Edgar Filing: FOOT LOCKER INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 -Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

Commission file no. 1-10299

FOOT LOCKER, INC.
(Exact name of registrant as specified in its charter)
New York		13-3513936
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
112 W. 34th Street, New York, New York		10120
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (212) 720-3700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Number of shares of Common Stock outstanding at November 27, 2009: 156,514,695

FOOT LOCKER, INC.

TABLE OF CONTENTS

			Page
Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Comprehensive Income (Loss)	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 4.	Controls and Procedures	25
Part II.	Other Information
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 6.	Exhibits	26
		Signature	27
		Index to Exhibits	28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except shares)

	October 31,			November 1,			January 31,
	2009			2008			2009
	(Unaudited)			(Unaudited)			*
ASSETS
Current assets
Cash and cash equivalents	$	425		$	328		$	385
Short-term investments		13			72			23
Merchandise inventories		1,228			1,262			1,120
Other current assets		216			238			236
		1,882			1,900			1,764
Property and equipment, net		400			505			432
Deferred taxes		376			232			358
Goodwill		146			264			144
Other intangibles and other assets		159			128			179
	$	2,963		$	3,029		$	2,877
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	276		$	271		$	187
Accrued expenses and other current liabilities		202			240			231
		478			511			418
Long-term debt		138			128			142
Other liabilities		365			228			393
		981			867			953
Shareholders’ equity
Common stock and paid-in capital: 161,224,691, 159,572,066 and 159,598,233 shares, respectively		706			689			691
Retained earnings		1,536			1,729			1,581
Accumulated other comprehensive loss		(157	)		(154	)		(246	)
Less: Treasury stock at cost: 4,723,330, 4,663,992, and 4,680,533 shares, respectively		(103	)		(102	)		(102	)
Total shareholders’ equity		1,982			2,162			1,924
	$	2,963		$	3,029		$	2,877

See Accompanying Notes to Condensed Consolidated Financial Statements.

* The balance sheet at January 31, 2009 has been derived from the previously reported audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)

	Thirteen weeks ended						Thirty-nine weeks ended
	October 31,			November 1,			October 31,			November 1,
	2009			2008			2009			2008
Sales	$	1,214		$	1,309		$	3,529		$	3,920
Costs and Expenses
Cost of sales		885			954			2,564			2,838
Selling, general and administrative expenses		274			287			804			885
Depreciation and amortization		29			32			85			97
Impairment charge and store closing program costs		36			3			36			23
Interest expense, net		3			1			8			4
Other income, net		—			(5	)		(2	)		(7	)
		1,227			1,272			3,495			3,840

(Loss) income from continuing operations before income taxes		(13	)		37			34			80
Income tax (benefit) expense		(7	)		13			10			35
(Loss) income from continuing operations		(6	)		24			24			45

Income from disposal of discontinued operations, net of tax		—			—			1			—

Net (loss) income	$	(6	)	$	24		$	25		$	45

Basic (loss) earnings per share:
(Loss) income from continuing operations		(0.04	)		0.16			0.16			0.29
Income from disposal of discontinued operations		—			—			—			—
Net (loss) income	$	(0.04	)	$	0.16		$	0.16		$	0.29
Weighted-average common shares outstanding		156.4			154.1			155.9			154.0

Diluted (loss) earnings per share:
(Loss) income from continuing operations		(0.04	)		0.16			0.16			0.29
Income from disposal of discontinued operations		—			—			—			—
Net (loss) income	$	(0.04	)	$	0.16		$	0.16		$	0.29
Weighted-average common shares assuming dilution		156.4			155.6			156.1			155.3

See Accompanying Notes to Condensed Consolidated Financial Statements.

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in millions)

	Thirteen weeks ended						Thirty-nine weeks ended
	October 31,			November 1,			October 31,			November 1,
	2009			2008			2009			2008
Net (loss) income	$	(6	)	$	24		$	25		$	45
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments arising during the period		28			(106	)		90			(89	)
Pension and postretirement plan adjustments		1			—			3			—
Change in fair value of derivatives		1			—			(1	)		(1	)
Unrealized gain (loss) on available-for-sale security		—			—			2			(2	)
Comprehensive income (loss)	$	24		$	(82	)	$	119		$	(47	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

FOOT LOCKER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)

	Thirty-nine weeks ended
	October 31,			November 1,
	2009			2008
From Operating Activities:
Net income	$	25		$	45
Adjustments to reconcile net income to net cash provided by operating activities:
Income from disposal of discontinued operations, net of tax		(1	)		—
Non-cash impairment charges		36			18
Depreciation and amortization		85			97
Share-based compensation expense		9			6
Change in assets and liabilities:
Merchandise inventories		(69	)		(28	)
Accounts payable		82			47
Other accruals		(41	)		(4	)
Qualified pension plan contributions		(40	)		(6	)
Gain on termination of interest rate swaps		19			—
Other, net		35			35
Net cash provided by operating activities of continuing operations		140			210

From Investing Activities:
Gain from lease termination		—			3
Gain from insurance recoveries		1			—
Short-term investment redemptions		10			—
Reclassification of cash equivalents to short-term investments		—			(75	)
Capital expenditures		(70	)		(116	)
Net cash used in investing activities of continuing operations		(59	)		(188	)

From Financing Activities:
Reduction in long-term debt		(3	)		(94	)
Issuance of common stock, net		2			2
Dividends paid		(70	)		(70	)
Net cash used in financing activities of continuing operations		(71	)		(162	)

Net cash used in operating activities of Discontinued Operations		(1	)		—
Effect of exchange rate fluctuations on Cash and Cash Equivalents		31			(20	)
Net change in Cash and Cash Equivalents		40			(160	)
Cash and Cash Equivalents at beginning of year		385			488
Cash and Cash Equivalents at end of interim period	$	425		$	328

Cash paid during the period:
Interest	$	6		$	10
Income taxes	$	13		$	51

See Accompanying Notes to Condensed Consolidated Financial Statements.

FOOT LOCKER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 30, 2010 and of the fiscal year ended January 31, 2009. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended January 31, 2009, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2009. Subsequent events have been evaluated through December 9, 2009, the date of issuance of the Company’s Condensed Consolidated Financial Statements. The Company has not evaluated subsequent events after such date.

As disclosed in the Company’s 2008 Annual Report on Form 10-K, the Condensed Consolidated Balance Sheet for the quarter ended November 1, 2008 has been corrected to reflect an immaterial revision related to income taxes. This correction did not affect the Condensed Consolidated Statement of Operations for the period ended November 1, 2008.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) amended the authoritative guidance for fair value measurements to provide additional guidance on (i) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, and (ii) circumstances that may indicate that a transaction is not orderly. This guidance, which is effective for interim and annual reporting periods ending after June 15, 2009, also requires additional disclosures about fair value measurements in interim and annual reporting periods. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance, which amends prior guidance and requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements, and requires those disclosures in summarized financial information at interim reporting periods. The guidance is effective for interim reporting periods ending after June 15, 2009. The disclosures required as a result of the adoption of this guidance are included herein.

In April 2009, the FASB issued authoritative guidance, which amends its other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the guidance during the second quarter of 2009. See Note 1, Basis of Presentation, for the disclosure required under the guidance.

In June 2009, the FASB issued authoritative guidance, which changes various aspects of accounting for and disclosures of interests in variable interest entities. This guidance will be effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In July of 2009, the Company adopted the FASB Accounting Standards Codification (“ASC” and collectively, the “Codification”), which establishes the Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). The historical GAAP hierarchy was eliminated and the Codification became the only level of authoritative GAAP, other than guidance issued by the SEC. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standard Updates (“ASUs”). ASUs will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on change(s) in the Codification. The Codification is effective for all financial statements issued for interim and annual periods ending after September 15, 2009. Accordingly, the Company has reflected all necessary changes in this filing.

In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, which provides clarification regarding acceptable valuation techniques for determining the fair value measurement of liabilities in circumstances in which a quoted price in an active market for the identical liability is not available. ASU 2009-05 is effective for interim and annual reporting periods ending after its issuance. The adoption of ASU 2009-05 did not have a material effect on the Company’s consolidated financial statements.

2. Impairment Charges and Store Closing Program Costs

The Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator, or a triggering event, exists comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s three-year strategic plans, in determining the impairment amount. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. During the third quarter of 2009, the Company recorded non-cash impairment charges totaling $36 million. A charge of $32 million was recorded to write-down long-lived assets such as store fixtures and leasehold improvements at its Lady Foot Locker, Kids Foot Locker, Footaction and Champs Sports divisions for 787 stores. Additionally, the Company recorded a charge of $4 million to write off certain software development costs for the Direct-to-Customers segment as a result of management’s decision to terminate this project.

Included in the thirteen weeks ended November 1, 2008 is a $3 million impairment charge to reflect a decline in fair value that is other-than-temporary related to the Company’s investment in the Reserve International Liquidity Fund. Additionally, included in the thirty-nine weeks ended November 1, 2008 is a non-cash impairment charge of $15 million related to the Northern Group note that was determined not to be collectible as well as $5 million in store closing costs, primarily representing lease termination costs.

3. Goodwill and Other Intangible Assets

The Company reviews goodwill and intangible assets with indefinite lives for impairment annually during the first quarter of its fiscal year or more frequently if impairment indicators arise. The Company’s annual review of goodwill and assets with indefinite lives during the first quarters of 2009 and 2008, did not result in any impairment charges. The following table provides a summary of the Company’s goodwill by reportable segment:

	October 31,		November 1,		January 31,
Goodwill (in millions)	2009		2008		2009
Athletic Stores	$	19	$	184	$	17
Direct-to-Customers		127		80		127
	$	146	$	264	$	144

The change in goodwill from the amount reported at November 1, 2008 primarily reflects the acquisition of CCS during the fourth quarter of 2008, which increased goodwill by $47 million, and the fourth quarter 2008 impairment charge of $167 million related to the Athletic Stores.

The components of the Company’s finite-lived intangible assets and intangible assets not subject to amortization are as follows:

	October 31, 2009							November 1, 2008							January 31, 2009
	Gross		Accum.			Net		Gross		Accum.			Net		Gross		Accum.			Net
(in millions)	Value		amort.			value		value		amort.			value		value		amort.			value
Finite life intangible assets:
Lease acquisition costs	$	193	$	(147	)	$	46	$	171	$	(119	)	$	52	$	173	$	(124	)	$	49

Trademark		20		(6	)		14		21		(5	)		16		20		(5	)		15

Loyalty program		1		(1	)		—		1		(1	)		—		1		(1	)		—

Favorable leases		10		(8	)		2		9		(7	)		2		9		(7	)		2

CCS customer relationships		21		(4	)		17		—		—			—		21		(1	)		20

Total finite life intangible assets		245		(166	)		79		202		(132	)		70		224		(138	)		86

Intangible assets not subject to amortization:
Republic of Ireland trademark		2		—			2		3		—			3		2		—			2
CCS trade-name		25		—			25		—		—			—		25		—			25

Total indefinite life intangible assets		27		—			27		3		—			3		27		—			27

Total other intangible assets	$	272	$	(166	)	$	106	$	205	$	(132	)	$	73	$	251	$	(138	)	$	113

The weighted-average amortization period as of October 31, 2009 was approximately 11.9 years. Amortization expense was $5 million and $3 million for the thirteen week periods ended October 31, 2009 and November 1, 2008, respectively. Amortization expense was $15 million and $13 million for the thirty-nine week periods ended October 31, 2009 and November 1, 2008, respectively. Additionally, the net intangible activity for the thirty-nine week period ended October 31, 2009 reflects the effect of the strengthening of the euro as compared with the U.S. dollar of $6 million and $2 million of lease acquisition costs. Estimated amortization expense for finite life intangible assets is expected to approximate $5 million for the remainder of 2009, $19 million for 2010, $16 million for 2011, $14 million for 2012 and $9 million for 2013.

4. Revolving Credit Facility

On March 20, 2009, the Company entered into a new credit agreement (the “2009 Credit Agreement”) with its banks, providing for a $200 million asset-based revolving credit facility maturing on March 20, 2013, which replaced the Company’s prior credit agreement. The 2009 Credit Agreement also provides for an incremental facility of up to $100 million under certain circumstances. The 2009 Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. If the Company is borrowing, then it may not make Restricted Payments, such as dividends or share repurchases, unless there is at least $50 million of Excess Availability (as defined in the Credit Agreement), and the Company’s projected fixed charge coverage ratio (Consolidated EBITDA less capital expenditures less cash taxes divided by Debt Service Charges and Restricted Payments) is at least 1.1 to 1.0. The Company’s management does not currently expect to borrow under the facility for the balance of 2009 or in 2010.

5. Financial Instruments

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third party and intercompany forecasted transactions. As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of entering into contracts only with major financial institutions selected based upon their credit ratings and other financial factors. The Company monitors the creditworthiness of counterparties throughout the duration of the derivative instrument. Additional information is contained within Note 11, Fair Value Measurements.

Derivatives designated as hedging instruments

Cash Flow Hedges

The primary currencies to which the Company is exposed are the euro, the British pound, the Canadian dollar, and the Australian dollar. For option and forward foreign exchange contracts designated as cash flow hedges of the purchase of inventory, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. Generally, the Company does not hedge forecasted transactions for more than the next twelve months, and the Company expects all derivative-related amounts reported in accumulated other comprehensive loss to be reclassified to earnings within twelve months.

The amount reclassified to cost of sales related to such contracts and the ineffective portion of gains and losses related to cash flow hedges recorded was not significant for any of the periods presented. Net changes in the fair value of foreign exchange derivative financial instruments designated as cash flow hedges of the purchase of inventory was $1 million and $2 million for the thirteen and thirty-nine weeks ended October 31, 2009, respectively. The change for the thirteen weeks ended November 1, 2008 was not significant and was $2 million for the thirty-nine weeks ended November 1, 2008.

Net Investment Hedges

The Company has numerous investments in foreign subsidiaries, and the net assets of those subsidiaries are exposed to foreign exchange-rate volatility. In 2005, the Company hedged a portion of its net investment in its European subsidiaries by entering into a 10-year cross currency swap, effectively creating a €100 million long-term liability and a $122 million long-term asset. During the third quarter of 2008, the Company terminated this hedge by amending its existing cross currency swap and entering simultaneously into a new cross currency swap, thereby fixing the amount owed to the counterparty in 2015 at $24 million. In 2006, the Company hedged a portion of its net investment in its Canadian subsidiaries. The Company entered into a 10-year cross currency swap, effectively creating a CAD $40 million liability and a $35 million long-term asset. During the fourth quarter of 2008, the Company terminated this hedge and received approximately $3 million.

The Company had designated these hedging instruments as hedges of the net investments in foreign subsidiaries, and used the spot rate method of accounting to value changes of the hedging instruments attributable to currency rate fluctuations. As such, adjustments in the fair market value of the hedging instruments due to changes in the spot rate were recorded in other comprehensive income and offset changes in the net investment. Amounts recorded to foreign currency translation within accumulated other comprehensive loss will remain there until the disposal of the net investment.

The amount recorded within the foreign currency translation adjustment included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet decreased shareholders’ equity by $15 million, net of tax, at October 31, 2009 and $14 million, net of tax, at November 1, 2008. The effect on the Condensed Consolidated Statements of Operations, recorded as part of interest expense, related to the net investments hedges was not significant for the thirteen and thirty-nine weeks ended October 31, 2009, and was $1 million and $3 million of expense, respectively, for the thirteen and thirty-nine weeks ended November 1, 2008.

Fair Value Hedges

The Company has employed various interest rate swaps to minimize its exposure to interest rate fluctuations. These swaps were designated as a fair value hedge of the changes in fair value of $100 million of the Company’s 8.50 percent debentures payable in 2022 attributable to changes in interest rates. The swaps effectively converted the interest rate on the debentures from 8.50 percent to a 1-month variable rate of LIBOR plus 3.45 percent. During the first quarter of 2009, the Company terminated these interest rate swaps for a gain of $19 million. This gain is amortized as part of interest expense over the remaining term of the debt, using the effective-yield method. The effect on the Condensed Consolidated Statements of Operations, recorded as part of interest expense, related to the interest rate swaps was not significant for the thirteen weeks ended October 31, 2009, and was income of $1 million for the thirteen weeks ended November 1, 2008. The effect on interest expense related to the interest rate swaps was income of $1 million and $2 million for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.

Derivatives not designated as hedging instruments

The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings by entering into a variety of derivative instruments, including option currency contracts. Changes in the fair value of these foreign currency option contracts are recorded in earnings immediately within other income. Mark-to-market, realized gains and premiums paid were not significant for the thirteen and thirty-nine weeks ended October 31, 2009. For the thirteen and thirty-nine weeks ended November 1, 2008 changes in fair value, realized gains and premiums paid were $5 million and $4 million, respectively.

The Company also enters into forward foreign exchange contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions. Net changes in the fair value of foreign exchange derivative financial instruments designated as non-hedges, recorded in selling, general and administrative expenses were substantially offset by the changes in value of the underlying transactions. The amounts recorded for the periods presented were not significant.

The Company enters into monthly diesel fuel forward and option contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. The notional value of the contracts outstanding as of October 31, 2009 was $5 million and these contracts extend through November 2010. Changes in the fair value of these contracts are recorded in selling, general and administrative expenses immediately. The amounts recorded for the periods presented were not significant.

As discussed above, the Company terminated its European net investment hedge during the third quarter of 2008. During the remaining term of the agreement, the Company will remit to its counterparty interest payments based on one-month U.S. LIBOR rates on the $24 million liability. The agreement includes a provision that may require the Company to settle this transaction in August 2010, at the option of the Company or the counterparty.

Fair Value of Derivative Contracts

The following represents the fair value of the Company’s derivative contracts. Many of the Company’s agreements allow for a netting arrangement. The following is presented on a gross basis, by type of contract:

	October 31, 2009				November 1, 2008
(in millions)	Balance Sheet	Fair Value			Balance Sheet	Fair Value

Hedging Instruments:
Forward contracts	Current assets	$	1		Current assets	$	—
Interest rate swaps	Non current assets		—		Non current assets		5
Canadian cross currency swap	Non current asset		—		Non current asset		1
Total		$	1			$	6

Non Hedging Instruments:
Forward contracts	Current assets	$	1		Current assets	$	7
European cross currency swap	Non current liability		(24	)	Non current liability		(24	)
Fuel forwards & options	Non current liability		—		Non current liability		(1	)
Total		$	(23	)		$	(18	)

Fair Value of Financial Instruments

The carrying value and estimated fair value of long-term debt was $138 million and $128 million, respectively, at October 31, 2009 and $142 million and $120 million, respectively, at January 31, 2009. The carrying values of cash and cash equivalents, short-term investments and other current receivables and payables approximate their fair value.

6. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss comprised the following:

	October 31,			November 1,			January 31,
(in millions)	2009			2008			2009
Foreign currency translation adjustments	$	100		$	4		$	10
Cash flow hedges		1			—			2
Unrecognized pension cost and postretirement benefit		(255	)		(154	)		(253	)
Unrealized loss on available-for-sale security		(3	)		(4	)		(5	)
	$	(157	)	$	(154	)	$	(246	)

7. Earnings Per Share

The Company’s basic earnings per share is computed by dividing the Company’s reported net income (loss) for the period by the weighted-average number of common shares outstanding at the end of the period. The Company’s restricted stock awards, which contain non-forfeitable rights to dividends, are considered participating securities and are included in the calculation of basic earnings per share. Diluted earnings per share reflects the weighted-average number of common shares outstanding during the period used in the basic earnings per share computation plus dilutive common stock equivalents, such as stock options and awards. The Company’s basic and diluted weighted-average number of common shares outstanding as of October 31, 2009 and November 1, 2008, were as follows:

	Thirteen weeks ended				Thirty-nine weeks ended
	October 31,		November 1,		October 31,		November 1,
(in millions)	2009		2008		2009		2008
Weighted-average common shares outstanding		156.4		154.1		155.9		154.0
Effect of Dilution:		—
Stock options and awards		—		1.5		0.2		1.3
Weighted-average common shares assuming dilution		156.4		155.6		156.1		155.3

Options to purchase 6.6 million and 3.8 million shares of common stock were not included in the computation for the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively. Options to purchase 6.3 million and 4.0 million shares of common stock were not included in the computation for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. These options were not included primarily because the exercise prices of the options were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Stock options and awards totaling 0.3 million shares were not included in the computation of earnings per share for the thirteen weeks ended October 31, 2009 as the effect would have been antidilutive due to a loss from continuing operations being reported for the period.

8. Segment Information

The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of October 31, 2009, the Company has two reportable segments, Athletic Stores and Direct-to-Customers. Sales and division results for the Company’s reportable segments for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 are presented below. Division profit reflects (loss) income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

Sales

	Thirteen weeks ended				Thirty-nine weeks ended
	October 31,		November 1,		October 31,		November 1,
(in millions)	2009		2008		2009		2008
Athletic Stores	$	1,111	$	1,216	$	3,247	$	3,656
Direct-to-Customers		103		93		282		264
Total sales	$	1,214	$	1,309	$	3,529	$	3,920

Operating Results

	Thirteen weeks ended						Thirty-nine weeks ended
	October 31,			November 1,			October 31,			November 1,
(in millions)	2009			2008			2009			2008
Athletic Stores (1)	$	1		$	42		$	67		$	121
Direct-to-Customers (2)		4			8			17			26
Restructuring reserve adjustment		1			—			1			—
Division profit		6			50			85			147
Corporate expense, net (3)		16			17			45			70
Operating (loss) profit		(10	)		33			40			77
Other income (4)		—			(5	)		(2	)		(7	)
Interest expense, net		3			1			8			4
(Loss) income from continuing operations before income taxes	$	(13	)	$	37		$	34		$	80

(1)

Included in the results for the thirteen and thirty-nine weeks ended October 31, 2009 are non-cash impairment charges totaling $32 million, which were recorded to write-down long-lived assets such as store fixtures and leasehold improvements at the Company’s Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports divisions. Additionally, included in the results for the thirty-nine weeks ended November 1, 2008 are store closing costs of $5 million, which primarily represent lease termination costs.

(2)	Included in the results for the thirteen and thirty-nine weeks ended October 31, 2009 is a non-cash impairment charge of $4 million to write off software costs.

(3)

Included in corporate expense for the thirteen-weeks ended November 1, 2008 is a $3 million other-than-temporary impairment charge related to the investment in the Reserve International Liquidity Fund. Additionally, included in the thirty-nine weeks ended November 1, 2008 is a $15 million impairment charge on the Northern Group note receivable.

(4)

Included in other income for the thirty-nine weeks ended October 31, 2009 are gains from insurance proceeds, gain on the purchase and retirement of bonds, and royalty income. Included in the thirteen weeks ended November 1, 2008 are changes in fair value, realized gains and premiums paid on foreign currency option contracts. Additionally, included in the prior year-to-date period was a $2 million lease termination gain related to the sale of a leasehold interest in Europe.

9. Pension and Postretirement Plans

The Company has defined benefit pension plans covering most of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These medical and life insurance plans are contributory and are not funded.

The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income:

	Pension Benefits												Postretirement Benefits
	Thirteen weeks						Thirty-nine weeks						Thirteen weeks						Thirty-nine weeks
	ended						ended						ended						ended
	Oct. 31,			Nov. 1,			Oct. 31,			Nov. 1,			Oct. 31,			Nov. 1,			Oct. 31,			Nov. 1,
	2009			2008			2009			2008			2009			2008			2009			2008
Service cost	$	3		$	3		$	9		$	8		$	—		$	—		$	—		$	—
Interest cost		9			9			27			27			—			1			—			1
Expected return on plan assets		(11	)		(13	)		(32	)		(40	)		—			—			—			—

Amortization of unrecognized prior service cost		1			1			1			1			—			—			—			—
Amortization of net loss (gain)		3			2			9			8			(2	)		(2	)		(5	)		(6	)
Net benefit expense (income)	$	5		$	2		$	14		$	4		$	(2	)	$	(1	)	$	(5	)	$	(5	)

During the thirty-nine weeks ended October 31, 2009 the Company made contributions of $37 million and $3 million to its U.S. and Canadian plans, respectively. No further pension contributions are required in 2009; however the Company may make additional contributions to its U.S. plan depending on the pension fund’s asset performance and other factors.

10. Share-Based Compensation

The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.

Compensation expense related to the Company’s stock option and stock purchase plans was $1.0 million and $0.7 million for the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively, and was $2.7 million and $2.8 million for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. The following table shows the Company’s assumptions used to compute the share-based compensation expense:

	Stock Option Plans						Stock Purchase Plan
	Thirty-nine weeks ended						Thirty-nine weeks ended
	October 31, 2009			November 1, 2008			October 31, 2009			November 1, 2008
Weighted-average risk free rate of interest		1.93	%		2.43	%		1.81	%		4.41	%
Expected volatility		53	%		37	%		39	%		25	%
Weighted-average expected award life	4.6 years			4.6 years			1.0 years			1.0 years
Dividend yield		6.0	%		5.1	%		4.3	%		2.6	%
Weighted-average fair value	$	2.89		$	2.50		$	4.42		$	8.36

The information set forth in the following table covers options granted under the Company’s stock option plans for the thirty-nine weeks ended October 31, 2009:

(in thousands, except price per share)	Shares			Weighted- Average Term		Weighted- Average Exercise Price
Options outstanding at the beginning of the year		6,080				$	18.64
Granted		1,518					10.02
Exercised		(138	)				8.95
Expired or cancelled		(371	)				21.14
Options outstanding at October 31, 2009		7,089			5.67	$	16.85
Options exercisable at October 31, 2009		4,957			4.18	$	19.11
Options available for future grant at October 31, 2009		2,207

The total intrinsic value of options exercised (the difference between the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) during the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 was not significant. The aggregate intrinsic value for stock options outstanding and exercisable (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) as of October 31, 2009 was $0.9 million and $0.2 million, respectively. The aggregate intrinsic value for stock options outstanding and exercisable as of November 1, 2008 was $7.4 million and $5.7 million, respectively.

The cash received from option exercises for the thirteen and thirty-nine weeks ended October 31, 2009 was $1.1 million and $1.2 million, respectively. The cash received from option exercises for the thirteen weeks ended November 1, 2008 was not significant and cash received for the thirty-nine weeks ended November 1, 2008 was $0.7 million. The tax benefit realized from option exercises for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 was not significant.

The following table summarizes information about stock options outstanding and exercisable at October 31, 2009:

				Options Outstanding						Options Exercisable
Range of Exercise Prices				Number Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
(in thousands, except price per share)
$	7.19	$	10.10		1,521		9.32	$	9.95		46	$	8.25
$	10.22	$	11.91		1,700		4.32	$	11.29		1,304	$	11.22
$	12.30	$	23.42		1,880		4.43	$	18.09		1,620	$	17.65
$	23.59	$	27.01		1,498		5.25	$	24.95		1,497	$	24.95
$	27.10	$	28.50		490		5.09	$	28.08		490	$	28.08
$	7.19	$	28.50		7,089		5.67	$	16.85		4,957	$	19.11

Changes in the Company’s nonvested options for the thirty-nine weeks ended October 31, 2009 are summarized as follows:

(in thousands, except price per share)	Number of shares			Weighted- average grant date fair value per share
Nonvested at January 31, 2009		1,268		$	17.71
Granted		1,518			10.02
Vested		(283	)		17.88
Expired or Cancelled		(371	)		21.14
Nonvested at October 31, 2009		2,132		$	11.61

As of October 31, 2009, there was $3.0 million of total unrecognized compensation cost, related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.06 years.

Restricted Stock and Units

Restricted shares of the Company’s common stock may be awarded to certain officers and key employees of the Company. For executives outside of the United States the Company issues restricted stock units. The Company also issues restricted stock units to its non-employee directors. Each restricted stock unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. As of October 31, 2009, 227,452 restricted stock units were outstanding. Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. These awards fully vest after the passage of time, generally three years. Restricted stock is considered outstanding at the time of grant, as the holders of restricted stock are entitled to receive dividends and have voting rights.

Restricted shares and units activity for the thirty-nine weeks ended October 31, 2009 and November 1, 2008 is summarized as follows:

	Number of Shares and Units
(in thousands)	October 31, 2009			November 1, 2008
Outstanding at beginning of period		844			810
Granted		1,115			233
Vested		(69	)		(79	)
Cancelled or forfeited		—			(90	)
Outstanding at end of period		1,890			874
Aggregate value (in millions)	$	26.1		$	17.5
Weighted-average remaining contractual life	1.58 years			1.49 years

The weighted-average grant-date fair value per share was $9.90 and $11.86 for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. The total value of awards for which restrictions lapsed during the thirty-nine weeks ended October 31, 2009 and November 1, 2008 was $1.7 million and $2.1 million, respectively. As of October 31, 2009, there was $10.6 million of total unrecognized compensation cost related to nonvested restricted awards. The Company recorded compensation expense related to restricted stock awards, net of forfeitures, of $6.3 million and $3.4 million in the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.

11. Fair Value Measurements

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs.

The Company’s financial assets recorded at fair value are categorized as follows:

Level 1 –

Quoted prices for identical instruments in active markets.

Level 2 –

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 –

Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis at October 31, 2009:

(in millions)	Level 1		Level 2		Level 3
Assets
Short-term investment	$	—	$	—	$	13
Auction rate security		—		4		—
Forward foreign exchange contracts		—		2		—
Total Assets	$	—	$	6	$	13

Liabilities
European cross currency swap		—		24		—
Total Liabilities	$	—	$	24	$	—

The Company’s auction rate security is classified as available-for-sale and, accordingly, is reported at fair value. The fair value of the security is determined by review of the underlying security at each reporting period. The change in the fair value of the auction rate security for the thirty-nine weeks ended October 31, 2009 represented an unrealized gain of $2 million. The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.

The Company’s Level 3 assets represent the Company’s investment in the Reserve International Liquidity Fund, Ltd. (the “Fund”), a money market fund classified in short-term investments. The Company assesses the fair value of its investment in the Fund, which includes an impairment evaluation, on a quarterly basis, through a review of the underlying securities within the Fund. During the third quarter of 2008, the Company recorded an impairment charge of $3 million, incorporating the valuation at zero for debt securities of Lehman Brothers. Changes in market conditions and the method and timing of the liquidation process of the Fund could result in further adjustments to the fair value and classification of this investment in future periods.

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3, for the thirty-nine weeks ended October 31, 2009:

(in millions)	Level 3
Balance at January 31, 2009	$	23
Redemptions received		(10	)
Balance at October 31, 2009	$	13

The following table provides a summary of the Company’s recognized assets that are measured at fair value on a non-recurring basis for the thirty-nine weeks ended October 31, 2009:

(in millions)	Level 1		Level 2		Level 3
Assets
Long-lived assets held and used	$	—	$	—	$	71

During the third quarter of 2009, long-lived assets held and used with a carrying amount of $107 million were written down to their fair value of $71 million, resulting in an impairment charge of $36 million, which was included in earnings for the period. See Note 2, Impairment Charges and Store Closing Program Costs, for further discussion and the additional disclosures required for assets measured at fair value on a non-recurring basis.

As the Company did not elect the fair value option for any non-financial assets or non-financial liabilities, the Company does not have any non-financial assets or liabilities that require measurement at fair value.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and Footaction. The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells athletic footwear, apparel, and equipment, through its affiliates, including Eastbay, Inc., and CCS, which sells skateboard and snowboard equipment, apparel, footwear, and accessories. The Direct-to-Customers segment sells to customers through catalogs and Internet websites.

STORE COUNT

At October 31, 2009, the Company operated 3,601 stores as compared with 3,641 and 3,714 stores at January 31, 2009 and November 1, 2008, respectively. During the thirty-nine weeks ended October 31, 2009, the Company opened 33 stores, remodeled or relocated 130 stores and closed 73 stores.

A total of 21 franchised stores were operational at October 31, 2009 as compared with 16 stores at November 1, 2008. Revenue from the franchised stores was not significant for the thirteen and thirty-nine weeks ended October 31, 2009 or November 1, 2008. These stores are not included in the Company’s operating store count above.

SALES AND OPERATING RESULTS

All references to comparable-store sales for a given period relate to sales of stores that are open at the period-end and that have been open for more than one year. Accordingly, stores opened and closed during the period are not included. Sales from the Direct-to-Customers segment, excluding CCS sales, are included in the calculation of comparable-store sales for all periods presented. Sales from acquired businesses that include the purchase of inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, CCS sales have been excluded in the computation of comparable-store sales. Division profit reflects (loss) income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

The following table summarizes results by segment:

Sales

	Thirteen weeks ended				Thirty-nine weeks ended
	October 31,		November 1,		October 31,		November 1,
(in millions)	2009		2008		2009		2008
Athletic Stores	$	1,111	$	1,216	$	3,247	$	3,656
Direct-to-Customers		103		93		282		264
Total sales	$	1,214	$	1,309	$	3,529	$	3,920

Operating Results

	Thirteen weeks ended				Thirty-nine weeks ended
	October 31,		November 1,		October 31,		November 1,
(in millions)	2009		2008		2009		2008
Athletic Stores (1)	$	1	$	42	$	67	$	121