avatar Foot Locker, Inc. Retail Trade
  • Location: New York 
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    2 0 1 5 AN N U AL R EP O RT Developing Our Leadership Positions


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    Foot Locker, Inc. (NYSE: FL) is a leading global retailer of athletically inspired shoes and apparel. Headquartered in New York City, the Company operates 3,383 athletic retail stores in 23 countries in North America, Europe, Australia, and New Zealand under the brand names Foot Locker, Champs Sports, Kids Foot Locker, Footaction, SIX:02, Lady Foot Locker, Runners Point, and Sidestep. ;OL*VTWHU`HSZVVWLYH[LZHKPYLJ[[VJ\Z[VTLYI\ZPULZZVɈLYPUNH[OSL[PJMVV[^LHYHWWHYLSHUKLX\PWTLU[[OYV\NOP[Z0U[LYUL[ ˆiv ÝiVṎÛi"vwViÀ ˆiv ÝiVṎÛi"vwViÀ œÀÌ Ƃ“iÀˆV> iÜ9œÀŽ] iÜ9œÀŽ£äää£  mobile, and catalog channels. In addition to websites for each of the store banners, such as footlocker.com, the direct-to-customer >˜` ˆiv"«iÀ>̈˜}"vwViÀ  ­Ó£Ó®ÇÓä‡ÎÇää business includes Eastbay, a leading destination for the serious athlete. "ÕÀÜiLÈÌi>Ì ÌÌ«Ã\ÉÉÜÜÜ°vœœÌœVŽ œÕÀ œ“«>˜Þ]>ÃÜi>Ãœ˜ˆ˜iÛiÀ Ȝ˜ÃœvœÕÀœÀ“£ä‡]- Ài«œÀÌÃ] F I N AN C I AL H I G H LI G H T S * ˆivˆ˜>˜Vˆ>"vwViÀ 2011 2012 2013 2014 2015 Sales** $ 5,623 $ 6,101 $ 6,505 $ 7,151 $ 7,412 ÝiVṎÛi"vwViÀ Sales per Gross Square Foot $ 406 $ 443 $ 460 $ 490 $ 504 *°"° œÝÎä£Çä  ˆivՓ>˜,iÜÕÀViÃ"vwViÀ œi}i-Ì>̈œ˜]/iÝ>ÃÇÇn{ӇΣÇä Adjusted Financial Results: ­nÈÈ®nxLJÓÓ£È  ­Ó䣮Ènä‡ÈxÇn Earnings Before Interest and Taxes** $ 446 $ 602 $ 676 $ 816 $ 946 *ÀiÈ`i˜Ì>˜` ˆiv ÝiVṎÛi"vwViÀ ­nää®ÓΣ‡x{și>Àˆ˜}“«>ˆÀi`‡//9* œ˜i ÜÜÜ°Vœ“«ÕÌiÀà >Ài°Vœ“Ɉ˜ÛiÃ̜À EBIT Margin 7.9% 9.9% 10.4% 11.4% 12.8% Net Income** $ 281 $ 380 $ 432 $ 522 $ 606 -i˜`ViÀ̈wV>ÌiÃvœÀÌÀ>˜ÃviÀ>˜`>``ÀiÃà ˆivƂVVœÕ˜Ìˆ˜}"vwViÀ Net Income Margin 5.0% 6.2% 6.6% 7.3% 8.2% *ÀiÈ`i˜Ì>˜` ˆiv ÝiVṎÛi"vwViÀ *°"° œÝÎä£Çä Diluted EPS from Continuing Operations $ 1.82 $ 2.47 $ 2.87 $ 3.58 $ 4.29 œi}i-Ì>̈œ˜]/iÝ>ÃÇÇn{ӇΣÇä Return on Invested Capital 11.8% 14.2% 14.1% 15.0% 15.8% Cash, Cash Equivalents and Short-Term Investment Position, Net of Debt** $ 716 $ 795 $ 728 $ 833 $ 891 ˆiv˜vœÀ“>̈œ˜"vwViÀ Î{x*>ÀŽƂÛi˜Õi 9LZ\S[ZPU[OPZ[HISLHUK[OYV\NOV\[WHNLZ[OYV\NOYLMLY[VUVU.((7HKQ\Z[LKÄN\YLZ iÜ9œÀŽ] iÜ9œÀŽ£ä£x{ ­Ó£Ó®Çxn‡™Çää See pages 16-17 of Form 10-K for the reconciliation of GAAP to non-GAAP adjusted results. ˆiv ÝiVṎÛi"vwViÀ ** In Millions à >ÀiœÜ˜iÀÓ>Þ>Ãœ“>Žiœ«Ìˆœ˜> TAB LE O F C O N T EN T S ˆiv ÝiVṎÛi"vwViÀ Financial Highlights ............................................................ 1 Apparel ............................................................................... 13 Our Businesses .................................................................. 2 Growth in Women’s ............................................................ 15 Letter to Shareholders ........................................................ 3 Industry-Leading Team ....................................................... 16 Our Vision, Core Values, Strategies and Goals .................. 6 Community ......................................................................... 17 *ÀiÈ`i˜Ì>˜` ˆiv ÝiVṎÛi"vwViÀ Core Business .................................................................... 7 Form 10-K .......................................................................... 18 >˜>}iÀ]œœÌœVŽiÀƂÈ>É*>VˆwV Kids’ Business .................................................................... 9 Board of Directors, Corporate Management, œÜ˜i`LÞœœÌœVŽiÀ]˜V°œÀˆÌÃ>vwˆ>Ìið European Expansion .......................................................... 11 Division Management, Corporate Information ................... IBC Digital ................................................................................. 12 *ÀiÈ`i˜Ì>˜` ˆiv ÝiVṎÛi"vwViÀ ­Ó£Ó®ÇÓä‡{Èää° This report contains forward-looking statements within the meaning of the federal securities laws. 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    footlocker.com ladyfootlocker.com kidsfootlocker.com APPROVED THE PLACE FOR HER GO BIG footaction.com six02.com champssports.com OWN IT IT’S YOUR TIME WE KNOW GAME runnerspoint.com sidestep-shoes.com eastbay.com FIRST CHOICE FOR ATHLETES YOUR WAY, OUR PASSION SNEAKER LIFESTYLE 2


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    LETT ER TO S HA R EHO L D E RS Current Long-Term 2009 2014 2015 Objectives DE V E LO PI NG Sales (billions) Sales per Gross Square Foot $333 $4.9 $7.2 $490 $7.4 $504 $10 $600 OU R L EA D E RS H IP Adjusted EBIT Margin 2.8% 11.4% 12.8% 12.5% Adjusted Net Income Margin 1.8% 7.3% 8.2% 8.5% POSITIONS Return on Invested Capital 5.3% 15.0% 15.8% 17% Welcome to Foot Locker, Inc.’s Annual Report for 2015, an 2015 FINANCIAL HIGHLIGHTS outstanding year for our Company, filled as it was with record As a company, we continued to deliver industry-leading financial and operating results. Indeed, I could not be more performance in 2015, as seen in the table above. Of particular proud of the many accomplishments our team compiled in this, note, in our first year working towards our current long-term my first full year as Chief Executive Officer. We began the year objectives, we succeeded in attaining one of them, having by introducing a revised strategic framework and priorities, as achieved an Earnings Before Interest and Taxes rate of 12.8 well as elevated long-term financial objectives, and I am pleased percent of sales. to report in this letter and on the following pages that we contin- Other financial highlights accomplished by the Foot Locker, ued to make progress throughout the year on multiple initiatives Inc. team in 2015 include: and on all the key performance measures we track. • Sales of $7.4 billion in total, up 8.9 percent from 2014 on a For those of you newer to our story, it was towards the end constant currency basis. of 2009 that we truly started our journey to become the high- performance company we are today. It was then that we intro- • Non-GAAP net income of $606 million in 2015, a 16 percent duced our first set of strategic priorities and long-range financial increase over last year’s $522 million. goals, and one constant ever since has been our vision: to be • Earnings of $4.29 per share, a 20 percent increase over last the leading global retailer of athletically inspired shoes and year’s EPS, with the four percentage point differential be- apparel. While each of the words in that vision statement was tween the growth in net income and EPS due to our acceler- chosen carefully, I would like to emphasize one particular word ated share repurchase activity during the year. which will provide a theme for this shareholder report: leading. We do not aspire merely to be good, above average performers; • 24 consecutive quarters of meaningful sales and profit we aspire to be leaders. We strive to be leaders as a company, increases, consistently lifting our operational and financial as operating divisions, as teams, as individuals, in the communi- results to new heights. ties in which we work and live, and as business partners. This leadership crosses multiple dimensions: geographic regions, BUILDING ON STRENGTHS sales channels, retail banners, families of business, and product categories. The strength of our results came from diverse sources. Each person in the Company can and does play an impor- For example: tant role in developing our position as leaders in the athletic industry, a point which we consistently emphasize at all levels of Channels We drove a 7.6 percent comparable sales gain in the organization. You will see many powerful examples of such our stores while also increasing sales in our direct-to-customer leadership positions throughout this annual report. channel by 14.4 percent. Geographies Our performance was strong in the United States, with a mid-single digit comparable sales gain, while our teams outside the U.S. drove even faster sales growth, with total sales in Europe, Canada, and Australia each increasing more than 10 percent in local currencies. Product Categories We made substantial progress improving the sales and profitability of all four legs of our product category stool: basketball, running, and casual footwear, and apparel. As the year unfolded, it became increasingly clear that we have de- veloped strong leadership positions in more than just basketball sneakers. True, our basketball business performed very well in 2015, up almost 10 percent, yet our sales of running product 3


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    TOTAL SALES EARNINGS PER SHARE (in billions) $7.4 $4.29 $7.2 $6.5 $6.1 $3.58 $5.6 $4.9 $5.1 $2.87 $2.47 $1.82 $1.10 $0.54 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 increased more than 10 percent. On top of that, we led the remodel program in our Foot Locker and Champs Sports industry in sales of a wide variety of classic sneakers, demon- banners, and we began a significant rollout of our remodeled strating the strength and diversity of our footwear assortments. Footaction store design, including several powerful flagship Apparel improved overall, as well, although not yet at the level of stores such as State Street in Chicago and Fulton Street in our footwear business. Brooklyn. Many of our remodeled stores, across all of our banners, included a vendor partnership space. For example, Families of Business Each of our men’s, women’s and kids’ in partnership with Nike we reached 200 Foot Locker House of footwear businesses posted substantial sales gains. The gain Hoops shops around the world and 37 Fly Zones in Kids Foot in men’s footwear in our core adult banners of Foot Locker, Lockers in North America. We have more shop-in-shops with Champs Sports, and Footaction was almost 10 percent, while Nike in our other banners, as well as additional partnerships sales of women’s product in those banners increased almost with adidas, Puma, and Under Armour. as much. Meanwhile, our women-specific division of Lady Foot We also continue to invest in our digital and mobile plat- Locker / SIX:02 also generated a solid mid-single digit compar- forms, our logistics and information technology systems, and able sales gain. Finally, our already-leading children’s footwear other infrastructure to support the growth of our business. That business increased more than 10 percent, with strength in both our return on invested capital reached a new height of 15.8 Kids Foot Locker itself and in the sales of children’s product in percent in 2015 is solid evidence that the strategic initiatives our other banners. behind these investments have led us in a positive direction and generated tremendous value for our business and for you, our Gross Margin Our strong performance did not stop at the shareholders. sales line; the rest of our income statement was also managed The returns generated by our investments in recent years carefully. Our gross margin rate increased to 33.8 percent of have put us in a strong financial position, enabling our Board sales, an all-time high for our company, for two primary reasons. of Directors to authorize an increase of our capital expenditure First, by focusing on offering the most innovative, premium program to almost $300 million in 2016. We will continue to sneakers created by our vendor partners, we strengthened our invest in our store remodel and vendor partnership projects, position at the top end of the distribution pyramid for athletic our website and mobile functionality, and training programs and shoes and apparel, resulting in more full-price selling and higher technology to enhance the capabilities of our associates. At merchandise margins. Second, we continued to drive success- the same time, we are building transformative retail spaces in ful initiatives to improve store productivity, leading to leverage of midtown Manhattan as well as relocating our corporate head- our mostly fixed rent expense. quarters down the block. 2016 will be another exciting year! SG&A This same emphasis on productivity, along with a steady Returns to Shareholders While making significant capital discipline in managing operating expenses, led to a reduction investments in our business to support future growth towards in our selling, general, and administrative expense rate to an all- our 2020 financial objectives, we are also committed to return- time best rate of 19.1 percent of sales in 2015. ing cash to our shareholders, with both our dividend and our share repurchase program hitting new highs in 2015. CREATING SHAREHOLDER VALUE: A BALANCED APPROACH • Dividends We paid $1.00 per share in divi- dends overall in 2015, and in February our Board Investing in the Business Our capital expend- approved a 10 percent increase in our common itures increased to $225 million in 2015, as we continue to lead the athletic market in stock dividend payable in the first quarter of creating exciting places to shop and 2016. This quarterly increase, to 27.5 cents buy, not just in terms of our stores, per share, marks the sixth year in a row with a but also our digital and mobile dividend increase in the 10 percent range. sites. We continued our 4


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    “Our love of the game has enabled us to build leadership positions in many areas—across banners, geographies, channels, and product categories—and consistently break records in our financial results.” • Share Repurchases Early in 2015, our Board of Directors CONCLUSION authorized a $1 billion share repurchase program, and during There are a great many factors that need to align to create the year we spent $419 million to buy back approximately a high-performing team such as we have at Foot Locker, Inc. 6.7 million shares. Some of that activity was under our previ- today. One phrase that is part of our company-specific leader- ous authorization, leaving $637 million remaining under the ship formula is “Love the Game.” Starting with our associates current repurchase authorization at year end. in stores around the world, and including associates in regional Between the $139 million spent on dividends and the $419 offices, distribution and financial service centers, and headquar- million of share repurchases, we returned $558 million directly to ters facilities, our entire team loves the game of retail, and we shareholders in 2015, which was 93 percent of non-GAAP net play to win. We are passionate about our own job responsibil- income, while still retaining a solid balance sheet offering good ities, our team’s specific goals, and the objectives of the entire financial flexibility for the future. The authorizations to increase corporation. This passion has enabled us to build leadership both our capital expenditures and our dividend rate in 2016 positions in many areas—across banners, geographies, chan- exhibit the Board’s confidence in our Company’s ability to lead nels, and product categories—and consistently break records in the athletic retail industry and maintain our financial performance our financial results. I want to thank each and every member of in the future. the Foot Locker, Inc. team for their high level of execution and outstanding contributions to our recent success, and for creat- ing the potential for even more excellent results in the future. LOOKING FORWARD I also want to thank our outstanding and highly-engaged The strategic framework that we introduced early in 2015 Board of Directors, whose guidance and support for me and remains central to our planning as we focus on the near- and the rest of our senior leadership team has helped the Company long-term objectives we have challenged ourselves to achieve. achieve so much and positioned us so well for the future. As a reminder, the framework is depicted below: I especially want to acknowledge and thank Nick DiPaolo, who was elected Chairman of the Board in May 2015, for his Customer business insights and dedication to our Company. Engagement Finally, I want to thank you, our shareholders, for your sup- People port and constructive dialogue over the past year. Your belief in our strategic initiatives, our core values, and, above all, the Women’s strength of our team is certainly gratifying. I look forward to Apparel Europe Digital Kids’ continuing our journey together towards being the leading global retailer of athletically inspired shoes and apparel. Core Business The corresponding strategic priorities are to: • Drive performance in the Core Business with compelling customer engagement Richard A. Johnson • Expand our leading position in the Kids’ business President and Chief Executive Officer • Aggressively pursue European expansion opportunities • Build our Apparel penetration and profitability • Build a more powerful Digital business with customer- focused channel connectivity • Deliver exceptional growth in our Women’s business • Build on our industry-leading team by embracing the power of our People We have already developed leadership positions in many of these areas—positions of strength we intend to build on further —and we believe we have excellent opportunities yet to seize in all of these businesses as we focus on the future. I’ll save most of the 2015 highlights and near-term initiatives for the remaining pages of this report. 5


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    Our Vision To be the leading global retailer of athletically inspired shoes and apparel. COR E VA L U ES INTEGRITY LEADERSHIP EXCELLENCE SERVICE TEAM WORK INNOVATION act honestly, respect, inspire, strive to be the satisfy our collaborate, be a student of the ethically develop best in everything customers trust, support, business to initiate and honorably and empower we do every time commit and foster new ideas COMMUNITY embrace diversity, act responsibly for our customers, associates, investors and communities E X E CUTE S T R AT EGIES • Drive performance in the Core Business • Build Apparel penetration and profitability with compelling customer engagement • Build a more powerful Digital business with • Expand our leading position in Kids’ customer-focused channel connectivity • Aggressively pursue European • Deliver exceptional growth in Women’s expansion opportunities • Build on our industry-leading team by embracing the power of our People ACHIE VE R ES U LTS Sales Sales per Earnings Net Return on Inventory B E A TOP Gross Square Before Interest Income Invested Turnover Q U ARTILE $10 Foot and Taxes Capital 3+ PE R F ORM ER BILLION $600 12.5% 8.5% 17% TIMES 6


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    DRI V E PE RFORM A NCE I N TH E CORE BUS I N ES S A year ago, we identified five strategies to elevate the • Promoting and extending our store banners through performance of our core Foot Locker, Champs Sports, and powerful 360o marketing Footaction businesses from their already-record levels: • We successfully extended our leadership position in social media engagement on Facebook, Instagram, • Creating fresh, engaging store environments, Twitter, and YouTube primarily through our store remodel programs and by testing, developing, and expanding innovative • We created strong marketing programs featuring vendor partnerships some of the most popular athletes and entertainers in the world • By the end of 2015, we had remodeled approximately 30 percent of the Foot Locker and Champs Sports store fleets, and just under 20 percent of the • Providing our sales associates with tools and training Footaction stores to best serve our customers • We significantly expanded our vendor shop-in-shops, • We invested in technology, both in-store—such as and now have 200 House of Hoops in partnership handheld devices to facilitate inventory location— with Nike. We also have powerful collaborations with and behind-the-scenes systems to improve product adidas, Jordan, Puma, and—new in 2015—an exciting allocation and trend analysis premium destination with Under Armour called The Armoury at Champs Sports • Building a highly-compelling, locally-relevant footwear • We created new flagship retail destinations in and apparel assortment Chicago, Los Angeles, and Brooklyn, among other locations, with two more pinnacle shopping environ- • The steadiness of our sales gains throughout the ments scheduled to open in Manhattan in 2016 year highlighted the fact that we have developed leadership positions in each of our primary footwear categories: basketball, running, and classics 7 Miracle Mile, Las Vegas, opened in Spring 2015


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    S A L E S PE R S Q UA RE F OOT $504 $490 $460 $443 $406 $360 $333 2009 2010 2011 2012 2013 2014 2015 12 8


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    N E T IN C OME E X PA ND (in millions) $606 $522 OUR LE A DI NG $380 $432 POS ITION I N KIDS’ $281 $173 $85 2009 2010 2011 2012 2013 2014 2015 Our Kids’ business continued to see tremendous growth around the world, as we expand our leadership position in this space as well. The three primary strategies we are pursuing to build on our advantage are: • Developing the kids’ business globally • We expanded the geographical footprint of our Kids’ Foot Locker banner to 374 locations: 349 in the United States, 18 in Europe, and 7 in Canada • We opened 30 Fly Zone shop-in-shop concepts in partnership with Nike • Sales of children’s footwear increased at a double digit percentage rate in all of our regions and in most of the banners that sell children’s product • Driving a full-family experience by building connectivity with parents, both in-store and online • We utilized professional athletes, such as Under Armour’s NBA All-Star Stephen Curry and Nike’s NFL All-Pro Rob Gronkowski, to create authentic, aspirational, and fun marketing content • Kids Foot Locker expanded its partnership with the Boys and Girls Club, thereby making an even bigger difference in the lives of kids and their families • Leveraging our strengths as the power player for kids in basketball, running, and casual shoes, as well as apparel • Similar to our adult business, we have developed leadership positions in the kids’ market for premium, athletically-inspired shoes across categories. Foot Locker and Kids Foot Locker, in fact, occupy the #1 and #3 positions as destinations for children’s athletic footwear in the United States* NET INCOME MARGIN 8.2% 7.3% 6.6% 6.2% 5.0% 3.4% 1.8% 2009 2010 2011 2012 2013 2014 2015 9 *NPD U.S. Consumer Panel as of July, 2015 (Wal-Mart #2)


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    PURSUE EUROPE AN E X PA N S ION Our Foot Locker business in Europe generated double-digit percentage comparable sales gains in almost every country and across all families of business. Our strategies to build on this momentum include: • Continuing to expand the Foot Locker banner, especially in underpenetrated markets • We added 16 new Foot Locker stores and two Kids Foot Locker stores in Europe, including a new flagship Foot Locker store in Madrid (shown below) that got off to a great start with a visit by NBA star Kevin Durant • Expanding Runners Point and Sidestep banners into new countries • Runners Point entered Austria with three new stores, including a key store in central Vienna (top right) which quickly drew exceptionally strong enthusiasm from the local running community • We are continuing to focus on segmenting our banners in Germany and diversifying the product offerings in order to position ourselves for future geographical expansion • Leveraging our strength as a power player across key product categories and families of business • Our merchant teams in Europe did an outstanding job leading the market in offering exciting new footwear and apparel styles from adidas, Nike, and our other brand partners • Our deep knowledge and understanding of local assort- ment preferences positions us well as a true pan-Euro- pean leader in the premium end of the sneaker market • Building our capability for substantial digital growth • We streamlined and consolidated the leadership of our Runners Point Group and Foot Locker digital businesses • We are embracing our digital opportunity by creating powerful and engaging online marketing content and having an “always on” social media strategy 11


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    BUILD A MORE POWE RFUL DIGITAL BUS I N E S S Our customers live in a world where they’re always connected digitally, and a very high percentage of our transactions, both those that end up being completed in a store and online, start on a mobile device. Due to strong profitability in our stores as well as online, we remain channel neutral and intend to let our customers decide how high digital will grow over time as a percentage of total sales. Meanwhile, the primary initiatives we identified last year to sustain our leadership position online include: • Creating a more engaging, personalized digital experience that reflects each brand’s essence • We introduced mobile apps for Foot Locker and Champs Sports with capabilities most in demand by our customers, including embedded product release calendars and locators • We created shoemojis for the Foot Locker app, providing our customers a unique way to talk about and share their passion for their favorite sneaker styles • Investing in technology platforms that deliver a high quality, coordinated shopping experience online, in store, and on mobile • We made significant investments in mobile technologies; mobile represents a tremendous portion of our online traffic and a rapidly growing percentage of our digital sales • We continued to enhance the customer experience by investing in systems to support BOSS (Buy Online, Ship from Store), another rapidly growing capability of our business • Meeting customer needs by leveraging our entire Company’s capabilities • Drawing resources from around our Company, we consoli- dated all of our European digital businesses onto a common technology platform, enhancing customer experience and facilitating future development 12


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    GROSS MARGIN 33.8% 33.2% 32.8% 32.8% 31.9% 30.0% 27.7% 2009 2010 2011 2012 2013 2014 2015 13


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    BUILD APPA REL PE N E TR ATION A N D PROFITA BI LIT Y We made solid progress improving our apparel busi- nesses in most of our banners, although apparel as a percent of total sales declined to 18.5 percent due largely to our very strong footwear sales in 2015. The strategies we are pursuing to lift our apparel performance include: • Enhancing banner segmentation by clearly • Improving responsiveness and speed to market by identifying the role of each brand and apparel partnering with existing vendors and expanding our category vendor base • Overall apparel profitability increased due to a • We utilized our Team Edition production capabilities successful focus on special, athletically-inspired, in collaboration with our vendors to get a jump on and fashion-right assortments, carefully targeting emerging t-shirt styles the core customer at each banner • We built on our popular Sneaker Freak and Champs • Our goal is to drive the level of excitement in Sports Gear private label programs apparel to be on par with the premium footwear selections our customers already expect from us • Improving our apparel presentations across the fleet and displaying full brand stories • Strengthening our capabilities by investing in talent and tools • By improving the visibility and accessibility of our apparel and accessories, the continued rollout of • We continued to add experienced apparel store remodels and vendor shop-in-shops has merchants and provide them with systems to more significantly elevated the customer’s connection quickly identify opportunities to improve with our brands our apparel allocations • Actively managing product life cycles • Our apparel markdown rate decreased meaning- fully as a result of initiatives to deliver fresh apparel styles more frequently and driving down the aver- age age of our inventory • Improving the number of times our apparel inven- tory turns over in a year continues to be a major focus in 2016 EBIT MARGIN 12.8% 11.4% 10.4% 9.9% 7.9% 5.4% 2.8% 2009 2010 2011 2012 2013 2014 2015 14


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    DE LI V E R E XCE P TION A L G ROW TH I N WOMEN’S We made good progress in our women’s business, especially in footwear. The Lady Foot Locker / SIX:02 division produced comparable store sales gains in each quarter, bringing our streak of delivering such gains to seven consecutive quarters. The strategies to deliver exceptional growth in women’s going forward include: • Developing SIX:02 into our primary women’s brand • We opened 15 new SIX:02 stores, doubling the store count to 30 • We are separating the leadership of Lady Foot Locker and SIX:02, enabling the SIX:02 team to concentrate on developing that brand without the added responsibility of managing the transition of the Lady Foot Locker business • Strengthening our SIX:02 customer connection by building brand awareness and providing superior store and online experiences • In 2016, we intend to relaunch the SIX02.com site with stronger storytelling and connections to our store base • We are also well underway in creating pinnacle SIX:02 experiences inside our new flagship Foot Locker stores in New York City on 34th Street and in Times Square • Building our apparel business in concert with our major vendors • We are resetting our apparel business to focus more on special, exclusive product with more of a fashion edge • We are partnering with our vendors to tell stronger collection and limited edition stories • Expanding women’s to play a more significant role in all of our relevant banners • Sales of women’s footwear increased at a double digit percentage rate in most banners 15


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    BUILD ON OUR I N DUS TRY- LE A DI NG TE AM The record-breaking success we have achieved over the last several years—and the potential to attain our 2020 financial and operational objectives—is due primarily to the strength of the outstanding team at Foot Locker, Inc. The initiatives we are focused on now to make our team even stronger include: • Building on our reputation as being a great place to work, with a strong culture and highly-engaged work force • Our overall favorability scores exceeded global and retail benchmarks in our associate engagement survey • Associate turnover rates were significantly better than industry norms, both in headquarters organizations and among store teams • Attracting talent with a powerful and inclusive employment brand • We added key talent across our businesses, bolstering our merchant, technology development, and strategy functions, among others • Accelerating our capability to drive operational perfor- mance and enable associates to reach their full potential • During 2015, we developed a new global framework for our operating divisions, consolidating leadership of our North American store businesses under Jake Jacobs, and our international operations under Lew Kimble • At the same time, we extended the General Manager role to each of our banners underneath those two leaders • Creating a connected, diverse, and high-performing organization • Our Human Resources team continues to develop exciting new education, coaching, and training programs that bring together leaders from different functions all around the world 16


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    RE M A IN COM M IT TE D TO COMMUNIT Y As a Company, we not only strive to make a difference Beyond our financial in the lives of our associates and our customers, we also commitment to education, aim to contribute to the communities in which we live we also volunteer signifi- and work. For example, the Foot Locker Foundation, Inc. cant time and resources has developed significant partnerships and programs to to other premier charitable improve and enrich the educational, health and sports organizations, including the opportunities for youth across the country. The Founda- American Cancer Society, tion’s “On Our Feet” fundraising gala has raised more The Fred Jordan Missions, and the Two Ten Footwear than $16 million to support our youth over the past 15 Foundation. This past year we also generated great years, and has awarded over 850 scholarships to out- enthusiasm in the Fitness Challenge organized through the standing students, both through its partners’ and its partnership between the Kids Foot Locker Foundation and internal programs. the Boys & Girls Club of America. Kids Foot Locker was also the title sponsor of Alonzo Mourning’s Family Health Since 2011, the Foot Locker Scholar Athlete’s pro- and Wellness Winter Game event. gram has invested $2 million in the education of some of America’s most promising scholar-athletes. The program Along with our corporate initiatives, our people also awards $20,000 college scholarships to 20 exceptional take pride in supporting local and international key causes, students who demonstrate academic excellence and such as Zoneparc in the Netherlands, building innovative strong leadership skills, both in sports and within their playgrounds in neighborhoods in need, and the Make a communities. Wish Foundation in Europe. Giving back to our communi- ties and enriching people’s lives is a long-held philosophy As a new addition to the Foot Locker Scholar Athlete’s that extends to our associates all over the world, and we program in 2015, one of the twenty winners will also be are proud to see it resonating today as part of Foot Locker, selected for the Ken C. Hicks scholarship, in honor of our Inc.’s culture. former Chairman and CEO, for demonstrating superior educational achievement, outstanding leadership, and a true love of the game. 17


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    This line represents final trim and will not print FORM 10-K 18


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    This line represents final trim and will not print UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) 嘺 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 2016 OR □ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-10299 (Exact name of registrant as specified in its charter) New York 13-3513936 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 112 West 34th Street, New York, New York 10120 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (212) 720-3700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $0.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 嘺 No 䡺 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes 䡺 No 嘺 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 嘺 No 䡺 Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 嘺 No 䡺 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. □ 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 嘺 Accelerated filer □ Non-accelerated filer □ Smaller reporting company □ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes 䡺 No 嘺 The number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding as of March 21, 2016: 136,094,471 The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, August 1, 2015, was approximately: $7,523,772,438* * For purposes of this calculation only (a) all directors plus three executive officers and owners of five percent or more of the Registrant are deemed to be affiliates of the Registrant and (b) shares deemed to be ‘‘held’’ by such persons include only outstanding shares of the Registrant’s voting stock with respect to which such persons had, on such date, voting or investment power. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive Proxy Statement (the ‘‘Proxy Statement’’) to be filed in connection with the Annual Meeting of Shareholders to be held on May 18, 2016: Parts III and IV.


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    This line represents final trim and will not print TABLE OF CONTENTS PART I Item 1. Business 1 Item 1A. Risk Factors 2 Item 1B. Unresolved Staff Comments 9 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Mine Safety Disclosures 9 PA RT I I Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11 Item 6. Selected Financial Data 13 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34 Item 8. Consolidated Financial Statements and Supplementary Data 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73 Item 9A. Controls and Procedures 73 Item 9B. Other Information 75 PART III Item 10. Directors, Executive Officers and Corporate Governance 75 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accounting Fees and Services 75 PA RT I V Item 15. Exhibits and Financial Statement Schedules 76 SIGNATURES 77 INDEX OF EXHIBITS 78


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    This line represents final trim and will not print PART I Item 1. Business General Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailer of athletically inspired shoes and apparel, operating 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of January 30, 2016. Foot Locker, Inc. and its subsidiaries hereafter are referred to as the ‘‘Registrant,’’ ‘‘Company,’’ ‘‘we,’’ ‘‘our,’’ or ‘‘us.’’ Information regarding the business is contained under the ‘‘Business Overview’’ section in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ The Company maintains a website on the Internet at www.footlocker-inc.com. The Company’s filings with the U.S. Securities and Exchange Commission (the ‘‘SEC’’), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through this website as soon as reasonably practicable after they are filed with or furnished to the SEC by clicking on the ‘‘SEC Filings’’ link. The Corporate Governance section of the Company’s corporate website contains the Company’s Corporate Governance Guidelines, Committee Charters, and the Company’s Code of Business Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request to the Company’s Corporate Secretary at 112 West 34th Street, New York, N.Y. 10120. Effective May 1, 2016 the address to use will be 330 West 34th Street, New York, N.Y. 10001. The Company intends to promptly disclose amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the Corporate Governance section of the Company’s corporate website. Information Regarding Business Segments and Geographic Areas The financial information concerning business segments, divisions, and geographic areas is contained under the ‘‘Business Overview’’ and ‘‘Segment Information’’ sections in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ Information regarding sales, operating results, and identifiable assets of the Company by business segment and by geographic area is contained under the Segment Information note in ‘‘Item 8. Consolidated Financial Statements and Supplementary Data.’’ The service marks, trade names, and trademarks appearing in this report (except for Nike, Inc.) are owned by Foot Locker, Inc. or its subsidiaries. Employees The Company and its consolidated subsidiaries had 14,944 full-time and 32,081 part-time employees at January 30, 2016. The Company considers employee relations to be satisfactory. Competition Financial information concerning competition is contained under the ‘‘Business Risk’’ section in the Financial Instruments and Risk Management note in ‘‘Item 8. Consolidated Financial Statements and Supplementary Data.’’ Merchandise Purchases Financial information concerning merchandise purchases is contained under the ‘‘Liquidity’’ section in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and under the ‘‘Business Risk’’ section in the Financial Instruments and Risk Management note in ‘‘Item 8. Consolidated Financial Statements and Supplementary Data.’’ 1


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    This line represents final trim and will not print Item 1A. Risk Factors The statements contained in this Annual Report on Form 10-K (‘‘Annual Report’’) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in ‘‘Item 1. Business’’ and ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ constitute ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. Please also see ‘‘Disclosure Regarding Forward-Looking Statements.’’ Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance. Our inability to implement our strategic long range plan may adversely affect our future results. Our ability to successfully implement and execute our long-range plan is dependent on many factors. Our strategies may require significant capital investment and management attention, which may result in the diversion of these resources from our core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance of our products and renovated store designs, competition, product differentiation, and the ability to attract and retain qualified personnel. If we cannot successfully execute our strategic growth initiatives or if the long-range plan does not adequately address the challenges or opportunities we face, our financial condition and results of operations may be adversely affected. Additionally, failure to meet market expectations, particularly with respect to sales, operating margins, and earnings per share, would likely result in volatility in the market value of our stock. The retail athletic footwear and apparel business is highly competitive. Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores, department stores, discount stores, traditional shoe stores, mass merchandisers, and Internet retailers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are selection of merchandise, reputation, store location, quality, advertising, price, and customer service. Our success also depends on our ability to differentiate ourselves from our competitors with respect to a quality merchandise assortment and superior customer service. We cannot assure that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors, and entry of new competitors or expansion of existing competitors into our markets, could have a material adverse effect on our business, financial condition, and results of operations. Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, all of our significant suppliers operate retail stores and distribute products directly through the Internet and others may follow. Should this continue to occur, and if our customers decide to purchase directly from our suppliers, it could have a material adverse effect on our business, financial condition, and results of operations. The industry in which we operate is dependent upon fashion trends, customer preferences, product innovations, and other fashion-related factors. The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. In addition, retailers in the athletic industry rely on their suppliers to maintain innovation in the products they develop. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from suppliers. A substantial portion of our highest margin sales are to young males (ages 12 − 25), many of whom we believe purchase athletic footwear and athletic apparel as a fashion statement and are frequent purchasers. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends that would make athletic footwear or athletic apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations. 2


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    This line represents final trim and will not print If we do not successfully manage our inventory levels, our operating results will be adversely affected. We must maintain sufficient inventory levels to operate our business successfully. However, we also must guard against accumulating excess inventory. For example, we order most of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations. A change in the relationship with any of our key suppliers or the unavailability of our key products at competitive prices could affect our financial health. Our business is dependent to a significant degree upon our ability to obtain exclusive product and the ability to purchase brand-name merchandise at competitive prices from a limited number of suppliers. In addition, our suppliers provide volume discounts, cooperative advertising, and markdown allowances, as well as the ability to negotiate returns of excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future. The Company purchased approximately 90 percent of its merchandise in 2015 from its top five suppliers and expects to continue to obtain a significant percentage of its athletic product from these suppliers in future periods. Approximately 72 percent of all merchandise purchased in 2015 was purchased from one supplier — Nike, Inc. (‘‘Nike’’). Each of our operating divisions is highly dependent on Nike; they individually purchased 55 to 82 percent of their merchandise from Nike. Merchandise that is high profile and in high demand is allocated by our suppliers based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our suppliers will continue to allocate sufficient amounts of such merchandise to us in the future. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nike’s reputation, financial condition or results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations. We depend on mall traffic and our ability to secure suitable store locations. Our stores are located primarily in enclosed regional and neighborhood malls. Our sales are dependent, in part, on the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing of anchor department stores and/or specialty stores, and a decline in the popularity of mall shopping among our target customers. Further, any terrorist act, natural disaster, public health or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in affected areas, could have a material adverse effect on our business. To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available at favorable rates. Some traditional enclosed malls are experiencing significantly lower levels of customer traffic, driven by economic conditions as well as the closure of certain mall anchor tenants. Several large landlords dominate the ownership of prime malls, particularly in the United States, Canada, and Australia, and because of our dependence upon these landlords for a substantial number of our locations, any significant erosion of their financial condition or our relationships with these landlords would negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms. 3


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    This line represents final trim and will not print We may experience fluctuations in and cyclicality of our comparable-store sales results. Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, product innovation, the highly competitive retail sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, supply chain disruptions, and weather conditions. Many of our products represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations. Economic or political conditions in other countries, including fluctuations in foreign currency exchange rates and tax rates may adversely affect our operations. A significant portion of our sales and operating income for 2015 was attributable to our operations in Europe, Canada, Australia, and New Zealand. As a result, our business is subject to the risks associated with doing business outside of the United States such as local customer product preferences, political unrest, disruptions or delays in shipments, changes in economic conditions in countries in which we operate, foreign currency fluctuations, real estate costs, and labor and employment practices in non-U.S. jurisdictions that may differ significantly from those that prevail in the United States. In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product. Fluctuations in the value of the euro may affect the value of our European earnings when translated into U.S. dollars. Similarly our earnings in Canada, Australia, and New Zealand may be affected by the value of currencies when translated into U.S. dollars. Our operating results may be adversely affected by significant changes in these foreign currencies relative to the U.S. dollar. For the most part, our international subsidiaries transact in their functional currency, other than in the U.K., whose inventory purchases are denominated in euro, which could result in foreign currency transaction gains or losses. Our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties and changes in tax legislation or regulation could have a material adverse effect on our results of operations and financial condition. Macroeconomic developments may adversely affect our business. Our performance is subject to global economic conditions and the related impact on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses postpone spending in response to tighter credit, unemployment, negative financial news, and/or declines in income or asset values, which could have a material negative effect on demand for our products. As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in macroeconomic conditions. Our customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit, and lower home values. There is also a risk that if negative economic conditions persist for a long period of time or worsen, consumers may make long-lasting reductions to their discretionary purchasing behavior. These and other economic factors could adversely affect demand for our products, which could adversely affect our financial condition and operating results. Instability in the financial markets may adversely affect our business. Any instability in the global financial markets could result in diminished credit availability. Although we currently have a revolving credit agreement in place until January 27, 2017, and other than amounts used for standby letters of credit, we do not have any borrowings under it, tightening of credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of the Company’s securities. 4


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    This line represents final trim and will not print We rely on a few key suppliers for a majority of our merchandise purchases (including a significant portion from one key supplier). The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver merchandise to us. Our inability to obtain merchandise in a timely manner from major suppliers could have a material adverse effect on our business, financial condition, and results of operations. Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition. At January 30, 2016, our cash and cash equivalents totaled $1,021 million. The majority of our investments were short-term deposits in highly-rated banking institutions. As of January 30, 2016, $608 million of our cash and cash equivalents were held in foreign jurisdictions. We regularly monitor our counterparty credit risk and mitigate our exposure by making short-term investments only in highly-rated institutions and by limiting the amount we invest in any one institution. We continually monitor the creditworthiness of our counterparties. At January 30, 2016, almost all of the investments were in institutions rated A or better from a major credit rating agency. Despite those ratings, it is possible that the value or liquidity of our investments may decline due to any number of factors, including general market conditions and bank-specific credit issues. Our U.S. pension plan trust holds assets totaling $544 million at January 30, 2016. The fair values of these assets held in the trust are compared to the plan’s projected benefit obligation to determine the pension funding liability. We attempt to mitigate funding risk through asset diversification, and we regularly monitor investment risk of our portfolio through quarterly investment portfolio reviews and periodic asset and liability studies. Despite these measures, it is possible that the value of our portfolio may decline in the future due to any number of factors, including general market conditions and credit issues. Such declines could have an impact on the funded status of our pension plan and future funding requirements. If our long-lived assets, goodwill or other intangible assets become impaired, we may need to record significant non-cash impairment charges. We review our long-lived assets, goodwill and other intangible assets when events indicate that the carrying value of such assets may be impaired. Goodwill and other indefinite lived intangible assets are reviewed for impairment if impairment indicators arise and, at a minimum, annually. As of January 30, 2016, we had $156 million of goodwill; this asset is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a reporting unit level, or a two-step impairment test, if necessary. The determination of impairment charges is significantly affected by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are identified from our strategic long-range plans, which are based upon our experience, knowledge, and expectations; however, these estimates can be affected by factors such as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, goodwill, and other intangible assets and could result in future impairment charges, which would adversely affect our results of operations. Our financial results may be adversely affected by tax rates or exposure to additional tax liabilities. We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our provision for income taxes is based on a jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. Our effective tax rate could be adversely affected by a number of factors, including shifts in the mix of pretax results by tax jurisdiction, changes in tax laws or related interpretations in the jurisdictions in which we operate, and tax assessments and related interest and penalties resulting from income tax audits. A substantial portion of our cash and investments is invested outside of the United States. As we plan to permanently reinvest our foreign earnings outside the United States, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. Recent proposals to reform U.S. tax rules may result in a reduction or elimination of the deferral of U.S. income tax on our foreign earnings, which could adversely affect our effective tax rate. 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    This line represents final trim and will not print The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business. Natural disasters, including earthquakes, hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Public health issues, such as flu or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse impact of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products. Manufacturer compliance with our social compliance program requirements. We require our independent manufacturers to comply with our policies and procedures, which cover many areas including labor, health and safety, and environmental standards. We monitor compliance with our policies and procedures using internal resources, as well as third-party monitoring firms. Although we monitor their compliance with these policies and procedures, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our policies and procedures or local laws in the country of manufacture could disrupt the shipment of merchandise to us, force us to locate alternate manufacturing sources, reduce demand for our merchandise, or damage our reputation. Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business. We operate multiple distribution centers worldwide to support our businesses. In addition to the distribution centers that we operate, we have third-party arrangements to support our operations in the United States, Canada, Australia, and New Zealand. If complications arise with any facility or if any facility is severely damaged or destroyed, our other distribution centers may be unable to support the resulting additional distribution demands. We may be affected by disruptions in the global transportation network such as a port strike, weather conditions, work stoppages or other labor unrest. These factors may adversely affect our ability to deliver inventory on a timely basis. We depend upon third-party carriers for shipment of a significant amount of merchandise. An interruption in service by these carriers for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects. Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges, among other factors, may increase freight costs and thereby increase our cost of sales. We enter into diesel fuel forward and option contracts to mitigate a portion of the risk associated with the variability caused by these surcharges. We are subject to technology risks including failures, security breaches, and cybersecurity risks which could harm our business, damage our reputation, and increase our costs in an effort to protect against such risks. Information technology is a critically important part of our business operations. We depend on information systems to process transactions, make operational decisions, manage inventory, operate our websites, purchase, sell and ship goods on a timely basis, and maintain cost-efficient operations. There is a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center or data leakage of confidential information, either internally or at our third-party providers. We may experience operational problems with our information systems as a result of system failures, system implementation issues, viruses, malicious hackers, sabotage, or other causes. 6


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    This line represents final trim and will not print Our business involves the storage and transmission of customers’ personal information, including consumer preferences and credit card information. In an effort to enhance the security of our customers’ credit card information, during 2015 we implemented an encryption and tokenization platform for certain credit card transactions, whereby no credit card data is stored in our internal systems, with plans to expand this platform to the entire Company. We invest in security technology to protect the data stored by the Company, including our data and business processes, against the risk of data security breaches and cyber-attacks. Our data security management program includes enforcement of standard data protection policies such as Payment Card Industry compliance. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification measures. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also maintain an IT Security Incident Response Plan and routinely perform a table-top exercise with key IT and business stakeholders. While we believe that our security technology and processes follow leading practices in the prevention of security breaches and the mitigation of cybersecurity risks, given the ever-increasing abilities of those intent on breaching cybersecurity measures and given the necessity of our reliance on the security procedures of third-party vendors, the total security effort at any point in time may not be completely effective. Any such security breaches and cyber incidents could adversely affect our business. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and negative consequences to us, our employees, and those with whom we do business. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information by us could also severely damage our reputation, expose us to the risks of litigation and liability, increase operating costs associated with remediation, and harm our business. While we carry insurance that would mitigate the losses, such insurance may be insufficient to compensate us for potentially significant losses. Risks associated with digital operations. Our digital operations are subject to numerous risks, including risks related to the failure of the computer systems that operate our websites and mobile sites and their related support systems, computer viruses, telecommunications failures, denial of service attacks, and similar disruptions. Also, we may require additional capital in the future to sustain or grow our digital commerce. Business risks related to digital commerce include risks associated with the need to keep pace with rapid technological change, Internet cybersecurity risks, risks of system failure or inadequacy, governmental regulation, legal uncertainties with respect to Internet regulatory compliance, and collection of sales or other taxes by additional states or foreign jurisdictions. If any of these risks materializes, it could have a material adverse effect on our business. The technology enablement of omni-channel in our business is complex and involves the development of a new digital platform and a new order management system in order to enhance the complete customer experience. We continue to invest in initiatives geared towards delivering a high-quality, coordinated shopping experience online, in-stores, and on mobile, which requires substantial investment in technology, information systems, employees, and management time and resources. Our omni-channel retailing efforts include the integration and implementation of new technology, software and processes to be able to fulfill orders from any point within our system of stores and distribution centers, which is extremely complex and may not meet customer expectations for timely and accurate deliveries. These efforts involve substantial risk, including risk of implementation delays, cost overruns, technology interruptions, supply and distribution delays, and other issues that can affect the successful implementation and operation of our omni-channel initiatives. If our omni-channel initiatives are not successful, or we do not realize the return on our omni-channel investments that we anticipate, our financial performance and future growth could be materially adversely affected. Our reliance on key management. Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management team. Our executive and senior management teams have substantial experience and expertise in our business and have made significant contributions to our recent growth and success. Our future performance 7


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    This line represents final trim and will not print depends to a significant extent both upon the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. While we feel that we have adequate succession planning and executive development programs, competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain and attract qualified executives. Risks associated with attracting and retaining store and field associates. Many of the store and field associates are in entry level or part-time positions which, historically, have had high rates of turnover. If we are unable to attract and retain quality associates, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, overtime regulations, and changing demographics. Changes in employment laws or regulation could harm our performance. Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime pay, paid time off, work scheduling, healthcare reform and the implementation of the Patient Protection and Affordable Care Act, unemployment tax rates, workers’ compensation rates, works council requirements, and union membership. A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. Legislative or regulatory initiatives related to global warming/climate change concerns may negatively affect our business. There has been an increasing focus and significant debate on global climate change, including increased attention from regulatory agencies and legislative bodies. This increased focus may lead to new initiatives directed at regulating an as-yet unspecified array of environmental matters. Legislative, regulatory, or other efforts in the United States to combat climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate future additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business. We may be adversely affected by regulatory and litigation developments. We are exposed to the risk that federal or state legislation may negatively impact our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare or entitlement programs, such as health insurance, paid leave programs, or other changes in workplace regulation could increase our cost of doing business or otherwise adversely affect our operations. Additionally, we are regularly involved in various litigation matters, including class actions and patent infringement claims, which arise in the ordinary course of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance. We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws. The U.S. Foreign Corrupt Practices Act (‘‘FCPA’’) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, which is broader in scope than the FCPA, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. Despite our training and compliance programs, we cannot be assured that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents. 8


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    This line represents final trim and will not print Our continued expansion outside the United States, including in developing countries, could increase the risk of FCPA violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition. Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, market confidence in our reported financial information, and the price of our common stock. We continue to document, test, and monitor our internal controls over financial reporting in order to satisfy all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002; however, we cannot be assured that our disclosure controls and procedures and our internal controls over financial reporting will prove to be completely adequate in the future. Failure to fully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, market confidence in our reported financial information, and the price of our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties The properties of the Company and its consolidated subsidiaries consist of land, leased stores, administrative facilities, and distribution centers. Gross square footage and total selling area for the Athletic Stores segment at the end of 2015 were approximately 12.92 and 7.58 million square feet, respectively. These properties, which are primarily leased, are located in the United States and its territories, Canada, various European countries, Australia, and New Zealand. The Company currently operates five distribution centers, of which two are owned and three are leased, occupying an aggregate of 2.9 million square feet. Three distribution centers are located in the United States, one in Germany, and one in the Netherlands. The location in Germany relates to the central warehouse distribution centers for the Runners Point Group store locations, as well as a distribution center for its direct-to-customer business. During 2014, we opened a new distribution center in Germany which provides us with increased capacity that will enable us to support the planned growth of both the store and direct-to-customer businesses. This larger distribution center also allowed us to consolidate the previous two locations in Germany during 2015. We also own a cross-dock and manufacturing facility and operate a leased warehouse in the United States, both of which support our Team Edition apparel business. Item 3. Legal Proceedings Information regarding the Company’s legal proceedings is contained in the Legal Proceedings note under ‘‘Item 8. Consolidated Financial Statements and Supplementary Data.’’ Item 4. Mine Safety Disclosures Not applicable. Executive Officers of the Registrant Information with respect to Executive Officers of the Company, as of March 24, 2016, is set forth below: President and Chief Executive Officer Richard A. Johnson Executive Vice President and Chief Executive Officer North America Stephen D. Jacobs Executive Vice President and Chief Executive Officer International Lewis P. Kimble Executive Vice President — Operations Support Robert W. McHugh Executive Vice President and Chief Financial Officer Lauren B. Peters Senior Vice President and Chief Human Resources Officer Paulette R. Alviti Senior Vice President — Real Estate Jeffrey L. Berk Senior Vice President and Chief Accounting Officer Giovanna Cipriano Senior Vice President, General Counsel and Secretary Sheilagh M. Clarke Senior Vice President and Chief Information Officer Pawan Verma Vice President, Treasurer and Investor Relations John A. Maurer 9


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    This line represents final trim and will not print Richard A. Johnson, age 58, has served as President and Chief Executive Officer since December 1, 2014. Mr. Johnson previously served as Executive Vice President and Chief Operating Officer from May 16, 2012 through November 30, 2014. He served as Executive Vice President and Group President from July 2011 to May 15, 2012; President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from January 2010 to July 2011; President and Chief Executive Officer of Foot Locker Europe from August 2007 to January 2010; and President and Chief Executive Officer of Footlocker.com/Eastbay from April 2003 to August 2007. Stephen D. Jacobs, age 53, has served as Executive Vice President and Chief Executive Officer North America since February 29, 2016. Mr. Jacobs has been with the Company for 18 years in positions of increasing responsibility. Mr. Jacobs previously served as Executive Vice President and Chief Executive Officer Foot Locker North America from December 1, 2014 through February 28, 2016. He served as President and Chief Executive Officer of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker, and Footaction from July 2011 to November 2014 and President and Chief Executive Officer of Champs Sports from January 2009 to June 2011. Lewis P. Kimble, age 57, has served as Executive Vice President and Chief Executive Officer International since February 29, 2016. Mr. Kimble previously served as President and Chief Executive Officer of Foot Locker Europe from February 1, 2010 to February 28, 2016. Prior to that role Mr. Kimble led our business in Australia and New Zealand as Managing Director of Foot Locker Asia Pacific. Over his almost 40 years with the Company, Mr. Kimble has also held Vice President positions across multiple functions within the United States and Europe. Robert W. McHugh, age 57, has served as Executive Vice President — Operations Support since July 2011. He served as Executive Vice President and Chief Financial Officer from May 2009 to July 2011. Lauren B. Peters, age 54, has served as Executive Vice President and Chief Financial Officer since July 2011. She served as Senior Vice President — Strategic Planning from April 2002 to July 2011. Paulette R. Alviti, age 45, has served as Senior Vice President and Chief Human Resources Officer since June 2013. From March 2010 to May 2013, Ms. Alviti served in various roles at PepsiCo, Inc.: SVP and Chief Human Resources Officer Asia, Middle East, Africa (February to May 2013); SVP Global Talent Acquisition and Deployment (July 2012 to February 2013); and SVP — Human Resources (March 2010 to July 2012). From March 2008 to March 2010, she served as VP — Human Resources of The Pepsi Bottling Group, Inc. Jeffrey L. Berk, age 60, has served as Senior Vice President — Real Estate since February 2000. Giovanna Cipriano, age 46, has served as Senior Vice President and Chief Accounting Officer since May 2009. Sheilagh M. Clarke, age 56, has served as Senior Vice President, General Counsel and Secretary since June 1, 2014. She previously served as Vice President, Associate General Counsel and Assistant Secretary from May 2007 to May 2014. Pawan Verma, age 39, has served as Senior Vice President and Chief Information Officer since August 10, 2015. From February 2013 to July 2015, Mr. Verma served in various technology leadership roles at Target Corporation ranging from enterprise architecture, eCommerce, Mobile and digital, with his most recent role as Vice President-Digital Technology and API Platforms. From March 2011 to January 2013, he served as Sr. Director, eCommerce, Digital and Mobile of Convergys Corporation. He also served in various technology leadership roles at Verizon Wireless between October 2003 and February 2011. John A. Maurer, age 56, has served as Vice President, Treasurer and Investor Relations since February 2011. Mr. Maurer served as Vice President and Treasurer from September 2006 to February 2011. There are no family relationships among the executive officers or directors of the Company. 10


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    This line represents final trim and will not print PART II Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Foot Locker, Inc. common stock (ticker symbol ‘‘FL’’) is listed on The New York Stock Exchange as well as on the Börse Stuttgart stock exchange in Germany. As of January 30, 2016, the Company had 14,237 shareholders of record owning 136,976,809 common shares. The following table provides the intra-day high and low sales prices for the Company’s common stock for the periods indicated below: 2015 2014 High Low High Low st 1 Quarter $63.66 $52.12 $48.71 $36.65 2nd Quarter 71.07 60.14 52.07 46.20 3rd Quarter 77.25 63.02 58.40 47.90 4th Quarter 69.99 57.23 59.19 51.12 During each of the quarters of 2015, the Company declared a dividend of $0.25 per share. The Board of Directors reviews the dividend policy and rate, taking into consideration the overall financial and strategic outlook for our earnings, liquidity, and cash flow. On February 17, 2016, the Board of Directors declared a quarterly dividend of $0.275 per share to be paid on April 29, 2016. This dividend represents a 10 percent increase over the Company’s previous quarterly per share amount. The following table is a summary of our fourth quarter share repurchases: Total Number Approximate of Shares Dollar Value of Total Purchased as Shares that may Number Average Part of Publicly yet be Purchased of Shares Price Paid Announced Under the Date Purchased Purchased(1) Per Share(1) Program(2) Program(2) Nov. 1, 2015 − Nov. 28, 2015 1,305,157 $62.63 1,300,000 $658,881,376 Nov. 29, 2015 − Jan. 2, 2016 219,484 64.76 219,484 644,668,097 Jan. 3, 2016 − Jan. 30, 2016 124,418 63.20 123,616 636,854,327 1,649,059 62.96 1,643,100 (1) These columns also reflect shares acquired in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested during the quarter, stock swaps, and shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. The calculation of the average price paid per share includes all fees, commissions, and other costs associated with the repurchase of such shares. (2) On February 17, 2015, the Board of Directors approved a 3-year, $1 billion share repurchase program extending through January 2018. Through January 30, 2016, 5.6 million shares of common stock were purchased under this program, for an aggregate cost of $363 million. 11


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    This line represents final trim and will not print Performance Graph The graph below compares the cumulative five-year total return to shareholders (common stock price appreciation plus dividends, on a reinvested basis) on Foot Locker, Inc.’s common stock relative to the total returns of the S&P 400 Retailing Index and the Russell Midcap Index. The following Performance Graph and related information shall not be deemed ‘‘soliciting material’’ or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. Indexed Share Price Performance $500 $400 $300 $200 $100 $0 1/29/2011 1/28/2012 2/2/2013 2/1/2014 1/31/2015 1/30/2016 Foot Locker, Inc. S&P 400 Retailing Index Russell Midcap Index 1/29/2011 1/28/2012 2/2/2013 2/1/2014 1/31/2015 1/30/2016 Foot Locker, Inc. $100.00 $153.23 $204.76 $233.92 $328.29 $423.20 S&P 400 Retailing Index $100.00 $121.84 $150.82 $170.21 $206.94 $181.10 Russell Midcap Index $100.00 $103.82 $123.03 $150.86 $171.46 $158.80 12


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    This line represents final trim and will not print Item 6. Selected Financial Data FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other information contained elsewhere in this report. 2015 2014 2013 2012(1) 2011 (in millions, except per share amounts) Summary of Operations Sales $7,412 7,151 6,505 6,182 5,623 Gross margin 2,505 2,374 2,133 2,034 1,796 Selling, general and administrative expenses 1,415 1,426 1,334 1,294 1,244 Litigation, impairment and other charges 105 4 2 12 5 Depreciation and amortization 148 139 133 118 110 Interest expense, net 4 5 5 5 6 Other income (4) (9) (4) (2) (4) Net income 541 520 429 397 278 Per Common Share Data Basic earnings 3.89 3.61 2.89 2.62 1.81 Diluted earnings 3.84 3.56 2.85 2.58 1.80 Common stock dividends declared per share 1.00 0.88 0.80 0.72 0.66 Weighted-average Common Shares Outstanding Basic earnings 139.1 143.9 148.4 151.2 153.0 Diluted earnings 140.8 146.0 150.5 154.0 154.4 Financial Condition Cash, cash equivalents, and short-term investments $1,021 967 867 928 851 Merchandise inventories 1,285 1,250 1,220 1,167 1,069 Property and equipment, net 661 620 590 490 427 Total assets 3,775 3,577 3,487 3,367 3,050 Long-term debt and obligations under capital leases 130 134 139 133 135 Total shareholders’ equity 2,553 2,496 2,496 2,377 2,110 Financial Ratios Sales per average gross square foot(2) $ 504 490 460 443 406 SG&A as a percentage of sales 19.1% 19.9 20.5 20.9 22.1 Earnings before interest and taxes (EBIT) $ 841 814 668 612 441 EBIT margin 11.3% 11.4 10.3 9.9 7.8 EBIT margin (non-GAAP)(3) 12.8% 11.4 10.4 9.9 7.9 Net income margin 7.3% 7.3 6.6 6.4 4.9 Net income margin (non-GAAP)(3) 8.2% 7.3 6.6 6.2 5.0 Return on assets (ROA) 14.7% 14.7 12.5 12.4 9.4 Return on invested capital (ROIC)(3) 15.8% 15.0 14.1 14.2 11.8 Net debt capitalization percent(3),(4) 47.4% 43.4 42.5 37.2 36.0 Current ratio 3.7 3.5 3.8 3.7 3.8 Other Data Capital expenditures $ 228 190 206 163 152 Number of stores at year end 3,383 3,423 3,473 3,335 3,369 Total selling square footage at year end (in millions) 7.58 7.48 7.47 7.26 7.38 Total gross square footage at year end (in millions) 12.92 12.73 12.71 12.32 12.45 (1) 2012 represents the 53 weeks ended February 2, 2013. (2) Calculated as Athletic Store sales divided by the average monthly ending gross square footage of the last thirteen months. The computation for each of the years presented reflects the foreign exchange rate in effect for such year. The 2012 amount has been calculated excluding the sales of the 53rd week. (3) See Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ for additional information and calculation. (4) Represents total debt and obligations under capital leases, net of cash, cash equivalents, and short-term investments. Additionally, this calculation includes the present value of operating leases, and accordingly is considered a non-GAAP measure. 13


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    This line represents final trim and will not print Item 7. 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, with formats that include Foot Locker, Lady Foot Locker, SIX:02, Kids Foot Locker, Champs Sports, Footaction, Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and our international ecommerce businesses, which sell to customers through their Internet and mobile sites and catalogs. The Foot Locker brand is one of the most widely recognized names in the markets in which the Company operates, epitomizing premium quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker, and Kids Foot Locker, as well as Footlocker.com, its direct-to-customer business. Through various marketing channels, including broadcast, digital, social, print, and various sports sponsorships and events, the Company reinforces its image with a consistent message — namely, that it is the destination for athletically inspired shoes and apparel with a wide selection of merchandise in a full-service environment. Store Profile Square Footage January 31, January 30, Relocations/ (in thousands) 2015 Opened Closed 2016 Remodels Selling Gross Foot Locker US 1,015 8 52 971 54 2,451 4,234 Foot Locker Europe 603 16 13 606 34 863 1,884 Foot Locker Canada 126 1 2 125 8 279 435 Foot Locker Asia Pacific 91 4 1 94 6 128 210 Lady Foot Locker 198 — 42 156 — 208 352 SIX:02 15 15 — 30 — 62 101 Kids Foot Locker 357 27 10 374 44 602 1,029 Footaction 272 13 17 268 20 800 1,303 Champs Sports 547 10 7 550 41 1,947 2,972 Runners Point 116 10 5 121 2 158 259 Sidestep 83 7 2 88 — 82 139 Total 3,423 111 151 3,383 209 7,580 12,918 Athletic Stores The Company operates 3,383 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segment’s operating businesses and their respective taglines: Foot Locker — ‘‘Approved’’ — Foot Locker is a leading global athletic footwear and apparel retailer, which caters to the sneaker enthusiast — If it’s at Foot Locker, it’s Approved. Its stores offer the latest in athletically-inspired footwear and apparel, manufactured primarily by the leading athletic brands. Foot Locker provides the best selection of premium products for a wide variety of activities, including basketball, running, and training. Additionally, we operate 199 House of Hoops, primarily a shop-in-shop concept, which sells premier basketball-inspired footwear and apparel. Foot Locker’s 1,796 stores are located in 23 countries including 971 in the United States, Puerto Rico, U.S. Virgin Islands, and Guam, 125 in Canada, 606 in Europe, and a combined 94 in Australia and New Zealand. The domestic stores have an average of 2,500 selling square feet and the international stores have an average of 1,500 selling square feet. Lady Foot Locker — ‘‘The Place for Her’’ — Lady Foot Locker is a U.S. retailer of athletic footwear, apparel, and accessories dedicated to active women. Its stores carry major athletic footwear, apparel, and accessories brands designed for a variety of activities, including running, walking, training, and fitness. Lady Foot Locker operates 156 stores that are located in the United States and Puerto Rico. These stores have an average of 1,300 selling square feet. 14


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    This line represents final trim and will not print SIX:02 — ‘‘It’s Your Time’’ — SIX:02 is an elevated retail concept designed for the modern woman, featuring top brands in athletic-inspired style. The apparel, footwear, and accessories assortments are carefully curated to inspire her best self-expression — in the gym and out of it. This banner has unique local fitness and fashion partners in each market and also leverages top celebrity and social influencers to connect meaningfully to all aspects of a woman’s life. SIX:02 operates 30 stores in the United States and have an average of 2,100 selling square feet. Kids Foot Locker — ‘‘Go Big’’ — Kids Foot Locker is a youth athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for young athletes. Its stores feature an environment geared to appeal to both parents and children. Of its 374 stores, 349 are located in the United States, Puerto Rico, and the U.S. Virgin Islands, 18 in Europe, and 7 in Canada. These stores have an average of 1,600 selling square feet. Footaction — ‘‘Own It’’ — Footaction is a national athletic footwear and apparel retailer that offers the freshest, best edited selection of athletic lifestyle brands and looks. This banner is uniquely positioned at the intersection of sport and style. The primary customer is a style-obsessed, confident, influential young male who is always dressed to impress. Its 268 stores are located throughout the United States and Puerto Rico and focus on authentic, premium product. The Footaction stores have an average of 3,000 selling square feet. Champs Sports — ‘‘We Know Game’’ — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in North America. Its product categories include athletic footwear and apparel, and sport-lifestyle inspired accessories. This assortment allows Champs Sports to differentiate itself from other mall-based stores by presenting complete head-to-toe merchandising stories representing the most powerful athletic brands, sports teams, and athletes in North America. Of its 550 stores, 519 are located throughout the United States, Puerto Rico, and the U.S. Virgin Islands and 31 in Canada. The Champs Sports stores have an average of 3,500 selling square feet. Runners Point — ‘‘Your Way, Our Passion’’ — Runners Point specializes in running footwear, apparel, and equipment for performance and lifestyle purposes. Its 121 stores are located in Germany, Austria and Switzerland. This banner caters to local running communities providing technical products, training tips and access to local running and group events. The Runners Point stores have an average of 1,300 selling square feet. Sidestep — ‘‘Sneaker Lifestyle’’ — Sidestep is a predominantly sports fashion footwear banner. Its 88 stores are located in Germany, Austria, the Netherlands, and Switzerland. Sidestep caters to a more discerning, fashion consumer. Sidestep stores have an average of 900 selling square feet. Direct-to-Customers The Company’s Direct-to-Customers segment is multi-branded and sells directly to customers through its Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com. Additionally, this segment includes the websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com). These sites offer some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between ecommerce and store banners. Eastbay — ‘‘First Choice For Athletes’’ — Eastbay is among the largest direct marketers in the United States, providing serious high school and other athletes with a complete sports solution including athletic footwear, apparel, equipment, team licensed, and private-label merchandise for a broad range of sports. Franchise Operations The Company has two separate ten-year agreements with third parties for the operation of Foot Locker stores located within the Middle East and the Republic of Korea. The franchised stores located in Germany operate under the Runners Point banner. A total of 64 franchised stores were operating at January 30, 2016, of which 40 were operating in the Middle East, 16 in Germany, and 8 in the Republic of Korea. During 2015, the Company completed an acquisition from Futura Sport AG of 10 Runners Point and Sidestep stores, which were previously franchise stores. Royalty income from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company’s operating store count above. 15


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    This line represents final trim and will not print Reconciliation of Non-GAAP Measures In the following tables, the Company has presented certain financial measures and ratios identified as non-GAAP. The Company believes this non-GAAP information is useful to investors because it allows for a more direct comparison of the Company’s performance for 2015 as compared with prior years and is useful in assessing the Company’s progress in achieving its long-term financial objectives. The following represents a reconciliation of the non-GAAP measures discussed throughout the Overview of Consolidated Results: 2015 2014 2013 (in millions, except per share amounts) Sales $7,412 $7,151 $6,505 Pre-tax income: Income before income taxes $ 837 $ 809 $ 663 Pre-tax amounts excluded from GAAP: Pension litigation charge 100 — — Impairment and other charges 5 4 2 Runners Point Group integration and acquisition costs — 2 6 Gain on sale of real estate — (4) — Total pre-tax amounts excluded 105 2 8 Income before income taxes (non-GAAP) $ 942 $ 811 $ 671 Calculation of Earnings Before Interest and Taxes (EBIT): Income before income taxes $ 837 $ 809 $ 663 Interest expense, net 4 5 5 EBIT $ 841 $ 814 $ 668 Income before income taxes (non-GAAP) $ 942 $ 811 $ 671 Interest expense, net 4 5 5 EBIT (non-GAAP) $ 946 $ 816 $ 676 EBIT margin % 11.3% 11.4% 10.3% EBIT margin % (non-GAAP) 12.8% 11.4% 10.4% After-tax income: Net income $ 541 $ 520 $ 429 After-tax amounts excluded from GAAP: Pension litigation charge 61 — — Impairment and other charges 4 3 1 Runners Point Group acquisition and integration costs — 2 5 Gain on sale of property — (3) — Settlement of foreign tax audits — — (3) Net income (non-GAAP) $ 606 $ 522 $ 432 Net income margin % 7.3% 7.3% 6.6% Net income margin % (non-GAAP) 8.2% 7.3% 6.6% Diluted earnings per share: Net income $ 3.84 $ 3.56 $ 2.85 Pension litigation charge 0.43 — — Impairment and other charges 0.02 0.02 0.01 Runners Point Group acquisition and integration costs — 0.01 0.03 Gain on sale of property — (0.01) — Settlement of foreign tax audits — — (0.02) Net income (non-GAAP) $ 4.29 $ 3.58 $ 2.87 The Company estimates the tax effect of the non-GAAP adjustments by applying its marginal tax rate to each of the respective items. During 2013, the Company recorded a benefit of $3 million, or $0.02 per diluted share, to reflect the settlement of foreign tax audits, which resulted in a reduction in tax reserves established in prior periods. When assessing Return on Invested Capital (‘‘ROIC’’), the Company adjusts its results to reflect its operating leases as if they qualified for capital lease treatment. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the presentation of these leases as if they were capital 16


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    This line represents final trim and will not print leases is appropriate. Accordingly, the asset base and net income amounts are adjusted to reflect this in the calculation of ROIC. ROIC, subject to certain adjustments, is also used as a measure in executive long-term incentive compensation. The closest U.S. GAAP measure is Return on Assets (‘‘ROA’’) and is also represented below. ROA remained unchanged compared with the prior year. Our ROIC improvement is due to an increase in our non-GAAP earnings before interest and income taxes, partially offset by an increase in our average invested capital, primarily related to an increase in capitalized operating leases. This reflected the inclusion of the new headquarters lease and the effect of opening larger stores supporting the various shop-in-shop initiatives. 2015 2014 2013 ROA(1) 14.7% 14.7% 12.5% ROIC % (non-GAAP)(2) 15.8% 15.0% 14.1% (1) Represents net income of $541 million, $520 million, and $429 million divided by average total assets of $3,676 million, $3,532 million, and $3,427 million for 2015, 2014, and 2013, respectively. (2) See below for the calculation of ROIC. 2015 2014 2013 ($ in millions) EBIT (non-GAAP) $ 946 $ 816 $ 676 + Rent expense 640 635 600 - Estimated depreciation on capitalized operating leases(3) (498) (482) (443) Net operating profit 1,088 969 833 - Adjusted income tax expense(4) (391) (347) (298) = Adjusted return after taxes $ 697 $ 622 $ 535 Average total assets $ 3,676 $ 3,532 $ 3,427 - Average cash, cash equivalents and short-term investments (994) (917) (898) - Average non-interest bearing current liabilities (697) (659) (630) - Average merchandise inventories (1,268) (1,235) (1,194) + Average estimated asset base of capitalized operating leases(3) 2,346 2,093 1,829 + 13-month average merchandise inventories 1,337 1,325 1,269 = Average invested capital $ 4,400 $ 4,139 $ 3,803 ROIC % 15.8% 15.0% 14.1% (3) The determination of the capitalized operating leases and the adjustments to income have been calculated on a lease-by-lease basis and have been consistently calculated in each of the years presented above. Capitalized operating leases represent the best estimate of the asset base that would be recorded for operating leases as if they had been classified as capital or as if the property were purchased. The present value of operating leases is discounted using various interest rates ranging from 2.5 percent to 14.5 percent, which represent the Company’s incremental borrowing rate at inception of the lease. The capitalized operating leases and related income statements amounts disclosed above do not reflect the requirements of the recently issued Accounting Standards Update 2016-02, Leases. (4) The adjusted income tax expense represents the marginal tax rate applied to net operating profit for each of the periods presented. Overview of Consolidated Results In March 2015, the Company updated its long-range plan and long-term financial objectives as presented below. The following represents our results and our progress towards meeting the updated objectives. Non-GAAP results are presented for all the periods. Long-term Objectives 2015 2014 2013 Sales ($ in millions) $10,000 $7,412 $7,151 $6,505 Sales per gross square foot $ 600 $ 504 $ 490 $ 460 EBIT margin 12.5% 12.8% 11.4% 10.4% Net income margin 8.5% 8.2% 7.3% 6.6% ROIC 17.0% 15.8% 15.0% 14.1% 17


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    This line represents final trim and will not print Highlights of our 2015 financial performance include: • Sales and comparable-store sales, as noted in the table below, both increased and continued to benefit from exciting assortments and enhanced store formats across our various banners, as well as improved performance of the Company’s store banner.com websites. 2015 2014 2013 Sales increase 3.6% 9.9% 6.6% Comparable-store sales increase 8.5% 8.0% 4.2% • The following represents the percentage of sales from each of the major product categories: 2015 2014 2013 Footwear sales 82% 79% 77% Apparel and accessories sales 18% 21% 23% • Sales from the Direct-to-Customers segment increased 9.1 percent to $944 million, compared with $865 million in 2014 and increased 60 basis points as a percentage of total sales to 12.7 percent. The direct business has been steadily increasing over the last several years, led by the growth in the store banners’ ecommerce sales. • Gross margin, as a percentage of sales, increased by 60 basis points to 33.8 percent in 2015. The improvement was driven by a decrease in the occupancy and buyers’ expense rate coupled with an increase in the merchandise margin rate. These reflect effective leverage on higher sales and a lower markdown rate. • SG&A expenses on a constant currency basis were 19.2 percent of sales, a decrease of 70 basis points as compared with the prior year, as we continued to diligently manage expenses. • EBIT margin was 12.8 percent, surpassing the long-term financial objective and reflecting the strong earnings generated during 2015. • Net income on a non-GAAP basis was $606 million, or $4.29 diluted earnings per share, an increase of 19.8 percent from the prior-year period. • The Company ended the year in a strong financial position. At year end, the Company had $891 million of cash and cash equivalents, net of debt and obligations under capital leases. Cash and cash equivalents at January 30, 2016 were $1,021 million, representing an increase of $54 million as compared with last year. This improvement reflects earnings strength and the successful execution of various key initiatives noted in the items below. • Net cash provided by operating activities was $745 million, representing a $33 million increase over last year. • Cash capital expenditures during 2015 totaled $228 million and were primarily directed to the remodeling or relocation of 209 stores, the build-out of approximately 100 new stores, as well as other technology and infrastructure projects. • During 2015 we returned significant value to our shareholders. Dividends totaling $139 million were declared and paid during 2015, and a total of 6.7 million shares were repurchased under our share repurchase program at a cost of $419 million. • ROIC increased to 15.8 percent as compared to the prior year result of 15.0 percent, reflecting profitability improvements and a disciplined approach to capital spending. 18


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    This line represents final trim and will not print Summary of Consolidated Statements of Operations 2015 2014 2013 (in millions, except per share data) Sales $7,412 $7,151 $6,505 Gross margin 2,505 2,374 2,133 Selling, general and administrative expenses 1,415 1,426 1,334 Depreciation and amortization 148 139 133 Interest expense, net 4 5 5 Net income $ 541 $ 520 $ 429 Diluted earnings per share $ 3.84 $ 3.56 $ 2.85 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 comparable-store sales also includes the sales of the Direct-to-Customers segment. 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. Computations exclude the effect of foreign currency fluctuations. Sales of $7,412 million in 2015 increased by 3.6 percent from sales of $7,151 million in 2014, this represented a comparable-store sales increase of 8.5 percent. Excluding the effect of foreign currency fluctuations, sales increased 8.9 percent as compared with 2014. Sales of $7,151 million in 2014 increased by 9.9 percent from sales of $6,505 million in 2013, this represented a comparable-store sales increase of 8.0 percent. Excluding the effect of foreign currency fluctuations and sales of Runners Point Group, sales increased 8.5 percent as compared with 2013. Gross Margin 2015 2014 2013 Gross margin rate 33.8% 33.2% 32.8% Basis point increase in the gross margin rate 60 40 Components of the increase- Merchandise margin rate improvement/(decline) 30 (30) Lower occupancy and buyers’ compensation expense rate 30 70 The gross margin rate improved by 60 basis points during 2015 as compared with the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, the gross margin rate improved by 70 basis points in 2015. The improvement was driven by both an improved merchandise margin rate and a decrease in the occupancy and buyers’ compensation rate reflecting improved sales leverage. The improvement in the merchandise margin rate primarily reflected an enhanced ability to achieve full-priced selling, as fewer markdowns were needed due to the freshness of inventory. Gross margin in 2014 improved 40 basis points to 33.2 percent as compared with 2013. This improvement reflected a decrease in the occupancy and buyers’ compensation rate, which reflected improved leverage of primarily fixed costs. Merchandise margin declined by 30 basis points in 2014 as the cost of merchandise increased as compared with 2013. This primarily reflected the effect of lower initial markups driven by supplier and category mix, and lower shipping and handling margin, partially offset by lower markdowns. Selling, General and Administrative Expenses (SG&A) 2015 2014 2013 ($ in millions) SG&A $1,415 $1,426 $1,334 $ Change $ (11) $ 92 % Change (0.8)% 6.9% SG&A as a percentage of sales 19.1% 19.9% 20.5% 19


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    This line represents final trim and will not print Excluding the effect of foreign currency fluctuations, SG&A increased by $72 million for 2015 as compared with 2014. The increase was driven by higher variable expenses to support sales, such as store wages and banking expenses. As a percentage of sales, SG&A improved 80 basis points representing improved leverage on our sales increase. Consistent with the prior year, this improvement reflects effective expense management, specifically store wage improvements due to productivity gains reflecting the continued utilization of hiring and scheduling tools. Excluding the effect of foreign currency fluctuations, SG&A increased by $101 million for 2014 as compared with 2013. Runners Point Group, which was acquired in early July 2013, represented an incremental $39 million in expenses in 2014. Additionally, the Company incurred $2 million in integration costs during 2014. Excluding these items, the increase was driven by higher variable expenses to support sales, such as store wages and banking expenses. As a percentage of sales, SG&A improved 60 basis points representing improved leverage on our sales increase. This improvement reflected continued effective expense management, including store wages, which benefitted from the utilization of hiring and scheduling tools, as well as enhanced associate training. Depreciation and Amortization 2015 2014 2013 ($ in millions) Depreciation and Amortization $148 $139 $133 $ Change 9 6 % Change 6.5% 4.5% Excluding the effect of foreign currency fluctuations, depreciation and amortization increased $17 million in 2015. On a constant currency basis, the increases in each year presented reflect increased capital spending on store improvements, our digital sites and other various technologies. In addition, the 2014 amount included $2 million of capital accrual adjustments made during the third quarter of 2014, which reduced depreciation and amortization. Pension Litigation Charge During the third quarter of 2015, the Company recorded a $100 million pension litigation charge ($61 million after-tax or $0.43 per diluted share). This charge relates to a class action in which the plaintiffs alleged that the Company failed to properly disclose the effects of the 1996 conversion of the retirement plan to a defined benefit plan with a cash balance formula. In September 2015, the court ruled in favor of the plaintiffs and issued a decision ordering that the pension plan be reformed. The Company is appealing the court’s decision, and the judgment has been stayed pending the outcome of the appeal. The Company’s reasonable estimate of this liability is a range between $100 million and $200 million, with no amount within that range more probable than any other amount. Therefore, in accordance with U.S. GAAP, the Company recorded a pre-tax charge of $100 million. Please see Item 8. ‘‘Consolidated Financial Statements and Supplementary Data,’’ Note 23, Legal Proceedings for further information. Interest Expense, Net 2015 2014 2013 ($ in millions) Interest expense $ 11 $ 11 $ 11 Interest income (7) (6) (6) Interest expense, net $ 4 $ 5 $ 5 Weighted-average interest rate (excluding fees) 7.2% 7.2% 7.1% Net interest expense decreased by $1 million in 2015 as compared with 2014, reflecting increased income due to higher interest rates. Net interest expense in 2014 was essentially unchanged from 2013. The Company did not have any short-term borrowings, other than amounts outstanding in connection with capital leases, for any of the periods presented. 20


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    This line represents final trim and will not print Income Taxes The effective tax rate for 2015 was 35.4 percent, as compared with 35.7 percent in 2014. The Company regularly assesses the adequacy of the provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the reserves for unrecognized tax benefits may be adjusted due to 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 limitations. The effective tax rate for 2015 and 2014 includes reserve releases totaling $4 million and $5 million, respectively, due to audit settlements and lapses of statutes of limitations. In 2015, the Company recorded a pension-related litigation charge of $100 million with a related tax benefit of $39 million. This litigation charge reduced the overall effective rate because it reduced the proportion of the Company’s worldwide income taxed in the United States, where the tax rates are the highest. Excluding the reserve releases in 2015 and in 2014 and the effect of the pension litigation charge, the effective tax rate for 2015 was essentially unchanged as compared with 2014. The effective tax rate for 2014 was 35.7 percent, as compared with 35.3 percent in 2013. Excluding the reserve releases, the effective tax rate for 2014 increased as compared with 2013 primarily due to the higher proportion of income earned in the United States, which is a higher tax jurisdiction. Segment Information The Company’s two reportable segments, Athletic Stores and Direct-to-Customers, are based on its method of internal reporting. The Company evaluates performance based on several factors, the primary financial measure of which is division results. Division profit reflects income before income taxes, pension litigation charge, corporate expense, non-operating income, and net interest expense. 2015 2014 2013 ($ in millions) Sales Athletic Stores $6,468 $6,286 $5,790 Direct-to-Customers 944 865 715 $7,412 $7,151 $6,505 Operating Results Athletic Stores $ 872 $ 777 $ 656 Direct-to-Customers 142 109 84 Division profit 1,014 886 740 Less: Pension litigation charge 100 — — Less: Corporate expense 77 81 76 Operating profit 837 805 664 Other income 4 9 4 Earnings before interest expense and income taxes 841 814 668 Interest expense, net 4 5 5 Income before income taxes $ 837 $ 809 $ 663 21


  • Page 45

    This line represents final trim and will not print Athletic Stores 2015 2014 2013 ($ in millions) Sales $6,468 $6,286 $5,790 $ Change $ 182 $ 496 % Change 2.9% 8.6% Division profit $ 872 $ 777 $ 656 Division profit margin 13.5% 12.4% 11.3% 2015 compared with 2014 Excluding the effect of foreign currency fluctuations, sales from the Athletic Stores segment increased 8.6 percent. Comparable-store sales increased by 7.6 percent. Foot Locker Europe and Foot Locker Asia Pacific led the comparable-stores sales increase. Foot Locker Europe generated double digit comparable-store gains in footwear, apparel, and accessories. The increase in footwear was primarily related to sales of classic court styles, lifestyle running, and men’s basketball. Apparel sales experienced gains in both the branded and private label categories. The strong performance internationally was partially offset by the underperformance of the Runners Point and Sidestep stores. The sales decline at our Runners Point and Sidestep stores reflected the continued segmentation process and the overreliance on a few key running styles. Our segmentation process includes better defining product offerings and executing upon our multi-banner strategy in the European market. We are broadening the assortment in the Runners Point stores beyond performance running to include more lifestyle running products, while the Sidestep stores are being shifted to lifestyle and casual footwear. We continue to refine this segmentation strategy, which we believe will position these banners to contribute to our further success in Europe. Domestically, sales increases were led by Foot Locker and Kids Foot Locker with all formats generating a comparable-store sales increase. Running and basketball were the strongest drivers of footwear sales. The Jordan brand, as well as the rise of new marquee styles contributed to the growth in the basketball category. Children’s footwear sales also performed well across all of the divisions. Sales continue to benefit from the expansion of shop-in-shop partnerships with our key vendors. The Company opened more than 40 shop-in-shops during the year, including 21 House of Hoops shops in partnership with Nike. While Lady Foot Locker/SIX:02’s overall sales declined slightly in 2015, the combined banners produced a mid-single digit comparable-store sales gain, the seventh consecutive quarter with a comparable-store sales gain. The comparable-store gain was led by both footwear and apparel, partially offset by a decline in accessories. The overall sales decline reflects 42 Lady Foot Locker store closures, partially offset by the opening of 15 SIX:02 stores during the year. The SIX:02 banner provides the female customer with elevated, athletic-inspired product assortments featuring top brands. During 2015, we continued to work with our vendors to refine this assortment to include more fashion styles. This initiative, as well other actions to promote brand development, will continue into 2016. Champs Sports generated a low single digit comparable-store sales increase driven by gains in footwear sales partially offset by declines in apparel and accessories. The decline in apparel primarily reflects the continuation of the customer’s shift away from licensed apparel. Division profit increased by $95 million to $872 million in 2015 as compared with last year reflecting higher sales and an improved gross margin rate. Variable expenses, such as store wages, were also diligently managed, resulting in an improved SG&A rate. Due to the underperformance of the Runners Point and Sidestep stores during 2015, an impairment review was performed. The review resulted in an impairment charge totaling $4 million, which was recorded to write down long-lived assets such as store fixtures and leasehold improvements for 61 stores. 22


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    This line represents final trim and will not print 2014 compared with 2013 Excluding the effect of foreign currency fluctuations, primarily related to the euro and Canadian dollar, sales from the Athletic Stores segment increased by 9.4 percent in 2014. Comparable-store sales increased by 6.7 percent. This segment included $133 million of incremental sales related to the Runners Point stores, which were acquired in early July 2013. Excluding the sales of the Runners Point stores, the comparable-store gain was primarily driven by Kids Foot Locker, Foot Locker U.S., Footaction, and Foot Locker Europe. While Lady Foot Locker’s overall sales declined in 2014, the banner generated a comparable-store gain for the year. The shift into more performance oriented assortments has resonated with our customers, as both footwear and apparel grew on a comparable-store basis. The overall Lady Foot Locker sales decrease in 2014 primarily reflected a net decline of 44 stores. Basketball, running, and children’s footwear were strong drivers of sales increases. Sales of basketball footwear were driven by Jordan and key marquee player styles, while running shoes from Nike and Adidas had strong results. Additionally, children’s footwear continued to perform well across multiple divisions. Apparel sales were challenging primarily in Foot Locker Europe and Champs Sports, as customers have shifted away from certain lifestyle and licensed apparel programs, which had previously driven strong results. This segment benefitted from strong banner differentiation, which has created unique store designs and product assortments which have resonated with customers and enhanced the shopping experience. Included in 2014 division profit was a $1 million impairment charge related to the write-down of a trade name for our stores operating in the Republic of Ireland, reflecting historical and projected underperformance. Additionally, a $1 million charge was recorded to fully write down the value of a private-label brand acquired as part of the Runners Point Group acquisition, as a result of exiting the product line. The overall division profit improvement in 2014 primarily reflected higher sales, an improved gross margin rate, and effective control over variable expenses, such as store wages. Direct-to-Customers 2015 2014 2013 ($ in millions) Sales $ 944 $ 865 $ 715 $ Change $ 79 $ 150 % Change 9.1% 21.0% Division profit $ 142 $ 109 $ 84 Division profit margin 15.0% 12.6% 11.7% 2015 compared with 2014 Excluding the effect of foreign currency fluctuations, sales of the Direct-to-Customers segment increased 10.6 percent as compared with the prior year, while comparable sales increased by 14.4 percent. The increase was primarily a result of continued strong sales performance of the Company’s domestic store-banner websites, as well as growth in our international ecommerce business, particularly in Europe. Of the total increase, sales from our U.S. store-banner websites comprised the majority of the increase. The growth in ecommerce reflects the continued elevation of the connection between the in-store experience and the banner websites, as well as the development of features and functionality to deliver an enhanced digital experience. These increases were partially offset by the 2014 closure of the CCS direct business. The strongest category for this segment was footwear, led by basketball and casual styles. Apparel increased slightly as compared with the prior year, which primarily reflected gains in the branded apparel category. This segment generated a division profit increase of $33 million as compared with 2014, which represented a division profit margin improvement of 240 basis points. The increase was the result of strong flow-through of sales to profit, resulting from improved gross margins due to more full-price selling and effective expense management. The improvement in gross margin was due, in part, to the fact that 2014 was negatively affected by the liquidation of the CCS merchandise. Division profit in 2015 included a $1 million impairment charge to write down the value of the SP24.com ecommerce trade name, which was acquired with the Runners Point Group. SP24.com is a clearance website that has been deemphasized as we focus on full-priced selling on the websites aligned with the stores banners. 23


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    This line represents final trim and will not print 2014 compared with 2013 Comparable sales increased 17.8 percent as compared to 2013, led by basketball and running footwear. The Direct-to-Customers segment included $18 million of incremental sales related to the ecommerce division of Runners Point Group, which the Company acquired during the second quarter of 2013. Excluding those sales, the increase was primarily a result of continued strong sales performance related to the Company’s store-banner websites both in the U.S. and in Europe, as well as increased Eastbay sales. Of the total increase, sales from our U.S. store-banner websites comprised the majority of the increase, which reflected the continued success of several initiatives, including the improvement of connectivity of the store banners to the ecommerce sites, enhancements to the mobile ecommerce sites, investments in technology to improve the shopping experience, and investments in making the sites more engaging. These increases were offset, in part, by a decline in the CCS business, which transitioned to the Eastbay banner during the third quarter of 2014. Division profit increased by $25 million as compared to 2013, representing a division profit margin improvement of 90 basis points. The 2014 results included a $2 million impairment charge related to the CCS business, which was triggered by the Company’s decision to transition the skate business to the Eastbay banner. Gross margin was negatively affected by the liquidation of the CCS merchandise and the effects of providing additional free shipping offers. Notwithstanding this, the increase in division profit was the result of strong flow-through of sales to profit and good expense management. Corporate Expense 2015 2014 2013 ($ in millions) Corporate expense $77 $81 $76 $ Change $ (4) $ 5 Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Depreciation and amortization included in corporate expense was $11 million, $13 million, and $12 million in 2015, 2014, and 2013, respectively. Corporate expense decreased by $4 million in 2015 as compared with the prior year. Depreciation and amortization included in corporate expense decreased by $2 million. The annual adjustment of the allocation of corporate expense to the operating divisions reduced corporate expense by $5 million. These decreases were offset by $3 million of costs incurred in late 2015 relating to the spring 2016 relocation of our corporate headquarters within New York City. Corporate expense increased by $5 million in 2014 as compared with 2013. This increase was primarily related to incentive compensation and legal costs, which increased $8 million and $2 million, respectively. Additionally, depreciation and amortization included in corporate expense increased by $1 million. These increases were partially offset by the annual adjustment to the allocation of corporate expense to the operating divisions, which reduced corporate expense by $4 million. In addition, acquisition and integration costs related to Runners Point Group were $4 million less in 2014 than in 2013. Liquidity and Capital Resources Liquidity The Company’s primary source of liquidity has been cash flow from earnings, while the principal uses of cash have been: to fund inventory and other working capital requirements; to finance capital expenditures related to store openings, store remodelings, Internet and mobile sites, information systems, and other support facilities; to make retirement plan contributions, quarterly dividend payments, and interest payments; and to fund other cash requirements to support the development of its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, and future cash flow from operations will be adequate to fund these requirements. 24


  • Page 48

    This line represents final trim and will not print As of January 30, 2016, the Company had $1,021 million of cash and cash equivalents, of which $608 million was held in foreign jurisdictions. Because we plan to permanently reinvest our foreign earnings, in accordance with U.S. GAAP, we have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from potential future remittances of undistributed earnings of foreign subsidiaries. Depending on the source, amount, and timing of a repatriation, some tax may be payable. The Company believes that its cash invested domestically and future domestic cash flows are sufficient to satisfy domestic requirements. The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Such repurchases and retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. As of January 30, 2016, approximately $637 million remained available under the Company’s current $1 billion share repurchase program. On February 17, 2016, the Board of Directors declared a quarterly dividend of $0.275 per share to be paid on April 29, 2016, representing a 10 percent increase over the Company’s previous quarterly per share amount. As discussed further in the Legal Proceedings note under ‘‘Item 8. Financial Statements and Supplementary Data,’’ the Company recorded a pre-tax charge of $100 million ($61 million after-tax) in 2015. In light of the uncertainties involved in this matter, there is no assurance that the ultimate resolution will not differ from the amount currently accrued by the Company. The $100 million charge has been classified as a long-term liability due to the uncertainty involved with the resolution of this litigation, as the appeals process can be lengthy. The pension plan is sufficiently funded to absorb a $100 million liability and, accordingly, we do not anticipate the need to make any additional pension contributions in the near term in connection with this matter. The timing and the amount of any future contributions to the pension plan are dependent on the funded status of the plan and various other factors, such as interest rates and the performance of the plan’s assets. Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, the Company’s reliance on a few key suppliers for a significant portion of its merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading ‘‘Disclosure Regarding Forward-Looking Statements,’’ could affect the ability of the Company to continue to fund its needs from business operations. Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key suppliers. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key suppliers. In 2015 and 2014, the Company purchased approximately 90 percent and 89 percent, respectively, of its merchandise from its top five suppliers and expects to continue to obtain a significant percentage of its athletic product from these suppliers in future periods. Approximately 72 percent in 2015 and 73 percent in 2014 was purchased from one supplier — Nike, Inc. The Company’s 2016 planned capital expenditures and lease acquisition costs are approximately $297 million. Planned capital expenditures are $292 million and planned lease acquisition costs related to the Company’s operations in Europe are $5 million. The Company’s planned capital expenditures reflect $210 million focused on elevating the customer’s in-store experience. It also includes the remodeling and expansion of over 250 existing stores, the planned opening of approximately 90 stores primarily related to Kids Foot Locker in the U.S. and Europe, as well as the continued expansion of the Foot Locker banner in Europe. Planned spending for 2016 also includes $82 million for the development of information systems, including a new ecommerce order management system, websites, infrastructure, and costs related to the relocation of our corporate headquarters within New York City. The Company has the ability to revise and reschedule much of the anticipated capital expenditure program, should the Company’s financial position require it. 25


  • Page 49

    This line represents final trim and will not print Free Cash Flow (non-GAAP measure) In addition to net cash provided by operating activities, the Company uses free cash flow as a useful measure of performance and as an indication of the strength of the Company and its ability to generate cash. The Company defines free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). The Company believes the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from the Company’s underlying operations in a manner similar to the method used by management. Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP, and may not be comparable to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The following table presents a reconciliation of the Company’s net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow. 2015 2014 2013 ($ in millions) Net cash provided by operating activities $ 745 $ 712 $ 530 Capital expenditures (228) (190) (206) Free cash flow (non-GAAP) $ 517 $ 522 $ 324 Operating Activities 2015 2014 2013 ($ in millions) Net cash provided by operating activities $745 $712 $530 $ Change $ 33 $182 The amount provided by operating activities reflects income adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include non-cash impairment charges, depreciation and amortization, deferred income taxes, share-based compensation expense and related tax benefits. The improvements in both 2015 and 2014 represented the Company’s earnings strength and working capital improvements. During 2015, the Company contributed $4 million to its U.S. qualified pension plans as compared with $6 million contributed to its Canadian qualified pension plan in 2014. Pension contributions were $2 million in 2013. The amounts and timing of pension contributions are dependent on several factors, including asset performance. Cash paid for income taxes was $283 million, $251 million, and $175 million for 2015, 2014, and 2013, respectively. Investing Activities 2015 2014 2013 ($ in millions) Net cash used in investing activities $230 $176 $248 $ Change $ 54 $ (72) Capital expenditures in 2015 were $228 million, an increase of $38 million compared with the prior year. Current year capital expenditures primarily related to the remodeling of 209 stores, the build-out of 111 new stores, preparing for our corporate headquarters relocation within New York City, and other corporate technology projects. Capital expenditures in 2014 were $190 million, primarily related to the remodeling of 319 stores, the build-out of 86 new stores, and various corporate technology upgrades. This was a decrease of $16 million as compared with 2013, as the timing of certain projects shifted to 2015. As of the end of fiscal 2015, approximately 30 percent of our domestic Foot Locker and Champs Sports stores and approximately 20 percent of the Footaction stores have been remodeled to the current store format. During the third quarter of 2015, the Company completed an asset acquisition for $2 million involving 10 previously franchised Runners Point and Sidestep stores in Switzerland. 26


  • Page 50

    This line represents final trim and will not print During 2014, the Company sold real estate for proceeds of $5 million and recorded a gain on sale of $4 million. In addition, maturities of short-term investments totaled $9 million in 2014. This compares with net sales and maturities of short-term investments of $37 million during 2013. The activity during 2013 included the purchase of Runners Point Group for $81 million, net of cash acquired. Financing Activities 2015 2014 2013 ($ in millions) Net cash used in financing activities $456 $401 $309 $ Change $ 55 $ 92 Cash used in financing activities consists primarily of the Company’s return to shareholders initiatives, including its share repurchase program and cash dividend payments, as follows: 2015 2014 2013 ($ in millions) Share repurchases $419 $305 $229 Dividends paid on common stock 139 127 118 Total returned to shareholders $558 $432 $347 During 2015, 2014, and 2013, the Company repurchased 6,693,100 shares, 5,888,698 shares, and 6,424,286 shares of its common stock under its share repurchase programs, respectively. Additionally, the Company declared and paid dividends representing a quarterly rate of $0.25, $0.22, and $0.20 per share in 2015, 2014, and 2013, respectively. Offsetting the amounts above were proceeds received from the issuance of common stock and treasury stock in connection with the employee stock programs of $69 million, $22 million, and $30 million for 2015, 2014, and 2013, respectively. In connection with stock option exercises, the Company recorded excess tax benefits related to share-based compensation of $35 million, $12 million, and $9 million for 2015, 2014, and 2013, respectively. The financing activity also includes payments on capital lease obligations of $2 million, $3 million, and $1 million for 2015, 2014, and 2013, respectively. These obligations were recorded in connection with the acquisition of the Runners Point Group. Capital Structure The 2011 Restated Credit Agreement provides for a $200 million asset based revolving credit facility maturing on January 27, 2017. In addition, during the term of the 2011 Restated Credit Agreement, the Company may make up to four requests for additional credit commitments in an aggregate amount not to exceed $200 million. Interest is based on the LIBOR rate in effect at the time of the borrowing plus a 1.25 to 1.50 percent margin depending on certain provisions as defined in the 2011 Restated Credit Agreement. The 2011 Restated Credit Agreement provides for a security interest in certain of the Company’s domestic assets, including certain inventory assets, but excluding intellectual property. The Company is not required to comply with any financial covenants as long as there are no outstanding borrowings. With regard to the payment of dividends and share repurchases, there are no restrictions if the Company is not borrowing and the payments are funded through cash on hand. If the Company is borrowing, Availability as of the end of each fiscal month during the subsequent projected six fiscal months following the payment must be at least 20 percent of the lesser of the Aggregate Commitments and the Borrowing Base (all terms as defined in the 2011 Restated Credit Agreement). The Company’s management currently does not expect to borrow under the facility in 2016, other than amounts used to support standby letters of credit. 27

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