PROGRESS ON STRATEGIC INITIATIVES

PROGRESS ON STRATEGIC INITIATIVES
Due to the outstanding skill and execution of our associates
throughout the organization, we continued to make progress on
each of the strategic initiatives outlined on the previous page.
Our core business, which we define as selling men’s footwear
in the Foot Locker, Champs Sports, and Footaction banners
in the United States, Canada, Australia, and New Zealand,
continued to grow steadily in 2016. This progress, which built
on the exceptionally strong results in 2015, was especially
encouraging given a significant slowdown in the basketball
category. In fact, it was the resilience of our core business
in the face of pressure from basketball which probably best
illustrates how important and successful the work was that we
have done over the last several years to expand our leadership
position in product categories such as lifestyle running, casual,
and classic sneakers.
Our kids’ business also posted very strong growth in 2016.
Fortunately for us, kids today are growing increasingly
savvy about sneakers at ever younger ages. It is a passion
sometimes handed down from their parents, who also grew up
wearing sneakers, and sometimes the kids themselves push
the parents into the fun and exciting world of sneaker culture.
Either way, it is a natural market for us to pursue, which is
one reason we opened 45 new Kids Foot Locker stores during
the year, the majority of which were in the United States, with
several in Europe and Canada, as well. Sales of children’s
footwear also increased substantially in our “adult” banners.
Our Foot Locker banner in Europe produced another strong
year. Although sales did not increase as rapidly in 2016 as
they had in recent years, productivity and profitability remained
high, and Foot Locker Europe maintained positive momentum
across men’s, women’s, and kids’ products, as well as across
footwear, apparel, and accessories. Our two newer European
banners, Runners Point and Sidestep, both of which are
primarily based in Germany, struggled with a retail climate
that saw significant declines in traffic there. Runners
Point in particular was challenged by the ongoing
consumer preference shift to lifestyle footwear from more performance-based product,which had traditionally been its strength.Our apparel businessdid very well in 2016,especially in terms of improved profitability.While sales momentum was mixed across our banners, our profit margins improved fairly consistently,
as we focused our
energy on premium,
mostly branded
assortments that
complemented
our strong footwear
business.

We have long said that we believe apparel margins,
which are lower than margins on footwear today, should be
meaningfully higher than footwear margins, and we closed
the gap by elevating our assortments, being on trend in key
categories such as windwear and graphic tee shirts, and
thereby lowering markdowns.
The investments we have made in our digital businesses
continue to pay off, with overall digital sales posting an 8.3
percent increase even as Eastbay, our single biggest online
banner, had an off year with a mid-single digit sales decline.
Our store banners’ online sales increased more than 20
percent, and the proportion of online sales to each banner’s
total sales increased significantly in almost every case. Most
importantly, the vast majority of sales in our store banners
involve one or more digital interactions prior to sale, a sure
indicator that the seamless integration of our sales channels,
while still a work in progress, is making tremendous strides.
Sneaker culture, and the appeal of athletic footwear and
apparel, is clearly not just a male phenomenon. Our women’s
business accelerated significantly during 2016, led by women’s
footwear sold in our male-led banners. Our newest banner,
SIX:02, also delivered strong sales growth, especially after the
opening of our new flagship store on 34th Street in Manhattan.
Our female customers have shown that they respond just as
passionately to the latest athletically-inspired products, backed
by the right style influencers and delivered in an exciting store
environment.
The accomplishments outlined above do not happen without
the excellent teamwork and leadership of each one of Foot
Locker, Inc.’s people. I have said it before, and I will say it
again, it is a very humbling experience being the
Chief Executive Officer of such a talented
and outstanding team. I want to thank
each of our associates around the world
for their valuable contributions, the
sum of which has led to our Company
producing several consecutive years of
record financial and operating results
— and claiming our place at the
center of sneaker culture.

A BALANCED APPROACH TO CAPITAL ALLOCATION
With the solid financial position created by our consistently
strong operating performance, we were well-positioned in
2016 to elevate our investments in the future of our business,
while also increasing the amount of cash returned directly
to shareholders. We invested a total of $284 million into our
stores, digital sites, logistics network, and other infrastructure.
This level of capital expenditures represents a peak for us, given
the substantial investment we made in two flagship properties in
New York City, one on 34th Street and the other in Times Square.
In April, we also moved two blocks west along 34th Street into
our new corporate headquarters, which is a much more modern,
energizing, and collaborative environment.
In February, 2017, our Board of Directors approved a capital
program for the coming year of $277 million, as we continue
to lead the industry in the investments we are making in our
store remodel and vendor shop-in-shop programs, our website
and mobile capabilities, training programs and technology to
enhance the effectiveness of our associates, and more pinnacle
new stores in cities such as Chicago, Los Angeles, Toronto,
Sydney, Melbourne, and Paris.
While we believe these investments will help us achieve our 2020
financial objectives, at the same time we are also committed
to returning cash to our shareholders, and this February our
Board increased the Company’s dividend 13 percent above the
2016 level, to a quarterly payout rate of 31 cents per share. This
increase marks the seventh consecutive year with a dividend
increase in the 10 percent range.
We also spent $432 million to repurchase and retire almost
seven million shares of our common stock in 2016, the most
ever spent on share repurchases in the Company’s history, and
in February the Board authorized a new three-year $1.2 billion
share repurchase program which we have already begun to
execute.
CONCLUSION
As I mentioned at the beginning of this letter, the success of
Foot Locker, Inc. in 2016 — and the continued success we
believe we can deliver as we step confidently into the future —
truly rests in the hands of our global team of associates, who
continue to do outstanding work to stay engaged with our
customers. I want to thank them for the work that they have
done, and the work I know they will do, to generate top quartile
results such as we delivered in 2016. I also want to thank our
Board of Directors, which has been invaluable in their support
for me and the entire leadership team at Foot Locker, Inc. This
year, I am very pleased to welcome two new members to our
Board, Kim Underhill and Ulice Payne, Jr., both of whom I know
will provide broad global leadership experience and unique
insights to our Company.
We also have one member of our Board, Nick DiPaolo, who is
retiring this spring when his term as a director expires, and I
want to recognize Nick with a special personal thanks. Not only
has Nick been on our Board for 15 years, he served as Lead
Director for several years, including during my transition to
Chief Executive Officer. He then served in the capacity of NonExecutive Chairman of the Board as my mentor until I became
Chairman myself last year. Nick has truly been an indispensable
partner to me and the entire Company, and I want to express
my sincere gratitude to him for his tremendous leadership and
guidance.
Finally, I want to thank you, our shareholders. In my interactions
with you over the last few years, I am consistently impressed
with the passion you share for our business and the trust you
have in the ability of our team to execute our strategic initiatives
to reach the ambitious goals we have set for ourselves.
Together with our innovative suppliers, landlords, and other
partners, I am excited about our direction and believe we have
the foundation to achieve our vision of being the leading global
retailer of athletically-inspired shoes and apparel.

D AW N
I was up before the others, before the birds, before the sun. I drank a cup of
coffee, wolfed down a piece of toast, put on my shorts and sweatshirt, and
laced up my green running shoes. Then slipped quietly out the back door.
I stretched my legs, my hamstrings, my lower back, and groaned as I took
the first few balky steps down the cool road, into the fog. Why is it always so
hard to get started?
There were no cars, no people, no signs of life. I was all alone, the world
to myself—though the trees seemed oddly aware of me. Then again, this was
Oregon. The trees always seemed to know. The trees always had your back.
What a beautiful place to be from, I thought, gazing around. Calm, green,
tranquil—I was proud to call Oregon my home, proud to call little Portland
my place of birth. But I felt a stab of regret, too. Though beautiful, Oregon
struck some people as the kind of place where nothing big had ever
happened, or was ever likely to. If we Oregonians were famous for anything,
it was an old, old trail we’d had to blaze to get here. Since then, things had
been pretty tame.
The best teacher I ever had, one of the finest men I ever knew, spoke of
that trail often. It’s our birthright, he’d growl. Our character, our fate—our
DNA. “The cowards never started,” he’d tell me, “and the weak died along
the way—that leaves us.”
Us. Some rare strain of pioneer spirit was discovered along that trail, my
teacher believed, some outsized sense of possibility mixed with a diminished
capacity for pessimism—and it was our job as Oregonians to keep that strain
alive.
I’d nod, showing him all due respect. I loved the guy. But walking away
I’d sometimes think: Jeez, it’s just a dirt road.
That foggy morning, that momentous morning in 1962, I’d recently
blazed my own trail—back home, after seven long years away. It was strange
being home again, strange being lashed again by the daily rains. Stranger
still was living again with my parents and twin sisters, sleeping in my
childhood bed. Late at night I’d lie on my back, staring at my college
textbooks, my high school trophies and blue ribbons, thinking: This is me?
Still?
I moved quicker down the road. My breath formed rounded, frosty puffs,
swirling into the fog. I savored that first physical awakening, that brilliant
moment before the mind is fully clear, when the limbs and joints first begin
to loosen and the material body starts to melt away. Solid to liquid.
Faster, I told myself. Faster.
On paper, I thought, I’m an adult. Graduated from a good college—‐
University of Oregon. Earned a master’s from a top business school—
Stanford. Survived a yearlong hitch in the U.S. Army—Fort Lewis and Fort
Eustis. My résumé said I was a learned, accomplished soldier, a twenty-fouryear-old man in full . . . So why, I wondered, why do I still feel like a kid?
Worse, like the same shy, pale, rail-thin kid I’d always been.
Maybe because I still hadn’t experienced anything of life. Least of all its
many temptations and excitements. I hadn’t smoked a cigarette, hadn’t tried
a drug. I hadn’t broken a rule, let alone a law. The 1960s were just under
way, the age of rebellion, and I was the only person in America who hadn’t
yet rebelled. I couldn’t think of one time I’d cut loose, done the unexpected.
I’d never even been with a girl.
If I tended to dwell on all the things I wasn’t, the reason was simple.
Those were the things I knew best. I’d have found it difficult to say what or
who exactly I was, or might become. Like all my friends I wanted to be
successful.

Unlike my friends I didn’t know what that meant. Money?

Maybe. Wife? Kids? House? Sure, if I was lucky. These were the goals I was
taught to aspire to, and part of me did aspire to them, instinctively. But deep
down I was searching for something else, something more. I had an aching
sense that our time is short, shorter than we ever know, short as a morning
run, and I wanted mine to be meaningful. And purposeful. And creative. And
important. Above all . . . different.
I wanted to leave a mark on the world.
I wanted to win.
No, that’s not right. I simply didn’t want to lose.
And then it happened. As my young heart began to thump, as my pink
lungs expanded like the wings of a bird, as the trees turned to greenish blurs,
I saw it all before me, exactly what I wanted my life to be. Play.
Yes, I thought, that’s it. That’s the word. The secret of happiness, I’d
always suspected, the essence of beauty or truth, or all we ever need to know
of either, lay somewhere in that moment when the ball is in midair, when
both boxers sense the approach of the bell, when the runners near the finish
line and the crowd rises as one. There’s a kind of exuberant clarity in that
pulsing half second before winning and losing are decided. I wanted that,
whatever that was, to be my life, my daily life.
At different times I’d fantasized about becoming a great novelist, a great
journalist, a great statesman. But the ultimate dream was always to be a great
athlete. Sadly, fate had made me good, not great. At twenty-four I was finally
resigned to that fact. I’d run track at Oregon, and I’d distinguished myself,
lettering three of four years. But that was that, the end. Now, as I began to
clip off one brisk six-minute mile after another, as the rising sun set fire to
the lowest needles of the pines, I asked myself: What if there were a way,
without being an athlete, to feel what athletes feel? To play all the time,
instead of working? Or else to enjoy work so much that it becomes
essentially the same thing.
The world was so overrun with war and pain and misery, the daily grind
was so exhausting and often unjust—maybe the only answer, I thought, was
to find some prodigious, improbable dream that seemed worthy, that seemed
fun, that seemed a good fit, and chase it with an athlete’s single-minded
dedication and purpose. Like it or not, life is a game. Whoever denies that
truth, whoever simply refuses to play, gets left on the sidelines, and I didn’t
want that. More than anything, that was the thing I did not want.
Which led, as always, to my Crazy Idea. Maybe, I thought, just maybe, I
need to take one more look at my Crazy Idea. Maybe my Crazy Idea just
might . . . work?
Maybe.
No, no, I thought, running faster, faster, running as if I were chasing
someone and being chased all at the same time. It will work. By God I’ll make
it work. No maybes about it.
I was suddenly smiling. Almost laughing. Drenched in sweat, moving as
gracefully and effortlessly as I ever had, I saw my Crazy Idea shining up
ahead, and it didn’t look all that crazy. It didn’t even look like an idea. It
looked like a place. It looked like a person, or some life force that existed
long before I did, separate from me, but also part of me. Waiting for me, but
also hiding from me. That might sound a little high-flown, a little crazy. But
that’s how I felt back then.
Or maybe I didn’t. Maybe my memory is enlarging this eureka moment,
or condensing many eureka moments into one. Or maybe, if there was such
a moment, it was nothing more than runner’s high. I don’t know. I can’t say.
So much about those days, and the months and years into which they slowly
sorted themselves, has vanished, like those rounded, frosty puffs of breath.
Faces, numbers, decisions that once seemed pressing and irrevocable, they’re
all gone.
What remains, however, is this one comforting certainty, this one
anchoring truth that will never go away. At twenty-four I did have a Crazy
Idea, and somehow, despite being dizzy with existential angst, and fears
about the future, and doubts about myself, as all young men and women in
their midtwenties are, I did decide that the world is made up of crazy ideas.
History is one long processional of crazy ideas. The things I loved most—
books, sports, democracy, free enterprise—started as crazy ideas.
For that matter, few ideas are as crazy as my favorite thing, running. It’s
hard. It’s painful. It’s risky. The rewards are few and far from guaranteed.
When you run around an oval track, or down an empty road, you have no
real destination. At least, none that can fully justify the effort. The act itself
becomes the destination. It’s not just that there’s no finish line; it’s that you
define the finish line. Whatever pleasures or gains you derive from the act of
running, you must find them within. It’s all in how you frame it, how you
sell it to yourself.
Every runner knows this. You run and run, mile after mile, and you never
quite know why. You tell yourself that you’re running toward some goal,
chasing some rush, but really you run because the alternative, stopping,
scares you to death.
So that morning in 1962 I told myself: Let everyone else call your idea
crazy . . . just keep going. Don’t stop. Don’t even think about stopping until
you get there, and don’t give much thought to where “there” is. Whatever
comes, just don’t stop.
That’s the precocious, prescient, urgent advice I managed to give myself,
out of the blue, and somehow managed to take. Half a century later, I
believe it’s the best advice

—maybe the only advice

—any of us should ever give.

P A R T O N E
Now, here, you see, it takes all the running you can do, to keep in the same
place. If you want to get somewhere else, you must run at least twice as fast
as that.
—Lewis Carroll, Through the Looking-Glass
1962
When I broached the subject with my father, when I worked up the nerve
to speak to him about my Crazy Idea, I made sure it was in the early evening.
That was always the best time with Dad. He was relaxed then, well fed,
stretched out in his vinyl recliner in the TV nook. I can still tilt back my
head and close my eyes and hear the sound of the audience laughing, the
tinny theme songs of his favorite shows, Wagon Train and Rawhide.
His all-time favorite was Red Buttons. Every episode began with Red
singing: Ho ho, hee hee . . . strange things are happening.
I set a straight-backed chair beside him and gave a wan smile and waited
for the next commercial. I’d rehearsed my spiel, in my head, over and over,
especially the opening. Sooo, Dad, you remember that Crazy Idea I had at
Stanford . . . ?
It was one of my final classes, a seminar on entrepreneurship. I’d written a
research paper about shoes, and the paper had evolved from a run-of-themill assignment to an all-out obsession. Being a runner, I knew something
about running shoes. Being a business buff, I knew that Japanese cameras
had made deep cuts into the camera market, which had once been dominated
by Germans. Thus, I argued in my paper that Japanese running shoes might
do the same thing. The idea interested me, then inspired me, then captivated
me. It seemed so obvious, so simple, so potentially huge.
I’d spent weeks and weeks on that paper. I’d moved into the library,
devoured everything I could find about importing and exporting, about
starting a company. Finally, as required, I’d given a formal presentation of
the paper to my classmates, who reacted with formal boredom. Not one
asked a single question. They greeted my passion and intensity with labored
sighs and vacant stares.
The professor thought my Crazy Idea had merit: He gave me an A. But
that was that. At least, that was supposed to be that. I’d never really stopped
thinking about that paper. Through the rest of my time at Stanford, through
every morning run and right up to that moment in the TV nook, I’d
pondered going to Japan, finding a shoe company, pitching them my Crazy
Idea, in the hopes that they’d have a more enthusiastic reaction than my
classmates, that they’d want to partner with a shy, pale, rail-thin kid from
sleepy Oregon.
I’d also toyed with the notion of making an exotic detour on my way to
and from Japan. How can I leave my mark on the world, I thought, unless I
get out there first and see it? Before running a big race, you always want to
walk the track. A backpacking trip around the globe might be just the thing,
I reasoned. No one talked about bucket lists in those days, but I suppose
that’s close to what I had in mind. Before I died, became too old or
consumed with everyday minutiae, I wanted to visit the planet’s most
beautiful and wondrous places.
And its most sacred. Of course I wanted to taste other foods, hear other
languages, dive into other cultures, but what I really craved was connection
with a capital C. I wanted to experience what the Chinese call Tao, the
Greeks call Logos, the Hindus call Jñāna, the Buddhists call Dharma. What
the Christians call Spirit. Before setting out on my own personal life voyage,
I thought, let me first understand the greater voyage of humankind. Let me
explore the grandest temples and churches and shrines, the holiest rivers and
mountaintops. Let me feel the presence of . . . God?
Yes, I told myself, yes. For want of a better word, God.
But first, I’d need my father’s approval.
More, I’d need his cash.
I’d already mentioned making a big trip, the previous year, and my father
seemed open to it. But surely he’d forgotten. And surely I was pushing it,
adding to the original proposal this Crazy Idea, this outrageous side trip—to
Japan? To launch a company? Talk about boondoggles.
Surely he’d see this as a bridge too far.
And a bridge too darned expensive. I had some savings from the Army,
and from various part-time jobs over the last several summers. On top of
which, I planned to sell my car, a cherry black 1960 MG with racing tires
and a twin cam. (The same car Elvis drove in Blue Hawaii.) All of which
amounted to fifteen hundred dollars, leaving me a grand short, I now told
my father. He nodded, uh-huh, mm-hmm, and flicked his eyes from the TV
to me, and back again, while I laid it all out.
Remember how we talked, Dad? How I said I want to see the World?
The Himalayas? The pyramids?
The Dead Sea, Dad? The Dead Sea?
Well, haha, I’m also thinking of stopping off in Japan, Dad. Remember
my Crazy Idea? Japanese running shoes? Right? It could be huge, Dad.
Huge.
I was laying it on thick, putting on the hard sell, extra hard, because I
always hated selling, and because this particular sell had zero chance. My
father had just forked out hundreds of dollars to the University of Oregon,
thousands more to Stanford. He was the publisher of the Oregon Journal, a
solid job that paid for all the basic comforts, including our spacious white
house on Claybourne Street, in Portland’s quietest suburb, Eastmoreland.
But the man wasn’t made of money.
Also, this was 1962. The earth was bigger then. Though humans were
beginning to orbit the planet in capsules, 90 percent of Americans still had
never been on an airplane. The average man or woman had never ventured
farther than one hundred miles from his or her own front door, so the mere
mention of global travel by airplane would unnerve any father, and especially
mine, whose predecessor at the paper had died in an air crash.
Setting aside money, setting aside safety concerns, the whole thing was
just so impractical. I was aware that twenty-six of twenty-seven new
companies failed, and my father was aware, too, and the idea of taking on
such a colossal risk went against everything he stood for. In many ways my
father was a conventional Episcopalian, a believer in Jesus Christ. But he also
worshipped another secret deity—respectability. Colonial house, beautiful
wife, obedient kids, my father enjoyed having these things, but what he
really cherished was his friends and neighbors knowing he had them. He
liked being admired. He liked doing a vigorous backstroke each day in the
mainstream. Going around the world on a lark, therefore, would simply
make no sense to him. It wasn’t done. Certainly not by the respectable sons
of respectable men. It was something other people’s kids did. Something
beatniks and hipsters did.

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