BUSINESS OVERVIEW

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments
- Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS. The Direct-to-Customers segment is multi-branded and multi-channeled. This segment sells, through its affiliates, directly to customers through its Internet websites, mobile devices, and catalogs. Eastbay, one of the affiliates, is among the largest direct marketers in the United States. The Direct-to-Customers segment operates the website for eastbay.com, final-score.com, and eastbayteamservices.com. Additionally, this segment operates websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, footaction.com, champssports.com, and ccs.com).

STORE COUNT

At April 28, 2012, the Company operated 3,360 stores as compared with 3,369 and 3,420 stores at January 28, 2012 and April 30, 2011, respectively. During the thirteen weeks ended April 28, 2012, the Company opened 25 stores, remodeled or relocated 53 stores and closed 34 stores.

A total of 36 franchised stores were operating at April 28, 2012, as compared with 34 and 27 stores at January 28, 2012 and April 30, 2011, respectively. Revenue from the franchised stores was not significant for any of the periods presented. These stores are not included in the Company's operating store count above.

SALES AND OPERATING RESULTS

All references to comparable-store sales for a given period relate to sales from stores (including sales from the Direct-to-Customers segment and sales from stores that have been relocated or remodeled during the relevant periods) that are open at the period-end, that have been open for more than one year, and exclude the effect of foreign currency fluctuations. Stores opened and closed during the period are not included.

The following table summarizes results by segment:

                                     Sales



                          Thirteen weeks ended
                       April 28,         April 30,
(in millions)            2012              2011
Athletic Stores       $     1,437       $     1,331
Direct-to-Customers           141               121
Total sales           $     1,578       $     1,452

                               Operating Results



                                  Thirteen weeks ended
                               April 28,        April 30,
(in millions)                     2012             2011
Athletic Stores                $      207       $      162
Direct-to-Customers                    18               13
Restructuring charge (1)                -               (1 )
Division profit                       225              174
Less: Corporate expense, net           23               24
Operating profit                      202              150
Interest expense, net                   1                2
Other income (2)                        -                1
Income before income taxes     $      201       $      149

(1) During 2011, the Company increased its 1993 Repositioning and 1991 Restructuring reserve by $1 million for repairs necessary to one of the locations comprising this reserve. This amount is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

(2) Other income includes non-operating items, such as gains from insurance recoveries, gains on the repurchase and retirement of bonds, royalty income, the changes in fair value, premiums paid and realized gains associated with foreign currency option contracts. The amount for the thirteen weeks ended April 30, 2011 primarily represents a lease termination gain related to the sale of a leasehold interest in Europe and royalty income from the Company's franchise operations.

Sales increased by $126 million, or 8.7 percent, to $1,578 million for the thirteen weeks ended April 28, 2012, from $1,452 million for the thirteen weeks ended April 30, 2011. Excluding the effect of foreign currency fluctuations, total sales for the thirteen-week period increased 9.8 percent, as compared with the corresponding prior-year period. Comparable-store sales increased by 9.7 percent for the thirteen weeks ended April 28, 2012.

Gross margin, as a percentage of sales, increased to 34.0 percent for the thirteen weeks ended April 28, 2012 as compared with 32.7 percent in the corresponding prior-year period. As a percent of sales, the cost of merchandise for the thirteen weeks ended April 28, 2012 decreased by 30 basis points as compared with the corresponding prior-year period, primarily reflecting a lower markdown rate and improved apparel margins. For the thirteen weeks ended April 28, 2012, the occupancy and buyers' salary expense rate decreased 100 basis points as a percentage of sales, as compared with the prior year thirteen-week period, reflecting improved leverage on these primarily fixed costs. Vendor allowances were not significant for any of the periods presented.

Segment Analysis

Athletic Stores

Athletic Stores sales increased by 8.0 percent to $1,437 million for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period of $1,331 million. Excluding the effect of foreign currency fluctuations, sales from athletic store divisions increased 9.2 percent for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period. Comparable-store sales increased by 9.1 percent for the thirteen weeks ended April 28, 2012. All divisions within this segment experienced comparable-store sales gains with the exception of Foot Locker Europe, which had a mid-single digit comparable-store sales decline. Foot Locker Europe's sales were negatively affected by the continued difficult economic conditions in that region. Lady Foot Locker's comparable-store sales increased by low single digits, while total sales declined principally due to lower store count. Management has continued to review the women's business and is developing various initiatives, such as expanded apparel offerings and a new store design, which is expected to be tested later this year. The Company's overall sales increase included gains in basketball, running, and casual footwear, as well as apparel and accessories.

Athletic Stores division profit increased 27.8 percent for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period. Athletic Stores division profit, as a percentage of sales, increased to 14.4 percent for the thirteen weeks ended April 28, 2012, from 12.2 percent in the corresponding prior-year period. The increase in division profit reflected improved sales, as well as a higher merchandise gross margin rate, reflecting lower promotions during the current year and improved apparel gross margins. The flow-through of incremental sales to division profit was 42.5 percent, reflecting primarily the leveraging of fixed expenses.

Direct-to-Customers

Direct-to-Customers sales increased by 16.5 percent to $141 million for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period of $121 million. Internet sales increased by 18.7 percent to $127 million for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period. All components of this segment reflected increased sales, representing the continued growth of the store banner websites and higher sales from Eastbay.

Direct-to-Customers division profit for the thirteen weeks ended April 28, 2012 increased by $5 million to $18 million as compared with the corresponding prior-year period. Division profit, as a percentage of sales, was 12.8 percent for the thirteen weeks ended April 28, 2012 as compared with 10.7 percent for the corresponding prior-year period. The increase primarily reflects improved gross margin partly offset by slightly higher expenses.

Corporate Expense

Corporate expense consists of unallocated general and administrative expenses, as well as depreciation and amortization related to the Company's corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses, and other items. Corporate expense for the thirteen weeks ended April 28, 2012 decreased by $1 million to $23 million from the corresponding prior-year period.

Selling, General and Administrative

Selling, general and administrative expenses ("SG&A") of $306 million increased by $8 million or 2.7 percent, for the thirteen weeks ended April 28, 2012 as compared with the corresponding prior-year period. SG&A, as a percentage of sales, decreased to 19.4 percent for the thirteen weeks ended April 28, 2012, as compared with 20.5 percent in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, SG&A increased by $12 million for the thirteen weeks ended April 28, 2012, as compared with the corresponding prior-year period. This increase principally represents increased variable costs to support sales, such as store wages and banking expenses. Additionally, marketing expenses increased by $2 million, as the Company continues to invest in marketing campaigns specific to each banner.

Depreciation and Amortization

Depreciation and amortization increased by $2 million in the first quarter of 2012 to $29 million as compared with $27 million for the first quarter of 2011, reflecting increased capital spending on store improvements and technology. The effect of foreign currency fluctuations, primarily related to the euro, was not significant for the thirteen weeks ended April 28, 2012.

Interest Expense



                            Thirteen weeks ended
                        April 28,          April 30,
(in millions)              2012               2011
Interest expense        $        3         $        4
Interest income                 (2 )               (2 )
Interest expense, net   $        1         $        2

The decrease in net interest expense for the thirteen weeks ended April 28, 2012 as compared with the corresponding prior-year period primarily reflects lower expenses associated with the Company's revolving credit facility, which was amended at the end of 2011 with lower annual fees.

Income Taxes

For the thirteen weeks ended April 28, 2012 and April 30, 2011, the Company recorded income tax provisions of $73 million and $55 million, respectively, which represents an effective tax rate of 36.4 percent and 36.9 percent, respectively. The Company's quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items that occur within the periods presented. The effective tax rate is significantly affected by the difference between the U.S. federal statutory tax rate and the tax rates in foreign jurisdictions.

The Company regularly assesses the adequacy of the Company's provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits for the impact of 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 effective tax rate for the thirteen weeks ended April 28, 2012 includes tax benefits of $2 million from reserve releases due to the settlements of federal, state, and foreign tax examinations. Excluding these nonrecurring benefits, the effective tax rate for the thirteen weeks ended April 28, 2012 increased as compared with the corresponding prior-year period, due primarily to a higher proportion of income earned in higher tax jurisdictions.

The Company currently expects its full year tax rate to approximate 37 percent, excluding the effect of any additional nonrecurring items that may occur. The actual rate will vary depending primarily on the proportion of income earned in the United States as compared with international operations.

Net Income

Net income of $128 million, or $0.83 per diluted share, for the thirteen weeks ended April 28, 2012 increased by $0.23 per diluted share from $94 million, or $0.60 per share last year. This represents a 41.3 percent flow-through of increased sales to pre-tax income, reflecting leveraging of fixed costs and controlling operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

The Company's 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 its short-term and long-term operating strategies. The Company generally finances real estate with operating leases. Management believes its cash, cash equivalents, future cash flow from operations, and the Company's current revolving credit facility will be adequate to fund these requirements.

The Company may also from time to time repurchase its common stock or seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions, or otherwise. Such repurchases, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.

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

On May 16, 2012, the Company's Board of Directors approved an overall increase of $10 million to the 2012 capital expenditure and lease acquisition plan to $170 million, representing capital expenditures of $163 million and lease acquisition costs related to the Company's operations in Europe of $7 million. Separately, in May 2012 the Company purchased from the U.S. pension trust its investment in real estate for $8 million.

Operating Activities

Net cash provided by operating activities was $133 million and $154 million for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. These amounts reflect net income adjusted for non-cash items and seasonal working capital changes. The decline in operating cash flow reflects the timing of income tax payments as well as the prior year receipt of a $46 million IRS income tax refund resulting from a loss carryback.

Investing Activities

Net cash used in investing activities was $89 million, reflecting the Company's purchase of $50 million of short-term investments, as well as increased capital expenditures. The Company's full year forecast for capital expenditures is $163 million, of which $122 million relates to the modernizations of existing stores and new store openings and $41 million for the development of information systems and infrastructure.

Financing Activities

Net cash used in financing was $36 million and $51 million for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. The Company declared and paid dividends during the first quarters of 2012 and 2011 of $28 million and $25 million, respectively. This represents a quarterly rate of $0.18 and $0.165 per share for 2012 and 2011, respectively. During the first quarter of 2012, the Company repurchased 878,700 shares of its common stock for $27 million, compared with $30 million repurchased in the first quarter of the prior year. Additionally, the Company received proceeds from the issuance of common stock in connection with employee stock programs of $14 million and $3 million for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. In connection with stock option exercises and share-based compensation programs, the Company recorded excess tax benefits of $5 million and $1 million as a financing activity for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively.

Recent Accounting Pronouncements

During the first quarter of 2012, the Company adopted ASU No. 2011-08, Testing Goodwill for Impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The adoption of this ASU did not have a significant effect on our results of operations or financial position.

During the first quarter of 2012, the Company also adopted ASU No. 2011-05, Presentation of Comprehensive Income, which requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The implementation of the amended reporting guidance had no effect on our disclosures.

Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company's present or future consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no significant changes to the Company's 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 Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company's business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company's filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company's merchandise mix and retail locations, the Company's reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor), pandemics and similar major health concerns, unseasonable weather, further deterioration of global financial markets, economic conditions worldwide, further deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution.

For additional discussion on risks and uncertainties that may affect forward-looking statements, see "Risk Factors" disclosed in the 2011 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.