Item 2.
Management’s D
iscussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the
U.S.
Securities and Exchange Commission
.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control.
For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors”
disclosed in the 2016
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.
Business Overview
Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include
Foot Locker,
Kids Foot Locker,
Lady Foot Locker,
Champs Sports,
Footaction, Runners Point,
Sidestep
, and SIX:02
. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and m
obile sites
and catalogs.
The Foot Locker brand is one of the most widely recognized names in
the markets in which we
operate, epitomizing premium quality for the active lifestyle customer. This brand
equity has aided our
ability to succe
ssfully develop and increase our
portfolio of complementary retail store fo
rmats, such as Lady Foot Locker
and Kids Foot Locker
, as well as Footlocker.com, part of our
direct-to-customer business. Through various marketing channels
and experiences
, including
social, digital,
broadcast,
and
print
media
,
as well as
various sports sponsorships and events,
we
reinforce
our
image with a consistent message
—
namely, that we are
the destination for
premium
athletically
-
inspired shoes and apparel with a wide selection of merchandise in a full-service environment.
Store Count
At
October 28, 2017
,
we
operated 3,349 stores
as compared with 3,3
63 and 3,394
stores at
January 28, 2017
and
October 29, 2016
, respectively.
During the first quarter of 2017, the Company entered into a franchise agreement with Fox-Wizel Ltd, for franchised stores operating in Israel.
There are 13 franchised
stores operating in Israel as of October 28, 2017. Also, during the second quarter of 2017, the Company terminated its franchise agreement with the third party that operated stores in the Republic of Korea.
A total
of
97
franchised
stores were operating at
October 28, 2017
, as compared with
74 and 71 stores at
January 28, 2017
and
October 29, 2016, respectively
. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in
the
operating store count above.
Reconciliation of Non-GAAP Measures
The
Company
presents
certain non-GAAP measures, such as sales changes excluding foreign currency fluctuations, adjusted net income before income taxes, adjusted net income, and adjust
ed diluted earnings per share.
Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts
in both years
using
the prior-year
average foreign exchange rates.
We
present these non-GAAP measures because we
believe
they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not in
dicative of our core business. Presenting
amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business
es that are not related to currency movements.
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 thirty-nine weeks ended October 28, 2017 and October 29, 2016
, respectively.
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Thirteen weeks ended
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Thirty-nine weeks ended
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October 28,
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October 29,
|
|
October 28,
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|
October 29,
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|
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2017
|
|
2016
|
|
2017
|
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2016
|
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|
($ in millions)
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Pre-tax income:
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Income before income taxes
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$
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156
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$
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227
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$
|
498
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$
|
723
|
Pre-tax amounts excluded from GAAP:
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Reorganization costs
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13
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—
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13
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—
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Pension litigation charge
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—
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—
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50
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—
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Impairment charge
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—
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6
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—
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6
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Adjusted income before income taxes (non-GAAP)
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$
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169
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$
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233
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$
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561
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$
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729
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After-tax income:
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Net income
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$
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102
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$
|
157
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$
|
333
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$
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475
|
After-tax adjustments excluded from GAAP:
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Reorganization costs, net of income tax benefit
of $5 million
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8
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—
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8
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—
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Pension litigation charge, net of income tax benefit of $20 million
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—
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—
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30
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—
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Impairment charge, net of income tax benefit of $1 million
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—
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5
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—
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5
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Tax benefit related to intellectual property reassessment
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—
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(10)
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—
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(10)
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Adjusted net income (non-GAAP)
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$
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110
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$
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152
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$
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371
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$
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470
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Earnings per share:
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Diluted EPS
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$
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0.81
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$
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1.17
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$
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2.55
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$
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3.50
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Diluted EPS amounts excluded from GAAP:
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Reorganization costs
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0.06
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—
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0.06
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—
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Pension litigation charge
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—
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—
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0.23
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—
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Impairment charge
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—
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0.03
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—
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0.03
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Tax benefit related to intellectual property reassessment
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—
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(0.07)
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—
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(0.07)
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Adjusted diluted EPS (non-GAAP)
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$
|
0.87
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$
|
1.13
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$
|
2.84
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$
|
3.46
|
During the third quarter ended October 28, 2017, the Company reduced and reorganized its division and corporate staff which resulted in a charge of $13 million, $8 million after-tax or $0.06 per share. The substantial majority of the charge is for severance and related costs.
During
the second quarter ended July 29,
2017, the Company recorded a charge of $50 million, $30 million after-tax or $0.23 per share, related to pension litigation.
Please see Item 1. “Financial Statements,”
Note 14
,
Legal Proceedings
for further information on this charge
.
In the third quarter of 2016, the Company recorded a $6 million, $5 million after-tax or $0.03 per share, impairment charge associated with underperforming store assets of Runners Point and Sidestep. Also during the third quarter of 2016, the Company’s scheduled triennial reassessment of the value of intellectual property provided to our European business by Foot Locker in the U.S. resulted in a $10 million tax reduction.
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 had been open for more than one year. The computation of consolidated comparable-store sales also includes the sales of the Direct-to-Customers segment. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Computations exclude the effect of foreign currency fluctuations.
Sales decreased by $16 million, or 0.8 percent, to $1,870 million for the thirteen weeks ended October 28, 2017, from $1,886 million for the thirteen weeks ended October 29, 2016. For the thirty-nine weeks ended October 28, 2017, sales decreased
by
1.4 percent
to
$5,572 million from sales of $5,653 million in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, sales decreased by 2.3 and 1.5 percent for the thirteen and thirty-nine weeks ended October 28, 2017
, re
spectively
. Comparable-store sales decreased by 3.7 and 2.9 percent for the thirteen and thirty-nine weeks ended October 28, 2017
, respectively
.
For both periods, t
his reflected a decline in our Athletic Stores segment, partially offset by an increase in our Direct-to-Customers segment.
Gross Margin
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Thirteen weeks ended
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Thirty-nine weeks ended
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October 28,
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October 29,
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October 28,
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October 29,
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2017
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|
2016
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|
2017
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|
2016
|
Gross margin rate
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31.0
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%
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33.9
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%
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31.6
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%
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34.0
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%
|
Basis point change in the gross margin rate
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(290)
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(240)
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Components of the change-
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Decline in the merchandise margin rate
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(200)
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(140)
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Higher occupancy and buyers' compensation expense rate
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(90)
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(100)
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Gross margin is calculated as sales minus cost of sales.
Cost of sales includes: the cost of merchandise, freight, distribution costs including
related
depreciation expense, shipping and handling, occupancy and buyers’ compensation. Occupancy costs include rent, common area maintenance charges, real estate taxes, general maintenance, and utilities.
The gross margin rate
decreased by 290 and 240 basis points for
the thirteen and
thirty-nine
weeks ended
October 28,
2017, respectively.
The merchandise margin rate decline for both the quarter and year-to-date periods primarily reflected a higher markdown rate in both our Athletic Stores and Direct-to-Customers segments as
the Company was
more promotional.
Additionally, our Direct-to-Customers segment was also somewhat affected by higher shipping and handling expense.
The increased promotional activity was necessary to stimulate sales and ensure that inventory levels remained current and in line with the pace of sales.
The higher occupancy and buyers’ compensation expense rate for both the quarter and year-to-date periods reflected higher rent-related costs coupled with a decrease in sales. Higher occupancy costs are primarily attributed to several high-profile location leases entered into recently
, partially offset by rent reductions in certain other stores
.
Selling, General and Administrative Expenses (SG&A)
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Thirteen weeks ended
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Thirty-nine weeks ended
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|
October 28,
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October 29,
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October 28,
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October 29,
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2017
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2016
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2017
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2016
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($ in millions)
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SG&A
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$
|
368
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$
|
366
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$
|
1,078
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$
|
1,077
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$ Change
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$
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2
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$
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1
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$
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% Change
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0.5
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%
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0.1
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%
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|
SG&A as a percentage of sales
|
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19.7
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%
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19.4
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%
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19.3
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%
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19.1
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%
|
For the thirteen weeks ended October 28, 2017, excluding the effect of foreign currency fluctuations, SG&A expense decreased by $4 million as compared with the corresponding prior-year period. The effect of foreign currency fluctuations for the thirty-nine weeks ended October 28, 2017 was not significant.
Comparing the SG&A expense rate with the prior-year periods, the rate increased by 30 and 20 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively
.
The higher SG&A expense rate for both the quarter and year-to-date periods, as compared with the corresponding prior-year periods, was driven by the Athletic Stores segment and was primarily related to higher store-related compensation costs and hurricane-related expenses. Wages were higher primarily due to minimum wage increases, as well as related payroll taxes and benefits. As a percentage of sales, store wages and associated costs increased due to the decline in sales as we were not able to reduce staffing levels commensurate with the rate of decline in sales. In addition, included in SG&A was $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses. These hurricane-related expenses negatively affected the SG&A expense rate for the quarter by 40 basis points. Our Direct-to-Customers segment’s SG&A expense rate declined for both the quarter and year-to-date periods reflecting decreased publicity and incentive compensation expenses. Additionally, corporate expense significantly declined during the third quarter and year-to-date periods reflecting primarily reduced incentive compensation expense.
Depreciation and Amortization
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Thirteen weeks ended
|
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Thirty-nine weeks ended
|
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|
|
October 28,
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|
October 29,
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|
October 28,
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October 29,
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|
2017
|
|
2016
|
|
2017
|
|
2016
|
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($ in millions)
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Depreciation and amortization
|
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$
|
44
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$
|
40
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$
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127
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$
|
118
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$ Change
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$
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4
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$
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9
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% Change
|
|
|
10.0
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%
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|
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7.6
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%
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|
Depreciation and amortization increased by $4 million and $9 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. The increase in depreciation and amortization reflected ongoing capital spending
on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.
Interest Expense, Net
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Thirteen weeks ended
|
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Thirty-nine weeks ended
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
($ in millions)
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Interest expense
|
|
$
|
3
|
|
$
|
3
|
|
$
|
9
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|
$
|
9
|
Interest income
|
|
|
(3)
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|
|
(2)
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|
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(10)
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|
(7)
|
Interest (income) / expense, net
|
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$
|
—
|
|
$
|
1
|
|
$
|
(1)
|
|
$
|
2
|
Interest income increased by $1 million and $3 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods, while interest expense was unchanged. The increase in interest income was due to higher average interest rates earned on our cash investments.
Income Taxes
The Company recorded income tax provisions of $54 million and $165 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, which represented effective tax rates of 34.7 percent and 33.2 percent. For the thirteen and thirty-nine weeks ended October 29, 2016, the Company recorded income tax provisions of $70 million and $248 million, which represented effective tax rates of 30.9 percent and 34.4 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. The changes in the tax reserves were not significant for any of the periods presented.
For the thirteen weeks ended October 28, 2017, the Company recorded excess tax benefits of $2 million from stock-based compensation reflecting the change required by ASC 718 as well as a tax benefit of $5 million related to a staff reduction and reorganization charge of $13 million. Additionally, for the thirty-nine weeks ended October 28, 2017, the Company recorded a pension-related litigation charge of $50 million with a related tax benefit of $20 million. The litigation charge and the reorganization costs reduced the overall effective rate because they reduced the proportion of the Company’s worldwide income taxed in jurisdictions where the tax rates are higher.
For the thirteen and thirty-nine weeks ended October 29, 2016, due to a scheduled reassessment the Company increased the value of the intellectual property provided to its European business by Foot Locker in the U.S. The higher valuation resulted in catch-up deductions that reduced 2016’s tax expense by $10 million.
Excluding the effects of the excess tax benefits, the litigation charge, the reorganization costs, and the change in the value of the intellectual property, there was no significant change in the effective tax rate for the thirteen and thirty-nine weeks ended October 28, 2017 as compared with the corresponding prior-year periods.
The Company currently expects its full-year tax rate to approximate 34 percent excluding the effect of any nonrecurring items that may occur and the effects of potential tax reform. The actual tax rate will vary depending on the level of stock option exercise activity and the stock price at exercise. Additionally, the actual tax rate will also vary depending on the level and mix of income earned in the United States, as compared with our international operations.
Net Income
For the thirteen weeks ended October 28, 2017, net income decreased by $55 million, or 35 percent, and
diluted earnings per share decreased by 31 percent to $0.81 per share,
as compared with the corresponding prior-year period
. For the thirty-nine weeks ended October 28, 2017, net income decreased by $142 million, or 30 percent, and diluted earnings per share decreased by 27 percent to $2.55 per share, as compared with the corresponding prior-year period.
Segment Information
We have two reportable segments, Athletic Stores and Direct-to-Customers, which are based on our method of internal reporting. We evaluate performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, reorganization charge, corporate expense, non-operating income, and net interest (income) / expense. The following table summarizes results by segment:
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|
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Thirteen weeks ended
|
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Thirty-nine weeks ended
|
|
|
October 28,
|
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October 29,
|
|
October 28,
|
|
October 29,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales
|
|
($ in millions)
|
Athletic Stores
|
|
$
|
1,612
|
|
$
|
1,644
|
|
$
|
4,819
|
|
$
|
4,955
|
Direct-to-Customers
|
|
|
258
|
|
|
242
|
|
|
753
|
|
|
698
|
Total sales
|
|
$
|
1,870
|
|
$
|
1,886
|
|
$
|
5,572
|
|
$
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating Results
|
|
($ in millions)
|
Athletic Stores
(1)
|
|
$
|
154
|
|
$
|
213
|
|
$
|
504
|
|
$
|
683
|
Direct-to-Customers
|
|
|
26
|
|
|
32
|
|
|
88
|
|
|
92
|
Division profit
|
|
|
180
|
|
|
245
|
|
|
592
|
|
|
775
|
Less: Pension litigation and reorganization charges
(2) (3)
|
|
|
13
|
|
|
—
|
|
|
63
|
|
|
—
|
Less: Corporate expense
|
|
|
12
|
|
|
17
|
|
|
34
|
|
|
53
|
Operating profit
|
|
|
155
|
|
|
228
|
|
|
495
|
|
|
722
|
Other income
(4)
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
3
|
Earnings before interest expense and income taxes
|
|
|
156
|
|
|
228
|
|
|
497
|
|
|
725
|
Interest (income) / expense, net
|
|
|
—
|
|
|
1
|
|
|
(1)
|
|
|
2
|
Income before income taxes
|
|
$
|
156
|
|
$
|
227
|
|
$
|
498
|
|
$
|
723
|
|
|
(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.
|
(2)
|
Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a charge of $50 million relating to a pension litigation matter described further in Note 14,
Legal Proceedings
.
|
(3)
|
Included in the thirteen and thirty-nine weeks ended October 28, 2017 is a $13 million pre-tax charge related to the reduction and reorganization of division and corporate staff that occurred in the third quarter of 2017. The substantial majority of the charge is for severance and related costs.
|
(
4
)
|
Other income includes non-operating items, such as lease termination gains, royalty income, insurance recoveries and the changes in fair value, premiums paid, and realized gain
s and losses
associated with foreign currency option contracts.
|
Athletic Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
($ in millions)
|
|
Sales
|
|
$
|
1,612
|
|
$
|
1,644
|
|
$
|
4,819
|
|
$
|
4,955
|
|
$ Change
|
|
$
|
(32)
|
|
|
|
|
$
|
(136)
|
|
$
|
|
|
% Change
|
|
|
(1.9)
|
%
|
|
|
|
|
(2.7)
|
%
|
|
|
|
Division profit
|
|
$
|
154
|
|
$
|
213
|
|
$
|
504
|
|
$
|
683
|
|
Division profit margin
|
|
|
9.6
|
%
|
|
13.0
|
%
|
|
10.5
|
%
|
|
13.8
|
%
|
Excluding the effect of foreign currency fluctuations, Athletic Stores segment sales decreased by 3.6 percent and 2.8 percent for the thirteen and thirty-nine weeks ended October 28, 2017
, re
spectively,
as compared with the corresponding prior-year
periods. The sales decline for the current quarter and year-to-date periods, excluding the effect of foreign currency fluctuations, was across almost all
store banners
,
with the exception of Footaction
and
Foot Locker Canada
,
which increased sales.
Comparable-store sales decreased by 5.1 percent and 4.5 percent for the thirteen and thirty-nine weeks ended
October 28, 2017, respectively. Foot Locker Canada
generated positive comparable-store sales for the quarter and year-to-date periods, while Footaction was positive for the third quarter but not the year-to-date period. All other store banners generated negative comparable-store sales for both periods.
The overall decline in comparable-store sales was due to a decrease in footwear sales for both the quarter and year-to-date periods
.
The footwear sales decline in the quarter was across men’s, women’s, and children’s, whereas the year-to-date decline was related primarily to declines in children’ and men’s footwear. A
comparable-sales increase in men’s lifestyle running footwear for both the quarter and year-to-date periods for the majority of our store banners was not enough to compensate for the comparable-store declines in basketball and court lifestyle footwear. The decline in most
other
footwear categories for both the quarter and year-to-date periods was the result of insufficient product availability of certain styles and the lack of product innovation in select categories to suit our customers
’
quickly
-
changing style preferences.
Women’s court styles mainly contributed to the comparable-store sales decline in women’s footwear both domestically and internationally for the quarter.
The decline in women’s footwear was most significant in Foot Locker, Lady Foot Locker, and Foot Locker Europe
.
Sales of children’s footwear declined
for the year-to-date period
due
primarily
by declines in the basketball category.
The decline in footwear sales was partially offset by gains in apparel sales, as the majority of our store banners experienced apparel sales gains for both the thirteen and thirty-nine weeks ended October 28, 2017. Most of our banners benefited from gains in men’s branded apparel and outerwear, which was partially offset by declines in private label and licensed apparel for both the quarter and year-to-date periods. Additionally, women’s apparel performed well for our SIX:02 banner for both the quarter and year-to-date periods, although this was largely driven by increased markdowns. For the quarter and year-to-date periods, children’s apparel experienced both total and comparable-store sales increases as compared to the corresponding prior-year periods.
Athletic Stores division profit decreased by 27.7 percent and 26.2 percent for the thirteen and thirty-nine weeks ended October 28, 2017, respectively,
as compared with the corresponding prior-year periods.
The decline in division profit
margin
for both the quarter and year-to-date periods was attributable primarily to a lower gross margin rate, coupled with a higher SG&A expense rate.
Direct-to-Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
($ in millions)
|
|
Sales
|
|
$
|
258
|
|
$
|
242
|
|
$
|
753
|
|
$
|
698
|
|
$ Change
|
|
$
|
16
|
|
|
|
|
$
|
55
|
|
|
|
|
% Change
|
|
|
6.6
|
%
|
|
|
|
|
7.9
|
%
|
|
|
|
Division
profit
|
|
$
|
26
|
|
$
|
32
|
|
$
|
88
|
|
$
|
92
|
|
Division profit margin
|
|
|
10.1
|
%
|
|
13.2
|
%
|
|
11.7
|
%
|
|
13.2
|
%
|
Comparable-sales for the Direct-to-Customers segment increased by 6.1 percent and 8.1 percent for the thirteen and thirty-nine weeks ended October 28, 2017
, respectively,
as compared with the corresponding prior-year periods.
The increase in the quarter was driven primarily by Eastbay and the continued growth of ecommerce sales associated with our store-banner websites, both domestically and internationally. The increase for the year-to-date period was primarily related to the growth of our store-banner websites.
The footwear category continued to deliver the strongest gains during the current quarter and year-to-date periods. The footwear gains related to our domestic store-banner websites
and Eastbay
for both the quarter and year-to-date periods were driven by strong results in
the
children’s
and men’s
footwear
categories
.
For the quarter, the women’s business softened primarily in the running category. O
ur international store-banner websites for both the quarter and year-to-date periods were primarily driven by
sales from
men’s and women’s lifestyle running styles.
Direct-to-Customers division profit for the thirteen and thirty-nine weeks ended October 28, 2017 decreased by $6 million and $4 million, respectively, as compared with the corresponding prior-year periods. Division profit, as a percentage of sales, declined by 310 basis points and 150 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, as compared with the corresponding prior-year periods. While sales increased, the gross margin rate declined due to increased markdowns
in response
to promotional activity
in the market
and, to a lesser degree, higher shipping and handling expense. Partially offsetting the gross margin decline was an expense rate improvement primarily related to lower publicity costs and incentive compensation expense in light of current performance as compared with our plan.
Corporate Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Thirty-nine weeks ended
|
|
|
|
October 28,
|
|
October 29,
|
|
October 28,
|
|
October 29,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
($ in millions)
|
|
Corporate expense
|
|
$
|
12
|
|
$
|
17
|
|
$
|
34
|
|
$
|
53
|
|
$ Change
|
|
$
|
(5)
|
|
|
|
|
$
|
(19)
|
|
|
|
|
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 both the thirteen and thirty-nine weeks ended
October 28, 2017 and October 29, 2016, respectively
.
The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study; accordingly, the allocation increased by $1 million and $4 million for the thirteen and thirty-nine weeks ended
October 28, 2017
,
thus reducing corporate expense. Excluding the corporate allocation change, corporate expense decreased by $4 million and $15 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.
Incentive compensation declined by $4 million and $11 million
for the
thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively, reflecting the Company’s underperformance compared to its plan. Share-based compensation declined by $3 million and $6 million for the thirteen weeks and thirty-nine weeks ended October 28, 2017, respectively,
which primarily represented
the portion of share-based compensation that is tied to Company performance.
Additionally, the decline for the thirty-nine weeks ended October 28, 2017 was due to the prior-
year corporate headquarters relocation costs of $4 million. These decreases were partially offset by a $2 million litigation settlement charge
recorded during the third quarter of 2017
and increased corporate support costs such as information technology and real estate management.
Liquidity and Capital Resources
Liquidity
Our 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, Internet 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 our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our 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 28, 2017, approximately $863 million remained available under the Company’s current $1.2 billion share repurchase program.
As discussed further in the
Legal Proceedings
note under “Item 1. Financial Statements,” during the second quarter of 2017, in connection with our pension litigation, we recorded a pre-tax charge of $50 million
($30 million after-tax or $0.23 per diluted share). The Company previously recorded a pre-tax charge of $100 million during 2015. Th
e second quarter 2017
charge reflects the Company’s revised estimate of its exposure for the matter, bringing the total pre-tax amount accrued to $150 million.
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 us. The total accrual of $150 million has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeal process may be lengthy. The pension plan is currently sufficiently funded to initially absorb a $150 million liability and, accordingly, we currently do not anticipate the need to make any pension contributions in the near term in connection with this matter. The timing and the amount of contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets.
Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key vendors for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading “Disclosure Regarding Forward-Looking Statements,” could affect our ability to continue to fund our needs from business operations.
Operating Activities
|
|
|
|
|
|
|
Thirty-nine weeks ended
|
|
October 28,
|
|
October 29,
|
|
2017
|
|
2016
|
|
($ in millions)
|
Net cash provided by operating activities
|
$
|
496
|
|
$
|
477
|
$ Change
|
$
|
19
|
|
|
|
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 depreciation and amortization, and share-based compensation expense. The increase from the prior year primarily reflects working capital changes, partially offset by the decline in net income as compared with the prior year.
Investing Activities
|
|
|
|
|
|
|
Thirty-nine weeks en
ded
|
|
October 28,
|
|
October 29,
|
|
2017
|
|
2016
|
|
($ in millions)
|
Net cash used in investing activities
|
$
|
204
|
|
$
|
193
|
$ Change
|
$
|
11
|
|
|
|
Capital expenditures were $11 million higher than the prior year. The increase was due to increased spending on technology projects and cash payments related to the 2016 capital program. The Company’s full-year capital spending is expected to be approximately $269 million, which includes $198 million related to the remodeling or relocation of approximately 180 existing stores and the opening of approximately 90 new stores, as well as $71 million for the development of information systems, websites, and infrastructure, including supply chain initiatives.
Financing Activities
|
|
|
|
|
|
|
Thirty-nine wee
ks ended
|
|
October 28,
|
|
October 29,
|
|
2017
|
|
2016
|
|
($ in millions)
|
Net cash used in financing activities
|
$
|
475
|
|
$
|
443
|
$ Change
|
$
|
32
|
|
|
|
During the thirty-nine weeks ended October 28, 2017, we repurchased 9,589,660 shares of our common stock for $362 million, as compared with 5,874,643 shares repurchased for $352 million in the corresponding prior-year period.
The Company also declared and paid dividends during the first three quarters of 2017 and 2016 of $
120 million and $
111 million, respectively. This represented quarterly rates of $0.31 and $0.275 per share for 2017 and 2016, respectively
.
Additionally, we received proceeds from the issuance of common stock in connection with employee stock programs of $1
7 million and $28 million for the
thirty-nine weeks ended October 28, 2017
and October
29,
2016, respectively. Also, during the thirty-nine weeks ended October 28, 2017 and October
29,
2016, the Company paid $
10 million and $6 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.
Included in the prior year’s financing activities were fees of $2 million paid in connection with the 2016 Credit Agreement.
Critical Accounting Policies and Estimates
There have been no significant changes to our 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 28, 2017.
Recent Accounting Pronouncements
Descriptions of the recently issued and adopted accounting principles are included Item 1. “Financial Statements” in Note 1,
Summary of Significant Accounting Policies
, to the Condensed Consolidated Financial Statements.