Foot Locker 2011 Annual Report Download - page 48

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(5) Represents open purchase orders, as well as other commitments for merchandise purchases, at January 28, 2012. The Company
is obligated under the terms of purchase orders; however, the Company is generally able to renegotiate the timing and quantity
of these orders with certain vendors in response to shifts in consumer preferences.
(6) Represents payments required by non-merchandise purchase agreements.
The Company does not have any off-balance sheet financing, other than operating leases entered into in
the normal course of business as disclosed above, or unconsolidated special purpose entities. The
Company does not participate in transactions that generate relationships with unconsolidated entities or
financial partnerships, including variable interest entities. The Company’s policy prohibits the use of
derivatives for which there is no underlying exposure.
In connection with the sale of various businesses and assets, the Company may be obligated for certain
lease commitments transferred to third parties and pursuant to certain normal representations,
warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although
the maximum potential amounts for such obligations cannot be readily determined, management believes
that the resolution of such contingencies will not significantly affect the Company’s consolidated financial
position, liquidity, or results of operations. The Company is also operating certain stores for which lease
agreements are in the process of being negotiated with landlords. Although there is no contractual
commitment to make these payments, it is likely that leases will be executed.
Critical Accounting Policies
Management’s responsibility for integrity and objectivity in the preparation and presentation of the
Company’s financial statements requires diligent application of appropriate accounting policies.
Generally, the Company’s accounting policies and methods are those specifically required by U.S.
generally accepted accounting principles. Included in the Summary of Significant Accounting Policies note
in ‘‘Item 8. Consolidated Financial Statements and Supplementary Data’’ is a summary of the Company’s
most significant accounting policies. In some cases, management is required to calculate amounts based on
estimates for matters that are inherently uncertain. The Company believes the following to be the most
critical of those accounting policies that necessitate subjective judgments.
Merchandise Inventories
Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using
the retail inventory method (‘‘RIM’’). The RIM is commonly used by retail companies to value inventories
at cost and calculate gross margins due to its practicality. Under the retail method, cost is determined by
applying a cost-to-retail percentage across groupings of similar items, known as departments. The
cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine
the cost of ending inventory on a department basis. The RIM is a system of averages that requires
management’s estimates and assumptions regarding markups, markdowns and shrink, among others, and
as such, could result in distortions of inventory amounts.
Significant judgment is required for these estimates and assumptions, as well as to differentiate between
promotional and other markdowns that may be required to correctly reflect merchandise inventories at
the lower of cost or market. The Company provides reserves based on current selling prices when the
inventory has not been marked down to market. The failure to take permanent markdowns on a timely
basis may result in an overstatement of cost under the retail inventory method. The decision to take
permanent markdowns includes many factors, including the current environment, inventory levels, and
the age of the item. Management believes this method and its related assumptions, which have been
consistently applied, to be reasonable.
Vendor Reimbursements
In the normal course of business, the Company receives allowances from its vendors for markdowns taken.
Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are
taken. Vendor allowances contributed 30 basis points to the 2011 gross margin rate. The Company also
has volume-related agreements with certain vendors, under which it receives rebates based on fixed
percentages of cost purchases. These volume-related rebates are recorded in cost of sales when the
product is sold and were not significant to the 2011 gross margin rate.
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