FL Foot Locker, Inc. - 10-K

Item   1A. Risk Factors

Risks Related to Our Business and Industry

Our inability to implement our long-range strategic plan may adversely affect our future results.

Our ability to successfully implement and execute our long-range strategic plan is dependent on many factors. Our strategies may require significant capital investment and management attention. Additionally, any new initiative is subject to certain risks, including customer acceptance of our products and renovated store designs or locations, our loyalty program, our digital e-commerce, competition, product differentiation, the ability to attract and retain qualified personnel, and our ability to successfully integrate our acquisitions and implement technological initiatives. 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 shareholder expectations, particularly with respect to sales, supplier diversification, cost-cutting programs, operating margins, and earnings per share, would likely result in volatility in the market value of our stock.

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, especially at the premium end of the price spectrum, in which we operate, 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, including our suppliers' 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 our customers could have a material adverse effect on our business, financial condition, and results of operations.

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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, traditional shoe stores, mass merchandisers, and online retailers, as well as our merchandise vendor suppliers direct-to-customers channels. Although we sell an increasing proportion of our merchandise online, a significantly faster shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods online 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 or accelerate, 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 principal competitive factors in our markets are selection of merchandise, customer experience, reputation, store location, advertising, and price. 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.

A change in the relationship with any of our key suppliers or the unavailability of key products at competitive prices could affect our financial health.

Our business is dependent to a significant degree upon our ability to obtain premium products and the ability to purchase brand-name merchandise at competitive prices, from a limited number of suppliers. In addition, we have negotiated volume discounts, cooperative advertising, and markdown allowances with our suppliers, as well as the ability to cancel orders and return excess or unneeded merchandise. We cannot be certain that such terms with our suppliers will continue in the future.

We purchased 85% of our merchandise in 2024 from our top five suppliers and we expect to continue to obtain a significant percentage of our athletic product from these suppliers in future periods. Approximately 59% of all merchandise purchased in 2024 was purchased from one supplier — Nike, Inc. ("Nike"). Each of our banners is highly dependent on Nike. Merchandise that is high profile and in high demand is allocated by our suppliers based upon their own criteria. We cannot be certain that our suppliers will allocate sufficient amounts to us in the future or whether our suppliers will choose to further sell such merchandise through their own direct-to-customers channel.

Our inability to obtain merchandise in a timely manner from major suppliers 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 the high proportion of purchases from Nike, any adverse development in Nike's reputation, ability to create new or innovative products, 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.

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 footwear four to six months prior to delivery to us. If we fail to anticipate accurately either the market for the merchandise 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 negatively affect our gross margins and have a material adverse effect on our business, financial condition, and results of operations.

We have key strategic initiatives designed to optimize our inventory levels and increase the efficiency and responsiveness of our supply chain. We are also developing additional capabilities to analyze customer behavior and demand, which we believe will allow us to better localize assortment and improve store-level allocations to further tailor our assortments to customer needs and increase sell-through. Further, we are leveraging technology and data science to optimize our product-to-market processes and supply chain which we anticipate will enhance our in-season responsiveness. These initiatives and additional capabilities involve significant changes to our inventory management systems and processes. If we are unable to implement these initiatives, integrate these additional capabilities successfully, or properly utilize them, we may not realize the return on our investments that we anticipate, and our results of operations could be adversely affected.

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We are affected by mall traffic and our ability to secure suitable store locations, both in malls and off-malls.

Many of our stores, especially in North America, are located primarily in enclosed regional and neighborhood malls. Our sales are affected, in part, by the volume of mall traffic. Mall traffic may be adversely affected by, among other factors, economic downturns, the closing or continued decline 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 issue, including pandemics, or safety concern that decreases the level of mall traffic, or that affects our ability to open and operate stores in such locations, 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, as well as high-traffic urban retail areas and high streets. We cannot be certain that desirable 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, public health issues, the closure of certain mall anchor tenants, and changes in customer shopping preferences, such as online shopping. Further, some malls have closed, and others may close in the future. While we seek to obtain suitable locations off-mall, there is no guarantee that we will be able to secure such locations. As of February 1, 2025, 42% of our North America locations are off-mall. One of our strategic imperatives is to further increase the penetration of our North American fleet of off-mall locations to 50%.

Several large landlords dominate the ownership of prime malls 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 them could negatively affect our ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect our ability to negotiate favorable lease terms.

Our future growth may depend on our ability to expand our market share in international markets, including through licensed arrangements.

Our future growth will depend, in part, on our ability to expand our market share internationally. This may include expansion into new international markets, where we may have only limited experience in operating our business in such markets. In other instances, we may have to rely on the efforts and abilities of foreign business partners, such as through licensing agreements. In addition, business practices in these new international markets may be unlike those in the other markets we serve, and we may face increased exposure to certain risks. Our future growth may be materially adversely affected if we are unsuccessful in our international expansion efforts. Our inability to expand in international markets could have a material adverse effect on our business.

We may experience fluctuations in, and cyclicality of, our comparable sales results.

Our comparable 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 sales results, including, among others, fashion trends, product innovation, promotional events, the highly competitive retail sales environment, economic conditions, timing of income tax refunds, changes in our merchandise mix, calendar shifts of holiday periods, declines in foot traffic, supply chain disruptions, and weather conditions. Many of our products represent discretionary purchases. Accordingly, customer demand for these products could decline in an economic downturn or other periods of economic uncertainty 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.

The effects of natural disasters, terrorism, acts of war, acts of violence, and public health issues may adversely affect our business.

Natural disasters, including earthquakes, wildfires, hurricanes, floods, and tornadoes 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. Any act of violence, including active shooter situations and terrorist activities, that are targeted at or threatened against shopping malls, our stores, offices or distribution centers, could result in restricted access to our stores and/or store closures in the short-term and, in the long-term, may cause our customers and employees to avoid visiting our stores. The ongoing conflicts in Ukraine and the Middle East may lead to disruption in the global supply chain, rising fuel costs, or cybersecurity risks, and economic instability generally, any of which could materially and adversely affect our business and results of operations.

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Public health issues, including 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 result in significantly lower traffic to or closure of our stores, or customer demand. Our ability to mitigate the adverse effect 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.

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. We may be required to suspend operations in some or all of our locations and incur significant costs to remediate concerns which could have a material adverse effect on our business, financial condition, and results of operations.

Social unrest, including riots, vandalism, and other crimes and acts of violence, may affect the markets in which we operate, our customers, delivery of our products and customer service, and could have a material adverse effect on our business, results of operations, or financial condition.

Our business may be adversely affected by instability, disruption, or destruction, regardless of cause, including riots, civil insurrection or social unrest, and manmade disasters or crimes. Such events may result in property damage and loss and may also cause customers to suspend their decisions to shop in our stores, interrupt our supply chain, and cause restrictions, postponements, and cancellations of events that attract large crowds and public gatherings, such as store marketing events. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition, or operating results.

Risk of loss or theft of assets, including inventory shrinkage, is inherent in the retail business. Loss may be caused by error or misconduct of employees, customers, vendors or other third parties including through organized retail crime and professional theft. While some level of inventory shrinkage is unavoidable, if we were to experience higher rates of inventory shrinkage, or if we were unable to effectively reduce losses or theft of assets, our results of operations could be affected adversely.

Our business could be materially harmed if we fail to adequately integrate the operations of the businesses we have acquired, or may acquire.

Acquisitions involve numerous inherent challenges, such as properly evaluating acquisition opportunities, properly evaluating risks and other diligence matters, ensuring adequate capital availability, and balancing other resource constraints. There are risks and uncertainties related to acquisitions, including difficulties integrating operations, personnel, and financial and other systems; unrealized sales expectations from the acquired business; unrealized synergies and cost savings; unknown or underestimated liabilities; diversion of management attention from running our existing businesses; and potential loss of key management or customers of the acquired business.

Risks Related to Technology, Data Security, and Privacy

We or our third-party providers are subject to technology risks, including failures, security breaches, and cybersecurity risks that could harm our business, damage our reputation, and increase our costs in an effort to protect against these risks.

Information technology is a critical part of our business operations. We depend on information systems to process transactions, analyze customer behaviors through our loyalty program, 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 through 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. We invest in security technology to protect the data stored by us, 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 and other regulatory requirements. Additionally, we evaluate our major technology suppliers and any outsourced services through accepted security assessment 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.

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While we believe that our security technology and processes follow appropriate 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. Failure of our systems, either internally or at our third-party providers, 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. We or our third-party providers have experienced and will continue to experience cyber incidents of varying degrees in conducting our business.

A cyberattack on a communications network or power grid could cause operational disruption resulting in loss of revenues. 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 losses in connection with security breaches and cyber incidents, insurance may be insufficient to compensate us fully for potentially significant losses.

New data security laws add additional complexity, requirements, restrictions and potential legal risk, and compliance programs may require additional investment in resources, and could affect strategies and availability of previously useful data.

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, mobile sites, and apps and their related support systems, computer viruses, cybersecurity risks, telecommunications or power failures, denial of service attacks, bot attacks, and similar disruptions. Also, to sustain, keep current, or grow our digital commerce business we will need to make additional investments. Risks related to digital commerce include those associated with credit card fraud, the need to keep pace with rapid technological change, governmental regulation, and legal uncertainties with respect to internet regulatory compliance. If any of these risks materialize, it could have a material adverse effect on our business.

Our inability to successfully manage the implementation of a new Enterprise Resource Planning ("ERP") system may adversely affect our business and results of operations or the effectiveness of our internal controls over financial reporting.

We are currently engaged in a multi-year program that includes implementing a new ERP system, as part of a plan to integrate and upgrade our systems and processes. This initiative includes a fully-integrated global accounting, operations, and finance enterprise resource planning system. It will also include warehouse management, order management, as well as various interfaces between these systems, and supporting back-office systems. Additional implementation activities are expected to continue in phases over the next few years. ERP implementations are complex, labor intensive, and time-consuming projects, which also involve substantial expenditures on system software and implementation activities. The ERP system is critical to our ability to provide important information to our management, obtain, and deliver products, provide services and customer support, accurately maintain books and records, provide accurate, timely and reliable reports on our financial and operating results, and otherwise operate our business. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Any such implementation involves risks inherent in the conversion to a new computer system technology solution, including loss of information and potential disruption to our normal operations. The implementation and maintenance of the new ERP system has required, and will continue to require, the investment of significant financial and human resources, the re-engineering of processes of our business, and the attention of many employees who would otherwise be focused on other aspects of our business. Our results of operations could be adversely affected if we experience time delays or cost overruns during the ERP implementation process, or if we are unable to reap the benefits we expect from the ERP system. Any material deficiencies in the design and implementation of the new ERP system could also result in potentially materially higher costs and could adversely affect our ability to operate our business and otherwise negatively affect our financial reporting and the effectiveness of our internal control over financial reporting. Any of these consequences could have a material adverse effect on our results of operations and financial condition.

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T he technology enablement of omni-channel initiatives in our business is complex.

We continue to invest in initiatives designed to deliver a high-quality, coordinated shopping experience online, in stores, and on mobile devices, which requires substantial investment in technology, information systems, and employee training, as well as significant management time and resources. Our omni-channel retailing efforts include the integration and implementation of new technology, including technology and software associated with our ERP implementation, 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 we may not be able to provide a relevant shopping experience, or we may not realize the return on our omni-channel investments that we anticipate, our financial performance and future growth could be materially adversely affected.

Privacy and data security concerns and regulation could result in additional costs and liabilities.

The protection of customer, employee, and Company data is critical. The regulatory environment surrounding privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation, breach or misuse involving this data could cause our customers to lose confidence in our ability to protect their data, which may cause them to potentially stop shopping with us or joining our loyalty program, attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position, and cash flows.

Regulatory scrutiny of privacy, user data protection, use of data and data collection is increasing on a global basis and regulations will likely continue to evolve over time. We are subject to numerous laws and regulations in the U.S. and internationally designed to protect the information of clients, customers, employees, and other third parties that we collect and maintain, including the European Union General Data Protection Regulation (the "EUGDPR") and the United Kingdom General Data Protection Regulation (the "UKGDPR"). Both the EUGDPR and UKGDPR, among other things, mandate requirements regarding the handling of personal data of employees and customers, including its use, protection, and the ability of persons whose data is stored to correct or delete such data about themselves. The state of California has a similar law called the California Consumer Privacy Act, (as amended, the "CCPA"). In addition to enforcement authority granted to the California Attorney General, the CCPA established the "California Privacy Protection Agency," a dedicated state agency charged with the authority to audit and enforce privacy rules, among other responsibilities, and the CCPA permits a private right of action for certain violations of law. Other U.S. states have also enacted comprehensive consumer privacy laws, and additional states may follow. We have from time to time received inquiries from governmental authorities regarding our practices. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data.

Laws and regulations related to privacy and data security are evolving and pose increasingly complex and rigorous compliance challenges, which may increase our compliance costs and related risk and/pr require adjustments to business strategies or uses of data, among other items. If we fail to comply with these laws or other similar regulations applicable to our business, we could be subject to reputational harm and significant litigation, monetary damages, regulatory enforcement actions, sanctions, or fines.

Risks Related to our Supply Chain and Operations

Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.

We operate multiple distribution centers worldwide, as well as third-party arrangements, to support our operations. If complications arise with any facility or third-party arrangements, or if any facility is severely damaged or destroyed, our other distribution centers may be unable to support the resulting additional distribution demands. Our distribution center capabilities may also be affected by disruptions caused by upgrades or changes to our warehouse management systems. For example, in mid-2025, we plan to move our European distribution center to a new facility with an upgraded warehouse management system. We also may be affected by disruptions in the global transportation network caused by events including delays caused by acts of war or hostility and related military actions, port disruption, port strikes, 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 merchandise. Any interruption in service by these carriers for any reason could cause disruptions in our business, a loss of sales and profits, and other material adverse effects.

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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 human rights policy, 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.

Our reliance on key management.

Future performance will depend upon our ability to attract, retain, and motivate our executive and senior management teams. Our future performance depends, to a significant extent, both upon the continued services of our current executive and senior management teams, as well as our ability to attract, hire, motivate, and retain additional qualified management in the future. We have succession plans in place and our Board of Directors reviews these succession plans. If our succession plans do not adequately cover significant and unanticipated turnover, the loss of the services of any of these individuals, or any resulting negative perceptions or reactions, could damage our reputation and our business.

Additionally, our success depends on the talents and abilities of our workforce in all areas of our business, especially personnel that can adapt to complexities and grow their skillset across the changing environment. Our ability to successfully execute our strategy depends on attracting, developing, and retaining qualified talent with diverse sets of skills, especially functional and technology specialists that directly support our strategies.

Risks associated with attracting and retaining store and field team members.

Our success depends, in part, upon our ability to attract, develop, and retain a sufficient number of qualified store and field team members. The turnover rate in the retail industry is generally high. If we are unable to attract and retain quality team members, our ability to meet our growth goals or to sustain expected levels of profitability may be compromised. While we believe we maintain good relations with our store and field team members, we also cannot predict whether any unionization or other organizing efforts could occur with our store or field team members.

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, and overtime regulations.

Risks Related to our Investments

If our long-lived tangible assets and operating lease right-of-use assets, or goodwill become impaired, we may need to record significant non-cash impairment charges.

We review our long-lived tangible assets, operating lease right-of-use assets, and goodwill when events indicate that the carrying value of such assets may be impaired. Goodwill is reviewed for impairment if impairment indicators arise and, at a minimum, annually.

Goodwill is not amortized but is subject to an impairment test, which consists of either a qualitative assessment on a reporting unit level, or a quantitative 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 long-range strategic 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 are difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, operating lease right-of-use assets, and goodwill and could result in future impairment charges, which would adversely affect our results of operations.

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We do not have the ability to exert control over our minority investments, and therefore, we are dependent on others in order to realize their potential benefits.

At February 1, 2025, we hold $115 million of non-controlling minority investments in various entities and we may make additional strategic minority investments in the future. Such minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, and compliance risks associated with the investments. Other investors in these entities may have business goals and interests that are not aligned with ours or may exercise their rights in a manner in which we do not approve. These circumstances could lead to delayed decisions or disputes and litigation with those other investors, all of which could have a material adverse impact on our reputation, business, financial condition, and results of operations.

If our investees seek additional financing to fund their growth strategies, these financing transactions may result in further dilution of our ownership stakes and these transactions may occur at lower valuations than the investment transactions through which we acquired such interests, which could significantly decrease the fair values of our investments in those entities. Additionally, if our investees are unable to obtain additional financing, those entities could need to significantly reduce their spending in order to fund their operations or result in their insolvency. These actions likely would result in reduced growth forecasts, which also could significantly decrease the fair values of our investments in those entities.

Risks Related to Shareholder Activism, Geopolitics, Regulations, Internal Controls, and Other External Risks

We may face risks associated with shareholder activism.

Publicly-traded companies are subject to campaigns by shareholders advocating corporate actions related to matters, such as corporate governance, operational practices, and strategic direction. We may become subject in the future to such shareholder activity and demands. Such activities could interfere with our ability to execute our business plans, affect our allocation of capital, disrupt relationships with our vendor partners, be costly and time-consuming, disrupt our operations, and divert the attention of management, any of which could have an adverse effect on our business or stock price.

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 2024 was attributable to our operations outside of the United States. 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 our suppliers manufacture a substantial amount of our products in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, labor, and other conditions in the countries from which our suppliers obtain their product.

Fluctuations in the value of the euro and the British Pound may affect the value of our European earnings when translated into U.S. dollars. Similarly, our earnings in other jurisdictions may be affected by the value of currencies when translated into U.S. dollars. Our international subsidiaries conduct most of their business in their local currency.

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.

Increasing inflation could adversely affect our business, financial condition, results of operations, or cash flows.

Inflation, as well as some of the measures taken by or that may be taken by the governments in countries where we operate in an attempt to curb inflation, may have negative effects on the economies of those countries generally. If the United States or other countries where we operate experience substantial inflation in the future, our business may be adversely affected. Fewer customers may shop as these purchases may be seen as discretionary, and those who do shop may limit the amount of their purchases. Any reduced demand or changes in customer purchasing behavior may lead to lower sales, higher markdowns and an overly promotional environment or increased marketing and promotional spending. This could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

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Our stock price may be volatile, and the value of our common stock has declined and may continue to decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including without limitation:

a change in the relationship with any of our key suppliers or the unavailability of key products at competitive prices;

actual or anticipated fluctuations in our financial condition or results of operations;

variance in our financial performance from expectations of securities analysts and securities analysts may issue unfavorable research about us;

changes in our projected operating and financial results;

announcements by us or our competitors of significant business developments, acquisitions, or new offerings;

significant data breaches;

material litigation;

future sales of our common stock by us or our shareholders, or the perception that such sales may occur;

changes in senior management or key personnel;

the trading volume of our common stock;

changes in the anticipated future size and growth rate of our market; and

general macroeconomic, geopolitical, and market conditions beyond our control.

Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions, such as recessions, interest rate changes, or international currency fluctuations, may also negatively affect the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial expenses and divert our management’s attention.

Macroeconomic developments may adversely affect our business.

Our performance is subject to global economic conditions and the related effects on consumer spending levels. Continued uncertainty about global economic conditions poses a risk as consumers and businesses may 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. The ongoing conflicts in Russia/Ukraine and the Middle East may lead to disruption in the global supply chain, rising fuel costs, or cybersecurity risks, and economic instability generally, any of which could materially and adversely affect our business and results of operations. Additionally, with the U.K.'s exit from the European Union, known as Brexit, the ongoing uncertainties of the trading relationship between the U.K. and the European Union have yet to be completely realized and the ultimate outcome and long-term impacts for the U.K. and Europe remain uncertain.

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. These and other economic factors could adversely affect demand for our products, which could adversely affect our financial condition and operating results.

Imposition of tariffs and export controls on the products we buy may have a material adverse effect on our business.

A significant portion of the products that we purchase, including the portion purchased from U.S.-based suppliers, as well as most of our private brand merchandise, is manufactured abroad. We may be affected by potential changes in international trade agreements or tariffs, such as new or increased tariffs imposed on certain goods imported into the U.S. For example, trade tensions between the U.S. and China have led to a series of significant tariffs on the importation of certain product categories and tariffs have been recently proposed, and in some cases enacted, on imports from Mexico, Canada, China, and other countries. We cannot predict what changes to trade agreements and tariffs may be made in the future, including whether existing policies will be maintained or modified, what products may be subject to such policies or whether the entry into new bilateral or multilateral trade agreements will occur, nor can we predict the effects that any such changes would have on our business. Furthermore, China or other countries may institute retaliatory trade measures in response to existing or future tariffs imposed by the U.S. that could have a negative effect on our business. As a result of these events, we may be obligated to seek alternative suppliers for our private brand merchandise, raise prices, make changes to our operations, or take other actions, any of which could have a material adverse effect on our sales and profitability, results of operations, and financial condition.

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Instability in the financial markets may adversely affect our business.

The global macroeconomic environment could be negatively affected by, among other things, instability in global economic markets, disruptions to the banking system and financial market volatility resulting from bank failures, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of Brexit, the ongoing conflicts in Russia/Ukraine and the Middle East, and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets.

This volatility may affect our future access to the credit and debt security markets, leading to higher borrowing costs, or, in some cases, the inability to obtain additional financing. Although we currently have a revolving credit agreement in place until June 20, 2029, 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.

Material changes in the market value of the securities we hold may adversely affect our results of operations and financial condition.

At February 1, 2025, our cash and cash equivalents totaled $401 million. The majority of our investments were short-term deposits in highly-rated banking institutions. 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 February 1, 2025, all investments were in investment grade institutions. Despite an investment grade rating, 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 $342 million at February 1, 2025. 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 affect the funded status of our pension plan and future funding requirements.

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. Further, many countries continue to consider changes in their tax laws by implementing new taxes such as the digital service tax and initiatives such as the Organization for Economic Co-operation and Development's Pillar II global minimum tax. Various countries are in the process of incorporating the Pillar II framework within their tax laws.

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, but are not limited to, minimum wage requirements, overtime, sick, and premium pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act, and the Protecting the Right to Organize Act, unemployment tax rates, workers' compensation rates, European works council requirements, and union organization.

A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime, sick, and premium pay, paid leaves of absence, mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. Complying with any new legislation or interpretation of law, or reversing changes implemented under existing law could be time-intensive and expensive and may affect our business.

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Legislative or regulatory initiatives related to climate change concerns may negatively affect our business.

Greenhouse gases may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could make it difficult or impossible for us to deliver products to our customers, create delays, and inefficiencies in our supply chain. Following an interruption to our business, we could require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. Concern over climate change may result in new or additional legal, legislative, regulatory, and compliance requirements to reduce or mitigate the effects of climate change on the environment, which could result in future tax, transportation, and utility increases, which could adversely affect our business.

We face increased scrutiny and evolving expectations regarding environmental, social, and governance ("ESG") matters.

We are subject to various reporting regimes in the U.S. and internationally. For example, we are subject to California's Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act, which require disclosure of emissions and other matters. Further, we are subject to the European Sustainability Reporting Standards, which also require emissions and other disclosures. The requirements of these standards are evolving and require increasing disclosures across our business and expense associated with compliance. Failure to comply with these standards may result in fines, penalties and reputational harm.

There has been increased focus, including by investors, customers, and other stakeholders, on these and other sustainability matters, such as worker safety, human rights, textile and packaging waste, materials traceability, deforestation, and the use of plastic, which all lead to our risk of non-compliance, as well as may require us to incur increased costs for materials traceability, due diligence oversight, and reporting. This may increase product costs, which in turn may adversely affect our business, operating results, and financial condition. Concerns about these issues may cause investors and customer preferences to change and move towards products that are more sustainable, which may affect our ability to meet the needs of our customers and stakeholders.

Although we have undertaken efforts to implement ESG initiatives, it is possible that stakeholders may not be satisfied with our efforts or the speed of their adoption, or that taking such steps may also be criticized. In the U.S., there is growing anti-ESG sentiment which may conflict with other regulatory requirements, resulting in regulatory uncertainty. For example, lawmakers and other interest groups have proposed or enacted anti-ESG policies or legislation. Moreover, proxy advisory firms that provide voting recommendations to investors have developed ratings for evaluating companies on their approach to different ESG matters, and unfavorable ratings of our company or our industry may lead to negative investor sentiment and the diversion of investment to other companies or industries. If we are unable to meet ESG-related standards or expectations, whether established by us or third parties, it could result in adverse publicity, reputational harm, or loss of customer and/or investor confidence, which could adversely affect our business, results of operations, financial condition, and liquidity.

We may be adversely affected by regulatory and litigation developments.

We are exposed to the risk that federal or state legislation may negatively affect our operations. Changes in federal or state wage requirements, employee rights, health care, social welfare, or entitlement programs, including 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 litigation and demands, including commercial, tort, intellectual property, customer, employment, wage and hour, data privacy, anti-corruption, and other claims, including purported class action lawsuits. The cost of defending against these types of claims against us or the ultimate resolution of such claims, whether by settlement, mediation, arbitration, or adverse court or agency decision, may harm our business.

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 government officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws.

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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. 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 have 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 control over financial reporting in order to satisfy 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 control over financial reporting will prove to be completely adequate in the future. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock and market confidence in our reported financial information.

International intellectual property protection can be uncertain and costly.

Uncertainty in intellectual property protection can result from conducting business outside the United States, particularly in jurisdictions that do not have comparable levels of protection for our assets such as intellectual property, copyrights, and trademarks. Continuing to operate in such foreign jurisdictions where the ability to enforce intellectual property rights is limited increases our exposure to risk.

Risks Related to our Indebtedness and our Credit Facility

Our debt may cause an adverse effect on our business.

We have $400 million of 4% Senior Notes due 2029. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our debt obligations could adversely affect our business, financial condition, results of operations, and other corporate requirements. This could require us to direct a substantial portion of our future cash flow toward payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, and other corporate requirements, thereby limiting our ability to respond to business opportunities.

We may be unable to draw on our credit facility in the future or we may be unable to secure a new credit facility with similar terms.

We have a $600 million asset-based revolving credit facility that is scheduled to expire in June 2029. Borrowings and letters of credit under our credit facility are not permitted to exceed a borrowing base, which is tied to our level of inventory. Therefore, reductions in the value of our inventory would result in a reduction in our borrowing base, which would reduce the amount of financial resources available to meet our operating requirements. Also, if we do not comply with our financial covenants and we do not obtain a waiver or amendment from our lenders, the lenders may elect to cause any amounts then owed to become immediately due and payable, not fund any new borrowing, or they may decline to renew our credit facility. In that event, we would seek to establish a replacement credit facility with one or more other lenders, including lenders with which we have an existing relationship, potentially on less desirable terms. There can be no guarantee that replacement financing would be available at commercially reasonable terms, if at all. Additionally, our rates on our revolving credit facility may be affected by our credit ratings which could result in higher interest expense in the future.

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Item   7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section of the Annual Report on Form 10-K generally discusses 2024 and 2023 detail and year-over-year comparisons between these years. For a comparison of our results for 2023 to our results of 2022 and other financial information related to 2022, refer to our Annual Report on Form 10-K for the year ended February 3, 2024 filed with the SEC on March 28, 2024.

Our Business

Foot Locker, Inc. is a leading specialty retailer operating 2,410 stores in 26 countries across the North America, Europe, Australia, New Zealand, and Asia. We also have a licensed store presence in the Middle East, Europe, and Asia. Results for fiscal year 2023 reflect 53 weeks of operations as compared with 52 weeks for all other years presented.

Foot Locker, Inc. has a strong history of sneaker authority that sparks discovery and ignites the power of sneaker culture through its portfolio of brands, including Foot Locker, Kids Foot Locker, Champs Sports, WSS, and atmos.

Overview of Consolidated Results

(in millions, except per share data)

Sales

Sales per average square foot

Licensing revenue

Gross margin

Gross margin rate

Selling, general and administrative expenses ("SG&A")

SG&A, as a percentage of sales

Income from operations

Income (loss) from continuing operations before income taxes

Net income (loss) attributable to Foot Locker, Inc.

Diluted earnings per share

Adjusted net income (non-GAAP)

Adjusted diluted earnings per share (non-GAAP)

Summary of our 2024 financial performance:

Sales (decrease) increase

Comparable sales increase (decrease)

Comparable sales increased in both of our channels during 2024, our direct-to-customers channel increased by 6.2% and the stores channel increased by 0.4%.

Total sales declined by 2.2% when compared with the 53 weeks of last year. Excluding the 53rd week of sales of $98 million, sales declined by 1.1%.

One of our strategic initiatives is improving our omni-channel capabilities. We are making ongoing investments in our omni-channel ecosystem, including our e-commerce experience and supply chain capabilities, in order to create seamless shopping experiences across all of our sales channels. During the year, we saw improvements in our e-commerce capabilities and the percentage of our direct-to-customers sales channel increased to 18.2% of total sales in 2024 as compared with   17.2% last year.

Our footwear sales represented 84% of total sales, while apparel and accessory sales were 16%, reflecting a 3% increase in footwear sales as compared with the prior year.

Gross margin, as a percentage of sales, increased to 28.9% as a result of decreased promotions during 2024 and occupancy rate leverage. We prudently managed markdowns to drive margin rate increases.

Our enhanced loyalty program, FLX Rewards, was launched in the second quarter across North America, with plans to expand to other geographies. The FLX Rewards program introduced FLX Cash, enabling customers to use points towards a discount on purchases, and other member-exclusive benefits, including priority access to highly anticipated sneaker launches, exclusive sales, member-only events, free returns, upgraded birthday gifts, and continued complimentary shipping for members. We believe that our FLX Rewards Program is key to driving customer retention and engagement. This program provides a platform to engage with our customers on a regular basis, through personalized offers and targeted communications.

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Our cost optimization program focused on driving efficiencies which allowed us to focus our SG&A dollars on strategic investments in technology and brand building, including our marketing partnership with the NBA. SG&A expenses were 24.1% of sales, an increase of 140 basis points as compared with the prior year.

We continued to rationalize our portfolio to improve profitability by focusing on underperforming geographies. During 2024, we announced the shutdown of underperforming operations in South Korea, Denmark, Norway, and Sweden. In addition, we entered into agreements to sell our Greece and Romania businesses to a third party and entered into licensing agreements with the purchaser. We expect to close the sale in early 2025.

In 2024, we closed 139 underperforming stores, as part of the Lace Up strategic plan to power up our portfolio. We have repositioned the Champs Sports banner, which delivered comparable sales growth in the second half of 2024.

Highlights of our financial position for the year ended February 1, 2025 include:

We ended the year with cash and cash equivalents of $401 million at February 1, 2025 as compared with $297 million at February 3, 2024.

We returned to free cash flow generation, generating $105 million of free cash flow.

Our merchandise inventories were $1.5 billion, an increase of 1.1%. Our inventory turns improved to 2.8 times in 2024, an increase of 5% as compared with 2023.

Net cash provided by operating activities was $345 million as compared with $91 million last year. This reflected lower payments for incentive compensation and income taxes, as well as changes in prepaid occupancy expense related to the timing of rent payments due to the 53rd week in 2023.

Cash capital expenditures during 2024 totaled $240 million and were primarily directed to the remodeling or relocation of 478 stores and the build-out of 26 new stores, as well as various technology and infrastructure projects. The new and remodeled stores included our Reimagined concept stores, which is the go-forward store expression of the Foot Locker brand. Our capital plans for 2025 will continue to focus on refreshing our store portfolio, with 80 additional Reimagined stores planned.

Reconciliation of Non-GAAP Measures

In addition to reporting our financial results in accordance with generally accepted accounting principles ("GAAP"), we report certain financial results that differ from what is reported under GAAP. In the following tables, we have presented certain financial measures and ratios identified as non-GAAP such as Earnings (Loss) Before Interest and Taxes ("EBIT"), adjusted EBIT, adjusted EBIT margin, adjusted income before income taxes, adjusted net income, adjusted net income margin, adjusted diluted earnings per share, adjusted Return on Invested Capital ("ROIC"), and free cash flow.

We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that are not indicative of our core business or which affect comparability across fiscal periods. These non-GAAP measures are also useful in assessing our progress in achieving our long-term financial objectives.

Additionally, we present certain amounts as excluding the effects of foreign currency fluctuations, which are also considered non-GAAP measures. Throughout the following discussions, where amounts are expressed as excluding the effects of foreign currency fluctuations, such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates. Presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements.

We estimate the tax effect of the non-GAAP adjustments by applying a marginal rate to each of the respective items. The income tax items represent the discrete amount that affected the period.

The non-GAAP financial information is provided in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Presented below is a reconciliation of GAAP and non-GAAP results discussed throughout this Annual Report on Form 10-K. All adjusted amounts exclude the loss from discontinued operations. Please see the non-GAAP reconciliations for free cash flow in the " Liquidity and Capital Resources " section.

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Reconciliation of Non-GAAP Measures

($ in millions)

Pre-tax income (loss):

Income (loss) from continuing operations before income taxes

Pre-tax adjustments excluded from GAAP:

Impairment and other (1)

Other expense / income, net (2)

Adjusted income before income taxes (non-GAAP)

Calculation of Earnings (Loss) Before Interest and Taxes (EBIT):

Income (loss) from continuing operations before income taxes

Interest expense, net

EBIT

Adjusted income before income taxes

Interest expense, net

Adjusted EBIT (non-GAAP)

EBIT margin %

Adjusted EBIT margin %

After-tax income:

Net income (loss) attributable to Foot Locker, Inc.

After-tax adjustments excluded from GAAP:

Impairment and other, net of income tax benefit of $22, $18, and $21, respectively (1)

Other expense / income, net of income tax (benefit) expense of $-, ($142), and ($9), respectively (2)

Net loss from discontinued operations, net of income tax benefit of $2, $-, and $1, respectively (3)

Tax reserves benefit / charge (4)

Adjusted net income (non-GAAP)

Earnings per share:

Diluted EPS

Diluted EPS amounts excluded from GAAP:

Impairment and other (1)

Other expense / income, net (2)

Net loss from discontinued operations (3)

Tax reserves benefit / charge (4)

Adjusted diluted EPS (non-GAAP)

Net income (loss) margin %

Adjusted net income margin %

For 2024, 2023, and 2022, we recorded impairment and other of $97 million ($75 million after tax), $80 million ($62 million after tax), and $112 million ($91 million after tax), respectively. See the " Impairment and Other " section for further information.

During 2024, 2023, and 2022, we recorded other expense of $37 million ($37 million after tax), $548 million ($406 million after tax), and $41 million ($32 million after tax), respectively. These adjustments represent fair value and other changes in our minority investments, the 2023 pension settlement charge, and gains on sales of properties and businesses. See the " Other (Expense) Income, net " section for further information.

We recognized a charge to discontinued operations of $8 million ($6 million after tax) during the fourth quarter of 2024 and $4 million ($3 million after tax) during the fourth quarter of 2022 related to legal matters of a business we formerly operated.

In the first quarter of 2023, we recorded a $4 million benefit related to income tax reserves due to a statute of limitations release. In the second quarter of 2022, we recorded a $5 million charge related to our income tax reserves due to the resolution of a foreign tax settlement.

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Return on Invested Capital

ROIC and Adjusted ROIC are presented below. Adjusted ROIC represents a non-GAAP measure and is calculated as adjusted return after taxes divided by average invested capital. We believe Adjusted ROIC is a meaningful measure because it quantifies how efficiently we generated operating income relative to the capital we have invested in the business, excluding items that are not indicative of our core business or which affect comparability.

ROIC using U.S. GAAP amounts is the most comparable measure to Adjusted ROIC. ROIC increased to 0.4% in 2024, as compared with (5.1)% in the prior year. This increase reflected net income in 2024 as compared with net loss in 2023. Adjusted ROIC increased to 4.1% as compared with 3.8% in the prior year due to a decline in average invested assets in 2024, as we continued to focus on working capital improvements.

ROIC %

Adjusted ROIC % (non-GAAP)

Calculation of ROIC

($ in millions)

EBIT

- Income tax adjustment (1)

+ Net loss attributable to noncontrolling interests

= Return after taxes

Average total assets (2)

- Average cash and cash equivalents

- Average non-interest bearing current liabilities

- Average merchandise inventories

+ 13‑month average merchandise inventories

= Average invested capital

ROIC %

Represents the income tax provision adjusted for the tax related to interest expense.

Represents the average total assets on the balance sheet for the current and preceding fiscal year.

Calculation of Adjusted ROIC

($ in millions)

Adjusted EBIT (non-GAAP)

+ Interest component of straight-line rent expense (1)

Adjusted net operating profit

- Adjusted income tax expense (2)

+ Net loss attributable to noncontrolling interests

= Adjusted return after taxes (non-GAAP)

Average invested capital - as calculated above

Adjusted ROIC % (non-GAAP)

Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each operating lease recorded as a component of rent expense. Operating lease interest is added back to adjusted net operating profit in the ROIC calculation to account for differences in capital structure between us and our competitors.

The adjusted income tax expense represents the marginal tax rate applied to adjusted net operating profit for each of the periods presented.

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Segment Reporting and Results of Operations

We have determined that we have three operating segments, North America, EMEA, and Asia Pacific. Our North America operating segment includes the results of the following banners operating in the U.S. and Canada: Foot Locker, Champs Sports, Kids Foot Locker, and WSS, including each of their related e-commerce businesses. Our EMEA operating segment includes the results of the Foot Locker and Kids Foot Locker banners operating in Europe, including each of their related e-commerce businesses. Our Asia Pacific operating segment includes the results of the Foot Locker banner and its related e-commerce business operating in Australia, New Zealand, and Asia, as well as atmos, which operates primarily in Asia. We have further aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics.

As previously announced, during the third quarter of 2024, we entered into agreements to sell our Greece and Romania businesses and entered into license arrangements with the purchaser for the rights to operate Foot Locker stores in Greece and Romania and six other countries in Europe.

Sales

Comparable sales is a key performance indicator for us. All references to comparable-store sales for a given period relate to sales of stores that were open at the period-end and had been open for more than one year. The computation of consolidated comparable sales also includes direct-to-customers sales as a result of our omnichannel strategy. We view our e-commerce business as an extension of our physical stores. 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. In fiscal years following those with 53 weeks, including 2024, we calculate comparable sales on a 52-week basis by comparing the current and prior-year weekly periods that are most closely aligned. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.

In 2024, sales decreased by 2.2% to $7,971 million from sales of $8,154 million in 2023. Excluding the effect of foreign currency fluctuations, sales decreased by 1.9% as compared with 2023. Sales decreased by $31 million from foreign currency fluctuations related primarily to the weakening of the Japanese yen, Canadian dollar, and euro against the U.S. dollar. Results from 2023 include the effect of the 53rd week, which represented sales of $98 million. Excluding sales from the 53rd week of 2023, sales decreased by 1.1%.

The information shown below represents certain sales metrics by sales channel:

($ in millions)

Store sales

$ Change

% Change

% of total sales

Comparable sales increase (decrease)

Direct-to-customer sales

$ Change

% Change

% of total sales

Comparable sales increase (decrease)

Total sales

$ Change

% Change

Comparable sales increase (decrease)

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Combined stores and direct-to-customer sales metrics for 2024 as compared with the corresponding prior-year period are presented below.

Constant Currencies

Comparable Sales

Foot Locker

Champs Sports

Kids Foot Locker

WSS

North America

Foot Locker (1)

Sidestep

EMEA

Foot Locker

atmos

Asia Pacific

Total

Includes sales from 13 and 7 Kids Foot Locker stores operating in Europe as of February 3, 2024 and February 1, 2025, respectively.

Comparable sales increased by 1.4% as compared with the prior year. By operating segment, North America and EMEA had increases of 1.3% and 4.4%, respectively, while Asia Pacific was a decline in comparable sales of 6.7%. Comparable sales increased in both our stores and direct-to-customer channels in 2024, resulting from a positive customer response to product offerings, enhancements in stores and online, marketing activities, and strategic promotions. From a product perspective, comparable sales increased within the footwear and accessories categories driven by growth and momentum from a broad portfolio of our brand partners and the positive customer response to our refreshed assortments. These increases were partially offset by a decrease in the apparel category. For the combined channels, sales excluding foreign currency fluctuations declined in North America and Asia Pacific, partially offset by an increase in EMEA.

Our North America comparable sales were 1.4%, however total sales, excluding foreign currency fluctuations, were negatively affected by our strategic decision to close underperforming stores in our Foot Locker, Kids Foot Locker, and Champs Sports banners , as 89 fewer stores were operating at year end as compared with the prior year. Over the past two years, we repositio ned the Champs Sports banner, which resulted in expected total sales and comparable sales declines due to the transition. As of the end of 2024, the repositioning is substantially complete as we rationalized the number of stores operating over the last two years by over 20%. Champs Sports sales declined by $148 million on a constant currency basis as compared with the prior year. During the second quarter, we launched our new Champs Sports brand platform, garnering positive results and improved comparable sales trends. This new brand platform, "Sport For Life" is a celebration of the powerful connection between sports and everyday life serving the sports-style enthusiast. Champs Sports exited the year with sustained momentum with comparable sales growth of 2.8% and 1.8% in the third and fourth quarters, respectively. Our WSS banner benefited from new store growth, as they operated 10 additional stores since the prior year end, however comparable sales were negatively affected by general economic and geopolitical conditions that disproportionately affected our value-based consumers.

Constant currency sales for EMEA increased, reflecting improved product assortments coupled with a positive response to media campaigns in a continued highly promotional marketplace. This was partially offset by the loss of sales from the Sidestep banner, which closed in the second quarter of 2023 resulting in a decrease of $26 million.

Asia Pacific's sales, excluding foreign currency fluctuations, decreased primarily as a result of the prior-year closures of our operations in Hong Kong and Macau and the sale of our Singapore and Malaysia operations to our licensing partner in the second quarter of 2023. These businesses represented a decline in sales of $30 million. Additionally, sales decreased from our operations in Australia and New Zealand due to macroeconomic headwinds and a highly competitive marketplace. Sales from our atmos banner declined by $40 million due to the weakening of the Japanese yen to the U.S. dollar, reducing sales by $11 million. Excluding foreign currency fluctuations, atmos' sales declined by $29 million and was primarily due to our decision to accelerate shifts to our own digital site and away from less profitable third-party digital platforms, in addition to the closing of our U.S. atmos operations at the end of the fourth quarter of 2023, which represented a decline in sales of $13 million.

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Licensing Revenue

We have license agreements with unaffiliated third-party operators located in the Middle East, Europe, and Asia. In 2024, licensing revenue increased to $17 million from $14 million of licensing revenue in 2023. The increase was driven by the net increase of 22 licensed stores as compared with the prior year.

Gross Margin

​($ in millions)

Cost of merchandise

$ Change

% of total sales

Effect on gross margin rate in basis points

Occupancy and buyers' compensation

$ Change

% of total sales

Effect on gross margin rate in basis points

Total cost of goods sold

$ Change

Gross margin rate

Basis point change

Gross margin is calculated as sales minus cost of sales. Cost of sales includes the cost of merchandise, freight, distribution costs including related depreciation expense, shipping and handling, occupancy and buyers' compensation. Occupancy costs include rent (including fixed common area maintenance charges and other fixed non-lease components), real estate taxes, general maintenance, and utilities.

The gross margin rate increased in 2024 by 120 basis points as compared to the prior year as we were less promotional in 2024 despite the highly promotional marketplace and the liquidation of inventories in the geographies that we are closing. The markdown pressure was partially offset by vendor allowances, which improved our gross margin rate by 20 basis points as compared with the prior year. Our focus on inventory management allowed us to compete competitively while achieving this improvement. During the second quarter, we launched our loyalty program, which converted existing points to a more valuable proposition for our customers and the cost of the program improvement pressured the gross margin rate by 10 basis points for the year. The leverage in the occupancy and buyers' compensation rate was primarily related to rent renegotiations and our ongoing optimization of our store portfolio.

Selling, General and Administrative Expenses (SG&A)

($ in millions)

$ Change

% Change

SG&A as a percentage of sales

SG&A increased by $68 million, or 3.7%, in 2024, as compared with the prior year. As a percentage of sales, the SG&A rate increased by 140 basis points as compared with 2023. Excluding the effect of foreign currency fluctuations, SG&A increased by $75 million, or 4.0%, as compared with the prior year.

The increase in SG&A, as a percentage of sales, primarily reflected investments in technology and brand-building, as well as higher inflation and incentive compensation expense. These increases were partially offset by savings from the cost optimization program, store closures, and ongoing expense discipline.

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Depreciation and Amortization

($ in millions)

Depreciation and amortization

$ Change

% Change

Depreciation and amortization increased by $3 million as compared with the prior year. Excluding the effect of foreign currency fluctuations, depreciation and amortization increased by $4 million primarily due to our capital expenditures, partially offset by operating fewer stores, the full amortization of our customer list intangibles, and lower depreciation and amortization associated with impairments recorded in the current and prior year.

Operating Results

Division profit was $250 million, or 3.1% of sales in 2024. This compares with $264 or 3.2% of sales, for the prior year. The decline in store sales coupled with higher SG&A expenses, despite our cost-cutting program benefits and improved gross margin rate, negatively affected division profit results. See Note 3, Segment Information  for additional information.

Impairment and Other

For 2024, impairment and other included impairment charges of $32 million from a review of underperforming stores and accelerated tenancy charges on right-of-use assets for the shutdown of operations in South Korea, Denmark, Norway, and Sweden, and the New York headquarters relocation. We will close all stores operating in South Korea, Denmark, Norway, and Sweden as we focus on improving the overall results of our international operations. Additionally, we incurred reorganization costs of $26 million primarily related to the announced closure and relocation of our global headquarters and the shutdown of our operations in South Korea, Denmark, Norway, and Sweden. This year also included intangible asset impairment of $25 million on an atmos tradename and a $14 million loss accrual for legal and other matters. We routinely monitor claims and record provisions for losses when claims become probable and the amount is estimable.

For 2023, impairment and other charges included $30 million of impairment of long-lived assets and right-of-use assets and accelerated tenancy charges on right-of-use assets for closures of the Sidestep banner, certain Foot Locker Asia stores, and our U.S. atmos stores. Additionally, we incurred $27 million of transformation consulting expense, $17 million of reorganization costs primarily related to a severance and the closures of the Sidestep banner, certain Foot Locker Asia stores, and a North American distribution center. We also incurred intangible asset impairment of $9 million on an atmos tradename, partially offset by a $4 million reduction in the fair value of the atmos contingent consideration.

See Note 4, Impairment and Other  for additional information.

Corporate Expense

($ in millions)

Corporate expense

$ Change

Corporate expense consists of unallocated general and administrative expenses as well as depreciation and amortization related to our corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. The allocation of corporate expense to the operating divisions is adjusted annually based upon an internal study.

Depreciation and amortization included in corporate expense was $35 million and $36 million in 2024 and 2023, respectively. Excluding the changes in depreciation and amortization, corporate expense increased primarily due to higher performance-based incentive compensation expense.

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Interest Expense, net

($ in millions)

Interest expense

Interest income

Interest expense, net

Weighted-average interest rate (excluding fees)

We recorded net interest expense of $8  million in 2024 , compared to $9  million in 2023 . Interest income increased primarily due to higher interest rates earned on our cash and cash equivalents.

Other (Expense) Income, net

($ in millions)

Other (expense) income, net

This caption generally includes non-operating items, of which the following items are excluded to arrive at our non-GAAP results, impairment charges and changes in fair value of minority investments measured at fair value or using the fair value measurement alternative, gains on sales of businesses or assets, and the pension settlement charge. Additionally included in this caption are the changes in the market value of our available-for-sale security and net benefit expense related to our pension and postretirement programs excluding the service cost component.

During 2024, we recorded a $35 million non-cash impairment charge related to a minority investment that is accounted for using the fair value measurement alternative, which is cost, adjusted for changes in observable prices minus impairment under the practicability exception. We assess the carrying value of this investment for impairment whenever events or circumstances indicate that the carrying value may not be recoverable and consider factors including, but not limited to, expected cash flows, underperformance relative to its plans and continued losses of the investee. We estimated the fair value using a discounted cash flow approach, which considered forecasted cash flows provided by the investee's management, as well as assumptions over discount rates and terminal values. Other expense also included our share of losses related to our equity method investments of $2 million and expense of $7 million related to our pension and postretirement programs.

During 2023, we recorded an impairment of $478 million on a minority investment. In addition, as part of efforts to reduce our pension plan obligations, we transferred approximately $109 million of our U.S. Qualified pension plan registered assets and liabilities to an insurance company through the purchase of a group annuity contract, under which an insurance company is required to directly pay and administer pension payments to certain of our pension plan participants, or their designated beneficiaries. In connection with this transaction, we recorded a non-cash pretax settlement charge of $75 million, which accelerated the recognition of previously unrecognized losses. Additionally, 2023 also included a $3 million gain from the sale of a North American corporate office property, a $3 million gain from the sale of our Singapore and Malaysian Foot Locker businesses to a license partner, and our share of losses related to equity method investments of $1 million. Additionally, we recorded expense of $8 million related to our pension and postretirement programs.

See Note 5, Other (Expense) Income, net   for additional information.

Income Taxes

($ in millions)

Income tax (benefit) expense

Effective tax rate

We recorded income tax expense of $33 million in 2024, or an effective rate of 64.6%, as compared with an income tax benefit of $93 million or 22.0% in 2023. The change in the effective tax rate reflected several factors, including the effects of non-deductible losses, other valuation allowance and reserve adjustments, coupled with changes to the level and geographic mix of income. During the current year, related to the impairment of a minority investments, we increased our valuation allowances related to capital losses as we do not believe we will generate capital gains to utilize these losses. In addition, the effective tax rate in 2023 included a 200-basis point deferred tax asset adjustment which negatively affected the tax rate.

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We regularly assess the adequacy of provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, reserves for unrecognized tax benefits may be adjusted due to new facts and developments, such as changes to interpretations of relevant tax law, assessments and settlements with taxing authorities, and lapses of statutes of limitations. During 2024, we recognized tax benefits of $5 million from reserve releases due to various statute of limitations expirations on our foreign income taxes. We recorded a $4 million reserve release in 2023 from a statute of limitations expiration on our foreign income taxes, as well as other various reserve releases totaling $4 million due to settlements of international tax examinations.

The Organization for Economic Co-operation and Development ("OECD") Pillar II guidelines published to date include transitional safe harbor rules around the implementation of the Pillar II global minimum tax of 15%. Certain jurisdictions where we operate have implemented select provisions of the OECD directive effective in 2024. Based on current enacted legislation, the implementation did not significantly increase our tax expense in 2024. We are monitoring developments and expect additional guidance or legislation to be issued by the OECD and various jurisdictions during 2025, which could affect any minimum tax we owe in future periods.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity has been cash flow from operations, while the principal uses of cash have been to pay down liabilities and other working capital requirements; finance capital expenditures related to store openings, store remodelings, internet and mobile sites, information systems, and other support facilities; quarterly dividend payments; and interest payments; and fund other cash requirements to support the development of our short-term and long-term operating strategies. We generally finance real estate with operating leases. We believe our cash, cash equivalents, future cash flow from operations, and amounts available under our credit agreement will be adequate to fund these requirements.

We may also repurchase our common stock through open market purchases, privately negotiated transactions, or otherwise, including through Rule 10b5-1 trading plans. Such repurchases if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. In 2022, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $1.2 billion of its common stock. The share repurchase program does not have an expiration date and as of February 1, 2025, approximately $1.1 billion remained available. The Board's authorization of the share repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be commenced, suspended, or discontinued at any time.

Any material adverse change in customer demand, fashion trends, competitive market forces, or customer acceptance of our merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, our reliance on a few key suppliers for a significant portion of our merchandise purchases and risks associated with global product sourcing, economic conditions worldwide, the effects of currency fluctuations, as well as other factors listed under the heading "Disclosure Regarding Forward-Looking Statements," could affect our ability to continue to fund our liquidity needs from business operations.

The Board of Directors regularly reviews the dividend policy and rate, taking into consideration the overall financial and strategic outlook of our earnings, liquidity, and cash flow.

Maintaining access to merchandise that we consider appropriate for our business may be subject to the policies and practices of our key suppliers. Therefore, we believe that it is critical to continue to maintain satisfactory relationships with these key suppliers. We purchased 85% and 84% of our merchandise from our top five suppliers in 2024 and 2023, respectively. Approximately 59% and 65% was purchased from one supplier, Nike, Inc., in 2024 and 2023, respectively.

Planned capital expenditures in 2025 are $270 million, of which $185 million is dedicated to real estate projects designed to elevate our customers' in-store experience. This includes the planned opening of 80 "Reimagined" Foot Locker and Kids Foot Locker stores, primarily through conversions or relocations of existing stores. Spending for 2025 also includes refreshing approximately 300 existing stores to our current brand design standards and will incorporate key elements of our "Reimagined" design specifications. Finally, the capital plan for 2025 also includes $85 million primarily for our technology and supply chain initiatives, including capital expenditures related to a new distribution center and our new global headquarters. We also expect to spend an additional $30 million in software-as-a-service implementation costs related to our technology initiatives as we modernize our customer facing and support capabilities as part of a multi-year project. We have the ability to revise and reschedule some of the anticipated spending program should our financial position require it.

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Operating Activities

($ in millions)

Net cash provided by operating activities

$ Change

The amount provided by operating activities reflects net income (loss) adjusted for non-cash items and working capital changes. Adjustments to net income for non-cash items include impairment and other, pension settlement charge, fair value adjustments to our minority investments, depreciation and amortization, deferred income taxes, and share-based compensation expense. The increase in cash from operating activities was primarily due to changes in other accruals reflecting lower payments for incentive compensation and income taxes, as well as changes in prepaid occupancy expense related to the timing of rent payments as compared to the prior year due to the shift caused by the 53rd week in 2023. The increases in operating cash were partially offset by a decrease in our net income, adjusted for non-cash items, partially related to the 53rd week of operations in 2023.

Investing Activities

($ in millions)

Net cash used in investing activities

$ Change

We have made meaningful progress as we continue to implement our strategic initiative to power-up our portfolio of stores. Capital expenditures were $240 million, as compared with $242 million last year. During 2024, we completed the remodeling or relocation of 478 existing stores, including the refresh of 407 stores to our updated brand design standards and opened 26 new stores, 7 of which were our Reimagined store concept that aims to deliver an elevated shopping experience and unrivaled customer service. At year end, 44% of our Foot Locker, Kids Foot Locker, and Champs Sports gross store square footage was at current brand standard. We also made progress on the development of information systems, websites, and infrastructure, including supply chain initiatives.

During 2023, we sold our businesses operating in Singapore and Malaysia for total cash consideration of $24 million, or $16 million net of $8 million of cash in the business. We also sold a corporate office property in North America for proceeds of $6 million.

Financing Activities

($ in millions)

Net cash used in financing activities

$ Change

The change in financing activities primarily resulted from not paying dividends in 2024, as compared with $113 million paid in 2023. Also contributing to the decline in cash used in financing activities was a $5 million reduction in repurchases of common stock related to share-based tax withholdings, partially offset by $4 million in debt issuance costs related to our credit facility amendment. During the second quarter of 2024, we amended our $600 million revolving credit facility, which provided for (i) an uncommitted "accordion" feature that allows us, subject to certain customary conditions, to increase the size of the revolving credit facility to up to $750 million in the aggregate, (ii) an extension of the maturity date from July 14, 2025 to June 20, 2029, and (iii) a change to the interest rates and commitment fees applicable to the loans and commitments, among other items.

Free Cash Flow (non-GAAP measure)

In addition to net cash provided by operating activities, we use free cash flow as a useful measure of performance and as an indication of our financial strength and our ability to generate cash. We define free cash flow as net cash provided by operating activities less capital expenditures (which is classified as an investing activity). We believe the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from 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.

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The following table presents a reconciliation of net cash flow provided by operating activities, the most directly comparable U.S. GAAP financial measure, to free cash flow.

($ in millions)

Net cash provided by operating activities

Capital expenditures

Free cash flow

Capital Structure

We maintain a credit facility for working capital and general corporate purposes. We currently have a $600 million asset-based revolving credit facility that is scheduled to expire on June 20, 2029. No borrowings were outstanding as of February 1, 2025. The amount of borrowing availability under our credit facility is reduced by the amount of standby and commercial letters of credit outstanding, which were $7 million as of February 1, 2025.

Credit Rating

As of March 27, 2025, our corporate credit ratings from Standard & Poor's and Moody's Investors Service are BB and Ba3, respectively. In addition, Standard & Poor's and Moody's Investors Service have rated our senior unsecured notes BB and B1, respectively.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity. Also, our financial policies prohibit the use of derivatives for which there is no underlying exposure.

Critical Accounting Policies

Our responsibility for integrity and objectivity in the preparation and presentation of the financial statements requires application of appropriate accounting policies. Generally, our accounting policies and methods are those specifically required by U.S. GAAP. Included in the Summary of Significant Accounting Policies note in "Item 8. Consolidated Financial Statements and Supplementary Data" is a summary of the most significant accounting policies. In some cases, we are required to calculate amounts based on estimates for matters that are inherently uncertain. We believe the following to be the most critical of those accounting policies that necessitate subjective judgments.

Impairment of Long-Lived Tangible Assets and Right-of-Use Assets

We perform an impairment review when circumstances indicate that the carrying value of long-lived tangible assets and right-of-use assets may not be recoverable ("a triggering event"). Our policy for determining whether a triggering event exists comprises the evaluation of measurable operating performance criteria and qualitative measures at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities, which is generally at the store level. We also evaluate for triggering events at the banner level. If an impairment review is necessitated by the identification of a triggering event, we determine the fair value of the asset using assumptions predominately identified from our historical performance and our long-range strategic plans.

To determine if an impairment exists, we compare the carrying amount of the asset with the estimated future undiscounted cash flows expected to result from the use of the asset group. If the carrying amount of the asset exceeds the estimated undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset group with its estimated fair value.

The estimation of fair value is measured by discounting expected future cash flows using a risk adjusted discount rate and by using a market approach to determine current lease rates. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results.

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Recoverability of Goodwill and Indefinite-Lived Intangible Assets

We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each fiscal year or more frequently if impairment indicators arise. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. The review of impairment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a one-step qualitative impairment test. In 2024, we performed a quantitative approach to valuing goodwill and indefinite-lived intangibles assets.

When we perform the qualitative assessment, we consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in our stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative test requires that the carrying value of each reporting unit be compared with its estimated fair value. If the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill).

We use a discounted cash flow approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires significant estimates and assumptions. These estimates and assumptions are consistent with our internal forecasts and operating plans and primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Additionally, we compare the indicated equity value to our market capitalization and evaluate the resulting implied control premium to determine if the estimated enterprise value is reasonable compared to external market indicators. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. We evaluate the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units.

We have three reporting units, representing our operating segments of North America, EMEA, and Asia Pacific. Our 2024 quantitative analysis determined that the fair value of each reporting unit exceeded its carrying value. However, the EMEA and Asia Pacific reporting units had fair values that were not substantially in excess of their carrying values. The total amount of goodwill attributable to these reporting units was $238 million and the fair value was 6.0% higher than the carrying value. The fair value of our North America reporting unit's goodwill was substantially greater than its carrying value.

It is possible, depending upon a number of factors that are not determinable at this time or within our control, that the fair value of these two reporting units could decrease in the future and result in an impairment to goodwill. Specifically, actual results may vary from our forecasts and such variations may be material and unfavorable. Additionally, further deterioration or sustained declines in our market capitalization may trigger the need for future impairment tests where the conclusions may differ and could result in the recognition of an impairment charge.

Owned trademarks and trade names that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment. Our impairment evaluation for indefinite-lived intangible assets consists of either a qualitative or quantitative assessment, similar to the process for goodwill.

If the results of the qualitative assessment indicate that it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, or if we elect to proceed directly to a quantitative assessment, we calculate the fair value using a discounted cash flow method, based on the relief-from-royalty concept, and compare the fair value to the carrying value to determine if the asset is impaired. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. Following the $25 million impairment recorded related to our atmos tradename during the year ended February 1, 2025, there is no excess of fair value over the carrying value. Therefore, any further decrease in estimated fair value will result in an additional impairment charge. Additionally, our WSS tradename, which has a carrying value of $296 million, has an excess of fair value over the carrying value of 7.8%. If future results for atmos or WSS deteriorate at rates in excess of our current projections, we may be required to record additional non-cash impairment charges to these intangible assets.

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Fair Value Measurements of Minority Investments

We account for certain minority investments using the fair value measurement alternative, which is at cost, adjusted for changes in observable prices minus impairment under the practicability exception. We evaluate our minority investments for impairment when events or circumstances indicate that the carrying value of the investment may not be recoverable and that impairment is other than temporary. If an indication of impairment occurs, we evaluate the recoverability of our carrying value based on the fair value of the investment. If an impairment is indicated, we adjust the carrying values of the investment downward, if necessary, to their estimated fair values.

We estimate the fair value of our minority investments using a discounted cash flow approach and/or a market approach, which consider forecasted cash flows provided by the investee's management, as well as assumptions over discount rates, terminal values, and selected comparable companies. Therefore, the valuation results cannot be determined with precision and may not be realized in an actual sale the investment. Additionally, there are inherent uncertainties in any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

Deferred Tax Asset Valuation Allowance

We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We must assess the likelihood that our deferred tax assets will be recoverable based on expected future taxable income. To the extent that we determine it is more-likely-than-not (greater than a 50% probability) that some portion or all of the deferred tax assets will not be realized, we must establish a valuation allowance.

At February 1, 2025, we had valuation allowances of $112 million to reduce our $927 million of deferred tax assets to amounts that are more likely than not to be realized. The net deferred tax assets of $815 million include $85 million net operating loss ("NOL") carryforwards and $13 million deferred interest deductions in the Netherlands that can be used to offset taxable income in future periods. These NOLs and deferred interest deductions have an indefinite carryfoward period. After weighing the positive and negative evidence and considering both recent losses and forecasted taxable income as well as other tax planning actions, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these deferred tax assets. However, it is possible that some or all of these deferred tax assets could ultimately not be realized, especially if our business initiatives are not successful or our forecasted taxable income is not generated. Specifically, unless we are able to generate sufficient future taxable income in the Netherlands, a substantial valuation allowance to reduce our $98 million deferred tax assets may be required.

We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events. Thus, recorded valuation allowances may be subject to material future changes. We will continue to monitor facts and circumstances in our reassessment of the likelihood that operating loss carryforwards and other deferred tax attributes will be utilized.

Recent Accounting Pronouncements

Descriptions of the recently issued and adopted accounting principles are included in the Summary of Significant Accounting Policies note in "Item 8. Consolidated Financial Statements and Supplementary Data."