Foot Locker 2008 Annual Report Download - page 40

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The expected dividend yield is derived from the Company’s historical experience. A 50 basis point change to the
dividend yield would change the fair value by approximately 5 percent. The Company records stock-based compensation
expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting
forfeiture data, which it believes are representative of future behavior, and periodically will revise those estimates in
subsequent periods if actual forfeitures differ from those estimates.
The Black-Scholes option valuation model requires the use of subjective assumptions. Changes in these
assumptions can materially affect the fair value of the options. The Company may elect to use different assumptions
under the Black-Scholes option pricing model in the future if there is a difference between the assumptions used in
determining stock-based compensation cost and the actual factors that become known over time.
Pension and Postretirement Liabilities
The Company determines its obligations for pension and postretirement liabilities based upon assumptions
related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, and
mortality among others. Management reviews all assumptions annually with its independent actuaries, taking into
consideration existing and future economic conditions and the Company’s intentions with regard to the plans.
Management believes that its estimates for 2008, as disclosed in the “Retirement Plans and Other Benefits” note in
“Item 8. Consolidated Financial Statements and Supplementary Data,” to be reasonable.
Long-Term Rate of Return Assumption - The expected long-term rate of return on invested pension plan assets
is a component of pension expense. The rate is based on the plans’ weighted-average target asset allocation, as well
as historical and future expected performance of those assets. The target asset allocation is selected to obtain an
investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the
Company. The Company’s common stock represented approximately one percent of the total pension plans’ assets at
January 31, 2009.
The weighted-average long-term rate of return used to determine 2008 pension expense was 8.17 percent. A
decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 2008
pension expense by approximately $3 million. The actual return on plan assets in a given year typically differs from
the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into the plans’ expense
over time.
Discount Rate - An assumed discount rate is used to measure the present value of future cash flow obligations of
the plans and the interest cost component of pension expense and postretirement income. The discount rate selected
to measure the present value of the Company’s U.S. benefit obligations as of January 31, 2009 was derived using a
cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the
corresponding yield on the Citibank Pension Discount Curve. The cash flows are then discounted to their present value
and an overall discount rate is determined. The discount rate selected to measure the present value of the Company’s
Canadian benefit obligations as of January 31, 2009 was developed by using the plan’s bond portfolio indices, which
match the benefit obligations.
The weighted-average discount rates used to determine the 2008 benefit obligations related to the Company’s
pension and postretirement plans were 6.22 percent and 6.20 percent, respectively. A decrease of 50 basis points in the
weighted-average discount rate would have increased the accumulated benefit obligation as of January 31, 2009 of the
pension plans by approximately $24 million and the effect on the postretirement plan would not be significant. Such a
decrease would not have significantly changed 2008 pension expense or postretirement income.
There is limited risk to the Company for increases in health care costs related to the postretirement plan as,
beginning in 2001, new retirees have assumed the full expected costs and then-existing retirees have assumed all
increases in such costs.
The Company expects to record postretirement income of approximately $6 million and pension expense of
approximately $18 million in 2009.