FOOT LOCKER, INC. Business Overview
Foot Locker, Inc. leads the celebration of sneaker and youth culture around the globe through a portfolio of brands includingFoot Locker ,Lady Foot Locker , Kids Foot Locker,Champs Sports ,Eastbay , atmos, WSS, Footaction, and Sidestep. As ofOctober 29, 2022 , we operated 2,794 primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in 28 countries acrossthe United States ,Canada ,Europe ,Australia ,New Zealand , andAsia , as well as websites and mobile apps. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of the global sneaker community. We use our omni-channel capabilities to bridge the digital world and physical stores, including order-in-store, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners includingfootlocker.com , kidsfootlocker.com, champssports.com, atmosusa.com, shopwss.com and related e-commerce sites in the various international countries that we operate. These sites offer some of the largest online product selections and provide a seamless link between e-commerce and physical stores. We also operate the website for eastbay.com. Store Count
At
Franchise Operations
A total of 155 franchised stores were operating atOctober 29, 2022 , as compared with 142 and 136 stores atJanuary 29, 2022 andOctober 30, 2021 , respectively, operating in theMiddle East andAsia . Revenue from franchised stores was not significant for any of the periods presented. These stores are not included in the operating store count above.
Leadership Transition
As part of a planned succession process,Richard A. Johnson retired as President and Chief Executive Officer, effectiveSeptember 1, 2022 .Mary N. Dillon , former Executive Chair and CEO of Ulta Beauty, Inc., was appointed President and Chief Executive Officer and a member of the Foot Locker Board, also effectiveSeptember 1, 2022 .
Reconciliation of Non-GAAP Measures
In addition to reporting our financial results in accordance withU.S. generally accepted accounting principles ("GAAP"), we report certain financial results that differ from what is reported under GAAP. We have presented certain financial measures identified as non-GAAP, such as sales changes excluding foreign currency fluctuations, adjusted income before income taxes, adjusted net income, and adjusted diluted earnings per share.
We present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. Where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our business that are not related to currency movements.
Third Quarter 2022 Form 10-Q Page 20
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These non-GAAP measures are presented because we believe they assist investors
in comparing our performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core business or
affect comparability. In addition, these non-GAAP measures are useful in
assessing our progress in achieving our long-term financial objectives. We
estimate the tax effect of all non-GAAP adjustments by applying a marginal tax
rate to each item. The income tax items represent the discrete amount that
affected the period. The non-GAAP financial information is provided in addition,
and not as an alternative, to our reported results prepared in accordance with
GAAP.
Effective with the first quarter of 2022, the calculation for non-GAAP earnings
excludes gains and losses from all minority investments, including the
adjustments related to the investment in Retailors, Ltd. We believe this is a
more representative measure of our recurring earnings, assists in the
comparability of results, and is consistent with how management reviews
performance. The non-GAAP results for 2021 have been recast, as applicable, to
conform to the current year's presentation. As we report quarterly results
through 2022, we will provide updated non-GAAP reconciliations for the
corresponding prior year's quarter under this revised definition.
Presented below is a reconciliation of GAAP and non-GAAP.
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions, except per
share amounts) 2022 2021 2022 2021
Pre-tax income:
Income before income taxes $ 143 $ 222 $ 476 $ 1,093
Pre-tax amounts excluded from
GAAP:
Impairment and other charges 20 57 38 97
Other income / expense, net 14 (27) 32 (347)
Adjusted income before income
taxes (non-GAAP) $ 177 $ 252 $ 546 $ 843
After-tax income: Net income attributable to Foot Locker, Inc. $ 96$ 158 $ 323 790 After-tax adjustments excluded from GAAP: Impairment and other charges, net of income tax benefit of$5 ,$14 ,$10 , and$24 million , respectively 15 43 28 73 Other income / expense, net of income tax benefit/(expense) of$4 , ($7 ),$7 , and$(91) million , respectively 10 (20) 25 (256) Tax reserves charge - - 5 -
Adjusted net income (non-GAAP) $ 121$ 181 $
381 607 Earnings per share: Diluted earnings per share$ 1.01 $ 1.52 $ 3.38 7.54 Diluted EPS amounts excluded from GAAP: Impairment and other charges 0.16 0.41 0.29 0.69 Other income / expense, net 0.10 (0.19) 0.26 (2.43) Tax reserves charge - - 0.05 - Adjusted diluted earnings per share (non-GAAP)$ 1.27 $ 1.74 $ 3.98 5.80 During the thirteen and thirty-nine weeks endedOctober 29, 2022 , we recorded pre-tax charges of$20 million and$38 million , respectively, classified as Impairment and Other. See the Impairment and Other Charges section for further information. Third Quarter 2022 Form 10-Q Page 21 Table of Contents
The adjustments made to other income / (expense), net reflect gains or losses primarily associated with our minority investments. See the Other Income / (Expense), net section for further information.
In the second quarter of 2022, we recorded a
Segment Reporting
We have determined that we have three operating segments,North America , EMEA, andAsia Pacific . OurNorth America operating segment includes the results of the following banners operating in theU.S. andCanada :Foot Locker , Kids Foot Locker,Lady Foot Locker ,Champs Sports , WSS, and Footaction, including each of their related e-commerce businesses, as well as ourEastbay business. Our EMEA operating segment includes the results of the following banners operating inEurope :Foot Locker , Sidestep, and Kids Foot Locker, including each of their related e-commerce businesses. OurAsia Pacific operating segment includes the results of theFoot Locker banner and its related e-commerce business operating inAustralia ,New Zealand , andAsia , as well as atmos, which operates primarily inAsia . We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.
Results of Operations
We evaluate performance based on several factors, primarily the banner's financial results, referred to as division profit. Division profit reflects income before income taxes, impairment and other charges, corporate expenses, non-operating income, and net interest expense.
The table below summarizes our results.
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021
Sales $ 2,173 $ 2,189 $ 6,413 $ 6,617
Operating Results
Division profit 216 283 660 930
Less: Impairment and other
charges (1) 20 57 38 97
Less: Corporate expense (2) 39 30 109 91
Income from operations 157 196 513 742
Interest expense, net (3) (4) (13) (8)
Other income / (expense), net
(3) (11) 30 (24) 359
Income before income taxes $ 143 $ 222 $ 476 $ 1,093 (1) See the Impairment and Other Charges section for further information.
Corporate expense consists of unallocated selling, general and administrative
expenses as well as depreciation and amortization related to the Company's (2) corporate headquarters, centrally managed departments, unallocated insurance
and benefit programs, certain foreign exchange transaction gains and losses,
and other items.
Other income / (expense), net includes non-operating items, franchise royalty
income, changes in fair value of minority interests measured at fair value or
using the fair value measurement alternative, changes in the market value of (3) our available-for-sale security, our share of earnings or losses related to
our equity method investments, and net benefit expense related to our pension
and postretirement programs excluding the service cost component. See the
Other income / (expense), net section for further information.
Third Quarter 2022 Form 10-Q Page 22
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Sales
All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable sales also includes our direct-to-customers channel. Stores opened or closed during the period are not included in the comparable-store base; however, stores closed temporarily for relocation or remodeling are included. Stores that were temporarily closed due to the COVID-19 pandemic are also included in the computation of comparable-store sales. Computations exclude the effect of foreign currency fluctuations. Sales from acquired businesses that include inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, sales of WSS and atmos have been excluded from the computation of comparable-store sales. As a result of the Eastbay Team Sales divestiture, sales from this business were removed for the computation of comparable sales for all periods. For the thirteen weeks endedOctober 29, 2022 , total sales decreased by$16 million , or 0.7%, to$2,173 million , as compared with the corresponding prior-year period. For the thirty-nine weeks endedOctober 29, 2022 , total sales decreased by$204 million , or 3.1%, to$6,413 million , as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales increased by$72 million , or 3.3%, for the thirteen weeks endedOctober 29, 2022 , and decreased by$4 million , or 0.1%, for the thirty-nine weeks endedOctober 29, 2022 . Comparable sales increased by 0.8% and decreased by 3.9% for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively. The information shown below represents certain sales metrics
by
sales channel.
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021
Stores
Sales $ 1,818 $ 1,756 $ 5,310 $ 5,193
$ Change $ 62 $ 117
% Change 3.5 % 2.3 %
% of total sales 83.7 % 80.2 % 82.8 % 78.5 %
Comparable sales increase 4.7 % 4.2 % 1.9 % 32.7 %
Direct-to-customers
Sales $ 355 $ 433 $ 1,103 $ 1,424
$ Change $ (78) $ (321)
% Change (18.0) % (22.5) %
% of total sales 16.3 % 19.8 % 17.2 % 21.5 %
Comparable sales decrease (14.5) % (4.6) % (24.2) % (7.1) %
Sales from our acquired WSS and atmos banners were $162 million and $40 million ,
respectively, for the thirteen weeks ended October 29, 2022 , and $437 million
and $137 million , respectively for the thirty-nine weeks ended October 29, 2022 .
WSS, which was acquired during the third quarter of 2021, generated sales for
partial quarter of 2021 of $56 million . The information shown below represents
certain combined stores and direct-to-customers sales metrics, excluding the
sales from WSS (current and prior-year periods) and atmos.
Thirteen weeks Thirty-nine weeks
Constant Comparable Constant Comparable
Currencies Sales Currencies Sales
North America (7.7) % (1.1) % (15.6) % (9.9) %
EMEA 3.5 % 0.8 % 17.6 % 14.7 %
Asia Pacific 42.2 % 36.5 % 25.5 % 20.9 %
(3.5) % 0.8 % (8.0) % (3.9) %
Third Quarter 2022 Form 10-Q Page 23
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Despite the decline in sales as compared with our record levels in 2021, sales
exceeded the results of 2019. Excluding the effect of foreign exchange rate
fluctuations and our acquisitions, sales increased by 4.5% and by 2.2% for the
quarter and year-to-date periods, respectively, as compared with the
corresponding periods of 2019.
Comparable sales increased in our stores, however sales decreased in our
direct-to-customer channel for the quarter and year-to-date periods of 2022. Our
sales in stores increased, driven by strong demand, brand diversification
efforts, and improved access to high-quality inventory. Our direct-to-customer
channel continued to decrease as shoppers navigated back to physical locations.
Our North American operating segment's sales, excluding WSS, and
comparable-store sales for the current year were negatively affected by the
significant fiscal stimulus, which contributed to last year's growth, as well as
the effects of inflation on customer demand. Additionally, the wind down of the
Footaction business negatively affected sales, last year we operated 161 stores
as compared with 11 this quarter. Within EMEA, sales from the Foot Locker banner
increased as tourism returned to more historical levels driving traffic back to
our stores. The overall positive comparable sales for EMEA was partly offset by
continued decline in sales from the Sidestep banner, which generated a negative
decline in comparable sales for the quarter. Asia Pacific , excluding atmos,
generated increases from both strong performance in Australia and New Zealand
compared to last year's COVID-19 related store closures, coupled with growth in
Asia , based on expansion in that region. Asia Pacific's increases were affected
by the increase in operating days, the current year was essentially open for all
days as compared with approximately 56% and 75% for the quarter and year-to-date
periods last year, respectively.
From a product perspective, for the combined channels for the quarter, increased
sales from footwear product was offset by a decline in apparel sales, while
sales of accessories were essentially flat. For the year-to-date period, the
decline in sales was primarily from lower footwear and apparel sales, offset, in
part, by higher sales of accessories. The decline in footwear for the third
quarter was primarily due to lower sales from men's and kids' running footwear
products, and the decline in sales of apparel represented lower sales of men's
and performance apparel products. For the year-to-date period, men's, kids', and
performance footwear decreased, offset by a small increase in sales of women's
footwear. Apparel sales decreased in the men's, kids', and performance
categories, while sales of women's product increased.
Gross Margin
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
2022 2021 2022 2021
Gross margin rate 32.0 % 34.7 % 32.6 % 34.9 %
Basis point decrease in the
gross margin rate (270) (230)
Components of the change:Merchandise margin rate decline (280)
(210) Occupancy and buyers' compensation expense rate 10 (20) Gross margin is calculated as sales minus cost of sales. Cost of sales includes: the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers' compensation. Occupancy costs include rent (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities. The gross margin rate decreased to 32.0% for the thirteen weeks endedOctober 29, 2022 , as compared with the corresponding prior-year period, reflecting a 280-basis point decrease in the merchandise margin rate, and a 10-basis point leverage in the occupancy and buyers' compensation rate. For the thirty-nine weeks endedOctober 29, 2022 , the gross margin rate declined by 230 basis points, reflecting a 210-basis point decrease in the merchandise margin rate and a 20-basis point deleverage in the occupancy and buyers' compensation rate.
Third Quarter 2022 Form 10-Q Page 24
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The declines in merchandise margin rate reflected higher markdowns versus
historically-low levels last year and higher supply chain costs. Additionally,
merchandise margin is negatively affected by the recent acquisitions that
generate a lower rate, which is offset by lower occupancy costs and therefore
does not significantly affect the overall gross margin rate. The occupancy rate
also reflected the effect of prior year rent abatements related to COVID-19 that
represented $3 million and $14 million for the thirteen and thirty-nine weeks of
last year, respectively, as compared with insignificant amounts this year.Selling, General and Administrative Expenses (SG&A)
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021
SG&A $ 467 $ 458 $ 1,382 $ 1,326
$ Change $ 9 $ 56
% Change 2.0 % 4.2 %SG&A as a percentage of sales 21.5 % 20.9 % 21.5 % 20.0 % SG&A increased by$9 million , or$32 million excluding the effect of foreign currency fluctuations, for the thirteen weeks endedOctober 29, 2022 , as compared with the corresponding prior-year period. For the year-to-date period SG&A increased by$56 million , or$109 million excluding the effect of foreign currency fluctuations. Our newly acquired businesses contributed$44 million and$116 million for the quarter and year-to-date periods, respectively, to the overall increase. As a percentage of sales, SG&A increased by 60 basis points and 150 basis points for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, driven by higher labor costs, information technology and support expenses, and COVID-19 related matters in the prior year, partially offset by early savings from our cost optimization program.
SG&A for the thirteen and thirty-nine weeks ended
Depreciation and Amortization
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021
Depreciation and amortization $ 52 $ 49 $ 157 $ 142 $ Change $ 3 $ 15 % Change 6.1 % 10.6 % Depreciation and amortization expense increased by$3 million and$15 million for the thirteen weeks and thirty-nine weeks endedOctober 29, 2022 , respectively, as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased by$5 million and$20 million for the thirteen weeks and thirty-nine weeks endedOctober 29, 2022 , respectively, as compared with the corresponding prior-year periods. The increase was primarily related to the acquisitions
of WSS and atmos. Impairment and Other Charges
Transformation consulting charges were$17 million and$27 million for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively. Impairment of long-lived assets and right-of-use assets was not significant and$5 million for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, compared to$13 million and$52 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively. Acquisition and integration costs related to WSS and atmos were$1 million and$4 million for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, compared with$14 million during each of the prior year periods. Third Quarter 2022 Form 10-Q Page 25 Table of Contents
We recorded reorganization costs, primarily severance, of
For the thirteen and thirty-nine weeks endedOctober 30, 2021 , impairment of investments was$30 million and$32 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively, due to continued losses and updated estimates of value for the Company's minority investments. We recorded charges of$4 million in lease-related termination costs, and a severance charge of$2 million in connection with the reorganization of certain support functions, offset by$7 million of insurance recovery income related to 2020 social unrest losses for the thirty-nine weeks endedOctober 30, 2021 . Corporate Expense Thirteen weeks ended Thirty-nine weeks ended October 29, October 30, October 29, October 30, ($ in millions) 2022 2021 2022 2021 Corporate expense $ 39 $ 30$ 109 $ 91 $ Change $ 9 $ 18 Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense increased by$9 million and$18 million for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, as compared with the corresponding prior-year periods. Depreciation and amortization included in corporate expense was$10 million and$9 million for the thirteen weeks endedOctober 29, 2022 andOctober 30, 2021 , respectively, and$29 million and$25 million for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 , respectively. Excluding the changes in depreciation and amortization, corporate expense increased primarily due to higher information technology and support expenses. Operating Results Thirteen weeks ended Thirty-nine weeks ended October 29, October 30, October 29, October 30, ($ in millions) 2022 2021 2022 2021 Division profit $ 216$ 283 $ 660 $ 930 Division profit margin 9.9 % 12.9 % 10.3 % 14.1 %
Division profit margin as a percentage of sales decreased to 9.9% and 10.3% of sales for the thirteen weeks and thirty-nine weeks endedOctober 29, 2022 , respectively, with both sales channels experiencing declines in gross margin and deleveraging expenses. WSS and atmos generated division profit of$8 million and$4 million , respectively for the third quarter, and$28 million and$21 million for the year-to-date period. WSS' division results for the prior year period was not significant as the acquisition occurred during the quarter. Our Sidestep business has been underperforming and management is currently reviewing strategic actions to assess this operation. Management will monitor the results of this business during the fourth quarter and will assess, if necessary, the effect of various initiatives on the projected performance of this division, which may include an impairment review. Third Quarter 2022 Form 10-Q Page 26 Table of Contents Interest Expense, Net Thirteen weeks ended Thirty-nine weeks ended October 29, October 30, October 29, October 30, ($ in millions) 2022 2021 2022 2021 Interest expense $ (6) $ (4)$ (18) $ (10) Interest income 3 - 5 2
Interest (expense) income, net $ (3) $ (4) $
(13)
We recorded$3 million and$13 million of net interest expense for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively as compared with net interest expense of$4 million and$8 million for the corresponding prior-year periods. Interest expense increased primarily due to the issuance of the 4% Notes, partially offset by higher interest income from our cross-currency swap and higher interest rates earned on our cash and cash equivalents.
Other Income / (Expense), Net
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021Other income / (expense), net$ (11) $ 30 $ (24) $ 359 This caption includes non-operating items, including franchise royalty income, changes in fair value of minority investments measured at fair value or using the fair value measurement alternative, changes in the market value of our available-for-sale security, our share of earnings or losses related to our equity method investments, and net benefit (expense) related to our pension and postretirement programs excluding the service cost component. The thirteen weeks endedOctober 29, 2022 reflected a gain of$1 million from the divestiture of Eastbay Team Sales, and a$15 million loss on minority investments, primarily the decline in the fair value of our Retailors, Ltd. investment. The thirty-nine weeks endedOctober 29, 2022 reflected the gain from the divestiture of$19 million , a decline in our Retailors, Ltd. investment of$52 million , partially offset by$1 million of dividend income.
Other income / (expense), net also includes
Other income for the thirteen weeks endedOctober 30, 2021 primarily consisted of the$26 million increase in the fair value of our Retailors, Ltd. investment and other minority investment income of$1 million . The amount for the thirty-nine weeks endedOctober 30, 2021 includes a$290 million increase in the fair value of our minority investment in GOAT,$50 million of income related to Retailors, Ltd.,$4 million related to our insurance recovery from the 2020 social unrest, and other minority investment income of$3 million .
Activity related to our minority investments and the insurance recovery were all considered our non-GAAP adjustments in all of the periods presented.
Third Quarter 2022 Form 10-Q Page 27
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Income Taxes
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
($ in millions) 2022 2021 2022 2021
Provision for income taxes $ 47 $ 64 $ 154 $ 303
Effective tax rate 33.0 % 28.8 % 32.4 % 27.7 %
Our current year interim provision for income taxes was measured using an estimated annual effective tax rate, which represented a blend of federal, state, and foreign taxes and included the effect of certain nondeductible items as well as changes in our mix of domestic and foreign earnings or losses, adjusted for discrete items that occurred within the periods presented.
We regularly assess the adequacy of our provisions for income tax contingencies in accordance with applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized tax benefits considering new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation.
In the second quarter of 2022, we recorded a
Partially offsetting this charge were tax benefits totaling$2 million from reserves releases due to various statute of limitation lapses. The changes in tax reserves were not significant for any of the prior-year periods. We also recorded a tax expense of$6 million in connection with Eastbay Team Sales divestiture, including the effect of a non-deductible goodwill write-off, that occurred in the second quarter. During the thirty-nine weeks endedOctober 29, 2022 , we recorded$1 million of expense related to tax deficiencies from share-based compensation, as compared with an excess tax benefit of$2 million recorded in the corresponding prior-year period. Excluding the above-mentioned discrete items, the effective tax rates for the current year periods increased, as compared with the corresponding prior-year periods, primarily due to the change in the level and mix of domestic and foreign earnings. Our effective tax rate will vary due to numerous factors, such as level and geographic mix of income and losses, acquisitions, investments, intercompany transactions, foreign currency exchange rates, our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions. OnAugust 16, 2022 ,President Biden signed the Inflation Reduction Act ("IRA") of 2022 into law. The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum tax and a 1% excise tax on corporate stock repurchases in tax years beginning afterDecember 31, 2022 . We do not currently expect the IRA tax provisions will have a significant effect on our overall effective tax rate.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity has been cash flow from operations, while the
principal uses of cash have been to fund inventory and other working capital
requirements; finance capital expenditures related to store openings, store
remodelings, internet and mobile sites, information systems, and other support
facilities; make retirement plan contributions, quarterly dividend payments, and
interest payments; and fund other cash requirements to support the development
of our short-term and long-term operating strategies, including strategic
investments.
Third Quarter 2022 Form 10-Q Page 28
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We generally finance real estate with operating leases. We believe our cash,
cash equivalents, future cash flow from operations, and amounts available under
our credit agreement will be adequate to fund these requirements.
The Company may also repurchase its common stock or seek to retire or purchase
outstanding debt through open market purchases, privately negotiated
transactions, or otherwise. Share repurchases and retirement of debt, if any,
will depend on prevailing market conditions, liquidity requirements, contractual
restrictions, strategic considerations, and other factors. The amounts involved
may be material. As of October 29, 2022 , approximately $1,103 million remained
available under our current $1.2 billion share repurchase program, which was
approved in February 2022 . The new program does not have an expiration date.
Any material adverse change in customer demand, fashion trends, competitive
market forces, or customer acceptance of our merchandise mix, retail locations
and websites, uncertainties related to the effect of competitive products and
pricing, our reliance on a few key suppliers for a significant portion of our
merchandise purchases and risks associated with global product sourcing,
economic conditions worldwide, the effects of currency fluctuations, continued
uncertainties caused by the COVID-19 pandemic, as well as other factors listed
under the headings "Disclosure Regarding Forward-Looking Statements," and "Risk
Factors" could affect our ability to continue to fund our needs from business
operations.
Operating Activities
Thirty-nine weeks ended
October 29, October 30,
($ in millions) 2022 2021
Net cash (used in) provided by operating
activities $ (32) $ 498
$ Change $ (530)
Operating activities reflects net income adjusted for non-cash items and working
capital changes. Adjustments to net income for non-cash items include gains,
losses, impairment charges, other charges, depreciation and amortization,
deferred income taxes, and share-based compensation expense.
The decrease in cash from operating activities reflected higher merchandise
purchases and payments of accounts payable and accrued and other liabilities, as
well as lower net income, as compared with the same period last year. Higher
merchandise purchases were necessary as our year-end inventory levels were
affected by the COVID-19 pandemic and the associated supply chain challenges.
As of October 29, 2022 , we have withheld approximately $5 million of lease and
lease-related payments as we continue to negotiate rent deferrals or abatements
with our landlords for the period that our stores were closed due to the
COVID-19 pandemic.
Investing Activities
Thirty-nine weeks ended
October 29, October 30,
($ in millions) 2022 2021
Net cash used in investing activities
$ 801 The change in investing activities primarily reflected the WSS acquisition in the prior year and higher capital expenditures in the current year, partially offset by divestiture of certain assets. During the third quarter of 2021, we completed the acquisition of WSS for$737 million , net of cash acquired. During the thirty-nine weeks endedOctober 29, 2022 , we paid an additional$18 million for the WSS and atmos acquisitions upon the satisfaction of certain post-closing conditions. Third Quarter 2022 Form 10-Q Page 29 Table of Contents For the thirty-nine weeks endedOctober 29, 2022 , capital expenditures increased by$81 million to$218 million , as compared with the corresponding prior-year period. Our full-year capital spending is expected to be$265 million . The forecast includes$182 million related to the remodeling or relocation of approximately 140 existing stores and the opening of approximately 110 new stores, as well as$83 million for the development of information systems, websites, and infrastructure, including supply chain initiatives. We have invested$5 million in minority investments during the current year, including various limited partner venture capital funds managed by Black fund managers, who are committed to advancing diverse-led businesses as part of our Leading in Education and Economic Development (LEED) initiative. During the second quarter of 2022, we sold our position in one of our minority investments receiving proceeds of$12 million . In the prior-year period, we invested$115 million which was comprised of an additional$33 million investment in GOAT, a$68 million investment in a public entity (Retailors, Ltd.), and a$14 million investment in various companies, primarily related to LEED.
Also during the second quarter of 2022, we sold our Eastbay Team Sales business
receiving proceeds of
We sold the formerRunners Point headquarters in the first quarter of 2021, generating proceeds of$3 million . Also last year, we received insurance proceeds of$3 million related to property and equipment claims from the social unrest losses in 2020. Financing Activities Thirty-nine weeks ended October 29, October 30, ($ in millions) 2022 2021 Net cash (used in) / provided by financing activities$ (237) $ 154 $ Change$ (391) Cash used in financing activities was driven by our return to shareholders initiatives, including our share repurchase program and cash dividends, as follows: Thirty-nine weeks ended October 29, October 30, ($ in millions) 2022 2021 Share repurchases$ 129 $ 170 Dividends paid on common stock 113 72
Total returned to shareholders
During the thirty-nine weeks endedOctober 29, 2022 , we repurchased 4,050,000 shares of common stock for$129 million under our share repurchase programs, whereas in the prior year we spent$170 million to repurchase shares. We also declared and paid$113 million in dividends representing a quarterly rate of$0.40 per share in 2022, as compared with$72 million in dividends representing quarterly rates of$0.20 per share for the first two quarters of 2021 and$0.30 per share for the third quarter. We paid$1 million to satisfy tax withholding obligations relating to the vesting of share-based equity awards during the thirty-nine weeks endedOctober 29, 2022 , as compared with$11 million in 2021. Offsetting this amount were proceeds received in connection with employee stock programs of$7 million in the current year, as compared with$17 million in the prior-year period. Additionally, we paid$5 million of principal on our finance lease obligations, mainly related to certain WSS stores.
Cash provided by financing activities in the prior-year period consisted
primarily of the issuance of the 4% Notes due 2029, for which we received
Third Quarter 2022 Form 10-Q Page 30
Table of Contents
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the 2021 Form 10-K.
Recent Accounting Pronouncements
Descriptions of the recently issued and adopted accounting principles are included in Item 1. "Financial Statements" in Note 1, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements.
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