Foot Locker 2003 Annual Report Download

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FOOT LOCKER, INC.
2003 Annual Report
Successful Growth...Worldwide
2003
2002
2001
$4,779,000,000
$4,509,000,000
$4,379,000,000

Table of contents

  • Page 1
    FOOT LOCKER, INC. Successful Growth...Worldwide 2003 Annual Report $4,779,000,000 2003 $4,509,000,000 2002 $4,379,000,000 2001

  • Page 2
    ...Locker, Kids Foot Locker and Champs Sports. Additionally, the Company's Footlocker.com/Eastbay business operates a rapidly growing direct-to-customers business offering athletic footwear, apparel and equipment through its Internet and catalog channels. Athletic Stores Sales Per Average Gross Square...

  • Page 3
    ..., our stores in the United States faced several unfavorable trends that put pressure on comparablestore sales. These trends included a fashion-shift to lower-priced classic footwear, declining customer traffic in shopping malls, weak consumer confi- dence and a highly promotional retail environment...

  • Page 4
    Gross Square Footage Store Summary February 1, 2003 Foot Locker Lady Foot Locker Kids Foot Locker Foot Locker International Champs Sports Total 1,477 606 377 583 582 3,625 Opened 30 2 - 64 17 113 Closed 59 24 20 7 18 128 January 31, 2004 1,448 584 357 640 581 3,610 Remodeled/ Relocated 75 105 19 10 ...

  • Page 5
    ... for his valued service during the past three years as Foot Locker, Inc.'s non-executive Chairman. Mr. Bacot has been an important advisor to management, particularly in matters of corporate governance and finance. We appreciate his continuing commitment to our Company as a member of our Board and...

  • Page 6
    ... positioning. This diversification is unique in the athletic footwear and apparel retail industry and provides many distinct advantages. Foot Locker, Inc. has established a strong presence in several global markets within the United States, Canada, Europe and Australia. 5 Guam Stores 70 Puerto Rico...

  • Page 7
    ... 84 stores in Australia. Foot Locker celebrates its 30th anniversary in 2004 as the world's largest athletic specialty retailer with 2,088 stores that average 3,700 gross square feet, in 16 countries. Developing this global footprint profitably in various international markets provides the Company...

  • Page 8
    ... retailers in North America. Its 581 stores in the United States and Canada, which average approximately 5,600 gross square feet, are designed to provide a sales environment that is attractive to its target customer: the 12 to 25 year old who resides in a suburban community. Champs Sports offers...

  • Page 9
    ...to its target customer: the 14 to 35 year old woman. The initial Kids Foot Locker store was opened in 1987 specifically targeted to appeal to mothers of 5 to 11 year old children. Today, Kids Foot Locker operates 357 stores across the United States that average 2,400 gross square feet, offering the...

  • Page 10
    ... with Amazon.com and the NBA, whereby the Company currently provides fulfillment and customer service for the NBA Store and WNBA Store on NBA.com and WNBA.com. A new 5-year extension with the National Football League was signed, whereby Foot Locker designs, merchandises and fulfills NFL's official...

  • Page 11
    ...Street, New York, New York (Address of principal executive offices) 10120 (Zip Code) Registrant's telephone number, including area code: (212) 720-3700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value...

  • Page 12
    ... Schedules and Reports on Form 8-K ...58 Directors and Executive Officers of the Company...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...Principal Accountant Fees and Services ...57 57 57 58 58 Market...

  • Page 13
    ... Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request to the Company's Corporate Secretary at 112 West 34th Street, New York, NY...

  • Page 14
    ... Chief Executive Officer, Foot Locker, Inc. - U.S.A. Senior Vice President, General Counsel and Secretary Senior Vice President - Real Estate Senior Vice President - Chief Information Officer Senior Vice President - Strategic Planning Senior Vice President - Human Resources Vice President - Investor...

  • Page 15
    ... Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker and Champs Sports. The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells, through its affiliates, including Eastbay...

  • Page 16
    ...number of sporting activities. Its 581 stores are located throughout the United States and Canada. The Champs Sports stores have an average of 3,900 selling square feet. Store Profile At February 1, 2003 Opened Closed At January 31, 2004 Foot Locker ...Lady Foot Locker ...Kids Foot Locker ...Champs...

  • Page 17
    ... to customers through catalogs and its Internet websites. Eastbay, Inc., one of its affiliates, is one of the largest direct marketers of athletic footwear, apparel, equipment and licensed private-label merchandise in the United States and provides the Company's seven full-service e-commerce sites...

  • Page 18
    ... related to the euro, sales from athletic store formats increased 1.9 percent in 2003, driven by the Company's new store opening program, particularly in Foot Locker Europe and Foot Locker Australia. Foot Locker Europe and Foot Locker Australia also continued to generate solid comparable-store sales...

  • Page 19
    ... during the fourth quarter of 2003, nearly reaching double-digit comparable-store sales. Lady Foot Locker sales remained essentially unchanged in 2003 versus the prior year as this business continued to modify its merchandising mix to better suit its target customers. The Company closed a number of...

  • Page 20
    ... into new alliance agreements with the NBA and the USOC and expanded its services through on-line specialty stores with Amazon.com. These agreements generally provide for the Company to merchandise, fulfill and manage the websites of these strategic partners. Direct-to-Customers sales increased...

  • Page 21
    ... and Popeye's franchises for cash proceeds of approximately $5 million. Corporate Expense Corporate expense consists of unallocated general and administrative expenses related to the Company's corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain...

  • Page 22
    ... to new store openings, $11 million related to the impact of foreign currency fluctuations, primarily related to the euro, and $10 million related to increased pension costs. The increase in pension costs resulted from the decline in the retirement plans' asset values experienced in prior years and...

  • Page 23
    ... The effective rate for 2002 was 34.2 percent. The Company recorded a tax benefit during 2002 of $5 million related to a multi-state tax planning strategy, a $1 million tax benefit related to settlement of tax examinations, a $2 million benefit related to the reduction in the valuation allowance for...

  • Page 24
    ... fund other general working capital requirements. Management believes operating cash flows and current credit facilities will be adequate to finance its working capital requirements, to make scheduled pension contributions for the Company's retirement plans, to fund quarterly dividend payments, and...

  • Page 25
    ...of $144 million in 2003 and $150 million in 2002 primarily related to store remodelings and new stores. Lease acquisition costs, primarily related to the process of securing and extending prime lease locations for real estate in Europe, were $15 million and $18 million in 2003 and 2002, respectively...

  • Page 26
    ...conversion price of $15.806 per share. The net proceeds of the offering are being used for working capital and general corporate purposes and to reduce reliance on bank financing. Credit Rating The Company's credit rating from Standard & Poor's is BB+. On February 26, 2004, Moody's Investors Service...

  • Page 27
    ... stock price at that time exceeds the conversion price of $15.806; however, holders may elect to receive cash at the then applicable conversion premium. The Company's other liabilities in the Consolidated Balance Sheet as of January 31, 2004 primarily include pension and postretirement benefits...

  • Page 28
    .... The calculation of fair value of long-lived assets is based on estimated expected discounted future cash flows by store, which is generally measured by discounting the expected future cash flows at the Company's weighted-average cost of capital. Management believes its policy is reasonable and is...

  • Page 29
    ... and postretirement liabilities based upon assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, mortality and health care cost trends, among others. Management reviews all assumptions annually with its independent actuaries, taking...

  • Page 30
    ...The Company is required to review the collectibility of the note based upon various criteria such as the credit-worthiness of the issuer or a delay in payment of the principal or interest. Future adjustments, if any, to the carrying value of the note will be recorded pursuant to SEC Staff Accounting...

  • Page 31
    ..., customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company's merchandise mix and retail locations, the Company's reliance on a few key vendors for a majority of its merchandise purchases...

  • Page 32
    ... statements. The Audit Committee of the Board of Directors, which is comprised solely of independent non-management directors who are not officers or employees of the Company, meets regularly with the Company's management, internal auditors, legal counsel and KPMG LLP to review the activities of...

  • Page 33
    ...cash flows for each of the years in the three-year period ended January 31, 2004. These consolidated financial statements are the responsibility of Foot Locker, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted...

  • Page 34
    ... 2002 (in millions, except per share amounts) 2001 Sales ...Costs and expenses Cost of sales ...Selling, general and administrative expenses ... benefit of $4, $2, and $-, respectively ...Cumulative effect of accounting change, net of income tax benefit of $- ...Net income ...Basic earnings per share:...

  • Page 35
    ... arising during the period ...Cash flow hedges: Cumulative effect of accounting change, net of income tax expense of $1 ...Change in fair value of derivatives, net of income tax ...Reclassification adjustments, net of income tax benefit of $1 ...Net change in cash flow hedges ...Minimum pension...

  • Page 36
    ...assets Cash and cash equivalents ...Merchandise inventories ...Assets of discontinued operations ...Other current assets ...Property and equipment, net ...Deferred taxes ...Goodwill ...Intangible assets, net ...Other assets ...LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable...

  • Page 37
    ... Par value $0.01 per share, 500 million shares authorized Issued at beginning of year ...Restricted stock issued under stock option and award plans ...Forfeitures of restricted stock ...Amortization of stock issued under restricted stock option plans ...Issued under director and employee stock plans...

  • Page 38
    ... charges (income) ...Cumulative effect of accounting change, net of tax ...Depreciation and amortization ...Impairment of long-lived assets ...Restricted stock compensation expense ...Tax benefit on stock compensation ...Gains on sales of real estate and assets ...Deferred income taxes ...Change...

  • Page 39
    ... years. Revenue Recognition Revenue from retail store sales is recognized when the product is delivered to customers. Retail sales include merchandise, net of returns and exclude all taxes. The Company recognizes revenue, including layaway sales, in accordance with SEC Staff Accounting Bulletin...

  • Page 40
    ... Stock Purchase Plan. The plan, which is compensatory as defined in SFAS No. 123, is noncompensatory as defined in APB No. 25. SFAS No. 123 requires disclosure of the impact on earnings per share if the fair value method of accounting for stock-based compensation is applied for companies electing...

  • Page 41
    ... may at any time include structural alterations to store locations and equipment removal costs from distribution centers required by certain leases. On February 2, 2003, the Company recorded a liability of $2 million for the expected present value of future retirement obligations, increased property...

  • Page 42
    ... annually. The Company performs its annual impairment review as of the beginning of each fiscal year. The fair value of each reporting unit, which was determined using a combination of market and discounted cash flow approach, exceeded the carrying value of each respective reporting unit. Previously...

  • Page 43
    ... translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted-average rates of exchange prevailing during the year. The unearned gains...

  • Page 44
    ... value pursuant to the then pending transaction, which was partially offset by reduced severance costs as a result of the transaction and favorable results from the liquidation of the U.S. stores and real estate disposition activity. On September 28, 2001, the Company completed the stock transfer...

  • Page 45
    ...primarily related to the $7 million payment for the buyout of the former leased corporate office. Net disposition activity of $13 million in 2002 included the $18 million reduction in the carrying value of the net assets and liabilities, recognition of the note receivable of $10 million, real estate...

  • Page 46
    ...-tax, or $1 million after-tax, for each of the second and third quarters of 2002 in the Specialty Footwear reserve primarily reflecting real estate costs more favorable than original estimates. In 1997, the Company announced that it was exiting its Domestic General Merchandise segment. In the second...

  • Page 47
    ...assets and liabilities for the Northern Group segment, the International General Merchandise segment, the Specialty Footwear segment and ...discontinued operations primarily comprised the Northern Group stores in the U.S. Liabilities included accounts payable, restructuring reserves and other accrued ...

  • Page 48
    ... restructuring plan also included an accelerated store-closing program in North America and Asia, corporate headcount reduction and a distribution center shutdown. The dispositions of Randy River Canada, Foot Locker Outlets, Colorado, Going to the Game!, Weekend Edition and the store-closing program...

  • Page 49
    ...in millions) Real estate ...Asset impairment ...Severance & personnel ...Other disposition costs ...Total ... $ 4 - 2 3 $ 9 $- 30 - 3 $33 $ (3) (30) (2) (3) $(38) $ 1 - - 3 $ 4 $- - - (2) $ (2) $- - - (1) $ (1) $ 1 - - - $ 1 $ 1 - - - $ 1 $ (1) - - - $ (1) $ 1 - - - $ 1 Corporate Overhead...

  • Page 50
    ...on its method of internal reporting. As of January 31, 2004, the Company has two reportable segments, Athletic Stores, which sells athletic footwear and apparel through its various retail stores, and Direct-to-Customers, which includes the Company's catalogs and Internet business. The disposition of...

  • Page 51
    ... $1,715 183 1,898 789 - 2 2001 $1,474 179 1,653 612 30 5 $2,300 Athletic Stores ...Direct-to-Customers(1) ...Corporate ...Assets of business transferred under contractual arrangement ...Discontinued operations, net ...Total Company ...(1) $118 4 122 25 $119 4 123 26 $115 11 126 28 $147 $149...

  • Page 52
    ...$835 The value of the Company's LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated...value of goodwill related to the Athletic Stores segment was $56 million at January 31, 2004 and February 2, 2003. The carrying value of goodwill related to the Direct-to-Customers...

  • Page 53
    ... required to secure prime lease locations and other lease rights, primarily in Europe. The weighted-average amortization period as of January 31, 2004 was 12.4 years. Amortization expense for lease acquisition costs was $11 million in 2003, $8 million in 2002 and $7 million in 2001. Annual estimated...

  • Page 54
    ...at 5.50 percent and are convertible into the Company's common stock at the option of the holder, at a conversion price of $15.806 per share. The Company may redeem all or a portion of the notes at any time on or after June 4, 2004. During 2002, the Company repaid the remaining $32 million of the $40...

  • Page 55
    ...from 5 to10 years. Certain leases provide for additional rent payments based on a percentage of store sales. Rent expense includes real estate taxes, insurance, maintenance, and other costs as required by some of the Company's leases. The present value of operating leases is discounted using various...

  • Page 56
    ... Pension benefits ...Postretirement benefits ...Income taxes ...Straight-line rent liability ...Other ...Workers' compensation / general liability reserves ...Reserve for discontinued operations ...Asset retirement obligations ...Repositioning and restructuring reserves ...Fair value of derivatives...

  • Page 57
    ... millions) Deferred tax assets: Tax loss/credit carryforwards ...Employee benefits ...Reserve for discontinued operations ...Repositioning and restructuring reserves ...Property and equipment ...Allowance for returns and doubtful accounts ...Straight-line rent ...Other ...Total deferred tax assets...

  • Page 58
    ... have been examined by the Internal Revenue Service (the "IRS") through 1998. The IRS has indicated it will survey the Company's income tax returns for the years from 1999-2001 and has begun an examination for the 2002 year and a voluntary pre-filing review process for 2003. The examination and...

  • Page 59
    ...using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a forward contract's time value is reported in earnings. For forward foreign exchange contracts designated as cash flow hedges of inventory, the effective portion...

  • Page 60
    ... carrying values of cash and cash equivalents, and other current receivables and payables approximate their fair value. Business Risk The retailing business is highly competitive. Price, quality and selection of merchandise, reputation, store location, advertising and customer service are important...

  • Page 61
    ... in plan assets Fair value of plan assets at beginning of year ...Actual return on plan assets ...Employer contribution ...Foreign currency translation adjustments ...Benefits paid ...Fair value of plan assets at end of year ...Funded status Funded status ...Unrecognized prior service cost (benefit...

  • Page 62
    ... defer accounting for the effects of the Act as specific authoritative guidance is pending and that guidance, when issued, could require the Company to change previously reported information. Accordingly, the Company's accumulated postretirement benefit obligation and net periodic benefit cost does...

  • Page 63
    ...this plan, 3,000,000 shares of common stock are available for purchase beginning June 2005. Under the Company's 1998 Stock Option and Award Plan (the "1998 Plan"), options to purchase shares of common stock may be granted to officers and key employees at not less than the market price on the date of...

  • Page 64
    ...schedule. Options granted beginning in 2003 become exercisable one year from the date of grant. Under the Company's 1994 Stock Purchase Plan, participating employees may contribute up to 10 percent of their annual compensation to acquire shares of common stock at 85 percent of the lower market price...

  • Page 65
    ....69 $15.99 Restricted shares of the Company's common stock may be awarded to certain officers and key employees of the Company. There were 845,000, 90,000 and 420,000 restricted shares of common stock granted in 2003, 2002 and 2001, respectively. The market values of the shares at the date of grant...

  • Page 66
    ...that a lease will be executed. 26 Shareholder Information and Market Prices (Unaudited) Foot Locker, Inc. common stock is listed on the New York stock exchange as well as on the boerse-stuttgart stock exchange in Germany and the Elektronische Bo ¨ rse Schweiz (EBS) stock exchange in Switzerland. In...

  • Page 67
    ...05) 1.05(e) Gross margin represents sales less cost of sales. Operating profit ...reported by the Company. As such, the Company has not amended these prior filings. Cumulative effect of accounting change became further diluted during the second quarter, and therefore is not shown in the year-to-date...

  • Page 68
    ... sales ...Net debt capitalization percent (3) ...Net debt capitalization percent (without present value of operating leases) (3) ...Current ratio ...Other Data Capital expenditures ...Number of stores at year end ...Total selling square footage at year end (in millions) ...Total gross square footage...

  • Page 69
    ... by reference. (e) Information about the Code of Business Conduct governing our employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Board of Directors, is set forth under the heading "Code of Business Conduct" under the Corporate Governance section...

  • Page 70
    ... 5 and 7, reporting an amendment to the Rights Agreement between the Company and The Bank of New York. Form 8-K, dated January 14, 2004, under Item 5, reporting that a Form 144 filed with the Securities and Exchange Commission by the Company's President and Chief Executive Officer was filed in error...

  • Page 71
    ... Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOOT LOCKER, INC. Matthew D. Serra Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange...

  • Page 72
    FOOT LOCKER, INC INDEX OF EXHIBITS REQUIRED BY ITEM 15 OF FORM 10-K AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K Exhibit No. in Item 601 of Regulation S-K Description 3(i)(a) Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New ...

  • Page 73
    ...respectively, to the Registrant's Form 8-K dated July 13, 1995). 1986 Foot Locker Stock Option Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant's Annual Report on Form 10-K for the year ended January 28, 1995, filed by the Registrant with the SEC on April 24, 1995 (the "1994...

  • Page 74
    ... with the SEC on December 15, 2003). Foot Locker Executive Severance Pay Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended October 31, 1998 (the "October 31, 1998 Form 10-Q")). Form of Senior Executive Employment Agreement...

  • Page 75
    ...30 Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.24 to the 1999 Form 10-K). Foot Locker, Inc. Directors' Stock Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant's October 28, 1995 Form 10-Q). Foot Locker, Inc. Excess Cash Balance Plan...

  • Page 76
    Exhibit 12 FOOT LOCKER, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited) ($ in millions) Fiscal Year Ended Feb. 2, Feb. 3, 2002 2001 Jan. 31, 2004 Feb. 1, 2003 Jan. 29, 2000 NET EARNINGS Income from continuing operations ...Income tax expense (benefit) ...Interest expense, ...

  • Page 77
    ... Sweden United Kingdom Germany Spain Delaware Delaware United Kingdom Delaware Florida New York New York Delaware Each subsidiary company is 100% owned, directly or indirectly, by Foot Locker, Inc. All subsidiaries are consolidated with Foot Locker, Inc. for accounting and financial reporting...

  • Page 78
    ..., Lda. FL Corporate NY, LLC FL Retail NY, LLC FL Specialty NY, LLC Venator Group Canada Holdings ULC (1) Delaware Delaware Florida New York Canada Delaware Delaware Portugal Delaware Delaware Delaware Canada Each subsidiary company is 100% owned, directly or indirectly, by Foot Locker, Inc. All...

  • Page 79
    ..., process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. April 5, 2004 3. 4. Matthew D. Serra Principal Executive Officer

  • Page 80
    ... Bruce L. Hartman, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Foot Locker, Inc. (the "Registrant"); Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light...

  • Page 81
    ...Act of 2002 In connection with the Annual Report on Form 10-K of Foot Locker, Inc. (the "Registrant") for the period ended January 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Matthew D. Serra as Chief Executive Officer of the Registrant and Bruce...

  • Page 82

  • Page 83
    ... and Chief Executive Officer Footlocker.com/Eastbay Spero Hrisostomou President Foot Locker Asia Pacific CORPORATE INFORMATION Corporate Headquarters 112 West 34th Street New York, New York 10120 (212) 720-3700 Transfer Agent and Registrar The Bank of New York Shareholder Relations Department...

  • Page 84
    FOOT LOCKER, INC. 112 West 34th Street New York, NY 10120