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~~May 4, 2019



☐	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



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.05 par value	GPS	The New York Stock Exchange

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~~May 24, 2019 was ~~388,857,073.~~377,971,511.

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~~recent accounting ~~standards;~~pronouncements;

recognition of revenue deferrals as revenue;

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

~~the impact of the potential settlement of outstanding~~total gross unrecognized tax ~~matters;~~benefits;

the impact of losses due to indemnification obligations;

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

structure and timing of completion of the planned separation transaction;

process of completing the separation transaction, including estimated costs;

anticipated strategic, financial, operational or other benefits of the separation transaction, including future financial performance of the independent companies following the proposed separation transaction;

plans to restructure the Gap brand specialty fleet, including anticipated store closures and timing, impact of to annualized sales, associated costs, and effect on annualized savings;

investing in digital and customer capabilities, as well as store experience;

increasing productivity by leveraging our scale and streamlining operations and processes;

attracting and retaining strong talent in our businesses and functions;

continuing ~~depreciation of certain foreign currencies on gross margins for~~to integrate social and environmental sustainability into business practices;

investing strategically in the business while maintaining operating discipline and driving efficiency;

continuing 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, Gap specialty fleet rationalization efforts, 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;~~2019; 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 risks associated with our plan to separate into two independent publicly-traded companies, including that the separation may not be completed in accordance with the expected plans or anticipated timeframe, or at all;

the risk that our plan to separate into two publicly-traded companies may not achieve some or all of the anticipated benefits;

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 could adversely impact~~a failure of, or updates or changes to, our ~~financial results;~~information technology (“IT”) systems may disrupt our 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~~results or our business initiatives;

the risk that ~~updates~~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 toin the regulatory or administrative landscape could adversely affect our ~~information technology (“IT”) systems may disrupt our~~financial condition and results of 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~~credit card arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows;

the risk that the 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 2, 2019 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,~~May 31, 2019, 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 2, 2019.

THE GAP, INC.

TABLE OF CONTENTS



		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of ~~October 28, 2017, January 28, 2017,~~May 4, 2019, February 2, 2019, and ~~October 29, 2016~~May 5, 2018	1

	Condensed Consolidated Statements of Income for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016~~May 5, 2018	2

	Condensed Consolidated Statements of Comprehensive Income for the Thirteen ~~and Thirty-Nine~~ Weeks Ended ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016~~May 5, 2018	3

	Condensed Consolidated Statements of Stockholders' Equity for the Thirteen Weeks Ended May 4, 2019 and May 5, 2018	4

	Condensed Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Thirteen Weeks Ended ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016~~May 5, 2018	45

	Notes to Condensed Consolidated Financial Statements	56

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2224

Item 4.	Controls and Procedures	2224

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	2325

Item 1A.	Risk Factors	2325

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325

Item 6.	Exhibits	2426

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		May 4, 2019		February 2, 2019		May 5, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,353	$	1,783	$	1,522	$	941	$	1,081	$	1,210
Short-term investments							272		288		164
Merchandise inventory	2,476		1,830		2,398		2,242		2,131		2,035
Other current assets	654		702		751		757		751		778
Total current assets	4,483		4,315		4,671		4,212		4,251		4,187
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 $5,871, $5,755, and $6,025							3,129		2,912		2,791
Operating lease assets							5,732		—		—
Other long-term assets	726		679		674		547		886		607
Total assets	$	7,895	$	7,610	$	8,007	$	13,620	$	8,049	$	7,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	—	$	65	$	424
Accounts payable	1,330		1,243		1,413		$	994	$	1,126	$	1,072
Accrued expenses and other current liabilities	1,132		1,113		1,059		882		1,024		975
Current portion of operating lease liabilities							929		—		—
Income taxes payable	134		32		19		26		24		11
Total current liabilities	2,596		2,453		2,915		2,831		2,174		2,058
Long-term liabilities:
Long-term debt	1,248		1,248		1,320		1,249		1,249		1,249
Long-term operating lease liabilities							5,597		—		—
Lease incentives and other long-term liabilities	1,027		1,005		1,046		372		1,073		1,081
Total long-term liabilities	2,275		2,253		2,366		7,218		2,322		2,330
Commitments and contingencies (see Note 11)
Commitments and contingencies (see Note 12)
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 378, 378, and 387 shares							19		19		19
Additional paid-in capital	—		81		57		—		—		—
Retained earnings	2,965		2,749		2,621		3,495		3,481		3,127
Accumulated other comprehensive income	40		54		28		57		53		51
Total stockholders’ equity	3,024		2,904		2,726		3,571		3,553		3,197
Total liabilities and stockholders’ equity	$	7,895	$	7,610	$	8,007	$	13,620	$	8,049	$	7,585

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ and shares in millions except per share amounts)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Net sales	$	3,838		$	3,798		$	11,077		$	11,087		$	3,706		$	3,783
Cost of goods sold and occupancy expenses	2,313			2,305			6,770			6,948			2,362			2,356
Gross profit	1,525			1,493			4,307			4,139			1,344			1,427
Operating expenses	1,147			1,104			3,224			3,249			1,028			1,198
Operating income	378			389			1,083			890			316			229
Interest expense	18			20			53			57			20			16
Interest income	(4		)	(3		)	(11		)	(6		)	(6		)	(6		)
Income before income taxes	364			372			1,041			839			302			219
Income taxes	135			168			398			383			75			55
Net income	$	229		$	204		$	643		$	456		$	227		$	164
Weighted-average number of shares - basic	391			399			395			398			379			389
Weighted-average number of shares - diluted	393			400			397			400			381			393
Earnings per share - basic	$	0.59		$	0.51		$	1.63		$	1.15		$	0.60		$	0.42
Earnings per share - diluted	$	0.58		$	0.51		$	1.62		$	1.14		$	0.60		$	0.42
Cash dividends declared and paid per share	$	0.23		$	0.23		$	0.69		$	0.69		$	0.2425		$	0.2425

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Net income	$	229		$	204		$	643		$	456		$	227		$	164
Other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Foreign currency translation	(5		)	(10		)	12			(1		)	(1		)	(7		)
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	17			29			(14		)	(57		)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $4 and $(6)													9			28
Reclassification adjustment for gains on derivative financial instruments, net of (tax) tax benefit of $(2) and $9													(4		)	(6		)
Other comprehensive income, net of tax													4			15
Comprehensive income	$	246		$	233		$	629		$	399		$	231		$	179

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)



	Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance as of February 3, 2018	389		$	19	$	8		$	3,081		$	36	$	3,144
Cumulative effect of a change in accounting principle related to revenue recognition								36					36
Net income								164					164
Other comprehensive loss, net of tax											15		15
Repurchases and retirement of common stock	(3	)	—		(40		)	(60		)			(100		)
Issuance of common stock related to stock options and employee stock purchase plans	1		—		20								20
Issuance of common stock and withholding tax payments related to vesting of stock units	—		—		(19		)						(19		)
Share-based compensation, net of estimated forfeitures					31								31
Common stock dividends ($0.2425 per share)								(94		)			(94		)
Balance as of May 5, 2018	387		$	19	$	—		$	3,127		$	51	$	3,197

Balance as of February 2, 2019	378		$	19	—			$	3,481		$	53	$	3,553
Cumulative effect of a change in accounting principle related to operating leases								(86		)			(86		)
Net income								227					227
Other comprehensive loss, net of tax											4		4
Repurchases and retirement of common stock	(2	)	—		(15		)	(35		)			(50		)
Issuance of common stock related to stock options and employee stock purchase plans	1		—		10								10
Issuance of common stock and withholding tax payments related to vesting of stock units	1		—		(19		)						(19		)
Share-based compensation, net of forfeitures					24								24
Common stock dividends ($0.2425 per share)								(92		)			(92		)
Balance as of May 4, 2019	378		$	19	$	—		$	3,495		$	57	$	3,571

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	39 Weeks Ended						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Cash flows from operating activities:
Net income	$	643		$	456		$	227		$	164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	418			449			138			140
Amortization of lease incentives	(46		)	(47		)	—			(14		)
Share-based compensation	60			55			24			21
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			7			7
Gain on sale of building							(191		)	—
Deferred income taxes	(50		)	(10		)	23			6
Changes in operating assets and liabilities:
Merchandise inventory	(636		)	(513		)	(83		)	(46		)
Other current assets and other long-term assets	(60		)	(52		)	25			(40		)
Accounts payable	55			294			(100		)	(120		)
Accrued expenses and other current liabilities	(46		)	10			(37		)	(232		)
Income taxes payable, net of prepaid and other tax-related items	188			80			36			31
Lease incentives and other long-term liabilities	48			(18		)	14			17
Net cash provided by operating activities	600			800
Operating lease assets and liabilities, net							(54		)	—
Net cash provided by (used for) operating activities							29			(66		)
Cash flows from investing activities:
Purchases of property and equipment	(463		)	(383		)	(165		)	(138		)
Insurance proceeds related to loss on property and equipment	60			—
Purchase of building							(343		)	—
Proceeds from sale of building							220			—
Purchases of short-term investments							(69		)	(167		)
Proceeds from sales and maturities of short-term investments							86			3
Purchase of Janie and Jack							(69		)	—
Other	(3		)	(1		)	—			(7		)
Net cash used for investing activities	(406		)	(384		)	(340		)	(309		)
Cash flows from financing activities:
Payments of current maturities of debt	(67		)	—
Proceeds from issuances under share-based compensation plans	23			25			10			20
Withholding tax payments related to vesting of stock units	(15		)	(18		)	(19		)	(19		)
Repurchases of common stock	(300		)	—			(50		)	(100		)
Excess tax benefit from exercise of stock options and vesting of stock units	—			1
Cash dividends paid	(272		)	(275		)	(92		)	(94		)
Net cash used for financing activities	(631		)	(267		)	(151		)	(193		)
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							—			(2		)
Net decrease in cash, cash equivalents, and restricted cash							(462		)	(570		)
Cash, cash equivalents, and restricted cash at beginning of period							1,420			1,799
Cash, cash equivalents, and restricted cash at end of period							$	958		$	1,229

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		$	18		$	19
Cash paid for operating lease liabilities							$	301		$	—

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Accounting Policies

Basis of Presentation

The Condensed Consolidated Balance Sheets as of ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016~~,May 5, 2018, and the Condensed Consolidated Statements of Income, ~~and~~ the Condensed Consolidated Statements of Comprehensive Income, ~~for~~ the ~~thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016,~~Condensed Consolidated Statements of Stockholders' Equity, and the Condensed Consolidated Statements of Cash Flows for the ~~thirty-nine~~thirteen weeks ended~~October 28, 2017~~ May 4, 2019 and ~~October 29, 2016~~May 5, 2018 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, stockholders' equity, and cash flows as of ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016~~May 5, 2018 and for all periods presented. The Condensed Consolidated Balance Sheet as of ~~January 28, 2017~~February 2, 2019 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 2, 2019.

The results of operations for the thirteen ~~and thirty-nine~~ weeks ended~~October 28, 2017~~ May 4, 2019 are not necessarily indicative of the operating results that may be expected for the ~~53-week~~52-week period ending February ~~3, 2018~~.1, 2020.

~~Note 2. Recent Accounting Pronouncements~~

Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its Consolidated Financial Statements, based on current information.

~~Recent~~ Accounting Pronouncements ~~Related to Revenue Recognition~~Recently Adopted

ASU No. 2016-02, Leases

In ~~May 2014,~~February 2016, 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 we do not expect the adoption of ASU No. 2014-09 and related ASUs to have a material impact on our Consolidated Financial Statements, we expect the adoption to result in change in the timing of recognizing revenue for breakage income for gift cards, gift certificates, and credit vouchers, credit card reward points and certificate liability, as well as sales where we ship the merchandise to the customer from a distribution center or store. Additionally, under the new guidance, we expect to recognize allowances for estimated sales returns on a gross basis rather than net basis on the Consolidated Balance Sheets.

We are currently evaluating the classification 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.

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

~~Other Recent Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU~~ No. 2016-02, Leases. Under the new guidance, lessees ~~will be~~are 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. We adopted ASU No. 2016-02 and related amendments (collectively "ASC 842") on February 3, 2019 using the optional transition method, which allows for the prospective application of the standard. As of the effective date, we recorded a decrease to opening retained earnings of $86 million, net of tax, which consisted primarily of impairments for certain store and operating lease assets. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which allowed us to carry forward our historical lease classification, to not reassess prior conclusions related to initial direct costs, and to not reassess whether any expired or existing contracts are or contain leases. We also elected the lessee practical expedient to combine lease and nonlease components for new leases and modified leases. The ~~ASU is effective for fiscal years~~adoption of ASC 842 resulted in the recording of operating lease assets and ~~interim periods within those years beginning after December 15, 2018. We are still assessing the impact~~operating lease liabilities of ~~this ASU~~$5.7 billion and $6.6 billion, respectively, on our Condensed Consolidated Balance Sheet as of February 3, 2019.

See Note 9 of Notes to Condensed Consolidated Financial Statements ~~but it will result in a substantial increase in~~for information regarding required disclosures related to our ~~long-term assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.~~leases.

~~In March 2016, the FASB issued~~ ASU No. ~~2016-09, Compensation - Stock Compensation:~~2017-12, Derivatives and Hedging: Targeted Improvements to ~~Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting~~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.Hedging Activities

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. In addition, this guidance amends and expands disclosure requirements. We adopted this ASU on a prospective basis on February 3, 2019. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

See Note 5 of Notes to Condensed Consolidated Financial Statements for information regarding derivative financial instruments.

Accounting Pronouncements Not Yet Adopted

Except as noted below, the Company has considered all recent accounting pronouncements and concluded that there are no recent accounting pronouncements that may have a material impact on our Condensed Consolidated Financial Statements, based on current information.

ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU is intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. This guidance is effective for ~~fiscal years and interim~~annual periods ~~within those years~~ beginning after December 15, ~~2018. We are~~2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently ~~assessing~~evaluating the ~~potential~~ impact of this ~~ASU~~guidance may have on our Consolidated Financial ~~Statements.~~Statements and related disclosures.

Restricted Cash

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.

As of May 4, 2019, restricted cash primarily included consideration that serves as collateral for our insurance obligations. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the total shown on our Condensed Consolidated Statements of Cash Flows:



($ in millions)	May 4, 2019		May 5, 2018
Cash and cash equivalents, per Condensed Consolidated Balance Sheets	$	941	$	1,210
Restricted cash included in other current assets	—		1
Restricted cash included in other long-term assets	17		18
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows	$	958	$	1,229

Note 2. Revenue

The Company’s revenues include merchandise sales at stores, online, and through franchise agreements. We also receive revenue sharing from our credit card agreement for private label and co-branded credit cards, and breakage revenue related to our gift cards, credit vouchers, and outstanding loyalty points. Breakage revenue is recognized based upon historical redemption patterns. For online sales and catalog sales, the Company has elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online 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. 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 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 include both providing a license and an obligation to redeem loyalty points issued under the loyalty rewards program. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to redeem loyalty points is deferred until those loyalty points are redeemed. Income related to our credit card agreement is classified within net sales on our Condensed Consolidated Statements 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 the subsequent sale or usage occurs and our obligation to supply franchise partners with our merchandise is satisfied when control of the merchandise transfers. As of the quarter ended May 4, 2019 and May 5, 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. For the thirteen weeks ended May 4, 2019, the opening and closing balance of deferred revenue for these obligations was $227 million and $206 million, respectively; $97 million of the opening balance was recognized as revenue during the period. For the thirteen weeks ended May 5, 2018, the opening and closing balance of deferred revenue for these obligations was $232 million and $201 million, respectively; $97 million of the opening balance was recognized as revenue during the period. We expect that the majority of our revenue deferrals as of the quarter ended May 4, 2019, will be recognized as revenue in the next 12 months as our performance obligations are satisfied.

See Note 13 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue by brand and by region.

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~~May 4, 2019, ~~January 28, 2017~~February 2, 2019, and ~~October 29, 2016~~May 5, 2018, 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~~1.30 billion, $~~1.32~~1.30 billion, and $~~1.34~~1.31 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.~~May 4, 2019.

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~~$57 million as of ~~October 28, 2017.~~May 4, 2019. As of ~~October 28, 2017,~~May 4, 2019, there were no borrowings under the Foreign Facilities. There were ~~$14~~$16 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of ~~October 28, 2017.~~May 4, 2019.

We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of ~~October 28, 2017~~May 4, 2019, we had $1513 million in standby letters of credit issued under these agreements.

Note 4. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen ~~and thirty-nine~~ weeks ended ~~October 28, 2017~~May 4, 2019 or ~~October 29, 2016~~May 5, 2018. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 23 during the thirteen ~~and thirty-nine~~ weeks ended ~~October 28, 2017~~May 4, 2019 or ~~October 29, 2016~~May 5, 2018.

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)		May 4, 2019		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	$	—	$	222	$	13		$	209	$	—
Short-term investments									272		129			143		—
Derivative financial instruments	31		—		31		—		27		—		��	27		—
Deferred compensation plan assets	46		46		—		—		51		51			—		—
Other assets									2		—			—		2
Total	$	466	$	74	$	392	$	—	$	574	$	193		$	379	$	2
Liabilities:
Derivative financial instruments	$	20	$	—	$	20	$	—	$	6	$	—		$	6	$	—
			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 2, 2019		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	$	—	$	373	$	26		$	347	$	—
Short-term investments									288		125			163		—
Derivative financial instruments	58		—		58		—		20		—			20		—
Deferred compensation plan assets	40		40		—		—		48		48			—		—
Other assets									2		—			—		2
Total	$	795	$	296	$	499	$	—	$	731	$	199		$	530	$	2
Liabilities:
Derivative financial instruments	$	21	$	—	$	21	$	—	$	11	$	—		$	11	$	—
			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)		May 5, 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	$	596	$	106	$	490	$	—	$	642	$	28		$	614	$	—
Short-term investments									164		57			107		—
Derivative financial instruments	62		—		62		—		26		—			26		—
Deferred compensation plan assets	41		41		—		—		51		51			—		—
Total	$	699	$	147	$	552	$	—	$	883	$	136		$	747	$	—
Liabilities:
Derivative financial instruments	$	49	$	—	$	49	$	—	$	15	$	—		$	15	$	—

We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, ~~and~~ money market ~~funds. We~~funds, and commercial paper. With 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 May 4, 2019 and May 5, 2018, the Company held $272 million and $164 million, respectively, of available-for-sale debt 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 May 4, 2019 and May 5, 2018, the Company held $35 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 within accumulated other comprehensive income were immaterial as of May 4, 2019 and May 5, 2018.

The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen weeks ended May 4, 2019 and May 5, 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.

~~During~~There were no material impairment charges recorded for long-lived assets for the thirteen weeks ended ~~October 28, 2017,~~May 4, 2019, or May 5, 2018.

As discussed in Note 1, we recorded a ~~charge for~~decrease to opening retained earnings due to the ~~impairment~~adoption of ~~long-lived assets of $4 million, which reduced the then carrying amount~~ASC 842 related to impairments as of the ~~applicable long-lived assets of $5 million to their fair value of $1 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 million to their fair value of $1 million.

During the thirty-nine weeks ended October 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.effective date.

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 impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen ~~and thirty-nine~~ weeks ended ~~October 28, 2017~~May 4, 2019, or ~~October 29, 2016.~~

May 5, 2018.

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 inon 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 ininto income induring 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~~these 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 inon 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		May 4, 2019		February 2, 2019		May 5, 2018
Derivatives designated as cash flow hedges	$	873	$	1,101	$	1,201	$	610	$	774	$	865
Derivatives designated as net investment hedges	30		31		31
Derivatives not designated as hedging instruments	581		618		664		666		660		647
Total	$	1,484	$	1,750	$	1,896	$	1,276	$	1,434	$	1,512

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		May 4, 2019		February 2, 2019		May 5, 2018
Derivatives designated as cash flow hedges:
Other current assets	$	16	$	28	$	35	$	20	$	15	$	12
Other long-term assets	$	4	$	16	$	13	—		—		3
Accrued expenses and other current liabilities	$	11	$	10	$	26	2		3		12
Lease incentives and other long-term liabilities	$	2	$	1	$	8

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

Derivatives not designated as hedging instruments:
Other current assets	$	11	$	13	$	13	7		5		11
Other long-term assets	$	—	$	1	$	—
Accrued expenses and other current liabilities	$	5	$	10	$	14	4		8		3
Lease incentives and other long-term liabilities	$	—	$	—	$	1

Total derivatives in an asset position	$	31	$	58	$	62	$	27	$	20	$	26
Total derivatives in a liability position	$	20	$	21	$	49	$	6	$	11	$	15

~~The majority~~All of the unrealized gains and losses from designated cash flow hedges as of ~~October 28, 2017~~May 4, 2019, will be recognized ininto income within the next 12 months at the then-current values, which may differ from the fair values as of ~~October 28, 2017~~May 4, 2019, 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~~were $2 million, $184 million, and $98 million as of ~~October 28, 2017~~May 4, 2019, ~~January 28, 2017~~February 2, 2019, and ~~October 29, 2016~~May 5, 2018, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would behave been $2325 million, $4016 million, and ~~$53~~$18 million and the net amounts of the derivative financial instruments in a liability position would be ~~$12~~have been $4 million,~~, $3~~ $7 million, and ~~$40~~$7 million as of ~~October 28, 2017,~~May 4, 2019, ~~January 28, 2017~~February 2, 2019, and ~~October 29, 2016~~May 5, 2018, 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 designated in a cash flow hedging ~~and net investment hedging relationships~~relationship 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
($ in millions) October 28,
2017
October 29,
2016
October 28,
2017
October 29,
2016
Derivatives in cash flow hedging relationships:
Gain (loss) recognized in other comprehensive income $ 25
$ 43
$ (26 ) $ (62 )
Gain (loss) reclassified into cost of goods sold and occupancy expenses $ (5 ) $ 2
$ 2
$ 15
Loss reclassified into operating expenses $ —
$ (2 ) $ —
$ (10 )

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



	13 Weeks Ended
($ in millions)	May 4, 2019		May 5, 2018
Gain recognized in other comprehensive income	$	13	$	22

The pre-tax amounts recognized in income related to derivative instruments are as follows:



	Location and Amount of (Gain) Loss Recognized in Income
	13 Weeks Ended May 4, 2019						13 Weeks Ended May 5, 2018
($ in millions)	Cost of goods sold and occupancy expense			Operating expenses			Cost of goods sold and occupancy expense			Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Income Statement in which the effects of derivatives are recorded	$	2,362		$	1,028		$	2,356		$	1,198

(Gain) recognized in income
Derivatives designated as cash flow hedges	$	(6	)	$	—		$	(3	)	$	—
Derivatives not designated as hedging instruments	—			(9		)	—			(12		)
Total (gain) recognized in income	$	(6	)	$	(9	)	$	(3	)	$	(12	)

For the thirteen ~~and thirty-nine~~ weeks ended ~~October 28, 2017~~May 4, 2019, and ~~October 29, 2016~~May 5, 2018, 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
($ in millions) October 28,
2017 October 29,
2016 October 28,
2017 October 29,
2016
Gain (loss) recognized in operating expenses $ 10
$ 12
$ (13 ) $ (5 )

Note 6. Share Repurchases

Share repurchase activity is as follows:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended
($ and shares in millions except average per share cost)	October 28, 2017		October 29, 2016		October 28, 2017		October 29, 2016		May 4, 2019		May 5, 2018
Number of shares repurchased (1)	3.8		—		12.5		—		1.9		3.2
Total cost	$	100	$	—	$	300	$	—	$	50	$	100
Average per share cost including commissions	$	26.64	$	—	$	24.21	$	—	$	25.96	$	31.22

__________


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

In February ~~2016, we announced that~~2019, the Board of Directors approved a new $1.0 billion share repurchase authorization of(the "February 2019 repurchase program") which ~~$700~~superseded and replaced a February 2016 repurchase authorization. The February 2019 repurchase program had $950 million ~~was~~ remaining as of ~~October 28, 2017.~~May 4, 2019.

The February 2016 repurchase authorization had $287 million remaining as of February 2, 2019.

All of the share repurchases were paid for as of ~~October 28, 2017.~~May 4, 2019, February 2, 2019, and May 5, 2018. 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			Foreign Currency Translation			Cash Flow Hedges			Total
Balance at January 28, 2017	$	29		$	25		$	54
13 Weeks Ended April 29, 2017:
Foreign currency translation	(4		)	—			(4		)
Change in fair value of derivative financial instruments	—			—			—
Amounts reclassified from accumulated other comprehensive income	—			(4		)	(4		)
Other comprehensive loss, net of tax	(4		)	(4		)	(8		)
Balance at April 29, 2017	25			21			46
13 Weeks Ended July 29, 2017:
Balance at February 2, 2019										$	47		$	6		$	53
13 Weeks Ended May 4, 2019:
Foreign currency translation	21			—			21			(1		)	—			(1		)
Change in fair value of derivative financial instruments	—			(43		)	(43		)	—			9			9
Amounts reclassified from accumulated other comprehensive income	—			(1		)	(1		)	—			(4		)	(4		)
Other comprehensive income (loss), net of tax	21			(44		)	(23		)	(1		)	5			4
Balance at July 29, 2017	46			(23		)	23
13 Weeks Ended October 28, 2017:
Balance at May 4, 2019										$	46		$	11		$	57

($ 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	(5		)	—			(5		)	(7		)	—			(7		)
Change in fair value of derivative financial instruments	—			23			23			—			28			28
Amounts reclassified from accumulated other comprehensive income	—			(1		)	(1		)	—			(6		)	(6		)
Other comprehensive income (loss), net of tax	(5		)	22			17			(7		)	22			15
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
Balance at May 5, 2018										$	57		$	(6	)	$	51

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 onwithin the respective line items inon the Condensed Consolidated Statements of Income.

Note 8. Share-Based Compensation

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


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Stock units	$	14		$	14		$	47		$	43		$	19		$	16
Stock options	3			4			10			9			4			4
Employee stock purchase plan	1			1			3			3			1			1
Share-based compensation expense	18			19			60			55			24			21
Less: Income tax benefit	(7		)	(8		)	(23		)	(25		)	(6		)	(5		)
Share-based compensation expense, net of tax	$	11		$	11		$	37		$	30		$	18		$	16

Note 9. Leases

The Company is a party to many agreements involving commitments to make payments to third parties. The majority of our long-term contractual obligations relate to operating leases for our retail stores. We also lease some of our corporate facilities and distribution centers. These operating leases expire at various dates through fiscal 2040. Most store leases have a five-year base period and include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed upon at lease inception. Some leases also include early termination options, which can be exercised under specific conditions. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We record our lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We recognize operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related operating lease cost on a straight-line basis over the lease term. In addition, certain of our lease agreements include variable lease payments, such as payments based on a percentage of sales that are in excess of a predetermined level and/or increases based on a change in the consumer price index or fair market value. These variable lease payments are excluded from minimum lease payments and are included in the determination of lease cost when it is probable that the expense has been incurred and the amount can be reasonably estimated.

As of May 4, 2019, the Company's finance leases were not material to our Condensed Consolidated Financial Statements.

Net lease cost recognized on our Condensed Consolidated Statement of Income is summarized as follows:



	13 Weeks Ended
($ in millions)	May 4, 2019
Operating lease cost	$	296
Variable lease cost	165
Sublease income	(5		)
Net lease cost	$	456

As of May 4, 2019, the maturities of lease liabilities based on the total minimum lease commitment amount including options to extend lease terms that are reasonably certain of being exercised are as follows:



($ in millions)
Fiscal Year
Remainder of 2019	$	902
2020	1,080
2021	953
2022	856
2023	753
Thereafter	3,537
Total minimum lease payments	8,081
Less: Interest	(1,555		)
Present value of operating lease liabilities	6,526
Less: Current portion of operating lease liabilities	(929		)
Long-term operating lease liabilities	$	5,597

During the thirteen weeks ended May 4, 2019, additions of operating lease assets were $166 million. As of May 4, 2019, the minimum lease commitment amount for operating leases signed but not yet commenced, primarily for retail stores, was $274 million.

As of May 4, 2019, the weighted-average remaining operating lease term was 8.6 years and the weighted-average discount rate was 4.7 percent for operating leases recognized on our Condensed Consolidated Financial Statements.

In accordance with Accounting Standards Codification ("ASC") 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on February 2, 2019 were as follows:



($ in millions)
Fiscal Year
2019	$	1,156
2020	1,098
2021	892
2022	730
2023	539
Thereafter	1,520
Total minimum lease commitments	$	5,935

The total minimum lease commitment amount above does not include minimum sublease income of $12 million receivable in the future under non-cancelable sublease agreements. In addition, the total minimum lease commitment amount above excludes options to extend lease terms that are reasonably certain of being exercised.

Note 10. Income Taxes

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

The Company 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,~~May 4, 2019, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $6$1 million, primarily due to the closing of audits. If we do recognize such a decrease in gross unrecognized tax benefits, the net impact on the Condensed Consolidated ~~Statement~~Statements of Income would not be material.

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

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


	13 Weeks Ended		39 Weeks Ended		13 Weeks Ended
(shares in millions)	October 28, 2017	October 29, 2016	October 28, 2017	October 29, 2016	May 4, 2019	May 5, 2018
Weighted-average number of shares - basic	391	399	395	398	379	389
Common stock equivalents	2	1	2	2	2	4
Weighted-average number of shares - diluted	393	400	397	400	381	393

The above computations of weighted-average number of shares – diluted exclude 911 million and 85 million shares related to stock options and other stock awards for the thirteen weeks ended ~~October 28, 2017~~May 4, 2019 and ~~October 29, 2016, respectively, and 9 million and 7 million shares related to stock options and other stock awards for the thirty-nine weeks ended October 28, 2017 and October 29, 2016,~~May 5, 2018, respectively, as their inclusion would have an anti-dilutive effect on earnings per share.

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

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

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of ~~October 28, 2017~~May 4, 2019, Actions filed against us included commercial, intellectual property, customer, ~~employment,~~ and ~~data privacy~~employment 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~~May 4, 2019, ~~January 28, 2017~~February 2, 2019, and ~~October 29, 2016~~May 5, 2018, 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~~May 4, 2019, ~~January 28, 2017~~February 2, 2019, and ~~October 29, 2016~~May 5, 2018, was not material for any individual Action or in total. Subsequent to ~~October 28, 2017~~May 4, 2019, 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 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 is probable. During fiscal 2016, the Company incurred a total of $133 million in certain fire-related costs. In January of fiscal 2016, 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 the thirteen and thirty-nine 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, 2017, we allocated $60 million of insurance proceeds to the loss on property and equipment based on the partial settlement of claims reported as insurance proceeds related to loss on property and equipment, a component of cash flows from investing activities, in the Condensed Consolidated Statement of Cash Flows.

Note ~~12.~~13. Segment Information

~~The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way brands.~~ We identify our operating segments according to how our business activities are managed and evaluated. As of ~~October 28, 2017,~~May 4, 2019, our operating segments included ~~Gap~~Old Navy Global, ~~Old Navy~~Gap Global, Banana Republic Global, Athleta, and Intermix. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customers through its store and online channels, allowing us to execute on our omni-channel strategy where customers can shop seamlessly across all of our brands in retail stores and online through desktop or mobile devices. 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~~were aggregated into one reportable segment as of ~~October 28, 2017.~~May 4, 2019. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.

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 (2)			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 (2)			Other (3)		Total		Percentage of Net Sales
13 Weeks Ended May 4, 2019																Old Navy Global		Gap Global			Banana Republic Global (2)			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	Old Navy Global		Gap Global		$	Banana Republic Global (2)		3,004	Other (3)		Total		Percentage of Net Sales		79	%
Canada	109			143		57			1			310		8		128		69			47			1		245		7
Europe	154			—		4			—			158		4		—		121			3			—		124		3
Asia	278			13		21			—			312		8		10		233			26			—		269		7
Other regions	31			15		8			—			54		1		20		21			5			—		46		1
Total	$	1,322		$	1,758	$	557		$	201		$	3,838	100	%	$	1,799	$	1,052		$	568		$	287	$	3,706	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 May 5, 2018																Old Navy Global		Gap Global			Banana Republic Global			Other (3)		Total		Percentage of Net Sales
U.S. (1)	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		127		77			50			1		255		7
Europe	150			—		14			—			164		4		—		135			4			—		139		4
Asia	296			55		25			—			376		10		12		284			25			—		321		8
Other regions	36			12		7			—			55		1		16		28			6			—		50		1
Total	$	1,340		$	1,705	$	580		$	173		$	3,798	100	%	$	1,745	$	1,204		$	564		$	270	$	3,783	100	%

($ in millions)	Gap Global			Old Navy Global		Banana Republic Global			Other (2)			Total		Percentage of Net Sales
39 Weeks Ended October 28, 2017
U.S. (1)	Gap Global		$	Old Navy Global	2,137	Banana Republic Global		$	Other (2)		4,609	Total		Percentage of Net Sales		$	1,396	$	633		$	8,775		79	%
Canada	277			387		156			2			822		8
Europe	435			—		11			—			446		4
Asia	780			34		69			—			883		8
Other regions	83			47		21			—			151		1
Total	$	3,712		$	5,077	$	1,653		$	635		$	11,077	100	%

($ in millions)	Gap Global			Old Navy Global		Banana Republic Global			Other (3)			Total		Percentage of Net Sales
39 Weeks Ended October 29, 2016
U.S. (1)	Gap Global		$	Old Navy Global	2,203	Banana Republic Global		$	Other (3)		4,335	Total		Percentage of Net Sales		$	1,456	$	550		$	8,544		77	%
Canada	264			358		159			2			783		7
Europe	453			—		45			—			498		5
Asia	856			171		80			—			1,107		10
Other regions	100			32		23			—			155		1
Total	$	3,876		$	4,896	$	1,763		$	552		$	11,087	100	%

__________


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


(2)	~~Includes Athleta, Intermix,~~Beginning on March 4, 2019, Banana Republic Global includes net sales for Janie and ~~Weddington Way.~~Jack brand.


(3)	~~Includes~~Primarily consists of net sales for the Athleta and ~~Intermix.~~Intermix brands. Beginning in the third quarter of fiscal year 2018, the Hill City brand is also included.

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.

Note 14. Acquisition

On March 4, 2019, the Company acquired select assets of Gymboree, Inc. related to Janie and Jack, a premium children's clothing brand, through a bankruptcy auction. We purchased intellectual property and property and equipment at the Janie and Jack store locations. We assumed the leases for the majority of Janie and Jack stores and entered into a separate transaction to purchase Janie and Jack inventory.

The purchase price for the net assets acquired was $69 million. The total purchase price was allocated to the net tangible and intangible assets acquired based on their estimated fair values. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets.

Amounts recorded for assets acquired and liabilities assumed on the acquisition date were as follows:



($ in millions)	As of March 4, 2019
Inventory	$	34
Property and equipment	15
Operating lease assets	51
Intangible assets	37
Net assets acquired	137
Operating lease liabilities	(64		)
Other liabilities	(4		)
Total consideration paid	$	69

The results of operations for Janie and Jack since the date of acquisition were not material to the Condensed Consolidated Statement of Income.


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

OUR BUSINESS

We are a global omni-channel retailer offering apparel, accessories, and personal care products for men, women, and children under the ~~Gap,~~ Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and ~~Weddington Way~~Jack, and Hill City 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, ship-from-store, and ~~ship-from-store,~~buy online pick-up in 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 for~~During the first ~~three quarters~~quarter of fiscal ~~2017 include~~2019, we adopted the new lease accounting standard, ASC 842, using the optional transition method and recorded a ~~gain from insurance proceeds~~decrease to opening retained earnings of ~~$64~~$86 million, ~~related~~net of tax. The adoption of ASC 842 resulted in the recording of operating lease assets and operating lease liabilities of $5.7 billion and $6.6 billion, respectively, as of February 3, 2019. The adoption of ASC 842 did not have a material impact to the fire that occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York on August 29, 2016 (“the Fishkill fire”), which was recorded in operating expenses in theour Condensed Consolidated Statement of Income. During the third quarter of fiscal 2017, we also received $20 million in insurance proceeds related to business interruption, which were recorded as a reduction to cost of goods sold and occupancy expenses in theIncome or Condensed Consolidated Statement of ~~Income. Fiscal 2016 results were impacted~~Cash Flows.

On February 28, 2019, the Company announced that its Board of Directors approved a plan to separate the Company into two independent publicly-traded companies: Old Navy and a yet-to-be-named company (“NewCo”), which will consist of Gap brand, Athleta, Banana Republic, Intermix, Janie and Jack, and Hill City. The separation is intended to enable both companies to capitalize on their respective opportunities in an evolving retail environment by creating distinct financial profiles, tailored operating priorities and unique capital allocation strategies. Both companies will be positioned to create value for customers, shareholders and employees with enhanced focus and flexibility, aligned investments and incentives to meet the unique strategic goals, and optimized cost structures to deliver growth. The transaction is targeted to be completed in 2020 and is subject to certain conditions, including final approval by the ~~previously announced measures to better align talent~~Company’s Board of Directors, receipt of a tax opinion from counsel, and ~~financial resources against our most important priorities to position~~the filing and effectiveness of a registration statement with the U.S. Securities and Exchange Commission. For the thirteen weeks ended May 4, 2019, we incurred $4 million of pre-tax separation-related costs.

In addition, on February 28, 2019, the Company announced plans to restructure the specialty fleet and revitalize the Gap brand, including closing about 230 Gap specialty stores during fiscal 2019 and fiscal 2020. The Company believes these actions will drive a healthier specialty fleet and will serve as a more appropriate foundation for ~~improved business performance and long-term success. In connection~~brand revitalization. During the two-year period, the Company estimates pre-tax costs associated with these ~~measures,~~closure actions to be about $250 million to $300 million, with the majority expected to be cash expenditures for lease-related costs. The remaining charges are expected to primarily include employee-related costs and the net impact of write-offs related to long-term assets and liabilities. The Company estimates an annualized sales loss of approximately $625 million as a result of these store closures, with resulting annualized pre-tax savings of about $90 million. For the thirteen weeks ended May 4, 2019, we incurred $1 million of pre-tax costs related to these measures.

During the thirteen weeks ended May 4, 2019, the Company ~~incurred $29 million and $179 million in restructuring costs~~purchased a building for $343 million. In addition, as part of a related tax exchange, during the thirteen ~~and thirty-nine~~ weeks ended ~~October 29, 2016, respectively, on~~May 4, 2019 the Company also sold a building for $220 million, which resulted in a pre-tax ~~basis.~~gain on sale of $191 million.

During the thirteen weeks ended May 4, 2019, the Company acquired select assets of Gymboree, Inc. related to Janie and Jack, a premium children's clothing brand, through a bankruptcy auction. We purchased intellectual property and property and equipment at the Janie and Jack store locations. We assumed the leases for the majority of Janie and Jack stores and entered into a separate transaction to purchase Janie and Jack inventory. The purchase price for the net assets acquired was $69 million.

Financial results for the ~~third~~first quarter of fiscal ~~2017~~2019 are as follows:

Net sales for the ~~third~~first quarter of fiscal ~~2017 increased 1~~2019 decreased 2 percent compared with the ~~third~~first quarter of fiscal ~~2016.~~2018.

Comparable sales for the ~~third~~first quarter of fiscal ~~2017 increased 3~~2019 decreased 4 percent compared with a 31 percent ~~decrease~~increase for the ~~third~~first quarter of fiscal ~~2016, which included an estimated negative impact from the Fishkill fire of approximately 2 percentage points.~~2018.

Gross profit for the ~~third~~first quarter of fiscal ~~2017 and~~2019 was $1.34 billion compared with $1.43 billion for the first quarter of fiscal ~~2016 were $1.5 billion.~~2018. Gross margin for the ~~third~~first quarter of fiscal ~~2017~~2019 was ~~39.7~~36.3 percent compared with ~~39.3~~37.7 percent for the ~~third~~first quarter of fiscal ~~2016.~~2018.

Operating margin for the ~~third~~first quarter of fiscal ~~2017~~2019 was ~~9.8~~8.5 percent compared with ~~10.2~~6.1 percent for the ~~third~~first quarter of fiscal ~~2016.~~2018. Fiscal 2019 includes a positive impact from the gain on the sale of a building of approximately 5 percentage points.

Net income for the ~~third~~first quarter of fiscal ~~2017~~2019 was ~~$229~~$227 million compared with ~~$204~~$164 million for the ~~third~~first quarter of fiscal ~~2016~~2018.

Diluted earnings per share ~~was $0.58~~were $0.60 for the ~~third~~first quarter of fiscal ~~2017~~2019 compared with ~~$0.51~~$0.42 for the ~~third~~first quarter of fiscal ~~2016~~2018. ~~Diluted earnings per share for the third quarter of fiscal 2016 included~~Fiscal 2019 includes about a ~~$0.09~~$0.37 positive impact from the gain on the sale of ~~restructuring costs incurred in the third quarter of fiscal 2016.~~a building.

During the first ~~three quarters~~quarter of fiscal ~~2017,~~2019, we ~~distributed $572 million to shareholders through~~paid dividends of $92 million.

During the first quarter of fiscal 2019, share repurchases ~~and dividends.~~were $50 million.

Our business priorities for fiscal ~~2017 remain~~2019 are 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;~~categories, with leading customer-focused product innovation;

preparing for successful separation;

restructuring the Gap brand specialty fleet globally to create a healthier, more profitable base from which to grow;

investing in digital and customer capabilities as well as store experience to ~~support growth;~~

~~creating~~create a unique and differentiated ~~customer~~converged retail experience that attracts new customers, retains existing customers, and builds ~~loyalty, with focus on both~~loyalty;

increasing productivity by leveraging our scale and streamlining operations and processes throughout the ~~physical and digital expressions of our brands;~~organization;

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

~~leveraging our scale~~continuing to ~~improve the effectiveness~~integrate social and ~~efficiency of our processes.~~

environmental sustainability into business practices to support long term growth.

In fiscal ~~2017,~~2019, while we ~~are~~work through the plan for separation, we remain 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 product, supply chain, and IT initiatives underway. Further,~~model. 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,~~ Underpinning these strategies is a focus on utilizing data, analytics, and technology to respond faster while making decisions that will fuel market share gains and lead to a more nimble organization. The current retail environment is quite challenging, but we ~~expect that gross margins for~~remain committed to our foreign subsidiaries, net of the impact from our merchandise hedge program, will continue to be negatively impacted by the depreciation of certain foreign currencies as our merchandise purchases are primarily in U.S. dollars.

long-term strategic priorities.

RESULTS OF OPERATIONS

Net Sales

See Note 1213 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”)

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
	May 4, 2019		May 5, 2018
Old Navy Global	(1	)%	3	%
Gap Global	(10	)%	(4	)%
Banana Republic Global	(3	)%	3	%
The Gap, Inc.	(4	)%	1	%

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.~~business and Janie and Jack.

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
($ in millions)	May 4, 2019		May 5, 2018
Net sales per average square foot (1)	$	75	$	79

__________


(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 2, 2019	13 Weeks Ended May 4, 2019		May 4, 2019
	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								1,139	6	1	1,144		18.7
Old Navy Asia								15	1	—	16		0.2
Gap North America	844	6	15	835		8.6		758	1	15	744		7.7
Gap Asia	311	24	26	309		3.0		332	20	14	338		3.1
Gap Europe	164	2	9	157		1.3		152	1	1	152		1.2
Banana Republic North America								556	2	4	554		4.7
Banana Republic Asia								45	2	1	46		0.2
Athleta North America								161	4	—	165		0.7
Intermix North America								36	—	—	36		0.1
Janie and Jack North America (1)								—	—	—	140		0.2
Company-operated stores total								3,194	37	36	3,335		36.8
Franchise								472	46	4	514		N/A
Total								3,666	83	40	3,849		36.8
Increase over prior year											6.4	%	0.8	%

								February 3, 2018	13 Weeks Ended May 5, 2018		May 5, 2018
								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		1,066	9	1	1,074		17.8
Old Navy Asia	13	—	—	13		0.2		14	—	—	14		0.2
Gap North America								810	3	7	806		8.4
Gap Asia								313	8	1	320		3.1
Gap Europe								155	3	3	155		1.3
Banana Republic North America	601	4	9	596		5.0		576	1	5	572		4.8
Banana Republic Asia	48	1	1	48		0.2		45	2	2	45		0.2
Banana Republic Europe	1	—	1	—		—
Athleta North America	132	8	—	140		0.6		148	—	1	147		0.6
Intermix North America	43	—	5	38		0.1		38	—	—	38		0.1
Company-operated stores total	3,200	65	72	3,193		36.6		3,165	26	20	3,171		36.5
Franchise	459	31	44	446		N/A		429	36	19	446		N/A
Total	3,659	96	116	3,639		36.6		3,594	62	39	3,617		36.5
Decrease over prior year				(2.8	)%	(2.9	)%				(1.0	)%	—	%

	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	)%

__________


(1)	On March 4, 2019, we acquired select assets of Gymboree, Inc. related to Janie and Jack. The 140 stores acquired were not included as store openings for fiscal 2019; however, they are included in the ending number of store locations as of May 4, 2019.

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

Net Sales

Our net sales for the ~~third~~first quarter of fiscal ~~2017~~2019 ~~increased $40~~decreased $77 million, or 12 percent, compared with the ~~third~~first quarter of fiscal ~~2016~~2018 ~~primarily driven by an increase in net sales at Old Navy, partially offset by a decrease in net sales at Gap and Banana Republic. The increase in Comp Sales of 3 percent for the~~ ~~third quarter of fiscal 2017~~ ~~was offset by the impact of lost sales primarily from international store closures in fiscal 2016.~~

~~Our net sales for the first three quarters of fiscal 2017 decreased $10 million compared with the first three quarters of fiscal 2016~~ primarily driven by a decrease in net sales at Gap ~~and Banana Republic, as well as an unfavorable impact of foreign exchange of $49 million,~~Global, partially offset by an increase in net sales at Old ~~Navy.~~Navy Global. The translation of net sales in foreign currencies to U.S. dollars had an unfavorable impact of ~~foreign exchange was primarily due to the weakening of the Japanese yen, British pound,~~$34 million and ~~Chinese yuan against the U.S. dollar. The foreign exchange impact~~ is ~~the translation impact if~~calculated by translating net sales for the first ~~three quarters~~quarter of fiscal ~~2016 were translated~~2018 at exchange rates applicable during the first ~~three quarters~~quarter 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.~~

2019.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Cost of goods sold and occupancy expenses	$	2,313		$	2,305		$	6,770		$	6,948		$	2,362		$	2,356
Gross profit	$	1,525		$	1,493		$	4,307		$	4,139		$	1,344		$	1,427
Cost of goods sold and occupancy expenses as a percentage of net sales	60.3		%	60.7		%	61.1		%	62.7		%	63.7		%	62.3		%
Gross margin	39.7		%	39.3		%	38.9		%	37.3		%	36.3		%	37.7		%

Cost of goods sold and occupancy expenses ~~decreased 0.4 percent~~increased 1.4percentage points as a percentage of net sales in the ~~third~~first quarter of fiscal ~~2017~~2019 compared with the ~~third~~first quarter of fiscal ~~2016~~2018.

Cost of goods sold ~~was flat~~increased 1.2percentage points as a percentage of net sales in the ~~third~~first quarter of fiscal ~~2017~~2019 compared with the ~~third~~first quarter of fiscal ~~2016~~2018, primarily driven by ~~improved average selling price per unit at Old Navy and Banana Republic, offset by~~ higher ~~average unit cost at all global brands.~~promotional activity.

Occupancy expenses ~~decreased~~increased ~~0.4 percent~~0.2 percentage points as a percentage of net sales in the ~~third~~first quarter of fiscal ~~2017~~2019 compared with the ~~third~~first quarter of fiscal ~~2016~~2018, ~~primarily driven by an increase in online~~due to lower net sales without a corresponding ~~increase~~decrease 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.expenses.

Operating Expenses


	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Operating expenses	$	1,147		$	1,104		$	3,224		$	3,249		$	1,028		$	1,198
Operating expenses as a percentage of net sales	29.9		%	29.1		%	29.1		%	29.3		%	27.7		%	31.7		%
Operating margin	9.8		%	10.2		%	9.8		%	8.0		%	8.5		%	6.1		%

Operating expenses ~~increased $43~~decreased $170 million, or ~~0.8 percent~~4.0 percentage points as a percentage of net sales in the ~~third~~first quarter of fiscal ~~2017~~2019 compared with the ~~third~~first quarter of fiscal ~~2016~~2018. , primarily driven by a $191 million gain on the sale of a building.

The remaining increase in operating expenses for the ~~third~~first quarter of fiscal ~~2017~~2019 compared with the ~~third quarter~~respective period of ~~fiscal 2016~~2018 was primarily due to the following:

~~an increase in payroll-related~~higher information technology costs, operating expenses ~~primarily driven by an increase in bonus expense;~~related to Janie and

~~an increase in marketing~~ Jack, and ~~investments in digital and customer initiatives;~~higher store payroll at Old Navy Global; partially offset by

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

a decrease ~~of $27 million of~~in advertising expense, primarily for Gap Global and Old Navy Global, and lower 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 of restructuring costs incurred during the first three quarters of fiscal 2016;~~

~~a gain from insurance proceeds of $64 million related to the Fishkill fire recorded in the second quarter of fiscal 2017; and~~

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

~~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.~~

payroll at Gap Global.

Interest Expense


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended
($ in millions)	October 28, 2017		October 29, 2016		October 28, 2017		October 29, 2016		May 4, 2019		May 5, 2018
Interest expense	$	18	$	20	$	53	$	57	$	20	$	16

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
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Income taxes	$	135		$	168		$	398		$	383		$	75		$	55
Effective tax rate	37.1		%	45.2		%	38.2		%	45.6		%	24.8		%	25.1		%

The decrease in the effective tax rate for the ~~third quarter and~~ first three quarters of fiscal 2017 compared with the third quarter and first three quarters of fiscal 2016 was primarily due to the impact of restructuring costs incurred for foreign subsidiaries during the third quarter of fiscal ~~2016 and resulting valuation allowances on certain foreign deferred tax assets. The decrease in the effective tax rate for the first three quarters of fiscal 2017~~2019 compared with the first ~~three quarters~~quarter of fiscal ~~2016 was partially offset by~~2018 is primarily due to changes in the ~~impact~~mix of the adoption of ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting in fiscal 2017. See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for additional disclosures on the adoption of the accounting standard.

pre-tax income between our domestic and international operations.

LIQUIDITY AND CAPITAL RESOURCES

Our largest source of cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel-related expenses, purchases of property and equipment, and payment of taxes. In addition, we may have dividend payments, debt repayments, and share repurchases. As of ~~October 28, 2017~~May 4, 2019, cash, ~~and~~ cash equivalents, and short-term investments were $~~1.4~~1.2 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, Gap brand specialty fleet restructuring costs, and planned capital expenditures, for the next 12 months and beyond. We are also able to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility or other available market instruments.

Cash Flows from Operating Activities

Net cash provided by operating activities increased $95 million during the first ~~three quarters~~quarter of fiscal ~~2017 decreased $200 million~~2019 compared with the first ~~three quarters~~quarter of fiscal ~~2016,~~2018, primarily due to the following:

~~Net income~~

an increase of ~~$187~~$195 million primarily due to a lower bonus payout 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~~2019 compared with the ~~first three quarters of fiscal 2016 primarily due to restructuring activities~~bonus payout in fiscal ~~2016.~~

~~Changes in operating assets and liabilities~~

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

~~a decrease of $123 million related to merchandise inventory primarily due to the volume and timing of receipts; and~~

~~a decrease of $56 million related to~~2018, which impacts accrued expenses and other current ~~liabilities in part due to the timing of severance payments as a result of fiscal 2016 restructuring activities;~~liabilities; partially offset by

~~an increase~~lower net income, after excluding the $191 million gain on the sale of ~~$108 million related to income taxes payable, net of prepaid and other tax-related items, primarily due to an increase in taxable income~~a building, during the first ~~three quarters~~quarter of fiscal ~~2017 compared with the first three quarters of fiscal 2016 as well as the timing of tax payments.~~2019.

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~~quarter of fiscal ~~2017~~2019 increased ~~$22~~ $31million compared with the first ~~three quarters~~quarter of fiscal ~~2016,~~2018, primarily due to the following:

$80343 million ~~more in property~~purchase of a building during the first quarter of fiscal 2019; and ~~equipment purchases including purchases related to~~

$69 million purchase of Janie and Jack during the ~~rebuilding~~first quarter of ~~the Company’s Fishkill, New York distribution center campus;~~fiscal 2019; partially offset by

$60220 million ~~in insurance~~of proceeds ~~allocated to loss on property and equipment~~received for the sale of a building during the first ~~three quarters~~quarter of fiscal ~~2017 related to the Fishkill fire compared with no insurance proceeds allocated~~2019; and

$181 million fewer net purchases of available-for-sale debt securities during the first ~~three quarters~~quarter of fiscal ~~2016.~~2019 compared with the first quarter of fiscal 2018.

Cash Flows from Financing Activities

Net cash used for financing activities during the first ~~three quarters~~quarter of fiscal ~~2017 increased $364~~2019 decreased $42 million compared with the first ~~three quarters~~quarter of fiscal ~~2016,~~2018, primarily due to ~~the following:~~

~~$300 million of cash used for~~fewer 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 2017.~~stock.

Free Cash Flow

Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results. Free cash flow for the first 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						13 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			May 4, 2019			May 5, 2018
Net cash provided by operating activities	$	600		$	800		$	29		$	(66	)
Less: Purchases of property and equipment(1)	(463		)	(383		)	(165		)	(138		)
Add: Insurance proceeds related to loss on property and equipment	60			—
Free cash flow	$	197		$	417		$	(136	)	$	(204	)

__________


(1)	Excludes purchase of building.

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~~$0.2425 per share and $0.2425 per share during ~~each of~~ the first ~~three quarters~~quarter of fiscal ~~2017~~2019 and fiscal ~~2016~~.2018, respectively. Including the dividend paid during the first ~~three quarters~~quarter of fiscal ~~2017~~2019 of ~~$0.69~~$0.2425 per share, we intend to pay an annual dividend of ~~$0.92~~$0.97 per share for fiscal ~~2017~~2019~~, consistent~~ compared with the annual dividend of $0.97 per share for fiscal ~~2016.~~2018.

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~~Except for presentation changes resulting from the adoption of ASC 842 during the period, 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 2, 2019, other than those which occur in the normal course of business. See Note 1112 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 2, 2019. See Note 1 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 2, 2019, 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

The Company implemented controls related to the adoption of ASC 842 and the related financial statement reporting. There ~~was~~were no ~~change~~other changes in the Company’s internal control over financial reporting that occurred during the Company’s ~~third~~first quarter of fiscal ~~2017~~2019 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~~employment 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 2, 2019.


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~~May 4, 2019 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 (February 3 - March 2)	—	$	—	—	$	1,000	million
Month #2 (March 3 - April 6)	1,146,294	$	25.97	1,146,294	$	970	million
Month #3 (April 7 - May 4)	780,103	$	25.93	780,103	$	950	million
Total	1,926,397	$	25.96	1,926,397

__________


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


(2)	On February ~~25, 2016,~~26, 2019, we announced that the Board of Directors approved a $1 billion share repurchase authorization, which superseded the February 2016 repurchase program and has no expiration date.


Item 6.	Exhibits.



10.1		Agreement with ~~Shawn Curran~~Brent Hyder dated ~~September 29, 2017~~February 25, 2019 and confirmed on ~~October 5, 2017.~~February 26, 2019. (1)
10.2		Form of Non-Qualified Stock Option Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.1 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
10.3		Form of Restricted Stock Unit Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
10.4		Form of Performance Share Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
32.1		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~October 28, 2017,~~May 4, 2019, 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 Stockholders' Equity; (v) the Condensed Consolidated Statements of Cash ~~Flows,~~Flows; and ~~(v)~~(vi) Notes to Condensed Consolidated Financial Statements. (1)

__________


(1)	Filed herewith.


(2)	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~~May 31, 2019	By	/s/ Arthur Peck
			Arthur Peck
			Chief Executive Officer

Date:	~~November 22, 2017~~May 31, 2019	By	/s/ Teri List-Stoll
			Teri List-Stoll
			Executive Vice President and Chief Financial Officer

Exhibit Index




10.1		Agreement with ~~Shawn Curran~~Brent Hyder dated ~~September 29, 2017~~February 25, 2019 and confirmed on ~~October 5, 2017.~~February 26, 2019. (1)
10.2		Form of Non-Qualified Stock Option Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.1 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
10.3		Form of Restricted Stock Unit Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
10.4		Form of Performance Share Agreement under the 2016 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant's Form 8-K on March 15, 2019, Commission File No. 1-7562.
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1)
32.1		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~October 28, 2017,~~May 4, 2019, 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 Stockholders' Equity; (v) the Condensed Consolidated Statements of Cash ~~Flows,~~Flows; and ~~(v)~~(vi) Notes to Condensed Consolidated Financial Statements. (1)

_____________________________


(1)	Filed herewith.


(2)	Furnished herewith.

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