risk associated with the variability caused by these surcharges.

Disruptions, failures or security breaches of our information technology infrastructure or unauthorized disclosure of sensitive or confidential customer information could harm our business and standing with our customers.

Information technology is a critically important part of our business operations. We depend on information systems to process transactions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center or data leakage of confidential information, either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, or other causes.

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Our business involves the storage and transmission of customers’ personal information, such as consumer preferences and credit card information. We invest in security technology to protect the data stored by the Company, as well as 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 cyber security risks, given the ever-increasing abilities of those intent on breaching cyber security 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, 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, telecommunications failures, and similar disruptions. Also, we may require additional capital in the future to sustain or grow our digital commerce. Business risks related to digital commerce include risks associated with the need to keep pace with rapid technological change, Internet cyber security risks, risks of system failure or inadequacy, governmental regulation, legal uncertainties with respect to Internet regulatory compliance, and collection of sales or other taxes by additional states or foreign jurisdictions. If any of these risks materializes, it could have a material adverse effect on our business.

Our reliance on key management.

Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management team. Our executive and senior management team have substantial experience and expertise in our business and have made significant contributions to our recent growth and success. Our future performance depends to a significant extent both upon the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. 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.

Many of the store and field associates are in entry level or part-time positions which, historically, have had high rates of turnover. 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.

We face risks arising from activity by the National Labor Relations Board in the United States.

The National Labor Relations Board continually considers changes to labor regulations, many of which could significantly affect the nature of labor relations in the United States and how union elections and contract negotiations are conducted. The National Labor Relations Board’s current definition of a bargaining unit makes it possible for smaller groups of employees to organize labor unions.

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Furthermore, recent regulations shorten the election process, significantly reducing the time between the filing of a petition and an election being held. These regulations and recent decisions could impose more labor relations requirements and union activity on our business conducted in the United States, thereby potentially increasing our costs, which could negatively affect our profitability.

Health care reform could adversely affect our business.

In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health care reform legislation and the large number of eligible employees who currently choose not to participate in our plans, it is difficult to predict the overall effect of the statute and related regulations on our business over the coming years. Due to the health care law changes, some eligible employees who had historically not chosen to participate in our health care plans have found it more advantageous to participate in our plans effective January 1, 2015. Such changes include tax penalties to persons for not obtaining health care coverage and being ineligible for certain health care subsidies if an employee is eligible for health care coverage under an employer’s plan. If a larger number of eligible employees, who currently choose not to participate in our plans, choose to enroll over the next few years, it may significantly increase our health care coverage costs and negatively affect our financial results.

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 in the United States to combat climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business.

We may be adversely affected by regulatory and litigation developments.

We are exposed to the risk that federal or state legislation may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs, such as health insurance, paid leave programs, or other changes in workplace regulation could increase our cost of doing business or otherwise adversely affect our operations. Additionally, we are regularly involved in various litigation matters, including class actions and patent infringement claims, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.

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 non-U.S. officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents.

Our continued expansion outside the 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 disrupt our business and result in a material adverse effect on our results of operations or financial condition.

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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 2014 were approximately 12.73 and 7.48 million square feet, respectively. These properties, which are primarily leased, are located in the United States, Canada, various European countries, Australia, and New Zealand.

The Company currently operates seven distribution centers, of which three are owned and four are leased, occupying an aggregate of 2.9 million square feet. Three distribution centers are located in the United States, three in Germany, and one in the Netherlands. The three locations in Germany relate to the central warehouse distribution centers for the Runners Point Group store locations, as well as a distribution center for its direct-to-customer business. During 2014, we opened a new distribution center in Germany which provides us with increased capacity that will enable us to support the planned growth of both the store and direct-to-customer businesses. This larger distribution center will also allow us to consolidate the other two locations in Germany in 2015.

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.

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.

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Executive Officers of the Registrant

Information with respect to Executive Officers of the Company, as of March 30, 2015, is set forth below:

 
Executive Chairman of the Board   Ken C. Hicks
President and Chief Executive Officer   Richard A. Johnson
Executive Vice President — Operations Support   Robert W. McHugh
Executive Vice President and Chief Financial Officer   Lauren B. Peters
Senior Vice President and Chief Human Resources Officer   Paulette R. Alviti
Senior Vice President, General Counsel and Secretary   Sheilagh M. Clarke
Senior Vice President — Real Estate   Jeffrey L. Berk
Senior Vice President and Chief Information Officer   Peter D. Brown
Senior Vice President and Chief Accounting Officer   Giovanna Cipriano
Vice President, Treasurer and Investor Relations   John A. Maurer

Ken C. Hicks, age 62, has served as Executive Chairman of the Board since January 31, 2010. He served as President and Chief Executive Officer from August 17, 2009 through November 30, 2014. Mr. Hicks is also a director of Avery Dennison Corporation.

Richard A. Johnson, age 57, has served as President and Chief Executive Officer since December 1, 2014. Mr. Johnson previously served as Executive Vice President and Chief Operating Officer from May 16, 2012 through November 30, 2014. He served as Executive Vice President and Group President from July 2011 to May 15, 2012; President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from January 2010 to July 2011; President and Chief Executive Officer of Foot Locker Europe from August 2007 to January 2010; and President and Chief Executive Officer of Footlocker.com/Eastbay from April 2003 to August 2007.

Robert W. McHugh, age 56, has served as Executive Vice President — Operations Support since July 2011. He served as Executive Vice President and Chief Financial Officer from May 2009 to July 2011.

Lauren B. Peters, age 53, has served as Executive Vice President and Chief Financial Officer since July 2011. She served as Senior Vice President — Strategic Planning from April 2002 to July 2011.

Paulette R. Alviti, age 44, 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.: SVP and Chief Human Resources Officer Asia, Middle East, Africa (February to May 2013); SVP Global Talent Acquisition and Deployment (July 2012 to February 2013); and SVP — Human Resources (March 2010 to July 2012). From March 2008 to March 2010, she served as VP — Human Resources of The Pepsi Bottling Group, Inc.

Sheilagh M. Clarke, age 55, has served as Senior Vice President, General Counsel and Secretary since June 1, 2014. She previously served as Vice President, Associate General Counsel and Assistant Secretary from May 2007 to May 31, 2014.

Jeffrey L. Berk, age 59, has served as Senior Vice President — Real Estate since February 2000.

Peter D. Brown, age 60, has served as Senior Vice President and Chief Information Officer since February 2011. He served as Senior Vice President, Chief Information Officer and Investor Relations from September 2006 to February 2011.

Giovanna Cipriano, age 45, has served as Senior Vice President and Chief Accounting Officer since May 2009.

John A. Maurer, age 55, has served as Vice President, Treasurer and Investor Relations since February 2011. Mr. Maurer served as Vice President and Treasurer from September 2006 to February 2011.

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

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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 January 31, 2015, the Company had 15,353 shareholders of record owning 140,864,188 common shares.

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

       
    2014   2013
     High   Low   High   Low
1st Quarter   $ 48.71     $ 36.65     $ 35.64     $ 31.30  
2nd Quarter     52.07       46.20       37.70       32.61  
3rd Quarter     58.40       47.90       37.85       31.91  
4th Quarter     59.19       51.12       41.73       34.09  

During each of the quarters of 2014, the Company declared a dividend of $0.22 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 17, 2015, the Board of Directors declared a quarterly dividend of $0.25 per share to be paid on May 1, 2015. This dividend represents a 14 percent increase over the Company’s previous quarterly per share amount.

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

       
Date Purchased   Total
Number of
Shares
Purchased(1)
  Average
Price Paid
per Share(1)
  Total Number of Shares Purchased as Part of Publicly Announced Program(2)   Approximate Dollar Value of Shares that may yet be Purchased Under the Program(2)
Nov. 2, 2014 – Nov. 29, 2014     1,059,790 (3)    $ 55.92       1,059,790     $ 136,841,263  
Nov. 30, 2014 – Jan. 3, 2015     862,663     $ 56.06       861,771     $ 88,527,414  
Jan. 4, 2015 – Jan. 31, 2015     419,584 (3)    $ 55.67       419,584     $ 65,167,625  
       2,342,037     $ 55.93       2,341,145           
(1) These columns also reflect shares purchased in connection with stock swaps. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares.
(2) Through January 31, 2015, 12.3 million shares of common stock were purchased under the previous program, for an aggregate cost of $535 million.
(3) On November 26, 2014, the Company paid $75 million under an Accelerated Share Repurchase (“ASR”) agreement with a financial institution and received an initial delivery of 1,059,790 shares. The transaction was completed by the end of the fourth quarter with the Company receiving 281,355 additional shares to settle the agreement. The price paid per share was calculated with reference to the average stock price of the Company’s common stock over the term of the ASR agreement.

On February 17, 2015, the Board of Directors approved a new 3-year, $1 billion share repurchase program extending through January 2018, replacing the Company’s previous $600 million program.

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Performance Graph

The graph below compares the cumulative five-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell Midcap Index.

The following Performance Graph and related information shall not be deemed “soliciting material” or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

Indexed Share Price Performance

[GRAPHIC MISSING]

           
    1/30/2010   1/29/2011   1/28/2012   2/2/2013   2/1/2014   1/31/2015
Foot Locker, Inc.   $ 100.00     $ 157.40     $ 234.19     $ 306.11     $ 341.90     $ 471.39  
S&P 400 Retailing Index   $ 100.00     $ 141.60     $ 170.80     $ 209.23     $ 234.04     $ 281.84  
Russell Midcap Index   $ 100.00     $ 129.27     $ 132.08     $ 153.77     $ 185.53     $ 207.66  

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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.

         
($ in millions, except per share amounts)   2014   2013   2012(1)   2011   2010
Summary of Operations
                                            
Sales   $ 7,151       6,505       6,182       5,623       5,049  
Gross margin     2,374       2,133       2,034       1,796       1,516  
Selling, general and administrative expenses     1,426       1,334       1,294       1,244       1,138  
Impairment and other charges     4       2       12       5       10  
Depreciation and amortization     139       133       118       110       106  
Interest expense, net     5       5       5       6       9  
Other income     (9 )      (4 )      (2 )      (4 )      (4 ) 
Net income     520       429       397       278       169  
Per Common Share Data
                                            
Basic earnings     3.61       2.89       2.62       1.81       1.08  
Diluted earnings     3.56       2.85       2.58       1.80       1.07  
Common stock dividends declared per share     0.88       0.80       0.72       0.66       0.60  
Weighted-average Common Shares Outstanding
                                            
Basic earnings     143.9       148.4       151.2       153.0       155.7  
Diluted earnings     146.0       150.5       154.0       154.4       156.7  
Financial Condition
                                            
Cash, cash equivalents, and short-term investments   $ 967       867       928       851       696  
Merchandise inventories     1,250       1,220       1,167       1,069       1,059  
Property and equipment, net     620       590       490       427       386  
Total assets     3,577       3,487       3,367       3,050       2,896  
Long-term debt and obligations under capital leases     134       139       133       135       137  
Total shareholders’ equity     2,496       2,496       2,377       2,110       2,025  
Financial Ratios
                                            
Sales per average gross square foot(2)   $ 490       460       443       406       360  
SG&A as a percentage of sales     19.9 %      20.5       20.9       22.1       22.5  
Earnings before interest and taxes (EBIT)   $ 814       668       612       441       266  
EBIT margin     11.4 %      10.3       9.9       7.8       5.3  
EBIT margin (non-GAAP)(3)     11.4 %      10.4       9.9       7.9       5.4  
Net income margin     7.3 %      6.6       6.4       4.9       3.3  
Net income margin (non-GAAP)(3)     7.3 %      6.6       6.2       5.0       3.4  
Return on assets (ROA)     14.7 %      12.5       12.4       9.4       5.9  
Return on invested capital (ROIC)(3)     15.0 %      14.1       14.2       11.8       8.3  
Net debt capitalization percent(3), (4)     43.4 %      42.5       37.2       36.0       39.0  
Current ratio     3.5       3.8       3.7       3.8       4.0  
Other Data
                                            
Capital expenditures   $ 190       206       163       152       97  
Number of stores at year end     3,423       3,473       3,335       3,369       3,426  
Total selling square footage at year end (in millions)     7.48       7.47       7.26       7.38       7.54  
Total gross square footage at year end (in millions)     12.73       12.71       12.32       12.45       12.64  
(1) 2012 represents the 53 weeks ended February 2, 2013.
(2) Calculated as Athletic Store sales divided by the average monthly ending gross square footage of the last thirteen months. The computation for each of the years presented reflects the foreign exchange rate in affect for such year. The 2012 amount has been calculated excluding the sales of the 53rd week.
(3) 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. Additionally, this calculation includes the present value of operating leases, and accordingly is considered a non-GAAP measure.

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

Business Overview

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments — Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, 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 the Company operates, epitomizing premium quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker, and Kids Foot Locker, as well as Footlocker.com, its direct-to-customer business. Through various marketing channels, including broadcast, digital, print, and various sports sponsorships and events, the Company reinforces its image with a consistent message — namely, that it is the destination for athletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment.

Store Profile

             
                        Square Footage
            (in thousands)
    February 1, 2014   Opened   Closed   January 31,
2015
  Relocations/ Remodels   Selling   Gross
Foot Locker US     1,044       11       40       1,015       94       2,494       4,298  
Foot Locker Europe     604       13       14       603       40       846       1,839  
Foot Locker Canada     128             2       126       31       270       422  
Foot Locker Asia Pacific     92       3       4       91       4       125       204  
Lady Foot Locker/SIX:02     257       8       52       213       51       299       501  
Kids Foot Locker     336       28       7       357       25       529       912  
Footaction     277       2       7       272       20       789       1,258  
Champs Sports     542       11       6       547       50       1,913       2,927  
Runners Point     115       5       4       116       4       143       244  
Sidestep     78       5             83             75       129  
Total     3,473       86       136       3,423       319       7,483       12,734  

Athletic Stores

The Company operates 3,423 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segment’s operating businesses and their respective taglines:

Foot Locker — “Approved” — Foot Locker is a leading global athletic footwear and apparel retailer, which caters to the sneaker enthusiast — If it’s at Foot Locker, it’s Approved. Its stores offer the latest in athletically-inspired footwear and apparel, manufactured primarily by the leading athletic brands. Foot Locker provides the best selection of premium products for a wide variety of activities, including basketball, running, and training. Additionally, we operate 178 House of Hoops, primarily a shop-in-shop concept, which sells premier basketball-inspired footwear and apparel. Foot Locker’s 1,835 stores are located in 23 countries including 1,015 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 126 in Canada, 603 in Europe, and a combined 91 in Australia and New Zealand. The domestic stores have an average of 2,500 selling square feet and the international stores have an average of 1,500 selling square feet.

Lady Foot Locker —“The Place for Her” — Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel, and accessories for active women. Its stores carry major athletic footwear, apparel, and accessories brands designed for a variety of activities, including running, walking, training, and fitness. Lady Foot Locker operates 198 stores that are located in the United States and Puerto Rico. These stores have an average of 1,400 selling square feet.

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SIX:02 —“It’s Your Time — SIX:02 is an elevated retail concept designed for her, featuring top brands in fitness apparel, footwear, and accessories for a variety of activities, including running, yoga, strength training, dance, and CrossFit. This banner connects with each local market’s fitness community through gym, studio, and trainer partnerships, and celebrates the time each woman invests in herself. SIX:02 operates 15 stores in the United States and have an average of 2,100 selling square feet.

Kids Foot Locker — “Go Big” — Kids Foot Locker is a children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Of its 357 stores, 336 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 16 in Europe, and 5 in Canada. These stores have an average of 1,500 selling square feet.

Footaction — “Own It” — Footaction is a national 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. The primary customer is a style-obsessed, confident, influential young male who is always dressed to impress. Its 272 stores are located throughout the United States and Puerto Rico and focus on authentic, premium product. The Footaction stores have an average of 2,900 selling square feet.

Champs Sports — “We Know Game” — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. Its product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to differentiate itself from other mall-based stores by presenting complete head-to-toe merchandising stories representing the most powerful athletic brands, sports teams, and athletes in North America. Of its 547 stores, 517 are located throughout the United States, Puerto Rico, and the U.S. Virgin Islands and 30 in Canada. The Champs Sports stores have an average of 3,500 selling square feet.

Runners Point — “Your Way, Our Passion” — Runners Point specializes in running footwear, apparel, and equipment for performance and lifestyle purposes. Its 116 stores are located in Germany and Austria. This banner caters to local running communities providing technical products, training tips and access to local running and group events. The Runners Point stores have an average of 1,200 selling square feet.

Sidestep — “Sneaker Lifestyle” — Sidestep is a predominantly sports fashion footwear banner. Its 83 stores are located in Germany, Austria, and the Netherlands. Sidestep caters to a more discerning, fashion consumer. Sidestep stores have an average of 900 selling square feet.

Direct-to-Customers

The Company’s Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells directly to customers through its Internet and mobile sites and catalogs.

The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamsales.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, footaction.com, footlocker.ca, footlocker.eu, and champssports.com). Additionally, this segment includes the direct-to-customer subsidiary of Runners Point Group, which operates the websites for runnerspoint.com, sidestep-shoes.com, and sp24.com. These sites offer one of the largest online selections of running sport items in Europe, while providing a seamless link between e-commerce and store banners.

Eastbay — “First Choice For Athletes” — Eastbay is among the largest direct marketers in the United States, providing high school and other athletes with a complete sports solution including athletic footwear, apparel, equipment, team licensed, and private-label merchandise for a broad range of sports.

Franchise Operations

The Company has two separate ten-year agreements with third parties for the operation of Foot Locker stores located within the Middle East and the Republic of Korea. Additionally, franchised stores located in Germany and Switzerland operate under the Runners Point and Sidestep banners. A total of 78 franchised stores were operating at January 31, 2015, of which 31 are operating in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea. Royalty income from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above.

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Reconciliation of Non-GAAP Measures

In the following tables, the Company has presented certain financial measures and ratios identified as non-GAAP. The Company believes this non-GAAP information is a useful measure to investors because it allows for a more direct comparison of the Company’s performance for 2014 as compared with prior years and is useful in assessing the Company’s progress in achieving its long-term financial objectives. The 2014 and 2013 results represent the 52 weeks ended January 31, 2015 and February 1, 2014, respectively, as compared with the 53 weeks in the 2012 reporting year. The following represents a reconciliation of the non-GAAP measures discussed throughout the Overview of Consolidated Results:

     
    2014   2013   2012
     (in millions, except per share amounts)
Sales:
                          
Sales   $ 7,151     $ 6,505     $ 6,182  
53rd week                 81  
Sales excluding 53rd week (non-GAAP)   $ 7,151     $ 6,505     $ 6,101  
Pre-tax income:
                          
Income before income taxes   $ 809     $ 663     $ 607  
Pre-tax amounts excluded from GAAP:
                          
Runners Point Group integration and acquisition costs     2       6        
Impairment and other charges     4       2       12  
Gain on sale of real estate     (4 )             
53rd week                 (22 ) 
Total pre-tax amounts excluded     2       8       (10 ) 
Income before income taxes (non-GAAP)   $ 811     $ 671     $ 597  
Calculation of Earnings Before Interest and Taxes (EBIT):
                          
Income before income taxes   $ 809     $ 663     $ 607  
Interest expense, net     5       5       5  
EBIT   $ 814     $ 668     $ 612  
Income before income taxes (non-GAAP)   $ 811     $ 671     $ 597  
Interest expense, net     5       5       5  
EBIT (non-GAAP)   $ 816     $ 676     $ 602  
EBIT margin%     11.4 %      10.3 %      9.9 % 
EBIT margin% (non-GAAP)     11.4 %      10.4 %      9.9 % 
After-tax income:
                          
Net income   $ 520     $ 429     $ 397  
After-tax amounts excluded from GAAP:
                          
Runners Point Group acquisition and integration costs     2       5        
Impairment and other charges     3       1       7  
Gain on sale of property     (3 )             
53rd week                 (14 ) 
Settlement of foreign tax audits           (3 )      (9 ) 
Canadian tax rate changes                 (1 ) 
Net income (non-GAAP)   $ 522     $ 432     $ 380  
Net income margin%     7.3 %      6.6 %      6.4 % 
Net income margin% (non-GAAP)     7.3 %      6.6 %      6.2 % 
Diluted earnings per share:
                          
Net income   $ 3.56     $ 2.85     $ 2.58  
Runners Point Group acquisition and integration costs     0.01       0.03        
Impairment and other charges     0.02       0.01       0.05  
Gain on sale of property     (0.01 )             
53rd week                 (0.09 ) 
Settlement of foreign tax audits           (0.02 )      (0.06 ) 
Canadian tax rate changes                 (0.01 ) 
Net income (non-GAAP)   $ 3.58     $ 2.87     $ 2.47  

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The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal tax rate to each of the respective items.

During 2013 and 2012, the Company recorded benefits of $3 million and $9 million, or $0.02 per diluted share and $0.06 per diluted share, respectively, to reflect the settlement of foreign tax audits, which resulted in a reduction in tax reserves established in prior periods. Additionally, in 2012, the Company recorded a benefit of $1 million, or $0.01 per diluted share, to reflect the repeal of the last two stages of certain Canadian provincial tax rate changes.

When assessing Return on Invested Capital (“ROIC”), the Company adjusts its results to reflect its operating leases as if they qualified for capital lease treatment. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the presentation of these leases as 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 is Return on Assets (“ROA”) and is also represented below. ROA increased to 14.7 percent as compared with 12.5 percent in the prior year reflecting the Company’s overall strong performance in 2014. Our ROIC improvement is due to an increase in our earnings before interest and income taxes, partially offset by an increase in our average invested capital, primarily related to an increase in capitalized operating leases. This reflected the effect of opening larger stores, and resulting additional rent, supporting the various shop-in-shop initiatives.

     
    2014   2013   2012
ROA (1)     14.7 %      12.5 %      12.4 % 
ROIC% (non-GAAP)(2)     15.0 %      14.1 %      14.2 % 
(1) Represents net income of $520 million, $429 million, and $397 million divided by average total assets of $3,532 million, $3,427 million, and $3,209 million for 2014, 2013, and 2012, respectively.
(2) See below for the calculation of ROIC.

     
    2014   2013   2012
     (in millions)
EBIT (non-GAAP)   $ 816     $ 676     $ 602  
+ Rent expense     635       600       560  
- Estimated depreciation on capitalized operating leases(3)     (482 )      (443 )      (409 ) 
Net operating profit     969       833       753  
- Adjusted income tax expense(4)     (347 )      (298 )      (274 ) 
= Adjusted return after taxes   $ 622     $ 535     $ 479  
Average total assets   $ 3,532     $ 3,427     $ 3,209  
- Average cash, cash equivalents and short-term investments     (917 )      (898 )      (890 ) 
- Average non-interest bearing current liabilities     (659 )      (630 )      (592 ) 
- Average merchandise inventories     (1,235 )      (1,194 )      (1,118 ) 
+ Average estimated asset base of capitalized operating leases(3)     2,093       1,829       1,552  
+ 13-month average merchandise inventories     1,325       1,269       1,200  
= Average invested capital   $ 4,139     $ 3,803     $ 3,361  
ROIC%     15.0 %      14.1 %      14.2 % 
(3) The determination of the capitalized operating leases and the adjustments to income have been calculated on a lease-by-lease basis and have been consistently calculated in each of the years presented above. Capitalized operating leases represent the best estimate of the asset base that would be recorded for operating leases as if they had been classified as capital or as if the property were purchased. The present value of operating leases is discounted using various interest rates ranging from 2.8 percent to 14.5 percent, which represent the Company’s incremental borrowing rate at inception of the lease.
(4) The adjusted income tax expense represents the marginal tax rate applied to net operating profit for each of the periods presented.

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Overview of Consolidated Results

The following represents our long-term financial objectives and our progress towards meeting those objectives. The following represents non-GAAP results for all the periods presented. In addition, the 2012 results are shown on a 53-week basis.

       
    Long-term Objectives   2014   2013   2012
Sales (in millions)   $ 7,500     $ 7,151     $ 6,505     $ 6,101  
Sales per gross square foot   $ 500     $ 490     $ 460     $ 443  
EBIT margin     11.0 %      11.4 %      10.4 %      9.9 % 
Net income margin     7.0 %      7.3 %      6.6 %      6.2 % 
ROIC     14.0 %      15.0 %      14.1 %      14.2 % 

Our results in 2014 were very strong and we achieved three of our long-term objectives. Highlights of our 2014 financial performance include:

Sales and comparable-store sales, as noted in the table below, both increased and continued to benefit from exciting assortments and enhanced store formats across our various banners, as well as improved performance of the Company’s store banner.com websites.

     
    2014   2013   2012
Sales increase     9.9 %      6.6 %      8.5 % 
Comparable-store sales increase     8.0 %      4.2 %      9.4 % 
Sales from Direct-to-Customers segment increased 21.0 percent to $865 million compared with $715 million in 2013 and increased 110 basis points as a percentage of total sales to 12.1 percent. The direct business has been steadily increasing over the last several years led by the growth in the store banners’ e-commerce sales.
Gross margin, as a percentage of sales, increased by 40 basis points to 33.2 percent in 2014. The improvement was driven by the occupancy and buyers expense rate, which decreased 70 basis points, reflecting effective leverage on higher sales.
SG&A expenses on a non-GAAP basis were 19.9 percent of sales, a decrease of 50 basis points as compared with the prior year, as we carefully managed expenses.
Net income on a non-GAAP basis was $522 million, or $3.58 diluted earnings per share, an increase of 24.7 percent from the prior-year period.
The Company ended the year in a strong financial position. At year end, the Company had $833 million of cash and cash equivalents, net of debt and obligations under capital leases. Cash and cash equivalents at January 31, 2015 were $967 million, representing an increase of $100 million as compared with last year. This reflects both the execution of various key initiatives noted in the items below and the Company’s strong performance.
Cash capital expenditures during 2014 totaled $190 million and were primarily directed to the remodeling or relocation of 319 stores, the build-out of 86 new stores, as well as other technology and infrastructure projects.
Dividends totaling $127 million were declared and paid during 2014, returning significant value to our shareholders.
A total of 5.9 million shares were repurchased under our 2012 share repurchase program at a cost of $305 million.
ROIC increased to 15.0 percent as compared to the prior year result of 14.1 percent, reflecting profitability improvements and a disciplined approach to capital spending.

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Summary of Consolidated Statements of Operations

     
    2014   2013   2012
     (in millions, except per share data)
Sales   $ 7,151     $ 6,505     $ 6,182  
Gross margin     2,374       2,133       2,034  
Selling, general and administrative expenses     1,426       1,334       1,294  
Depreciation and amortization     139       133       118  
Interest expense, net     5       5       5  
Net income   $ 520     $ 429     $ 397  
Diluted earnings per share   $ 3.56     $ 2.85     $ 2.58  

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 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. Sales from acquired businesses that include inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, sales of Runners Point Group were included in the computation of comparable-store sales beginning October 2014.

Sales of $7,151 million in 2014 increased by 9.9 percent from sales of $6,505 million in 2013, this represented comparable-store sales of 8.0 percent. Excluding the effect of foreign currency fluctuations and sales of Runners Point Group, sales increased 8.5 percent as compared with 2013.

Sales of $6,505 million in 2013 increased by 5.2 percent from sales of $6,182 million in 2012, this represented comparable-store sales of 4.2 percent. Excluding the effect of foreign currency fluctuations and sales of Runners Point Group, sales increased 2.4 percent as compared with the 53 weeks of 2012. Results for 2012 include the effect of the 53rd week, which represented sales of $81 million.

The following represents the percentage of sales from each of the major product categories:

     
    2014   2013   2012
Footwear sales     79%       77%       76%  
Apparel and accessories sales     21%       23%       24%  

Gross Margin

     
    2014   2013   2012
Gross margin rate     33.2%       32.8%       32.9%  
Change in the gross margin rate is comprised of:     2014 vs. 2013       2013 vs. 2012           
Occupancy and buyers’ compensation     0.7                 
Merchandise margin     (0.3)       (0.1)           
Increase (decrease) in gross margin rate       0.4%         (0.1)%           

The decrease in the occupancy and buyers’ compensation rate reflects improved leverage of primarily fixed costs. Merchandise margin declined by 30 basis points as the cost of merchandise increased in 2014 as compared with 2013. This primarily reflects the effect of lower initial markups driven by supplier and category mix, and lower shipping and handling margin, partially offset by lower markdowns.

The decline in the gross margin rate in 2013 as compared to 2012 primarily reflects the effect of lower initial markups. Excluding the effect of the 53rd week in 2012, the gross margin rate in 2013 was flat as compared with 2012.

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Selling, General and Administrative Expenses (SG&A)

     
    2014   2013   2012
     (in millions)
SG&A   $ 1,426     $ 1,334     $ 1,294  
$ Change   $ 92     $ 40           
% Change     6.9 %      3.1 %          
SG&A as a percentage of sales     19.9 %      20.5 %      20.9 % 

Excluding the effect of foreign currency fluctuations, SG&A increased by $101 million for 2014 as compared with 2013. Runners Point Group, which was acquired in early July 2013, represented an incremental $39 million in expenses in 2014. Additionally, the Company incurred $2 million in integration costs during 2014. Excluding these items, the increase was driven by higher variable expenses to support sales, such as store wages and banking expenses. As a percentage of sales, SG&A improved 60 basis points representing improved leverage on our sales increase. This improvement reflected continued effective expense management, including store wages, which benefitted from the utilization of hiring and scheduling tools, as well as enhanced associate training.

Excluding the effect of foreign currency fluctuations, SG&A increased by $34 million for 2013 as compared with 2012. Runners Point Group represented an incremental $45 million in expenses. Additionally, the Company incurred $6 million in integration and acquisition costs during 2013. Excluding foreign currency fluctuations, the effect of the acquisition, and the effect of the 53rd week in 2012, SG&A decreased by $4 million. The decrease reflects effective expense management, specifically variable costs.

Depreciation and Amortization

     
    2014   2013   2012
     (in millions)
Depreciation and Amortization   $ 139     $ 133     $ 118  
% Change     4.5 %      12.7 %      7.3 % 

The increases in both 2014 and 2013 reflect increased capital spending on store improvements and technology. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased $7 million in 2014. The 2014 amount included $2 million of capital accrual adjustments made during the third quarter of 2014 which reduced depreciation and amortization. The change in 2013 as compared with 2012 also included $6 million of Runners Point Group expense.

Interest Expense, Net

     
    2014   2013   2012
     (in millions)
Interest expense   $ 11     $ 11     $ 11  
Interest income     (6 )      (6 )      (6 ) 
Interest expense, net   $ 5     $ 5     $ 5  
Weighted-average interest rate (excluding fees)     7.2 %      7.1 %      7.6 % 

Net interest expense in 2014 was essentially unchanged from 2013 and 2012. The Company did not have any short-term borrowings, other than amounts outstanding in connection with capital leases, for any of the periods presented.

Income Taxes

The effective tax rate for 2014 was 35.7 percent, as compared with 35.3 percent in 2013. The Company regularly assesses the adequacy of the provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes.

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As a result, the reserves for unrecognized tax benefits may be adjusted due to new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitations. The effective tax rate for 2014 includes reserve releases totaling $5 million due to audit settlements and lapses of statutes of limitations.

Excluding the reserve releases in 2014 and in 2013, the effective tax rate for 2014 increased slightly as compared with 2013 primarily due to the higher proportion of income earned in higher tax jurisdictions in 2014.

The effective tax rate for 2013 was 35.3 percent, as compared with 34.6 percent in 2012. The effective tax rate for 2013 includes reserve releases totaling $6 million due to audit settlements and lapses of statutes of limitations. Additionally, in connection with the purchase of Runners Point Group, the Company recorded a tax expense of $1 million related to non-deductible acquisition costs. Excluding these items as well as the reserve releases in 2012, the effective tax rate for 2013 decreased as compared with 2012 primarily due to the effect of full implementation of international tax planning initiatives in 2013.

Segment Information

The Company’s two reportable segments, Athletic Stores and Direct-to-Customers, are based on its method of internal reporting. The Company evaluates performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, corporate expense, non-operating income, and net interest expense.

     
    2014   2013   2012
     (in millions)
Sales
                          
Athletic Stores   $ 6,286     $ 5,790     $ 5,568  
Direct-to-Customers     865       715       614  
     $ 7,151     $ 6,505     $ 6,182  
Operating Results
                          
Athletic Stores(1)   $ 777     $ 656     $ 653  
Direct-to-Customers(2)     109       84       65  
Division profit     886       740       718  
Less: Corporate expense (3)     81       76       108  
Operating profit     805       664       610  
Other income(4)     9       4       2  
Earnings before interest expense and income taxes     814       668       612  
Interest expense, net     5       5       5  
Income before income taxes   $ 809     $ 663     $ 607  
(1) Included in the results for 2014, 2013, and 2012 are impairment and other charges of $2 million, $2 million, and $5 million, respectively. The 2014 amount reflected impairment charges to fully write-down the value of certain trademarks. The 2013 and 2012 amounts were incurred in connection with the closure of CCS stores.
(2) Included in the results for 2014 and 2012 are non-cash impairment charges of $2 million and $7 million, respectively, related to the CCS trademarks.
(3) Corporate expense for 2014 and 2013 reflected the reallocation of expense between corporate and the operating divisions. Based upon annual internal studies of corporate expense, the allocation of such expenses to the operating divisions was increased by $4 million and $27 million for 2014 and 2013, respectively, thereby reducing corporate expense.
(4) Other income includes non-operating items such as: gains from insurance recoveries; discounts/premiums paid on the repurchase and retirement of bonds; royalty income; and the changes in fair value, premiums paid, realized gains associated with foreign currency option contracts and property sales. The increase in 2014 as compared with 2013 primarily reflects a $4 million gain on sale of real estate.

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Athletic Stores

     
    2014   2013   2012
     (in millions)
Sales   $ 6,286     $ 5,790     $ 5,568  
$ Change   $ 496     $ 222           
% Change     8.6 %      4.0 %          
Division profit   $ 777     $ 656     $ 653  
Division profit margin     12.4 %      11.3 %      11.7 % 

2014 compared with 2013

Excluding the effect of foreign currency fluctuations, primarily related to the euro and Canadian dollar, sales from the Athletic Stores segment increased 9.4 percent. Comparable-store sales increased by 6.7 percent. This segment includes $133 million of incremental sales related to the Runners Point stores, which were acquired in early July 2013. Excluding the sales of the Runners Point stores, the comparable-store gain was primarily driven by Kids Foot Locker, Foot Locker U.S., Footaction, and Foot Locker Europe. While Lady Foot Locker’s overall sales declined in 2014, the banner experienced a comparable-store gain for the year. The shift into more performance oriented assortments has been resonating with customers, as both footwear and apparel grew on a comparable-store basis. The overall Lady Foot Locker sales decrease primarily reflects a net decline of 44 stores.

Basketball, running, and children’s footwear were strong drivers of sales increases. Sales of basketball footwear were driven by Jordan and key marquee player styles, while running shoes from Nike and Adidas had strong results. Additionally, children’s footwear continued to perform well across multiple divisions. Apparel sales were challenging primarily in Foot Locker Europe and Champs Sports, as customers have shifted away from certain lifestyle and licensed apparel programs, which had previously driven strong results. This segment continues to benefit from strong banner differentiation, which has created unique store designs and product assortments which have resonated with customers and enhanced the shopping experience.

Included in the 2014 division profit was a $1 million impairment charge related to the write-down of a tradename for our stores operating in the Republic of Ireland, reflecting historical and projected underperformance, and a $1 million charge to fully write down the value of a private-label brand acquired as part of the Runners Point Group acquisition, as a result of exiting the product line. The overall improvement primarily reflected higher sales, an improved gross margin rate, and effective control over variable expenses, such as store wages.

2013 compared with 2012

Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from the Athletic Stores segment increased by 3.7 percent in 2013. Comparable-store sales increased by 3.0 percent. The Athletic Stores segment included $146 million of sales related to the Runners Point stores. Excluding the sales of the Runners Point stores, the increase was primarily driven by Kids Foot Locker, Foot Locker Europe, and Foot Locker U.S. Kids Foot Locker and Foot Locker Europe increased their store count during 2013 by 31 and 14 stores, respectively. The increase in these banners was partially offset by sales declines in Lady Foot Locker, Footaction, and Champs Sports. Lady Foot Locker’s sales declined in 2013 as management closed underperforming stores and redefined the product offerings. Lady Foot Locker’s store count declined by 46 stores during 2013. On a comparable-store sales basis, Footaction reported a modest increase for 2013. Comparable-store sales for Champs Sports were negatively affected, in part, by the level of store remodel projects, which require temporary store closure during remodel.

Within the Athletic Stores segment, footwear was the biggest driver, led by our children’s category, which had strong gains across all banners. Footwear sales increased in our largest category, basketball, which benefited from key marquee player shoes. The segment is also benefiting from the continued expansion of the shop-in-shop partnerships with our various suppliers.

Athletic Stores reported a division profit of $656 million in 2013 as compared with $653 million in 2012, an increase of $3 million. Included in the 2013 results are costs of $2 million associated with the closure of the CCS stores. While the results of the Runners Point stores were accretive during the period, it was not significant.

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Additionally, the 2013 results reflect the reallocation of corporate expense to this segment. Excluding these items, division profit margin for 2013 would have been essentially unchanged.

Direct-to-Customers

     
    2014   2013   2012
     (in millions)
Sales   $ 865     $ 715     $ 614  
$ Change   $ 150     $ 101           
% Change     21 %      16 %          
Division profit   $ 109     $ 84     $ 65  
Division profit margin     12.6 %      11.7 %      10.6 % 

2014 compared with 2013

Comparable sales increased 17.8 percent from the prior year, led by basketball and running footwear. The Direct-to-Customers segment includes $18 million of incremental sales related to the e-commerce division of Runners Point Group, which the Company acquired during the second quarter of 2013. Excluding these sales, the increase was primarily a result of continued strong sales performance related to the Company’s store-banner websites both in the U.S. and in Europe, as well as increased Eastbay sales. Of the total increase, sales from our U.S. store-banner websites comprised the majority of the increase, reflecting the continued success of several initiatives, including improving the connectivity of the store banners to the e-commerce sites, enhancements to the mobile e-commerce sites, investments in technology to improve the shopping experience, and investments in making the sites more engaging. These increases were offset, in part, by a decline in the CCS business, which was transitioned to the Eastbay banner during the third quarter of 2014.

Division profit increased by $25 million as compared to 2013, representing a division profit margin improvement of 90 basis points. The 2014 results include a $2 million impairment charge related to the CCS business which was triggered by the Company’s decision to transition the skate business to the Eastbay banner. Gross margin was negatively affected by the liquidation of the CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profit was the result of strong flow-through of sales to profit and good expense management.

2013 compared with 2012

Comparable sales increased 14.8 percent from the prior year. The Direct-to-Customers segment included $18 million of sales related to the e-commerce division of Runners Point Group. Excluding these sales, the increase was primarily a result of continued strong sales performance related to the Company’s store-banner websites, as well as increased Eastbay sales. Of the total increase, sales from our store-banner websites comprised approximately three quarters of the increase reflecting success of several e-commerce initiatives. These increases were offset, in part, by a further decline in the CCS business.

The Direct-to-Customers business generated division profit of $84 million in 2013, as compared with $65 million in 2012. The 2013 results reflect the reallocation of corporate expense. Excluding this change, division profit margin would have been 12.3 percent. During 2012, an impairment charge of $7 million was recorded to write down CCS intangible assets. Excluding these items, division profit increased by $17 million. The effect of the Runners Point Group acquisition was not significant to this segment’s 2013 division profit.

Corporate Expense

     
    2014   2013   2012
     (in millions)
Corporate expense   $ 81     $ 76     $ 108  
$ Change   $ 5     $ (32 )          

Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated

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insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $13 million, $12 million, and $13 million in 2014, 2013, and 2012, respectively.

Corporate expense increased by $5 million in 2014, as compared with 2013. This increase is primarily related to incentive compensation and legal costs, which increased $8 million and $2 million, respectively. Additionally, depreciation and amortization included in corporate expense increased by $1 million. These increases were partially offset by the annual adjustment to the allocation of corporate expense to the operating divisions, which reduced corporate expense by $4 million. In addition, acquisition and integration costs related to Runners Point Group were $4 million less in the current year.

Corporate expense decreased by $32 million to $76 million in 2013, as compared with 2012. The allocation of corporate expenses to the operating divisions was increased thereby reducing corporate expense by $27 million for 2013. In addition, incentive compensation decreased by $11 million and legal expenses, which in 2012 included a litigation charge, decreased by $4 million. Additionally, depreciation and amortization expense decreased by $1 million. These decreases were partially offset by $6 million of costs related to the Company’s acquisition and integration of Runners Point Group, as well as an increase of $5 million for share-based compensation expense.

Liquidity and Capital Resources

Liquidity

The Company’s primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been to: fund inventory and other working capital requirements; finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; make retirement plan contributions, quarterly dividend payments, and interest payments; and fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements.

As of January 31, 2015, the Company had $537 million of cash and cash equivalents held in foreign jurisdictions. Because we plan to permanently reinvest our foreign earnings, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from potential future remittances of undistributed earnings of foreign subsidiaries. Depending on the source, amount, and timing of a repatriation, some tax may be payable. The Company believes that its cash invested domestically and future domestic cash flows are sufficient to satisfy domestic requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Such repurchases, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of January 31, 2015, approximately $65 million was remaining on the share repurchase program. On February 17, 2015, the Board of Directors approved a new 3-year, $1 billion share repurchase program extending through January 2018, replacing the Company’s previous $600 million program.

Also on February 17, 2015, the Board of Directors declared a quarterly dividend of $0.25 per share to be paid on May 1, 2015. This dividend represents a 14 percent increase over the Company’s previous quarterly per share amount.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key suppliers for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.

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Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key suppliers. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key suppliers. In 2014 and 2013, the Company purchased approximately 89 percent and 88 percent, respectively, of its merchandise from its top five suppliers and expects to continue to obtain a significant percentage of its athletic product from these suppliers in future periods. Approximately 73 percent in 2014 and 68 percent in 2013 was purchased from one supplier — Nike, Inc.

The Company’s 2015 planned capital expenditures and lease acquisition costs are approximately $220 million. Planned capital expenditures are $218 million and planned lease acquisition costs related to the Company’s operations in Europe are $2 million. The Company’s planned capital expenditures include $176 million related to remodeling and expansion of existing stores and the planned opening of approximately 100 new stores primarily related to Kids Foot Locker, European expansion, and SIX:02. Additionally, the planned spending includes $42 million for the development of information systems and infrastructure, including a new e-commerce order management system, point of sale device enhancements, and further rollout of our merchandise allocation system. The Company has the ability to revise and reschedule much of the anticipated capital expenditure program, should the Company’s financial position require it.

Free Cash Flow (non-GAAP measure)

In addition to net cash provided by operating activities, the Company uses free cash flow as a useful measure of performance and as an indication of the strength of the Company and its ability to generate cash. The Company defines free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). The Company believes the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from the Company’s underlying operations in a manner similar to the method used by management.

Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP, and may not be comparable to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures.

The following table presents a reconciliation of the Company’s net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.

     
    2014   2013   2012
     (in millions)
Net cash provided by operating activities   $ 712     $ 530     $ 416  
Capital expenditures     (190 )      (206 )      (163 ) 
Free cash flow (non-GAAP)   $ 522     $ 324     $ 253  

Operating Activities

     
    2014   2013   2012
     (in millions)
Net cash provided by operating activities   $ 712     $ 530     $ 416  
$ Change   $ 182     $ 114           

The amount provided by operating activities reflects income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, deferred income taxes, share-based compensation expense and related tax benefits. The improvement in 2014 represented the Company’s earnings strength and working capital improvements. During 2014, the Company contributed $6 million to its Canadian qualified pension plans as compared with $2 million contributed in 2013. Cash paid for income taxes was $251 million for 2014 as compared with $175 million for 2013.

The improvement in 2013 as compared with 2012 also reflected the Company’s earnings strength. During 2012, the Company contributed $25 million and $1 million to its U.S. and Canadian qualified pension plans, respectively. Cash paid for income taxes was $175 million for 2013 as compared with $230 million for 2012.

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Investing Activities

     
    2014   2013   2012
     (in millions)
Net cash used in investing activities   $ 176     $ 248     $ 212  
$ Change   $ (72 )    $ 36           

Capital expenditures in 2014 were $190 million, primarily related to the remodeling of 319 stores, the build-out of 86 new stores, and various corporate technology upgrades. This represented a decrease of $16 million as compared with the prior year, as the timing of certain projects shifted to later in the current year. During 2014, the Company sold real estate for proceeds of $5 million and recorded a gain on sale of $4 million. During 2014, maturities of short-term investments totaled $9 million. This compares with net sales and maturities of $37 million of short-term investments during 2013.

During 2013, the Company completed its purchase of Runners Point Group for $81 million, net of cash acquired. Capital expenditures in 2013 were $206 million, primarily related to the remodeling of 320 stores, the build-out of 84 new stores, and various corporate technology upgrades. This represented an increase of $43 million as compared with 2012. Net sales and maturities of short-term investments were $37 million during 2013, as compared with net purchases of $49 million during 2012.

Financing Activities

     
    2014   2013   2012
     (in millions)
Net cash used in financing activities   $ 401     $ 309     $ 181  
$ Change   $ 92     $ 128           

Cash used in financing activities consists primarily of the Company’s return to shareholders initiatives, including its share repurchase program and cash dividend payments, as follows:

     
    2014   2013   2012
     (in millions)
Share repurchases   $ 305     $ 229     $ 129  
Dividends paid on common stock     127       118       109  
Total returned to shareholders   $ 432     $ 347       238  

During 2014, 2013, and 2012, the Company repurchased 5,888,698 shares, 6,424,286 shares, and 4,000,161 shares of its common stock under its share repurchase programs. Additionally, the Company declared and paid dividends representing a quarterly rate of $0.22, $0.20 and $0.18 per share in 2014, 2013, and 2012, respectively.

Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with the employee stock programs of $22 million, $30 million, and $48 million for 2014, 2013, and 2012, respectively. In connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $12 million, $9 million, and $11 million for 2014, 2013, and 2012, respectively.

The activity during 2014 also reflected payments on capital lease obligations of $3 million, as compared with $1 million during 2013. These obligations were recorded in connection with the acquisition of the Runners Point Group.

Capital Structure

The 2011 Restated Credit Agreement provides for a $200 million asset based revolving credit facility maturing on January 27, 2017. In addition, during the term of the 2011 Restated Credit Agreement, the Company may make up to four requests for additional credit commitments in an aggregate amount not to exceed $200 million. Interest is based on the LIBOR rate in effect at the time of the borrowing plus a 1.25 to 1.50 percent margin depending on certain provisions as defined in the 2011 Restated Credit Agreement.

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The 2011 Restated Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets, but excluding intellectual property. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. With regard to the payment of dividends and share repurchases, there are no restrictions if the Company is not borrowing and the payments are funded through cash on hand. If the Company is borrowing, Availability as of the end of each fiscal month during the subsequent projected six fiscal months following the payment must be at least 20 percent of the lesser of the Aggregate Commitments and the Borrowing Base (all terms as defined in the 2011 Restated Credit Agreement). The Company’s management currently does not expect to borrow under the facility in 2015, other than amounts used to support standby letters of credit.

Credit Rating

As of March 30, 2015, the Company’s corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BB+ and Ba1, respectively. In addition, Moody’s Investors Service has rated the Company’s senior unsecured notes Ba2.

Debt Capitalization and Equity (non-GAAP Measure)

For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases is considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 2.8 percent to 14.5 percent, which represent the Company’s incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the inclusion of the present value of operating leases in total debt is useful to our investors, credit constituencies, and rating agencies.

The following table sets forth the components of the Company’s capitalization, both with and without the present value of operating leases:

   
    2014   2013
     (in millions)
Long-term debt and obligations under capital leases   $ 134     $ 139  
Present value of operating leases     2,745       2,571  
Total debt including the present value of operating leases     2,879       2,710  
Less:
                 
Cash and cash equivalents     967       858  
Short-term investments           9  
Total net debt including the present value of operating leases     1,912       1,843  
Shareholders’ equity     2,496       2,496  
Total capitalization   $ 4,408     $ 4,339  
Total net debt capitalization percent     %      % 
Total net debt capitalization percent including the present value of
                 
operating leases (non-GAAP)     43.4 %      42.5 % 

The Company’s cash, cash equivalents, and short-term investments increased by $100 million during 2014, which was the result of strong cash flow generation from operating activities. Including the present value of operating leases, the Company’s net debt capitalization percent increased 90 basis points in 2014. The change in total debt including the present value of the operating leases, as compared with the prior-year period, primarily reflects the effect of lease renewals, partially offset by foreign exchange fluctuations.

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Contractual Obligations and Commitments

The following tables represent the scheduled maturities of the Company’s contractual cash obligations and other commercial commitments at January 31, 2015:

         
         Payments Due by Fiscal Period
     Total   2015   2016 – 2017   2018 – 2019   2020 and Beyond
     (in millions)
Long-term debt(1)   $ 195     $ 11     $ 22     $ 22     $ 140  
Operating leases(2)     3,426       567       969       726       1,164  
Capital leases     4       2       2              
Other long-term liabilities(3)                              
Total contractual cash obligations   $ 3,625     $ 580     $ 993     $ 748     $ 1,304  
Other Commercial Commitments  
Purchase commitments(4)     2,238       2,238                    
Other(5)     24       15       9              
Total commercial commitments   $ 2,262     $ 2,253     $ 9     $  —     $  —  
(1) The amounts presented above represent the contractual maturities of the Company’s long-term debt, including interest; however, it excludes the unamortized gain of the interest rate swap of $12 million. Additional information is included in the Long-Term Debt and Obligations Under Capital Leases note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
(2) The amounts presented represent the future minimum lease payments under non-cancelable operating leases. In addition to minimum rent, certain of the Company’s leases require the payment of additional costs for insurance, maintenance, and other costs. These costs have historically represented approximately 20 to 30 percent of the minimum rent amount. These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are unknown.
(3) The Company’s other liabilities in the Consolidated Balance Sheet at January 31, 2015 primarily comprise pension and postretirement benefits, deferred rent liability, income taxes, workers’ compensation and general liability reserves, and various other accruals. Other than this liability, other amounts (including the Company’s unrecognized tax benefits of $38 million, as well as penalties and interest of $2 million) have been excluded from the above table as the timing and/or amount of any cash payment is uncertain. The timing of the remaining amounts that are known has not been included as they are minimal and not useful to the presentation. Additional information is included in the Other Liabilities, Financial Instruments and Risk Management, and Retirement Plans and Other Benefits notes under “Item 8. Consolidated Financial Statements and Supplementary Data.”
(4) Represents open purchase orders, as well as other commitments for merchandise purchases, at January 31, 2015. The Company is obligated under the terms of purchase orders; however, the Company is generally able to renegotiate the timing and quantity of these orders with certain suppliers in response to shifts in consumer preferences.
(5) Represents payments required by non-merchandise purchase agreements.

Off-Balance Sheet Arrangements

The majority the Company’s contractual obligations relate to operating leases for our stores. Future scheduled lease payments under non-cancellable operating leases as of January 31, 2015 are described in the table under Contractual Obligations and Commitments above and with additional information in the Leases note in “Item 8. Consolidated Financial Statements and Supplementary Data.”

The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities. Our policy prohibits the use of derivatives for which there is no underlying exposure.

In connection with the sale of various businesses and assets, the Company may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not significantly affect the Company’s consolidated financial position, liquidity, or results of operations. The Company is also operating certain stores for which lease agreements are in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that leases will be executed.

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Critical Accounting Policies

Management’s responsibility for integrity and objectivity in the preparation and presentation of the financial statements requires diligent application of appropriate accounting policies. Generally, the Company’s accounting policies and methods are those specifically required by U.S. generally accepted accounting principles. Included in the Summary of Significant Accounting Policies note in “Item 8. Consolidated Financial Statements and Supplementary Data” is a summary of the Company’s most significant accounting policies. In some cases, management is required to calculate amounts based on estimates for matters that are inherently uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate subjective judgments.

Merchandise Inventories and Cost of Sales

Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method (“RIM”). The RIM is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The RIM is a system of averages that requires management’s estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts.

Significant judgment is required for these estimates and assumptions, as well as to differentiate between promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost or market. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. The failure to take permanent markdowns on a timely basis may result in an overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes many factors, including the current retail environment, inventory levels, and the age of the item. Management believes this method and its related assumptions, which have been consistently applied, to be reasonable.

Impairment of Long-Lived Assets, Goodwill and Other Intangibles

The Company performs an impairment review when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s strategic long-range plans, in performing an impairment review. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results.

The Company reviews goodwill for impairment annually during the first quarter of its fiscal year or more frequently if impairment indicators arise. The review of impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a two-step impairment test, if necessary. In performing the qualitative assessment, management considers many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed using a two-step test. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of that reporting unit exceeds its estimated fair value.

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In 2014, the Company elected to perform its review of goodwill using the two-step impairment test approach. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests, or securities that have been sold. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. The Company has evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations. The fair value of all the reporting units substantially exceeded their carrying values.

Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. During 2014, impairment charges totaled $4 million.

Share-Based Compensation

The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing valuation model requires the use of subjective assumptions. Changes in these assumptions, listed below, can materially affect the fair value of the options.

Risk-free Interest Rate — The risk-free interest rate is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.

Expected Volatility — The Company estimates the expected volatility of its common stock at the grant date using a weighted-average of the Company’s historical volatility and implied volatility from traded options on the Company’s common stock. A 50 basis point change in volatility would cause a 1 percent change to the fair value.

Expected Term — The expected term of options granted is estimated using historical exercise and post-vesting employment termination patterns, which the Company believes are representative of future behavior. Changing the expected term by one year changes the fair value by 7 to 8 percent depending on if the change was an increase or decrease to the expected term.

Dividend Yield — The expected dividend yield is derived from the Company’s historical experience. A 50 basis point change to the dividend yield would change the fair value by approximately 5 percent.

Share-based compensation expense is recorded for those awards expected to vest using an estimated forfeiture rate based on the Company’s historical pre-vesting forfeiture data, which it believes are representative of future behavior, and periodically will revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

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Pension and Postretirement Liabilities

Management reviews all assumptions used to determine its obligations for pension and postretirement liabilities annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with regard to the plans. The assumptions used are:

Long-Term Rate of Return — The expected rate of return on plan assets is the long-term rate of return expected to be earned on the plans’ assets and is recognized as a component of pension expense. The rate is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the Company. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy. The weighted-average long-term rate of return used to determine 2014 pension expense was 6.25 percent.

A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 2014 pension expense by approximately $3 million. The actual return on plan assets in a given year typically differs from the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into expense over the average life expectancy of its inactive participants.

Discount Rate — An assumed discount rate is used to measure the present value of future cash flow obligations of the plans and the interest cost component of pension expense and postretirement income. The cash flows are then discounted to their present value and an overall discount rate is determined. The discount rate is determined by reference to the Bond:Link interest rate model based upon a portfolio of highly rated U.S. corporate bonds with individual bonds that are theoretically purchased to settle the plan’s anticipated cash outflows. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations was developed by using the plan’s bond portfolio indices, which match the benefit obligations. The weighted-average discount rates used to determine the 2014 benefit obligations related to the Company’s pension and postretirement plans were 3.43 percent and 3.40 percent, respectively.

Changing the weighted-average discount rate by 50 basis points would have changed the accumulated benefit obligation of the pension plans at January 31, 2015 by approximately $35 million and $38 million, depending on if the change was an increase or decrease, respectively. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation on the postretirement plan by approximately $2 million. Such a decrease would not have significantly changed 2014 pension expense or postretirement income.

Trend Rate — The Company maintains two postretirement medical plans, one covering certain executive officers and key employees of the Company (“SERP Medical Plan”), and the other covering all other associates. With respect to the SERP Medical Plan, a one percent change in the assumed health care cost trend rate would change this plan’s accumulated benefit obligation by approximately $4 million and $3 million, depending on if the change was an increase or decrease, respectively. With respect to the postretirement medical plan covering all other associates, there is limited risk to the Company for increases in health care costs since, beginning in 2001, new retirees have assumed the full expected costs and then-existing retirees have assumed all increases in such costs.

Mortality Assumptions — In 2014, the Company changed the mortality table used to calculate the present value of pension and postretirement plan liabilities, excluding the SERP Medical Plan. We previously used the RP 2000 mortality table projected with scale AA to 2019 for males and to 2013 for females. In 2014, we used the RP 2000 mortality table with generational projection using scale AA for both males and females. This mortality table was chosen after considering alternative tables including the RP-2014 table. We chose the RP 2000 table because it resulted in the closest match to the Company’s actual experience. For the SERP Medical Plan, the mortality assumption was updated to the RP 2014 table with generational projection using MP 2014. These changes did not significantly affect the Company’s total obligations.

The Company expects to record postretirement income of approximately $1 million and pension expense of approximately $16 million in 2015.

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Income Taxes

In accordance with U.S. GAAP, deferred tax assets are recognized for tax credit and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. Estimates of taxable income are based upon the Company’s strategic long-range plans. A one percent change in the Company’s overall statutory tax rate for 2014 would have resulted in a $5 million change in the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense depending on whether the tax rate change was a decrease or an increase.

The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.

The Company expects its 2015 effective tax rate to approximate 36.5 percent, excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending primarily on the level and mix of income earned in the United States as compared with its international operations.

Recent Accounting Pronouncements

Descriptions of the recently issued accounting principles, if any, and the accounting principles adopted by the Company during the year ended January 31, 2015 are included in the Summary of Significant Accounting Policies note in “Item 8. Consolidated Financial Statements and Supplementary Data.”

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 Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key suppliers for a majority of its merchandise purchases (including a significant portion from one key supplier), pandemics and similar major health concerns, unseasonable weather, deterioration of global financial markets, economic conditions worldwide, deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.

For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” in Part I, Item 1A. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information regarding foreign exchange risk management is included in the Financial Instruments and Risk Management note under “Item 8. Consolidated Financial Statements and Supplementary Data.”

Item 8. Consolidated Financial Statements and Supplementary Data

The following Consolidated Financial Statements of the Company for the years ended January 31, 2015, February 1, 2014, and February 2, 2013 are included as part of this Report:

Consolidated Statements of Operations for the Fiscal Years January 31, 2015, February 1, 2014, and February 2, 2013.
Consolidated Statements of Comprehensive Income for the Fiscal Years January 31, 2015, February 1, 2014, and February 2, 2013.
Consolidated Balance Sheets as of January 31, 2015 and February 1, 2014.
Consolidated Statements of Shareholders’ Equity for the Fiscal Years January 31, 2015, February 1, 2014, and February 2, 2013.
Consolidated Statements of Cash Flows for the Fiscal Years January 31, 2015, February 1, 2014, and February 2, 2013.
Notes to the Consolidated Financial Statements.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Foot Locker, Inc.:

We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Foot Locker, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 30, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

New York, New York
March 30, 2015

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FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

     
    2014   2013   2012
     (in millions, except per share amounts)
Sales   $ 7,151     $ 6,505     $ 6,182  
Cost of sales     4,777       4,372       4,148  
Selling, general and administrative expenses     1,426       1,334       1,294  
Depreciation and amortization     139       133       118  
Impairment and other charges     4       2       12  
Interest expense, net     5       5       5  
Other income     (9 )      (4 )      (2 ) 
       6,342       5,842       5,575  
Income before income taxes     809       663       607  
Income tax expense     289       234       210  
Net income   $ 520     $ 429     $ 397  
Basic earnings per share   $ 3.61     $ 2.89     $ 2.62  
Weighted-average shares outstanding     143.9       148.4       151.2  
Diluted earnings per share   $ 3.56     $ 2.85     $ 2.58  
Weighted-average shares outstanding, assuming dilution     146.0       150.5       154.0  

 
 
See Accompanying Notes to Consolidated Financial Statements.

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FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     
    2014   2013   2012
     (in millions)
Net income   $ 520     $ 429     $ 397  
Other comprehensive income, net of income tax
                          
Foreign currency translation adjustment:
                          
Translation adjustment arising during the period, net of income tax     (132 )      (25 )      19  
Cash flow hedges:
                          
Change in fair value of derivatives, net of income tax     (1 )      (5 )      4  
Pension and postretirement adjustments:
                          
Net actuarial gain (loss) and prior service cost and foreign currency fluctuations arising during the year, net of income tax expense (benefit)
of $(7), $2, and $1 million, respectively
    (8 )      6       1  
Amortization of net actuarial gain/loss and prior service cost included in
net periodic benefit costs, net of income tax expense of
$4, $5, and $5 million, respectively
    8       9       8  
Available for sale securities:
                          
Unrealized gain on available-for-sale securities                 1  
Comprehensive income   $ 387     $ 414     $ 430  

 
 
See Accompanying Notes to Consolidated Financial Statements.

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FOOT LOCKER, INC.
CONSOLIDATED BALANCE SHEETS

   
    2014   2013
     (in millions)
ASSETS
                 
Current assets
                 
Cash and cash equivalents   $ 967     $ 858  
Short-term investments           9  
Merchandise inventories     1,250       1,220  
Other current assets     239       263  
       2,456       2,350  
Property and equipment, net     620       590  
Deferred taxes     221       241  
Goodwill     157       163  
Other intangible assets, net     49       67  
Other assets     74       76  
     $ 3,577     $ 3,487  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
Current liabilities
                 
Accounts payable   $ 301     $ 263  
Accrued and other liabilities     393       360  
Current portion of capital lease obligations     2       3  
       696       626  
Long-term debt and obligations under capital leases     132       136  
Other liabilities     253       229  
Total liabilities     1,081       991  
Shareholders’ equity     2,496       2,496  
     $ 3,577     $ 3,487  

 
 
See Accompanying Notes to Consolidated Financial Statements.

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FOOT LOCKER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

             
    Additional Paid-In
Capital &
Common Stock
  Treasury Stock   Retained
Earnings
  Accumulated
Other
Comprehensive
Loss
  Total
Shareholders'
Equity
     Shares   Amount   Shares   Amount
     (shares in thousands, amounts in millions)
Balance at January 28, 2012     164,460     $ 779       (12,841 )    $ (253 )    $ 1,788     $ (204 )    $ 2,110  
Restricted stock issued     99                                            
Issued under director and stock plans     2,350       46                                     46  
Share-based compensation expense           20                                     20  
Total tax benefit from exercise of options           11                                        11  
Shares of common stock used to satisfy tax withholding obligations                    (214 )      (7 )                        (7 ) 
Acquired in exchange of stock options                 (2 )                               
Share repurchases                 (4,000 )      (129 )                        (129 ) 
Reissued – employee stock purchase plan                 218       5                         5  
Net income                                         397                397  
Cash dividends declared on common stock ($0.72 per share)                                         (109 )               (109 ) 
Translation adjustment, net of tax                                                  19       19  
Change in cash flow hedges, net of tax                                                  4       4  
Pension and postretirement adjustments, net of tax                                                  9       9  
Unrealized gain on available-for-sale securities, with no tax                                                  1       1  
Balance at February 2, 2013     166,909     $ 856       (16,839 )    $ (384 )    $ 2,076     $ (171 )    $ 2,377  
Restricted stock issued     665                                            
Issued under director and stock plans     1,465       31                                     31  
Share-based compensation expense           25                                     25  
Total tax benefit from exercise of options           9                                           9  
Forfeitures of restricted stock                 (2 )                                     
Shares of common stock used to satisfy tax withholding obligations                 (479 )      (16 )                        (16 ) 
Acquired in exchange of stock options                 (1 )                               
Share repurchases                 (6,424 )      (229 )                        (229 ) 
Reissued – employee stock purchase plan                 133       3                         3  
Net income                                         429                429  
Cash dividends declared on common stock ($0.80 per share)                                         (118 )               (118 ) 
Translation adjustment, net of tax                                                  (25 )      (25 ) 
Change in cash flow hedges, net of tax                                                  (5 )      (5 ) 
Pension and postretirement adjustments, net of tax                                                  15       15  
Balance at February 1, 2014     169,039     $ 921       (23,612 )    $ (626 )    $ 2,387     $ (186 )     $ 2,496  
Restricted stock issued     578                                            
Issued under director and stock plans     912       22                                     22  
Share-based compensation expense           24                                     24  
Total tax benefit from exercise of options           12