F o o t L o c k e r I n c .  Proposed By: Bobby Camilleri Proposed For: Managerial Accounting Date: April 14, 2010

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Table of Contents History ............................................................................................................3

Company Ratio Analysis ..............................................................................5

Company and Industry Comparisons .......................................................10

Capital Stock Review ..................................................................................12

Review of Statement of Cash Flows...........................................................12

Common-Size Comparative Income Statements .....................................14

Trend Analysis.............................................................................................17

Conclusion ...................................................................................................18

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History

Foot Locker is the worlds largest athletic footwear/apparel company in the world. It has

approximately 3,600 retail stores located in 21 countries around the world. The Foot

Locker Company is represented by not only by Foot Locker stores, but also by Lady Foot

Locker, Kids Foot Locker, Footaction, Champs Sports, CCS and Eastbay. The company

spans the globe and has an economic impact on many countries, not just the United

States.

Foot Locker dates all the way back to 1905 when Frank Woolworth incorporated his

business as F. W. Woolworth & Co. In 1974 the first Foot Locker was opened as an

extension of Woolworths shoe department. In 1982 the first Lady Foot Locker was

opened. Foot Locker soon took off and began to outsell and eventually take over the

athletic shoe market. Continuing their aggressive expansion within the athletic business,

the company bought Champs Sports in 1987. In 1997 the company expanded again and

bought Eastbay, and then again in 2004 when they bought out Footaction. The most

recent expansion was in 2008 when Foot Locker bought CSS, a catalog/online skateboard

retailer.

Foot Locker is committed to the success of their company and maintaining their place

atop the athletic footwear/apparel industry.

Below are listed their Corporate Goals:

• Enhance our base business

• Expand in the global marketplace

• Pursue new business opportunities

• Generate a positive cash flow

• Redeploy excess cash

As mentioned above, Foot Locker is the worlds largest athletic footwear/apparel

company. With that being said, their stock prices are very reasonable and have been

rising over the past few years. As of April 13, 2010, stock is selling for $15.40 per share.

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Unfortunately, due to the lack of current information this report is based upon the 2008

fiscal year.

Foot Locker entered the 2008 calendar year with cautious optimism. They recognized the

declining economy, not only in the United States, but also around the globe and were

prepared to take a hit financially. And true to the prediction, they did take a loss, but they

still remained confident and took actions in order to help sustain the company’s interests

for the long term.

The company chose to focus their improvements as follows:

• Sell the most sought after premium athletic footwear

• Improve existing retail locations instead of opening new ones

• Improve upon customer service

Foot Locker also strives to impact the Community. Since 2001, Foot Locker has provided

college scholarships to more than 250 students, through partnering with the United Negro

College Fund. Foot Locker also partnered with the American Cancer Society and has

been releasing exclusively designed pink ribbon products to support breast cancer

awareness. The Foot Locker Organization has and continues to strive to make an impact.

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Company Ratio Analysis Current Ratio: Foot Locker 2008: 4.22 Foot Locker 2007: 4.03 The current ratio takes company’s current assets and divides them by its current

liabilities. In doing this, a company is given a ration that shows whether or not the

company is able to pay off its short-term debts (liabilities) with its short-term cash

(assets.) The higher the number produced, equals the higher the capability of the

company to pay off their current liabilities. If the ratio is below one, then the company is

not able to fully pay off their liabilities because they are greater than their current assets.

Foot Locker has a current ratio of 4.22, which means that they have 4 times more current

assets than current liabilities. This number increased from 4.03 in 2007, which means that

Foot Locker has either increased their current assets and or decreased their current

liabilities in 2008.

Accounts Receivable Ratio: Foot Locker 2008: N/A Foot Locker 2007: N/A This ratio is used to see how effective a company is in extending credit as well as

collecting what is owned to them. The companies net credit sales is divided by the

average accounts receivable in order to see if the organization is allowing customers to

have an outstanding credit. A high number means that the company maintains more of a

cash based operation and a low number means that the company is extending too much

credit. Foot Locker does not have any accounts receivable on their balance sheet, because

the company deals almost exclusively in cash. Thus, Foot Locker would have a high

number.

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Inventory Turnover Ratio: Foot Locker 2008: 4.67 Foot Locker 2007: 4.24 This ratio is used to calculate how often a company turns over their inventory. Dividing

sales by inventory shows how often your inventory is diminished in comparison to your

entire sales. The higher the number shows a strong sales or poor buying, while a low

number indicates poor sales and an excessive inventory. This number should be

compared to industry averages to see the effectiveness. Foot Locker has a 4.67 for their

number, which in my opinion seems to indicate strong sales.

Debt Ratio: Foot Locker 2008: 33% Foot Locker 2007: 30% This ratio shows a companies proportion of debt to assets. The number generated shows

whether a company has more debt than assets. Higher than one means that the assets

exceed the debt and that the company could pay off all debts if needed. While a number

less than one shows that the company’s debts are greater than the assets and that the

company could not pay off the debt with the assets. This ratio helps investors determine a

company’s level of risk, when they are investing. Foot Locker generates a .33, which

means that they are a low risk company.

Equity Ratio: Foot Locker 2008: 66% Foot Locker 2007: 69% This ratio shows the total equity as a percent of the total assets. This ratio shows how

much of the company or assets are backed by shareholders as opposed to debt. The debt

ratio combined with the equity ratio equals 100% of the assets. A low equity ratio should

indicate that the shareholders would be receiving good return on their shares as long as

the company earns a rate of return on assets that is greater than the interest rate

paid to creditors. Foot Locker’s ratio is 66%, which doesn’t necessarily mean a great

return for shareholders, but it also indicates that that is double the amount of equity as

debt.

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Profit Margin: Foot Locker 2008: -1% Foot Locker 2007: 0% This ratio shows how much money the organization actually keeps in its earnings. By

dividing the company revenue by sales a company is shown just how much they are

making per dollar spent. A positive profit margin shows that a company has good control

over its costs and overall a profitable company. But a negative profit margin shows that

the company has a net loss and therefore is loosing money. Foot Locker has a -1% profit

margin, which indicates that they are loosing money per each dollar they receive. This is

not positive for Foot Locker, but can be explained due to the struggles of the American

economy in 2008.

Gross Margin: Foot Locker 2008: 27% Foot Locker 2007: 26% This ratio shows exactly how much money a company keeps after they incur the cost of

producing their products. By subtracting the cost of good sold from the revenue you

know exactly how much a company has after it pays to produce the product. Then if you

divide that number by the overall revenue you will have the percentage on the dollar of

how much a company keeps after it produces the product. The higher the number

produced, the more a company keeps per dollar of revenue. This number should be

compared to industry averages. Foot Locker has a gross margin of 27%, which means

that for every dollar they keep $.27.

Return on Total Assets: Foot Locker 2008: -1% Foot Locker 2007: 4% This ratio shows how a company’s earnings before taxation and interest compared to the

total assets. You divide expenses before interest and taxes (EBIT) by total net assets. The

resulting calculation shows how effectively a company uses their assets. Foot Locker has

a -1 for its calculation because they have negative net income and no earnings. Thus, they

are not receiving any return on their assets. This is not good for Foot Locker because they

are loosing money.

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Return on Common Stockholders Equity Ratio: Foot Locker 2008: -4% Foot Locker 2007: 1% This ratio shows whether or not a company has earned a net income for its shareholders.

You subtract preferred dividends from net income and then divide that number by the

shareholders equity. The number calculated then should show the equity earned for the

shareholders. Due to the fact that Foot Locker had a loss of net income, the shareholders

equity actually was -4%. This is not very promising for Foot Locker shareholders. But

much of this loss can be accounted for due to the recession and shareholders should not

worry.

Book Value per Share: Foot Locker 2008: $16.41 Foot Locker 2007: $19.42 This vale shows what the shareholders should expect to receive if a company goes

bankrupt and liquidates all of their assets at book value. The company’s equity is divided

by shares outstanding in order to find out what each share is worth. The higher the book

value the more insurance the shareholders have against bankruptcy. Foot Locker’s book

value per share is $16.41. This is relatively high and therefore provides shareholders

relative security.

Basic Earnings per Share: Foot Locker 2008: $-0.52 Foot Locker 2007: $0.30 This value shows how much each share has earned throughout the year. You subtract

preferred dividends from net income and then divide that calculation by shares

outstanding. Again, if a company has a positive net income then the value will be

positive, but if they have a net loss then each share will loose money. This value was

stated in Foot Locker’s financial statements as $-.52. Thus, in 2008 Foot Locker lost

money and therefore so did each shareholder.

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Price Earnings: Foot Locker 2008: -21% Foot Locker 2007: 52% This ratio shows a company’s share price compared to its earnings or loss per-share. To

calculate it you divide market value by earnings per share. The higher the number means

that investors are expecting the company to grow in the future. Foot Locker had a price-

earning ratio of -21%. This is because the company took a net loss in 2008 and therefore

did not earn anything. This seems very bad, but in actuality it just means that Foot Locker

has great room for growth.

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Company and Industry Comparison

Current Ratio: Footlocker 2008: 4.22 Finish Line 2008: 2.59 Industry Average: 1.5 Footlocker has done well in 2008 with their current ratio. Assets have increased and

liabilities have decreased. Thus, Footlocker well exceeds both the industrial average as

well as Finish Line’s ratio. Finish Line also exceeds the industry average, which is a

success. As long as both companies stay above 1, then they are doing well in maintaining

more assets than liabilities.

Inventory Turnover Ratio: Footlocker 2008: 4.67 Finish Line 2008: 4.75 Industry Average: 3 Both Footlocker as well as Finish Line have done exceedingly well in 2008 with their

Inventory turnover ratio. Finish Line has done slightly better than Footlocker, and both

have exceeded the industry average. This data seems to indicate that both companies are

turning over their inventory at a fairly steady rate and thus generating constant revenue. If

these companies wish to remain successful they need to keep exceeding the industry

average. This would keep them atop the industry as well as avoid excessive inventory.

Debt Ratio: Footlocker 2008: 33% Finish Line 2008: 34% Industry Average: 79.7% The industry average for debt ratio is more than double the ratios of both Footlocker and

Finish Line. This means that both companies have considerable more assets compared to

their debts. We know that the lower the ratio, then the lower the risk of investors

investing in the company. These companies are not taking much risk and don’t have a lot

of outstanding debts. But in turn, they also don’t have very much upside as well.

Someone once said, to make a lot one must risk a lot. It is surprising that such a large

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company as Footlocker; it doesn’t have more debt because it knows that it can handle

paying it off.

Profit Margin Ratio: Footlocker 2008: -1% Finish Line 2008: 0% Industry Average: 3.5% This is an area of great concern for Footlocker. Because Footlocker had a net loss in

2008, the company lost money and therefore has a negative profit margin. Due to the

economic recession, Footlocker was caught off guard and could not change their

corporate strategy in order to avoid loss in 2008. Finish Line survived the recession

slightly better than Footlocker, but could only beak even. The industry average as a

whole only had a profit margin of 3.5%, which is seemingly very slight in my opinion. I

expect the profit margin to grow over the next few years as the economy returns to

normalcy.

Return on Total Assets: Footlocker 2008: -1% Finish Line 2008: -6% Industry Average: 11% Again, due to the fact that both Footlocker as well as Finish Line lost money in 2008,

both companies have a negative return on total assets. Both companies have significant

assets, but because they failed to produce a positive net income. Both companies need to

watch this closely and make sure that they return to the black soon, because if this

becomes a trend then they will be filing bankruptcy sooner than later.

Return on Common Stockholders Equity Ratio: Footlocker 2008: -4% Finish Line 2008: -14% Industry Average: 40% Due to the failure to produce a net gain in 2008, neither Footlocker nor Finish Line could

produce equitable contributions to distribute to their shareholders. As mentioned above,

this should not become a trend or the companies will not survive much longer. The

organizations need to make strategic changes in order to ensure a positive net income in

the future.

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Capital Stock Review

• 500 million shares authorized at par $0.01

• 158,997 shares issued at beginning of the 2008 year at $676 million

• Dividends of $93 million declared and issued

• Common Stock dividends $0.60 per share

• Treasury stocks equaling 4,681

During the 2008 fiscal year, Foot Locker had 500 million shares of common stock

authorized at a par value of $0.01. There were 158,977 shares issues, which totaled a

value of $676 million. In 2008 dividends of $93 million were declared and issued. The

common stock dividend was $0.60 per share. And at the close of the year, there were

4,681 shares of common stock in the treasury account.

Review of Statement of Cash Flows

• Lost $80 million

• $259 Million in non-cash impairment charges and store closing program costs

• $130 million in depreciation and amortization

• Merchandise Inventory of $128 million

• Net Cash provided by operating activities: 383 million

• Business acquisition $-106 million

• Capital Expenditures $-146 million

• Net Cash used in investing activities $272 million

• Reduction of long term debt $94 million

• Dividends paid on stock $93 million

• Net Cash used in Financing activities $185 million

• Cash at the end of the year $385 million

At the beginning of the 2008 fiscal year, Foot Locker had $488 million in cash and cash

equivalents. The operating activities section is as follows: $259 million dollars were used

in non-cash impairment charges and store program closing costs, which was a significant

amount of cash. The company also totaled $130 million in depreciation and amortization

costs in 2008. The merchandise inventory totaled $128 million and as a result the net cash

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provided by operating activities was $383 million dollars. It is positive that the company

brought in so much cash, but unfortunately it wasn’t enough to cover both the investing

as well as the financing activity costs.

The investing activities are as follows: $106 million was used in acquiring a new

business. And capital expenditures used a total of $146 million. Thus resulting net cash

used by investing activities to equal $272 million dollars. It may seem like the investing

activities cost Foot Locker a lot of cash, but in the long run these purchases will pay off.

The new company that they purchased will grow and produce a constant stream of

revenue. And paying dividends helps to keep the shareholders happy and encourages

investors to invest.

The financing activities are as follows: $94 million spent in reducing long-term debt. And

$93 Million in dividends were paid to shareholders. Thus the net cash in financing

activities was $185 million dollars. In total Foot Locker lost $80 million dollars during

the 2008 fiscal year. While this may seem negative, there is great upside to Foot Locker

because of their investing activities in 2008. The shareholders are happy and the new

business is sure to produce a new constant stream of revenue to really help booster the

cash flows in 2009.

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Common-Size Comparative Income Statements

($ In Millions)

Common-Size Percents (%)

2008 2007 2008 2007

Revenues $5,237 $5,437 100% 100%

Cost of Goods Sold $3,777 $4,017 72% 73%

Gross Profit $1,460 $1,420 27% 26%

Selling, General and Administrative Expenses $1,174 $1,176 22% 21%

Depreciation and Amortization $130 $166 2.4% 3%

Impairment Charges and Store Closing Costs $259 $128 4.9% 2.3%

Interest Expense, net $5 $1 0.09% 0.01%

Other Income $8 $1 0.1% 0.01%

(Loss) Income from Continuing Operations before income Taxes $100 $50 1.9% 0.9%

Income Tax (Benefit) Expense $21 $93 0.4% 1.7%

(Loss) Income from Continuing Operations $79 $34 1.55 0.6%

(Loss) Income on disposal of Discontinued Operations $1 $2 0.01% 0.03%

Net Income -$80 $45 -1.55 0.8%

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Common-Size Comparitive Income Statement

2008 Revenues

Cost of Goods Sold

Gross Profit

Selling, General and Administrative Expenses Depreciation and Amortization

Impairment Charges and Store Closing Costs Interest Expense, net

Other Income

(Loss) Income from Continuing Operations before income Taxes Income Tax (Benefit) Expense

(Loss) Income from Continuing Operations (Loss) Income on disposal of Discontinued Operations Net Income

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Common-Size Comparitive Income Statement

2007 Revenues

Cost of Goods Sold

Gross Profit

Selling, General and Administrative Expenses Depreciation and Amortization

Impairment Charges and Store Closing Costs Interest Expense, net

Other Income

(Loss) Income from Continuing Operations before income Taxes Income Tax (Benefit) Expense

(Loss) Income from Continuing Operations (Loss) Income on disposal of Discontinued Operations Net Income

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Trend Analysis

2004 2005 2006 2007 2008

Sales $5,355 $5,653 $5,750 $5,437 $5,237

Net Income $293 $264 $251 $45 -$80

2004 2005 2006 2007 2008

Sales % 100 105 107 101 97

Net Income % 100 90 85 15 -27

$4,600

$4,800

$5,000

$5,200

$5,400

$5,600

$5,800

$6,000

$6,200

2004 2005 2006 2007 2008

Trend Analysis

Net Income

Sales

-40

-20

0

20

40

60

80

100

120

2004 2005 2006 2007 2008

Trend Analysis

Sales %

Net Income %

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Common-Size Comparative Income Looking at the Common-Size Comparative Income Statement for 2008 you can see that

the revenues are the largest portion of the income statement. The gross profit is the next

largest portion, coming in at slightly more than a quarter of the entire percentage. The

selling and general administrative expenses are the most costly expense on the income

statement. If you then compare 2008 to 2007 you notice that the data is nearly identical.

Therefore, the graphs look identical. Therefore we know that the income statements in

2008 and 2007 were pretty much the same.

Trend Analysis Looking at the sales and Income trend analysis you can see that Foot Locker’s net income

was on the rise between 2004 and 2006, when it then took a drastic hit, which then

continued into 2008. We now know that this decrease is because of the recession. Net

sales also took a hit, but not nearly as drastic as net income. By looking at the percentage

analysis we see the net income drop from 2004 until 2008, when it is actually negative.

Interestingly enough, the sales percentage remains fairly constant from 2004 through

2008.

Conclusion After my extensive review of Foot Locker, I have gained a much better handle of the

finances of the sporting apparel giant. The main conclusion that I have drawn from the

2008 financial statements is that the economic recession really hit Foot Locker very hard.

Until now, I only heard stories about the devastating effects of this recession, but after

looking at Foot Locker’s financial statements I now know that it hit every industry. Foot

Locker, which is the leader in sporting apparel, had a net loss in 2008. This is incredible

and also very disconcerting. It shows that we never know what the economy will do.

These statements also showed me that despite a net loss in 2008, Foot Locker is

continually working to build and expand their sporting apparel empire. The company

took strategic measurements to ensure that the future would be bright. The company

bought a new company, and consequentially expanded into a new and expanding market.

Also, Foot Locker made sure to pay dividends to their shareholders in order to keep them

upbeat and positive, while also looking to attract new shareholders.