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 2017 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, is one of the largest athletic footwear and apparel retailers in the world. 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. 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 a destination for premium athletically-inspired shoes and apparel with a wide selection of merchandise in a full-service environment.
We identify our operating segments according to how our business activities are managed and evaluated by our chief operating decision maker, our CEO. Prior to fiscal 2018, we had two reportable segments, Athletic Stores and Direct-to-Customers. Beginning in fiscal 2018, the Company has changed its organizational and internal reporting structure in order to execute our omni-channel strategy. This change resulted in the combination of our stores and direct-to-customer financial results.
The Company has determined that it has two operating segments, North America and International. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as our Eastbay business that includes internet, catalog, and team services and sales. Our International operating segment includes the results of the following banners operating in Europe, Australia, and New Zealand: Foot Locker, Runners Point, Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Please see Item 1. “Financial Statements,” Note 3,
Segment Information
for further information on this change.
Store Count
At August 4, 2018, we operated 3,276 stores as compared with 3,310 and 3,359 stores at February 3, 2018 and July 29, 2017, respectively. A total of 117 franchised stores were operating at August 4, 2018, as compared with 112 and 82 stores at February 3, 2018 and July 29, 2017, 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 adjusted 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 indicative 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 businesses 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 twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively.
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Thirteen weeks ended
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Twenty-six weeks ended
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August 4, 2018
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July 29, 2017
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August 4, 2018
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July 29, 2017
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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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115
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$
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73
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$
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344
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$
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342
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Pre-tax amounts excluded from GAAP:
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Pension litigation charge
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3
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50
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15
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50
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Adjusted income before income taxes (non-GAAP)
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$
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118
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$
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123
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$
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359
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$
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392
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After-tax income:
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Net income
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$
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88
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$
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51
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$
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253
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$
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231
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After-tax adjustments excluded from GAAP:
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Pension litigation charge, net of income tax benefit of $1, $20, $4, and $20 million
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2
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30
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11
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30
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U.S. tax reform
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(1)
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—
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(1)
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—
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Tax benefit related to enacted change in foreign branch currency regulations
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(1)
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—
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(1)
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—
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Adjusted net income (non-GAAP)
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$
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88
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$
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81
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$
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262
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$
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261
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Earnings per share:
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Diluted EPS
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$
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0.75
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$
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0.39
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$
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2.14
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$
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1.74
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Diluted EPS amounts excluded from GAAP:
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Pension litigation charge
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0.02
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0.23
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0.09
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0.23
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U.S. tax reform
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(0.01)
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—
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(0.01)
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—
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Tax benefit related to enacted change in foreign branch currency regulations
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(0.01)
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—
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(0.01)
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—
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Adjusted diluted EPS (non-GAAP)
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$
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0.75
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$
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0.62
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$
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2.21
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$
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1.97
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During the thirteen and twenty-six weeks ended August 4, 2018, the Company recorded pre-tax charges of $3
million and $15 million, respectively, in connection with its U.S. retirement plan litigation
and required plan reformation
. These charges represented $2 million after-tax
(
$0.02 per share
)
and $11 million after-tax
(
$0.09 per share
)
, respectively. During the thirteen and twenty-six weeks ended July 29, 2017, the Company recorded a charge related to the same litigation of $50 million, $30 million after-tax or $0.23 per share. Please see Item 1. “Financial Statements,” Note 14,
Legal Proceedings
for further information on th
ese
charge
s
.
During the fourth quarter of 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions. During the second quarter of 2018, we revised the provisional amount
that was originally recorded
which resulted in a benefit of $1 million.
We revised our estimate of the amount of foreign tax credits that we expect to utilize.
Our accounting for
tax reform
is still incomplete
as
we have not finalized the deemed repatriation of deferred foreign income and prior-year deferred tax activity. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the one-year time period provided by SAB 118. Any adjustment to these amounts during the measurement period will be recorded in income tax expense in the period in which the analysis is complete.
During the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of regulations under Internal Revenue Code Section 987. These regulations, which were promulgated in December 2016, changed our method for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date, the Company updated its calculations for the effect of these regulations, which resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $1 million.
Results of Operations
We evaluate performance based on several factors, of which the primary financial measure is the banner’s financial results referred to as division profit. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest income. The following table summarizes our results:
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Thirteen weeks ended
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Twenty-six weeks ended
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August 4,
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July 29,
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August 4,
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July 29,
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2018
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2017
|
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2018
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2017
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|
|
($ in millions)
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Sales
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$
|
1,782
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$
|
1,701
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$
|
3,807
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$
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3,702
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Operating Results
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Division profit
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131
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129
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378
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412
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Less: Pension litigation
(1)
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3
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50
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15
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50
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Less: Corporate expense
(2)
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16
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7
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27
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22
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Income from operations
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112
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72
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336
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340
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Interest income, net
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(1)
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(1)
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(3)
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(1)
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Other income
(3)
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2
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—
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5
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1
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Income before income taxes
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$
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115
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$
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73
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$
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344
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$
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342
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(1)
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Included in the
thirteen and twenty-six weeks ended August 4, 2018 are pre-tax charges of $3 million and $15 million, respectively, relating to a pension litigation matter described further in Note 14,
Legal
Proceedings
. Included in the thirteen and twenty-six weeks ended July 29, 2017 are pre-tax charges of $50 million in both periods relating to the same matter.
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(2)
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Corporate expense consists of unallocated selling, general and administrative expenses 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 $5 million and $9 million for
the thirteen and twenty-six weeks ended August 4, 2018
, respectively, as compared with $4 million and $7 million for 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 $10 million and $20 million for the thirteen
and twenty-six weeks ended
August 4, 2018
thus reducing corporate
expense. Excluding the corporate allocation change as well as depreciation and amortization, corporate expense increased by $18 million and $23 million for
the
thirteen and twenty-six weeks ended August 4, 2018, respectively. The increase for the thirteen and twenty-six weeks ended August 4, 2018 was primarily due to an increase in incentive compensation as well as increased corporate support costs primarily related to information technology.
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(3)
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Other income includes non-operating items, such as lease termination gains, royalty income, changes in fair value, premiums paid, realized gains and losses associated with foreign currency option contracts, changes in the market value of our available-for-sale security, and net benefit expense related to our pension and postretirement programs excluding the service cost component.
The increase in other income for the thirteen and twenty-six weeks ended August 4, 2018 as compared with the corresponding prior-year period primarily reflects increased royalty income and lease termination gains.
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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 our direct-to-customer channel. 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 increased by $81 million, or 4.8 percent, to $1,782 million for the thirteen weeks ended August 4, 2018, from $1,701 million for the thirteen weeks ended July 29, 2017. For the twenty-six weeks ended August
4,
2018, sales of $3,807 million increased 2.8 percent from sales of $3,702 million in the corresponding prior-year period.
Excluding the effect of foreign currency fluctuations, total sales increased by 3.9
percent
and 0.9 percent for the thirteen and twenty-six weeks ended August 4, 2018, respectively. Total
comparable sales increased by 0.5 percent for the thirteen weeks ended August 4, 2018 and decreased 1.2 percent for the twenty-six weeks ended August 4, 2018
as compared with the corresponding prior-year periods
.
The main difference between the change in comparable sales and the total change in sales represented the shift caused by the 53
rd
week of 2017, which caused more of the higher-volume back-to-school selling period to be included in this quarter’s results.
The information shown below represents certain sales metrics by sales channel:
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Thirteen weeks ended
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Twenty-six weeks ended
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August 4,
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July 29,
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August 4,
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July 29,
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2018
|
2017
|
2018
|
2017
|
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($ in millions)
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Stores
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Sales
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$
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1,542
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$
|
1,485
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$
|
3,285
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$
|
3,207
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$ Change
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$
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57
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$
|
78
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% Change
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|
3.8
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%
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|
2.4
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%
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% of total sales
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86.5
|
%
|
|
87.3
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%
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|
86.3
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%
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86.6
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%
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Comparable sales (decrease)
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(0.8)
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%
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|
(7.5)
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%
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|
(2.0)
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%
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|
(4.2)
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%
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Direct-to-customers
|
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Sales
|
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$
|
240
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|
$
|
216
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$
|
522
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|
$
|
495
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|
$ Change
|
|
$
|
24
|
|
|
|
|
$
|
27
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|
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|
|
% Change
|
|
|
11.1
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%
|
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|
|
|
5.5
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%
|
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|
|
% of total sales
|
|
|
13.5
|
%
|
|
12.7
|
%
|
|
13.7
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%
|
|
13.4
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%
|
Comparable sales increase
|
|
|
9.3
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%
|
|
5.4
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%
|
|
3.8
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%
|
|
9.1
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%
|
Effective with the first quarter of 2018, the Company discloses one reportable segment and, accordingly, the following discussion describes the changes in sales by banner on an omni-channel basis, meaning that each banner’s results are inclusive of its store and e-commerce activity.
Excluding the effect of foreign currency, the increase in sales for both the thirteen and twenty-six weeks ended August 4, 2018 primarily reflects sales gains in our Champs Sports, Foot Locker in the U.S., and Kids Foot Locker banners. Our e-commerce businesses in Europe and the U.S. contributed to the sales gains for both the quarter and year-to-date periods. These increases were partially offset by the continued sales decline in our international banners including Foot Locker, Runners Point, and Sidestep. Footaction’s results for the second quarter were essentially flat with the corresponding prior-year period, although for the year-to-date period sales declined.
For both the thirteen and twenty-six weeks ended August 4, 2018, our direct-to-customers channel generated positive comparable sales results and was offset by a decline experienced in the stores channel. From a product perspective for the combined channels, the increase in the quarter was driven by gains in the apparel category, partially offset by a decline in the footwear category. The year-to-date decline in comparable sales was attributable to a decrease in footwear sales.
The increase in the apparel category for both the quarter and year-to-date periods reflected the continued success in men’s and children’s branded apparel, which was offset, in part, by declines in men’s private-label apparel.
The comparable sales decline in footwear for the thirteen weeks ended August 4, 2018 reflected decreases in women’s and children’s footwear sales, partially offset by gains in sales of men’s footwear. All of these wearer segments experienced comparable declines for the year-to-date period of 2018. For both the quarter and year-to-date periods, the comparable sales decline in women’s footwear primarily reflected decreases in sales of women’s running and court styles. This was the result of our prior-year success of certain women’s offerings with no comparable offerings in the current year. The increase in men’s footwear for the thirteen weeks ended August 4, 2018 primarily represented gains in sales of running styles, which was partially offset by declines in sales of men’s basketball styles. For the year-to-date period, sales of men’s footwear posted a slight comparable sales decline as the gains in sales of running footwear styles were not enough to compensate for the decline in sales of basketball styles.
Gross Margin
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Thirteen weeks ended
|
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Twenty-six weeks ended
|
|
|
August 4, 2018
|
|
July 29, 2017
|
|
August 4, 2018
|
|
July 29, 2017
|
Gross margin rate
|
|
30.2
|
%
|
|
29.6
|
%
|
|
31.7
|
%
|
|
32.0
|
%
|
Basis point change in the gross margin rate
|
|
60
|
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|
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|
(30)
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Components of the change-
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Increase/ (decrease) in the merchandise margin rate
|
|
30
|
|
|
|
|
|
(10)
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|
Lower / (higher) occupancy and buyers' compensation expense rate
|
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30
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|
(20)
|
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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
ra
te increased by 60 basis points
for the thirteen weeks ended August 4, 2018
and
decreased
by
30 basis points for the
twenty-six weeks ended August 4, 2018
, as compared with the corresponding prior-year periods
. The merchandise margin rate improvement for the thirteen weeks ended August 4, 2018 primarily reflected lower markdown rates as we increased full-price selling during the current quarter.
F
or the
twenty-six weeks ended August 4, 2018
, the gross margin rate was lower primarily due to additional promotional activity during the first quarter to maintain appropriate inventory levels. For both the quarter and year-to-date periods,
shipping and handling revenue declined as a result of higher free shipping offers, which
negatively affected the merchandise margin rate.
The occupancy and buyer’s compensation expense rate decreased for the thirteen weeks ended August 4, 2018, which reflected the higher sales, in part due to the shift that resulted due to the 53
rd
week of 2017, during the quarter as compared with a relatively fixed rent cost. However, the rate increased for the twenty-six weeks ended August 4, 2018 as the increase in sales was not enough to compensate for the increased rent-related costs
primarily attributed to several high-profile location leases entered into recently.
Selling, General and Administrative Expenses (SG&A)
|
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|
|
|
|
|
|
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|
|
|
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|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in millions)
|
|
SG&A
|
|
$
|
380
|
|
$
|
339
|
|
$
|
765
|
|
$
|
710
|
|
$ Change
|
|
$
|
41
|
|
|
|
|
$
|
55
|
|
|
|
|
% Change
|
|
|
12.1
|
%
|
|
|
|
|
7.7
|
%
|
|
|
|
SG&A as a percentage of sales
|
|
|
21.3
|
%
|
|
19.9
|
%
|
|
20.1
|
%
|
|
19.2
|
%
|
SG&A
increased by $41 million, or by 140 basis points, to $380 million for the thirteen weeks ended August
4
,
2018, as compared with the
corresponding prior-
year
period
.
F
or th
e twenty-six weeks ended August
4, 2018
,
SG&A increased by $55
million, or by 90 basis points, to $765 million, as compared with the
corresponding
prior
-
year
period
. The effect of foreign currency fluctuations for the current quarter and year-to-date periods was not significant.
The
higher
SG&A expense rate
for both the quarter and year-to-date periods
reflected higher wages
, higher incentive compensation expense, and
an increase in costs incurred in connection with our ongoing investment in various technology and infrastructure projects.
C
orporate expense
(a component of SG&A)
increased during the quarter and year-to-date periods
also
reflecting increased incentive compensation expense.
Th
e increase in in
centive compensation
expense
was the result of a reduction
in the prior year due to the underperformance of our results.
The increase for the year-to-date period was partially offset by a benefit of $5 million recorded in the first quarter relating to insurance recoveries for damaged inventory and fixed assets for losses incurred last year during Hurricane Maria.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in millions)
|
|
Depreciation and amortization
|
|
$
|
44
|
|
$
|
42
|
|
$
|
89
|
|
$
|
83
|
|
$ Change
|
|
$
|
2
|
|
|
|
|
$
|
6
|
|
|
|
|
% Change
|
|
|
4.8
|
%
|
|
|
|
|
7.2
|
%
|
|
|
|
Depreciation and
amortization increased by $2 million and $6 million for
the thirteen and twenty-six weeks ended August 4, 2018, respectively, as compared
with the corresponding prior-year period. The increase in depreciation and amortization reflected ongoing capital spending
on store projects, enhancing our digital capabilities, and various other technologies and infrastructure.
Division Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in millions)
|
|
Division profit
|
|
$
|
131
|
|
$
|
129
|
|
$
|
378
|
|
$
|
412
|
|
Division profit margin
|
|
|
7.4
|
%
|
|
7.6
|
%
|
|
9.9
|
%
|
|
11.1
|
%
|
Division profit increased by 1.6 percent for the thirteen weeks ended August 4, 2018 and decreased 8.3 percent for the twenty-six weeks ended August 4, 2018, as compared with the corresponding prior-year periods. The increase in division profit for the thirteen weeks ended August 4, 2018 reflects an increase in the gross margin rate as compared with the corresponding prior-year period. For the twenty-six weeks ended August 4, 2018, both the decline in our gross margin rate and the increase in our SG&A expense rate contributed to the decrease in division profit.
Interest Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
($ in millions)
|
Interest expense
|
|
$
|
3
|
|
$
|
3
|
|
$
|
6
|
|
$
|
6
|
Interest income
|
|
|
(4)
|
|
|
(4)
|
|
|
(9)
|
|
|
(7)
|
Interest income, net
|
|
$
|
(1)
|
|
$
|
(1)
|
|
$
|
(3)
|
|
$
|
(1)
|
Net interest income was un
changed for the thirteen weeks ended August 4, 2018 and increased by $2 million for the twenty-six weeks ended August 4, 2018
,
as compared with the corresponding prior-year periods. Interest expense was unchanged for both the thirteen and twenty-six weeks ended August 4, 2018 as compared with the corresponding prior-year periods
,
while
interest income
increased
primarily
due to
higher average interest rates on our cash investments.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
($ in millions)
|
|
Provision for income taxes
|
|
$
|
27
|
|
$
|
22
|
|
$
|
91
|
|
$
|
111
|
|
Effective tax rate
|
|
|
23.6
|
%
|
|
30.9
|
%
|
|
26.4
|
%
|
|
32.6
|
%
|
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 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 effective tax rate for the
thirteen
weeks ended August 4, 2018 included
a
tax benefit of $3 million from
a
reserve release due to
a
settlement of
an
international tax examination. The changes in the tax reserves were not significant for the
prior-year periods
.
During the second quarter of fiscal 2018,
the Company reduced its provisional net expense related to
the
mandatory deemed repatriation of foreign sourced net earnings by $1 million due to a
revised estimate of the foreign tax credits the Company expected to utilize.
Please see Item 1. “Financial Statements,” Note 9,
Income Taxes
for further information.
Also d
uring the second quarter of 2018, the U.S. Treasury issued a notice that delayed the effective date of Internal Revenue Code Section 987 regulations for determining the tax effects of foreign currency translation gains and losses for our foreign businesses that are operated as branches and are reported in a currency other than the currency of their parent. As a result of the delay in the effective date, the Company updated its calculations of the effect of these regulations, which resulted in an increase to deferred tax assets and a corresponding reduction in our income tax provision in the amount of $1 million.
During 2017, the Company adopted ASU 2016-09 requiring excess tax benefits or deficiencies from share-based compensation to be recorded as a component of the income tax provision, rather than to equity.
No significant excess tax benefits were recorded
during
the thirteen and twenty-six weeks ended August 4, 2018.
E
xcess tax benefits recorded
during
the thirteen weeks ended July 29, 2017 were not
significant
; however we
recognized $7 million
f
or the twenty-six weeks ended July 29, 2017
.
Excluding the above-mentioned discrete items, the effective tax rate for the thirteen and twenty-six weeks ended August 4, 2018 decreased as compared with the corresponding prior-year period, primarily due to the enactment of the Tax Act which reduced the statutory U.S. federal corporate income tax rate from 35 percent to 21 percent. This was offset, in part, by foreign taxes assessed at rates in excess of the U.S. federal rate for which no U.S. foreign tax credit is available, as well as valuation allowances for certain foreign operating loss carryforwards that the Company estimates it will not be able to utilize in future periods.
The Company currently expects its full-year tax rate to approximate 27.5 percent excluding the effect of any nonrecurring items that may occur. The actual tax rate will vary depending on the level and mix of income earned in the various jurisdictions as well as the finalization of our accounting for the Tax Act.
Please see Item 1. “Financial Statements,” Note 9,
Income Taxes
for further information.
Net Income
F
or the thirteen
and twenty-six
weeks ended August 4, 2018
, n
et income increased by $37 million, or 72.5 percent
and
by $22 million, or 9.5 percent
,
respectively, as compared with the corresponding prior-year periods.
D
iluted earnings per
share increased by 92.3 percent
to $0.75 per share,
and increased by 23.0 percent to $2.14 per share for the thirteen and twenty-six weeks ended August 4, 2018, respectively. The increase in diluted earnings per share for both the quarter and year-to-date periods reflected an increase in net income coupled with a reduction of in the number of shares outstanding as a result of the Company’s share repurchase program.
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; 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 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 August 4, 2018, approximately $554 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 thirteen and twenty-six weeks ended August 4, 2018, we recorded a pre-tax charge of $3 million
($2
million after-tax or $0.02 per diluted share
)
and $15 million
(
$
11
million after-tax or $0.0
9
per diluted share), respectively,
in connection with the pension
litigation
.
During the second quarter of 2018, the Company reform
ed
its U.S. qualified
pension plan, which required the
remeasurement of the pension liabilities and payment to plaintiffs’ counsel of $97 million representing class counsel fees awarded in the judgment.
The Company
contributed $30
million to
its U.S. qualified
pension
plan in May 2018 and
intends
make
another
contribution
in the amount of
$
98
million
in September
2018 to fund a portion of this liability.
Future
contributions to the pension plan are dependent on several factors, including the performance of the plan’s assets and interest rates.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
August 4, 2018
|
|
July 29, 2017
|
|
($ in millions)
|
Net cash provided by operating activities
|
$
|
427
|
|
$
|
251
|
$ Change
|
$
|
176
|
|
|
|
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
net income adjusted for
working capital changes and a decrease of $26 million in cash paid for income taxes during the twenty-six weeks ended August 4, 2018.
This was partially offset by an increase
in pension contributions.
During the twenty-six weeks ended August 4, 2018, we
contributed $30 million
to our
U.S. qualified pension plan
as compared with
$25 million
in the corresponding prior-year period. In connection with the pension litigation and the associated court order, the Company paid class counsel $97 million during the second quarter of 2018.
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
August 4, 2018
|
|
July 29, 2017
|
|
($ in millions)
|
Net cash used in investing activities
|
$
|
113
|
|
$
|
150
|
$ Change
|
$
|
(37)
|
|
|
|
Capital expenditures declined by $3
5
million compared with the corresponding prior-year period. This represented a decline in spending on store projects partially offset by an increase related to technology projects. The Company’s full-year capital spending is expected to be approximately $229 million, which includes $
130 million related to the remodeling or relocation of approximately 115 existing stores and the opening of approximately
50
new stores, as well as $99 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. Additionally,
investing activities for the twenty-six weeks ended August 4, 2018 includes the receipt of insurance proceeds of $
2 million for fixed assets from an insurance claim relating to Hurricane Maria.
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended
|
|
August 4, 2018
|
|
July 29, 2017
|
|
($ in millions)
|
Net cash used in financing activities
|
$
|
281
|
|
$
|
135
|
$ Change
|
$
|
146
|
|
|
|
During the twenty-six weeks ended August 4, 2018, we repurchased 4,452,405 shares of our common stock for $205 million
, as compared with 896,100 shares repurchased for $59 million in the corresponding prior-year period.
The Company also declared and paid dividends of $81 million and $82 million during the first two quarters of 2018 and 2017, respectively. This represented
quarterly rates of $0.345 and $0.31 per share for 2018 and 2017,
respectively
.
Also, during the twenty-six weeks ended August 4, 2018 and July 29, 2017,
we
paid $1 million and $9 million, respectively, to satisfy tax withholding obligations relating to the vesting of share-based equity awards.
Offsetting the amounts above were
proceeds
received
from
the issuance of
common stock
and treasury stock
in connection with employee stock
programs of
$4 million
and $10 million
for the twenty-six weeks ended August 4, 2018
and July 29, 2017, respectively.
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 February 3, 2018.
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.
Contractual Obligations and Commitments
The Company’s contractual cash obligations and commercial commitments at August 4, 2018 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed significantly since February 3, 2018 other than amounts related to tax reform. The Company
had previously disclosed its
plans to elect to pay the tax related to the mandatory deemed repatriation (“toll charge”) in annual installments over an eight year period.
However, d
uring the first quarter of 2018, the IRS issued a Q&A which indicated that a taxpayer may not receive a refund, or credit any portion of properly applied 2017 tax payments, unless the amount of payments exceeds the entire unpaid toll charge. Due to the Company’s prepayments with the IRS, the entire amount of the toll charge has been satisfied. Approximately $10 million related to tax reform remains payable
;
however
,
the timing of
this
payment is not determinable at this time.