Foot Locker 2007 Annual Report Download - page 31

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15
The Direct-to-Customers business generated division profit of $45 million in 2006, as compared with $48 million
in 2005. Division profit, as a percentage of sales, decreased to 11.8 percent in 2006 from 12.6 percent in 2005. Several
initiatives were implemented to mitigate the loss of revenue from the cancelled third party contract, such as expanding
the ESPN offerings. However, these initiatives did not fully offset the loss in profit which resulted in a decline in
division profit. The effect of the 53rd week on this segment was not significant.
Liquidity and Capital Resources
Liquidity
Generally, the Company’s primary source of cash has been from operations. The Company generally finances
real estate with operating leases. The principal uses of cash have been to finance inventory requirements, capital
expenditures related to store openings, store remodelings, and management information systems and other support
facilities, and to fund general working capital requirements.
Management believes its cash, cash equivalents and future operating cash flow from operations will be adequate
to fund its working capital requirements, capital expenditures, pension contributions for the Company’s retirement
plans, anticipated quarterly dividend payments, scheduled debt repayments, potential share repurchases, and other
cash requirements to support the development of its short-term and long-term operating strategies.
Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the
policies and practices of its key vendors. Therefore, the Company believes that it is critical to continue to maintain
satisfactory relationships with its key vendors. The Company purchased approximately 77 percent in 2007 and 78 percent
in 2006 of its merchandise from its top five vendors and expects to continue to obtain a significant percentage of its
athletic product from these vendors in future periods. Approximately 56 percent in 2007 and 50 percent in 2006 was
purchased from one vendor — Nike, Inc.
Planned capital expenditures for 2008 are approximately $158 million, of which $135 million relates to
modernizations of existing stores and new store openings, and $23 million reflects the development of information
systems and other support facilities. Additionally, the Company intends to spend an additional $2 million on key money
related to Europe. The Company has the ability to revise and reschedule the anticipated capital expenditure program,
should the Company’s financial position require it.
Any materially adverse change in customer demand, fashion trends, competitive market forces or customer
acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive
products and pricing, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases,
and risks associated with foreign global sourcing or economic conditions worldwide could affect the ability of the
Company to continue to fund its needs from business operations.
Cash Flow
Operating activities from continuing operations provided cash of $283 million in 2007 as compared with
$189 million in 2006. These amounts reflect income from continuing operations adjusted for non-cash items and
working capital changes. During 2007, the Company recorded non-cash impairment charges and store closing program
costs of $124 million related to its domestic operations. Merchandise inventories represented a $55 million source
of cash in 2007 as inventory purchases were reduced to keep inventory levels in line with sales. Additionally, the
Company did not contribute to its pension plans in 2007, as no contributions were required, compared with $68 million
contributed in 2006.
Operating activities from continuing operations provided cash of $189 million in 2006 as compared with
$349 million in 2005. These amounts reflect income from continuing operations adjusted for non-cash items and
working capital changes. During 2006, the Company recorded a non-cash impairment charge of $17 million related to
the operations in Europe. The decline in operating cash flows of $160 million is primarily due to a reduction of accounts
payable at year-end reflecting an acceleration of inventory receipts earlier in the fourth quarter of 2006. In addition,
due to the calendar shift related to the 53rd week, approximately $47 million of the decline represents the timing of
lease payments. Additionally, the Company contributed $68 million to its U.S. and Canadian qualified pension plans in
2006, as compared with contributions of $26 million in 2005.