UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberJuly 29, 20162017
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| ☐ | 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)
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| Delaware | | 94-1697231 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 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 ☑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 ☑ 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ |
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| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding as of November 25, 2016August 18, 2017 was 398,881,367.392,158,760.
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;
total store closures in fiscal 2016, including closure of Old Navy stores in Japan and closure of select Banana Republic stores, primarily internationally;
the impact of store closures and streamlining measures, including annualized savings, lost sales, tax expense, and restructuring costs;
recognition of unrealized gains and losses from designated cash flow hedges into income;
the impact of the potential settlement of outstanding tax matters and the closing of audits;matters;
the impact of losses due to indemnification obligations;
the outcome of proceedings, lawsuits, disputes, and claims;
the impact of the Fishkill distribution center fire, including anticipated insurance recoveries for certain costs related costs;
Old Navy’s near-term growth ambitions anchored in North America and Mexico, as well as China and its franchise operations;to the Fishkill distribution center fire;
continuing investment in our mobile digital capabilities;
further enhancing our shoppingcustomer experience, for our customers;
creation of a more efficient operating model;both in stores and online;
the impact of continuing depreciation of certain foreign exchange rate fluctuationscurrencies on gross margins for our financial results;foreign subsidiaries;
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 or other available market instruments;
the impact of the seasonality of our operations;
dividend payments in fiscal 2016;2017; 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 if we are unablefailure to managemaintain, enhance, and protect our inventory effectively,brand image could have an adverse effect on our gross margins will be adversely affected;results of operations;
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 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 changes in the regulatory or administrative landscape could adversely affect our financial condition, strategies, and results of operations;
the risk that our investments in omni-channel shopping initiatives may not deliver the results we anticipate;
the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected;
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 risks to our efforts to expand internationally, including our ability to operate under a global brand structure and operating in regions where we have less experience;
the risk that foreign currency exchange rate fluctuations could adversely impact our financial results;
the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;
the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;
the risks to our efforts to expand internationally, including our ability to operate under a global brand structure and operating in regions where we have less experience;
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 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 resultsposition or our business initiatives;
the risk that updates or changes to our information technology (“IT”) systems may disrupt our operations;
the risk that failure to maintain, enhance, and protect our brand image could have an adverse effect on our results of 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 changesreductions in the regulatory or administrative landscapeincome and cash flow from our marketing and servicing arrangement related to our private label and co-branded credit cards could adversely affect our financial condition, strategies,operating results and resultscash flows;
the risk that adoption of operations;new accounting pronouncements will impact future results;
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 January 30, 201628, 2017 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 5, 2016,August 25, 2017, 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 January 30, 2016.28, 2017.
THE GAP, INC.
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION
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| Item 1. | Financial Statements. |
THE GAP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | ($ and shares in millions except par value) | October 29,
2016 | | January 30,
2016 | | October 31,
2015 | July 29,
2017 | | January 28,
2017 | | July 30,
2016 |
| ASSETS | | | | | | | | | | |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | $ | 1,522 |
| | $ | 1,370 |
| | $ | 1,042 |
| $ | 1,609 |
| | $ | 1,783 |
| | $ | 1,681 |
|
| Merchandise inventory | 2,398 |
| | 1,873 |
| | 2,498 |
| 2,051 |
| | 1,830 |
| | 1,951 |
|
| Other current assets | 751 |
| | 742 |
| | 821 |
| 598 |
| | 702 |
| | 669 |
|
| Total current assets | 4,671 |
| | 3,985 |
| | 4,361 |
| 4,258 |
| | 4,315 |
| | 4,301 |
|
| Property and equipment, net of accumulated depreciation of $5,900, $5,644, and $5,673 | 2,662 |
| | 2,850 |
| | 2,814 |
| |
| Property and equipment, net of accumulated depreciation of $6,002, $5,813, and $5,903 | | 2,643 |
| | 2,616 |
| | 2,755 |
|
| Other long-term assets | 674 |
| | 638 |
| | 631 |
| 716 |
| | 679 |
| | 681 |
|
| Total assets | $ | 8,007 |
| | $ | 7,473 |
| | $ | 7,806 |
| $ | 7,617 |
| | $ | 7,610 |
| | $ | 7,737 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Current maturities of debt | $ | 424 |
| | $ | 421 |
| | $ | 421 |
| $ | — |
| | $ | 65 |
| | $ | 424 |
|
| Accounts payable | 1,413 |
| | 1,112 |
| | 1,327 |
| 1,230 |
| | 1,243 |
| | 1,224 |
|
| Accrued expenses and other current liabilities | 1,059 |
| | 979 |
| | 997 |
| 1,062 |
| | 1,113 |
| | 1,063 |
|
| Income taxes payable | 19 |
| | 23 |
| | 23 |
| 107 |
| | 32 |
| | 70 |
|
| Total current liabilities | 2,915 |
| | 2,535 |
| | 2,768 |
| 2,399 |
| | 2,453 |
| | 2,781 |
|
| Long-term liabilities: | | | | | | | | | | |
| Long-term debt | 1,320 |
| | 1,310 |
| | 1,331 |
| 1,248 |
| | 1,248 |
| | 1,321 |
|
| Lease incentives and other long-term liabilities | 1,046 |
| | 1,083 |
| | 1,098 |
| 1,025 |
| | 1,005 |
| | 1,076 |
|
| Total long-term liabilities | 2,366 |
| | 2,393 |
| | 2,429 |
| 2,273 |
| | 2,253 |
| | 2,397 |
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| Commitments and contingencies (see Note 12) |
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| Commitments and contingencies (see Note 11) | |
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| Stockholders’ equity: | | | | | | | | | | |
| Common stock $0.05 par value | | | | | | | | | | |
| Authorized 2,300 shares for all periods presented; Issued and Outstanding 399, 397, and 404 shares | 20 |
| | 20 |
| | 20 |
| |
| Authorized 2,300 shares for all periods presented; Issued and Outstanding 392, 399, and 398 shares | | 20 |
| | 20 |
| | 20 |
|
| Additional paid-in capital | 57 |
| | — |
| | — |
| — |
| | 81 |
| | 31 |
|
| Retained earnings | 2,621 |
| | 2,440 |
| | 2,484 |
| 2,902 |
| | 2,749 |
| | 2,509 |
|
| Accumulated other comprehensive income | 28 |
| | 85 |
| | 105 |
| |
| Accumulated other comprehensive income (loss) | | 23 |
| | 54 |
| | (1 | ) |
| Total stockholders’ equity | 2,726 |
| | 2,545 |
| | 2,609 |
| 2,945 |
| | 2,904 |
| | 2,559 |
|
| Total liabilities and stockholders’ equity | $ | 8,007 |
| | $ | 7,473 |
| | $ | 7,806 |
| $ | 7,617 |
| | $ | 7,610 |
| | $ | 7,737 |
|
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 | | 26 Weeks Ended |
| ($ and shares in millions except per share amounts) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Net sales | $ | 3,798 |
| | $ | 3,857 |
| | $ | 11,087 |
| | $ | 11,412 |
| $ | 3,799 |
| | $ | 3,851 |
| | $ | 7,239 |
| | $ | 7,289 |
|
| Cost of goods sold and occupancy expenses | 2,305 |
| | 2,417 |
| | 6,948 |
| | 7,132 |
| 2,320 |
| | 2,414 |
| | 4,457 |
| | 4,643 |
|
| Gross profit | 1,493 |
| | 1,440 |
| | 4,139 |
| | 4,280 |
| 1,479 |
| | 1,437 |
| | 2,782 |
| | 2,646 |
|
| Operating expenses | 1,104 |
| | 1,026 |
| | 3,249 |
| | 3,111 |
| 1,028 |
| | 1,158 |
| | 2,077 |
| | 2,145 |
|
| Operating income | 389 |
| | 414 |
| | 890 |
| | 1,169 |
| 451 |
| | 279 |
| | 705 |
| | 501 |
|
| Interest expense | 20 |
| | 19 |
| | 57 |
| | 41 |
| 16 |
| | 18 |
| | 35 |
| | 37 |
|
| Interest income | (3 | ) | | (1 | ) | | (6 | ) | | (3 | ) | (4 | ) | | (2 | ) | | (7 | ) | | (3 | ) |
| Income before income taxes | 372 |
| | 396 |
| | 839 |
| | 1,131 |
| 439 |
| | 263 |
| | 677 |
| | 467 |
|
| Income taxes | 168 |
| | 148 |
| | 383 |
| | 425 |
| 168 |
| | 138 |
| | 263 |
| | 215 |
|
| Net income | $ | 204 |
| | $ | 248 |
| | $ | 456 |
| | $ | 706 |
| $ | 271 |
| | $ | 125 |
| | $ | 414 |
| | $ | 252 |
|
| Weighted-average number of shares - basic | 399 |
| | 406 |
| | 398 |
| | 415 |
| 395 |
| | 398 |
| | 397 |
| | 398 |
|
| Weighted-average number of shares - diluted | 400 |
| | 408 |
| | 400 |
| | 417 |
| 396 |
| | 399 |
| | 398 |
| | 399 |
|
| Earnings per share - basic | $ | 0.51 |
| | $ | 0.61 |
| | $ | 1.15 |
| | $ | 1.70 |
| $ | 0.69 |
| | $ | 0.31 |
| | $ | 1.04 |
| | $ | 0.63 |
|
| Earnings per share - diluted | $ | 0.51 |
| | $ | 0.61 |
| | $ | 1.14 |
| | $ | 1.69 |
| $ | 0.68 |
| | $ | 0.31 |
| | $ | 1.04 |
| | $ | 0.63 |
|
| Cash dividends declared and paid per share | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.69 |
| | $ | 0.69 |
| $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.46 |
| | $ | 0.46 |
|
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 | | 26 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Net income | $ | 204 |
| | $ | 248 |
| | $ | 456 |
| | $ | 706 |
| $ | 271 |
| | $ | 125 |
| | $ | 414 |
| | $ | 252 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | |
| Other comprehensive income (loss) | | | | | | | | |
| Foreign currency translation | (10 | ) | | (2 | ) | | (1 | ) | | (9 | ) | 21 |
| | (22 | ) | | 17 |
| | 9 |
|
| Change in fair value of derivative financial instruments, net of tax (tax benefit) of $4, $(4) , $(5) and $9 | 39 |
| | (4 | ) | | (57 | ) | | 22 |
| |
| Reclassification adjustment for (gains) losses on derivative financial instruments, net of tax of $-, $(14), $(6) and $(31) | — |
| | (33 | ) | | 1 |
| | (73 | ) | |
| Other comprehensive income (loss), net of tax | 29 |
| | (39 | ) | | (57 | ) | | (60 | ) | |
| Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(12), $27, $(8), and $(9) | | (43 | ) | | (7 | ) | | (43 | ) | | (96 | ) |
| Reclassification adjustment for (gains) losses on derivative financial instruments, net of tax of $-, $(2), $(2), and $(6) | | (1 | ) | | 8 |
| | (5 | ) | | 1 |
|
| Other comprehensive loss, net of tax | | (23 | ) | | (21 | ) | | (31 | ) | | (86 | ) |
| Comprehensive income | $ | 233 |
| | $ | 209 |
| | $ | 399 |
| | $ | 646 |
| $ | 248 |
| | $ | 104 |
| | $ | 383 |
| | $ | 166 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | 39 Weeks Ended | 26 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 |
| Cash flows from operating activities: | | | | | | |
| Net income | $ | 456 |
| | $ | 706 |
| $ | 414 |
| | $ | 252 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | 449 |
| | 438 |
| 279 |
| | 303 |
|
| Amortization of lease incentives | (47 | ) | | (48 | ) | (30 | ) | | (31 | ) |
| Share-based compensation | 55 |
| | 58 |
| 42 |
| | 36 |
|
| Tax benefit from exercise of stock options and vesting of stock units | (4 | ) | | 22 |
| — |
| | (3 | ) |
| Excess tax benefit from exercise of stock options and vesting of stock units | (1 | ) | | (24 | ) | — |
| | (1 | ) |
| Store asset impairment charges | | 13 |
| | 56 |
|
| Non-cash and other items | 101 |
| | (45 | ) | — |
| | 6 |
|
| Deferred income taxes | (10 | ) | | (6 | ) | (27 | ) | | (14 | ) |
| Changes in operating assets and liabilities: | | | | | | |
| Merchandise inventory | (513 | ) | | (615 | ) | (203 | ) | | (52 | ) |
| Other current assets and other long-term assets | (52 | ) | | 30 |
| (23 | ) | | 31 |
|
| Accounts payable | 294 |
| | 149 |
| (49 | ) | | 102 |
|
| Accrued expenses and other current liabilities | 10 |
| | (24 | ) | (111 | ) | | (20 | ) |
| Income taxes payable, net of prepaid and other tax-related items | 80 |
| | 69 |
| 160 |
| | 92 |
|
| Lease incentives and other long-term liabilities | (18 | ) | | 24 |
| 21 |
| | (23 | ) |
| Net cash provided by operating activities | 800 |
| | 734 |
| 486 |
| | 734 |
|
| Cash flows from investing activities: | | | | | | |
| Purchases of property and equipment | (383 | ) | | (505 | ) | (275 | ) | | (270 | ) |
| Insurance proceeds related to loss on property and equipment | | 59 |
| | — |
|
| Other | (1 | ) | | (4 | ) | (3 | ) | | (1 | ) |
| Net cash used for investing activities | (384 | ) | | (509 | ) | (219 | ) | | (271 | ) |
| Cash flows from financing activities: | | | | | | |
| Proceeds from issuance of short-term debt | — |
| | 400 |
| |
| Payments of current maturities of debt | | (67 | ) | | — |
|
| Proceeds from issuances under share-based compensation plans | 25 |
| | 60 |
| 14 |
| | 16 |
|
| Withholding tax payments related to vesting of stock units | (18 | ) | | (68 | ) | (14 | ) | | (17 | ) |
| Repurchases of common stock | — |
| | (822 | ) | (200 | ) | | — |
|
| Excess tax benefit from exercise of stock options and vesting of stock units | 1 |
| | 24 |
| — |
| | 1 |
|
| Cash dividends paid | (275 | ) | | (285 | ) | (182 | ) | | (183 | ) |
| Other | — |
| | (1 | ) | — |
| | 23 |
|
| Net cash used for financing activities | (267 | ) | | (692 | ) | (449 | ) | | (160 | ) |
| Effect of foreign exchange rate fluctuations on cash and cash equivalents | 3 |
| | (6 | ) | 8 |
| | 8 |
|
| Net increase (decrease) in cash and cash equivalents | 152 |
| | (473 | ) | (174 | ) | | 311 |
|
| Cash and cash equivalents at beginning of period | 1,370 |
| | 1,515 |
| 1,783 |
| | 1,370 |
|
| Cash and cash equivalents at end of period | $ | 1,522 |
| | $ | 1,042 |
| $ | 1,609 |
| | $ | 1,681 |
|
| Non-cash investing activities: | | | | |
| Purchases of property and equipment not yet paid at end of period | $ | 63 |
| | $ | 85 |
| |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for interest during the period | $ | 80 |
| | $ | 76 |
| $ | 38 |
| | $ | 41 |
|
| Cash paid for income taxes during the period, net of refunds | $ | 318 |
| | $ | 338 |
| $ | 130 |
| | $ | 143 |
|
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 OctoberJuly 29, 20162017 and October 31, 2015July 30, 2016, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 and October 31, 2015,July 30, 2016, and the Condensed Consolidated Statements of Cash Flows for the thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 and October 31, 2015July 30, 2016 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements include all adjustments (which include normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, and cash flows as of OctoberJuly 29, 20162017 and October 31, 2015July 30, 2016 and for all periods presented. The Condensed Consolidated Balance Sheet as of January 30, 201628, 2017 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 (“U.S. GAAP”) have been omitted from these interim financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. 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 January 30, 201628, 2017.
The results of operations for the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 are not necessarily indicative of the operating results that may be expected for the 52-week53-week period ending January 28, 2017February 3, 2018.
Note 2. Recent Accounting Pronouncements
Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its Consolidated Financial Statements, based on current information.
Recent Accounting Pronouncements Related to Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB"(“FASB”) issued an accounting standards update ("ASU"(“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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017.
In March 2016,Subsequently, the FASB has issued the following ASUs related to revenue recognition, all with the same effective date as ASU No. 2014-09:
ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Considerations;
ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued Licensing;
ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting for shippingMeeting; and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, the FASB issued
ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASUs are the same as the effective date for ASU No. 2014-09. We are currently assessing the potential impact of these ASUs on our Condensed Consolidated Financial Statements.Expedients.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which changes how deferred taxes are classified on the balance sheet. The ASU eliminates the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is permitted under this ASU. We adopted ASU No. 2015-17 prospectively effective January 30, 2016, which resulted in a reclassification of our net current deferred tax assets to the net noncurrent deferred tax assets in our Consolidated Balance Sheet. In accordance with the provisions of the ASU, prior periods were not retrospectively adjusted.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. WeWhile we do not expect the adoption of this ASUthese ASUs to have a material impact on our Condensed Consolidated Financial Statements.Statements, we expect the adoption to result in change in the timing of recognizing revenue for breakage income for gift cards, gift certificates, and credit vouchers, credit card reward points and certificate liability, as well as sales where we ship the merchandise to the customer from a distribution center or store. Additionally, under the new guidance, we expect to recognize allowances for estimated sales returns on a gross basis rather than net basis on the Consolidated Balance Sheets.
We will adopt these ASUs on a modified retrospective basis beginning in the first quarter of fiscal 2018.
Other Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currentlystill assessing the impact of this ASU on our Condensed Consolidated Financial Statements, but we expect that it will result in a significantsubstantial increase in our long-term assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently assessingadopted the potential impactprovisions of this ASU in the first quarter of fiscal 2017. Beginning in the first quarter of fiscal 2017, we have made the policy election to account for forfeitures when they occur, rather than estimating expected forfeitures, when recognizing share-based compensation cost. We adopted this provision of the ASU using a modified retrospective transition method, which resulted in the cumulative-effect adjustment of $3 million to retained earnings as of the beginning of the first quarter of fiscal 2017. Also, all excess tax benefits and tax deficiencies related to share-based payment awards are now reflected in the Consolidated Statement of Income as a component of the provision for income taxes on a prospective basis, whereas they were recognized in equity under the previous guidance. Additionally, excess tax benefits related to share-based payment awards are now reflected in operating activities, along with other income tax related cash flows, in our Condensed Consolidated Financial Statements.Statement of Cash Flows on a prospective basis.
In June 2016,January 2017, the FASB issued ASU No. 2016-13, Financial Instruments2017-04, Intangibles - Credit Losses: Measurement of Credit Losses on Financial Instruments.Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments requiresimplify the subsequent measurement of all expected credit losses for financial assets held atgoodwill and eliminate the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption ofearly adopted this ASU to have a material impact on our Condensed Consolidated Financial Statements.
In August 2016,for the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance for eight specific cash flow issues and are intended to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We will adopt the presentation and disclosure provisions of this ASUgoodwill impairment test in the first quarter of fiscal 2018.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory.2017. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We do not expect the adoption of this ASU todid not have a materialany impact on our Condensedthe Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interests Held through Related Parties That Are Under Common Control. The amendments change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We do not expect the adoption of this ASU to have a material impact on our Condensed Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We will adopt the presentation and disclosure provisions of this ASU in the first quarter of fiscal 2018.
Note 3. Store Closing and Other Operating Charges
In May 2016, the Company announced measures to better align talent and financial resources against its most important priorities; these measures include (i) focusing each brand on geographies with the greatest potential and (ii) streamlining the Company’s operating model. The measures will result in the closure of its fleet of 53 Old Navy stores in Japan, the closure of select Banana Republic stores, primarily internationally, and the creation of a more efficient global brand structure. Including the Old Navy closures in Japan, the Company expects to close about 75 stores in total related to these measures in fiscal 2016. As of October 29, 2016, the Company has closed 10 stores related to these measures.
In connection with the decision to close stores and streamline the Company's operations, the Company incurred $29 million and $179 million in restructuring costs, on a pre-tax basis, during the thirteen and thirty-nine weeks ended October 29, 2016, respectively. The summary of the costs incurred during the thirteen weeks ended October 29, 2016 and cumulative amount incurred as of October 29, 2016, as well as the Company’s current estimates of the pre-tax amount expected to be incurred during the remainder of fiscal 2016, are as follows:
|
| | | | | | | | | | | | |
| | Costs Incurred | | Estimated Costs to be Incurred |
| ($ in millions) | 13 Weeks Ended
October 29, 2016 | | Cumulative as of October 29, 2016 | | Remainder of Fiscal 2016 | | Total |
| Costs recorded in cost of goods sold and occupancy expenses: | | | | | | | |
| Accelerated depreciation, net of reversal of depreciation expense related to asset retirement obligations | $ | (6 | ) | | $ | (2 | ) | | $ (5) - 0 |
| | $ about (5) |
| Employee related costs | 1 |
| | 12 |
| | Less than 5 |
| | about 15 |
| Other | (2 | ) | | (2 | ) | | (5) - 0 |
| | about (5) |
| Total costs recorded in cost of goods sold and occupancy expenses | (7 | ) | | 8 |
| | about (5) |
| | about 5 |
| | | |
|
| | | | |
| Costs recorded in operating expenses: | | |
|
| | | | |
| Lease termination fees and lease losses | 28 |
| | 62 |
| | 15 - 40 |
| | 75 - 100 |
| Employee related costs | 2 |
| | 32 |
| | 15 - 20 |
| | 45 - 50 |
| Store asset impairment | 2 |
| | 54 |
| | — |
| | about 55 |
| Other | 4 |
| | 23 |
| | about 5 |
| | about 30 |
| Total costs recorded in operating expenses | 36 |
| | 171 |
| | 35 - 65 |
| | 205 - 235 |
| Total restructuring costs | $ | 29 |
| | $ | 179 |
| | $ 31 - 61 |
| | $ 210 - 240 |
In addition to the total pre-tax amount estimated above, the Company also expects to incur incremental tax expense related to the restructuring costs and resulting valuation allowances on certain foreign deferred tax assets. The Company’s estimates of future charges associated with the store closures and streamlining of its operating model could change as the Company’s plans evolve and become finalized. The actual amounts will also depend on the timing of closures and negotiations on lease termination fees during the remainder of fiscal 2016.
The following table summarizes activities related to certain restructuring costs that will be settled with cash payments and the related liability balances as of October 29, 2016:
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Lease Termination Fees and Lease Losses | | Employee Related Costs | | Other | | Total |
| Balance at April 30, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| 13 Weeks Ended July 30, 2016: | | | | | | | |
| Provision | 34 |
| | 41 |
| | 12 |
| | 87 |
|
| Cash payments | — |
| | — |
| | (6 | ) | | (6 | ) |
| Balance at July 30, 2016 | 34 |
| | 41 |
| | 6 |
| | 81 |
|
| 13 Weeks Ended October 29, 2016: | | | | | | | |
| Provision | 28 |
| | 7 |
| | 4 |
| | 39 |
|
| Adjustments | — |
| | (4 | ) | | — |
| | (4 | ) |
| Cash payments | (8 | ) | | (10 | ) | | (8 | ) | | (26 | ) |
| Balance at October 29, 2016 | $ | 54 |
| | $ | 34 |
| | $ | 2 |
| | $ | 90 |
|
We expect that the majority of the liability balance related to the lease termination fees and lease losses will be settled with cash payments by the end of fiscal 2016 as the stores are closed. The remaining liability balances are expected to settle with cash payments through fiscal 2017.
Note 4.3. Debt and Credit Facilities
Long-term debt consists of the following:
| | | ($ in millions) | October 29,
2016 | | January 30,
2016 | | October 31,
2015 | July 29,
2017 | | January 28,
2017 | | July 30,
2016 |
| Notes | $ | 1,248 |
| | $ | 1,248 |
| | $ | 1,248 |
| $ | 1,248 |
| | $ | 1,248 |
| | $ | 1,248 |
|
| Japan Term Loan | 96 |
| | 83 |
| | 104 |
| — |
| | 65 |
| | 97 |
|
| Total debt | | 1,248 |
| | 1,313 |
| | 1,345 |
|
| Less: Current portion of Japan Term Loan | | — |
| | (65 | ) | | (24 | ) |
| Total long-term debt | 1,344 |
| | 1,331 |
| | 1,352 |
| $ | 1,248 |
| | $ | 1,248 |
| | $ | 1,321 |
|
| Less: Current portion | (24 | ) | | (21 | ) | | (21 | ) | |
| Total long-term debt, less current portion | $ | 1,320 |
| | $ | 1,310 |
| | $ | 1,331 |
| |
As of OctoberJuly 29, 20162017, January 30, 201628, 2017, and October 31, 2015July 30, 2016, the estimated fair value of our $1.25 billion aggregate principal amount of 5.95 percent notes (the "Notes”“Notes”) due April 2021 was $1.341.36 billion, $1.291.32 billion, and $1.331.34 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 October 29, 2016January 28, 2017, and JanuaryJuly 30, 2016, and October 31, 2015, the carrying amount of our 15 billion Japanese yen, four-year, unsecured term loan ("(“Japan Term Loan"Loan”) approximated its fair value, as the interest rate variesvaried depending on quoted market rates (level 1 inputs). Repayments of 2.5 billion Japanese yen ($24 million as of October 29, 2016) are payablewere paid on January 15 of each year, and commenced on January 15, 2015, with a final repayment of 7.5 billion Japanese yen ($72 million as of October 29, 2016)which was due on January 15, 2018.2018 was paid in full in June 2017. Interest iswas payable at least quarterly based on an interest rate equal to the Tokyo Interbank Offered Rate plus a fixed margin.
In October 2015, we entered into a $400 million unsecured term loan (the “Term Loan”)., which was included in current maturities of debt in the Condensed Consolidated Balance Sheet as of July 30, 2016. The Term Loan was originally scheduled to mature, and was payablerepaid in full on October 15, 2016, but had an option to be extended until October 15,in January 2017. In August 2016, the Company exercised the option to extend the Term Loan. As of October 29, 2016, the carrying amount of our $400 million Term Loan approximated its fair value due to the short-term nature of the loan. Interest iswas payable at least quarterly based on an interest rate equal to the London Interbank Offered Rate plus a fixed margin. The Term Loan is included in current maturities of debt in the Condensed Consolidated Balance Sheet.
We have a $500 million, five-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in May 2020. There were no borrowings and no material outstanding standby letters of credit under the Facility as of OctoberJuly 29, 2016.2017.
We maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). 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 $46$47 million as of OctoberJuly 29, 2016.2017. As of OctoberJuly 29, 2016,2017, there were no borrowings under the Foreign Facilities. There were $12$13 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of OctoberJuly 29, 2016.2017.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of OctoberJuly 29, 20162017, we had $1815 million in standby letters of credit issued under these agreements.
Note 5.4. Fair Value Measurements
There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 or October 31, 2015July 30, 2016. There were no transfers of financial assets or liabilities into or out of level 1 and level 2 during the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 or October 31, 2015July 30, 2016.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
| | | | | | Fair Value Measurements at Reporting Date Using | | | Fair Value Measurements at Reporting Date Using |
| ($ in millions) | October 29, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | July 29, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | |
| Cash equivalents | $ | 596 |
| | $ | 106 |
| | $ | 490 |
| | $ | — |
| $ | 555 |
| | $ | 96 |
| | $ | 459 |
| | $ | — |
|
| Derivative financial instruments | 62 |
| | — |
| | 62 |
| | — |
| 20 |
| | — |
| | 20 |
| | — |
|
| Deferred compensation plan assets | 41 |
| | 41 |
| | — |
| | — |
| 46 |
| | 46 |
| | — |
| | — |
|
| Total | $ | 699 |
| | $ | 147 |
| | $ | 552 |
| | $ | — |
| $ | 621 |
| | $ | 142 |
| | $ | 479 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | | | | |
| Derivative financial instruments | $ | 49 |
| | $ | — |
| | $ | 49 |
| | $ | — |
| $ | 52 |
| | $ | — |
| | $ | 52 |
| | $ | — |
|
| | | | Fair Value Measurements at Reporting Date Using | | | Fair Value Measurements at Reporting Date Using |
| ($ in millions) | January 30, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | January 28, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | |
| Cash equivalents | $ | 517 |
| | $ | 204 |
| | $ | 313 |
| | $ | — |
| $ | 697 |
| | $ | 256 |
| | $ | 441 |
| | $ | — |
|
| Derivative financial instruments | 93 |
| | — |
| | 93 |
| | — |
| 58 |
| | — |
| | 58 |
| | — |
|
| Deferred compensation plan assets | 37 |
| | 37 |
| | — |
| | — |
| 40 |
| | 40 |
| | — |
| | — |
|
| Total | $ | 647 |
| | $ | 241 |
| | $ | 406 |
| | $ | — |
| $ | 795 |
| | $ | 296 |
| | $ | 499 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | | | | |
| Derivative financial instruments | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | — |
|
| | | | Fair Value Measurements at Reporting Date Using | | | Fair Value Measurements at Reporting Date Using |
| ($ in millions) | October 31, 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | July 30, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | | | | | | | |
| Cash equivalents | $ | 174 |
| | $ | 62 |
| | $ | 112 |
| | $ | — |
| $ | 756 |
| | $ | 169 |
| | $ | 587 |
| | $ | — |
|
| Derivative financial instruments | 84 |
| | — |
| | 84 |
| | — |
| 52 |
| | — |
| | 52 |
| | — |
|
| Deferred compensation plan assets | 41 |
| | 41 |
| | — |
| | — |
| 41 |
| | 41 |
| | — |
| | — |
|
| Total | $ | 299 |
| | $ | 103 |
| | $ | 196 |
| | $ | — |
| $ | 849 |
| | $ | 210 |
| | $ | 639 |
| | $ | — |
|
| Liabilities: | | | | | | | | | | | | | | |
| Derivative financial instruments | $ | 8 |
| | $ | — |
| | $ | 8 |
| | $ | — |
| $ | 83 |
| | $ | — |
| | $ | 83 |
| | $ | — |
|
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, 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 currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Hong Kong dollars, Chinese yuan, and Taiwan dollars. 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 and non-employee directors to defer compensation up to a maximum amount. Plan investments are directed by participants and 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. The fair value of the long-lived assets is determineddetermined using level 3 inputs and based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores is primarily at the store level.
During the thirteen weeks ended July 29, 2017, we recorded a charge for the impairment of long-lived assets of $11 million. The impairment charge was recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of $11 million to their fair value of zero. There were no material impairment charges recorded for other long-lived assets for the thirteen weeks ended April 29, 2017.
In May 2016, the Company announced measures to close its fleet of 53 Old Navy stores in Japan and select Banana Republic stores, primarily internationally. As a result, we reviewed the global Banana Republic specialty fleet for impairment during the thirteen weeks ended July 30, 2016. During the thirteen weeks ended July 30, 2016, we recorded charges for impairment of long-lived assets of $52 million related to the announced store closures, primarily related to Old Navy Japan, and an additional $4 million for long-lived assets that were unrelated to the announced measures. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statements of Income and reduced the then carrying amount of the applicable long-lived assets of $68 million to their fair value of $12 million. There were no material impairment charges recorded for other long-lived assets for the thirteen weeks ended April 30, 2016.
We also 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.
We recorded a charge for the impairment of long-lived assets of $33 million for the thirteen weeks ended October 29, 2016, which reduced the then carrying amount of the applicable long-lived assets of $34 million to their fair value of $1 million. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income.
In May 2016, the Company announced measures that will result in the closure of its fleet of 53 Old Navy stores in Japan and select Banana Republic stores, primarily internationally. During the thirty-nine weeks ended October 29, 2016, we recorded a charge for the impairment of long-lived assets of $54 million related to the announced store closures, and an additional $35 million for long-lived assets that were unrelated to the announced measures. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of $102 million to their fair value of $13 million.
There were no impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 2017 or July 30, 2016.
We recorded a charge for the impairment of long-lived assets of $6 million for the thirteen weeks ended October 31, 2015, which reduced the then carrying amount of the applicable long-lived assets of $6 million to their fair value of zero. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income.
In June 2015, the Company announced a series of strategic actions to position Gap brand for improved business performance in the future, including its decision to close about 175 Gap brand specialty stores in North America and a limited number of international stores. As a result of the announced strategic actions, we reviewed the global Gap brand specialty fleet for impairment and recorded a charge for the impairment of long-lived assets of $38 million for the thirty-nine weeks ended October 31, 2015, primarily related to Gap brand, and an additional $5 million for long-lived assets that were unrelated to the strategic actions. We also recorded an impairment charge of $5 million related to an indefinite-lived intangible asset. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of $49 million to their fair value of $6 million and the applicable indefinite-lived intangible asset of $6 million to its fair value of $1 million during the thirty-nine weeks ended October 31, 2015.
There were no impairment charges recorded for goodwill for the thirteen and thirty-nine weeks ended October 31, 2015.
Note 6.5. Derivative Financial Instruments
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We use derivative financial instruments to manage our exposure to foreign currency exchange rate risk and do not enter into derivative financial contracts for trading purposes. 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 currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Hong Kong dollars, Chinese yuan, and Taiwan dollars. 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 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 entities, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. 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. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized in income in the period in which the underlying transaction impacts the income statement.
There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2016 or October 31, 2015 as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. There were no material amounts reclassified into earnings during the thirteen and thirty-nine weeks ended October 29, 2016 or October 31, 2015 as a result of 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.
There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks endedOctober 29, 2016 or October 31, 2015 as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness.
Other Derivatives Not Designated as Hedging Instruments
We 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 that represent economic hedges, 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.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
| | | ($ in millions) | October 29,
2016 | | January 30,
2016 | | October 31,
2015 | July 29,
2017 | | January 28,
2017 | | July 30,
2016 |
| Derivatives designated as cash flow hedges | $ | 1,201 |
| | $ | 1,220 |
| | $ | 1,349 |
| $ | 1,146 |
| | $ | 1,101 |
| | $ | 1,449 |
|
| Derivatives designated as net investment hedges | 31 |
| | 30 |
| | 31 |
| 30 |
| | 31 |
| | 32 |
|
| Derivatives not designated as hedging instruments | 664 |
| | 324 |
| | 394 |
| 616 |
| | 618 |
| | 625 |
|
| Total | $ | 1,896 |
| | $ | 1,574 |
| | $ | 1,774 |
| $ | 1,792 |
| | $ | 1,750 |
| | $ | 2,106 |
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows: | | | ($ in millions) | October 29,
2016 | | January 30,
2016 | | October 31,
2015 | July 29,
2017 | | January 28,
2017 | | July 30,
2016 |
| Derivatives designated as cash flow hedges: | | | | | | | | | | |
| Other current assets | $ | 35 |
| | $ | 71 |
| | $ | 56 |
| $ | 10 |
| | $ | 28 |
| | $ | 30 |
|
| Other long-term assets | $ | 13 |
| | $ | 8 |
| | $ | 12 |
| $ | 7 |
| | $ | 16 |
| | $ | 8 |
|
| Accrued expenses and other current liabilities | $ | 26 |
| | $ | 1 |
| | $ | 3 |
| $ | 26 |
| | $ | 10 |
| | $ | 38 |
|
| Lease incentives and other long-term liabilities | $ | 8 |
| | $ | 1 |
| | $ | 3 |
| $ | 11 |
| | $ | 1 |
| | $ | 23 |
|
| | | | | | | | | | | |
| Derivatives designated as net investment hedges: | | | | | | | | | | |
| Other current assets | $ | 1 |
| | $ | 1 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 1 |
|
| Other long-term assets | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Accrued expenses and other current liabilities | $ | — |
| | $ | — |
| | $ | — |
| $ | 3 |
| | $ | — |
| | $ | — |
|
| Lease incentives and other long-term liabilities | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Other current assets | $ | 13 |
| | $ | 13 |
| | $ | 16 |
| $ | 3 |
| | $ | 13 |
| | $ | 12 |
|
| Other long-term assets | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Accrued expenses and other current liabilities | $ | 14 |
| | $ | 1 |
| | $ | 2 |
| $ | 12 |
| | $ | 10 |
| | $ | 19 |
|
| Lease incentives and other long-term liabilities | $ | 1 |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 3 |
|
| | | | | | | | | | | |
| Total derivatives in an asset position | $ | 62 |
| | $ | 93 |
| | $ | 84 |
| $ | 20 |
| | $ | 58 |
| | $ | 52 |
|
| Total derivatives in a liability position | $ | 49 |
| | $ | 3 |
| | $ | 8 |
| $ | 52 |
| | $ | 21 |
| | $ | 83 |
|
The majority of the unrealized gains and losses from designated cash flow hedges as of OctoberJuly 29, 20162017 will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of OctoberJuly 29, 20162017 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 $9$13 million, $218 million, and $511 million as of OctoberJuly 29, 20162017, January 30, 201628, 2017, and October 31, 2015July 30, 2016, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $537 million, $9140 million, and $79$41 million and the net amounts of the derivative financial instruments in a liability position would be $4039 million, $1$3 million, and $3$72 million as of OctoberJuly 29, 2016,2017, January 30, 201628, 2017 and October 31, 2015July 30, 2016, respectively.
See Note 54 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
| |
| 13 Weeks Ended |
| 39 Weeks Ended | 13 Weeks Ended |
| 26 Weeks Ended |
| ($ in millions) | October 29,
2016 |
| October 31,
2015 |
| October 29,
2016 |
| October 31,
2015 | July 29,
2017 |
| July 30,
2016 |
| July 29,
2017 |
| July 30,
2016 |
| Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | |
| Gain (loss) recognized in other comprehensive income | $ | 43 |
| | $ | (8 | ) | | $ | (62 | ) | | $ | 31 |
| $ | (55 | ) | | $ | 20 |
| | $ | (51 | ) | | $ | (105 | ) |
| Gain reclassified into cost of goods sold and occupancy expenses | $ | 2 |
| | $ | 45 |
| | $ | 15 |
| | $ | 99 |
| $ | 1 |
| | $ | — |
| | $ | 7 |
| | $ | 13 |
|
| Gain (loss) reclassified into operating expenses | $ | (2 | ) | | $ | 2 |
| | $ | (10 | ) | | $ | 5 |
| |
| Loss reclassified into operating expenses | | $ | — |
| | $ | (6 | ) | | $ | — |
| | $ | (8 | ) |
| | | | | | | | | | | | | | | |
| Derivatives in net investment hedging relationships: | | | | | | | | | | | | | | |
| Gain (loss) recognized in other comprehensive income | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | 1 |
| $ | (3 | ) | | $ | 1 |
| | $ | (2 | ) | | $ | (2 | ) |
For the thirteen and thirty-ninetwenty-six weeks ended OctoberJuly 29, 20162017 and October 31, 2015July 30, 2016, there were no amounts of gaingains or losslosses 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 losses on foreign exchange forward contracts not designated as hedging instruments recorded in the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
| | | | 13 Weeks Ended | | 39 Weeks Ended | 13 Weeks Ended | | 26 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Gain (loss) recognized in operating expenses | $ | 12 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| $ | (11 | ) | | $ | 10 |
| | $ | (23 | ) | | $ | (17 | ) |
Note 7.6. Share Repurchases
Share repurchase activity is as follows:
| | | | 13 Weeks Ended | | 39 Weeks Ended | 13 Weeks Ended | | 26 Weeks Ended |
| ($ and shares in millions except average per share cost) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
Number of shares repurchased | — |
| | 6.2 |
| | — |
| | 21.8 |
| 4.5 |
| | — |
| | 8.7 |
| | — |
|
| Total cost | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | 807 |
| $ | 100 |
| | $ | — |
| | $ | 200 |
| | $ | — |
|
| Average per share cost including commissions | $ | — |
| | $ | 32.17 |
| | $ | — |
| | $ | 36.93 |
| $ | 22.30 |
| | $ | — |
| | $ | 23.15 |
| | $ | — |
|
In October 2014, we announced that the Board of Directors approved a $500 million share repurchase authorization, all of which was completed by the end of May 2015. __________
| |
| (1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
In February 2015,2016, we announced that the Board of Directors approved a $1.0 billion share repurchase authorization, (the "February 2015 repurchase program"). In February 2016, we announced that the Board of Directors approved a new $1.0 billion share repurchase authorization (the "February 2016 repurchase program"). The February 2015 repurchase program, which had $302$800 million remaining, was superseded and replaced by the February 2016 repurchase program. The February 2016 repurchase program still had $1.0 billion remaining as of OctoberJuly 29, 2016, as there were no shares repurchased during the thirteen and thirty-nine weeks ended October 29, 2016.2017.
All of the share repurchases were paid for as of July 29, 2017, January 28, 2017, and July 30, 2016 and October 31, 2015.2016. All common stock repurchased is immediately retired.
Note 7. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | Foreign Currency Translation | | Cash Flow Hedges | | Total |
| Balance at January 28, 2017 | $ | 29 |
| | $ | 25 |
| | $ | 54 |
|
| 13 Weeks Ended April 29, 2017: | | | | | |
| Foreign currency translation | (4 | ) | | — |
| | (4 | ) |
| Change in fair value of derivative financial instruments | — |
| | — |
| | — |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | (4 | ) | | (4 | ) |
| Other comprehensive loss, net of tax | (4 | ) | | (4 | ) | | (8 | ) |
| Balance at April 29, 2017 | 25 |
| | 21 |
| | 46 |
|
| 13 Weeks Ended July 29, 2017: | | | | | |
| Foreign currency translation | 21 |
| | — |
| | 21 |
|
| Change in fair value of derivative financial instruments | — |
| | (43 | ) | | (43 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (1 | ) | | (1 | ) |
| Other comprehensive income (loss), net of tax | 21 |
| | (44 | ) | | (23 | ) |
| Balance at July 29, 2017 | $ | 46 |
| | $ | (23 | ) | | $ | 23 |
|
| | | | | | |
| ($ in millions) | Foreign Currency Translation | | Cash Flow Hedges | | Total |
| Balance at January 30, 2016 | $ | 22 |
| | $ | 63 |
| | $ | 85 |
|
| 13 Weeks Ended April 30, 2016: | | | | | |
| Foreign currency translation | 31 |
| | — |
| | 31 |
|
| Change in fair value of derivative financial instruments | — |
| | (89 | ) | | (89 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (7 | ) | | (7 | ) |
| Other comprehensive income (loss), net of tax | 31 |
| | (96 | ) | | (65 | ) |
| Balance at April 30, 2016 | 53 |
| | (33 | ) | | 20 |
|
| 13 Weeks Ended July 30, 2016: | | | | | |
| Foreign currency translation | (22 | ) | | — |
| | (22 | ) |
| Change in fair value of derivative financial instruments | — |
| | (7 | ) | | (7 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 8 |
| | 8 |
|
| Other comprehensive income (loss), net of tax | (22 | ) | | 1 |
| | (21 | ) |
| Balance at July 30, 2016 | $ | 31 |
| | $ | (32 | ) | | $ | (1 | ) |
See Note 5 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 8. 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 | | 26 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Stock units | $ | 14 |
| | $ | 12 |
| | $ | 43 |
| | $ | 46 |
| $ | 18 |
| | $ | 17 |
| | $ | 33 |
| | $ | 29 |
|
| Stock options | 4 |
| | 2 |
| | 9 |
| | 8 |
| 3 |
| | 3 |
| | 7 |
| | 5 |
|
| Employee stock purchase plan | 1 |
| | 1 |
| | 3 |
| | 4 |
| 1 |
| | 1 |
| | 2 |
| | 2 |
|
| Share-based compensation expense | 19 |
| | 15 |
| | 55 |
| | 58 |
| 22 |
| | 21 |
| | 42 |
| | 36 |
|
| Less: Income tax benefit | (8 | ) | | (6 | ) | | (25 | ) | | (22 | ) | (8 | ) | | (11 | ) | | (16 | ) | | (17 | ) |
| Share-based compensation expense, net of tax | $ | 11 |
| | $ | 9 |
| | $ | 30 |
| | $ | 36 |
| $ | 14 |
| | $ | 10 |
| | $ | 26 |
| | $ | 19 |
|
Note 9. 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 |
| Balance at January 30, 2016 | $ | 22 |
| | $ | 63 |
| | $ | 85 |
|
| 13 Weeks Ended April 30, 2016: | | | | | |
| Foreign currency translation | 31 |
| | — |
| | 31 |
|
| Change in fair value of derivative financial instruments | — |
| | (89 | ) | | (89 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (7 | ) | | (7 | ) |
| Other comprehensive income (loss), net | 31 |
| | (96 | ) | | (65 | ) |
| Balance at April 30, 2016 | 53 |
| | (33 | ) | | 20 |
|
| 13 Weeks Ended July 30, 2016: | | | | | |
| Foreign currency translation | (22 | ) | | — |
| | (22 | ) |
| Change in fair value of derivative financial instruments | — |
| | (7 | ) | | (7 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 8 |
| | 8 |
|
| Other comprehensive income (loss), net | (22 | ) | | 1 |
| | (21 | ) |
| Balance at July 30, 2016 | 31 |
| | (32 | ) | | (1 | ) |
| 13 Weeks Ended October 29, 2016: | | | | | |
| Foreign currency translation | (10 | ) | | — |
| | (10 | ) |
| Change in fair value of derivative financial instruments | — |
| | 39 |
| | 39 |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | — |
| | — |
|
| Other comprehensive loss, net | (10 | ) | | 39 |
| | 29 |
|
| Balance at October 29, 2016 | $ | 21 |
| | $ | 7 |
| | $ | 28 |
|
| | | | | | |
| ($ in millions) | Foreign Currency Translation | | Cash Flow Hedges | | Total |
| Balance at January 31, 2015 | $ | 60 |
| | $ | 105 |
| | $ | 165 |
|
| 13 Weeks Ended May 2, 2015: | | | | | |
| 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 |
|
| 13 Weeks Ended August 1, 2015: | | | | | |
| Foreign currency translation | (13 | ) | | — |
| | (13 | ) |
| Change in fair value of derivative financial instruments | — |
| | 36 |
| | 36 |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | (19 | ) | | (19 | ) |
| Other comprehensive income (loss), net | (13 | ) | | 17 |
| | 4 |
|
| Balance at August 1, 2015 | 53 |
| | 91 |
| | 144 |
|
| 13 Weeks Ended October 31, 2015: | | | | | |
| Foreign currency translation | (2 | ) | | — |
| | (2 | ) |
| Change in fair value of derivative financial instruments | — |
| | (4 | ) | | (4 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (33 | ) | | (33 | ) |
| Other comprehensive loss, net | (2 | ) | | (37 | ) | | (39 | ) |
| Balance at October 31, 2015 | $ | 51 |
| | $ | 54 |
| | $ | 105 |
|
See Note 6 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. Income Taxes
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, the United Kingdom, China, Hong Kong, Japan, and India. 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 engagesis 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 OctoberJuly 29, 2016,2017, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $2$3 million, primarily due to 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.
Note 10. Earnings Per Share
Weighted-average number of shares used for earnings per share is as follows:
|
| | | | | | | | | | | |
| | 13 Weeks Ended | | 26 Weeks Ended |
| (shares in millions) | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Weighted-average number of shares - basic | 395 |
| | 398 |
| | 397 |
| | 398 |
|
| Common stock equivalents | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Weighted-average number of shares - diluted | 396 |
| | 399 |
| | 398 |
| | 399 |
|
The effective income tax rate was 45.2 percentabove computations of weighted-average number of shares – diluted exclude 11 million shares related to stock options and other stock awards for each of the thirteen weeks ended July 29, 2017 and July 30, 2016, and 9 million and 8 million shares related to stock options and other stock awards for the thirteentwenty-six weeks ended OctoberJuly 29, 2017 and July 30, 2016, compared with 37.4 percent for the thirteen weeks ended October 31, 2015. The effective income tax rate was 45.6 percent for the thirty-nine weeks ended October 29, 2016, compared with 37.6 percent for the thirty-nine weeks ended October 31, 2015. The increase in the effective tax rates was primarily due to the impact of restructuring costs incurred for foreign subsidiaries during the thirteen and thirty-nine weeks ended October 29, 2016 and resulting valuation allowancesrespectively, as their inclusion would have an anti-dilutive effect on certain foreign deferred tax assets.earnings per share.
Note 11. Earnings Per Share
Weighted-average number of shares used for earnings per share is as follows:
|
| | | | | | | | | | | |
| | 13 Weeks Ended | | 39 Weeks Ended |
| (shares in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Weighted-average number of shares - basic | 399 |
| | 406 |
| | 398 |
| | 415 |
|
| Common stock equivalents | 1 |
| | 2 |
| | 2 |
| | 2 |
|
| Weighted-average number of shares - diluted | 400 |
| | 408 |
| | 400 |
| | 417 |
|
The above computations of weighted-average number of shares – diluted exclude 8 million and 4 million shares related to stock options and other stock awards for the thirteen weeks endedOctober 29, 2016 and October 31, 2015, respectively, and 7 million and 3 million shares related to stock options and other stock awards for the thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively, as their inclusion would have an anti-dilutive effect on earnings per share.
Note 12. 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 OctoberJuly 29, 20162017, 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 OctoberJuly 29, 20162017, January 30, 201628, 2017, and October 31, 2015July 30, 2016, 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 OctoberJuly 29, 20162017, January 30, 201628, 2017, and October 31, 2015July 30, 2016 was not material for any individual Action or in total. Subsequent to OctoberJuly 29, 20162017 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.
Fire at the Fishkill Distribution Center
On August 29, 2016, a fire occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York. The impacted building primarily held Gap and Banana Republic products for distribution to stores and fulfilled online orders for Gap and Old Navy in the Northeast region of the United States. The otherCompany has begun reconstruction of the impacted building which processes Old Navy products, has returned to normal operation.on the Fishkill campus.
The Company maintains property and business interruption insurance coverage. Certain incremental costs incurred related to the fire and related insurance recovery for the thirteen weeks ended October 29, 2016 are as follows:
|
| | | |
| | 13 Weeks Ended |
| ($ in millions) | October 29,
2016 |
| Loss on inventory | $ | 86 |
|
| Loss on property, plant, and equipment | 12 |
|
| Other fire-related costs | 19 |
|
| Total | 117 |
|
| Less: Expected insurance recoveries | (117 | ) |
| Fire-related costs, net | $ | — |
|
Based on the provisions of the Company's insurance policies, the Company has determinedrecorded insurance recoveries based on the determination that recovery of certain fire-related costs is probable. During fiscal 2016, the Company incurred asa total of October 29,$133 million in certain fire-related costs. In January of fiscal 2016, is probablethe Company agreed upon a partial settlement of $159 million related to the loss on inventory and recorded $117a gain of $73 million, representing the excess over the loss on inventory, which was recorded in operating expenses in the Condensed Consolidated Statement of insurance recoveries.Income. During the thirteen weeks ended October 29,fiscal 2016, the Company received $73$174 million of insurance proceeds, representing an advance of funds.proceeds. As a result, the insurance receivable balance was $44$32 million as of OctoberJanuary 28, 2017 and was recorded in other current assets in the Consolidated Balance Sheet.
During the thirteen and twenty-six weeks ended July 29, 20162017, the Company incurred an additional $10 million and $15 million, respectively, in certain fire-related costs for which the Company recorded insurance recoveries based on the determination that recovery of certain fire-related costs is probable. During the thirteen weeks ended July 29, 2017, the Company also agreed upon a partial settlement and recorded a gain of $64 million, primarily related to property and equipment, representing the excess over the loss on fire-related recoverable costs, which was recorded in operating expenses in the Condensed Consolidated Statement of Income. The Company received $29 million and $102 million of insurance proceeds during the thirteen and twenty-six weeks ended July 29, 2017, respectively. As a result, the insurance receivable balance was $9 million as of July 29, 2017 and was recorded in other current assets in the Condensed Consolidated Balance Sheet. In November 2016,
We will continue to incur additional logistics costs related to the Company received an additional advancedisruption to our North American supply chain network. As settlements are reached, any recoveries related to business interruption insurance will be recognized in the Condensed Consolidated Statements of about $25 million.Income.
During the twenty-six weeks ended July 29, 2017, we allocated $59 million of insurance proceeds to the loss on property and equipment based on the partial settlement of claims, and the amount has been reported as insurance proceeds related to loss on property and equipment, a component of cash flows from investing activities, in the Condensed Consolidated Statement of Cash Flows.
Note 12. Segment Information
The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way brands. We identify our operating segments according to how our business activities are managed and evaluated. As of July 29, 2017, our operating segments included Gap Global, Old Navy Global, Banana Republic Global, Athleta, and Intermix. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one reportable segment as of July 29, 2017.
Net sales by brand and region are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales |
| 13 Weeks Ended July 29, 2017 | | | | | | |
| U.S. (1) | | $ | 719 |
| | $ | 1,596 |
| | $ | 492 |
| | $ | 231 |
| | $ | 3,038 |
| | 80 | % |
| Canada | | 91 |
| | 133 |
| | 54 |
| | — |
| | 278 |
| | 7 |
|
| Europe | | 148 |
| | — |
| | 3 |
| | — |
| | 151 |
| | 4 |
|
| Asia | | 252 |
| | 12 |
| | 24 |
| | — |
| | 288 |
| | 8 |
|
| Other regions | | 22 |
| | 16 |
| | 6 |
| | — |
| | 44 |
| | 1 |
|
| Total | | $ | 1,232 |
| | $ | 1,757 |
| | $ | 579 |
| | $ | 231 |
| | $ | 3,799 |
| | 100 | % |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
| 13 Weeks Ended July 30, 2016 | | | | | | |
| U.S. (1) | | $ | 749 |
| | $ | 1,500 |
| | $ | 523 |
| | $ | 200 |
| | $ | 2,972 |
| | 77 | % |
| Canada | | 92 |
| | 129 |
| | 57 |
| | — |
| | 278 |
| | 7 |
|
| Europe | | 159 |
| | — |
| | 17 |
| | — |
| | 176 |
| | 5 |
|
| Asia | | 280 |
| | 66 |
| | 29 |
| | — |
| | 375 |
| | 10 |
|
| Other regions | | 33 |
| | 10 |
| | 7 |
| | — |
| | 50 |
| | 1 |
|
| Total | | $ | 1,313 |
| | $ | 1,705 |
| | $ | 633 |
| | $ | 200 |
| | $ | 3,851 |
| | 100 | % |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales |
| 26 Weeks Ended July 29, 2017 | | | | | | |
| U.S. (1) | | $ | 1,387 |
| | $ | 3,022 |
| | $ | 929 |
| | $ | 433 |
| | $ | 5,771 |
| | 80 | % |
| Canada | | 168 |
| | 244 |
| | 99 |
| | 1 |
| | 512 |
| | 7 |
|
| Europe | | 281 |
| | — |
| | 7 |
| | — |
| | 288 |
| | 4 |
|
| Asia | | 502 |
| | 21 |
| | 48 |
| | — |
| | 571 |
| | 8 |
|
| Other regions | | 52 |
| | 32 |
| | 13 |
| | — |
| | 97 |
| | 1 |
|
| Total | | $ | 2,390 |
| | $ | 3,319 |
| | $ | 1,096 |
| | $ | 434 |
| | $ | 7,239 |
| | 100 | % |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
| 26 Weeks Ended July 30, 2016 | | | | | | |
| U.S. (1) | | $ | 1,447 |
| | $ | 2,828 |
| | $ | 977 |
| | $ | 378 |
| | $ | 5,630 |
| | 77 | % |
| Canada | | 162 |
| | 227 |
| | 104 |
| | 1 |
| | 494 |
| | 7 |
|
| Europe | | 303 |
| | — |
| | 31 |
| | — |
| | 334 |
| | 5 |
|
| Asia | | 560 |
| | 116 |
| | 55 |
| | — |
| | 731 |
| | 10 |
|
| Other regions | | 64 |
| | 20 |
| | 16 |
| | — |
| | 100 |
| | 1 |
|
| Total | | $ | 2,536 |
| | $ | 3,191 |
| | $ | 1,183 |
| | $ | 379 |
| | $ | 7,289 |
| | 100 | % |
__________
| |
| (1) | U.S. includes the United States, Puerto Rico, and Guam. |
| |
| (2) | Includes Athleta, Intermix, and Weddington Way. |
| |
| (3) | Includes Athleta and Intermix. |
Net sales by region are allocated based on the location of the store where the customer paid for and received the merchandise or the distribution center or store from which the products were shipped.
| |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Note 13. Segment InformationThe Gap, Inc. isOUR BUSINESS
We are a global retailer that sellsoffering apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and IntermixWeddington Way brands. We identifyhave Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico. We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, 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. 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 segments accordingin the specialty, outlet, online, and franchise channels, we also use our omni-channel capabilities to howbridge the digital world and physical stores to further enhance our business activitiesshopping experience for our customers. Our omni-channel services, including order-in-store, reserve-in-store, find-in-store, and ship-from-store, as well as enhanced mobile experiences, are managedtailored uniquely across our portfolio of brands. Most of the products sold under our brand names are designed by us and evaluated. Asmanufactured by independent sources. We also sell products that are designed and manufactured by branded third parties, primarily at our Intermix brand.
OVERVIEW
Results for the second quarter of Octoberfiscal 2017 include a gain from insurance proceeds of $64 million related to the fire that occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York on August 29, 2016 (“the Fishkill fire”), which was recorded in operating expenses in the Condensed Consolidated Statement of Income. Fiscal 2016 results were impacted by the previously announced measures to better align talent and financial resources against our most important priorities to position the Company for improved business performance and long-term success. In connection with these measures, the Company incurred $150 million in restructuring costs in the second quarter of fiscal 2016, of which $135 million was recorded in operating segments included Gap Global, Old Navy Global, Banana Republic Global, Athleta,expenses and Intermix. The operating$15 million was recorded in cost of goods sold and occupancy expenses in the Condensed Consolidated Statement of Income.
Financial results for the thirty-nine weeks ended October 31, 2015 also include Piperlime, which was discontinued as of the firstsecond quarter of fiscal 2015. We have determined2017 are as follows:
Net sales for the second quarter of fiscal 2017 decreased 1 percent compared with the second quarter of fiscal 2016.
Comparable sales for the second quarter of fiscal 2017 increased 1 percent compared with a 2 percent decrease for the second quarter of fiscal 2016.
Gross profit for the second quarter of fiscal 2017 was $1.5 billion compared with $1.4 billion for the second quarter of fiscal 2016. Gross margin for the second quarter of fiscal 2017 was 38.9 percent compared with 37.3 percent for the second quarter of fiscal 2016.
Operating margin for the second quarter of fiscal 2017 was 11.9 percent compared with 7.2 percent for the second quarter of fiscal 2016.
Net income for the second quarter of fiscal 2017 was $271 million compared with $125 million for the second quarter of fiscal 2016.
Diluted earnings per share was $0.68 for the second quarter of fiscal 2017 compared with $0.31 for the second quarter of fiscal 2016. Diluted earnings per share for the second quarter of fiscal 2017 included about a $0.10 benefit from the gain from insurance proceeds related to the Fishkill fire. Diluted earnings per share for the second quarter of fiscal 2016 included about a $0.29 impact of restructuring costs incurred in the second quarter of fiscal 2016.
During the first half of fiscal 2017, we distributed $382 million to shareholders through share repurchases and dividends.
Our business priorities for fiscal 2017 remain as follows:
offering product that eachis consistently brand-appropriate and on-trend with high customer acceptance, with a focus on expanding our advantage in loyalty categories;
investing in digital and customer capabilities to support growth;
creating a unique and differentiated customer experience that builds loyalty, with focus on both the physical and digital expressions of our brands; and
attracting and retaining great talent in our businesses and functions.
In fiscal 2017, we are focused on investing strategically in the business while also maintaining operating segmentsexpense discipline. One of our primary objectives is to continue transforming our product to market process, with the development of a more efficient operating model, allowing us to more fully leverage our scale. To enable this, we have several product, supply chain, and IT initiatives underway. Further, we expect to continue our investment in customer experience, both in stores and online, to drive higher customer engagement and loyalty, resulting in market share similar economicgains. Finally, we will continue to invest in strengthening brand awareness, customer acquisition, and other qualitative characteristics,digital capabilities.
In fiscal 2017, we expect that gross margins for our foreign subsidiaries, net of the impact from our merchandise hedge program, will continue to be negatively impacted by the depreciation of certain foreign currencies as our merchandise purchases are primarily in U.S. dollars.
RESULTS OF OPERATIONS
Net Sales
See Note 12 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q, for net sales by brand and thereforeregion.
Comparable Sales (“Comp Sales”)
The percentage change in Comp Sales by global brand and for total Company, as compared with the preceding year, is as follows:
|
| | | | | | | | | | | |
| | 13 Weeks Ended | | 26 Weeks Ended |
| | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Gap Global | (1 | )% | | (3 | )% | | (2 | )% | | (3 | )% |
| Old Navy Global | 5 | % | | — | % | | 6 | % | | (3 | )% |
| Banana Republic Global | (5 | )% | | (9 | )% | | (5 | )% | | (10 | )% |
| The Gap, Inc. | 1 | % | | (2 | )% | | 2 | % | | (4 | )% |
Comp Sales include the results of Company-operated stores and sales through online channels in those countries where we have existing comparable store sales. The calculation of The Gap, Inc. Comp Sales includes the results of Athleta and Intermix but excludes the results of our operating segmentsfranchise 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 aggregated into 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 reportable segment as of October 29, 2016. 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.
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 by brand and regionper average square foot are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales |
| 13 Weeks Ended October 29, 2016 | | | | | | |
| U.S. (1) | | $ | 756 |
| | $ | 1,507 |
| | $ | 479 |
| | $ | 172 |
| | $ | 2,914 |
| | 77 | % |
| Canada | | 102 |
| | 131 |
| | 55 |
| | 1 |
| | 289 |
| | 8 |
|
| Europe | | 150 |
| | — |
| | 14 |
| | — |
| | 164 |
| | 4 |
|
| Asia | | 296 |
| | 55 |
| | 25 |
| | — |
| | 376 |
| | 10 |
|
| Other regions | | 36 |
| | 12 |
| | 7 |
| | — |
| | 55 |
| | 1 |
|
| Total | | $ | 1,340 |
| | $ | 1,705 |
| | $ | 580 |
| | $ | 173 |
| | $ | 3,798 |
| | 100 | % |
| Sales growth (decline) | | (7 | )% | | 5 | % | | (7 | )% | | 9 | % | | (2 | )% | | |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales |
| 13 Weeks Ended October 31, 2015 | | | | | | |
| U.S. (1) | | $ | 838 |
| | $ | 1,449 |
| | $ | 520 |
| | $ | 159 |
| | $ | 2,966 |
| | 77 | % |
| Canada | | 94 |
| | 118 |
| | 56 |
| | — |
| | 268 |
| | 7 |
|
| Europe | | 182 |
| | — |
| | 17 |
| | — |
| | 199 |
| | 5 |
|
| Asia | | 300 |
| | 50 |
| | 26 |
| | — |
| | 376 |
| | 10 |
|
| Other regions | | 34 |
| | 6 |
| | 8 |
| | — |
| | 48 |
| | 1 |
|
| Total | | $ | 1,448 |
| | $ | 1,623 |
| | $ | 627 |
| | $ | 159 |
| | $ | 3,857 |
| | 100 | % |
| Sales growth (decline) | | (7 | )% | | 4 | % | | (11 | )% | | 4 | % | | (3 | )% | | |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales |
| 39 Weeks Ended October 29, 2016 | | | | | | |
| U.S. (1) | | $ | 2,203 |
| | $ | 4,335 |
| | $ | 1,456 |
| | $ | 550 |
| | $ | 8,544 |
| | 77 | % |
| Canada | | 264 |
| | 358 |
| | 159 |
| | 2 |
| | 783 |
| | 7 |
|
| Europe | | 453 |
| | — |
| | 45 |
| | — |
| | 498 |
| | 5 |
|
| Asia | | 856 |
| | 171 |
| | 80 |
| | — |
| | 1,107 |
| | 10 |
|
| Other regions | | 100 |
| | 32 |
| | 23 |
| | — |
| | 155 |
| | 1 |
|
| Total | | $ | 3,876 |
| | $ | 4,896 |
| | $ | 1,763 |
| | $ | 552 |
| | $ | 11,087 |
| | 100 | % |
| Sales growth (decline) | | (6 | )% | | 1 | % | | (8 | )% | | 8 | % | | (3 | )% | | |
| | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
| 39 Weeks Ended October 31, 2015 | | | | | | |
| U.S. (1) | | $ | 2,368 |
| | $ | 4,352 |
| | $ | 1,598 |
| | $ | 511 |
| | $ | 8,829 |
| | 77 | % |
| Canada | | 251 |
| | 344 |
| | 167 |
| | 2 |
| | 764 |
| | 7 |
|
| Europe | | 522 |
| | — |
| | 54 |
| | — |
| | 576 |
| | 5 |
|
| Asia | | 855 |
| | 142 |
| | 80 |
| | — |
| | 1,077 |
| | 10 |
|
| Other regions | | 128 |
| | 12 |
| | 26 |
| | — |
| | 166 |
| | 1 |
|
| Total | | $ | 4,124 |
| | $ | 4,850 |
| | $ | 1,925 |
| | $ | 513 |
| | $ | 11,412 |
| | 100 | % |
| Sales growth (decline) | | (8 | )% | | 4 | % | | (7 | )% | | (2 | )% | | (3 | )% | | |
|
| | | | | | | | | | | | | | |
| | 13 Weeks Ended | | 26 Weeks Ended |
| | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Net sales per average square foot (1) | $ | 85 |
| | $ | 85 |
| | 160 |
| | $ | 159 |
|
__________
| |
| (1) | U.S. includes the United States, Puerto Rico,Excludes net sales associated with our online and Guam.franchise businesses. |
| |
(2) | Includes Athleta and Intermix. |
| |
(3) | Includes Athleta, Intermix, and Piperlime, which was discontinued as of the first quarter of fiscal 2015. |
Net sales by region are allocated based on the location of the store where the customer paid for and received the merchandise or the distribution center or store from which the products were shipped.
Store count, openings, closings, and square footage for our stores are as follows:
|
| | | | | | | | | | | | | | |
| | January 28, 2017 | | 26 Weeks Ended July 29, 2017 | | July 29, 2017 |
| | Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) |
| Gap North America | 844 |
| | 3 |
| | 13 |
| | 834 |
| | 8.6 |
|
| Gap Asia | 311 |
| | 3 |
| | 9 |
| | 305 |
| | 2.9 |
|
| Gap Europe | 164 |
| | — |
| | 5 |
| | 159 |
| | 1.4 |
|
| Old Navy North America | 1,043 |
| | 13 |
| | 5 |
| | 1,051 |
| | 17.5 |
|
| Old Navy Asia | 13 |
| | — |
| | — |
| | 13 |
| | 0.2 |
|
| Banana Republic North America | 601 |
| | 3 |
| | 8 |
| | 596 |
| | 5.0 |
|
| Banana Republic Asia | 48 |
| | 1 |
| | 1 |
| | 48 |
| | 0.2 |
|
| Banana Republic Europe | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Athleta North America | 132 |
| | 1 |
| | — |
| | 133 |
| | 0.6 |
|
| Intermix North America | 43 |
| | — |
| | 3 |
| | 40 |
| | 0.1 |
|
| Company-operated stores total | 3,200 |
| | 24 |
| | 45 |
| | 3,179 |
| | 36.5 |
|
| Franchise | 459 |
| | 22 |
| | 18 |
| | 463 |
| | N/A |
|
| Total | 3,659 |
| | 46 |
| | 63 |
| | 3,642 |
| | 36.5 |
|
| Decrease over prior year | | | | | | | (2.4 | )% | | (3.4 | )% |
| | | | | | | | | | |
| | January 30, 2016 | | 26 Weeks Ended July 30, 2016 | | July 30, 2016 |
| | Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) |
| Gap North America | 866 |
| | 5 |
| | 15 |
| | 856 |
| | 8.9 |
|
| Gap Asia | 305 |
| | 11 |
| | 2 |
| | 314 |
| | 3.1 |
|
| Gap Europe | 175 |
| | 1 |
| | 9 |
| | 167 |
| | 1.4 |
|
| Old Navy North America | 1,030 |
| | 8 |
| | 6 |
| | 1,032 |
| | 17.4 |
|
| Old Navy Asia | 65 |
| | 4 |
| | — |
| | 69 |
| | 1.0 |
|
| Banana Republic North America | 612 |
| | 2 |
| | 5 |
| | 609 |
| | 5.1 |
|
| Banana Republic Asia | 51 |
| | — |
| | 1 |
| | 50 |
| | 0.2 |
|
| Banana Republic Europe | 10 |
| | — |
| | — |
| | 10 |
| | 0.1 |
|
| Athleta North America | 120 |
| | 6 |
| | — |
| | 126 |
| | 0.5 |
|
| Intermix North America | 41 |
| | — |
| | 1 |
| | 40 |
| | 0.1 |
|
| Company-operated stores total | 3,275 |
| | 37 |
| | 39 |
| | 3,273 |
| | 37.8 |
|
| Franchise | 446 |
| | 35 |
| | 24 |
| | 457 |
| | N/A |
|
| Total | 3,721 |
| | 72 |
| | 63 |
| | 3,730 |
| | 37.8 |
|
| Decrease over prior year | | | | | | | (0.6 | )% | | (1.0 | )% |
Gap and Banana Republic outlet and factory stores are reflected in each of the respective brands.
Net Sales
Our net sales for the second quarter of fiscal 2017 decreased $52 million, or 1 percent, compared with the second quarter of fiscal 2016 primarily driven by a decrease in net sales at Gap and Banana Republic, as well as an unfavorable impact of foreign exchange of $37 million, 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 Canadian dollar, British pound, and Japanese yen against the U.S. dollar. The foreign exchange impact is the translation impact if net sales for the second quarter of fiscal 2016 were translated at exchange rates applicable during the second quarter of fiscal 2017. The increase in Comp Sales of 1 percent for the second quarter of fiscal 2017 was offset by the impact of lost sales from international store closures in fiscal 2016.
Our net sales for the first half of fiscal 2017 decreased $50 million, or 1 percent, compared with the first half of fiscal 2016 primarily driven by a decrease in net sales at Gap and Banana Republic, as well as an unfavorable impact of foreign exchange of $48 million, partially offset by an increase in net sales at Old Navy. The unfavorable impact of foreign exchange was primarily due to the weakening of the British pound, Chinese yuan, Canadian dollar, and Japanese yen against the U.S. dollar. The foreign exchange impact is the translation impact if net sales for the first half of fiscal 2016 were translated at exchange rates applicable during the first half of fiscal 2017. The increase in Comp Sales of 2 percent for the first half of fiscal 2017 was offset by the impact of lost sales from international store closures in fiscal 2016.
Cost of Goods Sold and Occupancy Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| ($ in millions) | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Cost of goods sold and occupancy expenses | $ | 2,320 |
| | $ | 2,414 |
| | $ | 4,457 |
| | $ | 4,643 |
|
| Gross profit | $ | 1,479 |
| | $ | 1,437 |
| | $ | 2,782 |
| | $ | 2,646 |
|
| Cost of goods sold and occupancy expenses as a percentage of net sales | 61.1 | % | | 62.7 | % | | 61.6 | % | | 63.7 | % |
| Gross margin | 38.9 | % | | 37.3 | % | | 38.4 | % | | 36.3 | % |
Cost of goods sold and occupancy expenses decreased 1.6 percent as a percentage of net sales in the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016.
Cost of goods sold decreased1.4 percent as a percentage of net sales in the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016, primarily driven by higher margins achieved as a result of improved average selling price per unit primarily at Old Navy and Gap.
Occupancy expenses decreased0.2 percent as a percentage of net sales in the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016, primarily driven by the closure of international stores in fiscal 2016 and an increase in online sales without a corresponding increase in occupancy expenses, partially offset by expenses incurred in preparation for a store opening at the Times Square, New York location, for Gap and Old Navy.
Cost of goods sold and occupancy expenses decreased2.1 percent as a percentage of net sales in the first half of fiscal 2017 compared with the first half of fiscal 2016.
Cost of goods sold decreased1.8 percent as a percentage of net sales in the first half of fiscal 2017 compared with the first half of fiscal 2016, primarily driven by higher margins achieved as a result of improved average selling price per unit at all global brands. This was partially offset by a negative foreign exchange impact for our foreign subsidiaries as our merchandise purchases are primarily in U.S. dollars.
Occupancy expenses decreased0.3 percent as a percentage of net sales in the first half of fiscal 2017 compared with the first half of fiscal 2016, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses and the closure of international stores in fiscal 2016, partially offset by expenses incurred in preparation for a store opening at the Times Square, New York location, for Gap and Old Navy.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| ($ in millions) | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Operating expenses | $ | 1,028 |
| | $ | 1,158 |
| | $ | 2,077 |
| | $ | 2,145 |
|
| Operating expenses as a percentage of net sales | 27.1 | % | | 30.1 | % | | 28.7 | % | | 29.4 | % |
| Operating margin | 11.9 | % | | 7.2 | % | | 9.7 | % | | 6.9 | % |
Operating expenses decreased $130 million, or 3.0 percent as a percentage of net sales, in the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016. Operating expenses decreased $68 million, or 0.7 percent as a percentage of net sales, in the first half of fiscal 2017 compared with the first half of fiscal 2016.
The decrease in operating expenses for the second quarter and first half of fiscal 2017 compared with the respective periods of fiscal 2016 was primarily due to the following:
$135 million of restructuring costs incurred in the second quarter of fiscal 2016;
a gain from insurance proceeds of $64 million related to the Fishkill fire recorded in the second quarter of fiscal 2017; and
higher income from our credit card program; partially offset by
an increase in payroll-related expenses primarily driven by an increase in bonus expense and investments in digital capabilities; and
an increase in marketing.
Interest Expense
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| ($ in millions) | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Interest expense | $ | 16 |
| | $ | 18 |
| | $ | 35 |
| | $ | 37 |
|
Interest expense for the second quarters and first halves of fiscal 2017 and fiscal 2016 primarily includes interest on overall borrowings and obligations mainly related to our $1.25 billion 5.95 percent Notes.
Income Taxes
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| ($ in millions) | July 29,
2017 | | July 30,
2016 | | July 29,
2017 | | July 30,
2016 |
| Income taxes | $ | 168 |
| | $ | 138 |
| | $ | 263 |
| | $ | 215 |
|
| Effective tax rate | 38.3 | % | | 52.5 | % | | 38.8 | % | | 46.0 | % |
The decrease in the effective tax rate for the second quarter and first half of fiscal 2017 compared with the respective periods of fiscal 2016 was primarily due to the impact of restructuring costs incurred for foreign subsidiaries during the second quarter of fiscal 2016 and resulting valuation allowances on certain foreign deferred tax assets. The decrease in the effective tax rate for the first half of fiscal 2017 compared with the first half of fiscal 2016 was partially offset by the impact of the adoption of ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting in fiscal 2017. See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for additional disclosures on the adoption of the accounting standard.
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, and payment of taxes. In addition, we may have dividend payments, debt repayments, and share repurchases. As of July 29, 2017, cash and cash equivalents were $1.6 billion, the majority of which was held in the United States and is 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 or other available market instruments.
Cash Flows from Operating Activities
Net cash provided by operating activities during the first half of fiscal 2017 decreased $248 million compared with the first half of fiscal 2016, primarily due to the following:
Net income
an increase of $162 million in net income.
Changes in operating assets and liabilities
a decrease of $151 million related to merchandise inventory primarily due to the volume and timing of receipts;
a decrease of $151 million related to accounts payable primarily due to the timing of lease payments and other non-merchandise payables;
a decrease of $91 million related to accrued expenses and other current liabilities in part due to the timing of severance payments primarily as a result of fiscal 2016 restructuring measures; and
a decrease of $54 million related to other current assets and other long-term assets primarily due to the allocation of insurance proceeds related to loss of property and equipment from the Fishkill fire to cash flows from investing activities; partially offset by
an increase of $68 million related to income taxes payable, net of prepaid and other tax-related items, primarily due to an increase in taxable income for the first half of fiscal 2017 compared with the first half of fiscal 2016 as well as the timing of tax payments.
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 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.
Cash Flows from Investing Activities
Net cash used for investing activities during the first half of fiscal 2017 decreased $52 million compared with the first half of fiscal 2016, primarily due to $59 million in insurance proceeds allocated to loss on property and equipment in the first half of fiscal 2017 related to the Fishkill fire compared with no insurance proceeds allocated in the first half of fiscal 2016.
Cash Flows from Financing Activities
Net cash used for financing activities during the first half of fiscal 2017 increased $289 million compared with the first half of fiscal 2016, primarily due to the following:
$200 million of cash used for repurchases of common stock in the first half of fiscal 2017 compared with no repurchases of common stock in the first half of fiscal 2016; and
$67 million related to the repayment of the Japan Term Loan during the first half of fiscal 2017.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results. Free cash flow for the first half of fiscal 2017 is further adjusted for insurance proceeds allocated to loss on property and equipment, as our cash used for purchases of property and equipment for the first half of fiscal 2017 includes certain capital expenditures related to the rebuilding of the Company-owned distribution center which was impacted by the Fishkill fire.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
|
| | | | | | | |
| | 26 Weeks Ended |
| ($ in millions) | July 29,
2017 | | July 30,
2016 |
| Net cash provided by operating activities | $ | 486 |
| | $ | 734 |
|
| Less: Purchases of property and equipment | (275 | ) | | (270 | ) |
| Add: Insurance proceeds related to loss on property and equipment | 59 |
| | — |
|
| Free cash flow | $ | 270 |
| | $ | 464 |
|
Debt and Credit Facilities
Certain financial information about the Company's debt and credit facilities is set forth under the heading “Debt and Credit Facilities” in Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this 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 $0.46 per share during the first half of fiscal 2017 and fiscal 2016. Including the dividend paid during the first half of fiscal 2017, we intend to pay an annual dividend of $0.92 per share for fiscal 2017, consistent with the annual dividend for fiscal 2016.
Share Repurchases
Certain financial information about the Company's share repurchases is set forth under the heading “Share Repurchases” in Note 6 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of 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 January 28, 2017, other than those which occur in the normal course of business. See Note 11 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 January 28, 2017.
| |
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, Athleta, and Intermix brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and beginning in October 2015, Mexico. 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. We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, 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 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, including order-in-store, reserve-in-store, find-in-store, and ship-from-store, as well as enhanced mobile experiences, are tailored uniquely across our portfolio of brands. 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, primarily at our Intermix brand.
OVERVIEW
In fiscal 2016, one of our primary objectives is to continue transforming our product to market process, resulting in more consistent, on-trend product offerings, and a compelling customer experience in stores and online. To enable this, we have several product and supply chain initiatives underway. Further, we expect to continue our investment in mobile digital capabilities to enhance our shopping experience for our customers.
Trends in the apparel retail environment have been challenging, and the change in our business trajectory is not happening at the desired pace. On May 19, 2016, we announced measures to better align talent and financial resources against our most important priorities to position the Company for improved business performance and long-term success.
Our aim is to recapture market share in our home market, North America, where we have our largest structural advantages, and to focus on international regions with the greatest potential. As part of this effort, Old Navy is winding down its operations in Japan, resulting in the closure of its fleet of 53 stores by the end of fiscal 2016. The brand’s near-term growth ambitions will be anchored in North America, including its recent debut of Company-operated stores in Mexico, as well as China and its global franchise operations. Japan remains an important market for the Company's portfolio, with a continued strong presence of more than 200 Gap and Banana Republic stores. Additionally, the Company expects to close select Banana Republic stores, primarily internationally, by the end of fiscal 2016.
We are also creating a more efficient operating model, enabling us to more fully leverage our scale.
The Company estimates that its actions will result in annualized pre-tax savings of about $275 million. The Company estimates an annualized sales loss of about $250 million associated with the store closures and expects to recognize pre-tax restructuring costs in fiscal 2016 of about $210 million to $240 million from the store closures and operating model changes. The Company expects that the charges will primarily include lease termination fees, store asset impairment, and employee related costs. In addition to the total pre-tax amount of restructuring costs estimated, the Company also expects to incur incremental tax expense related to the restructuring costs and resulting valuation allowances on certain foreign deferred tax assets. In connection with the decision to close stores and streamline the Company's operations, the Company incurred $29 million and $179 million in restructuring costs during the third quarter of fiscal 2016 and thirty-nine weeks ended October 29, 2016, respectively, on a pre-tax basis.
On August 29, 2016, a fire occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York. We immediately activated contingency plans designed to help mitigate the overall impact to the business, including utilizing the Company's other distribution centers in North America and rerouting inbound freight intended for the Fishkill distribution center to other distribution centers. The Company also constructed a temporary fulfillment site at the Fishkill campus, which has begun processing orders. For the third quarter of fiscal 2016, the Company incurred fire-related costs which included $86 million in loss on inventory, $12 million on loss on property, plant, and equipment, and $19 million in other fire-related costs. Based on the provisions of the Company’s insurance policies, the Company has determined that recovery of certain fire-related costs incurred during the third quarter of fiscal 2016 is probable, and the insurance receivable balance, net of advance insurance proceeds received, has been recorded as of October 29, 2016 to fully offset the fire-related costs. The company expects to continue to record additional costs and recoveries until the insurance claim is fully settled. While the Company has activated contingency plans to help mitigate the overall impact to the business, we expect a negative impact to net sales for the remainder of fiscal 2016 as a result of lost inventory, as well as increased logistics costs.
Financial results for the third quarter of fiscal 2016 are as follows:
Net sales for the third quarter of fiscal 2016 decreased 2 percent compared with the third quarter of fiscal 2015.
Comparable sales for the third quarter of fiscal 2016 decreased 3 percent, including an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points, compared with a 2 percent decrease for the third quarter of fiscal 2015.
Operating margin for the third quarter of fiscal 2016 was 10.2 percent compared with 10.7 percent for the third quarter of fiscal 2015. Operating margin is defined as operating income as a percentage of net sales.
Net income for the third quarter of fiscal 2016 was $204 million compared with $248 million for the third quarter of fiscal 2015, and diluted earnings per share was $0.51 for the third quarter of fiscal 2016 compared with $0.61 for the third quarter of fiscal 2015. Diluted earnings per share for the third quarter of fiscal 2016 included about $0.09 impact of restructuring costs incurred in the third quarter of fiscal 2016.
During the first three quarters of fiscal 2016, we distributed $275 million to shareholders through dividends.
We expect that foreign exchange rate fluctuations will continue to have a meaningful negative impact on our full-year results in fiscal 2016, primarily in gross margin. Our merchandise purchases are primarily in U.S. dollars, which can have a negative impact on gross margins for our largest foreign subsidiaries whose currencies weakened.
Fiscal 2015 results were impacted by a series of strategic actions to position Gap brand for improved business performance in the future, including right-sizing the Gap brand store fleet primarily in North America, streamlining the brand's headquarter workforce, and developing a clear, on-brand product aesthetic framework to strengthen the Gap brand to compete more successfully on the global stage. During fiscal 2015, the Company completed the closure of about 150 Gap global specialty stores related to the strategic actions. In the third quarter of fiscal 2015, the Company incurred $13 million of charges in connection with the strategic actions, primarily consisting of impairment charges and employee related expenses. During the thirty-nine weeks ended October 31, 2015, the Company incurred $107 million of charges in connection with the strategic actions, primarily consisting of impairment of store assets related to underperforming stores, lease termination fees and lease losses, and impairment of inventory that did not meet brand standards.
RESULTS OF OPERATIONS
Net Sales
See Note 13 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, as compared with the preceding year, is as follows:
|
| | | | | | | | | | | |
| | 13 Weeks Ended | | 39 Weeks Ended |
| | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Gap Global | (8 | )% | | (4 | )% | | (5 | )% | | (7 | )% |
| Old Navy Global | 3 | % | | 4 | % | | (1 | )% | | 3 | % |
| Banana Republic Global | (8 | )% | | (12 | )% | | (9 | )% | | (8 | )% |
| The Gap, Inc. | (3 | )% | | (2 | )% | | (3 | )% | | (3 | )% |
Comp sales for the third quarter of fiscal 2016 include an estimated negative impact from the Fishkill distribution center fire of approximately 4 percentage points for Gap Global, approximately 1 percentage point for Old Navy Global, and approximately 2 percentage points for Banana Republic Global.
Comp sales include the results of Company-operated stores and sales through online channels in those countries where we have existing Comp store sales. The calculation of total Company Comp sales includes the results of Athleta and Intermix but excludes the results of our franchise 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 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.
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 |
| | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Net sales per average square foot (1) | $ | 81 |
| | $ | 82 |
| | 240 |
| | $ | 246 |
|
__________ | |
(1) | Excludes net sales associated with our online and franchise businesses. |
Store count, openings, closings, and square footage for our stores are as follows:
|
| | | | | | | | | | | | | | |
| | January 30, 2016 | | 39 Weeks Ended October 29, 2016 | | October 29, 2016 |
| | Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) |
| Gap North America | 866 |
| | 11 |
| | 19 |
| | 858 |
| | 9.0 |
|
| Gap Asia | 305 |
| | 18 |
| | 8 |
| | 315 |
| | 3.0 |
|
| Gap Europe | 175 |
| | 1 |
| | 10 |
| | 166 |
| | 1.4 |
|
| Old Navy North America | 1,030 |
| | 19 |
| | 10 |
| | 1,039 |
| | 17.4 |
|
| Old Navy Asia | 65 |
| | 5 |
| | 10 |
| | 60 |
| | 0.9 |
|
| Banana Republic North America | 612 |
| | 7 |
| | 7 |
| | 612 |
| | 5.1 |
|
| Banana Republic Asia | 51 |
| | — |
| | 2 |
| | 49 |
| | 0.2 |
|
| Banana Republic Europe | 10 |
| | — |
| | — |
| | 10 |
| | 0.1 |
|
| Athleta North America | 120 |
| | 10 |
| | — |
| | 130 |
| | 0.5 |
|
| Intermix North America | 41 |
| | 2 |
| | 1 |
| | 42 |
| | 0.1 |
|
| Company-operated stores total | 3,275 |
| | 73 |
| | 67 |
| | 3,281 |
| | 37.7 |
|
| Franchise | 446 |
| | 52 |
| | 37 |
| | 461 |
| | N/A |
|
| Total | 3,721 |
| | 125 |
| | 104 |
| | 3,742 |
| | 37.7 |
|
| Decrease over prior year | | | | | | | (1.4 | )% | | (2.3 | )% |
| | | | | | | | | | |
| | January 31, 2015 | | 39 Weeks Ended October 31, 2015 | | October 31, 2015 |
| | Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) |
| Gap North America | 960 |
| | 25 |
| | 46 |
| | 939 |
| | 9.8 |
|
| Gap Asia | 266 |
| | 34 |
| | 1 |
| | 299 |
| | 2.9 |
|
| Gap Europe | 189 |
| | 5 |
| | 10 |
| | 184 |
| | 1.6 |
|
| Old Navy North America | 1,013 |
| | 27 |
| | 13 |
| | 1,027 |
| | 17.4 |
|
| Old Navy Asia | 43 |
| | 14 |
| | — |
| | 57 |
| | 0.8 |
|
| Banana Republic North America | 610 |
| | 18 |
| | 10 |
| | 618 |
| | 5.2 |
|
| Banana Republic Asia | 44 |
| | 6 |
| | — |
| | 50 |
| | 0.2 |
|
| Banana Republic Europe | 11 |
| | — |
| | — |
| | 11 |
| | 0.1 |
|
| Athleta North America | 101 |
| | 17 |
| | — |
| | 118 |
| | 0.5 |
|
| Intermix North America | 42 |
| | 2 |
| | 1 |
| | 43 |
| | 0.1 |
|
| Piperlime North America | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Company-operated stores total | 3,280 |
| | 148 |
| | 82 |
| | 3,346 |
| | 38.6 |
|
| Franchise | 429 |
| | 42 |
| | 23 |
| | 448 |
| | N/A |
|
| Total | 3,709 |
| | 190 |
| | 105 |
| | 3,794 |
| | 38.6 |
|
| Increase over prior year | | | | | | | 3.1 | % | | 1.6 | % |
Gap and Banana Republic outlet and factory stores are reflected in each of the respective brands.
Net Sales
Our net sales for the third quarter of fiscal 2016 decreased $59 million, or 2 percent, compared with the third quarter of fiscal 2015 driven by a decrease in net sales at Gap and Banana Republic, partially offset by an increase in net sales at Old Navy, as well as a favorable impact of foreign exchange of $17 million. The favorable impact of foreign exchange was primarily due to the strengthening of the Japanese yen against the U.S. dollar, offset by the weakening of the British pound. The foreign exchange impact is the translation impact if net sales for the third quarter of fiscal 2015 were translated at exchange rates applicable during the third quarter of fiscal 2016.
Our net sales for the first three quarters of fiscal 2016 decreased $325 million, or 3 percent, compared with the first three quarters of fiscal 2015 driven by a decrease in net sales at Gap and Banana Republic, partially offset by an increase at Old Navy.
Cost of Goods Sold and Occupancy Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Cost of goods sold and occupancy expenses | $ | 2,305 |
| | $ | 2,417 |
| | $ | 6,948 |
| | $ | 7,132 |
|
| Gross profit | $ | 1,493 |
| | $ | 1,440 |
| | $ | 4,139 |
| | $ | 4,280 |
|
| Cost of goods sold and occupancy expenses as a percentage of net sales | 60.7 | % | | 62.7 | % | | 62.7 | % | | 62.5 | % |
| Gross margin | 39.3 | % | | 37.3 | % | | 37.3 | % | | 37.5 | % |
Cost of goods sold and occupancy expenses decreased 2.0 percentage points in the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015.
Cost of goods sold decreased 2.2 percent as a percentage of net sales in the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015, primarily driven by improved product acceptance resulting in improved margins at Old Navy.
Occupancy expenses increased 0.2 percentage points in the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015, primarily driven by the decrease in net sales without a corresponding decrease in occupancy expenses.
Cost of goods sold and occupancy expenses increased 0.2 percentage points during the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015.
Cost of goods sold decreased 0.3 percent as a percentage of net sales during the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015, primarily driven by improved product acceptance resulting in improved margins at Old Navy.
Occupancy expenses increased 0.5 percentage points during the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015, primarily driven by the decrease in net sales without a corresponding decrease in occupancy expenses.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Operating expenses | $ | 1,104 |
| | $ | 1,026 |
| | $ | 3,249 |
| | $ | 3,111 |
|
| Operating expenses as a percentage of net sales | 29.1 | % | | 26.6 | % | | 29.3 | % | | 27.3 | % |
| Operating margin | 10.2 | % | | 10.7 | % | | 8.0 | % | | 10.2 | % |
Operating expenses increased $78 million, or 2.5 percent as a percentage of net sales, in the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015. The increase in operating expenses was primarily due to restructuring costs of $36 million incurred in the third quarter of fiscal 2016 compared with the costs related to strategic actions of $7 million incurred in the third quarter of fiscal 2015, as well as store asset impairment charges of $31 million unrelated to restructuring activities in the third quarter of fiscal 2016 compared with store asset impairment charges of $4 million unrelated to the strategic actions in the third quarter of fiscal 2015.
Operating expenses increased $138 million, or 2.0 percent as a percentage of net sales, during the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015. The increase was primarily due to restructuring costs of $171 million incurred during the first three quarters of fiscal 2016 compared with the costs related to strategic actions of $79 million incurred during the first three quarters of fiscal 2015, as well as store asset impairment charges of $35 million unrelated to restructuring activities during the first three quarters of fiscal 2016 compared with store asset impairment charges of $5 million unrelated to the strategic actions during the first three quarters of fiscal 2015.
Interest Expense
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Interest expense | $ | 20 |
| | $ | 19 |
| | $ | 57 |
| | $ | 41 |
|
Interest expense for the third quarter of fiscal 2016 and 2015 and the first three quarters of fiscal 2016 primarily consists of interest on overall borrowings and obligations mainly related to our $1.25 billion 5.95 percent Notes.
Interest expense for the first three quarters of fiscal 2015 includes $56 million of interest on overall borrowings and other obligations mainly related to our $1.25 billion 5.95 percent Notes, partially offset by a reversal of approximately $15 million of tax-related interest expense primarily resulting from a favorable foreign tax ruling and actions of foreign tax authorities related to transfer pricing matters.
Income Taxes
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 | | October 29,
2016 | | October 31,
2015 |
| Income taxes | $ | 168 |
| | $ | 148 |
| | $ | 383 |
| | $ | 425 |
|
| Effective tax rate | 45.2 | % | | 37.4 | % | | 45.6 | % | | 37.6 | % |
The increase in the effective tax rates for the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015, and the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015, was primarily due to the impact of restructuring costs incurred for foreign subsidiaries during fiscal 2016 and resulting valuation allowances on certain foreign deferred tax assets.
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, payment of taxes, dividends, and share repurchases. As of October 29, 2016, cash and cash equivalents were $1.5 billion. As of October 29, 2016, the majority of our cash and cash equivalents was held in the United States and is 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 or other available market instruments.
Cash Flows from Operating Activities
Net cash provided by operating activities during the first three quarters of fiscal 2016 increased $66 million compared with the first three quarters of fiscal 2015, primarily due to the following:
an increase of $146 million related to non-cash and other items primarily due to the reclassification of gain related to our derivative financial instruments in the first three quarters of fiscal 2015 and an increase in store asset impairment in the first three quarters of fiscal 2016 compared with the first three quarters of fiscal 2015;
an increase of $145 million related to accounts payable primarily due to the timing of merchandise payments; and
an increase of $102 million related to merchandise inventory primarily due to the volume and timing of receipts; partially offset by
a decrease of $250 million in net income; and
a decrease of $82 million related to other current assets and other long-term assets in part due to the insurance claim receivable from the fire of the company-owned distribution center in Fishkill, New York on August 29, 2016.
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 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.
Cash Flows from Investing Activities
Net cash used for investing activities during the first three quarters of fiscal 2016 decreased $125 million compared with the first three quarters of fiscal 2015, primarily due to less property and equipment purchases.
Cash Flows from Financing Activities
Net cash used for financing activities during the first three quarters of fiscal 2016 decreased $425 million compared with the first three quarters of fiscal 2015, primarily due to the following:
no repurchases of common stock in the first three quarters of fiscal 2016 compared with $822 million cash outflows related to repurchases of common stock in the first three quarters of fiscal 2015; partially offset by
$400 million proceeds from the issuance of short-term debt in fiscal 2015.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
|
| | | | | | | |
| | 39 Weeks Ended |
| ($ in millions) | October 29,
2016 | | October 31,
2015 |
| Net cash provided by operating activities | $ | 800 |
| | $ | 734 |
|
| Less: Purchases of property and equipment | (383 | ) | | (505 | ) |
| Free cash flow | $ | 417 |
| | $ | 229 |
|
Debt and Credit Facilities
Certain financial information about the Company's debt and credit facilities is set forth under the heading "Debt and Credit Facilities" in Note 4 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this 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 $0.23 per share during each of the first three quarters of fiscal 2016 and fiscal 2015. Including the dividend paid during the first three quarters of fiscal 2016 of $0.69 per share, we intend to pay an annual dividend of $0.92 per share for fiscal 2016, consistent with the annual dividend for fiscal 2015.
Share Repurchases
Certain financial information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 7 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of 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 January 30, 2016, other than those which occur in the normal course of business. See Note 12 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 January 30, 2016.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Our market risk profile as of January 30, 201628, 2017 is disclosed in our Annual Report on Form 10-K and has not significantly changed. See 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.
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| 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 thirdsecond quarter of fiscal 20162017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
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| 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.
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 financial results.
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 January 30, 201628, 2017, other than what was previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2016, except as follows:.
Our results could be adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.
Natural disasters, such as hurricanes, tornadoes, floods, earthquakes, and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war, labor unrest, and other political instability; or other catastrophic events, such as fires or other disasters occurring at our distribution centers or vendors' manufacturing facilities, whether occurring in the United States or internationally, could disrupt our operations, including the operations of our franchisees or the operations of one or more of our vendors. In particular, these types of events could impact our product supply chain from or to the impacted region and could impact our ability or the ability of our franchisees or other third parties to operate our stores or websites. In addition, these types of events could negatively impact consumer spending in the impacted regions or, depending upon the severity, globally. Disasters occurring at our vendors’ manufacturing facilities could impact our reputation and our customers’ perception of our brands. To the extent any of these events occur, our operations and financial results could be adversely affected.
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| 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 OctoberJuly 29, 20162017 by The Gap, Inc. or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3). There were no shares repurchased during the period.:
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| | | | | | | | | | | | | |
| | 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 (July 31-August 27) | — |
| | $ | — |
| | — |
| | $ | 1,000 | million |
| Month #2 (August 28 - October 1) | — |
| | $ | — |
| | — |
| | $ | 1,000 | million |
| Month #3 (October 2 - October 29) | — |
| | $ | — |
| | — |
| | $ | 1,000 | million |
| Total | — |
| | $ | — |
| | — |
| | |
|
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | 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 (2) |
| Month #1 (April 30 - May 27) | 506,025 |
| | $ | 22.23 |
| | 506,025 |
| | $ | 889 | million |
| Month #2 (May 28 - July 1) | 2,730,524 |
| | $ | 22.44 |
| | 2,730,524 |
| | $ | 828 | million |
| Month #3 (July 2 - July 29) | 1,248,655 |
| | $ | 22.00 |
| | 1,248,655 |
| | $ | 800 | million |
| Total | 4,485,204 |
| | $ | 22.30 |
| | 4,485,204 |
| | |
__________
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| (1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
| |
| (2) | On February 26, 2015,25, 2016, we announced that the Board of Directors approved a $1 billion share repurchase authorization. On February 25, 2016, we announced that the Board of Directors approved a new $1 billion share repurchase authorization. The February 2015 repurchase program, which had $302 million remaining, was superseded and replaced by the February 2016 repurchase program,authorization, which has no expiration date. |
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| | |
| 10.1 | | Letter Amendment No. 1 to the AmendedAgreement with Mark Breitbard dated February 27, 2017 and Restated Revolving Credit confirmed on March 2, 2017. (1) |
| 10.2 | | Agreement with Brent Hyder dated August 31, 2016,April 3, 2017 and confirmed on April 19, 2017. (1) |
| 10.3 | | Agreement with Jeff Kirwan dated May 17, 2017 and confirmed on May 16, 2017. (1) |
| 10.4 | | Agreement for Post-Termination Benefits with Mark Breitbard dated June 2, 2017, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| 10.5 | | Agreement for Post-Termination Benefits with Paul Chapman dated June 2, 2017, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| 10.6 | | Agreement for Post-Termination Benefits with Sebastian DiGrande dated June 2, 2017, filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended July 30, 2016.April 29, 2017, Commission File No. 1-7562.
|
| 10.7 | | Agreement for Post-Termination Benefits with Julie Gruber dated June 2, 2017, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| 10.8 | | Agreement for Post-Termination Benefits with Brent Hyder dated June 2, 2017, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| 10.9 | | Agreement for Post-Termination Benefits with Jeff Kirwan dated June 2, 2017, filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| 10.10 | | Agreement for Post-Termination Benefits with Teri List-Stoll dated June 2, 2017, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| 10.11 | | Agreement for Post-Termination Benefits with Art Peck dated June 2, 2017, filed as Exhibit 10.9 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| 10.12 | | Agreement for Post-Termination Benefits with Sonia Syngal dated June 2, 2017, filed as Exhibit 10.10 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, 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 | | 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 | | 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. (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. (2) |
| 101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended OctoberJuly 29, 2016,2017, 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) |
__________
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.
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| | | |
| | | THE GAP, INC. |
| | | | |
| Date: | December 5, 2016August 25, 2017 | By | /s/ Arthur Peck |
| | | | Arthur Peck |
| | | | Chief Executive Officer |
| | | | |
| Date: | December 5, 2016August 25, 2017 | By | /s/ Sabrina L. SimmonsTeri List-Stoll |
| | | | Sabrina L. SimmonsTeri List-Stoll |
| | | | Executive Vice President and Chief Financial Officer |
Exhibit Index
|
| | |
| | | |
| | Letter Amendment No. 1 to the AmendedAgreement with Mark Breitbard dated February 27, 2017 and Restated Revolving Credit confirmed on March 2, 2017. (1) |
| | Agreement with Brent Hyder dated August 31, 2016,April 3, 2017 and confirmed on April 19, 2017. (1) |
| | Agreement with Jeff Kirwan dated May 17, 2017 and confirmed on May 16, 2017. (1) |
| | Agreement for Post-Termination Benefits with Mark Breitbard dated June 2, 2017, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| | Agreement for Post-Termination Benefits with Paul Chapman dated June 2, 2017, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| | Agreement for Post-Termination Benefits with Sebastian DiGrande dated June 2, 2017, filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended July 30, 2016.April 29, 2017, Commission File No. 1-7562.
|
| | Agreement for Post-Termination Benefits with Julie Gruber dated June 2, 2017, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| | Agreement for Post-Termination Benefits with Brent Hyder dated June 2, 2017, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| | Agreement for Post-Termination Benefits with Jeff Kirwan dated June 2, 2017, filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| | Agreement for Post-Termination Benefits with Teri List-Stoll dated June 2, 2017, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| | Agreement for Post-Termination Benefits with Art Peck dated June 2, 2017, filed as Exhibit 10.9 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562.
|
| | Agreement for Post-Termination Benefits with Sonia Syngal dated June 2, 2017, filed as Exhibit 10.10 to Registrant’s Form 10-Q for the quarter ended April 29, 2017, Commission File No. 1-7562. |
| | 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) |
| | 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) |
| | 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. (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. (2) |
| 101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended OctoberJuly 29, 2016,2017, 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) |
_____________________________