SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended January 31, 200429, 2005
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-1697231 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
Two Folsom Street
San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (650) 952-4400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value | New York Stock Exchange, Inc. | |
Pacific Exchange, | ||
(Title of class) | (Name of each exchange where registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The aggregate market value of the common equity held by non-affiliates of the registrant as of August 2, 2003July 31, 2004 was approximately $11,938,000,000$15,461,000,000 based upon the last price reported for such date in the NYSE-Composite transactions.
The number of shares of the registrant’s Common Stock outstanding as of March 15, 200414, 2005 was 898,095,233.858,529,251.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s 2004 Annual Report to Shareholders, which is included as Exhibit 13 to the Annual Report on Form 10-K, are incorporated into Parts I, II and IV.
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 200410, 2005 (hereinafter referred to as the “2004“2005 Proxy Statement”) are incorporated into Parts I andPart III.
Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended January 31, 2004 (hereinafter referred to as the “2003 Annual Report to Shareholders”) are incorporated into Parts II and IV.
The Exhibit Index is located on Page 1315 hereof.
This Annual Report on Form 10-K and the information incorporated herein by reference contain certaincontains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that reflect the current view of The Gap, Inc. (the “Company”, “we”, and “our”) with respect to future events and financial performance. Wherever used, the words “estimate”,are purely historical are forward-looking statements. Words such as “expect,” “plan,” “anticipate,” “believe,” “may”“estimate,” “intend,” “plan,” and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding: our current strategies and initiatives; our launch of successor IT systems related to supply chain; our launch of other successor IT systems; and outcome of legal actions.
Any suchBecause these forward-looking statements are subject toinvolve risks and uncertainties, andthere are important factors that could cause our futureactual results of operations couldto differ materially from historical results or current expectations. Some of these risks are discussedthose in Item 1 of this report below, andthe forward-looking statements. These factors include, without limitation, ongoingthe following: the risk that we will be unsuccessful in gauging fashion trends and changing consumer preferences; the highly competitive pressuresnature of our business in the apparel industry, risks associated with challenging domesticU.S. and international retail environments,internationally and our dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that we will be unsuccessful in identifying and negotiating new store locations effectively; the risk that comparable store sales and margins will experience fluctuations; the risk that we will be unsuccessful in implementing our strategic, operating and people initiatives; the risk that adverse changes in our credit ratings may have a negative impact on our financing costs and structure in future periods; the levelrisk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or IT systems changes may disrupt our supply chain or operations; and the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; any of consumer spending or preferences in apparel, trade restrictionswhich could impact net sales, costs and political or financial instability in countries where our goods are manufactured, impact of legal proceedings,expenses, and/or otherplanned strategies. Additional information regarding factors that maycould cause results to differ can be describedfound in our filings with the Securities and Exchange Commission. this Annual Report on Form 10-K.
Future economic and industry trends that could potentially impact revenuesnet sales and profitability are difficult to predict.
We These forward-looking statements are based on information as of March 25, 2005 and we assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
PART I
Item 1 - Business
General
The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988.
We are a global specialty retailer operating retail and outlet stores selling casual apparel, accessories, and personal care products for men, women and children under the Gap, Banana Republic and Old Navy brands. We operate stores in the United States, Canada, the United Kingdom, France Germany and Japan. In addition, our U.S. customers may shop online at gap.com, bananarepublic.com, and oldnavy.com.
We design virtually all of our products, which in turn are manufactured by independent sources, and sell them under our brands in the following store formats:three brands:
Gap. Founded in 1969, Gap stores offer extensive selections of classically-styled,classically styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis and T-shirts to fashion apparel, accessories and personal care products for men and women, ages teen through adult. We entered the children’s apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children, ages newborn through pre-teen. Launched in 1998, GapBody offers women’s underwear, sleepwear, swimwear and personal care products. As of January 31, 2004, we operated 1,747 Gap brand store locations in the United States, Canada, the United Kingdom, France, Germany and Japan, of which 151 were Gap Outlet stores. We have reached an agreement to sell our German operations, with 10 store locations, effective August 1, 2004.
Banana Republic. Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored apparel, shoes and accessories for men and women at higher price points than Gap. Banana Republic products range from apparel, including intimate apparel, to personal care products and home products. As of January 31, 2004, we operated 435 Banana Republic stores in the United States and Canada, of which 43 were Banana Republic Outlet stores.
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Old Navy. We launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants as well as other items, including personal care products, in an innovative, exciting shopping environment. As of January 31, 2004, we operated 840 Old Navy storesalso offers a line of maternity and plus sizes in the United States and Canada, of which 42 were Old Navy Outletits stores.
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As of January 31, 2004,29, 2005, we operated a total of 3,0222,994 store locations. For more information on the number of stores by brand and country,region, see the table in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to page 25 of our 20032004 Annual Report to Shareholders.
We established Gap Online, a web-based store located at www.gap.com, in 1997. Products comparable to those carried in Gap, GapKids and babyGap stores as well as a line of maternity apparel, can be purchased on-line. Banana Republic introduced Banana Republic Online, a web-based store located at www.BananaRepublic.com, in 1999, which offers products comparable to those carried in the store collections. In 2000, we established Old Navy Online, a web-based store located at www.oldnavy.com. Old Navy Online also offers apparel and accessories comparable to those carried in the store collections, plus a line of maternity apparel.collections. Our online businesses are offered as an extension of our store experience and are intended to strengthen our relationship with our customers.
Certain financial information about international operations is set forth under the heading “Segment Information” in Note M to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 – Financial Statements and Supplementary Data.
Store Operations
Our stores offer a shopper-friendly environment with an assortment of casual apparel and accessories which emphasize style, quality and good value. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store.
Our stores generally are open seven days per week (where permitted by law) and most holidays. All sales are tendered for cash, personal checks, debit cards, or credit cards, including Gap, Banana Republic and Old Navy private label credit cards which are issued by a third party. We also issue and redeem gift cards through our brands.
Merchandise Vendors
We purchase merchandise on average from more than 800approximately 700 vendors with facilities in approximately 50 countries. No vendor accounted for more than 5% of the dollar amount of our fiscal 20032004 purchases. Of our merchandise sold during fiscal 2003,2004, approximately 5%2% of all units (representing approximately 3%2% of total cost) was produced domestically while the remaining 95%98% of all units (representing approximately 97%98% of total cost) was made outside the United States. Approximately 16%18% of our total merchandise units (representing approximately 17%19% of total cost) was made in China, with the remainder coming from more than 50 other countries. Any event causing a sudden disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. Also see the section entitled “Certain Additional Business Risk Factors”Factors – Trade matters and IT system changes may disrupt our supply chain” below in this Item 1.
Seasonal Business
Our business follows a seasonal pattern, with sales peaking over a total of about 13 weeks during the Back-to-School (August) and Holiday (November through December) periods. During fiscal 2003,2004, these periods accounted for approximately 33%32% of our net sales.
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Brand Building
Our continued ability to develop new brands and continually change and evolve our existing brands is a key source of competitive advantage.to our success. We believe our three distinct brands are among our most important assets. All aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us. We continue to invest in the development of our brands through consumer research and advertising. We have also made investments to enhance the customer experience through the expansion and remodeling of existing stores, the closure of under-performing stores, and a focus on customer service.
Advertising
We place print ads in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines. Our ads also appear in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and billboards. We have also run TV ads for Gap, and Old Navy and Banana Republic and radio ads for Old Navy.
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We plan to continue our investments in advertising and marketing in 2004.2005. There can be no assurances that these investments will result in increased sales or profitability.
Employees
OnAs of January 31, 2004,29, 2005, we had a work force of approximately 153,000152,000 employees, which includes a combination of part and full-time employees. We hire temporary employees primarily during the peak Back-to-School and Holiday seasons.
To remain competitive in the apparel retail industry we must attract, develop and retain skilled employees, including executives. Competition for such personnel is intense. Our success is dependent to a significant degree on the continued contributions of key employees. The inability to develop effective plans to motivate, develop and retain key personnel could lead to unexpected loss of personnel and could have a material adverse effect on our results of operations. Also see the section entitled “Certain Additional Business Risk Factors – We must successfully gauge fashion trends and changing consumer preferences to succeed” below in this Item 1.
Trademarks and Service Marks
Gap, GapKids, babyGap, GapBody, Banana Republic and Old Navy trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law.
Certain Additional Business Risk Factors
We must successfully gauge fashion trends and changing consumer preferences to succeed.
Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The global specialty retail business fluctuates according to changes in consumer preferences dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for local markets, our sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect our operating results. AIn prior years, a disproportionate part of our past product offerings may have been too fashion-forward for our broad and diverse customer base. While we believe our current strategies and initiatives appropriately address these issues, merchandise misjudgments could have a material adverse effect on our image with our customers and on our operating results.
Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. Competition for this personnel is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. Also see the section entitled “Employees” above in this Item 1.
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Fluctuations in the global specialty retail business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the global specialty retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels. We must enter into contracts for the purchase and manufacture of merchandise well in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the past, we have not always predicted our customers’ preferences and acceptance levels of our fashion items with accuracy. In addition, lead times for many of our purchases are long, which may make it more difficult for us to respond rapidly to new or changing fashion trends or consumer acceptance for our products. If sales do not meet expectations, too much inventory may cause excessive markdowns and, therefore, lower than planned margins. Also see the section entitled “We experience fluctuations in our comparable store sales and margins” below in this Item 1.
Our business is highly competitive and depends on consumer spending patterns.
The global specialty retail industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise. We face a variety of competitive challenges including:
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Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Declines in consumer spending on apparel and accessories could have an adverse effect on our operating results.
We are also faced with competition in European, Japanese and Canadian markets from established regional and national chains. Our success in these markets depends on determining a sustainable profit formula to build brand loyalty and gain market share in these especially challenging retail environments. If international business is not successful or if we cannot effectively take advantage of international growth opportunities, our results of operations could be adversely affected.
CertainThe market for prime real estate is competitive.
Our ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets our criteria and our ability to negotiate terms that meet our financial information about international operations is set forth undertargets. In addition, we must be able to effectively renew our existing store leases. Failure to secure real estate locations adequate to meet annual targets as well as effectively manage the heading “Segments” in Note A to Notes to Consolidated Financial Statements, incorporated by reference in Item 8—Financial Statements and Supplementary Data.profitability of our existing fleet of stores could have a material adverse effect on our results of operations.
We experience fluctuations in our comparable store sales and margins.
Our continued success depends, in part, upon our ability to continue to further improve sales, as well as both gross margins and operating margins. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that they will continue to fluctuate in the future. For example,
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over the past 2three years, our quarterly comparable store sales have ranged from decreasesa decrease of 17% and 7% in the first two fiscal quartersquarter of fiscal 2002 to an increase of 12% and 10% in the first two fiscal quartersquarter of 2003.2003 to a decrease of 3% in the last fiscal quarter of 2004. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from expectations. Over the past fourfive years our reported gross margins have ranged from 37% in fiscal 2000 to 30% in fiscal 2001 to 34% in fiscal 2002 to 38% in fiscal 2003.2003 to 39% in fiscal 2004. In addition, over the past fourfive years our reported operating margins, have ranged from 10.6%10.1% in fiscal 2000 to 2.4%2.2% in fiscal 2001 to 7.0% in fiscal 2002 to 11.9% in fiscal 2003.2003 to 12.2% in fiscal 2004.
Our ability to further improve ourdeliver healthy comparable store sales results and margins depends in large part on improving ouraccurately forecasting of demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base, managing inventory effectively, using more effective pricing strategies, and optimizing store performance by closing under performing stores. Any failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline.
Changes in our credit ratings may have a negative or positive impact on our financing costs and structure in future periods.
In November 2001, we issued $200 million aggregate principal amount of debt securities at an original annual interest rate of 8.15 percent, due December 15, 2005 (the “2005 notes”), and $500 million aggregate principal amount of debt securities of which only $138 million remains outstanding at an original annual interest rate of 8.80 percent,%, due December 15, 2008 (the “2008 notes”“notes”). The interest rate payable on the notes of each series is subject to adjustment from time to time if either Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Service (“Standard & Poor’s”) reduces the rating ascribed to the notes below Baa2, in the case of Moody’s, or below BBB+, in the case of Standard & Poor’s. The interest rate on the notes will be increasedincreases by 0.25 percent% for each rating category downgrade by either rating
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agency. In addition, if Moody’s or Standard & Poor’s subsequently increases the rating ascribed to the notes, the ongoing interest rate then payable on the notes will be decreaseddecreases by 0.25 percent0.25% for each rating category upgrade by either rating agency up to Baa2, in the case of Moody’s, or BBB+, in the case of Standard & Poor’s. In no event will the interest rate be reduced below the original interest rate payable on the notes. As a result of downgrades to our long-term credit ratings, the interest rate payable by us on the 2005 notes has increased by 175 basis points to 9.90 percent10.05% per annum andas of January 29, 2005. On February 10, 2005, Standard & Poor’s upgraded our long term credit rating which will decrease the interest rate payable by us on the 2008 notes has increased by 175 basis points to 10.55 percent per annum. As a result of the downgrades in9.80% effective June 15, 2005. Given our short-termcurrent credit ratings, we no longerdo not have meaningful access to the commercial paper market; however, we replaced this borrowing capacity with proceeds from the issuance of senior convertible notes in March 2002. In addition, anymarket. Any future reduction in our long-term senior unsecured credit rating could result in reduced access to the capital markets and higher interest costs on future financings.
For further information on our credit rating including outlook see the section entitled “Other debt information”“Credit Facility and Debt” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to page 3031 our 20032004 Annual Report to Shareholders.
Trade matters and IT systems changes may disrupt our supply chain.
We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations. Effective January 1, 2005,Although the quota system established by the Agreement on Textiles and Clothing will bewas completely phased out. Thereout for World Trade Organization countries effective January 1, 2005, there can be no assurances that quotarestrictions will not be reestablished for certain categories in specific countries. We are unable to determine the impact of thesethe changes to the quota system on our global sourcing operations, including China. Our sourcing operations may be adversely affected by quota (or the elimination of quota)trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.
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Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and are currently implementing modifications and upgrades to our information technology systems supporting the product pipeline, including merchandise planning and forecasting, inventory and price management. Modifications involve replacing legacy systems with successor systems or making changes to legacy systems. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. We anticipate that theThe launch of these successor systems will take place in a phased approach over an approximate five-year period that began in 2002. ThereAlthough we are on track with the replacement of our systems, there can be no assurances that we will successfully launch these new systems as planned or that they will occur without supply chain or other disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
We are implementing certain other changes to our IT systems that may disrupt operations.
In addition to modifying and replacing our systems related to sourcing and distributing merchandise, we continue to evaluate and are currently implementing modifications and upgrades to our information technology systems for financial reporting, point of sales (cash registers), real estate, portfolio management, and human resources. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. We anticipate that theThe launch of these successor systems will take place in a phased approach over an approximate five year period that began in 2002. ThereIn 2004 we completed installation of our new point of sales system in all of our domestic stores, implemented our global financial systems, and replaced our lease management systems. Although we are on track with replacement of our systems, there can be no assurances that we will successfully launch these newthe remaining systems as planned or that
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they will occur without disruptions to operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
Our growth is dependent on strategy development.
Our ability to grow our existing brands and develop or identify new growth opportunities depends in part on our ability to appropriately identify, develop and effectively execute strategies and initiatives. Failure to effectively identify, develop and execute strategies and initiatives may lead to increased operating costs without offsetting benefits and could have a material adverse effect on our results of operations.
Available Information
We make available on our website, www.gapinc.com, under “Financials & Media, SEC Filings” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”).
Our Code of Business Conduct, Board of Directors Committee Charters (Audit and Finance, Compensation and Management Development, Governance, Nominating and Social Responsibility Committees), and Corporate Governance Guidelines are also available on our website. The Code of Business Conduct can be found at www.gapinc.com, under “Financials & Media, Corporate Compliance, Code of Business Conduct.” Any amendments and waivers to the code will also be available on the website. The Committee Charters and Governance Guidelines can be found on our website under “Financials & Media, Corporate Governance.” All of these documents are also available in print to any shareholder who requests them.
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Executive Officers of the Registrant
Donald G. Fisher is our Chairman. Mr. Fisher will assume the role of Founder and Chairman Emeritus effective in May 2004, at which time Robert J. Fisher will assume the role of non-executive Chairman. Paul S. Pressler is our President and Chief Executive Officer. Donald G. Fisher and Paul S. Pressler are directors. The required information for each of them is set forth in the table located in the section entitled “Nominees for Election as Directors” of the 2004 Proxy Statement and is incorporated by reference herein. The following are alsoour executive officers:
Name, Age, Position and Principal Occupation During Past Five Years:
Nick Cullen, 49,50, Executive Vice President and Chief Supply Chain Officer since October 2003; President, North America Supply, Diageo PLC, a division of a global beer, wine and spirits distributor from 2000 to 2003; Director UK Operations Diageo PLC from 1999 to 2000; Director, Integration2000.
Donald Fisher, 76, Founder and Transformation Diageo PLC from 1998 to 1999.Chairman Emeritus since 2004; Chairman of the Company, 1969-2004.
Anne Gust, 46,47, Executive Vice President, Chief Administrative Officer since 2000 and Chief Compliance Officer since 1998; Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration from 1999 to 2000. Joined in 1991.
Jenny Ming, 48,49, President, Old Navy Brand since 1998. Joined in 1986.
Gary Muto, 44, President, Gap Brand since 2002; President of Banana Republic Brand from 2001 to 2002; Executive Vice President Banana Republic Merchandising from 1999 to 2001. Joined in 1988.
Byron Pollitt, 52,53, Executive Vice President and Chief Financial Officer since January 2003; Executive Vice President and Chief Financial Officer of Walt Disney Parks and Resorts from 1999 to 2003; Senior Vice2003.
Paul Pressler, 48, President and Chief FinancialExecutive Officer of Disneylandthe Company since 2002; Chairman of Walt Disney Parks and Resorts, from 1995 to 1999.an entertainment company, 2000-2002; President of Walt Disney Attractions, an entertainment company, 1998-2000.
Eva Sage-Gavin, 45,46, Executive Vice President Human Resources since March 2003; Senior Vice President Human Resources of Sun Microsystems, Inc. from 2000 to 2003; Senior Vice President Human Resources of Disney Consumer Products from 1997 to 2000.
Item 2—2 – Properties
We operate stores in the United States, Canada, the United Kingdom, France, Germany and Japan. The stores operated as of January 31, 200429, 2005 aggregated approximately 36.536.6 million square feet. Almost all our stores are leased either on a short term basis with one or more options after our initial term, or slightly longer terms with
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negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location. We have reached an agreement to sell our German operations, with 10 store locations, effective August 1, 2004.
We own approximately 1.2 million square feet of headquarters office space located in San Francisco, San Bruno and Rocklin, California. We lease approximately 1.5 million square feet of headquarters office space, located in San Francisco, San Bruno and Rocklin, California; New York, New York; and Albuquerque, New Mexico. Of the 1.5 million square feet of office space leased, approximately 125,000130,000 square feet is under sublease to others and approximately 440,000450,000 square feet is being marketed for sublease to others. We also lease approximately 25 domestic regional offices and approximately 35 international offices. We own approximately 9.5 million square feet of distribution space located in Fresno, California; Edgewood, Maryland; Fishkill, New York; Groveport, Ohio; Gallatin, Tennessee; Brampton, Ontario, Canada; and Rugby, England. We recently announced that we will be closing our Edgewood, Maryland facility and consolidating its operations into several of our other facilities in the summer of 2005. We lease approximately 1.7 million square feet of distribution space located in Grove City, Ohio and in the Northern Kentucky suburbs outside Cincinnati, Ohio. A third-party logistics company provides logistics services to us through a 390,000 square feetfoot distribution warehouse in Funabashi City, Chiba, Japan is owned and operated by a third-party logistics provider.Japan.
In fiscal 20032004, we recorded certain chargesadditional sublease loss reserves relating to certain facilities. See Note EF to Notes to Consolidated Financial Statements, incorporated by reference in Item 8—8 - Financial Statements and Supplementary Data.
Item 3—3 - Legal Proceedings
As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us include commercial, intellectual property, customer, and labor and employment related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.
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We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements or resolutions may occur and negatively impact earnings in the quarter of such development, settlement or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results fromof operations, liquidity or financial position taken as a whole.
Item 4—4 - Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5—5 - Market For Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) The information required by this item is incorporated herein by reference to page 5764 of the 20032004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K10-K.
(b) Not applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table presents information with respect to purchases of common stock of the section entitled “Equity Plan Compensation Information”Company made during the thirteen weeks ended January 29, 2005, by Gap Inc. or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the 2004 Proxy Statement.Exchange Act.
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or approximate dollar amount) of shares that May Yet be Purchased Under the Plans or Programs(1) | ||||||
Month #1 (Oct. 31 – Nov.27) | 12,477,100 | $ | 22.32 | 12,477,100 | $134 million | ||||
Month #2 (Nov. 28 – Jan. 1) | 11,737,800 | $ | 21.19 | 11,737,800 | $135 million | ||||
Month #3 (Jan. 2 – Jan. 29) | 6,436,100 | $ | 20.94 | 6,436,100 | $1.5 billion | ||||
Total, Jan. 29, 2005 | 30,651,000 | $ | 21.60 | 30,651,000 | $1.5 billion | ||||
(1) | On October 7, 2004, the Company announced a $500 million share repurchase program. On November 4, 2004, the Company announced an addition of $250 million to the program. On December 2, 2004, the Company announced an addition of $250 million to the program for an aggregate of $1 billion. On January 25, 2005, the Board of Directors approved an incremental $1.5 billion to the program for an aggregate $2.5 billion. The Board of Directors’ authority with respect to this additional $1.5 billion expires February 24, 2007. |
Item 6—6 - Selected Financial Data
The information required by this item is incorporated herein by reference to page 2220 of the 20032004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
Item 7—7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is incorporated herein by reference to pages 2321 through 3336 of the 20032004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
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Item 7A—7A - Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is incorporated herein by reference to pages 3437 through 3538 of the 20032004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
Item 8—8 - Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to pages 3741 through 5664 of the 20032004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
Item 9—9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A—9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
OurManagement, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of January 31, 2004.amended. Based on such evaluation, they havethis review, the Chief Executive Officer and Chief Financial Officer concluded that as of such date, ourthe Company’s disclosure controls and procedures are effective.were effective as of January 29, 2005.
As part of these disclosure controls and procedures, we review the appropriateness of our accounting policies. During the fourth quarter of fiscal 2004, we initiated a reassessment of our policy related to the accounting for operating leases with scheduled rent increases. We determined that our policy should be corrected to recognize minimum rent payments on a straight-line basis beginning with the time we take possession of the premises, instead of the previous policy of using the store opening date. The previously reported financial statements included in this Form 10-K have been restated to reflect this correction.
During fiscal 2003, we also reassessed our accounting policy that classified a portion of our lease incentives as a reduction of leasehold improvements. Effective February 1, 2004, we prospectively changed our accounting policy to treat lease incentives received as deferred lease incentives. The controls related to the application of this new policy were evaluated and deemed to be operating effectively as of January 29, 2005. We corrected the prior year financial statements in conjunction with the restatement.
Management’s Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Our system of internal control is evaluated on a cost benefit basis and is designed to provide reasonable, not absolute assurance that reported financial information is materially accurate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the design and effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”). Based on this evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of January 29, 2005.
In reaching its conclusion that the internal control over financial reporting was effective as of January 29, 2005, management carefully considered the facts and circumstances surrounding the restatement of the Company’s previously issued financial statements.
During fiscal 2003, we reassessed our accounting policy that classified a portion of our lease incentives as a reduction of leasehold improvements. Effective February 1, 2004, we prospectively changed our accounting policy
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to treat lease incentives received as deferred lease incentives. The controls related to the application of this new policy were evaluated and deemed to be operating effectively as of January 29, 2005. We corrected the prior year financial statements in conjunction with the restatement.
A control deficiency in monitoring compliance with generally accepted accounting principles in the area of accounting for operating leases with scheduled rent increases was detected during our assessment process that resulted in cumulative, non-cash adjustments that would have been material to the financial performance of fiscal 2004. As a result, management decided to restate previously issued financial statements to provide transparency as to the effect of the correction on the prior period results, and enhance the comparability of the prior financial information.
The impact of this correction on the periods subject to restatement was immaterial. Substantially all of the adjustment related to periods prior to 2002, and the correcting cumulative adjustment was also immaterial to shareholders’ equity as of February 2, 2002. As a result, management concluded that this control deficiency was not a material weakness.
Management’s assessment of the effectiveness of internal control over financial reporting as of January 29, 2005 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is incorporated herein by reference to page 40 of the 2004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
Changes in Internal ControlsControl Over Financial Reporting
During our last fiscal quarter,2004, the Company initiated a company-wide implementation of a new integrated financial application software system. As of January 29, 2005, substantially all of the Company’s businesses were using the new system. Management believes the new system represents an improvement to the internal control environment. The new system was subject to review during its implementation phase, and audit and validation during the controls self assessment process. As a result of these evaluations, it was concluded that the design and effectiveness of the controls over the new system was functioning effectively.
Other than the above, there waswere no changechanges in ourthe Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal 2004 that has materially affected, or isare reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Item 9B – Other Information
Not applicable.
PART III
Item 10—10 - Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference to the sections entitled “Nominees for Election as Directors,” “Board Committees – Audit and Finance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 20042005 Proxy Statement. See also Item 1 above in the section entitled “Executive Officers of the Registrant.”
The Company has adopted a code of ethics, our Code of Business Conduct, that applies to all employees including our principal executive officer, principal financial officer, controller and persons performing similar functions. Our Code of Business Conduct is available on our website, www.gapinc.com, under “Financials & Media, Corporate Compliance, Code of Business Conduct” and in print to any shareholderperson who requests it. Any amendments and waivers to the code will also be available on the website.
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Item 11—11 - Executive Compensation
The information required by this item is incorporated herein by reference to the sections entitled “Compensation of Directors,” “Summary of Executive Compensation,” “Stock Options,” “Compensation Committee Interlocks and Insider Participation,” and “Employment Contracts, Termination of Employment and Change in Control Provisions”Arrangements,” in the 20042005 Proxy Statement.
Item 12—12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the sections entitled “Equity Plan Compensation Information” and “Beneficial Ownership of Shares” in the 20042005 Proxy Statement.
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Item 13—13 - Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section entitled “Other Reportable Transactions” in the 20042005 Proxy Statement.
Item 14—14 – Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section entitled “Principal Accounting Firm Fees” in the 20042005 Proxy Statement.
PART IV
Item 15—15 – Exhibits and Financial Statements,Statement Schedules and Reports on Form 8-K
(a) | The following consolidated financial statements, schedules and exhibits are filed as part of this report |
(1) | Consolidated Financial Statements of The Gap, Inc. are included in Part II, Item 8: |
Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit Index
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