UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 28, 2017
November 2, 2019
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-7562
THE GAP, INC.INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 94-1697231 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer
Identification No.)
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Two Folsom Street, San Francisco, California | | 94105 |
(Address of principal executive offices) | | (Zip code)I.R.S. Employer Identification No.) |
Two Folsom Street
San Francisco, California94105
(Address of principal executive offices)
Registrant’s telephone number, including area code: (415) (415) 427-0100
Securities registered pursuant to Section 12(b) of the Act:
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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 ☐
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.
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Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding as of November 15, 201720, 2019 was 388,857,073.373,299,389.
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 newrecent 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 outstandingtotal 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 benefits, store closures and timing, impact of to annualized sales, associated costs, and effect on annualized savings;
offering product that is consistently brand-appropriate and on-trend with high customer acceptance;
improving inventory productivity by leveraging responsive capabilities;
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 forto integrate social and environmental sustainability into business practices;
investing strategically in the business while maintaining operating discipline and driving efficiency;
continuing to transform our foreign subsidiaries;product to market processes;
continuing our investment in customer experience to drive higher customer engagement and loyalty;
continuing to invest in strengthening brand awareness, customer acquisition, and digital capabilities;
utilizing data, analytics, and technology to respond faster while making decisions;
current cash balances and cash flows being sufficient to support our business operations, including growth initiativesseparation related costs and planned capital expenditures;expenditures, as well as Gap brand specialty fleet restructuring costs and growth initiatives;
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;
closure of Old Navy stores in China; 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 customeromni-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 impacta 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 positionresults or our business initiatives;
the risk that updatestrade 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 ourfinancial 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 servicingcredit 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, 2017February 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, 2017,27, 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
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Item 1. | | |
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| Condensed Consolidated Balance Sheets as of October 28, 2017, January 28, 2017,November 2, 2019, February 2, 2019, and October 29, 2016November 3, 2018 | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
THE GAP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | ($ and shares in millions except par value) | October 28, 2017 | | January 28, 2017 | | October 29, 2016 | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 1,353 |
| | $ | 1,783 |
| | $ | 1,522 |
| $ | 788 |
| | $ | 1,081 |
| | $ | 958 |
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Short-term investments | | 294 |
| | 288 |
| | 296 |
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Merchandise inventory | 2,476 |
| | 1,830 |
| | 2,398 |
| 2,720 |
| | 2,131 |
| | 2,668 |
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Other current assets | 654 |
| | 702 |
| | 751 |
| 770 |
| | 751 |
| | 792 |
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Total current assets | 4,483 |
| | 4,315 |
| | 4,671 |
| 4,572 |
| | 4,251 |
| | 4,714 |
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Property and equipment, net of accumulated depreciation of $6,041, $5,813, and $5,900 | 2,686 |
| | 2,616 |
| | 2,662 |
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Property and equipment, net of accumulated depreciation of $5,999, $5,755, and $6,112 | | 3,225 |
| | 2,912 |
| | 2,887 |
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Operating lease assets | | 5,796 |
| | — |
| | — |
|
Other long-term assets | 726 |
| | 679 |
| | 674 |
| 525 |
| | 886 |
| | 572 |
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Total assets | $ | 7,895 |
| | $ | 7,610 |
| | $ | 8,007 |
| $ | 14,118 |
| | $ | 8,049 |
| | $ | 8,173 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Current maturities of debt | $ | — |
| | $ | 65 |
| | $ | 424 |
| |
Accounts payable | 1,330 |
| | 1,243 |
| | 1,413 |
| $ | 1,241 |
| | $ | 1,126 |
| | $ | 1,299 |
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Accrued expenses and other current liabilities | 1,132 |
| | 1,113 |
| | 1,059 |
| 974 |
| | 1,024 |
| | 1,070 |
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Current portion of operating lease liabilities | | 934 |
| | — |
| | — |
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Income taxes payable | 134 |
| | 32 |
| | 19 |
| 43 |
| | 24 |
| | 24 |
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Total current liabilities | 2,596 |
| | 2,453 |
| | 2,915 |
| 3,192 |
| | 2,174 |
| | 2,393 |
|
Long-term liabilities: | | | | | | | | | | |
Long-term debt | 1,248 |
| | 1,248 |
| | 1,320 |
| 1,249 |
| | 1,249 |
| | 1,249 |
|
Long-term operating lease liabilities | | 5,650 |
| | — |
| | — |
|
Lease incentives and other long-term liabilities | 1,027 |
| | 1,005 |
| | 1,046 |
| 393 |
| | 1,073 |
| | 1,091 |
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Total long-term liabilities | 2,275 |
| | 2,253 |
| | 2,366 |
| 7,292 |
| | 2,322 |
| | 2,340 |
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Commitments and contingencies (see Note 11) |
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Commitments and contingencies (see Note 12) | |
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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 |
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Authorized 2,300 shares for all periods presented; Issued and Outstanding 373, 378, and 382 shares | | 19 |
| | 19 |
| | 19 |
|
Additional paid-in capital | — |
| | 81 |
| | 57 |
| — |
| | — |
| | — |
|
Retained earnings | 2,965 |
| | 2,749 |
| | 2,621 |
| 3,573 |
| | 3,481 |
| | 3,368 |
|
Accumulated other comprehensive income | 40 |
| | 54 |
| | 28 |
| 42 |
| | 53 |
| | 53 |
|
Total stockholders’ equity | 3,024 |
| | 2,904 |
| | 2,726 |
| 3,634 |
| | 3,553 |
| | 3,440 |
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Total liabilities and stockholders’ equity | $ | 7,895 |
| | $ | 7,610 |
| | $ | 8,007 |
| $ | 14,118 |
| | $ | 8,049 |
| | $ | 8,173 |
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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 | | 39 Weeks Ended |
($ and shares in millions except per share amounts) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Net sales | $ | 3,838 |
| | $ | 3,798 |
| | $ | 11,077 |
| | $ | 11,087 |
| $ | 3,998 |
| | $ | 4,089 |
| | $ | 11,709 |
| | $ | 11,957 |
|
Cost of goods sold and occupancy expenses | 2,313 |
| | 2,305 |
| | 6,770 |
| | 6,948 |
| 2,439 |
| | 2,466 |
| | 7,250 |
| | 7,280 |
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Gross profit | 1,525 |
| | 1,493 |
| | 4,307 |
| | 4,139 |
| 1,559 |
| | 1,623 |
| | 4,459 |
| | 4,677 |
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Operating expenses | 1,147 |
| | 1,104 |
| | 3,224 |
| | 3,249 |
| 1,338 |
| | 1,260 |
| | 3,640 |
| | 3,687 |
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Operating income | 378 |
| | 389 |
| | 1,083 |
| | 890 |
| 221 |
| | 363 |
| | 819 |
| | 990 |
|
Interest expense | 18 |
| | 20 |
| | 53 |
| | 57 |
| 19 |
| | 21 |
| | 58 |
| | 54 |
|
Interest income | (4 | ) | | (3 | ) | | (11 | ) | | (6 | ) | (7 | ) | | (8 | ) | | (21 | ) | | (21 | ) |
Income before income taxes | 364 |
| | 372 |
| | 1,041 |
| | 839 |
| 209 |
| | 350 |
| | 782 |
| | 957 |
|
Income taxes | 135 |
| | 168 |
| | 398 |
| | 383 |
| 69 |
| | 84 |
| | 247 |
| | 230 |
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Net income | $ | 229 |
| | $ | 204 |
| | $ | 643 |
| | $ | 456 |
| $ | 140 |
| | $ | 266 |
| | $ | 535 |
| | $ | 727 |
|
Weighted-average number of shares - basic | 391 |
| | 399 |
| | 395 |
| | 398 |
| 375 |
| | 384 |
| | 377 |
| | 387 |
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Weighted-average number of shares - diluted | 393 |
| | 400 |
| | 397 |
| | 400 |
| 376 |
| | 387 |
| | 379 |
| | 390 |
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Earnings per share - basic | $ | 0.59 |
| | $ | 0.51 |
| | $ | 1.63 |
| | $ | 1.15 |
| $ | 0.37 |
| | $ | 0.69 |
| | $ | 1.42 |
| | $ | 1.88 |
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Earnings per share - diluted | $ | 0.58 |
| | $ | 0.51 |
| | $ | 1.62 |
| | $ | 1.14 |
| $ | 0.37 |
| | $ | 0.69 |
| | $ | 1.41 |
| | $ | 1.86 |
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Cash dividends declared and paid per share | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.69 |
| | $ | 0.69 |
| $ | 0.2425 |
| | $ | 0.2425 |
| | $ | 0.7275 |
| | $ | 0.7275 |
|
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 | | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Net income | $ | 229 |
| | $ | 204 |
| | $ | 643 |
| | $ | 456 |
| $ | 140 |
| | $ | 266 |
| | $ | 535 |
| | $ | 727 |
|
Other comprehensive income (loss) | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | |
Foreign currency translation | (5 | ) | | (10 | ) | | 12 |
| | (1 | ) | (4 | ) | | (4 | ) | | (5 | ) | | (27 | ) |
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 |
| |
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $-, $1, $5, and $(2) | | — |
| | 11 |
| | 10 |
| | 57 |
|
Reclassification adjustment for gains on derivative financial instruments, net of (tax) tax benefit of $-, $(1), $(5), and $8 | | (9 | ) | | (7 | ) | | (16 | ) | | (13 | ) |
Other comprehensive income (loss), net of tax | 17 |
| | 29 |
| | (14 | ) | | (57 | ) | (13 | ) | | — |
| | (11 | ) | | 17 |
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Comprehensive income | $ | 246 |
| | $ | 233 |
| | $ | 629 |
| | $ | 399 |
| $ | 127 |
| | $ | 266 |
| | $ | 524 |
| | $ | 744 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) |
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| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | |
($ and shares in millions except per share amounts) | | Shares | | Amount | | Total |
Balance as of August 4, 2018 | | 385 |
| | $ | 19 |
| | $ | — |
| | $ | 3,268 |
| | $ | 53 |
| | $ | 3,340 |
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Net income for the thirteen weeks ended November 3, 2018 | | | | | | | | 266 |
| | | | 266 |
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Other comprehensive income, net of tax | | | | | | | | | | — |
| | — |
|
Repurchases and retirement of common stock | | (4 | ) | | — |
| | (27 | ) | | (73 | ) | | | | (100 | ) |
Issuance of common stock related to stock options and employee stock purchase plans | | 1 |
| | — |
| | 7 |
| | | | | | 7 |
|
Issuance of common stock and withholding tax payments related to vesting of stock units | | — |
| | — |
| | (2 | ) | | | | | | (2 | ) |
Share-based compensation, net of forfeitures | | | | | | 22 |
| | | | | | 22 |
|
Common stock dividends ($0.2425 per share) | | | | | | | | (93 | ) | | | | (93 | ) |
Balance as of November 3, 2018 | | 382 |
| | $ | 19 |
| | $ | — |
| | $ | 3,368 |
| | $ | 53 |
| | $ | 3,440 |
|
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 |
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Net income for the thirty-nine weeks ended November 3, 2018 | | | | | | | | 727 |
| | | | 727 |
|
Other comprehensive income, net of tax | | | | | | | | | | 17 |
| | 17 |
|
Repurchases and retirement of common stock | | (10 | ) | | — |
| | (105 | ) | | (195 | ) | | | | (300 | ) |
Issuance of common stock related to stock options and employee stock purchase plans | | 2 |
| | — |
| | 40 |
| | | | | | 40 |
|
Issuance of common stock and withholding tax payments related to vesting of stock units | | 1 |
| | — |
| | (22 | ) | | | | | | (22 | ) |
Share-based compensation, net of forfeitures | | | | | | 79 |
| | | | | | 79 |
|
Common stock dividends ($0.7275 per share) | | | | | | | | (281 | ) | | | | (281 | ) |
Balance as of November 3, 2018 | | 382 |
| | $ | 19 |
| | $ | — |
| | $ | 3,368 |
| | $ | 53 |
| | $ | 3,440 |
|
| | | | | | | | | | | | |
Balance as of August 3, 2019 | | 376 |
| | $ | 19 |
| | $ | — |
| | $ | 3,551 |
| | $ | 55 |
| | $ | 3,625 |
|
Net income for the thirteen weeks ended November 2, 2019 | | | | | | | | 140 |
| | | | 140 |
|
Other comprehensive loss, net of tax | | | | | | | | | | (13 | ) | | (13 | ) |
Repurchases and retirement of common stock | | (3 | ) | | — |
| | (23 | ) | | (27 | ) | | | | (50 | ) |
Issuance of common stock related to stock options and employee stock purchase plans | | — |
| | — |
| | 5 |
| | | | | | 5 |
|
Issuance of common stock and withholding tax payments related to vesting of stock units | | — |
| | — |
| | (1 | ) | | | | | | (1 | ) |
Share-based compensation, net of forfeitures | | | | | | 19 |
| | | | | | 19 |
|
Common stock dividends ($0.2425 per share) | | | | | | | | (91 | ) | | | | (91 | ) |
Balance as of November 2, 2019 | | 373 |
| | $ | 19 |
| | $ | — |
| | $ | 3,573 |
| | $ | 42 |
| | $ | 3,634 |
|
Balance as of February 2, 2019 | | 378 |
| | $ | 19 |
| | $ | — |
| | $ | 3,481 |
| | $ | 53 |
| | $ | 3,553 |
|
Cumulative effect of a change in accounting principle related to leases | | | | | | | | (86 | ) | | | | (86 | ) |
Net income for the thirty-nine weeks ended November 2, 2019 | | | | | | | | 535 |
| | | | 535 |
|
Other comprehensive loss, net of tax | | | | | | | | | | (11 | ) | | (11 | ) |
Repurchases and retirement of common stock | | (8 | ) | | — |
| | (67 | ) | | (83 | ) | | | | (150 | ) |
Issuance of common stock related to stock options and employee stock purchase plans | | 1 |
| | — |
| | 22 |
| | | | | | 22 |
|
Issuance of common stock and withholding tax payments related to vesting of stock units | | 2 |
| | — |
| | (21 | ) | | | | | | (21 | ) |
Share-based compensation, net of forfeitures | | | | | | 66 |
| | | | | | 66 |
|
Common stock dividends ($0.7275 per share) | | | | | | | | (274 | ) | | | | (274 | ) |
Balance as of November 2, 2019 | | 373 |
| | $ | 19 |
| | $ | — |
| | $ | 3,573 |
| | $ | 42 |
| | $ | 3,634 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | 39 Weeks Ended | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | November 2, 2019 | | November 3, 2018 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 643 |
| | $ | 456 |
| $ | 535 |
| | $ | 727 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 418 |
| | 449 |
| 417 |
| | 425 |
|
Amortization of lease incentives | (46 | ) | | (47 | ) | — |
| | (45 | ) |
Share-based compensation | 60 |
| | 55 |
| 64 |
| | 72 |
|
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 |
| | 10 |
|
Gain on sale of building | | (191 | ) | | — |
|
Deferred income taxes | (50 | ) | | (10 | ) | 42 |
| | 33 |
|
Changes in operating assets and liabilities: | | | | | | |
Merchandise inventory | (636 | ) | | (513 | ) | (559 | ) | | (696 | ) |
Other current assets and other long-term assets | (60 | ) | | (52 | ) | 8 |
| | (64 | ) |
Accounts payable | 55 |
| | 294 |
| 129 |
| | 90 |
|
Accrued expenses and other current liabilities | (46 | ) | | 10 |
| 28 |
| | (148 | ) |
Income taxes payable, net of prepaid and other tax-related items | 188 |
| | 80 |
| 89 |
| | 127 |
|
Lease incentives and other long-term liabilities | 48 |
| | (18 | ) | 19 |
| | 36 |
|
Operating lease assets and liabilities, net | | (60 | ) | | — |
|
Net cash provided by operating activities | 600 |
| | 800 |
| 528 |
| | 567 |
|
Cash flows from investing activities: | | | | | | |
Purchases of property and equipment | (463 | ) | | (383 | ) | (523 | ) | | (510 | ) |
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 | | (235 | ) | | (408 | ) |
Proceeds from sales and maturities of short-term investments | | 231 |
| | 112 |
|
Purchase of Janie and Jack | | (69 | ) | | — |
|
Other | (3 | ) | | (1 | ) | — |
| | (7 | ) |
Net cash used for investing activities | (406 | ) | | (384 | ) | (719 | ) | | (813 | ) |
Cash flows from financing activities: | | | | | | |
Payments of current maturities of debt | (67 | ) | | — |
| |
Proceeds from issuances under share-based compensation plans | 23 |
| | 25 |
| 22 |
| | 40 |
|
Withholding tax payments related to vesting of stock units | (15 | ) | | (18 | ) | (21 | ) | | (22 | ) |
Repurchases of common stock | (300 | ) | | — |
| (150 | ) | | (300 | ) |
Excess tax benefit from exercise of stock options and vesting of stock units | — |
| | 1 |
| |
Cash dividends paid | (272 | ) | | (275 | ) | (274 | ) | | (281 | ) |
Other | | — |
| | (1 | ) |
Net cash used for financing activities | (631 | ) | | (267 | ) | (423 | ) | | (564 | ) |
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 | | — |
| | (13 | ) |
Net decrease in cash, cash equivalents, and restricted cash | | (614 | ) | | (823 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | | 1,420 |
| | 1,799 |
|
Cash, cash equivalents, and restricted cash at end of period | | $ | 806 |
| | $ | 976 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest during the period | $ | 76 |
| | $ | 80 |
| $ | 75 |
| | $ | 77 |
|
Cash paid for income taxes during the period, net of refunds | $ | 260 |
| | $ | 318 |
| $ | 117 |
| | $ | 73 |
|
Cash paid for operating lease liabilities | | $ | 916 |
| | $ | — |
|
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, 2017November 2, 2019 and October 29, 2016,November 3, 2018, and the Condensed Consolidated Statements of Income, and the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and thirty-nine weeks ended October 28, 2017November 2, 2019 and October 29, 2016,November 3, 2018, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks endedOctober 28, 2017 November 2, 2019 and October 29, 2016November 3, 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, 2017November 2, 2019 and October 29, 2016November 3, 2018 and for all periods presented. The Condensed Consolidated Balance Sheet as of January 28, 2017February 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 endedOctober 28, 2017 November 2, 2019 are not necessarily indicative of the operating results that may be expected for the 53-week52-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 RecognitionRecently 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 beare 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 yearsadoption 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 impactoperating lease liabilities of this ASU$5.7 billion and $6.6 billion, respectively, on our 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 infor 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 accountingAccounting 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 ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the potential impactadoption of this ASUstandard did not have a material impact on our 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 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 annual periods beginning after December 15, 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 evaluating the impact this guidance may have on our Consolidated Financial 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 November 2, 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) | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
Cash and cash equivalents, per Condensed Consolidated Balance Sheets | $ | 788 |
| | $ | 1,081 |
| | $ | 958 |
|
Restricted cash included in other current assets | — |
| | 1 |
| | 1 |
|
Restricted cash included in other long-term assets (a) | 18 |
| | 338 |
| | 17 |
|
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows | $ | 806 |
| | $ | 1,420 |
| | $ | 976 |
|
__________
| |
(a) | As of February 2, 2019, restricted cash included in other long-term assets included $320 million of consideration held by a third party in connection with the purchase of a building that was completed in fiscal 2019. |
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 as 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 November 2, 2019 and November 3, 2018, there were 0 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 November 2, 2019, the opening balance of deferred revenue for these obligations was $195 million, of which $78 million was recognized as revenue during the period. For the thirty-nine weeks ended November 2, 2019, the opening balance of deferred revenue for these obligations was $227 million, of which $161 million was recognized as revenue during the period. The closing balance of deferred revenue related to gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts was $189 million as of November 2, 2019.
We expect that the majority of our revenue deferrals as of the quarter ended November 2, 2019, will be recognized as revenue in the next 12 months as our performance obligations are satisfied.
For the thirteen weeks ended November 3, 2018, the opening balance of deferred revenue for these obligations was $194 million, of which $84 million was recognized as revenue during the period. For the thirty-nine weeks ended November 3, 2018, the opening balance of deferred revenue for these obligations was $232 million, of which $170 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $193 million as of November 3, 2018.
See Note 13 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue by brand and by region.
Note 3. Debt and Credit Facilities
Long-term debt consists of the following:
|
| | | | | | | | | | | |
($ 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, January 28, 2017,November 2, 2019, February 2, 2019, and October 29, 2016,November 3, 2018, the estimated fair value of our $1.25$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$1.29 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 no0 borrowings and no0 material outstanding standby letters of credit under the Facility as of October 28, 2017.
November 2, 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$55 million as of October 28, 2017.November 2, 2019. As of October 28, 2017,November 2, 2019, there were no0 borrowings under the Foreign Facilities. There were $14$17 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of October 28, 2017.November 2, 2019.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of October 28, 2017November 2, 2019, we had $1522 million in standby letters of credit issued under these agreements.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no0 purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks endedOctober 28, 2017November 2, 2019 or October 29, 2016November 3, 2018. There were no0 transfers of financial assets or liabilities into or out of level 1, level 2, and level 23 during the thirteen and thirty-nine weeks endedOctober 28, 2017November 2, 2019 or October 29, 2016November 3, 2018.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | November 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 | $ | 238 |
| | $ | 3 |
| | $ | 235 |
| | $ | — |
|
Short-term investments | 294 |
| | 131 |
| | 163 |
| | — |
|
Derivative financial instruments | 12 |
| | — |
| | 12 |
| | — |
|
Deferred compensation plan assets | 53 |
| | 53 |
| | — |
| | — |
|
Other assets | 2 |
| | — |
| | — |
| | 2 |
|
Total | $ | 599 |
| | $ | 187 |
| | $ | 410 |
| | $ | 2 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
|
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | 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 | $ | 373 |
| | $ | 26 |
| | $ | 347 |
| | $ | — |
|
Short-term investments | 288 |
| | 125 |
| | 163 |
| | — |
|
Derivative financial instruments | 20 |
| | — |
| | 20 |
| | — |
|
Deferred compensation plan assets | 48 |
| | 48 |
| | — |
| | — |
|
Other assets | 2 |
| | — |
| | — |
| | 2 |
|
Total | $ | 731 |
| | $ | 199 |
| | $ | 530 |
| | $ | 2 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
|
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | November 3, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 438 |
| | $ | 30 |
| | $ | 408 |
| | $ | — |
|
Short-term investments | 296 |
| | 124 |
| | 172 |
| | — |
|
Derivative financial instruments | 46 |
| | — |
| | 46 |
| | — |
|
Deferred compensation plan assets | 49 |
| | 49 |
| | — |
| | — |
|
Total | $ | 829 |
| | $ | 203 |
| | $ | 626 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | 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) |
Assets: | | | | | | | |
Cash equivalents | $ | 389 |
| | $ | 28 |
| | $ | 361 |
| | $ | — |
|
Derivative financial instruments | 31 |
| | — |
| | 31 |
| | — |
|
Deferred compensation plan assets | 46 |
| | 46 |
| | — |
| | — |
|
Total | $ | 466 |
| | $ | 74 |
| | $ | 392 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 20 |
| | $ | — |
| | $ | 20 |
| | $ | — |
|
| | | 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) |
Assets: | | | | | | | |
Cash equivalents | $ | 697 |
| | $ | 256 |
| | $ | 441 |
| | $ | — |
|
Derivative financial instruments | 58 |
| | — |
| | 58 |
| | — |
|
Deferred compensation plan assets | 40 |
| | 40 |
| | — |
| | — |
|
Total | $ | 795 |
| | $ | 296 |
| | $ | 499 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | — |
|
| | | 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) |
Assets: | | | | | | | |
Cash equivalents | $ | 596 |
| | $ | 106 |
| | $ | 490 |
| | $ | — |
|
Derivative financial instruments | 62 |
| | — |
| | 62 |
| | — |
|
Deferred compensation plan assets | 41 |
| | 41 |
| | — |
| | — |
|
Total | $ | 699 |
| | $ | 147 |
| | $ | 552 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 49 |
| | $ | — |
| | $ | 49 |
| | $ | — |
|
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, and money market funds. Wefunds, 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 November 2, 2019 and November 3, 2018, the Company held $294 million and $296 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 November 2, 2019 and November 3, 2018, the Company held $17 million and $6 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 and losses on available-for-sale debt securities included within accumulated other comprehensive income were immaterial as of November 2, 2019 and November 3, 2018.
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 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 in theSee Note 5 of Notes to 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 inFinancial Statements for information regarding currencies hedged against the Condensed Consolidated Balance Sheets.U.S. dollar.
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.
DuringThere were 0 material impairment charges recorded for long-lived assets for the thirteen and thirty-nine weeks ended October 28, 2017,November 2, 2019 or November 3, 2018.
As discussed in Note 1, we recorded a charge fordecrease to fiscal 2019 opening retained earnings due to the impairmentadoption of long-lived assets of $4 million, which reduced the then carrying amountASC 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 no0 material impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and thirty-nine weeks ended October 28, 2017November 2, 2019 or October 29, 2016.
November 3, 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,dollar, Japanese yen, British pounds,pound, Mexican peso, Euro, Mexican pesos,Taiwan dollar, and Chinese yuan, and Taiwan dollars.yuan. 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 currently 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)(2) 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 thethese subsidiaries.
Other Derivatives Not Designated as Hedging Instruments
We enter intouse 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) | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
Derivatives designated as cash flow hedges | $ | 640 |
| | $ | 774 |
| | $ | 815 |
|
Derivatives not designated as hedging instruments | 706 |
| | 660 |
| | 717 |
|
Total | $ | 1,346 |
| | $ | 1,434 |
| | $ | 1,532 |
|
|
| | | | | | | | | | | |
($ in millions) | October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Derivatives designated as cash flow hedges | $ | 873 |
| | $ | 1,101 |
| | $ | 1,201 |
|
Derivatives designated as net investment hedges | 30 |
| | 31 |
| | 31 |
|
Derivatives not designated as hedging instruments | 581 |
| | 618 |
| | 664 |
|
Total | $ | 1,484 |
| | $ | 1,750 |
| | $ | 1,896 |
|
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 | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
Derivatives designated as cash flow hedges: | | | | | | | | | | |
Other current assets | $ | 16 |
| | $ | 28 |
| | $ | 35 |
| $ | 7 |
| | $ | 15 |
| | $ | 21 |
|
Other long-term assets | $ | 4 |
| | $ | 16 |
| | $ | 13 |
| 1 |
| | — |
| | 5 |
|
Accrued expenses and other current liabilities | $ | 11 |
| | $ | 10 |
| | $ | 26 |
| 2 |
| | 3 |
| | 1 |
|
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 |
| 4 |
| | 5 |
| | 20 |
|
Other long-term assets | $ | — |
| | $ | 1 |
| | $ | — |
| |
Accrued expenses and other current liabilities | $ | 5 |
| | $ | 10 |
| | $ | 14 |
| 8 |
| | 8 |
| | — |
|
Lease incentives and other long-term liabilities | $ | — |
| | $ | — |
| | $ | 1 |
| |
| | | | | | | | | | |
Total derivatives in an asset position | $ | 31 |
| | $ | 58 |
| | $ | 62 |
| $ | 12 |
| | $ | 20 |
| | $ | 46 |
|
Total derivatives in a liability position | $ | 20 |
| | $ | 21 |
| | $ | 49 |
| $ | 10 |
| | $ | 11 |
| | $ | 1 |
|
The majoritySubstantially all of the unrealized gains and losses from designated cash flow hedges as of October 28, 2017November 2, 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, 2017November 2, 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 $8were $5 million, $184 million, and $91 million as of October 28, 2017November 2, 2019, January 28, 2017February 2, 2019, and October 29, 2016November 3, 2018, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be have been $237 million, $4016 million, and $53$45 million and the net amounts of the derivative financial instruments in a liability position would be $12have been $5 million,, $3 $7 million, and $40 million$0 as of October 28, 2017, January 28, 2017November 2, 2019, February 2, 2019, and October 29, 2016November 3, 2018, respectively.
See Note 4 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts designated in a cash flow hedging and net investment hedging relationshipsrelationship recorded in other comprehensive income, and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended |
| 39 Weeks Ended |
($ 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 |
| 39 Weeks Ended |
($ in millions) | November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Gain recognized in other comprehensive income | $ | — |
| | $ | 12 |
| | $ | 15 |
| | $ | 55 |
|
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 November 2, 2019 | | 13 Weeks Ended November 3, 2018 |
($ in millions) | Cost of goods sold and occupancy expenses | | Operating expenses | | Cost of goods sold and occupancy expenses | | Operating expenses |
Total amount of expense line items presented in the Condensed Consolidated Statements of Income in which the effects of derivatives are recorded | $ | 2,439 |
| | $ | 1,338 |
| | $ | 2,466 |
| | $ | 1,260 |
|
| | | | | | | |
(Gain) loss recognized in income | | | | | | | |
Derivatives designated as cash flow hedges | $ | (9 | ) | | $ | — |
| | $ | (8 | ) | | $ | — |
|
Derivatives not designated as hedging instruments | — |
| | 8 |
| | — |
| | (14 | ) |
Total (gain) loss recognized in income | $ | (9 | ) | | $ | 8 |
| | $ | (8 | ) | | $ | (14 | ) |
|
| | | | | | | | | | | | | | | |
| Location and Amount of (Gain) Loss Recognized in Income |
| 39 Weeks Ended November 2, 2019 | | 39 Weeks Ended November 3, 2018 |
($ in millions) | Cost of goods sold and occupancy expenses | | Operating expenses | | Cost of goods sold and occupancy expenses | | Operating expenses |
Total amount of expense line items presented in the Condensed Consolidated Statements of Income in which the effects of derivatives are recorded | $ | 7,250 |
| | $ | 3,640 |
| | $ | 7,280 |
| | $ | 3,687 |
|
| | | | | | | |
(Gain) recognized in income | | | | | | | |
Derivatives designated as cash flow hedges | $ | (21 | ) | | $ | — |
| | $ | (5 | ) | | $ | — |
|
Derivatives not designated as hedging instruments | — |
| | (4 | ) | | — |
| | (38 | ) |
Total (gain) recognized in income | $ | (21 | ) | | $ | (4 | ) | | $ | (5 | ) | | $ | (38 | ) |
For the thirteen and thirty-nine weeks endedOctober 28, 2017November 2, 2019 and October 29, 2016November 3, 2018, there were no0 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 |
($ and shares in millions except average per share cost) | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Number of shares repurchased (1) | 2.9 |
| | 3.6 |
| | 7.5 |
| | 10.0 |
|
Total cost | $ | 50 |
| | $ | 100 |
| | $ | 150 |
| | $ | 300 |
|
Average per share cost including commissions | $ | 17.17 |
| | $ | 28.09 |
| | $ | 19.85 |
| | $ | 30.01 |
|
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
($ and shares in millions except average per share cost) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Number of shares repurchased (1) | 3.8 |
| | — |
| | 12.5 |
| | — |
|
Total cost | $ | 100 |
| | $ | — |
| | $ | 300 |
| | $ | — |
|
Average per share cost including commissions | $ | 26.64 |
| | $ | — |
| | $ | 24.21 |
| | $ | — |
|
__________
| |
(1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
In February 2016, we announced that2019, the Board of Directors approved a new $1.0 billion share repurchase authorization of(the "February 2019 repurchase program") which $700superseded and replaced a February 2016 repurchase authorization. The February 2019 repurchase program had $850 million was remaining as of October 28, 2017.November 2, 2019.
The February 2016 repurchase authorization had $287 million remaining as of February 2, 2019.
All of the share repurchases were paid for as of October 28, 2017.November 2, 2019, February 2, 2019, and November 3, 2018. All common stock repurchased is immediately retired.
Note 7. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, are as follows:
| | ($ 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: | | | | | | |
Balance at February 2, 2019 | | $ | 47 |
| | $ | 6 |
| | $ | 53 |
|
13 Weeks Ended May 4, 2019: | | | | | | |
Foreign currency translation | | (1 | ) | | — |
| | (1 | ) |
Change in fair value of derivative financial instruments | | — |
| | 9 |
| | 9 |
|
Amounts reclassified from accumulated other comprehensive income | | — |
| | (4 | ) | | (4 | ) |
Other comprehensive income (loss), net of tax | | (1 | ) | | 5 |
| | 4 |
|
Balance at May 4, 2019 | | 46 |
| | 11 |
| | 57 |
|
13 Weeks Ended August 3, 2019: | | | | | | |
Foreign currency translation | (4 | ) | | — |
| | (4 | ) | — |
| | — |
| | — |
|
Change in fair value of derivative financial instruments | — |
| | — |
| | — |
| — |
| | 1 |
| | 1 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | (4 | ) | | (4 | ) | — |
| | (3 | ) | | (3 | ) |
Other comprehensive loss, net of tax | (4 | ) | | (4 | ) | | (8 | ) | — |
| | (2 | ) | | (2 | ) |
Balance at April 29, 2017 | 25 |
| | 21 |
| | 46 |
| |
13 Weeks Ended July 29, 2017: | | | | | | |
Balance at August 3, 2019 | | $ | 46 |
| | $ | 9 |
| | $ | 55 |
|
13 Weeks Ended November 2, 2019: | | | | | | |
Foreign currency translation | | (4 | ) | | — |
| | (4 | ) |
Change in fair value of derivative financial instruments | | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive income | | — |
| | (9 | ) | | (9 | ) |
Other comprehensive loss, net of tax | | (4 | ) | | (9 | ) | | (13 | ) |
Balance at November 2, 2019 | | $ | 42 |
| | $ | — |
| | $ | 42 |
|
| | | | | | |
($ 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 | 21 |
| | — |
| | 21 |
| (7 | ) | | — |
| | (7 | ) |
Change in fair value of derivative financial instruments | — |
| | (43 | ) | | (43 | ) | — |
| | 28 |
| | 28 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | (1 | ) | | (1 | ) | — |
| | (6 | ) | | (6 | ) |
Other comprehensive income (loss), net of tax | 21 |
| | (44 | ) | | (23 | ) | (7 | ) | | 22 |
| | 15 |
|
Balance at July 29, 2017 | 46 |
| | (23 | ) | | 23 |
| |
13 Weeks Ended October 28, 2017: | | | | | | |
Balance at May 5, 2018 | | 57 |
| | (6 | ) | | 51 |
|
13 Weeks Ended August 4, 2018: | | | | | | |
Foreign currency translation | (5 | ) | | — |
| | (5 | ) | (16 | ) | | — |
| | (16 | ) |
Change in fair value of derivative financial instruments | — |
| | 23 |
| | 23 |
| — |
| | 18 |
| | 18 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | (1 | ) | | (1 | ) | — |
| | — |
| | — |
|
Other comprehensive income (loss), net of tax | (5 | ) | | 22 |
| | 17 |
| (16 | ) | | 18 |
| | 2 |
|
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: | | | | | | |
Balance at August 4, 2018 | | $ | 41 |
| | $ | 12 |
| | $ | 53 |
|
13 Weeks Ended November 3, 2018: | | | | | | |
Foreign currency translation | 31 |
| | — |
| | 31 |
| (4 | ) | | — |
| | (4 | ) |
Change in fair value of derivative financial instruments | — |
| | (89 | ) | | (89 | ) | — |
| | 11 |
| | 11 |
|
Amounts reclassified from accumulated other comprehensive income | — |
| | (7 | ) | | (7 | ) | — |
| | (7 | ) | | (7 | ) |
Other comprehensive income (loss), net of tax | 31 |
| | (96 | ) | | (65 | ) | (4 | ) | | 4 |
| | — |
|
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 November 3, 2018 | | $ | 37 |
| | $ | 16 |
| | $ | 53 |
|
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 |
($ in millions) | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Stock units | $ | 13 |
| | $ | 19 |
| | $ | 49 |
| | $ | 57 |
|
Stock options | 3 |
| | 4 |
| | 12 |
| | 12 |
|
Employee stock purchase plan | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Share-based compensation expense | 17 |
| | 24 |
| | 64 |
| | 72 |
|
Less: Income tax benefit | (5 | ) | | (6 | ) | | (20 | ) | | (17 | ) |
Share-based compensation expense, net of tax | $ | 12 |
| | $ | 18 |
| | $ | 44 |
| | $ | 55 |
|
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Stock units | $ | 14 |
| | $ | 14 |
| | $ | 47 |
| | $ | 43 |
|
Stock options | 3 |
| | 4 |
| | 10 |
| | 9 |
|
Employee stock purchase plan | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Share-based compensation expense | 18 |
| | 19 |
| | 60 |
| | 55 |
|
Less: Income tax benefit | (7 | ) | | (8 | ) | | (23 | ) | | (25 | ) |
Share-based compensation expense, net of tax | $ | 11 |
| | $ | 11 |
| | $ | 37 |
| | $ | 30 |
|
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 interest 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 net lease cost when it is probable that the expense has been incurred and the amount can be reasonably estimated.
As of November 2, 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 | | 39 Weeks Ended |
($ in millions) | November 2, 2019 | | November 2, 2019 |
Operating lease cost | $ | 308 |
| | $ | 905 |
|
Variable lease cost | 142 |
| | 463 |
|
Sublease income | (2 | ) | | (8 | ) |
Net lease cost | $ | 448 |
| | $ | 1,360 |
|
As of November 2, 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 | $ | 301 |
|
2020 | 1,171 |
|
2021 | 1,048 |
|
2022 | 940 |
|
2023 | 836 |
|
Thereafter | 3,864 |
|
Total minimum lease payments | 8,160 |
|
Less: Interest | (1,576 | ) |
Present value of operating lease liabilities | 6,584 |
|
Less: Current portion of operating lease liabilities | (934 | ) |
Long-term operating lease liabilities | $ | 5,650 |
|
During the thirteen and thirty-nine weeks ended November 2, 2019, additions of operating lease assets were $341 million and $797 million, respectively. As of November 2, 2019, the minimum lease commitment amount for operating leases signed but not yet commenced, primarily for retail stores, was $186 million.
As of November 2, 2019, the weighted-average remaining operating lease term was 8.7 years and the weighted-average discount rate was 4.7 percent for operating leases recognized on our Condensed Consolidated Financial Statements.
In accordance with Accounting Standards Codification ("ASC") 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on February 2, 2019 were as follows:
|
| | | |
($ 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 effective income tax rate was 33.0 percent for the thirteen weeks ended November 2, 2019, compared with 24.0 percent for the thirteen weeks ended November 3, 2018. The increase in the effective tax rate is primarily due to a measurement period adjustment recorded during the thirteen weeks ended November 3, 2018 to reduce our fiscal 2017 provisional estimated net charge related to the Tax Cuts and Jobs Act (“TCJA”) transition tax and changes in the mix of income before taxes across jurisdictions with varying tax rates during the thirteen weeks ended November 2, 2019.
The effective income tax rate was 31.6 percent for the thirty-nine weeks ended November 2, 2019, compared with 24.0 percent for the thirty-nine weeks ended November 3, 2018. The increase in the effective tax rate is primarily due to an adjustment recorded during the thirteen weeks ended August 3, 2019 to increase our fiscal 2017 tax liability for additional guidance issued by the U.S. Treasury Department regarding the TCJA and a measurement period adjustment recorded during the thirteen weeks ended November 3, 2018 to reduce our fiscal 2017 provisional estimated net charge related to the TCJA transition tax.
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,November 2, 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$3 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated StatementStatements 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 |
(shares in millions) | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Weighted-average number of shares - basic | 375 |
| | 384 |
| | 377 |
| | 387 |
|
Common stock equivalents | 1 |
| | 3 |
| | 2 |
| | 3 |
|
Weighted-average number of shares - diluted | 376 |
| | 387 |
| | 379 |
| | 390 |
|
|
| | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
(shares in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Weighted-average number of shares - basic | 391 |
| | 399 |
| | 395 |
| | 398 |
|
Common stock equivalents | 2 |
| | 1 |
| | 2 |
| | 2 |
|
Weighted-average number of shares - diluted | 393 |
| | 400 |
| | 397 |
| | 400 |
|
The above computations of weighted-average number of shares – diluted exclude 9 million and 8 million shares related to stock options and other stock awards for the thirteen weeks ended October 28, 2017 and October 29, 2016, respectively, and 917 million and 7 million shares related to stock options and other stock awards for the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively, and 14 million and 6 million shares related to stock options and other stock awards for the thirty-nine weeks ended October 28, 2017November 2, 2019 and October 29, 2016,November 3, 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, 2017November 2, 2019, Actions filed against us included commercial, intellectual property, customer, employment, and data privacyemployment 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, 2017November 2, 2019, January 28, 2017February 2, 2019, and October 29, 2016November 3, 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, 2017November 2, 2019, January 28, 2017February 2, 2019, and October 29, 2016November 3, 2018, was not material for any individual Action or in total. Subsequent to October 28, 2017November 2, 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 $60 million of insurance proceeds to the loss on property and equipment based on the partial settlement of claims reported as insurance proceeds related to loss on property and equipment, a component of cash flows from investing activities, in the Condensed Consolidated Statement of Cash Flows.
Note 12.13. Segment Information
The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way brands. We identify our operating segments according to how our business activities are managed and evaluated. As of October 28, 2017,November 2, 2019, our operating segments included GapOld Navy Global, Old NavyGap Global, Banana Republic Global, Athleta, and Intermix. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customers through its store and online channels, allowing us to execute on our omni-channel strategy where customers can shop seamlessly across all of our brands in retail stores and online through desktop or mobile devices. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments arewere aggregated into one1 reportable segment as of October 28, 2017.November 2, 2019. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.
Net sales by brand and region are as follows: | | ($ 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 | | |
13 Weeks Ended November 2, 2019 | | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (3) | | Total | | Percentage of Net Sales |
U.S. (1) | | $ | 750 |
| | $ | 1,587 |
| | $ | 467 |
| | $ | 200 |
| | $ | 3,004 |
| | 79 | % | |
Canada | | 109 |
| | 143 |
| | 57 |
| | 1 |
| | 310 |
| | 8 |
| | 151 |
| | 97 |
| | 55 |
| | 1 |
| | 304 |
| | 8 |
|
Europe | | 154 |
| | — |
| | 4 |
| | — |
| | 158 |
| | 4 |
| | — |
| | 128 |
| | 3 |
| | — |
| | 131 |
| | 3 |
|
Asia | | 278 |
| | 13 |
| | 21 |
| | — |
| | 312 |
| | 8 |
| | 9 |
| | 220 |
| | 21 |
| | — |
| | 250 |
| | 6 |
|
Other regions | | 31 |
| | 15 |
| | 8 |
| | — |
| | 54 |
| | 1 |
| | 18 |
| | 24 |
| | 7 |
| | — |
| | 49 |
| | 1 |
|
Total | | $ | 1,322 |
| | $ | 1,758 |
| | $ | 557 |
| | $ | 201 |
| | $ | 3,838 |
| | 100 | % | | $ | 1,947 |
| | $ | 1,158 |
| | $ | 618 |
| | $ | 275 |
| | $ | 3,998 |
| | 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 | | |
13 Weeks Ended November 3, 2018 | | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
U.S. (1) | | $ | 756 |
| | $ | 1,507 |
| | $ | 479 |
| | $ | 172 |
| | $ | 2,914 |
| | 77 | % | |
Canada | | 102 |
| | 131 |
| | 55 |
| | 1 |
| | 289 |
| | 8 |
| | 152 |
| | 104 |
| | 59 |
| | 1 |
| | 316 |
| | 8 |
|
Europe | | 150 |
| | — |
| | 14 |
| | — |
| | 164 |
| | 4 |
| | — |
| | 145 |
| | 4 |
| | — |
| | 149 |
| | 4 |
|
Asia | | 296 |
| | 55 |
| | 25 |
| | — |
| | 376 |
| | 10 |
| | 13 |
| | 266 |
| | 21 |
| | — |
| | 300 |
| | 7 |
|
Other regions | | 36 |
| | 12 |
| | 7 |
| | — |
| | 55 |
| | 1 |
| | 13 |
| | 30 |
| | 7 |
| | — |
| | 50 |
| | 1 |
|
Total | | $ | 1,340 |
| | $ | 1,705 |
| | $ | 580 |
| | $ | 173 |
| | $ | 3,798 |
| | 100 | % | | $ | 1,947 |
| | $ | 1,283 |
| | $ | 601 |
| | $ | 258 |
| | $ | 4,089 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (3) | | Total | | Percentage of Net Sales |
39 Weeks Ended October 28, 2017 | | |
39 Weeks Ended November 2, 2019 | | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (3) | | Total | | Percentage of Net Sales |
U.S. (1) | | $ | 2,137 |
| | $ | 4,609 |
| | $ | 1,396 |
| | $ | 633 |
| | $ | 8,775 |
| | 79 | % | |
Canada | | 277 |
| | 387 |
| | 156 |
| | 2 |
| | 822 |
| | 8 |
| | 427 |
| | 251 |
| | 155 |
| | 2 |
| | 835 |
| | 7 |
|
Europe | | 435 |
| | — |
| | 11 |
| | — |
| | 446 |
| | 4 |
| | — |
| | 380 |
| | 10 |
| | — |
| | 390 |
| | 3 |
|
Asia | | 780 |
| | 34 |
| | 69 |
| | — |
| | 883 |
| | 8 |
| | 30 |
| | 654 |
| | 70 |
| | — |
| | 754 |
| | 6 |
|
Other regions | | 83 |
| | 47 |
| | 21 |
| | — |
| | 151 |
| | 1 |
| | 57 |
| | 69 |
| | 18 |
| | — |
| | 144 |
| | 1 |
|
Total | | $ | 3,712 |
| | $ | 5,077 |
| | $ | 1,653 |
| | $ | 635 |
| | $ | 11,077 |
| | 100 | % | | $ | 5,718 |
| | $ | 3,296 |
| | $ | 1,802 |
| | $ | 893 |
| | $ | 11,709 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
39 Weeks Ended October 29, 2016 | | |
39 Weeks Ended November 3, 2018 | | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales |
U.S. (1) | | $ | 2,203 |
| | $ | 4,335 |
| | $ | 1,456 |
| | $ | 550 |
| | $ | 8,544 |
| | 77 | % | |
Canada | | 264 |
| | 358 |
| | 159 |
| | 2 |
| | 783 |
| | 7 |
| | 430 |
| | 275 |
| | 167 |
| | 2 |
| | 874 |
| | 7 |
|
Europe | | 453 |
| | — |
| | 45 |
| | — |
| | 498 |
| | 5 |
| | — |
| | 425 |
| | 11 |
| | — |
| | 436 |
| | 4 |
|
Asia | | 856 |
| | 171 |
| | 80 |
| | — |
| | 1,107 |
| | 10 |
| | 36 |
| | 779 |
| | 68 |
| | — |
| | 883 |
| | 7 |
|
Other regions | | 100 |
| | 32 |
| | 23 |
| | — |
| | 155 |
| | 1 |
| | 43 |
| | 87 |
| | 20 |
| | — |
| | 150 |
| | 1 |
|
Total | | $ | 3,876 |
| | $ | 4,896 |
| | $ | 1,763 |
| | $ | 552 |
| | $ | 11,087 |
| | 100 | % | | $ | 5,684 |
| | $ | 3,712 |
| | $ | 1,769 |
| | $ | 792 |
| | $ | 11,957 |
| | 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 the Janie and Weddington Way.Jack brand. |
| |
(3) | IncludesPrimarily consists of net sales for the Athleta and Intermix.Intermix brands, as well as a portion of income related to our credit card agreement. Beginning in the third quarter of fiscal 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 our net income.
Note 15. Subsequent Events
On November 7, 2019, Art Peck stepped down as president and chief executive officer and resigned his position as a director of the Company. Robert J. Fisher, the Company’s current chairman of the board of directors, began serving as the Company’s president and chief executive officer on an interim basis.
| |
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 WayJack, 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 forOn February 28, 2019, the first three quartersCompany announced that its Board of fiscal 2017 includeDirectors approved a gain from insurance proceeds of $64 million relatedplan to separate the fire that occurred in one ofCompany into two independent publicly-traded companies: Old Navy and the buildings at a Company-owned distribution center campus in Fishkill, New York on August 29, 2016 (“the Fishkill fire”)new Gap Inc., which waswill 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 Company’s Board of Directors, receipt of a tax opinion from counsel, and the filing and effectiveness of a registration statement with the U.S. Securities and Exchange Commission. For the thirteen and thirty-nine weeks ended November 2, 2019, we incurred separation costs of $70 million and $112 million, respectively, which primarily consist of costs associated with information technology and external adviser fees and are recorded inas operating expenses in the Condensed Consolidated Statement of Income.
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 brand revitalization. During the third quartertwo-year period, the Company estimates pre-tax costs associated with these 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 fiscal 2017, we also received $20 million in insurance proceedswrite-offs related to business interruption, which were recordedlong-term assets and liabilities. The Company estimates an annualized sales loss of approximately $625 million as a reduction to costresult of goods sold and occupancy expenses in the Condensed Consolidated Statementthese store closures, with resulting annualized pre-tax savings of Income. Fiscal 2016 results were impacted by the previously announced measures to better align talent and financial resources against our most important priorities to position the Company for improved business performance and long-term success. In connection with these measures, the Company incurred $29 million and $179 million in restructuring costs duringabout $90 million. For the thirteen and thirty-nine weeks ended October 29, 2016,November 2, 2019, we incurred restructuring costs of $8 million and $23 million, respectively, which primarily include lease and employee-related costs. Our discussions and negotiations with landlords around store closures continue to be difficult, and our ability to execute on our strategy quickly and decisively is challenging. We continue to focus on rationalizing stores that don’t generate sufficient returns to warrant the investments necessary to provide our customers with a differentiated experience.
During the first quarter of fiscal 2019, we adopted the new lease accounting standard, ASC 842, using the optional transition method and recorded a decrease to opening retained earnings of $86 million, 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 our Condensed Consolidated Statement of Income or Condensed Consolidated Statement of Cash Flows.
During the first quarter of fiscal 2019, the Company purchased a building for $343 million. In addition, as part of a related tax exchange, during the thirteen weeks ended May 4, 2019 the Company also sold a building for $220 million, which resulted in a pre-tax gain on sale of $191 million.
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.
On November 7, 2019, Art Peck stepped down as president and chief executive officer and resigned his position as a director of the Company. Robert J. Fisher, the Company’s current chairman of the board of directors, began serving as the Company’s president and chief executive officer on an interim basis.
Financial results for the third quarter of fiscal 20172019 are as follows:
Net sales for the third quarter of fiscal 2017 increased 12019 decreased 2 percent compared with the third quarter of fiscal 2016.2018.
Comparable sales for the third quarter of fiscal 2017 increased 32019 decreased 4 percent compared with a 3 percent decreaseflat for the third 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 quarter of fiscal 2017 and2019 was $1.56 billion compared with $1.62 billion for the third quarter of fiscal 2016 were $1.5 billion.2018. Gross margin for the third quarter of fiscal 20172019 was 39.739.0 percent compared with 39.339.7 percent for the third quarter of fiscal 2016.2018.
Operating margin for the third quarter of fiscal 20172019 was 9.85.5 percent compared with 10.28.9 percent for the third quarter of fiscal 2016.2018.
| |
• | The effective income tax rate for the third quarter of fiscal 2019 was 33.0 percent, compared with 24.0 percent for the third quarter of fiscal 2018. |
| |
• | Net income for the third quarter of fiscal 2019 was $140 million compared with $266 million for the third quarter of fiscal 2018. |
| |
• | Diluted earnings per share were $0.37 for the third quarter of fiscal 2019 compared with $0.69 for the third quarter of fiscal 2018. |
During the third quarterfirst three quarters of fiscal 2017 was $229 million compared with $204 million for the third quarter2019, we paid dividends of fiscal 2016.
Diluted earnings per share was $0.58 for the third quarter of fiscal 2017 compared with $0.51 for the third quarter of fiscal 2016. Diluted earnings per share for the third quarter of fiscal 2016 included about a $0.09 impact of restructuring costs incurred in the third quarter of fiscal 2016.
$274 million.During the first three quarters of fiscal 2017, we distributed $572 million to shareholders through2019, share repurchases and dividends.were $150 million.
Our business priorities for fiscal 2017 remain2019 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;
improving inventory productivity by leveraging responsive capabilities;
investing in digital and customer capabilities, as well as store experience, to support growth;
creatingcreate a unique and differentiated customerconverged retail experience that attracts new customers, retains existing customers, and builds loyalty, with focus on bothloyalty;
increasing productivity by leveraging our scale and streamlining operations and processes throughout the physical and digital expressions of our brands;organization;
attracting and retaining greatstrong talent in our businesses and functions;functions, which includes initiating the search for a new CEO; and
leveraging our scalecontinuing to improve the effectivenessintegrate social and efficiency of our processes.
environmental sustainability into business practices to support long term growth.
In fiscal 2017,2019, while we arework 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 forremain 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.
Comp Sales include the results ofmerchandise 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.
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 |
| November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Old Navy Global | (4 | )% | | 4 | % | | (3 | )% | | 4 | % |
Gap Global | (7 | )% | | (7 | )% | | (8 | )% | | (6 | )% |
Banana Republic Global | (3 | )% | | 2 | % | | (3 | )% | | 2 | % |
The Gap, Inc. | (4 | )% | | — | % | | (4 | )% | | 1 | % |
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 |
($ in millions) | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Net sales per average square foot (1) | $ | 78 |
| | $ | 83 |
| | $ | 236 |
| | $ | 252 |
|
|
| | | | | | | | | | | | | | |
| 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 |
|
__________ | |
(1) | Excludes net sales associated with our online and franchise businesses. Online sales includes sales through our online channels such 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 | | 39 Weeks Ended November 2, 2019 | | November 2, 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 (2) | | Number of Store Locations | | Square Footage (in millions) |
Old Navy North America | | 1,139 |
| | 60 |
| | 2 |
| | 1,197 |
| | 19.4 |
|
Old Navy Asia (1) | | 15 |
| | 4 |
| | 1 |
| | 18 |
| | 0.2 |
|
Gap North America | 844 |
| | 6 |
| | 15 |
| | 835 |
| | 8.6 |
| 758 |
| | 3 |
| | 34 |
| | 727 |
| | 7.5 |
|
Gap Asia | 311 |
| | 24 |
| | 26 |
| | 309 |
| | 3.0 |
| 332 |
| | 46 |
| | 27 |
| | 351 |
| | 3.2 |
|
Gap Europe | 164 |
| | 2 |
| | 9 |
| | 157 |
| | 1.3 |
| 152 |
| | 3 |
| | 12 |
| | 143 |
| | 1.2 |
|
Banana Republic North America | | 556 |
| | 8 |
| | 10 |
| | 554 |
| | 4.7 |
|
Banana Republic Asia | | 45 |
| | 4 |
| | 2 |
| | 47 |
| | 0.2 |
|
Athleta North America | | 161 |
| | 24 |
| | — |
| | 185 |
| | 0.8 |
|
Intermix North America | | 36 |
| | — |
| | 1 |
| | 35 |
| | 0.1 |
|
Janie and Jack North America (2) | | — |
| | — |
| | — |
| | 139 |
| | 0.2 |
|
Company-operated stores total | | 3,194 |
| | 152 |
| | 89 |
| | 3,396 |
| | 37.5 |
|
Franchise | | 472 |
| | 94 |
| | 24 |
| | 542 |
| | N/A |
|
Total | | 3,666 |
| | 246 |
| | 113 |
| | 3,938 |
| | 37.5 |
|
Increase over prior year | | | | | | | | 6.8 | % | | 1.6 | % |
| | | | | | | | | | |
| | February 3, 2018 | | 39 Weeks Ended November 3, 2018 | | November 3, 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 |
| | 54 |
| | 3 |
| | 1,117 |
| | 18.4 |
|
Old Navy Asia | 13 |
| | — |
| | — |
| | 13 |
| | 0.2 |
| 14 |
| | — |
| | — |
| | 14 |
| | 0.2 |
|
Gap North America | | 810 |
| | 9 |
| | 21 |
| | 798 |
| | 8.2 |
|
Gap Asia | | 313 |
| | 17 |
| | 7 |
| | 323 |
| | 3.1 |
|
Gap Europe | | 155 |
| | 8 |
| | 9 |
| | 154 |
| | 1.3 |
|
Banana Republic North America | 601 |
| | 4 |
| | 9 |
| | 596 |
| | 5.0 |
| 576 |
| | 8 |
| | 10 |
| | 574 |
| | 4.8 |
|
Banana Republic Asia | 48 |
| | 1 |
| | 1 |
| | 48 |
| | 0.2 |
| 45 |
| | 3 |
| | 3 |
| | 45 |
| | 0.2 |
|
Banana Republic Europe | 1 |
| | — |
| | 1 |
| | — |
| | — |
| |
Athleta North America | 132 |
| | 8 |
| | — |
| | 140 |
| | 0.6 |
| 148 |
| | 10 |
| | 1 |
| | 157 |
| | 0.6 |
|
Intermix North America | 43 |
| | — |
| | 5 |
| | 38 |
| | 0.1 |
| 38 |
| | — |
| | 2 |
| | 36 |
| | 0.1 |
|
Company-operated stores total | 3,200 |
| | 65 |
| | 72 |
| | 3,193 |
| | 36.6 |
| 3,165 |
| | 109 |
| | 56 |
| | 3,218 |
| | 36.9 |
|
Franchise | 459 |
| | 31 |
| | 44 |
| | 446 |
| | N/A |
| 429 |
| | 84 |
| | 43 |
| | 470 |
| | N/A |
|
Total | 3,659 |
| | 96 |
| | 116 |
| | 3,639 |
| | 36.6 |
| 3,594 |
| | 193 |
| | 99 |
| | 3,688 |
| | 36.9 |
|
Decrease over prior year | | | | | | | (2.8 | )% | | (2.9 | )% | |
| | | | | | | | | | |
| 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 | )% | |
Increase over prior year | | | | | | | | 1.3 | % | | 0.8 | % |
__________
| |
(1) | We intend to close Old Navy stores in China by early 2020. |
| |
(2) | 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 November 2, 2019, net of one closure that occurred in the third quarter of fiscal 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 quarter of fiscal 2017 increased $402019 decreased $91 million, or 12 percent, compared with the third quarter of fiscal 2016 primarily2018 driven by a decrease in Comp Sales across all global brands and a decrease in net sales at Gap Global as a result of store closures, partially offset by an increase in net sales at Old Navy, partially offset by aAthleta. The decrease in net sales at Gap and Banana Republic. The increase in Comp Sales of 3 percent for the third quarter of fiscal 20172019 was partially offset by new store openings at Old Navy Global as well as the impactaddition of lost sales primarily from international store closures in fiscal 2016.Janie and Jack.
Our net sales for the first three quarters of fiscal 20172019 decreased $10$248 million, or 2 percent, compared with the first three quarters of fiscal 20162018 primarily driven by a decrease in net sales at Gap and Banana Republic,Global, as well as an unfavorable impact of foreign exchange of $49$68 million, partially offset by the addition of Janie and Jack as well as an increase in net sales at Old Navy. The unfavorable impact of foreign exchange was primarily due to the weakening of the Japanese yen, British pound, and Chinese yuan against the U.S. dollar.Athleta. The foreign exchange impact is the translation impact if net sales for the first three quarters of fiscal 20162018 were translated at exchange rates applicable during the first three quarters of fiscal 2017. The increase in Comp Sales of 2 percent for the first three quarters of fiscal 2017 was offset by the impact of lost sales primarily from international store closures in fiscal 2016.2019.
Cost of Goods Sold and Occupancy Expenses
| | | 13 Weeks Ended | | 39 Weeks Ended | 13 Weeks Ended | | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Cost of goods sold and occupancy expenses | $ | 2,313 |
| | $ | 2,305 |
| | $ | 6,770 |
| | $ | 6,948 |
| $ | 2,439 |
| | $ | 2,466 |
| | $ | 7,250 |
| | $ | 7,280 |
|
Gross profit | $ | 1,525 |
| | $ | 1,493 |
| | $ | 4,307 |
| | $ | 4,139 |
| $ | 1,559 |
| | $ | 1,623 |
| | $ | 4,459 |
| | $ | 4,677 |
|
Cost of goods sold and occupancy expenses as a percentage of net sales | 60.3 | % | | 60.7 | % | | 61.1 | % | | 62.7 | % | 61.0 | % | | 60.3 | % | | 61.9 | % | | 60.9 | % |
Gross margin | 39.7 | % | | 39.3 | % | | 38.9 | % | | 37.3 | % | 39.0 | % | | 39.7 | % | | 38.1 | % | | 39.1 | % |
Cost of goods sold and occupancy expenses decreased 0.4 percentincreased 0.7 percentage points as a percentage of net sales in the third quarter of fiscal 20172019 compared with the third quarter of fiscal 20162018.
| |
• | Cost of goods sold increased 0.5 percentage points as a percentage of net sales in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018, primarily driven by higher promotional activity at Old Navy Global as well as higher inventory shortage costs at all global brands; partially offset by improved margins at Athleta. |
| |
• | Occupancy expenses increased 0.2 percentage points as a percentage of net sales in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 driven by lower net sales without a corresponding decrease in occupancy expenses. |
Cost of goods sold was flatand occupancy expenses increased 1.0 percentage points as a percentage of net sales in the third quarterfirst three quarters of fiscal 20172019 compared with the third quarterfirst three quarters of fiscal 2016, 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.
2018.Occupancy expenses decreased0.4 percentCost of goods sold increased 0.8 percentage points as a percentage of net sales in the third quarter of fiscal 2017 compared with the third quarter 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 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 20172019 compared with the first three quarters of fiscal 2016.2018, primarily driven by higher promotional activity at Old Navy Global.
Cost of goods sold decreased1.2 percentOccupancy expenses increased 0.2 percentage points as a percentage of net sales duringin the first three quarters of fiscal 20172019 compared with the first three quarters of fiscal 2016,2018 primarily driven by higher margins achieved aslower net sales without a resultcorresponding decrease in occupancy expenses.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
($ in millions) | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Operating expenses | $ | 1,338 |
| | $ | 1,260 |
| | $ | 3,640 |
| | $ | 3,687 |
|
Operating expenses as a percentage of net sales | 33.5 | % | | 30.8 | % | | 31.1 | % | | 30.8 | % |
Operating margin | 5.5 | % | | 8.9 | % | | 7.0 | % | | 8.3 | % |
Operating expenses increased $78 million in the third quarter of improved average selling price per unit at all global brands,fiscal 2019 compared with the third quarter of fiscal 2018 primarily due to separation-related costs and operating expenses related to Janie and Jack; partially offset by higher average unit cost at all global brands.
a decrease in bonus expense.OccupancyOperating expenses decreased0.4 percent as a percentage of net sales during $47 million in the first three quarters of fiscal 20172019 compared with the first three quarters of fiscal 2016, primarily2018, driven by ana $191 million gain on the sale of a building. The remaining increase in online sales without a corresponding increase in occupancy expenses and the closure of international stores in fiscal 2016, partially offset by real estate expenses incurred for new stores at the Times Square, New York location for Gap and Old Navy.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Operating expenses | $ | 1,147 |
| | $ | 1,104 |
| | $ | 3,224 |
| | $ | 3,249 |
|
Operating expenses as a percentage of net sales | 29.9 | % | | 29.1 | % | | 29.1 | % | | 29.3 | % |
Operating margin | 9.8 | % | | 10.2 | % | | 9.8 | % | | 8.0 | % |
Operating expenses increased $43 million, or 0.8 percent as a percentage of net sales, in the third quarter of fiscal 2017 compared with the third quarter of fiscal 2016. The increase in operating expenses for the third quarter of fiscal 2017 compared with the third quarter of fiscal 2016 was primarily due to the following:
an increase in payroll-related expenses primarily driven by an increase in bonus expense; and
an increase in marketing and investments in digital and customer initiatives; partially offset by
$36 million of restructuring costs incurred in the third quarter of fiscal 2016; and
a decrease of $27 million of store asset impairment charges unrelated to restructuring activities.
Operating expenses decreased $25 million, or 0.2 percent as a percentage of net sales, during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016. The decrease in operating expenses for the first three quarters of fiscal 20172019 compared with the first three quarters of fiscal 20162018 was primarily due to the following:
$171 million of restructuringseparation-related costs, incurred during the first three quarters of fiscal 2016;
a gain from insurance proceeds of $64 millionoperating expenses related to the Fishkill fire recorded in the second quarter of fiscal 2017;Janie and
a decrease of $18 million of store asset impairment charges unrelated to Jack, and specialty fleet restructuring activities;costs; partially offset by
an increase in payroll-related expenses primarily driven by an increase a decrease in bonus expense; andexpense.
an increase in marketing and investments in digital and customer initiatives.
Interest Expense
| | | 13 Weeks Ended | | 39 Weeks Ended | 13 Weeks Ended | | 39 Weeks Ended |
($ in millions) | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Interest expense | $ | 18 |
| | $ | 20 |
| | $ | 53 |
| | $ | 57 |
| $ | 19 |
| | $ | 21 |
| | $ | 58 |
| | $ | 54 |
|
We believe that current cash balances and cash flows from our operations will be sufficient to support our business operations, including growth initiativesseparation-related costs and planned capital expenditures, as well as Gap brand specialty fleet restructuring costs and growth initiatives, 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.
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.
Net cash used for financing activities during the first three quarters of fiscal 2017 increased $3642019 decreased $141 million compared with the first three quarters of fiscal 2016,2018, primarily due to the following:
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.business and infrastructure. 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.
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.
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.
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
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.