Item 2.
Management’s D
iscussion 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,
SIX:02,
Champs Sports, Footaction
, Runners Point, and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites, and catalogs.
The Foot Locker brand is one of the most widely recognized names in the markets in which 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, social, 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 Count
At
October 29, 2016
, the Company
operated
3,394
stores
as compared with
3,383
and
3,432
stores at
January
30,
2016
and
October 31, 2015
, respectively. A total of
71 f
ranchised stores were operati
ng
at
October
29,
2016
, as
compared with
64 stores at both
January 30, 2016
and
October 31, 2015
. Revenue 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
.
Reconciliation of Non-GAAP Measures
The
Company
present
s
certain non-GAAP measures
, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjusted diluted earnings per share
.
The Company presents these non-GAAP measures because we
believe
they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business
.
In addition, these non-GAAP measures are useful in assessing the Company’s progress in achieving its long-term financial objectives.
The non-GAAP financial information is provided in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP.
The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal rate to each of the respective items.
Presented below
is a reconciliation of
GAAP and non-GAAP results for the thirteen and th
irty-nine weeks ended October 29, 2016
and
October 31, 2015
, respectively.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
October 29,
|
|
October 31,
|
|
October 29,
|
|
October 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
($ in millions)
|
Pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
227
|
|
$
|
117
|
|
$
|
723
|
|
$
|
592
|
Pre-tax amounts excluded from GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
Pension litigation charge
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
Adjusted income before income taxes (non-GAAP)
|
|
$
|
233
|
|
$
|
217
|
|
$
|
729
|
|
$
|
692
|
Reconciliation of Non-GAAP Measures – (continued)
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29,
|
|
October 31,
|
|
October 29,
|
|
October 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
($ in millions)
|
|
After-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
157
|
|
$
|
80
|
|
$
|
475
|
|
$
|
383
|
|
After-tax adjustments excluded from GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to intellectual property reassessment
|
|
|
(10)
|
|
|
—
|
|
|
(10)
|
|
|
—
|
|
Impairment charge, net of income tax benefit of $1, $—, $1, $— million, respectively
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Pension litigation charge, net of income tax benefit of $—, $39, $—, and $39 million, respectively
|
|
|
—
|
|
|
61
|
|
|
—
|
|
|
61
|
|
Adjusted net income (non-GAAP)
|
|
$
|
152
|
|
$
|
141
|
|
$
|
470
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
1.17
|
|
$
|
0.57
|
|
$
|
3.50
|
|
$
|
2.71
|
|
Diluted EPS amounts excluded from GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to intellectual property reassessment
|
|
|
(0.07)
|
|
|
—
|
|
|
(0.07)
|
|
|
—
|
|
Impairment charge
|
|
|
0.03
|
|
|
—
|
|
|
0.03
|
|
|
—
|
|
Pension litigation charge
|
|
|
—
|
|
|
0.43
|
|
|
—
|
|
|
0.43
|
|
Adjusted diluted EPS (non-GAAP)
|
|
$
|
1.13
|
|
$
|
1.00
|
|
$
|
3.46
|
|
$
|
3.14
|
|
During the thirteen weeks ended October 29, 2016, the Company
recorded a
non-cash impairment charge of $6 million ($5 million after-tax or $0.03 per share),
to write
down store fixtures and leasehold improvements
related to our Runners Point and Sidestep stores. Additionally d
uring the third quarter
of 2016
, the Company performed a scheduled reassessment of the value of intellectual property
previously
provided to
its
European busi
ness by Foot Locker in the U.S. during the fourth quarter of 2012.
Driven by the success of the European business
since the implementation of our tax planning strategy
, the
higher valuation
resulted in
catch-up
tax
deductions that reduced tax expense by
$
10 million,
or
$0.07
per share.
During the third quarter of 2015, the Company recorded a charge of $100 million, $61 million after-tax or $0.43 per share, related to pension litigation.
Please see Item 1. “Financial Statements,” Note 3,
Impairment and
Litigation
Charges
and Note 13,
Legal Proceedings
for further information on these items.
The Company estimates the tax effects of each of the non-GAAP adjustments individually by applying the applicable marginal tax rate to each of the respective items.
Foreign Currency Fluctuations
Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts using average foreign exchange rates for the same period of the prior year. We believe that presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business.
Results of Operations
Sales
All references to comparable-store sales for a given period relate to sales
of
stores
that
were
open at the period-end
and
ha
d
been open for more than one year
.
The computation of consolidated comparable-store sales also includes the sales of the Direct-to-Customers segment. S
tores 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
increased
by $
92
million, or
5.1
percent, to $
1,886
million for the
thirteen weeks ended
October 29, 2016
, from $
1,794
million for the thirteen weeks ended
October 31, 2015
.
For the
thirty-nine
weeks ended
October
29,
2016
, sales of $5,653 million increased 4.6 percent from sales of $
5,405
million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, sales increased by 5.5 percent and 4.9 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively.
Comparable-store sales
increased by
4.7
and
4.0
percent for the thirteen and
thirty-nine
weeks ended
October
29,
2016
, respectively.
Gross Margin
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|
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|
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|
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|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
October 29,
|
|
October 31,
|
|
October 29,
|
|
October 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Gross margin rate
|
|
33.9
|
%
|
|
33.8
|
%
|
|
34.0
|
%
|
|
33.9
|
%
|
Basis point change in the gross margin rate
|
|
10
|
|
|
|
|
|
10
|
|
|
|
|
Components of the change-
|
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|
|
|
|
|
|
|
|
|
|
|
Merchandise margin rate improvement
|
|
10
|
|
|
|
|
|
20
|
|
|
|
|
Higher occupancy and buyers' compensation expense rate
|
|
—
|
|
|
|
|
|
(10)
|
|
|
|
|
The gross margin rate
improved by 10 basis points
for
both
the thirteen
and
thirty-nine
weeks ended
October
29,
2016
.
This reflected a
merchandise margin rate improvement of
10
and
20
basis points
for the thirteen and thirty-nine weeks ended October 29, 2016
, respectively.
The change in the gross margin rate also reflected an increase in the occupancy and buyer’s compensation expense rate of 10 basis points for the thirty-nine weeks ended October 29, 2016.
The merchandise
margin
rate improvement
for both the quarter and year-to-date periods of 2016
primarily
reflected a
lower markdown
rate
within the Athletic Stores segment
,
as we increased full-price selling. This improvement was
partially offset by increased
promotional activity
with
in our
D
irect-to-
C
ustomers segment
for both the current and year-to-date periods.
Also pressuring the gross margin rate was the fact that certain high-profile locations
were closed for remodeling for all or part of the year, which increased the
oc
cupancy expense rate since these locations were not generating sales while incurring tenancy costs.
Selling, General and Administrative
Expenses
(SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
($ in millions)
|
|
SG&A
|
|
$
|
366
|
|
$
|
352
|
|
$
|
1,077
|
|
$
|
1,028
|
|
$ Change
|
|
$
|
14
|
|
|
|
|
$
|
49
|
|
$
|
|
|
% Change
|
|
|
4.0
|
%
|
|
|
|
|
4.8
|
%
|
|
|
|
SG&A as a percentage of sales
|
|
|
19.4
|
%
|
|
19.6
|
%
|
|
19.1
|
%
|
|
19.0
|
%
|
SG&
A increased by $
14
million and $49 million for the
thirteen and
thirty-nine
weeks ended
October 29, 2016
, respectively, as compared
with the corresponding prior-year period
s
. The effect of foreig
n currency fluctuations for the current quarter and year-to-date
period
s
was not significant.
Comparing the SG&A rate to the prior-year periods, the rate decreased by 20 basis points for the thirteen
weeks ended
October 29, 2016, while it increased by 10 basis points for
the thirty-nine weeks ended October 29, 2016.
The change in the SG&A rate was primarily driven by diligent expense management by our Athletic Stores segment, partially offset by an increase in marketing costs incurred by our Direct-to-Customers segment in order to drive traffic to its websites. While the higher expense rate within Direct-to-Customers segment continued during the third quarter, it was more pronounced in the first half of 2016, and therefore negatively affected the year-to-date comparison.
Additionally, corporate expense for the thirty-nine weeks ended October 29, 2016 included an increase of $3 million
in costs
associated with the relocation of the corporate headquarters within New York City.
Depreciation
a
nd Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
($ in millions)
|
|
Depreciation and amortization
|
|
$
|
40
|
|
$
|
38
|
|
$
|
118
|
|
$
|
109
|
|
$ Change
|
|
$
|
2
|
|
|
|
|
$
|
9
|
|
|
|
|
% Change
|
|
|
5.3
|
%
|
|
|
|
|
8.3
|
%
|
|
|
|
Depreciation and
amortization increased by $
2
million
and $9 million for
the
thirteen and
thirty-nine
weeks ended
October 29, 2016
, respectively, as compared with the corresponding prior-year period
s
. The increase in depreciation and amortization reflected increased capital spending
on store
projects
, enhancing our digital sites, and various other technologies
and infrastructure
.
Impairment and Litigation Charges
The Company recorded an impairment charge totaling $6 million ($5 million after-tax or $0.03 per diluted share) relating to the write-down of store fixtures and leasehold improvements for 116 of our Runners Point and Sidestep stores.
During the third quarter of 2015, the Company recorded a $100 million pension litigation charge ($61 million after-tax or $0.43 per diluted share).
This charge relates to a class action in which the plaintiffs alleged that the Company failed to properly disclose the effects of the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula. In September 2015,
the court ruled in favor of the plaintiffs and issued a decision ordering that the pension plan be reformed. The Company is appealing the court’s decision, and the judgment has been stayed pending the outcome of the appeal.
Please see Item 1. “Financial Statements,” Note 3,
Impairment and
Litigation
Charges
and Note 13,
Legal Proceedings
for further information on these items.
Interest Expense
, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
($ in millions)
|
Interest expense
|
|
$
|
3
|
|
$
|
3
|
|
$
|
9
|
|
$
|
8
|
Interest income
|
|
|
(2)
|
|
|
(2)
|
|
|
(7)
|
|
|
(5)
|
Interest expense, net
|
|
$
|
1
|
|
$
|
1
|
|
$
|
2
|
|
$
|
3
|
Net interest expense was unchanged for the thirteen weeks ended October 29, 2016 as compared
with the corresponding prior-year period. For the thirty-nine weeks ended
October 29, 2016
net interest expense
decreased by
$1 million compared with the corresponding prior-year period, which primarily represented
increased income due
to
higher average interest rates
on our cash investments
.
Income Taxes
The Company recorded income tax provisions of $7
0
million and $
248
million, which represented effective tax rate
s
of 3
0.9
percent
and 34.4 percent
for the thirteen and
thirty-nine
weeks ended
October 29, 2016, respectively
. For the thirteen and
thirty-nine
weeks ended
October 31, 2015
, the Company recorded income tax provisions of $
37
million and $
209
million, which represented effective tax rates of
31.7
percent and 3
5.3
percent, respectively.
The Company’s interim provision for income taxes is measured using an annual effective tax rate adjusted for discrete items that occur within the periods presented.
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. For the thirteen and thirty-nine weeks ended October 29, 2016, the changes in the tax reserves were not significant. Included in the thirteen weeks and thirty-nine weeks ended October 31, 2015 were tax benefits of $1 million and $2 million, respectively, from reserve releases due to expiration of statutes of limitation and settlements of tax examinations.
During the third quarter of 2016, the Company performed a scheduled reassessment of the value of the intellectual property provided to its European business by Foot Locker in the U.S. during the fourth quarter of 2012. Driven by the recent success of the Foot Locker business in Europe, the new, higher valuation resulted in catch-up deductions that reduced tax expense by $10 million. The higher valuation will also result in a current year benefit, of which approximately $2 million was recognized during the third quarter with an additional $1 million that will be recognized during the fourth quarter.
During the third quarter of 2015, the Company recorded a pension-related litigation charge of $100 million with a related tax benefit of $39 million. The thirty-nine weeks ended October 31, 2015 also included tax benefits totaling $1 million related to an adjustment to deductible compensation costs resulting from executive changes and a Canadian provincial tax rate change.
Excluding the reserve releases and other discrete items mentioned above, the effective tax rate for the thirteen and thirty-nine weeks ended October 29, 2016 decreased as compared with the corresponding prior-year periods, due primarily to the current year effect of the higher valuation of the intellectual property provided from Foot Locker U.S. to its European business.
The Company currently expects its fourth quarter and full-year tax rate to approximate 36 percent and 35 percent, respectively, excluding the effect of any additional nonrecurring items that may occur. The actual tax rates will depend primarily on the level and mix of income earned in the United States as compared with its international operations.
Net Income
For the thirteen weeks ended
October 29, 2016
, net income increased
by $
77
million
,
or 96.3 percent, and
diluted earnings per share increased by 105.3 percent to $1.17 per share,
as compared with the c
orresponding prior-year period
. For the
thirty-nine
weeks ended
October 29, 2016
, net income increased by $92 million, or 24.0 percent, above the corresponding prior-year period. Diluted earnings per share increased by 29.2 percent to $3.50 per share. In addition to the growth in net income for both the quarter and year-to-date periods, the increase in diluted earnings per share was also positively affected by the Company’s continued share repurchase program.
Segment
Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting.
T
he Company has two reportable segments, Athletic Stores and Direct-to-Customers.
The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division
profit
reflects
income
before income taxes,
pension litigation charge,
corporate expense,
non-operating income, and net interest expense
.
The following table summarizes results by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
($ in millions)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletic Stores
|
|
$
|
1,644
|
|
$
|
1,571
|
|
$
|
4,955
|
|
$
|
4,755
|
Direct-to-Customers
|
|
|
242
|
|
|
223
|
|
|
698
|
|
|
650
|
|
|
$
|
1,886
|
|
$
|
1,794
|
|
$
|
5,653
|
|
$
|
5,405
|
Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletic Stores
(1)
|
|
$
|
213
|
|
$
|
206
|
|
$
|
683
|
|
$
|
649
|
Direct-to-Customers
|
|
|
32
|
|
|
31
|
|
|
92
|
|
|
98
|
Division profit
|
|
|
245
|
|
|
237
|
|
|
775
|
|
|
747
|
Less: Pension litigation charge
(2)
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
Less: Corporate expense
|
|
|
17
|
|
|
20
|
|
|
53
|
|
|
54
|
Operating profit
|
|
|
228
|
|
|
117
|
|
|
722
|
|
|
593
|
Other income
(3)
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
2
|
Earnings before interest expense and income taxes
|
|
|
228
|
|
|
118
|
|
|
725
|
|
|
595
|
Interest expense, net
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
3
|
Income before income taxes
|
|
$
|
227
|
|
$
|
117
|
|
$
|
723
|
|
$
|
592
|
|
|
(1)
|
Included in the thirteen and thirty-nine weeks ended October 29, 2016 is a $6 million pre-tax non-cash impairment charge to write-down long-lived store assets of Runners Point and Sidestep. See Item 1. “Financial Statements,” Note 3,
Impairment and
Litigation
Charges
for further information.
|
(2)
|
Included in the thirteen and thirty-nine weeks ended October 31, 2015 is a pre-tax litigation charge of $100 million relating to the pension litigation matter. Please see Item 1. “Financial Statements,” Note 13,
Legal Proceedings
for further information.
|
(3)
|
Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries and the changes in fair value, premiums paid, and realized gains associated with foreign currency option contracts.
|
Athletic Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
($ in millions)
|
|
Sales
|
|
$
|
1,644
|
|
$
|
1,571
|
|
$
|
4,955
|
|
$
|
4,755
|
|
$ Change
|
|
$
|
73
|
|
|
|
|
$
|
200
|
|
$
|
|
|
% Change
|
|
|
4.6
|
%
|
|
|
|
|
4.2
|
%
|
|
|
|
Division profit
|
|
$
|
213
|
|
$
|
206
|
|
$
|
683
|
|
$
|
649
|
|
Division profit margin
|
|
|
13.0
|
%
|
|
13.1
|
%
|
|
13.8
|
%
|
|
13.6
|
%
|
Excluding the effect of foreign currency fluctuations,
Athletic Stores
segment sales increased by
5.0 percent and 4.5 percent
for the thirte
en and
thirty-nine
weeks ended
October 29, 2016
, respectively,
as compared with the corresponding prior-year period.
The sales increase for both the quarter and year-to-date periods of 2016 was driven by our domestic banners, led by Champs Sports. Our international sales growth for both the quarter and the full year was led by our Canadian businesses. Foot Locker Europe’s sales increased for both the quarter and year-to-date periods, with the majority of the increase coming from the first half of the year, as the third quarter was negatively affected by reduced traffic. The Runners Point and Sidestep banners continued to experience sales declines.
Both of
these banners continue to face assortment and traffic challenges. We are focus
ed
on improving these banners by better diversifying our product offerings
,
along with providing a more elevated in-store exp
erience
.
Comparable-store sales
increased by
4.0
percent and
3.5
percent for the thirteen
and
thirty-nine
weeks ended
October 29, 2016
, respectively.
These increases were
primarily driven by our continued success in footwear.
C
hildren’s
and
women’s
footwear
sales increase
d
across multiple
banners
for the current quarter and year-to-date periods,
led
by court classic and casual styles.
The increase in m
en’s footwear
sales
was largely driven by
casual styles,
especially in our
Champs Sports
banner
.
Our basketball footwear business was down slightly for the quarter, but represented a positive comparable gain for the year-to-date
period
led, by
Foot Locker Canada.
Apparel sales also experienced gains for both the quarter and year-to-date period.
The strongest contributors were
sales of men’s branded and private label apparel
at
Champs Sports. Additionally, Foot Locker Europe’s apparel sales benefited during the year-to-date period with gai
ns in men’s branded apparel.
Athletic Stores division profit increased 3.4 percent and 5.2 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively,
as compared with the corresponding prior-year period.
Division profit, as a percentage of sales decreased to 13.0 percent and increased to 13.8 percent for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, as compared to the corresponding prior-year period. During the third quarter of 2016, a $6 million impairment charge was
recorded to write
down
the value of
store fixtures and leasehold improvements for 116 Runners Point and Sidestep stores. Excluding th
e effect of the impairment charge,
division profit increased as a percent
age
of sales by 20 and 30 basis points for the thirteen and thirty-nine weeks ended October 29, 2016, respectively
, as compared to the corresponding prior-year periods
. The division profit
rate
improvement, excluding the effect of the impairment charge,
was primarily due to
an improved merchandise margin rate
,
reflecting
a lower markdown rate for both the quarter and year-to-date periods.
D
irect-to-Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
($ in millions)
|
|
Sales
|
|
$
|
242
|
|
$
|
223
|
|
$
|
698
|
|
$
|
650
|
|
$ Change
|
|
$
|
19
|
|
|
|
|
$
|
48
|
|
|
|
|
% Change
|
|
|
8.5
|
%
|
|
|
|
|
7.4
|
%
|
|
|
|
Division profit
|
|
$
|
32
|
|
$
|
31
|
|
$
|
92
|
|
$
|
98
|
|
Division profit margin
|
|
|
13.2
|
%
|
|
13.9
|
%
|
|
13.2
|
%
|
|
15.1
|
%
|
Comparable
-
sales
for the
Direct-to-Customers
segment increased by
8.9
percent
and 7.7 percent
for the thirteen
and
thirty-nine
weeks ended
October 29, 2016
, respectively
.
This increase was primarily a result of the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally, which was partially offset by declines in our Eastbay, Runners Point and Sidestep ecommerce businesses.
Footwear continued to be our strongest category for both the quarter and year-to-date periods. This category was led by gains from the Jordan brand, women’s casual styles, and children’s footwear, each of which posted strong sales gains during the quarter and year-to-date periods. Eastbay’s sales decreased for the quarter and year-to-date periods, which reflected the customer’s continued shift away from performance-related product.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 29, 2016 increased by $1 million and decreased by $6 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, was 13.2 percent for both the thirteen and thirty-nine weeks ended October 29, 2016 as compared with 13.9 percent and 15.1 percent for the corresponding prior-year periods.
The division profit
rate
decline for the quarter and year-to-date periods primarily related to higher marketing related costs coupled with a lower gross margin rate within our domestic ecommerce business due to higher promotional activity.
Corporate Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
|
|
|
($ in millions)
|
|
Corporate expense
|
|
$
|
17
|
|
$
|
20
|
|
$
|
53
|
|
$
|
54
|
|
$ Change
|
|
$
|
(3)
|
|
|
|
|
$
|
(1)
|
|
|
|
|
Corporate expense consists of unallocated
SG&A
, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items.
Depreciation and amortization included in corporate expense
was $
4
million and $
11
million for the thirteen and
thirty-nine
weeks ended
October 29, 2016
, respectively,
which
increased by $2 million and $3 million for the quarter and year-to-date periods, respectively, as compared with the corresponding prior-year periods.
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly
, the allocation increased by $3
million
and $7 million
for the thirteen
and
thirty-nine
weeks ended
October 29, 2016
, respectively,
thus reducing
corporate expense. Excluding the corporate allocation change as well as
the change attributable to
depreciation and amortization, corporate expense
decreased by
$
2
million
for the
thirteen weeks ended
October 29, 2016
,
and increased by $3 million for the thirty-nine weeks ended October 29, 2016
. The increase for the
thirty-nine
weeks ended
October
29,
2016
was primarily
due to
costs incurred
to
relocat
e
our corporate headquarters within New York City
, which
was completed during the first quarter.
During 2016 we incurred $4 million of relocation-related expenses, as compared with $1 million during the prior-year period.
Liquidity
a
nd 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;
to
finance capital expenditures related to store openings, store remodelings,
I
nternet and mobile sites, information systems, and other support facilities;
to
make retirement plan contributions, quarterly dividend payments, and interest payments; and
to
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
.
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.
Share repurchases and retirement of debt
, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions
,
and other factors.
The amounts involved may be material. As of
October 29, 2016
, approximately $285 million remained available under the Company’s
$1
billion share repurchase program.
As discussed further in the
Legal Proceedings
note under “Item 1. Financial Statements,”
during the third quarter of 2015
the Company recorded a pre-tax charge of $100 million
,
($61 million after-tax).
In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company. The $100 million charge has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation
,
as the appeals process can be lengthy. The pension plan is
currently
sufficiently funded to absorb a $100 million liability and, accordingly, we do not anticipate the need to make any pension contributions in the near term
in connection with this matter
.
T
he timing and the amount of contributions to the pension plan
are
dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases and risks associated with global
product
sourcing
,
economic conditions worldwide,
the effects of currency
fluctuations,
as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect the ability of the Company to continue to fund its needs from business operations.
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
October 29,
|
|
October 31,
|
|
2016
|
|
2015
|
|
($ in millions)
|
Net cash provided by operating activities
|
$
|
454
|
|
$
|
414
|
$ Change
|
$
|
40
|
|
|
|
The amount provided by operating activities reflects
net income adjusted for non-cash items
and working capital changes. Adjustments to net income for non-cash items include impairment charges, depreciation and amortization, share-based compensation expense, and share-based related tax benefits
.
The increase from the prior year primarily reflects the Company’s earnings strength. This was partially
offset by
$33 million
of contributions to the U.S. qualified pension plan, which is an increase of $29 million as compared with the contribution made in the corresponding prior-year period.
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
October 29,
|
|
October 31,
|
|
2016
|
|
2015
|
|
($ in millions)
|
Net cash used in investing activities
|
$
|
193
|
|
$
|
174
|
$ Change
|
$
|
19
|
|
|
|
Capital expenditures
were
$
20
million
higher than
the prior year
. The increase was due, in part, to the build out of our new corporate headquarters and two flagship stores in New York City. The Company also
increased spending on corporate technology projects. The Company’s full
-
year forecast for capital expenditures is
expected to be approximately $290 million, which includes $220
million related to the remodeling or relocation of
approximately 220
existing stores and
opening
approximately
100
new store
s
, as well as $
70
million for the development of information systems, websites,
infrastructure
, and our corporate headquarters relocation within New York City
.
The prior year reflected a $2 million asset acquisition of 10 previously franchised Runners Point and Sidestep stores in Switzerland, of which $1 million was paid during the third quarter of 2015.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
October 29,
|
|
October 31,
|
|
2016
|
|
2015
|
|
($ in millions)
|
Net cash used in financing activities
|
$
|
421
|
|
$
|
322
|
$ Change
|
$
|
99
|
|
|
|
During the
thirty-nine
weeks ended
October 29, 2016
, the Company
repurchased
5,874,643
shares
of its common stock
for $
352
million
,
as compared with
5,050,000
shares
repurchased for $316
million in the corresponding prior-year period.
The Company declared and
paid dividends during the first three quarters of
2016
and
2015
of
$
111
million and
$
105
million, respectively.
This represent
ed
quarterly rates of $0.275
and $0.25 per share for
2016
and
2015
, respectively
. Additionally, the Company received proceeds from the issuance of common stock in connection with employee stock programs of
$
28
million and $
68
million for the
thirty-nine
weeks ended
October
29, 2016
and
October 31, 2015
,
respectively.
In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $
16 million and $
33
million as a financing
activity for
the
thirty-nine
weeks ended
October 29, 2016
and
October 31, 2015
, respectively. The
reduction in the amount of the
excess tax benefit primarily reflected a lower number of stock option exercises during the first
three
quarter
s
of 2016 as compared with the prior
year.
In May 2016, the Company entered into a new $400 million credit agreement and in connection with this transaction the Company paid fees of $2 million. The activity for the thirty-nine weeks ended October 31, 2015 also reflected payments made on capital lease obligations of $2 million.
Critical Accounting Policies
a
nd Estimates
There have been no significant changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
.
Recent Accounting Pronouncements
Descriptions of the recently issued accounting principle
s
are included
Item 1. “Financial Statements
”
in Note 1
,
Summary of Significant Accounting Policies
,
to the Condensed Consolidated Financial
S
tatements.
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), cybersecurity breaches, 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”
disclosed in the 201
5
Annual Report on Form 10-K
. 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.