Foot Locker 2008 Annual Report Download - page 26

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10
The Company has an agreement with ESPN for ESPN Shop — an ESPN-branded direct mail catalog and e-commerce
site linked to www.ESPNshop.com, where consumers can purchase athletic footwear, apparel and equipment, which will
be managed by Footlocker.com. Both the catalog and the e-commerce site feature a variety of ESPN-branded and non-
ESPN-branded athletically inspired merchandise.
On November 5, 2008, the Company purchased CCS from dELiA*s, Inc. CCS is a direct marketer of skateboard and
snowboard equipment, apparel, footwear, and accessories primarily targeting teenage boys. CCS operates through
catalogs and its Internet website.
Franchise Operations
In March of 2006, the Company entered into a ten-year area development agreement with the Alshaya Trading
Co. W.L.L., in which the Company agreed to enter into separate license agreements for the operation of Foot Locker
stores, subject to certain restrictions, located within the Middle East. Additionally, in March 2007, the Company
entered into a ten-year agreement with another third party for the exclusive right to open and operate Foot Locker
stores in the Republic of Korea. A total of 17 franchised stores were operational at January 31, 2009. Revenue from
the franchised stores was not significant for the any of the periods presented. These stores are not included in the
Company’s operating store count above.
2007 Results
The 2007 results as presented in this Annual Report have been corrected to reflect an immaterial revision to its
fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The income tax
benefit of $99 million related to continuing operations, as reported for the full year of 2007 within the Form 10-K,
was overstated by $6 million. This overstatement comprises primarily five items. First, the Company understated its
income taxes payable by $9 million due to incorrectly accounting for foreign dividend withholding taxes. Second,
the Company noted that certain foreign currency fluctuations related to the tax assets and liabilities, totaling
$5 million, should have been reflected as part of the foreign currency translation adjustment within accumulated
other comprehensive loss. The Company had incorrectly reflected these foreign exchange movements within the
income tax provision, thereby increasing the income tax provision erroneously. Third, the Company overstated the
value of a portion of its Canadian deferred tax assets by $3 million as a result of using incorrect tax rates. Fourth, the
Company understated a deferred tax liability of $2 million related to goodwill. Finally, various state and international
depreciation corrections totaling $3 million were overstated in the income tax provision.
Overview of Consolidated Results
2008 was a very challenging year for the overall retail industry. The severe recession, which began in the latter
part of 2007 in the United States, worsened and spread to other countries throughout the year. This past year has been
defined by historically low consumer confidence, rising unemployment levels, and declining consumer spending. We had
anticipated that consumer spending would continue to slow during 2008 and we therefore planned our business strategy,
accordingly. In 2007, we initiated a program to close underperforming stores to improve the overall profitability of our
store fleet. Another significant area of focus was inventory management. We began the year with inventory levels in
line with anticipated sales. This improved inventory position allowed us to reduce promotional markdowns and improve
our gross margin rate in 2008.
The Company reported a net loss from continuing operations of $79 million or $0.52 per share for the year ended
January 31, 2009, which compares with $43 million or $0.28 per share for the year ended February 2, 2008. Several
factors affect the comparability of these two years, specifically:
• The overall decline in current business trends, as well as lower projected earnings, resulted in our recognizing
non-cash charges for goodwill and other intangible assets impairments in 2008 totaling $169 million, or
$123 million after-tax.
• In addition to the above impairment charges, during 2008 the following charges were recorded:
• $15 million impairment charge, with no tax benefit, related to the write-off of a note due from the
purchasers of the Northern Group, a previously discontinued business,