UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~October 28, 2017~~August 4, 2018



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

For the transition period from to

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)



Delaware		94-1697231
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Two Folsom Street, San Francisco, California		94105
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (415) 427-0100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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 15, 2017~~August 27, 2018 was ~~388,857,073.~~384,708,284.

FORWARD-LOOKING STATEMENTS

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

the impact of the adoption of new accounting standards;

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

the impact of the Tax Cuts and Jobs Act of 2017, including adjustments to our provisional estimates of the tax effects;

the impact of the potential settlement of outstanding tax matters;

the impact of losses due to indemnification obligations;

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

investing in digital and customer capabilities to support growth;

increasing productivity by leveraging our scale and streamlining operations and processes throughout the ~~impact~~organization;

continuing to integrate social and environmental sustainability into business practices;

attracting and retaining strong talent in our business and functions;

investing strategically while maintaining operating expense discipline and driving efficiency through productivity initiative;

continuing to transform our product to market process with development of a more efficient operating model;

continuing ~~depreciation of certain foreign currencies on gross margins for~~ our ~~foreign subsidiaries;~~investment in customer experience to drive higher customer engagement and loyalty;

continuing to invest in strengthening brand awareness, customer acquisition, and digital capabilities;

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 ~~2017;~~2018; 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 we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer ~~preferences, including channel~~ preferences;

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

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 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 customer, digital, and ~~customer~~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 risk that ~~foreign currency exchange rate fluctuations~~a failure of, or updates or changes to, our information technology (“IT”) systems may disrupt our 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 ~~impact~~affect our financial ~~results;~~condition and results of operations;

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 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 foreign currency exchange rate fluctuations could adversely impact our financial results;

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 position or our business initiatives;

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

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

the risk that reductions in income and cash flow from our ~~marketing and servicing arrangement~~credit card agreement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows;

the risk that adoption of 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.~~claims.

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 28, 2017~~February 3, 2018 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 ~~November 22, 2017,~~August 31, 2018, 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 28, 2017.~~February 3, 2018.

THE GAP, INC.

TABLE OF CONTENTS



		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of ~~October 28,~~August 4, 2018, February 3, 2018, and July 29, 2017 ~~January 28, 2017, and October 29, 2016~~	1

	Condensed Consolidated Statements of Income for the Thirteen and ~~Thirty-Nine~~Twenty-Six Weeks Ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~	2

	Condensed Consolidated Statements of Comprehensive Income for the Thirteen and ~~Thirty-Nine~~Twenty-Six Weeks Ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~	3

	Condensed Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Twenty-Six Weeks Ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 6.	Exhibits	24

PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements.

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	October 28, 2017		January 28, 2017		October 29, 2016		August 4, 2018		February 3, 2018		July 29, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,353	$	1,783	$	1,522	$	1,322	$	1,783	$	1,609
Short-term investments							286		—		—
Merchandise inventory	2,476		1,830		2,398		2,202		1,997		2,051
Other current assets	654		702		751		780		788		598
Total current assets	4,483		4,315		4,671		4,590		4,568		4,258
Property and equipment, net of accumulated depreciation of $6,041, $5,813, and $5,900	2,686		2,616		2,662
Property and equipment, net of accumulated depreciation of $6,063, $5,962, and $6,002							2,832		2,805		2,643
Other long-term assets	726		679		674		588		616		716
Total assets	$	7,895	$	7,610	$	8,007	$	8,010	$	7,989	$	7,617
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	—	$	65	$	424
Accounts payable	1,330		1,243		1,413		$	1,297	$	1,181	$	1,230
Accrued expenses and other current liabilities	1,132		1,113		1,059		1,026		1,270		1,062
Income taxes payable	134		32		19		18		10		107
Total current liabilities	2,596		2,453		2,915		2,341		2,461		2,399
Long-term liabilities:
Long-term debt	1,248		1,248		1,320		1,249		1,249		1,248
Lease incentives and other long-term liabilities	1,027		1,005		1,046		1,080		1,135		1,025
Total long-term liabilities	2,275		2,253		2,366		2,329		2,384		2,273
Commitments and contingencies (see Note 11)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued and Outstanding 389, 399, and 399 shares	19		20		20
Authorized 2,300 shares for all periods presented; Issued and Outstanding 385, 389, and 392 shares							19		19		20
Additional paid-in capital	—		81		57		—		8		—
Retained earnings	2,965		2,749		2,621		3,268		3,081		2,902
Accumulated other comprehensive income	40		54		28		53		36		23
Total stockholders’ equity	3,024		2,904		2,726		3,340		3,144		2,945
Total liabilities and stockholders’ equity	$	7,895	$	7,610	$	8,007	$	8,010	$	7,989	$	7,617

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 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net sales	$	3,838		$	3,798		$	11,077		$	11,087		$	4,085		$	3,799		$	7,868		$	7,239
Cost of goods sold and occupancy expenses	2,313			2,305			6,770			6,948			2,458			2,320			4,814			4,457
Gross profit	1,525			1,493			4,307			4,139			1,627			1,479			3,054			2,782
Operating expenses	1,147			1,104			3,224			3,249			1,229			1,028			2,427			2,077
Operating income	378			389			1,083			890			398			451			627			705
Interest expense	18			20			53			57			17			16			33			35
Interest income	(4		)	(3		)	(11		)	(6		)	(7		)	(4		)	(13		)	(7		)
Income before income taxes	364			372			1,041			839			388			439			607			677
Income taxes	135			168			398			383			91			168			146			263
Net income	$	229		$	204		$	643		$	456		$	297		$	271		$	461		$	414
Weighted-average number of shares - basic	391			399			395			398			387			395			388			397
Weighted-average number of shares - diluted	393			400			397			400			390			396			391			398
Earnings per share - basic	$	0.59		$	0.51		$	1.63		$	1.15		$	0.77		$	0.69		$	1.19		$	1.04
Earnings per share - diluted	$	0.58		$	0.51		$	1.62		$	1.14		$	0.76		$	0.68		$	1.18		$	1.04
Cash dividends declared and paid per share	$	0.23		$	0.23		$	0.69		$	0.69		$	0.2425		$	0.23		$	0.485		$	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 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net income	$	229		$	204		$	643		$	456		$	297		$	271		$	461		$	414
Other comprehensive income (loss)
Foreign currency translation	(5		)	(10		)	12			(1		)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $2, $4, $(6), and $(5)	23			39			(20		)	(57		)
Reclassification adjustment for (gains) losses on derivative financial instruments, net of (tax) tax benefit of $6, $-, $4, and $(6)	(1		)	—			(6		)	1
Other comprehensive income (loss), net of tax
Foreign currency translation and other, net													(16		)	21			(23		)	17
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $3, $(12), $(3), and $(8)													18			(43		)	46			(43		)
Reclassification adjustment for gains on derivative financial instruments, net of (tax) tax benefit of $-, $-, $9, and $(2)													—			(1		)	(6		)	(5		)
Other comprehensive income (loss), net of tax	17			29			(14		)	(57		)	2			(23		)	17			(31		)
Comprehensive income	$	246		$	233		$	629		$	399		$	299		$	248		$	478		$	383

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 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017
Cash flows from operating activities:
Net income	$	643		$	456		$	461		$	414
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	418			449			280			279
Amortization of lease incentives	(46		)	(47		)	(29		)	(30		)
Share-based compensation	60			55			48			42
Tax benefit from exercise of stock options and vesting of stock units	—			(4		)
Excess tax benefit from exercise of stock options and vesting of stock units	—			(1		)
Store asset impairment charges	17			89
Non-cash and other items	9			12			12			13
Deferred income taxes	(50		)	(10		)	24			(27		)
Changes in operating assets and liabilities:
Merchandise inventory	(636		)	(513		)	(224		)	(203		)
Other current assets and other long-term assets	(60		)	(52		)	(46		)	(23		)
Accounts payable	55			294			104			(49		)
Accrued expenses and other current liabilities	(46		)	10			(180		)	(111		)
Income taxes payable, net of prepaid and other tax-related items	188			80			62			160
Lease incentives and other long-term liabilities	48			(18		)	34			21
Net cash provided by operating activities	600			800			546			486
Cash flows from investing activities:
Purchases of property and equipment	(463		)	(383		)	(326		)	(275		)
Insurance proceeds related to loss on property and equipment	60			—			—			59
Purchases of short-term investments							(322		)	—
Sales and maturities of short-term investments							36			—
Other	(3		)	(1		)	(6		)	—
Net cash used for investing activities	(406		)	(384		)	(618		)	(216		)
Cash flows from financing activities:
Payments of current maturities of debt	(67		)	—			—			(67		)
Proceeds from issuances under share-based compensation plans	23			25			33			14
Withholding tax payments related to vesting of stock units	(15		)	(18		)	(20		)	(14		)
Repurchases of common stock	(300		)	—			(200		)	(200		)
Excess tax benefit from exercise of stock options and vesting of stock units	—			1
Cash dividends paid	(272		)	(275		)	(188		)	(182		)
Other							(1		)	—
Net cash used for financing activities	(631		)	(267		)	(376		)	(449		)
Effect of foreign exchange rate fluctuations on cash and cash equivalents	7			3
Net increase (decrease) in cash and cash equivalents	(430		)	152
Cash and cash equivalents at beginning of period	1,783			1,370
Cash and cash equivalents at end of period	$	1,353		$	1,522
Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash							(11		)	8
Net decrease in cash, cash equivalents, and restricted cash							(459		)	(171		)
Cash, cash equivalents, and restricted cash at beginning of period							1,799			1,797
Cash, cash equivalents, and restricted cash at end of period							$	1,340		$	1,626

Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	76		$	80		$	38		$	38
Cash paid for income taxes during the period, net of refunds	$	260		$	318		$	61		$	130

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 ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and~~ ~~October 29, 2016~~, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ and the Condensed Consolidated Statements of Cash Flows for the ~~thirty-nine~~twenty-six weeks ended~~October 28,~~ August 4, 2018 and July 29, 2017 ~~and~~ ~~October 29, 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 ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and~~ ~~October 29, 2016~~ and for all periods presented. The Condensed Consolidated Balance Sheet as of ~~January 28, 2017~~February 3, 2018 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 28, 2017~~February 3, 2018.

The results of operations for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~August 4, 2018 are not necessarily indicative of the operating results that may be expected for the ~~53-week~~52-week period ending February ~~3, 2018~~2, 2019.

Note 2. ~~Recent~~ Accounting ~~Pronouncements~~Policies

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~~ Recently Adopted

Revenue ~~Recognition~~from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. ~~ASU No. 2014-09, as amended, is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017.~~

~~While~~On February 4, 2018, we ~~do not expect the adoption of~~adopted ASU No. 2014-09 and related ~~ASUs~~amendments (collectively “ASC 606”) using the modified retrospective transition method and recorded an increase to ~~have a material impact on our Consolidated Financial Statements, we expect the adoption~~opening retained earnings of $36 million, net of tax, related primarily to ~~result in change in the timing of recognizing~~breakage revenue ~~for breakage income~~ for gift cards ~~gift certificates,~~ and credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company’s revenues include merchandise sales at stores, online, and through franchise agreements. We also receive revenue sharing from our credit card ~~reward~~agreement for private label and co-branded credit cards, and breakage revenue related to our gift cards, credit vouchers, and outstanding loyalty points, which are realized based upon historical redemption patterns. For online sales, ship-from-stores sales, and ~~certificate liability,~~catalog sales, the Company has elected to treat shipping and handling as ~~well as~~fulfillment activities and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales, ~~where we ship~~ship-from-store sales, and catalog sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. We also record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable, which are presented on a gross basis on our Condensed Consolidated Balance Sheet. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Our credit card agreement provides for certain payments to be made to us, including a ~~distribution center or store. Additionally,~~share of revenue from the performance of the credit card portfolios and reimbursements of loyalty program discounts. We have identified separate performance obligations related to our credit card agreement that includes both providing a license and an obligation to redeem loyalty points issued under the ~~new guidance,~~loyalty rewards program. Revenue related to our obligation to redeem loyalty points is deferred until those loyalty points are redeemed. With the adoption of ASC 606, income related to our credit card agreement is now classified within net sales in our Condensed Consolidated Statement of Income.

We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in a number of countries throughout Asia, 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. We have identified separate performance obligations related to our franchise agreements that include both providing our franchise partners with a license and an obligation to supply franchise partners with our merchandise. Our obligation to provide a license is satisfied when subsequent sales occur and our obligation to supply franchise partners with our merchandise is satisfied when control transfers. As of the quarter ended August 4, 2018, there were no material contract liabilities related to our franchise agreements.

We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts associated with our credit card agreement. The opening balance of deferred revenue for these obligations was $232 million and $201 million for the twenty-six and thirteen weeks ended August 4, 2018, respectively. We recognized revenue of $145 million and $87 million related to the opening balance during the twenty-six and thirteen weeks ended August 4, 2018, respectively. The closing balance of deferred revenue related to gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts was $194 million as of the quarter ended August 4, 2018. We expect that the majority of our revenue deferrals as of the quarter ended August 4, 2018 will be recognized in the next 12 months as our performance obligations are satisfied.

For the thirteen and twenty-six weeks ended August 4, 2018, the impact of applying ASC 606 primarily resulted in an increase in net sales driven by a reclassification of $96 million and $192 million, respectively, for revenue sharing associated with our credit card programs and breakage revenue for gift cards and credit vouchers, which were previously recorded as a reduction to operating expenses in our Condensed Consolidated Statements of Income. Net sales for the thirteen and twenty-six weeks ended August 4, 2018 also increased by $43 million and $87 million, respectively, due to the reclassification of reimbursements of loyalty program discounts associated with our credit card programs, which were previously recorded as a reduction to cost of goods sold and occupancy expenses in our Condensed Consolidated Statements of Income. There were no other material impacts to the Condensed Consolidated Statements of Income resulting from the application of ASC 606 during the thirteen or twenty-six weeks ended August 4, 2018.

In addition, with the adoption of ASC 606 we ~~expect to~~now recognize allowances for estimated sales returns on a gross basis rather than net basis on our Condensed Consolidated Balance Sheet. For the quarter ended August 4, 2018, we recorded a right of return asset for merchandise we expect to receive back from customers of $38 million, which is recorded within other current assets on our Condensed Consolidated Balance Sheet, and a liability for refunds payable of $86 million, which is recorded within accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheet. For the quarter ended August 4, 2018, the net amount under the previous guidance would have been $45 million recorded as accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheet. Accordingly, the impact of the change in accounting standard is an increase of $38 million to other current assets on our Condensed Consolidated Balance Sheet and an increase of $41 million to accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheet.

See Note 12 of Notes to Condensed Consolidated Financial Statements “Segment Information” for disaggregation of revenue by brand and by region.

Statement of Cash Flows: Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which amended the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be added to cash and cash equivalents on the statement of cash flows. On February 4, 2018, we adopted ASU 2016-18 on a retrospective basis. The retrospective adoption increased our beginning and ending cash and cash equivalent balances within our Condensed Consolidated Statements of Cash Flows to include restricted cash balances. The adoption had no other material impacts to our Condensed Consolidated Statements of Cash Flows and had no impact on our results of operations or financial position.

Amounts included in restricted cash primarily represent cash that serves as collateral for our insurance obligations. Any cash that is legally restricted from use is classified as restricted cash. If the purpose of restricted cash is related to acquiring a long-term asset, liquidating a long-term liability, or is otherwise unavailable for a period longer than one year from the balance sheet date, the restricted cash is included within other long-term assets on our Condensed Consolidated Balance Sheets. Otherwise, restricted cash is included within other current assets on our Condensed Consolidated Balance Sheets.

~~We are currently evaluating~~The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the ~~classification~~total shown in our Condensed Consolidated Statements of income earned in connection with our private label and co-branded credit cards. We are also evaluating expanded disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.Cash Flows:

~~We will adopt these ASUs on a modified retrospective basis beginning in the first quarter of fiscal 2018.~~



($ in millions)	August 4, 2018		February 3, 2018		July 29, 2017
Cash and cash equivalents	$	1,322	$	1,783	$	1,609
Restricted cash included in other current assets	—		1		1
Restricted cash included in other long-term assets	18		15		16
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statement of Cash Flows	$	1,340	$	1,799	$	1,626

~~Other Recent~~ Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, that updates certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We adopted this ASU on February 4, 2018 with no material impact to our Condensed Consolidated Financial Statements.

Accounting Pronouncements Not Yet Adopted

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 Condensed Consolidated Financial Statements, based on current information.

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 2016-02, as amended, is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The ASU can be adopted either as of the effective date without restating prior periods or retrospectively by restating prior periods. We are ~~still~~ assessing the impact of this ASU on our Consolidated Financial Statements, but it will result in a ~~substantial~~material increase in our long-term assets and liabilities. We are also assessing our method of adoption. 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. We adopted the provisions 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 a $3 million increase 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 Consolidated Statement of Cash Flows on a prospective basis.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the 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 early adopted this ASU for the interim goodwill impairment test in the first quarter of fiscal 2017. The adoption of this ASU did not have any impact on the Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the potential impact of this ASU on our Consolidated Financial Statements. We will adopt the ASU beginning in the first quarter of fiscal 2019.

Note 3. Debt and Credit Facilities

~~Long-term debt consists of the following:~~

($ in millions) October 28,
2017 January 28,
2017 October 29,
2016
Notes $ 1,248
$ 1,248
$ 1,248
Japan Term Loan —
65
96
Total debt 1,248
1,313
1,344
Less: Current portion of Japan Term Loan —
(65 ) (24 )
Total long-term debt $ 1,248
$ 1,248
$ 1,320

As of ~~October 28, 2017~~August 4, 2018, ~~January 28, 2017~~February 3, 2018, and ~~October~~July 29, ~~2016~~2017, the estimated fair value of our $1.25 billion aggregate principal amount of 5.95 percent notes (the “Notes”) due April 2021 was $~~1.35~~1.31 billion, $~~1.32~~1.33 billion, and $~~1.34~~1.36 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 inon the Condensed Consolidated Balance Sheets, net of the unamortized discount.

~~As of~~ ~~January 28, 2017~~ ~~and~~ ~~October 29, 2016, the carrying amount of our~~ ~~15 billion~~ ~~Japanese yen, four-year, unsecured term loan (“Japan Term Loan”) approximated its fair value, as the interest rate varied depending on quoted market rates (level 1 inputs). Repayments of~~ ~~2.5 billion~~ ~~Japanese yen were paid on January 15 of each year, and a final repayment of~~ ~~7.5 billion~~ Japanese yen which was due on January 15, 2018 was paid in full in June 2017. Interest was 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 October 29, 2016. The Term Loan was repaid in full in January 2017. Interest was payable at least quarterly based on an interest rate equal to the London Interbank Offered Rate plus a fixed margin.

We have a $500 million, five-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in May ~~2020.~~2023. There were no borrowings and no material outstanding standby letters of credit under the Facility as of ~~October 28, 2017.~~August 4, 2018.

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 ~~$47~~$56 million as of ~~October 28, 2017.~~August 4, 2018. As of ~~October 28, 2017,~~August 4, 2018, there were no borrowings under the Foreign Facilities. There were ~~$14~~$15 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of ~~October 28, 2017.~~August 4, 2018.

We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of ~~October 28, 2017~~August 4, 2018, we had $1513 million in standby letters of credit issued under these agreements.

Our 15 billion Japanese yen, four-year, unsecured term loan (“Japan Term Loan”) with repayments of 2.5 billion Japanese yen paid on January 15 of each year, and a final repayment of 7.5 billion Japanese yen, which was due on January 15, 2018, was paid in full in June 2017. Interest was payable at least quarterly based on an interest rate equal to the Tokyo Interbank Offered Rate plus a fixed margin.

Note 4. Fair Value Measurements

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~August 4, 2018 or ~~October~~July 29, ~~2016~~2017. There were no transfers of financial assets or liabilities into or out of level 1 and level 2 during the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~August 4, 2018 or ~~October~~July 29, ~~2016~~2017.

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 28, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		August 4, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	389	$	28	$	361	$	—	$	481	$	21	$	460	$	—
Short-term investments									286		109		177		—
Derivative financial instruments	31		—		31		—		40		—		40		—
Deferred compensation plan assets	46		46		—		—		53		53		—		—
Total	$	466	$	74	$	392	$	—	$	860	$	183	$	677	$	—
Liabilities:
Derivative financial instruments	$	20	$	—	$	20	$	—	$	7	$	—	$	7	$	—
			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
($ in millions)	January 28, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		February 3, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	697	$	256	$	441	$	—	$	527	$	37	$	490	$	—
Derivative financial instruments	58		—		58		—		14		—		14		—
Deferred compensation plan assets	40		40		—		—		47		47		—		—
Total	$	795	$	296	$	499	$	—	$	588	$	84	$	504	$	—
Liabilities:
Derivative financial instruments	$	21	$	—	$	21	$	—	$	43	$	—	$	43	$	—
			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	$	—

We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits and money market funds. WeWith the exception of our available-for-sale investments noted below, we value these investments at their original purchase prices plus interest that has accrued at the stated rate.

Our available-for-sale securities are comprised of investments in debt securities. These securities are recorded at fair value using market prices. As of August 4, 2018, the Company held $286 million of available-for-sale securities with maturity dates greater than three months and less than two years within short-term investments on the Condensed Consolidated Balance Sheets. In addition, as of August 4, 2018, the Company held $14 million of available-for-sale debt securities with maturities of less than three months at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheets. Unrealized gains or losses on available-for-sale debt securities included in accumulated other comprehensive income were immaterial as of August 4, 2018. The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and twenty-six weeks ended August 4, 2018, the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment loss.

Derivative financial instruments primarily include foreign exchange forward contracts. The currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, British pounds, Euro, Mexican pesos, 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 inon 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 inon the Condensed Consolidated Balance Sheets.

We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees and non-employee directors to defer base compensation up to a maximum ~~amount.~~percentage. Plan investments are directed by participants and are recorded at market value and 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 inon 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 determined 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.

There were no material impairment charges recorded for long-lived assets for the thirteen and twenty-six weeks ended August 4, 2018.

During the thirteen weeks ended ~~October 28,~~July 29, 2017, we recorded a charge for the impairment of long-lived assets of ~~$4 million, which reduced the then carrying amount of the applicable long-lived assets of $5 million to their fair value of $1~~$11 million. The impairment charge was ~~recorded in operating expenses in the Condensed Consolidated Statement of Income.~~

During the thirty-nine weeks ended October 28, 2017, we recorded a charge for the impairment of long-lived assets of $17 million, which reduced the then carrying amount of the applicable long-lived assets of $18 million to their fair value of $1 million. The impairment charge was recorded in operating expenses in the Condensed Consolidated Statement of Income.

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. During the thirteen weeks ended October 29, 2016, we recorded charges for impairment of long-lived assets of $2 million related to the announced store closures, and an additional $31 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 ~~$34~~$11 million to their fair value of ~~$1 million.~~

~~During~~zero. There were no material impairment charges recorded for other long-lived assets for the ~~thirty-nine~~thirteen weeks ended ~~October~~April 29, 2016, we recorded charges for impairment of long-lived assets of $54 million related to the announced store closures, primarily related to Old Navy Japan, 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.2017.

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

There were no material impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~August 4, 2018 or ~~October~~July 29, ~~2016.~~2017.

Note 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, British pounds, Euro, Mexican pesos, 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 entity, 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.~~Condensed Consolidated Statements of Income.

Net Investment Hedges

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

Other Derivatives Not Designated as Hedging Instruments

We ~~enter into~~use 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 28, 2017		January 28, 2017		October 29, 2016		August 4, 2018		February 3, 2018		July 29, 2017
Derivatives designated as cash flow hedges	$	873	$	1,101	$	1,201	$	1,052	$	745	$	1,146
Derivatives designated as net investment hedges	30		31		31		—		—		30
Derivatives not designated as hedging instruments	581		618		664		646		577		616
Total	$	1,484	$	1,750	$	1,896	$	1,698	$	1,322	$	1,792

Quantitative Disclosures about Derivative Financial Instruments

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


($ in millions)	October 28, 2017		January 28, 2017		October 29, 2016		August 4, 2018		February 3, 2018		July 29, 2017
Derivatives designated as cash flow hedges:
Other current assets	$	16	$	28	$	35	$	19	$	11	$	10
Other long-term assets	$	4	$	16	$	13	$	7	$	—	$	7
Accrued expenses and other current liabilities	$	11	$	10	$	26	$	3	$	32	$	26
Lease incentives and other long-term liabilities	$	2	$	1	$	8	$	1	$	—	$	11

Derivatives designated as net investment hedges:
Other current assets	$	—	$	—	$	1	$	—	$	—	$	—
Other long-term assets	$	—	$	—	$	—	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	2	$	—	$	—	$	—	$	—	$	3
Lease incentives and other long-term liabilities	$	—	$	—	$	—	$	—	$	—	$	—

Derivatives not designated as hedging instruments:
Other current assets	$	11	$	13	$	13	$	14	$	3	$	3
Other long-term assets	$	—	$	1	$	—	$	—	$	—	$	—
Accrued expenses and other current liabilities	$	5	$	10	$	14	$	3	$	11	$	12
Lease incentives and other long-term liabilities	$	—	$	—	$	1	$	—	$	—	$	—

Total derivatives in an asset position	$	31	$	58	$	62	$	40	$	14	$	20
Total derivatives in a liability position	$	20	$	21	$	49	$	7	$	43	$	52

The majority of the unrealized gains and losses from designated cash flow hedges as of ~~October 28, 2017~~August 4, 2018, will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of ~~October 28, 2017~~August 4, 2018, 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 inon 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 $8$4 million, $181 million, and $913 million as of ~~October 28, 2017~~August 4, 2018, ~~January 28, 2017~~February 3, 2018, and ~~October~~July 29, ~~2016~~2017, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $2336 million, $4013 million, and ~~$53~~$7 million and the net amounts of the derivative financial instruments in a liability position would be $123 million, $3$42 million, and ~~$40~~$39 million as of ~~October 28, 2017,~~August 4, 2018, ~~January 28, 2017~~February 3, 2018, and ~~October~~July 29, ~~2016~~2017, respectively.

See Note 4 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 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018		July 29, 2017			August 4, 2018		July 29, 2017
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income	$	25		$	43		$	(26	)	$	(62	)	$	21	$	(55	)	$	43	$	(51	)
Gain (loss) reclassified into cost of goods sold and occupancy expenses	$	(5	)	$	2		$	2		$	15
Loss reclassified into operating expenses	$	—		$	(2	)	$	—		$	(10	)
Gain reclassified into cost of goods sold and occupancy expenses													$	—	$	1		$	3	$	7
Gain (loss) reclassified into operating expenses													$	—	$	—		$	—	$	—

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

For the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~August 4, 2018 and ~~October~~July 29, ~~2016~~2017, there were no amounts of gains or losses 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 28, 2017		October 29, 2016		October 28, 2017			October 29, 2016			August 4, 2018		July 29, 2017			August 4, 2018		July 29, 2017
Gain (loss) recognized in operating expenses	$	10	$	12	$	(13	)	$	(5	)	$	12	$	(11	)	$	24	$	(23	)

Note 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 28, 2017		October 29, 2016		October 28, 2017		October 29, 2016		August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Number of shares repurchased (1)	3.8		—		12.5		—		3.2		4.5		6.4		8.7
Total cost	$	100	$	—	$	300	$	—	$	100	$	100	$	200	$	200
Average per share cost including commissions	$	26.64	$	—	$	24.21	$	—	$	30.95	$	22.30	$	31.08	$	23.15

__________


(1)	Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.

In February 2016, ~~we announced that~~ the Board of Directors approved a $1.0 billion share repurchase authorization, of which ~~$700~~$485 million was remaining as of ~~October 28, 2017.~~August 4, 2018.

All of the share repurchases were paid for as of ~~October 28,~~August 4, 2018, February 3, 2018, and July 29, 2017. 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 February 3, 2018										$	64		$	(28	)	$	36
13 Weeks Ended May 5, 2018:
Foreign currency translation and other, net										(7		)	—			(7		)
Change in fair value of derivative financial instruments										—			28			28
Amounts reclassified from accumulated other comprehensive income										—			(6		)	(6		)
Other comprehensive income (loss), net of tax										(7		)	22			15
Balance at May 5, 2018										57			(6		)	51
13 Weeks Ended August 4, 2018:
Foreign currency translation and other, net										(16		)	—			(16		)
Change in fair value of derivative financial instruments										—			18			18
Amounts reclassified from accumulated other comprehensive income										—			—			—
Other comprehensive income (loss), net of tax										(16		)	18			2
Balance at August 4, 2018										$	41		$	12		$	53

($ in millions)	Foreign Currency Translation			Cash Flow Hedges			Total			Foreign Currency Translation			Cash Flow Hedges			Total
Balance at January 28, 2017	$	29		$	25		$	54		$	29		$	25		$	54
13 Weeks Ended April 29, 2017:
Foreign currency translation	(4		)	—			(4		)
Foreign currency translation and other, net										(4		)	—			(4		)
Change in fair value of derivative financial instruments	—			—			—			—			—			—
Amounts reclassified from accumulated other comprehensive income	—			(4		)	(4		)	—			(4		)	(4		)
Other comprehensive loss, net of tax	(4		)	(4		)	(8		)	(4		)	(4		)	(8		)
Balance at April 29, 2017	25			21			46			25			21			46
13 Weeks Ended July 29, 2017:
Foreign currency translation	21			—			21
Foreign currency translation and other, net										21			—			21
Change in fair value of derivative financial instruments	—			(43		)	(43		)	—			(43		)	(43		)
Amounts reclassified from accumulated other comprehensive income	—			(1		)	(1		)	—			(1		)	(1		)
Other comprehensive income (loss), net of tax	21			(44		)	(23		)	21			(44		)	(23		)
Balance at July 29, 2017	46			(23		)	23			$	46		$	(23	)	$	23
13 Weeks Ended October 28, 2017:
Foreign currency translation	(5		)	—			(5		)
Change in fair value of derivative financial instruments	—			23			23
Amounts reclassified from accumulated other comprehensive income	—			(1		)	(1		)
Other comprehensive income (loss), net of tax	(5		)	22			17
Balance at October 28, 2017	$	41		$	(1	)	$	40

($ 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		)
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 income (loss), net of tax	(10		)	39			29
Balance at October 29, 2016	$	21		$	7		$	28

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 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Stock units	$	14		$	14		$	47		$	43		$	22		$	18		$	38		$	33
Stock options	3			4			10			9			4			3			8			7
Employee stock purchase plan	1			1			3			3			1			1			2			2
Share-based compensation expense	18			19			60			55			27			22			48			42
Less: Income tax benefit	(7		)	(8		)	(23		)	(25		)	(6		)	(8		)	(12		)	(16		)
Share-based compensation expense, net of tax	$	11		$	11		$	37		$	30		$	21		$	14		$	36		$	26

Note 9. Income Taxes

The effective income tax rate was 23.5 percent for the thirteen weeks ended August 4, 2018, compared with 38.3 percent for the thirteen weeks ended July 29, 2017. The effective income tax rate was 24.1 percent for the twenty-six weeks ended August 4, 2018, compared with 38.8 percent for the twenty-six weeks ended July 29, 2017. The decrease in the effective tax rates was primarily due to the reduction in the U.S. federal statutory tax rate from 35 percent to 21 percent, enacted as part of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).

On December 22, 2017, the Securities and Exchange Commission (“SEC”) issued SEC Staff Accounting Bulletin (“SAB”) No. 118 to address the application of FASB ASC Topic 740, Income Taxes, in reporting periods that include December 22, 2017. SAB No. 118, codified under ASU 2018-05 in March 2018, permits organizations to report provisional amounts during a measurement period for the specific income tax effects of the TCJA for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. The measurement period ends when an organization has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC Topic 740, not to extend beyond one year from the enactment date of the TCJA.

During the fourteen weeks ended February 3, 2018, we recorded an estimated net charge of $57 million for the effects of the enactment of TCJA, primarily due to the impact of the one-time transition tax on the deemed repatriation of foreign income and the impact of TCJA on deferred tax assets and liabilities. During the thirteen weeks ended May 5, 2018, we did not make any measurement period adjustments related to our provisional estimated net charge. During the thirteen weeks ended August 4, 2018, we made certain immaterial measurement period adjustments to our fiscal 2017 provisional estimated net charge of $57 million for the impacts of deferred tax assets and liabilities subject to the TCJA rate reduction. We will continue to evaluate the TCJA, collect and prepare necessary data, and interpret additional guidance issued by the U.S. Treasury Department and Internal Revenue Service (“IRS”), including the proposed regulations regarding the computation of the one-time transition tax on the deemed repatriation of foreign income. In accordance with SAB No. 118, we will complete our accounting for the tax effects of the TCJA during fiscal 2018 and adjustments to our provisional estimated net charge may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made.

The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries, a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries, and favorable tax treatment for certain Foreign Derived Intangible Income (“FDII”), effective for us beginning fiscal 2018. Our provisional estimates for GILTI, BEAT, and FDII do not materially impact our effective income tax rate for the thirteen and twenty-six weeks ended August 4, 2018.

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 is 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 ~~October 28, 2017,~~August 4, 2018, we have not identified any gross unrecognized tax benefits where it is reasonably possible ~~that~~ we will recognize a decrease ~~in gross unrecognized tax benefits~~ within the next 12 ~~months of up to $6 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.~~months.

Note 10. Earnings Per Share

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


	13 Weeks Ended		39 Weeks Ended		13 Weeks Ended		26 Weeks Ended
(shares in millions)	October 28, 2017	October 29, 2016	October 28, 2017	October 29, 2016	August 4, 2018	July 29, 2017	August 4, 2018	July 29, 2017
Weighted-average number of shares - basic	391	399	395	398	387	395	388	397
Common stock equivalents	2	1	2	2	3	1	3	1
Weighted-average number of shares - diluted	393	400	397	400	390	396	391	398

The above computations of weighted-average number of shares – diluted exclude 96 million and 811 million shares related to stock options and other stock awards for the thirteen weeks ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively, and 96 million and 79 million shares related to stock options and other stock awards for the ~~thirty-nine~~twenty-six weeks ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively, as their inclusion would have an anti-dilutive effect on earnings per share.

Note 11. Commitments and Contingencies

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

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of ~~October 28, 2017~~August 4, 2018, 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 ~~October 28, 2017~~August 4, 2018, ~~January 28, 2017~~February 3, 2018, and ~~October~~July 29, ~~2016~~2017, 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 ~~October 28, 2017~~August 4, 2018, ~~January 28, 2017~~February 3, 2018, and ~~October~~July 29, ~~2016~~2017 was not material for any individual Action or in total. Subsequent to ~~October 28, 2017~~August 4, 2018 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~~ Company maintains property and business interruption insurance ~~coverage. Based~~coverage and, based on the provisions of the Company’s insurance policies, the Company recorded insurance recoveries based on the determination that recovery of certain fire-related costs iswas probable. ~~During fiscal 2016,~~In January 2018, the Company ~~incurred~~agreed upon a ~~total of $133 million in certain fire-related costs. In January of fiscal 2016,~~final settlement with its insurers.

During the thirteen weeks ended July 29, 2017, the Company agreed upon a partial settlement of $159 million related to the loss on inventory and recorded a gain of $73 million, representing the excess over the loss on inventory, which was recorded in operating expenses in the Consolidated Statement of Income. During fiscal 2016, the Company received $174 million of insurance ~~proceeds. As a result, the insurance receivable balance was $32 million as of January 28, 2017 and was recorded in other current assets in the Consolidated Balance Sheet.~~

During the thirteen and thirty-nine weeks ended October 28, 2017, the Company incurred immaterial costs and $15 million, respectively, in certain fire-related costs for which the Company recorded insurance recoveries based on the determination that recovery of these fire-related costs is probable. In June 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 $131 million of insurance proceeds during~~During the ~~thirteen and thirty-nine~~twenty-six weeks ended October 28, 2017, respectively. Included in the $29 million was $20 million in insurance proceeds related to business interruption, which were recorded as a reduction to cost of goods sold and occupancy expenses in the Condensed Consolidated Statement of Income. The remaining $9 million and $111 million of insurance proceeds received during the thirteen and thirty-nine weeks ended October 28, 2017, respectively, were recorded as a reduction to the insurance receivable balance. As a result, the insurance proceeds received in excess of expected recoveries was less than $1 million as of October 28, 2017.

We will continue to incur additional logistics costs related to the disruption to our North American supply chain network. As settlements are reached, any recoveries related to business interruption insurance will be recognized as a reduction to cost of goods sold and occupancy expenses in the Condensed Consolidated Statements of Income.

~~During the thirty-nine weeks ended October 28,~~July 29, 2017, we allocated ~~$60~~$59 million of advance payments of insurance proceeds to the loss on property and equipment based on the ~~partial settlement~~current estimate of ~~claims~~recovery of certain fire-related costs, and the amount has been reported as insurance proceeds ~~related~~allocated 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, Gap, Banana Republic, Athleta, ~~Intermix,~~ and ~~Weddington Way~~Intermix brands. We identify our operating segments according to how our business activities are managed and evaluated. As of ~~October 28, 2017,~~August 4, 2018, our operating segments included ~~Gap~~Old Navy Global, ~~Old Navy~~Gap 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 ~~October 28, 2017.~~August 4, 2018.

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		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
13 Weeks Ended October 28, 2017											Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. (1)	Gap Global		$	Old Navy Global	750	Banana Republic Global		$	Other (2)	1,587	$	467	$	200		$	3,004			79	%
13 Weeks Ended August 4, 2018 (1)															Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. (2)																							Banana Republic Global			Other (3)			Total			Percentage of Net Sales
Canada	109			143		57			1		310		8		Old Navy Global			151				94			58			—			303				7
Europe	154			—		4			—		158		4		—				Gap Global	145				3			—			148			4
Asia	278			13		21			—		312		8		11				229				22			—			262			6
Other regions	31			15		8			—		54		1		14				29				7			—			50			1
Total	$	1,322		$	1,758	$	557		$	201	$	3,838	100	%	$	1,992			$	1,225			$	604		$	264		$	4,085		100	%

($ in millions)	Gap Global			Old Navy Global		Banana Republic Global			Other (3)		Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
13 Weeks Ended October 29, 2016											Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
13 Weeks Ended July 29, 2017 (1)															Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. ~~(1)~~(2)	Gap Global		$	Old Navy Global	756	Banana Republic Global		$	Other (3)	1,507	$	479	$	172	Old Navy Global				Gap Global			$	Banana Republic Global		2,914	Other (3)			Total			Percentage of Net Sales		77	%
Canada	102			131		55			1		289		8		133				91				54			—			278			7
Europe	150			—		14			—		164		4		—				148				3			—			151			4
Asia	296			55		25			—		376		10		12				252				24			—			288			8
Other regions	36			12		7			—		55		1		16				22				6			—			44			1
Total	$	1,340		$	1,705	$	580		$	173	$	3,798	100	%	$	1,757			$	1,232			$	579		$	231		$	3,799		100	%

($ in millions)	Gap Global			Old Navy Global		Banana Republic Global			Other (2)		Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
39 Weeks Ended October 28, 2017											Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. (1)	Gap Global		$	Old Navy Global	2,137	Banana Republic Global		$	Other (2)	4,609	$	1,396	$	633		$	8,775			79	%
26 Weeks Ended August 4, 2018 (1)															Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. (2)																							Banana Republic Global			Other (3)			Total			Percentage of Net Sales
Canada	277			387		156			2		822		8		Old Navy Global			278				171			108			1			558				7
Europe	435			—		11			—		446		4		—				Gap Global	280				7			—			287			4
Asia	780			34		69			—		883		8		23				513				47			—			583			7
Other regions	83			47		21			—		151		1		30				57				13			—			100			1
Total	$	3,712		$	5,077	$	1,653		$	635	$	11,077	100	%	$	3,737			$	2,429			$	1,168		$	534		$	7,868		100	%

($ in millions)	Gap Global			Old Navy Global		Banana Republic Global			Other (3)		Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
39 Weeks Ended October 29, 2016											Total		Percentage of Net Sales		Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
26 Weeks Ended July 29, 2017 (1)															Old Navy Global				Gap Global				Banana Republic Global			Other (3)			Total			Percentage of Net Sales
U.S. ~~(1)~~(2)	Gap Global		$	Old Navy Global	2,203	Banana Republic Global		$	Other (3)	4,335	$	1,456	$	550	Old Navy Global				Gap Global			$	Banana Republic Global		8,544	Other (3)			Total			Percentage of Net Sales		77	%
Canada	264			358		159			2		783		7		244				168				99			1			512			7
Europe	453			—		45			—		498		5		—				281				7			—			288			4
Asia	856			171		80			—		1,107		10		21				502				48			—			571			8
Other regions	100			32		23			—		155		1		32				52				13			—			97			1
Total	$	3,876		$	4,896	$	1,763		$	552	$	11,087	100	%	$	3,319			$	2,390			$	1,096		$	434		$	7,239		100	%

__________

(1)

Net sales for the thirteen and twenty-six weeks ended August 4, 2018 reflect the adoption of the new revenue recognition standard, which resulted in an increase to net sales of $139 million and $279 million, respectively, for revenue sharing and reimbursements of loyalty program discounts associated with the Company's credit card programs, as well as breakage revenue for our gift cards and credit vouchers. Prior period amounts have not been restated and continue to be reported under accounting standards in effect for those periods.


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


~~(2)~~	~~Includes Athleta, Intermix, and Weddington Way.~~


(3)	~~Includes~~Primarily consists of net sales for the Athleta and ~~Intermix.~~Intermix brands.

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.

OUR BUSINESS

We are a global retailer offering apparel, accessories, and personal care products for men, women, and children under the ~~Gap,~~ Old Navy, Gap, Banana Republic, Athleta, ~~Intermix,~~ and ~~Weddington Way~~Intermix brands. We have 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 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

~~Results~~During the first quarter of fiscal 2018, we adopted the new revenue recognition standard, ASC 606, using the modified retrospective transition method and recorded an increase to opening retained earnings of $36 million, net of tax. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new revenue recognition standard did not have a significant impact to net income for the first ~~three quarters~~half of fiscal ~~2017 include~~2018, but did have a ~~gain from insurance proceeds of $64 million related~~significant impact to the ~~fire that occurred in one~~presentation 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~~net sales, cost of goods sold and occupancy expenses, and operating expenses in the Condensed Consolidated Statement of Income. ~~During~~The presentation changes primarily consist of $96 million and $192 million for the ~~third quarter~~thirteen and twenty-six weeks ended August 4, 2018, respectively, for revenue sharing associated with our credit card programs and breakage revenue for gift cards and credit vouchers, which now is recorded as net sales and previously was recorded as a reduction to operating expenses in our Condensed Consolidated Statements of ~~fiscal 2017, we also received $20~~Income; and $43 million ~~in insurance proceeds related to business interruption,~~and $87 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively, for reimbursements of loyalty program discounts associated with our credit card programs, which ~~were~~now is recorded as net sales and previously was recorded as a reduction to cost of goods sold and occupancy expenses in ~~the~~our Condensed Consolidated ~~Statement~~Statements of Income. ~~Fiscal 2016 results were impacted by~~See Note 2 of Notes to Condensed Consolidated Financial Statements for additional disclosures about the ~~previously announced measures to better align talent and financial resources against our most important priorities to position~~adoption of the Company for improved business performance and long-term success. In connection with these measures, the Company incurred $29 million and $179 million in restructuring costs during the thirteen and thirty-nine weeks ended October 29, 2016, respectively, on a pre-tax basis.new revenue standard.

Financial results for the ~~third~~second quarter of fiscal ~~2017~~2018 are as follows:

Net sales for the ~~third~~second quarter of fiscal ~~2017~~2018 increased 18 percent compared with the ~~third~~second quarter of fiscal ~~2016.~~2017.

Comparable sales for the ~~third~~second quarter of fiscal ~~2017~~2018 increased 32 percent compared with a 31 percent ~~decrease~~increase for the ~~third~~second quarter of fiscal ~~2016, which included an estimated negative impact from the Fishkill fire of approximately 2 percentage points.~~2017.

Gross profit for the ~~third~~second quarter of fiscal ~~2017 and~~2018 was $1.6 billion compared with $1.5 billion for the second quarter of fiscal ~~2016 were $1.5 billion.~~2017. Gross margin for the ~~third~~second quarter of fiscal ~~2017~~2018 was ~~39.7~~39.8 percent compared with ~~39.3~~38.9 percent for the ~~third~~second quarter of fiscal ~~2016.~~2017.

Operating margin for the ~~third~~second quarter of fiscal 2018 was 9.7 percent compared with 11.9 percent for the second quarter of fiscal 2017, ~~was 9.8 percent compared with 10.2 percent for~~which includes a gain on insurance proceeds of $64 million related to the ~~third quarter of fiscal 2016.~~fire that occurred at the Fishkill, New York Company-owned distribution center.

Net income for the ~~third~~second quarter of fiscal ~~2017~~2018 was ~~$229~~$297 million compared with ~~$204~~$271 million for the ~~third~~second quarter of fiscal ~~2016~~2017.

Diluted earnings per share was ~~$0.58~~$0.76 for the ~~third~~second quarter of fiscal 2018 compared with $0.68 for the second quarter of fiscal 2017 ~~compared with $0.51 for the~~ ~~third quarter of fiscal 2016~~. ~~Diluted earnings per share for the third quarter of fiscal 2016 included about a $0.09 impact of restructuring costs incurred in the third quarter of fiscal 2016.~~

During the first ~~three quarters~~half of fiscal ~~2017,~~2018, we distributed ~~$572~~$388 million to shareholders through share repurchases and dividends.

Our business priorities for fiscal ~~2017~~2018 remain as follows:

offering product that is consistently brand-appropriate and on-trend with high customer acceptance, with a focus on expanding our advantage in core businesses and loyalty categories;

investing in digital and customer capabilities to support growth;

creating a unique and differentiated ~~customer~~converged retail shopping experience that attracts new customers and builds loyalty, with focus on both the physical and digital expressions of our brands;

increasing productivity by leveraging our scale and streamlining operations and processes throughout the organization;

continuing to integrate social and environmental sustainability into business practices to support long term growth; and

attracting and retaining ~~great~~strong talent in our businesses and ~~functions; and~~

~~leveraging our scale to improve the effectiveness and efficiency of our processes.~~functions.

In fiscal ~~2017,~~2018, we are focused on investing strategically in the business while ~~also~~ maintaining operating expense ~~discipline.~~discipline and driving efficiency through our productivity initiative. 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~~a number of product, supply chain, and IT initiatives underway. ~~Further,~~Furthermore, we expect to continue our investment in customer experience ~~both in stores and online,~~ to drive higher customer engagement and loyalty across all of our brands and channels, resulting in market share gains. Finally, we will continue to invest in strengthening brand awareness, customer acquisition, and digital capabilities.

~~In fiscal 2017, we expect~~ Underpinning these strategies is a focus on utilizing data, analytics, and technology to respond faster while making decisions that ~~gross margins for our foreign subsidiaries, net of the impact from our merchandise hedge program,~~ will ~~continue~~fuel market share gains and lead to ~~be negatively impacted by the depreciation of certain foreign currencies as our merchandise purchases are primarily in U.S. dollars.~~a more nimble organization.

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 region.

Comparable Sales (“Comp Sales”)

Fiscal 2018 consists of 52 weeks versus 53 weeks in fiscal 2017. Due to the 53rd week in fiscal 2017, in order to maintain consistency, comparable ("Comp") sales for the second quarter of fiscal 2018 and the first half of fiscal 2018 are compared to the thirteen and twenty-six weeks ended August 5, 2017.

The percentage change in Comp Sales by global brand and for The Gap, Inc., as compared with the preceding year, is as follows:

13 Weeks Ended 39 Weeks Ended
October 28,
2017 October 29,
2016 October 28,
2017 October 29,
2016
Gap Global 1 % (8 )% (1 )% (5 )%
Old Navy Global 4 % 3 % 5 % (1 )%
Banana Republic Global (1 )% (8 )% (4 )% (9 )%
The Gap, Inc. 3 % (3 )% 2 % (3 )%

Comp Sales for the third quarter of fiscal 2016 include an estimated negative impact from the Fishkill 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.



	13 Weeks Ended				26 Weeks Ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Old Navy Global	5	%	5	%	4	%	6	%
Gap Global	(5	)%	(1	)%	(5	)%	(2	)%
Banana Republic Global	2	%	(5	)%	2	%	(5	)%
The Gap, Inc.	2	%	1	%	1	%	2	%

Comp Sales include ~~the results of~~merchandise sales in Company-operated stores and merchandise 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 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 are as follows:

13 Weeks Ended 39 Weeks Ended
October 28,
2017 October 29,
2016 October 28,
2017 October 29,
2016
Net sales per average square foot (1) $ 82
$ 81
242
$ 240



	13 Weeks Ended				26 Weeks Ended
	August 4, 2018		July 29, 2017		August 4, 2018	July 29, 2017
Net sales per average square foot (1)	$	90	$	85	169	$	160

__________


(1)	Excludes net sales associated with our online and franchise businesses. Online sales includes both sales through our online channels as well as ship-from-store sales.

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


	January 28, 2017	39 Weeks Ended October 28, 2017		October 28, 2017				February 3, 2018	26 Weeks Ended August 4, 2018		August 4, 2018
	Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)		Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)
Old Navy North America								1,066	30	2	1,094		18.1
Old Navy Asia								14	—	—	14		0.2
Gap North America	844	6	15	835		8.6		810	4	14	800		8.2
Gap Asia	311	24	26	309		3.0		313	9	3	319		3.1
Gap Europe	164	2	9	157		1.3		155	5	5	155		1.3
Banana Republic North America								576	3	9	570		4.8
Banana Republic Asia								45	2	3	44		0.2
Athleta North America								148	7	1	154		0.6
Intermix North America								38	—	1	37		0.1
Company-operated stores total								3,165	60	38	3,187		36.6
Franchise								429	47	37	439		N/A
Total								3,594	107	75	3,626		36.6
Increase (decrease) over prior year											(0.4	)%	0.3	%

								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)
Old Navy North America	1,043	20	6	1,057		17.6		1,043	13	5	1,051		17.5
Old Navy Asia	13	—	—	13		0.2		13	—	—	13		0.2
Gap North America								844	3	13	834		8.6
Gap Asia								311	3	9	305		2.9
Gap Europe								164	—	5	159		1.4
Banana Republic North America	601	4	9	596		5.0		601	3	8	596		5.0
Banana Republic Asia	48	1	1	48		0.2		48	1	1	48		0.2
Banana Republic Europe	1	—	1	—		—		1	—	1	—		—
Athleta North America	132	8	—	140		0.6		132	1	—	133		0.6
Intermix North America	43	—	5	38		0.1		43	—	3	40		0.1
Company-operated stores total	3,200	65	72	3,193		36.6		3,200	24	45	3,179		36.5
Franchise	459	31	44	446		N/A		459	22	18	463		N/A
Total	3,659	96	116	3,639		36.6		3,659	46	63	3,642		36.5
Decrease over prior year				(2.8	)%	(2.9	)%				(2.4	)%	(3.4	)%

	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	)%

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

Net Sales

Our net sales for the ~~third~~second quarter of fiscal ~~2017~~2018 increased ~~$40~~$286 million, or 18 percent, compared with the ~~third~~second quarter of fiscal ~~2016~~2017 primarily driven by an increase in ~~net sales at~~Comp Sales for Old Navy ~~partially offset by a decrease in net sales at Gap and Banana Republic. The~~Global, an increase in ~~Comp Sales of 3 percent for the~~ ~~third quarter of fiscal 2017~~ ~~was offset by~~new stores, and the impact of ~~lost sales primarily~~significant presentation changes of $139 million resulting from ~~international store closures in fiscal 2016.~~the adoption of the new revenue recognition standard.

Our net sales for the first ~~three quarters~~half of fiscal ~~2017 decreased $10~~2018 increased $629 million, or 9 percent, compared with the first ~~three quarters~~half of fiscal ~~2016~~2017 primarily driven by an increase in Comp Sales for Old Navy Global, the impact of significant presentation changes of $279 million resulting from the adoption of the new revenue recognition standard, and a ~~decrease in~~ net ~~sales at Gap and Banana Republic, as well as an unfavorable~~favorable impact of foreign exchange of $49 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 Japanese yen, British pound, and Chinese yuan against the U.S. dollar.$65 million. The foreign exchange impact is the translation impact if net sales for the first ~~three quarters~~half of fiscal ~~2016~~2017 were translated at exchange rates applicable during the first ~~three quarters~~half of fiscal ~~2017. The increase in Comp Sales of 2 percent for the first three quarters of fiscal 2017 was offset by the impact of lost sales primarily from international store closures in fiscal 2016.~~2018.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended						26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Cost of goods sold and occupancy expenses	$	2,313		$	2,305		$	6,770		$	6,948		$	2,458		$	2,320		$	4,814		$	4,457
Gross profit	$	1,525		$	1,493		$	4,307		$	4,139		$	1,627		$	1,479		$	3,054		$	2,782
Cost of goods sold and occupancy expenses as a percentage of net sales	60.3		%	60.7		%	61.1		%	62.7		%	60.2		%	61.1		%	61.2		%	61.6		%
Gross margin	39.7		%	39.3		%	38.9		%	37.3		%	39.8		%	38.9		%	38.8		%	38.4		%

Cost of goods sold and occupancy expenses decreased ~~0.4 percent~~0.9 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2018 compared with the ~~third~~second quarter of fiscal ~~2016~~2017.

Cost of goods sold ~~was flat~~increased 0.3 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2018 compared with the ~~third~~second quarter of fiscal ~~2016~~2017, primarily driven by ~~improved average selling price per unit~~lower product margin at ~~Old Navy~~Gap Global, and ~~Banana Republic,~~higher online shipping costs. This was partially offset by ~~higher average unit cost at all global brands.~~a favorable impact from presentation changes resulting from the adoption of the new revenue recognition standard.

Occupancy expenses decreased ~~0.4 percent~~1.2 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2018 compared with the ~~third~~second quarter of fiscal ~~2016~~2017, primarily driven by presentation changes resulting from the adoption of the new revenue recognition standard, store closures, and an increase in online sales without a corresponding increase in occupancy expenses.

Cost of goods sold and occupancy expenses decreased 0.4 percentage points as a percentage of net sales in the first half of fiscal 2018 compared with the first half of fiscal 2017.

Cost of goods sold increased 0.8 percentage points as a percentage of net sales in the first half of fiscal 2018 compared with the first half of fiscal 2017, primarily driven by higher online shipping costs, higher inventory write-offs at Gap Global, and lower product margin at Gap Global. This was partially offset by a favorable impact from presentation changes resulting from the adoption of the new revenue recognition standard.

Occupancy expenses decreased1.2 percentage points as a percentage of net sales in the first half of fiscal 2018 compared with the first half of fiscal 2017, primarily driven by presentation changes resulting from the adoption of the new revenue recognition standard, an increase in online sales without a corresponding increase in occupancy expenses, and ~~the closure of international stores in fiscal 2016, partially offset by real estate expenses for new stores at the Times Square, New York location for Gap and Old Navy.~~

~~Cost of goods sold and occupancy expenses decreased1.6 percent as a percentage of net sales during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016.~~

~~Cost of goods sold decreased~~1.2 percent as a percentage of net sales during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016, primarily driven by higher margins achieved as a result of improved average selling price per unit at all global brands, partially offset by higher average unit cost at all global brands.

~~Occupancy expenses decreased~~0.4 percent as a percentage of net sales during the first three quarters of fiscal 2017 compared with the first three quarters 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 real estate expenses incurred for new stores at the Times Square, New York location for Gap and Old Navy.store closures.

Operating Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended						26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Operating expenses	$	1,147		$	1,104		$	3,224		$	3,249		$	1,229		$	1,028		$	2,427		$	2,077
Operating expenses as a percentage of net sales	29.9		%	29.1		%	29.1		%	29.3		%	30.1		%	27.1		%	30.8		%	28.7		%
Operating margin	9.8		%	10.2		%	9.8		%	8.0		%	9.7		%	11.9		%	8.0		%	9.7		%

Operating expenses increased ~~$43~~$201 million, or ~~0.8 percent~~3.0 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2018 compared with the ~~third~~second quarter of fiscal ~~2016~~2017. Operating expenses increased $350 million, or 2.1 percentage points as a percentage of net sales in the first half of fiscal 2018 compared with the first half of fiscal 2017.

The increase in operating expenses for the ~~third~~second quarter and first half of fiscal ~~2017~~2018 compared with the ~~third quarter~~respective periods of ~~fiscal 2016~~ ~~was primarily due to the following:~~

~~an increase in payroll-related expenses primarily driven by an increase in bonus expense; and~~

~~an increase in marketing and investments in digital and customer initiatives; partially offset by~~

~~$36 million of restructuring costs incurred in the third quarter of fiscal 2016; and~~

~~a decrease of $27 million of store asset impairment charges unrelated to restructuring activities.~~

~~Operating expenses decreased $25 million, or 0.2 percent as a percentage of net sales, during the first three quarters of fiscal~~ 2017 ~~compared with the first three quarters of fiscal 2016. The decrease in operating expenses for the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016~~ was primarily due to the following:

~~$171 million~~presentation changes resulting from the adoption of ~~restructuring costs incurred during~~ the ~~first three quarters of fiscal 2016;~~new revenue recognition standard;

a gain ~~from~~on insurance proceeds of $64 million ~~related to the Fishkill fire recorded~~ in the second quarter of fiscal ~~2017;~~2017 related to the fire that occurred at the Fishkill, New York Company-owned distribution center; and

~~a decrease of $18 million of store asset impairment charges unrelated to restructuring activities; partially offset by~~

an increase in ~~payroll-related~~ expenses related to payroll and benefits, primarily ~~driven by an increase in bonus expense;~~at stores and

~~an increase in marketing and investments in digital and customer initiatives.~~ distribution centers due to increased volume.

Interest Expense


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				26 Weeks Ended
($ in millions)	October 28, 2017		October 29, 2016		October 28, 2017		October 29, 2016		August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Interest expense	$	18	$	20	$	53	$	57	$	17	$	16	$	33	$	35

Interest expense ~~for the third quarter and the first three quarters 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						39 Weeks Ended						13 Weeks Ended						26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Income taxes	$	135		$	168		$	398		$	383		$	91		$	168		$	146		$	263
Effective tax rate	37.1		%	45.2		%	38.2		%	45.6		%	23.5		%	38.3		%	24.1		%	38.8		%

The decrease in the effective tax rate for the ~~third~~second quarter and first ~~three quarters~~half of fiscal 2018 compared with the respective periods of fiscal 2017 ~~compared with the third quarter and first three quarters of fiscal 2016 was~~is primarily due to the ~~impact~~reduction in the U.S. federal statutory tax rate from 35% to 21%, enacted as part of ~~restructuring costs incurred for foreign subsidiaries during~~ the ~~third~~Tax Cuts and Jobs Act of 2017 (the “TCJA”).

During the fourth quarter of fiscal ~~2016~~2017, we calculated our best estimate of the impact associated the TCJA one-time transition tax on the deemed repatriation of foreign income and ~~resulting valuation allowances~~the impact of TCJA on ~~certain foreign~~ deferred tax ~~assets. The decrease in~~assets and liabilities. During the ~~effective tax rate~~thirteen weeks ended August 4, 2018, we made certain immaterial measurement period adjustments to our fiscal 2017 provisional estimated net charge of $57 million for the ~~first three quarters~~impacts of ~~fiscal 2017 compared with~~deferred tax assets and liabilities subject to the ~~first three quarters of fiscal 2016 was partially offset~~TCJA rate reduction. We continue to evaluate the TCJA, collect and prepare necessary data, and interpret additional guidance issued by the U.S. Treasury Department and Internal Revenue Service (“IRS”) and will complete our accounting for the impact of the ~~adoption of ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting in~~TCJA during 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.~~2018.

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 ~~October 28, 2017~~August 4, 2018, cash, ~~and~~ cash equivalents, and short-term investments were $~~1.4~~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~~from operating activities increased $60 million during the first ~~three quarters~~half of fiscal ~~2017 decreased $200 million~~2018 compared with the first ~~three quarters~~half of fiscal ~~2016,~~2017, primarily due to the following:

~~Net income~~

an increase of ~~$187 million in net income.~~

~~Non-cash items~~

a decrease of $72 million related to store asset impairment charges during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016 primarily due to restructuring activities in fiscal 2016.

~~Changes in operating assets and liabilities~~

~~a decrease of $239~~$153 million related to accounts payable primarily due to the timing of inventory and lease ~~payments and other non-merchandise payables;~~payments;

an increase of $47 million in net income; partially offset by

a decrease of ~~$123~~$98 million ~~related to merchandise inventory~~in income taxes payable primarily due to the ~~volume and timing of receipts;~~federal statutory tax rate decrease; and

a decrease of ~~$56~~$69 million related to accrued expenses and other current liabilities ~~in part due to the timing of severance payments as a result of fiscal 2016 restructuring activities; partially offset by~~

~~an increase of $108 million related to income taxes payable, net of prepaid and other tax-related items,~~ primarily due to ~~an increase~~higher bonus payout in ~~taxable income during the first three quarters of~~ fiscal ~~2017~~2018 compared with the ~~first three quarters of~~bonus payout in fiscal ~~2016 as well as the timing of tax payments.~~2017.

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~~half of fiscal ~~2017~~2018 increased ~~$22~~$402 million compared with the first ~~three quarters~~half of fiscal ~~2016,~~2017, primarily due to the following:

$80286 million ~~more in property~~of net purchases of available-for-sale securities during fiscal 2018; and ~~equipment purchases including purchases related to the rebuilding of the Company’s Fishkill, New York distribution center campus; offset by~~

$6059 million inof insurance proceeds allocated to the loss on property and equipment during the first ~~three quarters~~half of fiscal ~~2017 related to the Fishkill fire compared with no insurance proceeds allocated during the first three quarters of fiscal 2016.~~2017.

Cash Flows from Financing Activities

Net cash used for financing activities during the first ~~three quarters~~half of fiscal ~~2017 increased $364~~2018 decreased $73 million compared with the first ~~three quarters~~half of fiscal ~~2016,~~2017, primarily due to ~~the following:~~

~~$300~~a $67 million ~~of cash used for repurchases of common stock during the first three quarters of fiscal 2017 compared with no repurchases of common stock during the first three quarters of fiscal 2016; and~~

~~$67 million related to the~~ repayment of the Japan ~~Term Loan in full in June~~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, net of insurance proceeds related to loss on property and equipment, 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 three quarters 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 three quarters 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.


	39 Weeks Ended						26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			August 4, 2018			July 29, 2017
Net cash provided by operating activities	$	600		$	800		$	546		$	486
Less: Purchases of property and equipment	(463		)	(383		)	(326		)	(275		)
Add: Insurance proceeds related to loss on property and equipment	60			—			—			59
Free cash flow	$	197		$	417		$	220		$	270

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 ~~$0.23~~$0.485 per share and $0.46 per share during ~~each of~~ the first ~~three quarters~~half of fiscal 2018 and fiscal 2017, ~~and~~ ~~fiscal 2016~~.respectively. Including the dividend paid during the first ~~three quarters~~half of fiscal ~~2017 of $0.69 per share,~~2018, we intend to pay an annual dividend of ~~$0.92~~$0.97 per share for fiscal ~~2017~~2018~~, consistent~~ compared with the annual dividend of $0.92 per share for fiscal ~~2016.~~2017.

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~~February 3, 2018, 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~~Except for changes resulting from the adoption of new accounting standards during the period, 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~~February 3, 2018. See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

Our market risk profile as of ~~January 28, 2017~~February 3, 2018, is disclosed in our Annual Report on Form 10-K and has not significantly changed. See Notes 3, 4, and 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q, for disclosures on our debt, investments, and derivative financial instruments.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s ~~third~~second quarter of fiscal ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION


Item 1.	Legal Proceedings.

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.


Item 1A.	Risk Factors.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017~~February 3, 2018., other than what was previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2018.


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 ~~October 28, 2017~~August 4, 2018 by The Gap, Inc. or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3):

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 (July 30 - August 26) 539,800
$ 23.15
539,800
$ 788 million
Month #2 (August 27 - September 30) 2,249,992
$ 26.66
2,249,992
$ 728 million
Month #3 (October 1 - October 28) 963,538
$ 28.57
963,538
$ 700 million
Total 3,753,330
$ 26.64
3,753,330



	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 (May 6 - June 2)	407,272	$	28.52	407,272	$	573	million
Month #2 (June 3 - July 7)	1,686,360	$	32.14	1,686,360	$	519	million
Month #3 (July 8 - August 4)	1,138,830	$	30.04	1,138,830	$	485	million
Total	3,232,462	$	30.95	3,232,462

__________


(1)	Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.


(2)	On February 25, 2016, we announced that the Board of Directors approved a $1 billion share repurchase authorization, which has no expiration date.


Item 6.	Exhibits.



10.1		Second Amended and Restated Revolving Credit Agreement dated May 31, 2018. (2).
10.2		Sixth Amendment to Amended and Restated Consumer Credit Card Program Agreement by and among the Registrant, Gap (Puerto Rico), Inc., GPS Consumer Direct, Inc., Gap (Apparel), LLC, Gap (ITM) Inc., Synchrony Bank (f/k/a GE Capital Retail Bank) and Synchrony Financial, dated as of May 22, 2018. (1) (2)
10.3		Agreement with ~~Shawn Curran~~Neil Fiske dated ~~September 29, 2017 and confirmed~~June 11, 2018. (2)
10.4		Agreement with Art Peck dated June 1, 2018, filed as Exhibit 10.1 to Registrant’s Form 8-K on ~~October 5, 2017. (1)~~June 4, 2018, 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)~~(2)
31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). ~~(1)~~(2)
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)~~(3)
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)~~(3)
101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~October 28, 2017,~~August 4, 2018, 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)~~(2)

__________


(1)	Pursuant to a request for confidential treatment, confidential portions of this Exhibit have been redacted and have been filed separately with the Securities

and Exchange Commission.


(2)	Filed herewith.


~~(2)~~(3)	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		THE GAP, INC.

Date:	~~November 22, 2017~~August 31, 2018	By	/s/ Arthur Peck
			Arthur Peck
			Chief Executive Officer

Date:	~~November 22, 2017~~August 31, 2018	By	/s/ Teri List-Stoll
			Teri List-Stoll
			Executive Vice President and Chief Financial Officer

Exhibit Index




10.1		Second Amended and Restated Revolving Credit Agreement dated May 31, 2018. (2)
10.2		Sixth Amendment to Amended and Restated Consumer Credit Card Program Agreement by and among the Registrant, Gap (Puerto Rico), Inc., GPS Consumer Direct, Inc., Gap (Apparel), LLC, Gap (ITM) Inc., Synchrony Bank (f/k/a GE Capital Retail Bank) and Synchrony Financial, dated as of May 22, 2018. (1) (2)
10.3		Agreement with ~~Shawn Curran~~Neil Fiske dated ~~September 29, 2017 and confirmed~~June 11, 2018. (2)
10.4		Agreement with Art Peck dated June 1, 2018, filed as Exhibit 10.1 to Registrant’s Form 8-K on ~~October 5, 2017. (1)~~June 4, 2018, 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)~~(2)
31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). ~~(1)~~(2)
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)~~(3)
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)~~(3)
101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~October 28, 2017,~~August 4, 2018, 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)~~ (2)

_____________________________


(1)	Pursuant to a request for confidential treatment, confidential portions of this Exhibit have been redacted and have been filed separately with the Securities

and Exchange Commission.


(2)	Filed herewith.


~~(2)~~(3)	Furnished herewith.