Foot Locker 2009 Annual Report Download - page 35

Athletic Stores reported a loss of $59 million in 2008 as compared with a loss of $27 million in 2007, which
was primarily attributable to the U.S. operations. Included in the results for 2008 and 2007 are impairment
charges and store closing costs totaling $241 million and $128 million, respectively. Athletic Stores division loss
for 2008 includes a $167 million goodwill impairment charge, a $67 million write-down of long-lived assets such
as store fixtures and leasehold improvements for 868 stores at the Company’s U.S. store operations, $5 million of
exit costs related to the closure of underperforming stores comprising primarily lease terminations and $2 million
in other intangible impairment charges related to its tradenames. The Company performs its annual impairment
test as of the beginning of each year; however, due to the macroeconomic conditions affecting retail and the
significant decline in the Company’s common stock and market capitalization, plus a reasonable control premium,
in relation to the book value, the Company determined that a triggering event had occurred and, therefore,
performed an interim impairment test.
During 2008, the fair value of the four reporting units containing goodwill was determined under step 1 of
the goodwill impairment test based on a weighting of a discounted cash flow analysis using forward-looking
projections of estimated future operating results and a guideline company methodology under the market
approach. Based on this testing, the Company determined that the fair values, as determined under step 1 as
described above, was less than the carrying values of the Foot Locker, Kids Foot Locker and Footaction reporting
unit and the Champs Sports reporting unit. Accordingly, the Company performed a step 2 analysis to determine
the extent of the goodwill impairment and concluded that the goodwill of these two reporting units was fully
impaired, resulting in a non-cash impairment charge of $167 million. There were no goodwill impairment charges
in 2007. Excluding the impairment charges and store exit costs from both 2008 and 2007, division profit would
have increased to $182 million in 2008 from $101 million in 2007. This increase in division profit primarily
related to the domestic divisions as a result of lower promotional markdowns and reduced depreciation and
amortization expense.
Direct-to-Customers
2009 2008 2007
(in millions)
Sales ....................................... $406 $ 390 $ 364
Division profit ................................. $ 32 $ 43 $ 40
Division profit margin ............................ 7.9% 11.0% 11.0%
2009 compared with 2008
Direct-to-Customers sales increased 4.1 percent to $406 million in 2009, as compared with $390 million in
2008, reflecting a comparable-store sales decrease of 6.8 percent, offset by additional sales from CCS, which was
acquired during the fourth quarter of 2008. Internet sales increased by 6.8 percent to $344 million, as compared
with 2008 reflecting continued growth in the store brands’ websites. Catalog sales decreased by 8.8 percent to
$62 million in 2009 from $68 million in 2008. Management believes that the decrease in catalog sales, which was
substantially offset by the increase in Internet sales, is a result of customers browsing and selecting products
through its catalogs and then making their purchases via the Internet.
The Direct-to-Customers business generated division profit of $32 million in 2009, as compared with
$43 million in 2008. Division profit, as a percentage of sales, was 7.9 percent in 2009 and 11.0 percent in 2008.
Included in division profit is a $4 million impairment charge, which was recorded to write off certain software
development costs as a result of management’s decision to terminate the project. Gross margin was negatively
affected by the lack of close-out inventory purchases during the year. Additionally, division profit, as compared
with the corresponding prior-year period, was negatively affected by $3 million in additional amortization
expense related to the CCS customer list intangible asset.
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