UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~November 1, 2014~~May 2, 2015



¨	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 or other jurisdiction of incorporation or organization)		(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: (415) 427-0100

Indicate by check mark whether the 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

The number of shares of the registrant’s common stock outstanding as of ~~November 28, 2014~~May 29, 2015 was ~~423,576,007.~~417,355,180.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following:

the impact of the adoption of new accounting standards;

recognition of unrealized gains and losses from designated cash flow hedges;

the impact of the potential settlement of outstanding tax matters and the closing of audits;

the impact of losses due to indemnification obligations;

the outcome of proceedings, lawsuits, disputes, and claims;

~~operating margin in fiscal 2014;~~offering product that is consistent, brand-appropriate, and on-trend;

~~earnings per share for fiscal 2014;~~evolving our customer experience to reflect the intersection of digital and physical;

attracting, retaining, and training great talent;

growing ~~sales with healthy merchandise margins;~~globally across our brands and channels;

~~managing our expenses in a disciplined manner;~~

~~delivering earnings per share growth;~~

~~returning excess cash to shareholders;~~

~~growing global online sales, driven by continued~~continuing investment in ~~our omni-channel~~digital capabilities;

opening additional stores in Asia with a focus on Gap China, Old Navy China, and Old Navy Japan;

~~expanding our global outlet presence;~~

opening additional Athleta stores;

~~continuing to expand our franchise presence worldwide;~~optimize and improve store fleet productivity;

the impact of foreign exchange rate fluctuations on our financial results;

~~number~~the impact of ~~Company-operated and franchise store openings in fiscal 2014;~~

~~square footage change in fiscal 2014;~~

delayed merchandise receipts at the ~~effective tax rate in fiscal 2014;~~U.S. West Coast ports;

current cash balances and cash flows being sufficient to support our business operations, including growth initiatives and planned capital expenditures;

ability to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility;

the impact of the seasonality of our operations;

~~depreciation and amortization expense in fiscal 2014;~~

~~capital expenditures in fiscal 2014;~~

dividend payments in fiscal ~~2014;~~

~~market risk profile;~~2015; and

the impact of changes in internal control over financial reporting.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:

the risk that adoption of new accounting pronouncements will impact future results;

the risk that we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;

the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;

the highly competitive nature of our business in the United States and internationally;

~~the risk that we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;~~

the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected;

the risks to our efforts to expand internationally, including our ability to operate under a global brand structure, foreign exchange fluctuations, and operating in regions where we have less experience;

the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;

the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct;

the risk that trade matters could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations;

the risk that our franchisees’ operation of franchise stores is not directly within our control and could impair the value of our brands;

the risk that we or our franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively;

the risk that ~~comparable sales and margins will experience fluctuations;~~

~~the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial results or our business initiatives;~~

~~the risk that the failure to attract and retain key personnel could have an adverse impact on our results of operations;~~

~~the risk that our investments in omni-channel shopping initiatives may not deliver the results we anticipate;~~

~~the risk that updates or changes to our information technology (“IT”) systems may disrupt our operations;~~

~~the risk that~~ we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation;

the risk that the failure to attract and retain key personnel, or effectively manage succession, could have an adverse impact on our results of operations;

the risk that our investments in omni-channel shopping initiatives may not deliver the results we anticipate;

the risk that comparable sales and margins will experience fluctuations;

the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial results or our business initiatives;

the risk that updates or changes to our information technology (“IT”) systems may disrupt our operations;

the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect our operations and financial results, or those of our franchisees or vendors;

the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition, strategies, and results of operations;

the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; and

the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits.

Additional information regarding factors that could cause results to differ can be found in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2014~~January 31, 2015 and our other filings with the U.S. Securities and Exchange Commission.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of ~~December~~June 8, ~~2014~~,2015, 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.

We suggest that this document be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2014~~.January 31, 2015.

THE GAP, INC.

TABLE OF CONTENTS



		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of ~~November 1,~~May 2, 2015, January 31, 2015, and May 3, 2014 ~~February 1, 2014, and November 2, 2013~~	1

	Condensed Consolidated Statements of Income for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~November 1,~~May 2, 2015 and May 3, 2014 ~~and November 2, 2013~~	2

	Condensed Consolidated Statements of Comprehensive Income for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~November 1,~~May 2, 2015 and May 3, 2014 ~~and November 2, 2013~~	3

	Condensed Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Thirteen Weeks Ended ~~November 1,~~May 2, 2015 and May 3, 2014 ~~and November 2, 2013~~	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1713

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2318

Item 4.	Controls and Procedures	2318

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	2419

Item 1A.	Risk Factors	2419

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2419

Item 6.	Exhibits	2420

PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements.

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	November 1, 2014		February 1, 2014			November 2, 2013			May 2, 2015		January 31, 2015		May 3, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	954	$	1,510		$	996		$	1,234	$	1,515	$	1,544
Merchandise inventory	2,553		1,928			2,471			2,010		1,889		1,909
Other current assets	816		992			923			874		913		867
Total current assets	4,323		4,430			4,390			4,118		4,317		4,320
Property and equipment, net of accumulated depreciation of $5,555, $5,401, and $5,448	2,777		2,758			2,714
Property and equipment, net of accumulated depreciation of $5,599, $5,532, and $5,459									2,790		2,773		2,703
Other long-term assets	719		661			682			587		600		672
Total assets	$	7,819	$	7,849		$	7,786		$	7,495	$	7,690	$	7,695
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	22	$	25		$	—		$	21	$	21	$	24
Accounts payable	1,477		1,242			1,513			1,156		1,173		1,101
Accrued expenses and other current liabilities	1,011		1,142			1,064			960		1,020		980
Income taxes payable	12		36			54			37		20		98
Total current liabilities	2,522		2,445			2,631			2,174		2,234		2,203
Long-term liabilities:
Long-term debt	1,358		1,369			1,247			1,331		1,332		1,369
Lease incentives and other long-term liabilities	1,084		973			952			1,111		1,141		1,087
Total long-term liabilities	2,442		2,342			2,199			2,442		2,473		2,456
Commitments and contingencies (see Note 12)
Commitments and contingencies (see Note 11)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued 424, 1,106, and 1,106 shares; Outstanding 424, 446, and 449 shares	21		55			55
Additional paid-in capital	—		2,899			2,876
Authorized 2,300 shares for all periods presented; Issued and Outstanding 419, 421, and 443 shares									21		21		22
Retained earnings	2,680		14,218			14,000			2,718		2,797		2,884
Accumulated other comprehensive income	154		135			145			140		165		130
Treasury stock at cost (-, 660, and 657 shares)	—		(14,245		)	(14,120		)
Total stockholders’ equity	2,855		3,062			2,956			2,879		2,983		3,036
Total liabilities and stockholders’ equity	$	7,819	$	7,849		$	7,786		$	7,495	$	7,690	$	7,695

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ and shares in millions except per share amounts)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Net sales	$	3,972		$	3,976		$	11,727		$	11,573		$	3,657		$	3,774
Cost of goods sold and occupancy expenses	2,376			2,387			7,096			6,873			2,275			2,308
Gross profit	1,596			1,589			4,631			4,700			1,382			1,466
Operating expenses	1,042			1,013			3,067			3,073			996			1,023
Operating income	554			576			1,564			1,627			386			443
Interest expense	19			21			55			41			5			17
Interest income	(1		)	(1		)	(2		)	(3		)	(1		)	—
Income before income taxes	536			556			1,511			1,589			382			426
Income taxes	185			219			568			616			143			166
Net income	$	351		$	337		$	943		$	973		$	239		$	260
Weighted-average number of shares - basic	432			463			439			465			421			445
Weighted-average number of shares - diluted	437			468			444			471			424			451
Earnings per share - basic	$	0.81		$	0.73		$	2.15		$	2.09		$	0.57		$	0.58
Earnings per share - diluted	$	0.80		$	0.72		$	2.12		$	2.07		$	0.56		$	0.58
Cash dividends declared and paid per share	$	0.22		$	0.20		$	0.66		$	0.50		$	0.23		$	0.22

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Net income	$	351		$	337		$	943		$	973		$	239		$	260
Other comprehensive income (loss), net of tax:
Foreign currency translation	(22		)	9			(13		)	(32		)	6			11
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $27, $(5), $24, and $17	59			(7		)	51			27
Reclassification adjustment for realized gains on derivative financial instruments, net of tax of $(6), $(7), $(11), and $(19)	(12		)	(13		)	(19		)	(31		)
Change in fair value of derivative financial instruments, net of tax benefit of $(4) and $(4)													(10		)	(11		)
Reclassification adjustment for realized gains on derivative financial instruments, net of tax of $(9) and $(3)													(21		)	(5		)
Other comprehensive income (loss), net of tax	25			(11		)	19			(36		)	(25		)	(5		)
Comprehensive income	$	376		$	326		$	962		$	937		$	214		$	255

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Cash flows from operating activities:
Net income	$	943		$	973		$	239		$	260
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	412			398			148			133
Amortization of lease incentives	(47		)	(49		)	(15		)	(15		)
Share-based compensation	76			86			22			25
Tax benefit from exercise of stock options and vesting of stock units	34			54			15			23
Excess tax benefit from exercise of stock options and vesting of stock units	(35		)	(55		)	(17		)	(24		)
Non-cash and other items	(52		)	(37		)	(20		)	2
Deferred income taxes	(29		)	27			2			7
Changes in operating assets and liabilities:
Merchandise inventory	(644		)	(723		)	(117		)	21
Other current assets and other long-term assets	174			(50		)	(8		)	173
Accounts payable	244			370			(20		)	(144		)
Accrued expenses and other current liabilities	(99		)	(41		)	(81		)	(141		)
Income taxes payable, net of prepaid and other tax-related items	(8		)	(6		)	61			83
Lease incentives and other long-term liabilities	145			6			2			110
Net cash provided by operating activities	1,114			953			211			513
Cash flows from investing activities:
Purchases of property and equipment	(508		)	(487		)	(150		)	(162		)
Proceeds from sale of property and equipment	121			—
Maturities of short-term investments	—			50
Other	(1		)	(2		)	—			(1		)
Net cash used for investing activities	(388		)	(439		)	(150		)	(163		)
Cash flows from financing activities:
Issuances under share-based compensation plans, net	25			90
Proceeds from issuances under share-based compensation plans							35			33
Withholding tax payments related to vesting of stock units							(66		)	(47		)
Repurchases of common stock	(1,046		)	(875		)	(232		)	(230		)
Excess tax benefit from exercise of stock options and vesting of stock units	35			55			17			24
Cash dividends paid	(290		)	(232		)	(97		)	(98		)
Other	—			(1		)
Net cash used for financing activities	(1,276		)	(963		)	(343		)	(318		)
Effect of foreign exchange rate fluctuations on cash and cash equivalents	(6		)	(15		)	1			2
Net decrease in cash and cash equivalents	(556		)	(464		)
Net increase (decrease) in cash and cash equivalents							(281		)	34
Cash and cash equivalents at beginning of period	1,510			1,460			1,515			1,510
Cash and cash equivalents at end of period	$	954		$	996		$	1,234		$	1,544
Non-cash investing activities:
Purchases of property and equipment not yet paid at end of period	$	93		$	87		$	85		$	72
Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	77		$	76		$	38		$	38
Cash paid for income taxes during the period, net of refunds	$	570		$	587		$	63		$	54

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The Condensed Consolidated Balance Sheets as of ~~November 1, 2014~~May 2, 2015 and ~~November 2, 2013~~May 3, 2014, the Condensed Consolidated Statements of Income, ~~and~~ the Condensed Consolidated Statements of Comprehensive Income, ~~for the~~ ~~thirteen and thirty-nine weeks endedNovember 1, 2014~~ ~~and~~ ~~November 2, 2013~~, and the Condensed Consolidated Statements of Cash Flows for the ~~thirty-nine~~thirteen weeks ended ~~November 1, 2014~~May 2, 2015 and ~~November 2, 2013~~May 3, 2014 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, and cash flows as of ~~November 1, 2014~~May 2, 2015 and ~~November 2, 2013~~May 3, 2014 and for all periods presented. The Condensed Consolidated Balance Sheet as of ~~February 1, 2014~~January 31, 2015 has been derived from our audited financial statements.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these interim financial statements. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2014~~January 31, 2015.

The results of operations for the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January ~~31, 2015~~30, 2016.

Note 2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued an accounting standards update ("ASU") No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. This ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently assessing the potential impact of this ASU on our Condensed Consolidated Financial Statements.

~~Note 3. Goodwill and Other Intangible Assets~~

~~Goodwill and intangible assets consist of the following and are included in other long-term assets in the Condensed Consolidated Balance Sheets:~~

($ in millions) November 1,
2014 February 1,
2014 November 2,
2013
Goodwill $ 180
$ 180
$ 177
Trade names $ 92
$ 92
$ 92
Other indefinite-lived intangible assets $ 6
$ 6
$ 6
Intangible assets subject to amortization $ 18
$ 18
$ 18
Less: Accumulated amortization (17 ) (17 ) (17 )
Intangible assets subject to amortization, net $ 1
$ 1
$ 1

~~Goodwill~~

~~During the~~ ~~thirteen and thirty-nine weeks endedNovember 1, 2014~~ ~~and~~ ~~November 2, 2013, there were~~ no ~~changes to the~~ ~~$99 million~~ ~~carrying amount of goodwill related to Athleta.~~

~~The carrying amount of goodwill related to Intermix decreased by $7 million to $78 million during the thirty-nine weeks ended~~ ~~November 2, 2013~~ ~~and was further adjusted to $81 million as of~~ ~~February 1, 2014. These changes were due to an adjustment of the initial fair values, which were preliminary and subject to adjustments as of December 31, 2012, the date of acquisition. As of~~ ~~February 1, 2014, the purchase price allocation for Intermix was complete. During the~~ ~~thirteen and thirty-nine weeks endedNovember 1, 2014, there were no changes to the $81 million carrying amount of goodwill related to Intermix.~~

~~Other Intangible Assets~~

~~Trade names consist of $54 million and $38 million related to Athleta and Intermix, respectively, as of~~ ~~November 1, 2014, February 1, 2014, and~~ ~~November 2, 2013~~.

~~The intangible assets subject to amortization consist of customer relationships and non-compete agreements related to Athleta and Intermix of~~ ~~$15 million~~ ~~and~~ ~~$3 million~~, respectively. Athleta's intangible assets subject to amortization were fully amortized by the end of fiscal 2012. Intermix's non-compete agreements were fully amortized by the end of fiscal 2013 and its customer relationships are being amortized over a period of ~~four~~ ~~years.~~

There was no material amortization expense for intangible assets subject to amortization recorded in operating expenses in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended ~~November 1, 2014~~ ~~and November 2, 2013.~~

Note 4.3. Debt and Credit Facilities


($ in millions)	November 1, 2014			February 1, 2014			November 2, 2013		May 2, 2015			January 31, 2015			May 3, 2014
Notes	$	1,247		$	1,247		$	1,247	$	1,247		$	1,247		$	1,247
Japan Term Loan	133			147			—		105			106			146
Total long-term debt	1,380			1,394			1,247		1,352			1,353			1,393
Less: Current portion	(22		)	(25		)	—		(21		)	(21		)	(24		)
Total long-term debt, less current portion	$	1,358		$	1,369		$	1,247	$	1,331		$	1,332		$	1,369

As of ~~November 1, 2014~~May 2, 2015, ~~February 1, 2014~~January 31, 2015, and ~~November 2, 2013~~May 3, 2014, the estimated fair value of our $1.25 billion aggregate principal amount of 5.95 percent notes (the "Notes”) due April 2021 was $~~1.41~~1.43 billion, $~~1.39~~1.44 billion, and $~~1.38~~1.42 billion, respectively, and was based on the quoted market price of the Notes (level 1 inputs) as of the last business day of the respective fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt in the Condensed Consolidated Balance Sheets, net of the unamortized discount.

As of ~~November 1, 2014~~May 2, 2015, January 31, 2015, and ~~February 1,~~May 3, 2014, the carrying amount of our 15 billion Japanese yen, (~~$133 million~~ ~~as of~~ ~~November 1, 2014~~), four-year, unsecured term loan ("Japan Term Loan") approximated its fair value, as the interest rate varies depending on quoted market rates (level 1 inputs). Repayments of 2.5 billion Japanese yen ($2221 million as of ~~November 1, 2014~~May 2, 2015) are payable on January 15 of each year, ~~commencing~~and commenced on January 15, 2015, with a final repayment of 7.5 billion Japanese yen ($6762 million as of ~~November 1, 2014~~May 2, 2015) due on January 15, 2018. Interest is payable at least quarterly based on an interest rate equal to the Tokyo Interbank Offered Rate ("TIBOR") plus a fixed margin.

We have a $500 million, five-year, unsecured revolving credit facility (the “Facility”), which ~~is scheduled~~was set to expire in May ~~2018~~.2018. On May 20, 2015, the Facility was amended under substantially similar terms to extend the expiration date to May 2020 and improve the pricing structure. There were no borrowings and no material outstanding standby letters of credit under the Facility as of ~~November 1, 2014.~~May 2, 2015.

We maintain multiple agreements towith third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). ~~They~~These Foreign Facilities are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The total capacity of the Foreign Facilities was ~~$51~~$50 million as of ~~November 1, 2014~~May 2, 2015. As of ~~November 1, 2014,~~May 2, 2015, there were no borrowings under the Foreign Facilities. There were $1012 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of ~~November 1, 2014~~May 2, 2015.

We have a bilateral unsecured standby letter of credit ~~agreement~~agreements that isare uncommitted and ~~does~~do not have an expiration date. As of ~~November 1, 2014~~May 2, 2015, we had $2321 million in standby letters of credit issued under ~~this agreement.~~these agreements. We also have a $50 million, two-year, unsecured committed letter of credit agreement, which ~~is set to expire~~expires in September 2016. We had no trade letters of credit issued under this letter of credit agreement as of ~~November 1, 2014~~May 2, 2015.

Note 5.4. Fair Value Measurements

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 or ~~November 2, 2013~~May 3, 2014. There were no transfers of financial assets or liabilities into or out of level 1 and level 2 during the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 or ~~November 2, 2013~~May 3, 2014.

Financial Assets and Liabilities

Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
($ in millions)	November 1, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		May 2, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	241	$	29	$	212	$	—	$	201	$	72	$	129	$	—
Derivative financial instruments	98		—		98		—		118		—		118		—
Deferred compensation plan assets	40		40		—		—		45		45		—		—
Total	$	379	$	69	$	310	$	—	$	364	$	117	$	247	$	—
Liabilities:
Derivative financial instruments	$	2	$	—	$	2	$	—	$	13	$	—	$	13	$	—
			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
($ in millions)	February 1, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		January 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	519	$	196	$	323	$	—	$	429	$	88	$	341	$	—
Derivative financial instruments	64		—		64		—		157		—		157		—
Deferred compensation plan assets	37		37		—		—		40		40		—		—
Total	$	620	$	233	$	387	$	—	$	626	$	128	$	498	$	—
Liabilities:
Derivative financial instruments	$	15	$	—	$	15	$	—	$	1	$	—	$	1	$	—
			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
($ in millions)	November 2, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		May 3, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	307	$	126	$	181	$	—	$	452	$	147	$	305	$	—
Derivative financial instruments	47		—		47		—		44		—		44		—
Deferred compensation plan assets	37		37		—		—		42		42		—		—
Total	$	391	$	163	$	228	$	—	$	538	$	189	$	349	$	—
Liabilities:
Derivative financial instruments	$	11	$	—	$	11	$	—	$	22	$	—	$	22	$	—

We have highly liquid investments classified as cash equivalents, which are placed primarily in money market funds, time deposits, and commercial paper. These investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. We value these investments at their original purchase prices plus interest that has accrued at the stated rate.

Derivative financial instruments primarily include foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are British pounds, Canadian dollars, Euro, and Japanese yen. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. Derivative financial instruments in an asset position are recorded in other current assets or other long-term assets in the Condensed Consolidated Balance Sheets. Derivative financial instruments in a liability position are recorded in accrued expenses and other current liabilities or lease incentives and other long-term liabilities in the Condensed Consolidated Balance Sheets.

We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees to defer compensation up to a maximum amount. Plan investments are recorded at market value and are designated for the DCP. The fair value of the Company’s DCP assets is determined based on quoted market prices, and the assets are recorded in other long-term assets in the Condensed Consolidated Balance Sheets.

Nonfinancial Assets

We review the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.

There were no material impairment charges recorded for goodwill, other indefinite-lived intangible assets, or other long-lived assets for the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 or ~~November 2, 2013~~May 3, 2014.

Note 6.5. Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Consistent with our risk management guidelines, we hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. These contracts are entered into with large, reputable financial institutions that are monitored for counterparty risk. The principal currencies hedged against changes in the U.S. dollar are British pounds, Canadian dollars, Euro, and Japanese yen. We do not enter into derivative financial contracts for trading purposes. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

Cash Flow Hedges

We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated ~~primarily~~ in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies of British pounds and Euro. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and intercompany revenue transactions generally have terms of up to 24 months.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 or ~~November 2, 2013~~May 3, 2014 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash flow hedges because the forecasted transactions were no longer probable.

Net Investment Hedges

We also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries.

Other Derivatives Not Designated as Hedging Instruments

We ~~use~~enter into foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses in the Condensed Consolidated Statements of Income in the same period and generally offset. ~~We generally enter into foreign exchange forward contracts as needed to hedge intercompany balances that bear foreign exchange risk.~~

Outstanding Notional Amounts

We had foreign exchange forward contracts outstanding in the following notional amounts:


(notional amounts in millions)	November 1, 2014		February 1, 2014		November 2, 2013		May 2, 2015		January 31, 2015		May 3, 2014
U.S. dollars (1)	$	1,615	$	1,309	$	1,468	$	1,977	$	1,395	$	1,583
Canadian dollars	C$	14	C$	8	C$	8	C$	40	C$	14	C$	8
Euro	€	1	€	25	€	25	€	3	€	1	€	26
Japanese yen	¥	—	¥	—	¥	30,000

__________


(1)	The principal currencies hedged against changes in the U.S. dollar were British pounds, Canadian dollars, Euro, and Japanese yen.

~~Contingent Features~~

~~We had~~ no ~~derivative financial instruments with credit-risk-related contingent features underlying the agreements as of~~ ~~November 1, 2014~~, ~~February 1, 2014, or~~ ~~November 2, 2013~~.

Quantitative Disclosures about Derivative Financial Instruments

The fair values of foreign exchange forward contracts are as follows:


($ in millions)	November 1, 2014		February 1, 2014		November 2, 2013		May 2, 2015		January 31, 2015		May 3, 2014
Derivatives designated as cash flow hedges:
Other current assets	$	59	$	48	$	27	$	89	$	115	$	37
Other long-term assets	$	23	$	6	$	7	$	19	$	23	$	4
Accrued expenses and other current liabilities	$	1	$	13	$	8	$	3	$	—	$	16
Lease incentives and other long-term liabilities	$	—	$	1	$	2	$	8	$	—	$	4

Derivatives designated as net investment hedges:
Other current assets	$	—	$	1	$	4	$	—	$	1	$	—
Other long-term assets	$	—	$	—	$	—	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	—	$	—	$	—	$	—	$	—	$	—
Lease incentives and other long-term liabilities	$	—	$	—	$	—	$	—	$	—	$	—

Derivatives not designated as hedging instruments:
Other current assets	$	16	$	9	$	9	$	10	$	18	$	3
Other long-term assets	$	—	$	—	$	—	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	1	$	1	$	1	$	2	$	1	$	2
Lease incentives and other long-term liabilities	$	—	$	—	$	—	$	—	$	—	$	—

Total derivatives in an asset position	$	98	$	64	$	47	$	118	$	157	$	44
Total derivatives in a liability position	$	2	$	15	$	11	$	13	$	1	$	22

~~Substantially all~~The majority of the unrealized gains and losses from designated cash flow hedges as of ~~November 1, 2014~~May 2, 2015 will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of ~~November 1, 2014~~May 2, 2015 shown above.

Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments in the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are $211 million, $1 million, and $21 million as of ~~November 1, 2014~~May 2, 2015, ~~February 1, 2014~~January 31, 2015, and ~~November 2, 2013~~May 3, 2014, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $96107 million, $63156 million, and $4543 million and the net amounts of the derivative financial instruments in a liability position would be ~~zero~~$2 million, ~~$14 million~~zero, and $921 million as of ~~November 1, 2014~~May 2, 2015, ~~February 1, 2014~~January 31, 2015, and ~~November 2, 2013~~May 3, 2014, respectively.

See Note 54 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.

The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:


	13 Weeks Ended					39 Weeks Ended				13 Weeks Ended
($ in millions)	November 1, 2014		November 2, 2013			November 1, 2014		November 2, 2013		May 2, 2015			May 3, 2014
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	86	$	(12	)	$	75	$	44
Loss recognized in other comprehensive income										$	(14	)	$	(15	)
Gain reclassified into cost of goods sold and occupancy expenses	$	16	$	17		$	26	$	43	$	28		$	7
Gain reclassified into operating expenses	$	2	$	3		$	4	$	7	$	2		$	1

Derivatives in net investment hedging relationships:
Gain recognized in other comprehensive income	$	2	$	3		$	2	$	2
Loss recognized in other comprehensive income										$	(1	)	$	(1	)

For the thirteen ~~and thirty-nine~~ weeks ended ~~November 1, 2014~~May 2, 2015 and ~~November 2, 2013~~May 3, 2014, there were no amounts of gain or loss reclassified from accumulated other comprehensive income into net income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.

~~Gains and~~There were no material gains or losses on foreign exchange forward contracts not designated as hedging instruments that were recorded in operating expenses in the Condensed Consolidated Statements of Income, on a pre-tax basis ~~are as follows:~~

13 Weeks Ended 39 Weeks Ended
($ in millions) November 1,
2014 November 2,
2013 November 1,
2014 November 2,
2013
Gain (loss) recognized in operating expenses $ 8
$ (2 ) $ 6
$ 1
for the thirteen weeks ended May 2, 2015 and May 3, 2014.

Note 7.6. Share Repurchases

Share repurchase activity is as follows:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended
($ and shares in millions except average per share cost)	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013		May 2, 2015		May 3, 2014
Number of shares repurchased	11.4		20.4		26.0		22.7		5.6		5.6
Total cost	$	433	$	790	$	1,016	$	875	$	230	$	219
Average per share cost including commissions	$	37.95	$	38.77	$	39.15	$	38.49	$	41.01	$	39.25

~~Between January 2013 and~~In November 2013, we announced that the Board of Directors authorized a total of ~~$2.0~~$1.0 billion for share repurchases, all of which was completed by the end of October 2014. In October 2014, we announced that the Board of Directors approved a ~~new~~ $500 million share repurchase authorization, of which ~~$450~~$72 million was remaining as of ~~November 1, 2014.~~May 2, 2015. In February 2015, we announced that the Board of Directors approved a new $1.0 billion share repurchase authorization, of which the full amount was remaining as of May 2, 2015.

All ~~of the share repurchases were paid for as of November 1, 2014~~except $13 million, $15 million and ~~November 2, 2013. All except $30~~$19 million of total share repurchases were paid for as of ~~February 1, 2014.~~

~~As of March 1,~~May 2, 2015, January 31, 2015 and May 3, 2014, the Company retired all existing treasury stock. Upon retirement, the treasury stock balance as of March 1, 2014 was reduced for the amount originally recorded for the shares repurchased. Common stock was also reduced, at par, for the shares repurchased, and the remaining balance was allocated between additional paid-in capital and retained earnings.respectively. All common stock repurchased ~~subsequent to March 1, 2014~~ is immediately ~~retired and all shares related to stock options and other stock awards are issued from authorized but unissued common stock.~~retired.

Note 8.7. Share-Based Compensation

Share-based compensation expense recognized in the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows:


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Stock units	$	18		$	21		$	64		$	72		$	18		$	22
Stock options	3			3			8			10			3			2
Employee stock purchase plan	2			2			4			4			1			1
Share-based compensation expense	23			26			76			86			22			25
Less: Income tax benefit	(8		)	(10		)	(29		)	(33		)	(8		)	(10		)
Share-based compensation expense, net of tax	$	15		$	16		$	47		$	53		$	14		$	15

119

Note 9.8. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income by component, net of tax, are as follows:


($ in millions)	Foreign Currency Translation			Cash Flow Hedges			Total			Foreign Currency Translation		Cash Flow Hedges			Total
Balance at January 31, 2015										$	60	$	105		$	165
Foreign currency translation										6		—			6
Change in fair value of derivative financial instruments										—		(10		)	(10		)
Amounts reclassified from accumulated other comprehensive income										—		(21		)	(21		)
Other comprehensive income (loss), net										6		(31		)	(25		)
Balance at May 2, 2015										$	66	$	74		$	140

($ in millions)										Foreign Currency Translation		Cash Flow Hedges			Total
Balance at February 1, 2014	$	107		$	28		$	135		$	107	$	28		$	135
13 Weeks Ended May 3, 2014:
Foreign currency translation	11			—			11			11		—			11
Change in fair value of derivative financial instruments	—			(11		)	(11		)	—		(11		)	(11		)
Amounts reclassified from accumulated other comprehensive income	—			(5		)	(5		)	—		(5		)	(5		)
Other comprehensive income (loss), net	11			(16		)	(5		)	11		(16		)	(5		)
Balance at May 3, 2014	118			12			130			$	118	$	12		$	130
13 Weeks Ended August 2, 2014:
Foreign currency translation	(2		)	—			(2		)
Change in fair value of derivative financial instruments	—			3			3
Amounts reclassified from accumulated other comprehensive income	—			(2		)	(2		)
Other comprehensive income (loss), net	(2		)	1			(1		)
Balance at August 2, 2014	116			13			129
13 Weeks Ended November 1, 2014:
Foreign currency translation	(22		)	—			(22		)
Change in fair value of derivative financial instruments	—			59			59
Amounts reclassified from accumulated other comprehensive income	—			(12		)	(12		)
Other comprehensive income (loss), net	(22		)	47			25
Balance at November 1, 2014	$	94		$	60		$	154

($ in millions)	Foreign Currency Translation			Cash Flow Hedges			Total
Balance at February 2, 2013	$	158		$	23		$	181
13 Weeks Ended May 4, 2013:
Foreign currency translation	(28		)	—			(28		)
Change in fair value of derivative financial instruments	—			22			22
Amounts reclassified from accumulated other comprehensive income	—			(8		)	(8		)
Other comprehensive income (loss), net	(28		)	14			(14		)
Balance at May 4, 2013	130			37			167
13 Weeks Ended August 3, 2013:
Foreign currency translation	(13		)	—			(13		)
Change in fair value of derivative financial instruments	—			12			12
Amounts reclassified from accumulated other comprehensive income	—			(10		)	(10		)
Other comprehensive income (loss), net	(13		)	2			(11		)
Balance at August 3, 2013	117			39			156
13 Weeks Ended November 2, 2013:
Foreign currency translation	9			—			9
Change in fair value of derivative financial instruments	—			(7		)	(7		)
Amounts reclassified from accumulated other comprehensive income	—			(13		)	(13		)
Other comprehensive income (loss), net	9			(20		)	(11		)
Balance at November 2, 2013	$	126		$	19		$	145

See Note 65 of Notes to Condensed Consolidated Financial Statements for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Condensed Consolidated Statements of Income.

Note ~~10.~~9. Income Taxes

Effective February 2, 2014, we adopted ASU No. 2013-11, Income Taxes, which clarifies the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This adoption did not have a material impact on our Condensed Consolidated Financial Statements.

The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, China, Hong Kong, Japan, India, and the United Kingdom. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we are also no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2008.

The Company ~~has~~engages in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions in the normal course of business. As of ~~November 1, 2014~~May 2, 2015, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of ~~approximately $18~~up to $5 million, primarily due to the potential settlement of outstanding tax matters and the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statement of Income would not be material.

~~In connection with a review of~~During the ~~Company’s cash position and anticipated cash needs for business operations, the Company made a non-recurring distribution of earnings from certain of its foreign subsidiaries during the~~ thirteen weeks endedMay 2, 2015~~November 1, 2014~~. This distribution resulted in a net tax benefit of approximately $34 million because the estimated foreign tax credits associated with the distribution were greater than the estimated tax due on the distribution of the foreign earnings.

~~During the thirty-nine weeks ended November 2, 2013,~~, we recognized an interest expense reversal of ~~$18~~approximately $14 million primarily as a result of a favorable foreign tax ruling and actions of foreign tax authorities related to transfer pricing matters. We reduced our unrecognized tax benefits for this matter by $31 million, and there was no impact on the ~~favorable resolution~~tax provision due to the offsetting decrease for the U.S. indirect effect of these unrecognized tax ~~matters.~~benefits.

Note ~~11.~~10. Earnings Per Share

Weighted-average number of shares used for earnings per share is as follows:


	13 Weeks Ended		39 Weeks Ended		13 Weeks Ended
(shares in millions)	November 1, 2014	November 2, 2013	November 1, 2014	November 2, 2013	May 2, 2015	May 3, 2014
Weighted-average number of shares - basic	432	463	439	465	421	445
Common stock equivalents	5	5	5	6	3	6
Weighted-average number of shares - diluted	437	468	444	471	424	451

The above computations of weighted-average number of shares – diluted exclude 2 ~~million~~ ~~and 1 million shares related to stock options and other stock awards for the~~ ~~thirteen weeks endedNovember 1, 2014~~ ~~and November 2, 2013, respectively, and 1~~ million shares related to stock options and other stock awards for each of the ~~thirty-nine~~thirteen weeks ended ~~November 1,~~May 2, 2015 and May 3, 2014 ~~and November 2, 2013,~~ as their inclusion would have an anti-dilutive effect on earnings per share.

Note ~~12.~~11. Commitments and Contingencies

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated, and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our Condensed Consolidated Financial Statements taken as a whole.

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. As of ~~November 1, 2014~~May 2, 2015, Actions filed against us included commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. 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. As of ~~November 1, 2014~~May 2, 2015, ~~February 1, 2014~~January 31, 2015, and ~~November 2, 2013~~May 3, 2014, we recorded a liability for an estimated loss if the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable. The liability recorded as of ~~November 1, 2014~~May 2, 2015, ~~February 1, 2014~~January 31, 2015, and ~~November 2, 2013~~May 3, 2014 was not material for any individual Action or in total. Subsequent to ~~November 1, 2014~~May 2, 2015 and through the filing date of this Quarterly Report on Form 10-Q, no information has become available that indicates a change is required that would be material to our Condensed Consolidated Financial Statements taken as a whole.

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact income 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 effect on our Condensed Consolidated Financial Statements taken as a whole.

Note ~~13.~~12. Segment Information

The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, ~~Piperlime,~~ Athleta, and Intermix brands. We identify our operating segments according to how our business activities are managed and evaluated. ~~Our~~As of May 2, 2015, our operating segments ~~include~~included Gap Global, Old Navy Global, Banana Republic Global, ~~and Growth, Innovation, and Digital (“GID”). GID manages our newer brands, Piperlime,~~ Athleta, and Intermix. The operating results for the thirteen weeks ended May 2, 2015 and May 3, 2014 also includes Piperlime, which was discontinued as of April 30, 2015. We ~~believe~~have determined that each of our operating segments share similar economic and other qualitative characteristics, and ~~aggregate~~therefore the results of our operating segments are aggregated into one reportable ~~segment.~~segment as of May 2, 2015.

Net sales by brand and region are as follows:


($ in millions)	Gap Global				Old Navy Global			Banana Republic Global				Other (2)				Total			Percentage of Net Sales		Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
13 Weeks Ended November 1, 2014																Total			Percentage of Net Sales		Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
13 Weeks Ended May 2, 2015																					Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
U.S. (1)	Gap Global			$	Old Navy Global	907		Banana Republic Global			$	Other (2)	1,390			$	581		$	152	Gap Global				Old Navy Global			$	Banana Republic Global			3,030	Other (2)			Total				Percentage of Net Sales		76	%
Canada	105				129			63				1				298			8		69				102				52				1			224				6
Europe	198				—			22				—				220			6		164				—				17				—			181				5
Asia	296				39			33				—				368			9		285				43				27				—			355				10
Other regions	49				—			7				—				56			1		55				4				10				—			69				2
Total	$	1,555			$	1,558		$	706			$	153			$	3,972		100	%	$	1,308			$	1,552			$	621			$	176		$	3,657			100	%
Sales growth (decline)	(3		)%		3		%	1		%		(2		)%		—		%			(9		)%		5		%		(7		)%		(4		)%	(3		)%

($ in millions)	Gap Global				Old Navy Global			Banana Republic Global				Other (2)				Total			Percentage of Net Sales		Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
13 Weeks Ended November 2, 2013																Total			Percentage of Net Sales		Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
U.S. (1)	Gap Global			$	Old Navy Global	960		Banana Republic Global			$	Other (2)	1,371			$	572		$	155		$	3,058			77	%
Canada	111				126			60				1				298			7
Europe	199				—			21				—				220			6
Asia	282				20			37				—				339			8
Other regions	53				—			8				—				61			2
Total	$	1,605			$	1,517		$	698			$	156			$	3,976		100	%
Sales growth	3		%		—		%	—		%		75		%		3		%

($ in millions)	Gap Global				Old Navy Global			Banana Republic Global				Other (2)				Total			Percentage of Net Sales
39 Weeks Ended November 1, 2014
13 Weeks Ended May 3, 2014																					Gap Global				Old Navy Global				Banana Republic Global				Other (2)			Total				Percentage of Net Sales
U.S. (1)	Gap Global			$	Old Navy Global	2,585		Banana Republic Global			$	Other (2)			4,202	Total			Percentage of Net Sales		Gap Global			$	Old Navy Global			1,705	Banana Republic Global				Other (2)			Total			$	Percentage of Net Sales		519		$	9,011	77	%
Canada	280				357			174				3				814			7		80				101				53				1			235				6
Europe	605				—			71				—				676			6		201				—				23				—			224				6
Asia	856				102			107				—				1,065			9		286				28				37				—			351				10
Other regions	139				—			22				—				161			1		46				—				8				—			54				1
Total	$	4,465			$	4,661		$	2,079			$	522			$	11,727		100	%	$	1,441			$	1,481			$	669			$	183		$	3,774			100	%
Sales growth (decline)	(2		)%		3		%	2		%		10		%		1		%			(2		)%		2		%		2		%		24		%	1		%

($ in millions)	Gap Global				Old Navy Global			Banana Republic Global				Other (2)				Total			Percentage of Net Sales
39 Weeks Ended November 2, 2013
U.S. (1)	Gap Global			$	Old Navy Global	2,750		Banana Republic Global			$	Other (2)			4,121	Total			Percentage of Net Sales		$	1,682			$	472			$	9,025			78	%
Canada	293				346			167				3				809			7
Europe	567				—			61				—				628			5
Asia	802				49			112				—				963			9
Other regions	128				—			20				—				148			1
Total	$	4,540			$	4,516		$	2,042			$	475			$	11,573		100	%
Sales growth	4		%		5		%	2		%		71		%		6		%

__________


(1)	U.S. includes the United States, Puerto Rico, and Guam.


(2)	Includes Piperlime, Athleta, and Intermix.

Online ~~and franchise~~ sales are reflected within the respective results of each brand and region in the net sales above.

Total online sales were $~~621~~563 million and $~~589~~575 million for the thirteen weeks ended ~~November 1, 2014~~May 2, 2015 and ~~November 2, 2013~~May 3, 2014, ~~respectively. Total online sales were $1.7 billion and $1.6 billion for the thirty-nine weeks ended November 1, 2014 and November 2, 2013, respectively.~~

~~Total franchise sales were $101 million and $105 million for the~~ ~~thirteen weeks endedNovember 1, 2014~~ ~~and~~ ~~November 2, 2013, respectively. Total franchise sales were $291 million and $267 million for the thirty-nine weeks ended November 1, 2014 and November 2, 2013,~~ respectively.

Net sales by region are ~~recorded~~allocated based on the location in which the sale was originated. ~~Store sales are recorded~~This is determined based on the location of the store where the customer paid for and ~~online sales are recorded based on~~received the ~~location of~~merchandise or the distribution center or store from ~~where~~which the products were shipped.

1612


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.

OUR BUSINESS

We are a global retailer offering apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, Banana Republic, ~~Piperlime,~~ Athleta, and Intermix brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, and beginning in March 2014, Taiwan. We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, ~~Eastern~~ Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. ~~In addition, our~~Our products are also available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. In addition to operating in the specialty, outlet, online, and franchise channels, we also use our omni-channel capabilities to bridge the digital world and physical stores to further enhance our shopping experience for our customers. Our omni-channel services include order-in-store, reserve-in-store, find-in-store, and ship-from-store. Most of the products sold under our brand names are designed by us and manufactured by independent sources. We also sell products that are designed and manufactured by branded third parties, ~~especially~~primarily at our ~~Piperlime and~~ Intermix ~~brands.~~brand.

OVERVIEW

Financial ~~highlights~~results for the ~~third~~first quarter of fiscal ~~2014~~2015 are as follows:

Net sales ~~were flat at~~ ~~$4.0 billion~~for ~~each of~~ the ~~third~~first quarter of fiscal ~~2014~~ ~~and 2013.~~2015 decreased 3 percent compared with the first quarter of fiscal 2014. Excluding the impact of foreign exchange, our net sales ~~increased~~decreased 1 percent for the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014. See Net Sales discussion for impact of foreign exchange.

Comparable sales for the ~~third~~first quarter of fiscal ~~2014~~2015~~, which include the associated comparable online sales,~~ decreased 24 percent compared with a 1 percent ~~increase~~decrease for the ~~third~~first quarter of fiscal ~~2013~~2014.

Gross profit ~~was~~ ~~$1.6 billion~~for ~~each of~~ the ~~third~~first quarter of fiscal ~~2014 and 2013.~~2015 was $1.4 billion compared with $1.5 billion for the first quarter of fiscal 2014. Gross margin for the ~~third~~first quarter of fiscal ~~2014~~2015 was ~~40.2~~37.8 percent compared with ~~40.0~~38.8 percent for ~~third~~the first quarter of fiscal ~~2013.~~2014.

Operating margin for the ~~third~~first quarter of fiscal ~~2014~~2015 was ~~13.9~~10.6 percent compared with ~~14.5~~11.7 percent for the ~~third~~first quarter of fiscal ~~2013~~2014.

Net income for the ~~third~~first quarter of fiscal ~~2014~~2015 was $~~351~~239 million compared with $~~337~~260 million for the ~~third~~first quarter of fiscal ~~2013~~2014, and diluted earnings per share was $~~0.80~~0.56 for the ~~third~~first quarter of fiscal ~~2014~~2015 compared with $~~0.72~~0.58 for the ~~third~~first quarter of fiscal ~~2013~~2014.

During the first ~~three quarters~~quarter of fiscal ~~2014,~~2015, we ~~generated free cash flow of~~ ~~$606~~distributed $329 million ~~compared with free cash flow of~~ ~~$466 million~~ ~~during the first three quarters of fiscal 2013. Free cash flow is defined as net cash provided by operating activities less purchases of property~~ to shareholders through share repurchases and ~~equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure, see Liquidity and Capital Resources section.~~

dividends.

Our full year business ~~and financial~~ priorities for fiscal ~~2014~~2015 remain as follows:

~~grow sales~~creating product with ~~healthy merchandise margins;~~more consistent product acceptance by our customers;

~~manage~~evolving our ~~expenses in a disciplined manner;~~customer experience to better reflect the intersection of digital and physical;

~~deliver earnings per share growth;~~attracting, retaining, and

~~return excess cash to shareholders.~~

~~In addition to increasing sales within our existing business, our goal is to grow revenues through our newer brands, channels,~~ developing great talent; and ~~geographies, including the following:~~

growing globally across our brands and channels.

For fiscal 2015, we expect to continue our investment in digital capabilities and to further enhance our shopping experience for our customers. We also plan to continue our global ~~online sales, driven by continued investments in our omni-channel capabilities;~~

growth, including opening additional stores in Asia with a focus on Gap China, Old Navy China, and Old Navy ~~Japan;~~

~~expanding our global outlet presence;~~

~~opening~~Japan. In addition, we also expect to open additional Athleta ~~stores;~~stores in the United States. Turning around Gap brand remains a top priority as we focus on reestablishing the brand product aesthetic while concurrently reviewing the store fleet for opportunities to optimize and

~~continuing to expand our franchise presence worldwide.~~ improve productivity.

In fiscal ~~2014,~~2015, we expect that foreign exchange rate fluctuations will continue to have a meaningful negative impact on ~~the~~our results, ofparticularly in our largest foreign subsidiaries in Canada and Japan. With the depreciation of the Canadian dollar, ~~and~~ Japanese yen, and other foreign currencies, we expect net sales ~~in Canadian dollars and Japanese yen~~ translated into U.S. dollars will decrease and negatively impact our total Company net sales growth. In addition, we expect gross margins for our ~~largest~~ foreign subsidiaries to be negatively impacted as our merchandise purchases are primarily in U.S. dollars. We expect this negative impact of foreign exchange rate fluctuations to be partially offset by the favorable impact of translation of expenses in foreign currencies into U.S. dollars. In addition to the impact of the foreign exchange rate fluctuations, we also expect that delayed merchandise receipts at the U.S. West Coast ports during the first half of fiscal 2015 will have a meaningful negative impact on our fiscal 2015 operating results.

1713

RESULTS OF OPERATIONS

Net Sales

~~Net sales primarily consist of retail sales from stores and online, and franchise revenues.~~

See ~~Item 1, Financial Statements,~~ Note 1312 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q, for net sales by brand and region.

Comparable Sales

The percentage change in comparable ("Comp") sales by global brand and for total Company, ~~including the associated comparable online sales,~~ as compared with the preceding year, is as follows:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended
	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013		May 2, 2015		May 3, 2014
Gap Global	(5	)%	1	%	(5	)%	3	%	(10	)%	(5	)%
Old Navy Global	1	%	—	%	2	%	3	%	3	%	1	%
Banana Republic Global	—	%	(1	)%	—	%	(1	)%	(8	)%	(1	)%
The Gap, Inc.	(2	)%	1	%	(1	)%	3	%	(4	)%	(1	)%

Comparable online sales favorably impacted total Company Comp sales by ~~2 percent and 4 percent in the~~ ~~third quarter of fiscal 2014~~ ~~and 2013, respectively. Comparable online sales favorably impacted total Company Comp sales by 2~~1 percent and 3 percent in the first ~~three quarters~~quarter of fiscal ~~2014~~2015 and ~~2013,~~2014, respectively.

Only Company-operated stores are included in the calculations of Comp sales. ~~Gap and Banana Republic outlet and factory store Comp sales are reflected within the respective results of each global brand.~~ The calculation of total Company Comp sales includes the results of Athleta ~~stores~~ and ~~online,~~ Intermix ~~stores and online, and the Piperlime store,~~ but excludes the results of our franchise ~~business and Piperlime online.~~business.

A store is included in the Comp sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp sales calculations until the first day they have comparable prior year sales.

A store is considered non-comparable (“Non-comp”) when it has been open and operated by the Company for less than one ~~calendar~~ year or has changed its selling square footage by 15 percent or more within the past year.

A store is considered “Closed” if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.

Online Comp sales are defined as sales through online channels in ~~all~~those countries where we have existing Comp store sales.

Current year foreign exchange rates are applied to both current year and prior year Comp sales to achieve a consistent basis for comparison.

Store Count and Square Footage Information

Net sales per average square foot is as follows:

13 Weeks Ended 39 Weeks Ended
November 1,
2014 November 2,
2013 November 1,
2014 November 2,
2013
Net sales per average square foot (1) $ 86
$ 89
260
$ 264



	13 Weeks Ended
	May 2, 2015		May 3, 2014
Net sales per average square foot (1)	$	78	$	83

__________


(1)	Excludes net sales associated with our online and franchise businesses.

1814

Store count, openings, closings, and square footage for our stores are as follows:


	February 1, 2014	39 Weeks Ended November 1, 2014		November 1, 2014				January 31, 2015	13 Weeks Ended May 2, 2015		May 2, 2015
	Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)		Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)
Gap North America	968	32	23	977		10.2		960	10	7	963		10.1
Gap Asia	228	24	3	249		2.5		266	15	—	281		2.8
Gap Europe	193	—	4	189		1.6		189	1	2	188		1.6
Old Navy North America	1,004	27	16	1,015		17.3		1,013	4	7	1,010		17.1
Old Navy Asia	18	18	—	36		0.5		43	7	—	50		0.8
Banana Republic North America	596	25	11	610		5.1		610	6	4	612		5.1
Banana Republic Asia	43	4	2	45		0.2		44	2	—	46		0.2
Banana Republic Europe	11	—	—	11		0.1		11	—	—	11		0.1
Athleta North America	65	28	1	92		0.4		101	4	—	105		0.4
Intermix North America								42	1	—	43		0.1
Piperlime North America	1	—	—	1		—		1	—	1	—		—
Intermix North America	37	4	—	41		0.1
Company-operated stores total	3,164	162	60	3,266		38.0		3,280	50	21	3,309		38.3
Franchise	375	51	12	414		N/A		429	14	3	440		N/A
Total	3,539	213	72	3,680		38.0		3,709	64	24	3,749		38.3
Increase over prior year				4.7	%	2.2	%				5.2	%	3.0	%

	February 2, 2013	39 Weeks Ended November 2, 2013		November 2, 2013				February 1, 2014	13 Weeks Ended May 3, 2014		May 3, 2014
	Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)		Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)
Gap North America	990	26	38	978		10.2		968	3	5	966		10.1
Gap Asia	191	31	2	220		2.2		228	4	1	231		2.3
Gap Europe	198	3	7	194		1.7		193	—	3	190		1.6
Old Navy North America	1,010	19	22	1,007		17.3		1,004	7	6	1,005		17.2
Old Navy Asia	1	13	—	14		0.2		18	5	—	23		0.3
Banana Republic North America	590	12	6	596		5.0		596	3	1	598		5.0
Banana Republic Asia	38	6	1	43		0.2		43	3	—	46		0.2
Banana Republic Europe	10	1	—	11		0.1		11	—	—	11		0.1
Athleta North America	35	26	—	61		0.2		65	6	—	71		0.3
Intermix North America								37	—	—	37		0.1
Piperlime North America	1	—	—	1		—		1	—	—	1		—
Intermix North America	31	5	1	35		0.1
Company-operated stores total	3,095	142	77	3,160		37.2		3,164	31	16	3,179		37.2
Franchise	312	46	3	355		N/A		375	15	4	386		N/A
Total	3,407	188	80	3,515		37.2		3,539	46	20	3,565		37.2
Increase over prior year				5.3	%	0.8	%				4.0	%	0.5	%

Gap and Banana Republic outlet and factory stores are reflected in each of the respective brands.

In ~~fiscal 2014, we expect net openings of about 115 Company-operated store locations. We expect square footage for Company-operated stores to increase about 2.5 percent at the end of~~ ~~fiscal 2014. We expect our franchisees to open about 65 franchise stores in~~ ~~fiscal 2014~~.

Net Sales

Our net sales for the ~~third~~first quarter of fiscal 2015 decreased $117 million, or 3 percent, compared with the first quarter of fiscal 2014 ~~decreased $4 million compared with the~~ ~~third quarter of fiscal 2013~~primarily due to ~~a decrease in net sales at Gap and~~ the unfavorable impact of foreign exchange of ~~$31 million;~~$88 million and a decrease in net sales primarily at Gap and Banana Republic; partially offset by an increase in net sales at Old Navy. The unfavorable impact of foreign exchange was primarily due to the weakening of the Japanese yen and Canadian dollar ~~and Japanese yen~~ against the U.S. dollar. The foreign exchange impact is the translation impact if net sales for the ~~third~~first quarter of fiscal ~~2013~~2014 were translated at exchange rates applicable during the ~~third~~first quarter of fiscal ~~2014~~2015. ~~On this basis,~~Excluding the impact of foreign exchange, our net sales for the ~~third~~first quarter of fiscal ~~2014~~2015 ~~increased~~decreased 1 percent on a constant currency basis compared with the ~~third~~first quarter of fiscal ~~2013~~2014. We believe this metric enhances the visibility of underlying business trends by excluding the impact of foreign currency exchange rate fluctuations.

1915

Our net sales during the first three quarters of fiscal 2014 increased $154 million, or 1 percent, compared with the first three quarters of fiscal 2013 primarily due to an increase in net sales at Old Navy and Athleta; partially offset by a decrease in net sales at Gap and the unfavorable impact of foreign exchange of $52 million. The unfavorable impact of foreign exchange was primarily due to the weakening of the Canadian dollar and Japanese yen against the U.S. dollar; partially offset by the favorable impact of the weakening of the U.S. dollar against the British pound. The foreign exchange impact is the translation impact if net sales during the first three quarters of fiscal 2013 were translated at exchange rates applicable during the first three quarters of fiscal 2014. On this basis, our net sales for the first three quarters of fiscal 2014 increased 2 percent compared with the first three quarters of fiscal 2013. We believe this metric enhances the visibility of underlying business trends by excluding the impact of foreign currency exchange rate fluctuations.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Cost of goods sold and occupancy expenses	$	2,376		$	2,387		$	7,096		$	6,873		$	2,275		$	2,308
Gross profit	$	1,596		$	1,589		$	4,631		$	4,700		$	1,382		$	1,466
Cost of goods sold and occupancy expenses as a percentage of net sales	59.8		%	60.0		%	60.5		%	59.4		%	62.2		%	61.2		%
Gross margin	40.2		%	40.0		%	39.5		%	40.6		%	37.8		%	38.8		%

Cost of goods sold and occupancy expenses ~~as a~~increased 1.0 percentage ~~of net sales decreased 0.2 percent~~point in the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014.

Cost of goods sold ~~decreased 0.9 percent~~was flat as a percentage of net sales in the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014~~, primarily driven by the reclassification of a portion of income related to our credit card program from operating expenses to cost of goods sold.~~.

Occupancy expenses increased ~~0.7 percent as a~~1.0 percentage ~~of net sales~~point in the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014, primarily driven by ~~the~~a decrease in ~~Comp store~~net sales without a corresponding decrease in occupancy expenses.

~~Cost of goods sold and occupancy expenses as a percentage of net sales increased 1.1 percent during the first three quarters of fiscal 2014 compared with the first three quarters of fiscal 2013.~~

Cost of goods sold increased 0.7 percent as a percentage of net sales during the first three quarters of fiscal 2014 compared with the first three quarters of fiscal 2013, primarily driven by increased promotional activities; partially offset by the reclassification of a portion of income related to our credit card program from operating expenses to cost of goods sold.

Occupancy expenses increased 0.4 percent as a percentage of net sales during the first three quarters of fiscal 2014 compared with the first three quarters of fiscal 2013, primarily driven by the decrease in Comp store sales without a corresponding decrease in occupancy expenses.

Operating Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Operating expenses	$	1,042		$	1,013		$	3,067		$	3,073		$	996		$	1,023
Operating expenses as a percentage of net sales	26.2		%	25.5		%	26.2		%	26.6		%	27.2		%	27.1		%
Operating margin	13.9		%	14.5		%	13.3		%	14.1		%	10.6		%	11.7		%

Operating expenses decreased $27 million, but increased ~~$29 million, or 0.7 percent as a~~0.1 percentage ~~of net sales,~~point, in the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014. The increase in operating expenses was primarily due to the reclassification of a portion of income related to our credit card program from operating expenses to cost of goods sold and an increase in marketing expenses; partially offset by lower bonus expense.

~~Operating expenses decreased $6 million, or 0.4 percent as a percentage of net sales, during the first three quarters of fiscal 2014 compared with the first three quarters of fiscal 2013.~~ The decrease in operating expenses was primarily due to the ~~gain on sale~~favorable translation impact as a result of a building owned but no longer occupied by the Company and lower bonus expense; partially offset by the reclassification of a portion of income related to our credit card program from operating expenses to cost of goods sold.

~~For~~ ~~fiscal 2014, we expect operating margin to be about 12.5 percent.~~foreign exchange rate fluctuations.

Interest Expense


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended
($ in millions)	November 1, 2014		November 2, 2013		November 1, 2014		November 2, 2013		May 2, 2015		May 3, 2014
Interest expense	$	19	$	21	$	55	$	41	$	5	$	17

Interest expense for the ~~third~~first quarter of fiscal ~~2014~~2015 ~~and 2013 primarily consists~~includes $19 million of interest on overall borrowings and ~~obligations mainly related to our $1.25 billion 5.95 percent Notes.~~

Interest expense during the first three quarters of fiscal 2014 primarily consists of interest on overall borrowings and obligations mainly related to our $1.25 billion 5.95 percent Notes. Interest expense during the first three quarters of fiscal 2013 includes $59 million of interest on overall borrowings andother obligations mainly related to our $1.25 billion 5.95 percent Notes, partially offset by a reversal of ~~$18~~approximately $14 million of tax-related interest expense primarily resulting from ~~the~~a favorable ~~resolution~~foreign tax ruling and actions of foreign tax ~~matters in~~authorities related to transfer pricing matters. Interest expense for the first quarter of fiscal ~~2013.~~2014 primarily consists of interest on overall borrowings and other obligations mainly related to our $1.25 billion 5.95 percent Notes.

Income Taxes


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Income taxes	$	185		$	219		$	568		$	616		$	143		$	166
Effective tax rate	34.5		%	39.4		%	37.6		%	38.8		%	37.4		%	39.0		%

The decrease in the effective tax rate for the ~~third~~first quarter of fiscal ~~2014~~2015 compared with the ~~third~~first quarter of fiscal ~~2013~~2014 was primarily due to the ~~recognition of foreign tax credits upon a distribution~~indefinite reinvestment of certain additional foreign fiscal 2015 earnings ~~that occurred during the~~ ~~third quarter of fiscal 2014. In connection with a review of the Company’s cash position~~to be used to fund international growth and anticipated cash needs for business operations, the Company made a non-recurring distribution of earnings from certain of its foreign subsidiaries. This distribution resulted in a net tax benefit of approximately $34 million because the estimated foreign tax credits associated with the distribution were greater than the estimated tax due on the distribution of the foreign earnings.

The decrease in the effective tax rate during the first three quarters of fiscal 2014 compared with the first three quarters of fiscal 2013 was primarily due to the recognition of foreign tax credits upon a distribution of certain foreign earnings made during the ~~third quarter of fiscal 2014. The decrease was partially offset by an increase related to~~ the favorable impact ~~from the resolution~~ of ~~certain tax matters~~changes in ~~the first quarter of fiscal 2013 and the expiration of tax laws in fiscal 2014 that had previously provided a favorable tax impact.~~

~~We currently expect the fiscal 2014 effective tax rate to be about 38.0 percent. The actual rate will ultimately depend on several variables, including~~ the mix of pre-tax income between our domestic and international ~~operations, the overall level of income, the potential resolution of outstanding tax matters, and changes in tax laws and rates.~~

~~For fiscal 2014, we expect diluted earnings per share to be in the range of $2.73 to $2.78.~~operations.

LIQUIDITY AND CAPITAL RESOURCES

Our largest source of cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel-related expenses, purchases of property and equipment, share repurchases, and payment of taxes. As of ~~November 1, 2014~~May 2, 2015, cash and cash equivalents were $~~1.0~~1.2 billion. As of ~~November 1, 2014~~May 2, 2015, ~~about~~over half of our cash and cash equivalents were held in the U.S. and ~~was~~are generally accessible without any limitations.

We believe that current cash balances and cash flows from our operations will be sufficient to support our business operations, including growth initiatives and planned capital expenditures, for the next 12 months and beyond. We are also able to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary cash outflows from operating activities are merchandise inventory purchases, occupancy costs, personnel-related expenses, and payment of taxes. Net cash provided by operating activities during the first ~~three quarters~~quarter of fiscal ~~2014 increased $161~~2015 decreased $302 million compared with the first ~~three quarters~~quarter of fiscal ~~2013,~~2014, primarily due to the following:

~~an increase~~a decrease of ~~$224~~$181 million related to other current assets and other long-term assets primarily due to the change in timing of payments received ~~for receivables~~ related to our credit card program;

~~an increase~~a decrease of ~~$139~~$138 million related to merchandise inventory primarily due to the volume and timing of receipts;

a decrease of $108 million related to lease incentives and other long-term liabilities primarily due to the receipt of an upfront payment in the first ~~three quarters~~quarter of fiscal 2014 related to the amendment of our credit card program agreement with the third-party financing ~~company;~~company, which is being amortized over the term of the contract;

a decrease of $21 million in net income; partially offset by

~~a decrease~~an increase of ~~$126~~$124 million related to accounts payable primarily due to the volume and timing of merchandise payments; and

~~a decrease~~an increase of ~~$58~~$60 million related to accrued expenses and other current liabilities primarily due to ~~timing of payments and~~ a lower bonus ~~accrual as~~payout in the first quarter of ~~November 1, 2014~~fiscal 2015 compared with the bonus ~~accrual as~~payout in the first quarter of ~~November 2, 2013.~~fiscal 2014.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, with sales peaking ~~over a total of about eight weeks~~ during the end-of-year holiday period. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

~~For~~ ~~fiscal 2014, we expect depreciation and amortization expense, net of amortization of lease incentives, to be about $500 million.~~

Cash Flows from Investing Activities

~~Our cash outflows from investing activities are primarily for capital expenditures, while cash inflows are primarily proceeds from the sale of property and equipment and maturities of investments.~~ Net cash used for investing activities during the first ~~three quarters~~quarter of fiscal ~~2014~~2015 decreased ~~$51~~$13 million compared with the first ~~three quarters~~quarter of fiscal ~~2013,~~2014, primarily due to the following:

$~~121~~12 million ~~of proceeds from the sale of a building owned but no longer occupied by the Company in the first three quarters of fiscal 2014; partially offset by~~

~~$50 million~~ less ~~maturities of short-term investments; and~~

~~$21 million more~~ property and equipment purchases.

~~For~~ ~~fiscal 2014, we expect cash spending for purchases of property and equipment to be about $700 million.~~

Cash Flows from Financing Activities

~~Our cash outflows from financing activities consist primarily of repurchases of our common stock and dividend payments.~~ Net cash used for financing activities during the first ~~three quarters~~quarter of fiscal ~~2014~~2015 increased ~~$313~~$25 million compared with the first ~~three quarters~~quarter of fiscal ~~2013,~~2014, primarily due to the following:

$~~171~~19 million more ~~repurchases~~tax withholding payments related to the vesting of ~~common stock;~~

~~$65 million less net proceeds from issuances under share-based compensation plans; and~~

~~$58 million more cash dividends paid.~~stock units.

Free Cash Flow

Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.


	39 Weeks Ended						13 Weeks Ended
($ in millions)	November 1, 2014			November 2, 2013			May 2, 2015			May 3, 2014
Net cash provided by operating activities	$	1,114		$	953		$	211		$	513
Less: Purchases of property and equipment	(508		)	(487		)	(150		)	(162		)
Free cash flow	$	606		$	466		$	61		$	351

~~Long-Term Debt~~

~~Long-term debt as of~~ ~~November 1, 2014~~ ~~consists of our $1.25 billion aggregate principal amount of 5.95 percent Notes due April 2021 and our 15 billion Japanese yen ($133 million as of~~ ~~November 1, 2014) Japan Term Loan due January 2018.~~

~~Credit Facilities~~

We have a $500 million, five-year, unsecured revolving credit facility, which expires in May 2018. There were no borrowings and no material outstanding standby letters of credit under the Facility as of November 1, 2014.

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~~We maintain multiple agreements to make unsecured revolving~~Long-Term Debt and Credit Facilities

Certain financial information about the Company's long-term debt and credit facilities available for our operations in certain foreign locations. They are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The total capacity of the Foreign Facilities was $51 million as of ~~November 1, 2014. As of November 1, 2014, there were~~ no ~~borrowings~~is set forth under the ~~Foreign Facilities. There were~~ ~~$10 million~~heading "Debt and Credit Facilities" in ~~bank guarantees primarily related~~Note 3 of Notes to ~~store leases under the Foreign Facilities as~~Condensed Consolidated Financial Statements included in Part I, Item 1 of ~~November 1, 2014~~.

~~We have a bilateral unsecured standby letter of credit agreement that is uncommitted and does not have an expiration date. As of~~ ~~November 1, 2014, we had~~ ~~$23 million~~ ~~in standby letters of credit issued under the agreement.~~

~~We also have a $50 million, two-year, unsecured committed letter of credit agreement, which is set to expire in September 2016. We had no trade letters of credit issued under~~ this ~~letter of credit agreement as of~~ ~~November 1, 2014~~.Form 10-Q.

Dividend Policy

In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.

We paid a dividend of ~~$0.66~~$0.23 per share and $~~0.50~~0.22 per share during the first ~~three quarters~~quarter of fiscal ~~2014~~2015 and fiscal ~~2013~~2014, respectively. Including the ~~dividends~~dividend paid during the first ~~three quarters~~quarter of fiscal ~~2014,~~2015, we intend to pay an annual dividend of ~~$0.88~~$0.92 per share for fiscal ~~2014~~2015~~, which is an increase of 10 percent~~ compared with the annual dividend of ~~$0.80~~$0.88 per share ~~as of~~for fiscal ~~year end 2013.~~2014.

Share Repurchases

~~Between January 2013 and November 2013, we announced that~~Certain financial information about the ~~Board of Directors authorized a total of $2.0 billion for~~Company's share repurchases ~~all~~is set forth under the heading "Share Repurchases" in Note 6 of ~~which was completed by the end~~Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of ~~October 2014. In October 2014, we announced that the Board of Directors approved a new~~ ~~$500 million~~ ~~share repurchase authorization, of which $450 million was remaining as of November 1, 2014.~~

~~During the first three quarters of fiscal 2014, we repurchased and retired approximately~~ ~~26.0 million~~ ~~shares for~~ ~~$1.0 billion, including commissions, at an average price per share of~~ ~~$39.15~~.this Form 10-Q.

Summary Disclosures about Contractual Cash Obligations and Commercial Commitments

There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of ~~February 1, 2014~~January 31, 2015, other than those which occur in the normal course of business. See ~~Item 1, Financial Statements,~~ Note 1211 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2014~~January 31, 2015.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

Our market risk profile as of ~~November 1, 2014~~May 2, 2015 has not significantly changed since ~~February 1, 2014~~January 31, 2015. Our market risk profile as of ~~February 1, 2014~~January 31, 2015 is disclosed in our Annual Report on Form 10-K. See ~~Item 1, Financial Statements,~~ Notes 3, 4, 5, and 65 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q, for disclosures on our debt, investments, and derivative financial instruments.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s ~~third~~first quarter of fiscal ~~2014~~2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION


Item 1.	Legal Proceedings.

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims 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 from time to time include commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. 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.


Item 1A.	Risk Factors.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2014~~January 31, 2015.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended ~~November 1, 2014~~May 2, 2015 by The Gap, Inc. or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3):

Total
Number of
Shares
Purchased

Average
Price Paid
Per Share
Including
Commissions

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 (August 3 - August 30) 886,580
$ 42.29
886,580
$345 million
Month #2 (August 31 - October 4) 1,500,160
$ 42.84
1,500,160
$281 million
Month #3 (October 5 - November 1) 9,009,852
$ 36.71
9,009,852
$450 million
Total 11,396,592
$ 37.95
11,396,592



	Total Number of Shares Purchased	Average Price Paid Per Share Including Commissions		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 (February 1 - February 28)	3,037,706	$	41.02	3,037,706	$	1,177	million
Month #2 (March 1 - April 4)	1,243,839	$	41.43	1,243,839	$	1,126	million
Month #3 (April 5 - May 2)	1,332,226	$	40.59	1,332,226	$	1,072	million
Total	5,613,771	$	41.01	5,613,771

__________

(1)

~~On November 21, 2013, we announced that the Board of Directors approved a $1 billion share repurchase authorization. This authorization was fully utilized by the end of October 2014.~~ On October 16, 2014, we announced that the Board of Directors approved a ~~new~~ $500 million share repurchase authorization. ~~This authorization has~~On February 26, 2015, we announced that the Board of Directors approved a new $1 billion share repurchase authorization. These authorizations have no expiration date.


Item 6.	Exhibits.



10.1		~~Letter~~ Agreement with Sabrina Simmons dated ~~October~~February 1, 2015 and confirmed on February 3, ~~2014 by~~2015. (1)
10.2		Agreement with Stefan Larsson dated February 1, 2015 and ~~between Art Peck~~confirmed on February 4, 2015. (1)
10.3		Agreement with Roberta Silten dated April 28, 2015 and ~~The Gap, Inc.,~~confirmed on April 29, 2015. (1)
10.4		Executive Management Incentive Compensation Award Plan, filed as Appendix A to Registrant’s definitive proxy statement for its annual meeting of shareholders held on May 19, 2015, Commission File No. 1-7562.
10.5		Form of Non-Qualified Stock Option Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.1 to ~~Registrant’s~~Registrant's Form 8-K on ~~October 8, 2014~~March 6, 2015, Commission File No. 1-7562.
31.1*10.6		Form of Restricted Stock Unit Award Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
10.7		Form of Performance Share Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
10.8		Form of Director Stock Unit Agreement and Stock Unit Deferral Election Form under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.4 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
31.2*31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
32.1*32.1		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002. (2)
32.2*32.2		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002. (2)
101*101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~November 1, 2014,~~May 2, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (1)

__________


*(1)	Filed herewith.


(2)	Furnished herewith.

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SIGNATURES

Pursuant to the requirements 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.



		THE GAP, INC.

Date:	~~December~~June 8, ~~2014~~2015	By	/s/ ~~Glenn K. Murphy~~Arthur Peck
			~~Glenn K. Murphy~~Arthur Peck
			~~Chairman and~~ Chief Executive Officer

Date:	~~December~~June 8, ~~2014~~2015	By	/s/ Sabrina L. Simmons
			Sabrina L. Simmons
			Executive Vice President and Chief Financial Officer

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Exhibit Index




10.1		~~Letter~~ Agreement with Sabrina Simmons dated ~~October~~February 1, 2015 and confirmed on February 3, ~~2014 by~~2015. (1)
10.2		Agreement with Stefan Larsson dated February 1, 2015 and ~~between Art Peck~~confirmed on February 4, 2015. (1)
10.3		Agreement with Roberta Silten dated April 28, 2015 and ~~The Gap, Inc.,~~confirmed on April 29, 2015. (1)
10.4		Executive Management Incentive Compensation Award Plan, filed as Appendix A to Registrant’s definitive proxy statement for its annual meeting of shareholders held on May 19, 2015, Commission File No. 1-7562.
10.5		Form of Non-Qualified Stock Option Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.1 to ~~Registrant’s~~Registrant's Form 8-K on ~~October 8, 2014~~March 6, 2015, Commission File No. 1-7562.
31.1*10.6		Form of Restricted Stock Unit Award Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
10.7		Form of Performance Share Agreement under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
10.8		Form of Director Stock Unit Agreement and Stock Unit Deferral Election Form under the 2011 Long-Term Incentive Plan, filed as Exhibit 10.4 to Registrant's Form 8-K on March 6, 2015, Commission File No. 1-7562.
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
31.2*31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
32.1*32.1		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002. (2)
32.2*32.2		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002. (2)
101*101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~November 1, 2014,~~May 2, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (1)

_____________________________


*(1)	Filed herewith.


(2)	Furnished herewith.

2622