FOOT LOCKER, INC. Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (type 10-Q)

Business Overview

Foot Locker, Inc. leads the celebration of sneaker and youth culture around the
globe through a portfolio of brands including Foot Locker, Lady Foot Locker,
Kids Foot Locker, Champs Sports, Eastbay, atmos, WSS, Footaction, and Sidestep.
As of April 30, 2022, we operated 2,815 primarily mall-based stores, as well as
stores in high-traffic urban retail areas and high streets, in 28 countries
across the United States, Canada, Europe, Australia, New Zealand, and Asia, as
well as websites and mobile apps. Our purpose is to inspire and empower youth
culture around the world, by fueling a shared passion for self-expression and
creating unrivaled experiences at the heart of the global sneaker community.

We use our omni-channel capabilities to bridge the digital world and physical
stores, including order-in-store, buy online and pickup-in-store, and buy online
and ship-from-store, as well as e-commerce. We operate websites and mobile apps
aligned with the brand names of our store banners including footlocker.com,
kidsfootlocker.com, champssports.com, atmosusa.com, shopwss.com and related
e-commerce sites in the various international countries that we operate. These
sites offer some of the largest online product selections and provide a seamless
link between e-commerce and physical stores. We also operate the websites for
eastbay.com and eastbayteamsales.com.

Store Count

At April 30, 2022, we operated 2,815 stores as compared with 2,858 and 2,952
stores at January 29, 2022 and May 1, 2021, respectively.

Franchise Operations

A total of 148 franchised stores were operating at April 30, 2022, as compared
with 142 and 131 stores at January 29, 2022 and May 1, 2021, respectively.
Revenue from franchised stores was not significant for any of the periods
presented. These stores are not included in the operating store count above.

COVID-19 Update

COVID-19 had a significant effect on overall economic conditions in the various
geographic areas in which we have operations. We have made best efforts to
comply with all precautionary measures as directed by health authorities and
local, state, and national governments. We continue to monitor outbreaks of
COVID-19 which cause store closures, reduced operating hours, capacity
limitations, and social distancing that may be required to help ensure the
health and safety of our team members and our customers. COVID-19 has had, and
may continue to have, an effect on ports and trade, as well as global travel.

Given the dynamic nature of these circumstances, the duration of business
disruption, and reduced customer traffic, the related financial affect cannot be
reasonably estimated at this time but may materially affect our business for the
foreseeable future.

Reconciliation of Non-GAAP Measures

In addition to reporting our financial results in accordance with U.S. generally
accepted accounting principles (“GAAP”), we report certain financial results
that differ from what is reported under GAAP. We have presented certain
financial measures identified as non-GAAP, such as sales changes excluding
foreign currency fluctuations, adjusted income before income taxes, adjusted net
income, and adjusted diluted earnings per share.

First Quarter 2022 Form 10-Q Page 19

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

These non-GAAP measures are presented because we believe they assist investors
in comparing our performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core business or
affect comparability. In addition, these non-GAAP measures are useful in
assessing our progress in achieving our long-term financial objectives. We
estimate the tax effect of all non-GAAP adjustments by applying a marginal tax
rate to each 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.

Effective with the first quarter of 2022, the calculation for non-GAAP earnings
will exclude gains and losses from all minority investments, including the
adjustments related to the investment in Retailors, Ltd. We believe this is a
more representative measure of our recurring earnings, assists in the
comparability of results, and is consistent with how management reviews
performance. The non-GAAP results for 2021 will be recast, as applicable, to
conform to the current year’s presentation. As we report quarterly results
through 2022, we will provide updated non-GAAP reconciliations for the
corresponding prior year’s quarter under this revised definition. First quarter
2021’s results were not affected by this change.

Presented below is a reconciliation of GAAP and non-GAAP.

Thirteen weeks ended
April 30, May 1,
($ in millions, except per share amounts) 2022 2021
Pre-tax income:
Income before income taxes $ 190 $ 284
Pre-tax amounts excluded from GAAP:
Impairment and other charges 6 4
Other expense 24 –
Adjusted income before income taxes
(non-GAAP) $ 220 $ 288

After-tax income:
Net income attributable to Foot Locker,
Inc. $ 133 $ 202
After-tax adjustments excluded from GAAP:
Impairment and other charges, net of income
tax benefit of $2 and $1, respectively 4 3
Other expense, net of income tax benefit of
$6 and $-, respectively 18 –
Adjusted net income (non-GAAP) $ 155 $ 205

Thirteen weeks ended
April 30, May 1,
2022 2021
Earnings per share:
Diluted earnings per share $ 1.37 $ 1.93
Diluted EPS amounts excluded from GAAP:
Impairment and other charges 0.05 0.03
Other expense 0.18 –

Adjusted diluted earnings per share (non-GAAP) $ 1.60 $ 1.96

First Quarter 2022 Form 10-Q Page 20

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During the thirteen weeks ended April 30, 2022, we recorded pre-tax charges of
$6 million and $4 million, respectively, classified as Impairment and Other. See
the Impairment and Other Charges section for further information.

Other expense for the thirteen weeks ended April 30, 2022, primarily consisted
of a $25 million loss on the change in fair value of our investment in
Retailors, Ltd., a publicly-listed entity, which was partially offset by
$1 million of dividend income and other various equity method investments.

Segment Reporting

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, Kids Foot
Locker, Lady Foot Locker, Champs Sports, WSS, and Footaction, including each of
their related e-commerce businesses, as well as our Eastbay business that
includes internet, catalog, and team sales. Our EMEA operating segment includes
the results of the following banners operating in Europe: Foot Locker, Sidestep,
and Kids Foot Locker, including each of their related e-commerce businesses. Our
Asia Pacific operating segment includes the results of Foot Locker and Kids Foot
Locker and the related e-commerce businesses 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.

Results of Operations

We evaluate performance based on several factors, primarily the banner’s
financial results, referred to as division profit. Division profit reflects
income before income taxes, impairment and other charges, corporate expenses,
non-operating income, and net interest expense.

The table below summarizes our results.

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Sales $ 2,175 $ 2,153

Operating Results
Division profit 260 315
Less: Impairment and other charges (1) 6 4
Less: Corporate expense (2) 37 29
Income from operations 217 282
Interest expense, net (5) (2)
Other (expense) income, net (3) (22) 4
Income before income taxes $ 190 $ 284

(1) See the Impairment and Other Charges section for further information.

Corporate expense consists of unallocated selling, general and administrative

expenses as well as depreciation and amortization related to the Company’s
(2) corporate headquarters, centrally managed departments, unallocated insurance

and benefit programs, certain foreign exchange transaction gains and losses,
and other items.

Other income includes non-operating items, franchise royalty income, changes
in fair value of minority interests measured at fair value or using the fair

value measurement alternative, changes in the market value of our
(3) available-for-sale security, our share of earnings or losses related to our

equity method investments, and net benefit expense related to our pension and
postretirement programs excluding the service cost component. See the Other
(expense)/income, net section for further information.

First Quarter 2022 Form 10-Q Page 21

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Sales

All references to comparable-store sales for a given period relate to sales of
stores that were open at the period-end and had been open for more than
one year. The computation of consolidated comparable sales also includes our
direct-to-customers channel. Stores opened or closed during the period are not
included in the comparable-store base; however, stores closed temporarily for
relocation or remodeling are included. Stores that were temporarily closed due
to the COVID-19 pandemic are also included in the computation of
comparable-store sales. Computations exclude the effect of foreign currency
fluctuations.

Sales from acquired businesses that include inventory are included in the
computation of comparable-store sales after 15 months of operations.
Accordingly, sales of WSS and atmos have been excluded from the computation of
comparable-store sales.

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

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Stores
Sales $ 1,776 $ 1,620
$ Change $ 156
% Change 9.6 %
% of total sales 81.7 % 75.2 %
Comparable sales increase 7.9 % 97.4 %

Direct-to-customers
Sales $ 399 $ 533
$ Change $ (134)
% Change (25.1) %
% of total sales 18.3 % 24.8 %

Comparable sales (decrease)/increase (29.0) % 43.0 %

The information shown below represents certain combined stores and
direct-to-customers sales metrics for the thirteen weeks ended April 30, 2022 as
compared with the corresponding prior-year period.

Sales at
constant
currencies,
excluding Comparable
acquisitions Sales
North America (16.9) % (11.8) %
EMEA 60.9 % 56.3 %
Asia Pacific 14.5 % 10.0 %
(6.0) % (1.9) %

For the thirteen weeks ended April 30, 2022, total sales increased by $22
million, or 1.0%, to $2,175 million, as compared with the corresponding
prior-year period. Excluding the effect of foreign currency fluctuations, total
sales increased by $63 million, or 3.0%, for the thirteen weeks ended April 30,
2022. Sales from our acquired WSS and atmos banners were $138 million and $49
million, respectively, during the first quarter of 2022.

The period over period comparisons were affected by the closures necessitated by
the COVID-19 pandemic, as our stores were open for approximately 80% of the
total available operating days during the first quarter of 2021 as compared with
approximately 98% this year. Total comparable sales represented a decrease of
1.9% for the quarter.

First Quarter 2022 Form 10-Q Page 22

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Our direct-to-customer channel saw significant decreases as shoppers navigated
back to physical locations, partially offset by an increase in our stores
channel as a result of the temporary store closures during 2021.

As summarized on the prior page, our North American operating segment’s sales
for the quarter were negatively affected primarily by the significant fiscal
stimulus which contributed to last year’s growth. North American sales were also
negatively affected by the wind down of the Footaction business, last year we
operated 231 stores as compared with 22 this quarter. Within EMEA, sales from
the Foot Locker and Sidestep banners increased primarily in line with the
increase in operating days, resulting from COVID-19 related store closures in
the prior year. Asia Pacific generated increases from both strong performance in
Australia and New Zealand, coupled with growth in Asia, based on expansion in
that region, and primarily related to the growth in e-commerce sales.

From a product perspective for the combined channels, sales decline in the
quarter was primarily related to decreased sales of footwear, slightly offset by
increased sales of apparel and accessories. The decline in sales of footwear
primarily represented a decline in sales of men’s and kids’ basketball footwear
styles, partially offset by an increase in sales of women’s footwear. Apparel
sales benefited from increases in sales across all wearer segments, led by sales
of men’s and women’s apparel.

Gross Margin

Thirteen weeks ended
April 30, May 1,
2022 2021
Gross margin rate 34.0 % 34.8 %
Basis point decrease in the gross margin rate (80)
Components of the change:
Merchandise margin rate decline (80)
Occupancy and buyers’ compensation expense rate –

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

The gross margin rate decreased to 34.0% for the thirteen weeks ended April 30,
2022, as compared with the corresponding prior-year period, reflecting an
80-basis point decrease in the merchandise margin rate, while occupancy and
buyers’ compensation rate remained unchanged. The decline in merchandise margin
rate reflects higher supply chain costs and slightly higher markdowns versus
historically-low levels last year.

Selling, General and Administrative Expenses (SG&A)

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
SG&A $ 463 $ 418
$ Change $ 45
% Change 10.8 %

SG&A as a percentage of sales 21.3 % 19.4 %

SG&A increased by $45 million, or $55 million excluding the effect of foreign
currency fluctuations, for the thirteen weeks ended April 30, 2022, as compared
with the corresponding prior-year period. Our newly acquired businesses
contributed $34 million to the overall increase. As a percentage of sales, SG&A
increased by 190 basis points for the thirteen weeks ended April 30, 2022,
driven by higher labor costs, information technology and support expenses this
quarter, as well as the effect of COVID-19 related matters in the prior year.

First Quarter 2022 Form 10-Q Page 23

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SG&A for the thirteen weeks ended April 30, 2022 included nominal payroll
subsidies from local governments, compared to $10 million for the corresponding
prior-year period.

Depreciation and Amortization

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021

Depreciation and amortization $ 54 $ 45
$ Change

$ 9
% Change 20.0 %

Depreciation and amortization expense increased by $9 million for the thirteen
weeks ended April 30, 2022, as compared with the corresponding prior-year
period. The increase was primarily related to the acquisitions of WSS and atmos.

Impairment and Other Charges

During the first quarter of 2022, we recorded impairment charges of $3 million
related to long-lived assets and right-of-use assets as well as accelerated
tenancy charges, $2 million of acquisition and integration costs related to WSS
and atmos acquisitions, and $1 million of other expenses. This compared with
impairment charges of $2 million related to the underperformance of our minority
investment and reorganization charges of $2 million for the prior-year period.

Corporate Expense

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Corporate expense $ 37 $ 29
$ Change $ 8

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.
Depreciation and amortization included in corporate expense was $9 million and
$7 million for the thirteen weeks ended April 30, 2022 and May 1, 2021,
respectively.

Corporate expense increased by $8 million for the thirteen weeks ended
April 30, 2022, as compared with the prior-year period. The increase was
primarily due to higher information technology and support expenses.

Operating Results

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Division profit $ 260 $ 315

Division profit margin 12.0 % 14.6 %

Division profit margin as a percentage of sales decreased to 12.0% of sales for
the thirteen weeks ended April 30, 2022, with both sales channels experiencing
declines in gross margin. Division profit reflected the stores and
direct-to-customers channels deleveraging expenses. WSS and atmos generated
division profit of $14 million and $8 million, respectively.

First Quarter 2022 Form 10-Q Page 24

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Interest Expense, Net

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Interest expense $ (6) $ (3)
Interest income 1 1

Interest (expense) income, net $ (5) $ (2)

We recorded $5 million of net interest expense for the thirteen weeks ended
April 30, 2022, as compared with net interest expense of $2 million for the
corresponding prior-year period. Interest expense increased primarily due to the
issuance of the 4% Notes.

Other (Expense) / Income, Net

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Other (expense) / income, net $ (22) $ 4

Other (expense) / income includes non-operating items, including franchise
royalty income, changes in fair value of minority investments measured at fair
value or using the fair value measurement alternative, changes in the market
value of our available-for-sale security, our share of earnings or losses
related to our equity method investments, and net benefit (expense) related to
our pension and postretirement programs excluding the service cost component.

The change in other (expense) / income primarily represented a decrease in the
fair value of our Retailors, Ltd. investment, resulting in a non-cash loss of
$25 million, partially offset by franchise income of $3 million.

Income Taxes

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Provision for income taxes $ 58 $ 82
Effective tax rate 30.3 % 28.8 %

Our current year interim provision for income taxes was measured using an
estimated annual effective tax rate, which represented a blend of federal,
state, and foreign taxes and included the effect of certain nondeductible items
as well as changes in our mix of domestic and foreign earnings or losses,
adjusted for discrete items that occurred within the periods presented.

We regularly assess the adequacy of our provisions for income tax contingencies
in accordance with applicable authoritative guidance on accounting for income
taxes. As a result, we may adjust the reserves for unrecognized tax benefits
considering new facts and developments, such as changes to interpretations of
relevant tax law, assessments from taxing authorities, settlements with taxing
authorities, and lapses of statutes of limitation. The changes in tax reserves
were not significant for any of the periods presented.

During the thirteen weeks ended April 30, 2022, we recorded $1 million related
to excess tax deficiencies from share-based compensation, as compared with a
benefit of $1 million in the corresponding prior-year period.

Excluding the above-mentioned discrete items, the effective tax rates for the
current year period increased, as compared with the corresponding prior-year
period, primarily due to the change in the mix of domestic and foreign earnings
and losses.

First Quarter 2022 Form 10-Q Page 25

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We currently expect our full-year tax rate to approximate 29% to 30% excluding
the effect of any nonrecurring items that may occur. The actual tax rate will
vary due to numerous factors, such as level and geographic mix of income and
losses, acquisitions, investments, intercompany transactions, foreign currency
exchange rates, our stock price, changes in our deferred tax assets and
liabilities and their valuation, changes in the laws, regulations,
administrative practices, principles, and interpretations related to tax,
including changes to the global tax framework and other laws and accounting
rules in various jurisdictions.

Liquidity and Capital Resources

Liquidity

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

The Company may also repurchase its common stock or seek to retire or purchase
outstanding debt through open market purchases, privately negotiated
transactions, or otherwise. Share repurchases and retirement of debt, if any,
will depend on prevailing market conditions, liquidity requirements, contractual
restrictions, strategic considerations, and other factors. The amounts involved
may be material. As of April 30, 2022, approximately $1,143 million remained
available under our current $1.2 billion share repurchase program, which was
approved in February 2022. The new program does not have an expiration date.

Any material adverse change in customer demand, fashion trends, competitive
market forces, or customer acceptance of our merchandise mix, retail locations
and websites, uncertainties related to the effect of competitive products and
pricing, our reliance on a few key suppliers for a significant portion of our
merchandise purchases and risks associated with global product sourcing,
economic conditions worldwide, the effects of currency fluctuations, continued
uncertainties caused by the COVID-19 pandemic, as well as other factors listed
under the headings “Disclosure Regarding Forward-Looking Statements,” and “Risk
Factors” could affect our ability to continue to fund our needs from business
operations.

Operating Activities

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021

Net cash (used in) / provided by operating activities $ (21) $ 398
$ Change

$ (419)

Operating activities reflects net income adjusted for non-cash items and working
capital changes. Adjustments to net income for non-cash items include gains,
losses, impairment charges, other charges, depreciation and amortization,
deferred income taxes, and share-based compensation expense.

The decrease in cash from operating activities reflected higher merchandise
purchases and payments of accounts payable and accrued and other liabilities, as
well as lower net income, as compared with the same period last year. Higher
merchandise purchases were necessary as our year-end inventory levels were
affected by the COVID-19 pandemic and the associated supply chain challenges.

First Quarter 2022 Form 10-Q Page 26

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As of April 30, 2022, we have withheld approximately $12 million of lease and
lease-related payments as we continue to negotiate rent deferrals or abatements
with our landlords for the period that our stores were closed due to the
COVID-19 pandemic.

Investing Activities

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021

Net cash used in investing activities $ (105) $ (54)
$ Change

$ (51)

For the thirteen weeks ended April 30, 2022, capital expenditures increased by
$44 million to $95 million, as compared with the corresponding prior-year
period. Our full-year capital spending is expected to be $275 million. The
forecast includes $190 million related to the remodeling or relocation of
approximately 100 existing stores and the opening of approximately 110 new
stores, as well as $85 million for the development of information systems,
websites, and infrastructure, including supply chain initiatives.

During the thirteen weeks ended April 30, 2022, we paid an additional $7 million
for the WSS and atmos acquisitions upon the resolution of certain post-closing
conditions.

Additionally, we invested $3 million in minority investments, including various
limited partner venture capital funds managed by Black fund managers, who are
committed to advancing diverse-led businesses as part of our Leading in
Education and Economic Development (LEED) initiative. In the prior-year period,
we invested $8 million in minority investments.

We sold the former Runners Point headquarters in the first quarter of 2021,
generating proceeds of $3 million. Also last year, we received insurance
proceeds of $2 million related to property and equipment claims from the social
unrest losses in 2020.

Financing Activities

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021

Net cash used in financing activities $ (128) $ (61)
$ Change

$ (67)

Cash used in financing activities was driven by our return to shareholders
initiatives, including our share repurchase program and cash dividends, as
follows:

Thirteen weeks ended
April 30, May 1,
($ in millions) 2022 2021
Share repurchases $ 89 $ 34
Dividends paid on common stock 38 21

Total returned to shareholders $ 127 $ 55

During the thirteen weeks ended April 30, 2022, we repurchased 2,650,000 shares
of common stock for $89 million under our share repurchase programs, whereas in
the prior year we spent $34 million to repurchase shares. We also declared and
paid $38 million in dividends representing a quarterly rate of $0.40 per share
in 2022, as compared with a quarterly rate of $0.20 per share in the prior-year
period.

First Quarter 2022 Form 10-Q Page 27

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We paid $1 million to satisfy tax withholding obligations relating to the
vesting of share-based equity awards during the thirteen weeks ended April 30,
2022, as compared with $10 million in 2021. Offsetting this amount were proceeds
received in connection with employee stock programs of $2 million in the current
year, as compared with $4 million in the prior-year period.

Additionally, we paid $2 million of principal on our finance lease obligations,
mainly related to certain WSS stores.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and
estimates from the information provided in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” included in the 2021
Form 10-K.

Recent Accounting Pronouncements

Descriptions of the recently issued and adopted accounting principles are
included in Item 1. “Financial Statements” in Note 1, Summary of Significant
Accounting Policies, to the Condensed Consolidated Financial Statements.

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