Foot Locker(FL) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and comprehensive notes Condensed Consolidated Balance Sheets (Unaudited) | Metric | October 28, 2023 ($ in millions) | October 29, 2022 ($ in millions) | January 28, 2023 ($ in millions) | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | ASSETS | | | | | Cash and cash equivalents | 187 | 351 | 536 | | Merchandise inventories | 1,862 | 1,685 | 1,643 | | Total Current Assets | 2,374 | 2,338 | 2,521 | | Total Assets | 7,420 | 7,762 | 7,907 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | Accounts payable | 593 | 522 | 492 | | Total Current Liabilities | 1,459 | 1,522 | 1,610 | | Total Liabilities | 4,215 | 4,503 | 4,614 | | Total Shareholders' Equity | 3,205 | 3,259 | 3,293 | - Total assets decreased from $7,907 million at January 28, 2023, to $7,420 million at October 28, 2023. Total liabilities also decreased from $4,614 million to $4,215 million over the same period[11][12] Condensed Consolidated Statements of Operations (Unaudited) | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Sales | 1,986 | 2,173 | 5,774 | 6,413 | | Licensing revenue | 3 | 3 | 10 | 9 | | Total revenue | 1,989 | 2,176 | 5,784 | 6,422 | | Income from operations | 47 | 160 | 109 | 522 | | Net income attributable to Foot Locker, Inc. | 28 | 96 | 59 | 323 | | Basic earnings per share | 0.30 | 1.02 | 0.63 | 3.41 | | Diluted earnings per share | 0.30 | 1.01 | 0.63 | 3.38 | - For the thirteen weeks ended October 28, 2023, total revenue decreased by 8.6% YoY to $1,989 million, and net income attributable to Foot Locker, Inc. decreased significantly from $96 million to $28 million. Diluted EPS also saw a substantial decline from $1.01 to $0.30[13] Condensed Consolidated Statements of Comprehensive Income / (Loss) (Unaudited) | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income attributable to Foot Locker, Inc. | 28 | 96 | 59 | 323 | | Foreign currency translation adjustment | (41) | (29) | (48) | (104) | | Change in fair value of derivatives | 2 | (1) | — | (3) | | Pension and postretirement adjustments | 2 | 3 | 6 | 7 | | Comprehensive income / (loss) | (9) | 69 | 17 | 223 | - Comprehensive income for the thirteen weeks ended October 28, 2023, was a loss of $9 million, a significant decrease from a gain of $69 million in the prior-year period, primarily driven by a larger foreign currency translation adjustment loss[15] Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) | Metric | Balance at July 29, 2023 ($ in millions) | Balance at October 28, 2023 ($ in millions) | | :----------------------------------- | :------------------------------------- | :------------------------------------ | | Common Shares (thousands) | 94,253 | 94,266 | | Common Stock & Paid-In Capital | 767 | 772 | | Retained Earnings | 2,881 | 2,871 | | Accumulated Other Comprehensive Loss | (397) | (434) | | Total Shareholders' Equity | 3,247 | 3,205 | - Total shareholders' equity decreased from $3,247 million at July 29, 2023, to $3,205 million at October 28, 2023, primarily due to cash dividends paid ($38 million) and translation adjustments ($41 million), partially offset by net income ($28 million) and share-based compensation expense ($5 million)[17] Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | (98) | (32) | | Net cash used in investing activities | (145) | (182) | | Net cash used in financing activities | (120) | (237) | | Net change in cash, cash equivalents, and restricted cash | (359) | (457) | | Cash, cash equivalents, and restricted cash at end of period | 223 | 393 | - For the thirty-nine weeks ended October 28, 2023, net cash used in operating activities increased to $98 million from $32 million in the prior year. Net cash used in investing activities decreased to $145 million from $182 million, while net cash used in financing activities decreased to $120 million from $237 million[19] Notes to the Unaudited Condensed Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies - Foot Locker, Inc. operates as a leading footwear and apparel retailer with integrated shopping channels across North America, Europe, and Asia Pacific, aggregated into one reportable segment due to shared customer base and similar economic characteristics[20] - The financial statements are prepared in accordance with U.S. GAAP, and management expects fiscal year 2023 to be a 53-week period ending February 3, 2024[21] - ASU 2023-07, effective for fiscal years beginning after December 15, 2023, will require additional detailed segment expense disclosures but is not expected to change consolidated financial statements[23] 2. Revenue | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Stores Sales | 1,649 | 1,818 | 4,834 | 5,310 | | Direct-to-customers | 337 | 355 | 940 | 1,103 | | Total sales | 1,986 | 2,173 | 5,774 | 6,413 | | Licensing revenue | 3 | 3 | 10 | 9 | | Total revenue | 1,989 | 2,176 | 5,784 | 6,422 | | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | United States | 1,343 | 1,503 | 3,807 | 4,433 | | International | 646 | 673 | 1,977 | 1,989 | | Total revenue | 1,989 | 2,176 | 5,784 | 6,422 | - Gift card liability decreased from $25 million at October 29, 2022, to $15 million at October 28, 2023, with redemptions ($225 million) exceeding activations ($215 million) for the thirty-nine weeks ended October 28, 2023[31] 3. Segment Information - Foot Locker, Inc. operates as one reportable segment, with division profit reflecting income before income taxes, impairment, corporate expense, other income/expense, and net interest expense[32] | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Division profit | 67 | 219 | 192 | 669 | | Income from operations | 47 | 160 | 109 | 522 | | Income before income taxes | 47 | 143 | 101 | 476 | 4. Impairment and Other | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Transformation consulting | 1 | 17 | 27 | 27 | | Impairment of long-lived assets and right-of-use assets | (2) | — | 19 | 5 | | Reorganization costs | 7 | 2 | 12 | 2 | | Total impairment and other | 6 | 20 | 59 | 38 | - For the thirty-nine weeks ended October 28, 2023, total impairment and other charges increased to $59 million from $38 million in the prior year, primarily due to $19 million in impairment charges related to Sidestep banner and Foot Locker Asia store closures, and $12 million in reorganization costs[34] 5. Other Income / (Expense), net | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :--------------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Pension and postretirement net benefit expense | (2) | — | (6) | — | | Foot Locker Singapore and Malaysia divestiture gain | 2 | — | 4 | — | | Gain on sale of property | 3 | — | 3 | — | | Minority investment in Retailors, Ltd. | — | (15) | — | (52) | | Total other income / (expense), net | 2 | (14) | (1) | (33) | - Other income/(expense), net shifted from an expense of $14 million in the prior-year quarter to an income of $2 million for the thirteen weeks ended October 28, 2023, driven by gains from the Singapore and Malaysia divestiture ($2 million) and a corporate office property sale ($3 million)[36] 6. Cash, Cash Equivalents, and Restricted Cash | Metric | October 28, 2023 ($ in millions) | October 29, 2022 ($ in millions) | | :----------------------------------- | :------------------------------- | :------------------------------- | | Cash and cash equivalents | 187 | 351 | | Restricted cash included in other current assets | 3 | 14 | | Restricted cash included in other non-current assets | 33 | 28 | | Cash, cash equivalents, and restricted cash | 223 | 393 | - Total cash, cash equivalents, and restricted cash decreased from $393 million at October 29, 2022, to $223 million at October 28, 2023. Restricted cash primarily relates to escrow for leasing arrangements and deposits in insurance trusts[38] 7. Accumulated Other Comprehensive Loss | Component | 2023 ($ in millions) | 2022 ($ in millions) | | :--------------------------------------- | :------------------- | :------------------- | | Foreign currency translation adjustments | (196) | (211) | | Hedge contracts | (3) | (3) | | Unrecognized pension cost and postretirement benefit | (235) | (229) | | Total Accumulated Other Comprehensive Loss | (434) | (443) | - Accumulated other comprehensive loss (AOCL) was $434 million at October 28, 2023, compared to $392 million at January 28, 2023, primarily due to a $48 million foreign currency translation adjustment loss during the thirty-nine weeks ended October 28, 2023[40][43] 8. Fair Value Measurements | Asset/Liability | As of Oct 28, 2023 (Level 2, $ in millions) | As of Oct 29, 2022 (Level 2, $ in millions) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | | Available-for-sale security | 6 | 5 | | Foreign exchange forward contracts (assets) | 1 | 2 | | Cross-currency swap contract | 6 | 4 | | Total assets (Level 2) | 13 | 11 | | Foreign exchange forward contracts (liabilities) | 1 | — | | Total liabilities (Level 2) | 1 | — | | Metric | October 28, 2023 ($ in millions) | October 29, 2022 ($ in millions) | | :----------- | :------------------------------- | :------------------------------- | | Long-term debt carrying value | 395 | 395 | | Long-term debt fair value | 294 | 308 | - The fair value of long-term debt was $294 million at October 28, 2023, lower than its carrying value of $395 million, indicating a discount in the market valuation of the debt[50] 9. Earnings Per Share | Metric | Thirteen weeks ended Oct 28, 2023 | Thirteen weeks ended Oct 29, 2022 | Thirty-nine weeks ended Oct 28, 2023 | Thirty-nine weeks ended Oct 29, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income attributable to Foot Locker, Inc. ($ in millions) | 28 | 96 | 59 | 323 | | Weighted-average common shares outstanding (millions) | 94.3 | 93.4 | 94.1 | 94.6 | | Diluted earnings per share | 0.30 | 1.01 | 0.63 | 3.38 | | Anti-dilutive share-based awards excluded (millions) | 3.0 | 2.8 | 2.6 | 2.7 | - Diluted EPS for the thirteen weeks ended October 28, 2023, was $0.30, a significant decrease from $1.01 in the prior-year period. For the thirty-nine weeks, diluted EPS was $0.63, down from $3.38[52] 10. Pension | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Service cost | 2 | 4 | 5 | 11 | | Interest cost | 7 | 5 | 20 | 15 | | Expected return on plan assets | (7) | (8) | (22) | (23) | | Amortization of net loss | 2 | 3 | 8 | 8 | | Net benefit expense | 4 | 4 | 11 | 11 | - Net pension benefit expense remained consistent at $4 million for the thirteen weeks and $11 million for the thirty-nine weeks ended October 28, 2023, compared to the prior-year periods[53] 11. Share-Based Compensation | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :----------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Options and employee stock purchase plan | 1 | 1 | 3 | 4 | | Restricted stock units and performance stock units | 4 | 8 | 6 | 21 | | Total share-based compensation expense | 5 | 9 | 9 | 25 | | Tax benefit recognized | — | — | 1 | 2 | - Total share-based compensation expense decreased to $5 million for the thirteen weeks and $9 million for the thirty-nine weeks ended October 28, 2023, from $9 million and $25 million respectively in the prior year[56] - As of October 28, 2023, there was $3 million of unrecognized compensation cost for nonvested stock options (expected over 1.6 years) and $28 million for nonvested RSU/PSU awards[63][69] 12. Legal Proceedings - The Company is involved in ordinary, routine litigation, including a consolidated class action alleging wage/hour violations in California, but management does not believe the outcome would have a material adverse effect on its financial position, liquidity, or results of operations[70][71] 13. Subsequent Events - From November 3 to December 5, 2023, the Company borrowed $146 million under its credit facility to fund holiday selling season working capital needs, with $35 million outstanding as of December 5, 2023[72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial performance, condition, and operational results, covering sales, margins, expenses, and liquidity Business Overview - Foot Locker, Inc. is a leading footwear and apparel retailer, leveraging a portfolio of brands (Foot Locker, Kids Foot Locker, Champs Sports, WSS, atmos) and omni-channel capabilities to engage customers[74] Store Count | Date | Operated Stores | | :---------------- | :-------------- | | October 28, 2023 | 2,607 | | January 28, 2023 | 2,714 | | October 29, 2022 | 2,794 | - The Company operated 2,607 stores as of October 28, 2023, a decrease from 2,794 stores at October 29, 2022[75] Franchise Operations | Date | Franchised Stores | | :---------------- | :---------------- | | October 28, 2023 | 190 | | January 28, 2023 | 159 | | October 29, 2022 | 155 | - The number of franchised stores increased to 190 at October 28, 2023, from 155 at October 29, 2022, primarily located in the Middle East and Asia[76] Results of Operations | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total revenue | 1,989 | 2,176 | 5,784 | 6,422 | | Division profit | 67 | 219 | 192 | 669 | | Income from operations | 47 | 160 | 109 | 522 | | Income before income taxes | 47 | 143 | 101 | 476 | - For the thirteen weeks ended October 28, 2023, total revenue decreased by 8.6% YoY, and income from operations decreased by 70.6% YoY, reflecting a challenging operating environment[78] Reconciliation of Non-GAAP Measures - The Company presents non-GAAP measures, such as adjusted income before income taxes and adjusted diluted EPS, to provide investors with a consistent view of performance by excluding items not indicative of core business or comparability, like impairment and other charges, and certain other income/expense[80][82] | Metric | Thirteen weeks ended Oct 28, 2023 | Thirteen weeks ended Oct 29, 2022 | Thirty-nine weeks ended Oct 28, 2023 | Thirty-nine weeks ended Oct 29, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Income before income taxes (GAAP, $M) | 47 | 143 | 101 | 476 | | Adjusted income before income taxes (non-GAAP, $M) | 48 | 177 | 154 | 546 | | Diluted earnings per share (GAAP) | 0.30 | 1.01 | 0.63 | 3.38 | | Adjusted diluted earnings per share (non-GAAP) | 0.30 | 1.27 | 1.04 | 3.98 | - For the thirty-nine weeks ended October 28, 2023, a $4 million benefit was recorded from an income tax reserves release due to a statute of limitations expiration[84] Segment Reporting and Results of Operations - Foot Locker has three operating segments: North America (Foot Locker, Champs Sports, Kids Foot Locker, WSS), EMEA (Foot Locker, Kids Foot Locker in Europe), and Asia Pacific (Foot Locker, atmos in Australia, New Zealand, Asia). These are aggregated into one reportable segment[85] - Strategic actions in Q2 2023 included ceasing operations of the Sidestep banner, closing stores in Hong Kong and Macau, and selling Singapore and Malaysia businesses to a license partner[86] Sales - Total sales decreased by 8.6% to $1,986 million for the thirteen weeks and by 10.0% to $5,774 million for the thirty-nine weeks ended October 28, 2023, compared to prior-year periods[88] | Sales Channel | Thirteen weeks ended Oct 28, 2023 | Thirteen weeks ended Oct 29, 2022 | Thirty-nine weeks ended Oct 28, 2023 | Thirty-nine weeks ended Oct 29, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Store sales ($M) | 1,649 | 1,818 | 4,834 | 5,310 | | Store sales % Change | (9.3)% | | (9.0)% | | | Store sales % Comparable | (8.5)% | 4.7% | (8.2)% | 1.9% | | Direct-to-customers sales ($M) | 337 | 355 | 940 | 1,103 | | Direct-to-customers % Change | (5.1)% | | (14.8)% | | | Direct-to-customers % Comparable | (5.6)% | (14.5)% | (12.2)% | (24.2)% | | Total sales % Comparable | (8.0)% | 0.8% | (8.9)% | (3.9)% | - Comparable sales decreased across all channels and product categories (footwear, apparel, accessories) due to macroeconomic headwinds, changing vendor mix, and the repositioning of the Champs Sports banner. North America sales were also negatively affected by the closure of Eastbay[92][93] Gross Margin | Metric | Thirteen weeks ended Oct 28, 2023 | Thirteen weeks ended Oct 29, 2022 | Thirty-nine weeks ended Oct 28, 2023 | Thirty-nine weeks ended Oct 29, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Gross margin rate | 27.3% | 32.0% | 28.1% | 32.6% | | Basis point decrease in the gross margin rate | (470) | | (450) | | | Merchandise margin rate decline (bps) | (370) | | (310) | | | Higher occupancy and buyers' compensation expense rate (bps) | (100) | | (140) | | - The gross margin rate decreased by 470 basis points to 27.3% for the thirteen weeks and by 450 basis points to 28.1% for the thirty-nine weeks ended October 28, 2023. This decline was driven by higher promotional activity, increased merchandise costs, higher shrink, and deleverage from fixed occupancy and buyers' compensation costs due to lower sales[94][96] Selling, General and Administrative Expenses (SG&A) | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :---------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | SG&A | 446 | 467 | 1,319 | 1,382 | | SG&A % Change | (4.5)% | | (4.6)% | | | SG&A as a percentage of sales | 22.5% | 21.5% | 22.8% | 21.5% | - SG&A decreased by $21 million (4.5%) for the thirteen weeks and $63 million (4.6%) for the thirty-nine weeks ended October 28, 2023. However, as a percentage of sales, SG&A increased by 100 and 130 basis points, respectively, due to sales decline, inflation, and investments in wages and technology, partially offset by lower incentive compensation and cost optimization[97] Depreciation and Amortization | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Depreciation and amortization | 47 | 52 | 148 | 157 | | % Change | (9.6)% | | (5.7)% | | - Depreciation and amortization expense decreased by $5 million (9.6%) for the thirteen weeks and $9 million (5.7%) for the thirty-nine weeks ended October 28, 2023, primarily due to operating fewer stores and the effect of prior-year impairments[98] Impairment and Other - For the thirty-nine weeks ended October 28, 2023, the Company incurred $27 million in transformation consulting expense, $19 million in impairment charges (primarily for Sidestep banner and Foot Locker Asia store closures), and $12 million in reorganization costs (severance and closures)[99] - The thirteen weeks ended October 28, 2023, included a $3 million net benefit from lease obligation settlements for Sidestep stores, partially offset by a $1 million impairment on atmos U.S. assets[99] Corporate Expense | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Corporate expense | 14 | 39 | 24 | 109 | | $ Change | (25) | | (85) | | - Corporate expense decreased by $25 million for the thirteen weeks and $85 million for the thirty-nine weeks ended October 28, 2023, primarily due to increased allocation of corporate expense to banners and lower incentive compensation, partially offset by ongoing IT investments[102] Operating Results | Metric | Thirteen weeks ended Oct 28, 2023 | Thirteen weeks ended Oct 29, 2022 | Thirty-nine weeks ended Oct 28, 2023 | Thirty-nine weeks ended Oct 29, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Division profit ($M) | 67 | 219 | 192 | 669 | | Division profit margin | 3.4% | 10.1% | 3.3% | 10.4% | - Division profit margin significantly decreased to 3.4% for the thirteen weeks and 3.3% for the thirty-nine weeks ended October 28, 2023, from 10.1% and 10.4% respectively in the prior year, driven by sales declines, lower gross margins, and deleveraging expenses[103] Interest Expense, Net | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Interest expense | (6) | (6) | (17) | (18) | | Interest income | 4 | 3 | 10 | 5 | | Interest (expense) / income, net | (2) | (3) | (7) | (13) | - Net interest expense decreased for both the quarter and year-to-date periods, primarily due to an increase in interest income earned on cash and cash equivalents, benefiting from higher interest rates and income from cross-currency swaps[104] Other Income / (Expense), Net | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :---------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Other income / (expense), net | 2 | (14) | (1) | (33) | - Other income/(expense), net for the thirteen weeks ended October 28, 2023, was a $2 million gain, a positive shift from a $14 million expense in the prior year, driven by gains from the Singapore and Malaysia divestiture ($2 million) and a corporate office property sale ($3 million)[106] - For the thirty-nine weeks, the net expense was $1 million, significantly lower than the $33 million expense in the prior year, which included a $52 million decrease in fair value of a minority investment[107] Income Taxes | Metric | Thirteen weeks ended Oct 28, 2023 ($ in millions) | Thirteen weeks ended Oct 29, 2022 ($ in millions) | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :---------------------------- | :---------------------------------------------- | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Provision for income taxes | 19 | 47 | 42 | 154 | | Effective tax rate | 39.4% | 33.0% | 41.1% | 32.4% | - The effective tax rate increased to 39.4% for the thirteen weeks and 41.1% for the thirty-nine weeks ended October 28, 2023, compared to 33.0% and 32.4% respectively in the prior year. This increase is primarily due to a decline in income before tax and a change in the geographic mix of earnings, partially offset by a $4 million reserve release from a statute of limitations expiration[108][109] Liquidity and Capital Resources - The Company's primary liquidity source is cash flow from operations, used for inventory, capital expenditures, retirement plan contributions, dividends, and strategic investments. It believes current cash, future cash flow, and credit facility access are adequate[110] - As of October 28, 2023, approximately $1,103 million remained available under the $1.2 billion share repurchase program. The Company has paused dividends to increase balance sheet flexibility for longer-term strategic initiatives[111][112] - Expected full-year capital spending is $255 million, including $198 million for store remodels/relocations and new store openings (80 new, 25 WSS), and $57 million for information systems and infrastructure[112] Operating Activities | Metric | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | (98) | (32) | | $ Change | (66) | | - Net cash used in operating activities increased by $66 million to $98 million for the thirty-nine weeks ended October 28, 2023, primarily due to lower net income, partially offset by timing of merchandise purchases and accounts payable payments[114][115] Investing Activities | Metric | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in investing activities | (145) | (182) | | $ Change | 37 | | - Net cash used in investing activities decreased by $37 million to $145 million for the thirty-nine weeks ended October 28, 2023, mainly due to lower capital expenditures ($165 million vs. $218 million in prior year) and proceeds from business divestitures ($16 million from Singapore/Malaysia, $6 million from property sale)[116] - The Company invested $2 million in minority investments with Black fund managers as part of its LEED initiative during the thirty-nine weeks ended October 28, 2023[117] Financing Activities | Metric | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in financing activities | (120) | (237) | | $ Change | 117 | | | Metric | Thirty-nine weeks ended Oct 28, 2023 ($ in millions) | Thirty-nine weeks ended Oct 29, 2022 ($ in millions) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Dividends paid on common stock | 113 | 113 | | Share repurchases | — | 129 | | Total returned to shareholders | 113 | 242 | - Net cash used in financing activities decreased by $117 million to $120 million for the thirty-nine weeks ended October 28, 2023, primarily due to no share repurchases in the current year compared to $129 million in the prior year[118][120] Critical Accounting Policies and Estimates - There have been no significant changes to the Company's critical accounting policies and estimates from those disclosed in the 2022 Form 10-K[121] Recent Accounting Pronouncements - Descriptions of recently issued and adopted accounting principles are included in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements[122] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section reports no significant changes in the Company's market risk exposures or management since the 2022 Form 10-K - No significant changes in primary risk exposures or market risk management have occurred since the 2022 Form 10-K filing[123] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to un-remediated material weaknesses in IT controls at WSS, with remediation ongoing Evaluation of Disclosure Controls and Procedures - As of October 28, 2023, the Company's CEO and CFO concluded that disclosure controls and procedures were not effective due to un-remediated material weaknesses in internal control over financial reporting, specifically ineffective general information technology controls over logical access and change management at the WSS business[124] Remediation - Management is implementing remediation actions including designing and implementing controls for deprovisioning, privileged access, and user access reviews, developing an enhanced risk assessment process, and improving training programs. Remediation is expected to be completed by the end of 2023[125] Changes in Internal Control Over Financial Reporting - Other than the ongoing remediation efforts for the material weaknesses, there were no other material changes in internal control over financial reporting during the quarter ended October 28, 2023[126] Limitations on Effectiveness of Controls and Procedures - Management acknowledges the inherent limitations of any control system, stating that it can only provide reasonable, not absolute, assurance against error and fraud, and effectiveness may deteriorate due to changing conditions or compliance issues[127] PART II - OTHER INFORMATION Item 1. Legal Proceedings Information on the Company's legal proceedings is detailed in Note 12 of the financial statements - Information on legal proceedings is detailed in Note 12 of the financial statements[128] Item 1A. Risk Factors No significant changes to the risk factors described in the 2022 Annual Report on Form 10-K have occurred - No significant changes to the risk factors described in the 2022 Form 10-K have occurred[129] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company acquired shares for tax withholding on restricted stock units, but made no purchases under its public repurchase program | Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (1) | Dollar Value of Shares that may yet be Purchased Under the Program | | :------------------------ | :----------------------------------- | :------------------------------- | :--------------------------------------------------------------- | | July 30 to August 26, 2023 | 3,566 | 25.76 | 1,103,814,042 | | August 27 to September 30, 2023 | 1,406 | 19.07 | 1,103,814,042 | | October 1 to October 28, 2023 | — | — | 1,103,814,042 | | Total | 4,972 | 23.87 | | - During the thirteen weeks ended October 28, 2023, 4,972 shares were acquired at an average price of $23.87 per share to satisfy tax withholding obligations for vested restricted stock units. No shares were purchased under the publicly announced share repurchase program during this period[130] Item 3. Defaults Upon Senior Securities This item is not applicable, indicating no defaults on senior securities during the reporting period - This item is not applicable for the reporting period[130] Item 4. Mine Safety Disclosures This item is not applicable, as no mine safety disclosures are required for the Company - This item is not applicable for the reporting period[130] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended October 28, 2023[131] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including bylaws, CEO/CFO certifications, and Inline XBRL documents - Exhibits include Bylaws, CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, and Inline XBRL documents[132] SIGNATURE SIGNATURE The report was signed by Michael Baughn, Executive Vice President and Chief Financial Officer, on December 6, 2023 - The report was signed by Michael Baughn, Executive Vice President and Chief Financial Officer, on December 6, 2023[134]