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
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 94-1697231 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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Two Folsom Street, San Francisco, California | | 94105 |
(Address of principal executive offices) | | (Zip code) |
Two Folsom Street
San Francisco, California 94105
(Address of principal executive offices)
Registrant’s telephone number, including area code: (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, 201718, 2020 was 388,857,073.
374,029,098.
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 potential impact of COVID-19 on the assumptions and estimates used when preparing the quarterly financial statements, and on our results of operations, financial position, and liquidity;
•the potential impact if economic conditions caused by COVID-19 were to worsen beyond what is currently estimated by management;
•the impact of the adoption of newrecent accounting standards;pronouncements;
•recognition of revenue deferrals as revenue;
•compliance with applicable financial covenants under the 2023 Notes, 2025 Notes, 2027 Notes, and the ABL Facility;
•the expected tax impact of our participation in the Coronavirus Aid, Relief and Economic Security Act;
•unrealized gains and losses from designated cash flow hedges into income;hedges;
the impact of the potential settlement of outstanding•total gross unrecognized tax matters;benefits;
•the impact of losses due to indemnification obligations;
•the outcome of proceedings, lawsuits, disputes, and claims;
claims, including the impact of continuing depreciationsuch actions on our financial results;
•the ability of certain foreign currencies on gross margins for our foreign subsidiaries;new capital structure to provide sufficient liquidity to continue to navigate the COVID-19 pandemic;
current cash balances and cash flows being sufficient to support our business operations, including growth initiatives and planned capital expenditures;
•the ability to supplement near-term liquidity, if necessary, with our $500 million$1.8675 billion asset-based revolving credit facility or other available market instruments;
•current cash balances and cash flows from our operations and from issuance of the 2023 Notes, 2025 Notes, 2027 Notes being sufficient to support our business operations;
•the impact of the seasonality of our operations;
dividend•offering product that is consistently brand-appropriate and on-trend with high customer acceptance;
•the impact of adopting the accounting standards update No. 2019-12 on January 31 2021;
•growing and operating our global online business and our newly introduced business-to-business program;
•realigning inventory with customer demand;
•increasing focus on improving operational discipline and efficiency by streamlining operations and processes and leveraging scale;
•managing inventory to support a healthy merchandise margin;
•the expected timing, cost and scope of the strategic review of our operating model in Europe;
•the expectation that we will reach additional agreements with our landlords regarding suspended rent payments for our temporarily closed stores;
•rationalizing the Gap and Banana Republic brands, with emphasis on the specialty fleet globally, to create a healthier business while prioritizing asset-light growth through licensing and franchise partnerships in fiscal 2017;international markets;
•the impact of our expected lease buyouts related to a small population of stores in the future;
•continuing to integrate social and environmental sustainability into business practices;
•increased interest expense on future borrowings caused by any future reductions in our credit ratings; 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 overall global economic environment and risks associated with the COVID-19 pandemic;
•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 changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;
•engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;
•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 manage key executive succession and retention and to continue to attract and retain keyqualified 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 risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;
•the risk that we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation;
•the risk that foreign currency exchange rate fluctuations could adversely impact our financial results;
the risksa failure of, or updates or changes to, our business, includinginformation technology ("IT") systems may disrupt our costs and supply chain, associated with global sourcing and manufacturing;operations;
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 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 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 foreign currency exchange rate fluctuations could adversely impact our financial results;
•the risk that comparable sales and margins will experience fluctuations;
•the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives;
•the risk that updateschanges in the regulatory or changes toadministrative 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 (similar to and including the ongoing COVID-19 pandemic), 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 Annualthis Quarterly Report on Form 10-K for the fiscal year ended January 28, 201710-Q 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, 2017,25, 2020, 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 1, 2020.
THE GAP, INC.
TABLE OF CONTENTS
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| Item 1. | | |
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Item 1. | | |
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| Condensed Consolidated Balance Sheets as of October 28, 2017, January 28, 2017,31, 2020, February 1, 2020, and October 29, 2016November 2, 2019 | |
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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 6.5. | | |
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| Item 6. | | |
PART I – FINANCIAL INFORMATION
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Item 1. | 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 | ($ and shares in millions except par value) | October 31,
2020 | | February 1,
2020 | | November 2,
2019 |
| ASSETS | | | | | | ASSETS | | | | | |
| Current assets: | | | | | | Current assets: | |
| Cash and cash equivalents | $ | 1,353 |
| | $ | 1,783 |
| | $ | 1,522 |
| Cash and cash equivalents | $ | 2,471 | | | $ | 1,364 | | | $ | 788 | |
| Short-term investments | | Short-term investments | 178 | | | 290 | | | 294 | |
| Merchandise inventory | 2,476 |
| | 1,830 |
| | 2,398 |
| Merchandise inventory | 2,747 | | | 2,156 | | | 2,720 | |
| Other current assets | 654 |
| | 702 |
| | 751 |
| Other current assets | 966 | | | 706 | | | 770 | |
| Total current assets | 4,483 |
| | 4,315 |
| | 4,671 |
| Total current assets | 6,362 | | | 4,516 | | | 4,572 | |
| Property and equipment, net of accumulated depreciation of $6,041, $5,813, and $5,900 | 2,686 |
| | 2,616 |
| | 2,662 |
| |
| Property and equipment, net of accumulated depreciation of $5,891, $5,839 and $5,999 | | Property and equipment, net of accumulated depreciation of $5,891, $5,839 and $5,999 | 2,846 | | | 3,122 | | | 3,225 | |
| Operating lease assets | | Operating lease assets | 4,460 | | | 5,402 | | | 5,796 | |
| Other long-term assets | 726 |
| | 679 |
| | 674 |
| Other long-term assets | 705 | | | 639 | | | 525 | |
| Total assets | $ | 7,895 |
| | $ | 7,610 |
| | $ | 8,007 |
| Total assets | $ | 14,373 | | | $ | 13,679 | | | $ | 14,118 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| Current liabilities: | | | | | | Current liabilities: | |
| Current maturities of debt | $ | — |
| | $ | 65 |
| | $ | 424 |
| |
| | Accounts payable | 1,330 |
| | 1,243 |
| | 1,413 |
| Accounts payable | $ | 2,284 | | | $ | 1,174 | | | $ | 1,241 | |
| Accrued expenses and other current liabilities | 1,132 |
| | 1,113 |
| | 1,059 |
| Accrued expenses and other current liabilities | 1,283 | | | 1,067 | | | 974 | |
| Current portion of operating lease liabilities | | Current portion of operating lease liabilities | 823 | | | 920 | | | 934 | |
| Income taxes payable | 134 |
| | 32 |
| | 19 |
| Income taxes payable | 41 | | | 48 | | | 43 | |
| Total current liabilities | 2,596 |
| | 2,453 |
| | 2,915 |
| Total current liabilities | 4,431 | | | 3,209 | | | 3,192 | |
| Long-term liabilities: | | | | | | Long-term liabilities: | | | | | |
| Long-term debt | 1,248 |
| | 1,248 |
| | 1,320 |
| Long-term debt | 2,214 | | | 1,249 | | | 1,249 | |
| Long-term operating lease liabilities | | Long-term operating lease liabilities | 4,899 | | | 5,508 | | | 5,650 | |
| Lease incentives and other long-term liabilities | 1,027 |
| | 1,005 |
| | 1,046 |
| Lease incentives and other long-term liabilities | 458 | | | 397 | | | 393 | |
| Total long-term liabilities | 2,275 |
| | 2,253 |
| | 2,366 |
| Total long-term liabilities | 7,571 | | | 7,154 | | | 7,292 | |
| Commitments and contingencies (see Note 11) |
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| Commitments and contingencies (see Note 9) | | Commitments and contingencies (see Note 9) | | | | | |
| Stockholders’ equity: | | | | | | Stockholders’ equity: | |
| Common stock $0.05 par value | | | | | | Common stock $0.05 par value | |
| Authorized 2,300 shares for all periods presented; Issued and Outstanding 389, 399, and 399 shares | 19 |
| | 20 |
| | 20 |
| |
| Authorized 2,300 shares for all periods presented; Issued and Outstanding 374, 371, and 373 shares | | Authorized 2,300 shares for all periods presented; Issued and Outstanding 374, 371, and 373 shares | 19 | | | 19 | | | 19 | |
| Additional paid-in capital | — |
| | 81 |
| | 57 |
| Additional paid-in capital | 60 | | | 0 | | | 0 | |
| Retained earnings | 2,965 |
| | 2,749 |
| | 2,621 |
| Retained earnings | 2,268 | | | 3,257 | | | 3,573 | |
| Accumulated other comprehensive income | 40 |
| | 54 |
| | 28 |
| Accumulated other comprehensive income | 24 | | | 40 | | | 42 | |
| Total stockholders’ equity | 3,024 |
| | 2,904 |
| | 2,726 |
| Total stockholders’ equity | 2,371 | | | 3,316 | | | 3,634 | |
| Total liabilities and stockholders’ equity | $ | 7,895 |
| | $ | 7,610 |
| | $ | 8,007 |
| Total liabilities and stockholders’ equity | $ | 14,373 | | | $ | 13,679 | | | $ | 14,118 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(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 | ($ and shares in millions except per share amounts) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Net sales | $ | 3,838 |
| | $ | 3,798 |
| | $ | 11,077 |
| | $ | 11,087 |
| Net sales | $ | 3,994 | | | $ | 3,998 | | | $ | 9,376 | | | $ | 11,709 | |
| Cost of goods sold and occupancy expenses | 2,313 |
| | 2,305 |
| | 6,770 |
| | 6,948 |
| Cost of goods sold and occupancy expenses | 2,374 | | | 2,439 | | | 6,339 | | | 7,250 | |
| Gross profit | 1,525 |
| | 1,493 |
| | 4,307 |
| | 4,139 |
| Gross profit | 1,620 | | | 1,559 | | | 3,037 | | | 4,459 | |
| Operating expenses | 1,147 |
| | 1,104 |
| | 3,224 |
| | 3,249 |
| Operating expenses | 1,445 | | | 1,338 | | | 4,033 | | | 3,640 | |
| Operating income | 378 |
| | 389 |
| | 1,083 |
| | 890 |
| |
| Operating income (loss) | | Operating income (loss) | 175 | | | 221 | | | (996) | | | 819 | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | 0 | | | 0 | | | 58 | | | 0 | |
| Interest expense | 18 |
| | 20 |
| | 53 |
| | 57 |
| Interest expense | 55 | | | 19 | | | 132 | | | 58 | |
| Interest income | (4 | ) | | (3 | ) | | (11 | ) | | (6 | ) | Interest income | (1) | | | (7) | | | (7) | | | (21) | |
| Income before income taxes | 364 |
| | 372 |
| | 1,041 |
| | 839 |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | 121 | | | 209 | | | (1,179) | | | 782 | |
| Income taxes | 135 |
| | 168 |
| | 398 |
| | 383 |
| Income taxes | 26 | | | 69 | | | (280) | | | 247 | |
| Net income | $ | 229 |
| | $ | 204 |
| | $ | 643 |
| | $ | 456 |
| |
| Net income (loss) | | Net income (loss) | $ | 95 | | | $ | 140 | | | $ | (899) | | | $ | 535 | |
| Weighted-average number of shares - basic | 391 |
| | 399 |
| | 395 |
| | 398 |
| Weighted-average number of shares - basic | 374 | | | 375 | | | 373 | | | 377 | |
| Weighted-average number of shares - diluted | 393 |
| | 400 |
| | 397 |
| | 400 |
| Weighted-average number of shares - diluted | 380 | | | 376 | | | 373 | | | 379 | |
| Earnings per share - basic | $ | 0.59 |
| | $ | 0.51 |
| | $ | 1.63 |
| | $ | 1.15 |
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| Earnings per share - diluted | $ | 0.58 |
| | $ | 0.51 |
| | $ | 1.62 |
| | $ | 1.14 |
| |
| Cash dividends declared and paid per share | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.69 |
| | $ | 0.69 |
| |
| Earnings (loss) per share - basic | | Earnings (loss) per share - basic | $ | 0.25 | | | $ | 0.37 | | | $ | (2.41) | | | $ | 1.42 | |
| Earnings (loss) per share - diluted | | Earnings (loss) per share - diluted | $ | 0.25 | | | $ | 0.37 | | | $ | (2.41) | | | $ | 1.41 | |
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See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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| | 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Net income | $ | 229 |
| | $ | 204 |
| | $ | 643 |
| | $ | 456 |
|
| Other comprehensive income (loss) | | | | | | | |
| Foreign currency translation | (5 | ) | | (10 | ) | | 12 |
| | (1 | ) |
| Change in fair value of derivative financial instruments, net of tax (tax benefit) of $2, $4, $(6), and $(5) | 23 |
| | 39 |
| | (20 | ) | | (57 | ) |
| Reclassification adjustment for (gains) losses on derivative financial instruments, net of (tax) tax benefit of $6, $-, $4, and $(6) | (1 | ) | | — |
| | (6 | ) | | 1 |
|
| Other comprehensive income (loss), net of tax | 17 |
| | 29 |
| | (14 | ) | | (57 | ) |
| Comprehensive income | $ | 246 |
| | $ | 233 |
| | $ | 629 |
| | $ | 399 |
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| | 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Net income (loss) | $ | 95 | | | $ | 140 | | | $ | (899) | | | $ | 535 | |
| Other comprehensive income (loss), net of tax | | | | | | | |
| Foreign currency translation | 5 | | | (4) | | | (14) | | | (5) | |
| Change in fair value of derivative financial instruments, net of tax of $0, $0, $1, and $5 | (2) | | | 0 | | | 9 | | | 10 | |
| Reclassification adjustment for gains on derivative financial instruments, net of tax of $(1), $0, $(2), and $(5) | (1) | | | (9) | | | (11) | | | (16) | |
| Other comprehensive income (loss), net of tax | 2 | | | (13) | | | (16) | | | (11) | |
| Comprehensive income (loss) | $ | 97 | | | $ | 127 | | | $ | (915) | | | $ | 524 | |
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 1, 2020 | | 374 | | | $ | 19 | | | $ | 39 | | | $ | 2,173 | | | $ | 22 | | | $ | 2,253 | |
| Net income for the thirteen weeks ended October 31, 2020 | | | | | | | | 95 | | | | | 95 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | 5 | | 5 |
| Change in fair value of derivative financial instruments | | | | | | | | | | (2) | | (2) | |
| Amounts reclassified from accumulated other comprehensive income | | | | | | | | | | (1) | | (1) | |
| | | | | | | | | | | | |
| Issuance of common stock related to stock options and employee stock purchase plans | | 0 | | | 0 | | | 4 | | | | | | | 4 | |
| Issuance of common stock and withholding tax payments related to vesting of stock units | | 0 | | | 0 | | | 0 | | | | | | | 0 | |
| Share-based compensation, net of forfeitures | | | | | | 17 | | | | | | | 17 | |
| Common stock dividends (1) | | | | | | | | 0 | | | | | 0 | |
| Balance as of October 31, 2020 | | 374 | | | $ | 19 | | | $ | 60 | | | $ | 2,268 | | | $ | 24 | | | $ | 2,371 | |
| | | | | | | | | | | | |
| Balance as of August 3, 2019 | | 376 | | | $ | 19 | | | $ | 0 | | | $ | 3,551 | | | $ | 55 | | | $ | 3,625 | |
| Net income for the thirteen weeks ended November 2, 2019 | | | | | | | | 140 | | | | | 140 | |
| Other comprehensive loss, net of tax | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | (4) | | | (4) | |
| Change in fair value of derivative financial instruments | | | | | | | | | | 0 | | | 0 | |
| Amounts reclassified from accumulated other comprehensive income | | | | | | | | | | (9) | | | (9) | |
| Repurchases and retirement of common stock | | (3) | | | 0 | | | (23) | | | (27) | | | | | (50) | |
| Issuance of common stock related to stock options and employee stock purchase plans | | 0 | | | 0 | | | 5 | | | | | | | 5 | |
| Issuance of common stock and withholding tax payments related to vesting of stock units | | 0 | | | 0 | | | (1) | | | | | | | (1) | |
| Share-based compensation, net of forfeitures | | | | | | 19 | | | | | | | 19 | |
| Common stock dividends declared and paid ($0.2425 per share) | | | | | | | | (91) | | | | | (91) | |
| Balance as of November 2, 2019 | | 373 | | | $ | 19 | | | $ | 0 | | | $ | 3,573 | | | $ | 42 | | | $ | 3,634 | |
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income | | |
| ($ and shares in millions except per share amounts) | | Shares | | Amount | | Total |
| Balance as of February 1, 2020 | | 371 | | | $ | 19 | | | $ | 0 | | | $ | 3,257 | | | $ | 40 | | | $ | 3,316 | |
| Net loss for the thirty-nine weeks ended October 31, 2020 | | | | | | | | (899) | | | | | (899) | |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | (14) | | | (14) | |
| Change in fair value of derivative financial instruments | | | | | | | | | | 9 | | | 9 | |
| Amounts reclassified from accumulated other comprehensive income | | | | | | | | | | (11) | | | (11) | |
| | | | | | | | | | | | |
| Issuance of common stock related to stock options and employee stock purchase plans | | 1 | | | 0 | | | 16 | | | | | | | 16 | |
| Issuance of common stock and withholding tax payments related to vesting of stock units | | 2 | | | 0 | | | (8) | | | | | | | (8) | |
| Share-based compensation, net of forfeitures | | | | | | 52 | | | | | | | 52 | |
| Common stock dividends ($0.2425 per share) (1) | | | | | | | | (90) | | | | (90) | |
| Balance as of October 31, 2020 | | 374 | | | $ | 19 | | | $ | 60 | | | $ | 2,268 | | | $ | 24 | | | $ | 2,371 | |
| | | | | | | | | | | | |
| Balance as of February 2, 2019 | | 378 | | | $ | 19 | | | $ | 0 | | | $ | 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 income (loss), net of tax | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | (5) | | | (5) | |
| Change in fair value of derivative financial instruments | | | | | | | | | | 10 | | | 10 | |
| Amounts reclassified from accumulated other comprehensive income | | | | | | | | | | (16) | | | (16) | |
| Repurchases and retirement of common stock | | (8) | | | 0 | | | (67) | | | (83) | | | | | (150) | |
| Issuance of common stock related to stock options and employee stock purchase plans | | 1 | | | 0 | | | 22 | | | | | | | 22 | |
| Issuance of common stock and withholding tax payments related to vesting of stock units | | 2 | | | 0 | | | (21) | | | | | | | (21) | |
| Share-based compensation, net of forfeitures | | | | | | 66 | | | | | | | 66 | |
| Common stock dividends declared and paid ($0.7275 per share) | | | | | | | | (274) | | | | | (274) | |
| Balance as of November 2, 2019 | | 373 | | | $ | 19 | | | $ | 0 | | | $ | 3,573 | | | $ | 42 | | | $ | 3,634 | |
__________
(1) On March 4, 2020, the Company declared a first quarter fiscal year 2020 dividend of $0.2425 per share. On March 26, 2020, the Company announced that the dividend will be payable on or after April 28, 2021 to shareholders of record at the close of business on April 7, 2021. The dividend payable amount was estimated based upon the shareholders of record as of October 31, 2020.
See Accompanying Notes to Condensed Consolidated Financial Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | 39 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | ($ in millions) | October 31,
2020 | | November 2,
2019 |
| Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net income | $ | 643 |
| | $ | 456 |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Net income (loss) | | Net income (loss) | $ | (899) | | | $ | 535 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Depreciation and amortization | 418 |
| | 449 |
| Depreciation and amortization | 381 | | | 417 | |
| Amortization of lease incentives | (46 | ) | | (47 | ) | |
| | Share-based compensation | 60 |
| | 55 |
| Share-based compensation | 55 | | | 64 | |
| 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 |
| |
| Impairment of operating lease assets | | Impairment of operating lease assets | 361 | | | 1 | |
| Impairment of store assets | | Impairment of store assets | 127 | | | 9 | |
| | Loss on extinguishment of debt | | Loss on extinguishment of debt | 58 | | | 0 | |
| Amortization of debt issuance costs | | Amortization of debt issuance costs | 8 | | | 1 | |
| Non-cash and other items | 9 |
| | 12 |
| Non-cash and other items | 0 | | | (4) | |
| Gain on sale of building | | Gain on sale of building | 0 | | | (191) | |
| Deferred income taxes | (50 | ) | | (10 | ) | Deferred income taxes | (74) | | | 42 | |
| Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | |
| Merchandise inventory | (636 | ) | | (513 | ) | Merchandise inventory | (590) | | | (559) | |
| Other current assets and other long-term assets | (60 | ) | | (52 | ) | Other current assets and other long-term assets | 37 | | | 8 | |
| | Accounts payable | 55 |
| | 294 |
| Accounts payable | 1,120 | | | 129 | |
| Accrued expenses and other current liabilities | (46 | ) | | 10 |
| Accrued expenses and other current liabilities | 98 | | | 28 | |
| Income taxes payable, net of prepaid and other tax-related items | 188 |
| | 80 |
| |
| Income taxes payable, net of receivables and other tax-related items | | Income taxes payable, net of receivables and other tax-related items | (206) | | | 89 | |
| Lease incentives and other long-term liabilities | 48 |
| | (18 | ) | Lease incentives and other long-term liabilities | 54 | | | 19 | |
| Operating lease assets and liabilities, net | | Operating lease assets and liabilities, net | (131) | | | (60) | |
| Net cash provided by operating activities | 600 |
| | 800 |
| Net cash provided by operating activities | 399 | | | 528 | |
| Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Purchases of property and equipment | (463 | ) | | (383 | ) | Purchases of property and equipment | (288) | | | (523) | |
| Insurance proceeds related to loss on property and equipment | 60 |
| | — |
| |
| Purchase of building | | Purchase of building | 0 | | | (343) | |
| Proceeds from sale of building | | Proceeds from sale of building | 0 | | | 220 | |
| | Purchases of short-term investments | | Purchases of short-term investments | (237) | | | (235) | |
| Proceeds from sales and maturities of short-term investments | | Proceeds from sales and maturities of short-term investments | 348 | | | 231 | |
| Purchase of Janie and Jack | | Purchase of Janie and Jack | 0 | | | (69) | |
| Other | (3 | ) | | (1 | ) | Other | 2 | | | 0 | |
| Net cash used for investing activities | (406 | ) | | (384 | ) | Net cash used for investing activities | (175) | | | (719) | |
| Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Payments of current maturities of debt | (67 | ) | | — |
| |
| | Proceeds from revolving credit facility | | Proceeds from revolving credit facility | 500 | | | — | |
| Payments for revolving credit facility | | Payments for revolving credit facility | (500) | | | 0 | |
| Proceeds from issuance of long-term debt | | Proceeds from issuance of long-term debt | 2,250 | | | 0 | |
| Payments to extinguish debt | | Payments to extinguish debt | (1,307) | | | 0 | |
| Payments for debt issuance costs | | Payments for debt issuance costs | (61) | | | 0 | |
| Proceeds from issuances under share-based compensation plans | 23 |
| | 25 |
| Proceeds from issuances under share-based compensation plans | 16 | | | 22 | |
| Withholding tax payments related to vesting of stock units | (15 | ) | | (18 | ) | Withholding tax payments related to vesting of stock units | (8) | | | (21) | |
| Repurchases of common stock | (300 | ) | | — |
| Repurchases of common stock | 0 | | | (150) | |
| Excess tax benefit from exercise of stock options and vesting of stock units | — |
| | 1 |
| |
| | Cash dividends paid | (272 | ) | | (275 | ) | Cash dividends paid | 0 | | | (274) | |
| Net cash used for financing activities | (631 | ) | | (267 | ) | |
| 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 |
| |
| | Net cash provided by (used for) financing activities | | Net cash provided by (used for) financing activities | 890 | | | (423) | |
| Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash | | Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash | 4 | | | 0 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | Net increase (decrease) in cash, cash equivalents, and restricted cash | 1,118 | | | (614) | |
| Cash, cash equivalents, and restricted cash at beginning of period | | Cash, cash equivalents, and restricted cash at beginning of period | 1,381 | | | 1,420 | |
| Cash, cash equivalents, and restricted cash at end of period | | Cash, cash equivalents, and restricted cash at end of period | $ | 2,499 | | | $ | 806 | |
| | | | | | |
| Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
| Cash paid for interest during the period | $ | 76 |
| | $ | 80 |
| Cash paid for interest during the period | $ | 41 | | | $ | 75 | |
| Cash paid for income taxes during the period, net of refunds | $ | 260 |
| | $ | 318 |
| Cash paid for income taxes during the period, net of refunds | $ | 8 | | | $ | 117 | |
|
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, 201731, 2020 and October 29, 2016November 2, 2019, and the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive IncomeStockholders' Equity for the thirteen and thirty-nine weeks ended October 28, 201731, 2020 and October 29, 2016,November 2, 2019, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks endedOctober 28, 201731, 2020 and October 29, 2016November 2, 2019, have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements includecontain all normal and recurring adjustments (which include normal recurring adjustments)(except as otherwise disclosed) considered necessary to present fairly our financial position, results of operations, comprehensive income (loss), stockholders' equity, and cash flows as of October 28, 201731, 2020 and October 29, 2016November 2, 2019 and for all periods presented. The Condensed Consolidated Balance Sheet as of January 28, 2017February 1, 2020 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 1, 2020.
The results of operations for the thirteen and thirty-nine weeks endedOctober 28, 201731, 2020 are not necessarily indicative of the operating results that may be expected for the 53-week52-week period ending FebruaryJanuary 30, 2021.
COVID-19
In March 2020, the World Health Organization declared the coronavirus disease ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed our North America retail stores and a large number of our stores globally. In May 2020, we began to safely reopen our temporarily closed stores in accordance with local government guidelines and most stores were open during the thirteen weeks ended October 31, 2020. Beginning in late October 2020, several European countries instituted new lockdown mandates to contain surging COVID-19 cases and as a result we have temporarily closed certain stores in Europe. We will continue to monitor regional mandates for additional temporary store closures as they arise.
During the thirty-nine weeks ended October 31, 2020, the Company implemented several actions including completing the issuance of our Senior Secured Notes for $2.25 billion due 2023 (“2023 Notes”), 2025 (“2025 Notes”), and 2027 (“2027 Notes”) (collectively, the “Notes”) and entering into a third amended and restated senior secured asset-based revolving credit agreement (the "ABL Facility") in May 2020. See Note 3 2018.of Notes to Condensed Consolidated Financial Statements for further details related to our debt and credit facilities. Additionally, we suspended share repurchases and dividends and deferred the first quarter of fiscal 2020 dividend in March 2020.
As a result of COVID-19, we suspended rent payments beginning in April 2020 due to our temporarily closed stores and are continuing to work through negotiations with our landlords relating to those leases. We considered the Financial Accounting Standards Board's ("FASB") guidance regarding lease modifications as a result of the effects of COVID-19 and elected to apply the temporary practical expedient to account for lease changes as variable rent unless an amendment results in a substantial change in the Company's lease obligations. As of October 31, 2020, the impact of applying the temporary practical expedient was not material to our Condensed Consolidated Financial Statements.
In response to COVID-19, various governments worldwide have enacted, or are in the process of enacting, measures to provide relief to businesses negatively affected by the pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the United States. The CARES Act provides relief to U.S. corporations through financial assistance programs and modifications to certain payroll and income tax provisions. In connection with CARES Act and other financial relief measures worldwide, the Company has recognized $67 million of payroll related credits for the thirty-nine weeks ended October 31, 2020. The payroll related credits are recorded as a reduction within operating expenses in the Condensed Consolidated Statements of Operations. The Company is also considering certain other beneficial provisions of the CARES Act, including the net operating loss carryback provision. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the estimated income tax impact of the CARES Act.
We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements including inventory valuation, lease accounting impacts, income taxes, and the impairment of long-lived store assets and operating lease assets. These assumptions and estimates may change as the current situation evolves or new events occur and additional information is obtained. If the economic conditions caused by COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.
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 October 31, 2020, restricted cash primarily included consideration that serves as collateral for certain obligations occurring in the normal course of business and 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) | October 31,
2020 | | February 1,
2020 | | November 2,
2019 |
| Cash and cash equivalents, per Condensed Consolidated Balance Sheets | $ | 2,471 | | | $ | 1,364 | | | $ | 788 | |
| Restricted cash included in other current assets | 4 | | | 0 | | | 0 | |
| Restricted cash included in other long-term assets | 24 | | | 17 | | | 18 | |
| Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows | $ | 2,499 | | | $ | 1,381 | | | $ | 806 | |
Accounting Pronouncements Recently Adopted
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 accounting standards update ("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. We adopted this ASU on a prospective basis on February 2, 2020. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements or related disclosures.
Accounting Pronouncements Not Yet Adopted
Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on itsour Condensed Consolidated Financial Statements, based on current information.
RecentASU No. 2019-12, Simplifying the Accounting Pronouncements Related to Revenue Recognitionfor Income Taxes
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. ASU No. 2014-09, as amended, is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017.
While 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 2016,2019, the FASB issued ASU No. 2016-02, Leases. Under2019-12, Simplifying the newAccounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance lessees will be required to recognize a lease liability and a right-of-use asset for all leases (within ASC 740 as part of the exception of short-term leases) at the commencement date. The ASUFASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are still assessing the impact of2020 with early adoption permitted. The Company will adopt this ASU on January 31, 2021 and does not expect there to be a material impact on our Condensed Consolidated Financial Statements.
Note 2. Revenue
The Company’s revenues include merchandise sales at stores, online, and through franchise agreements, as well as the newly introduced business-to-business ("B2B") program. 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, 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 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 Operations.
We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, Old Navy, and Athleta 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. There were no material contract liabilities related to our franchise agreements for all periods presented.
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 October 31, 2020, the opening balance of deferred revenue for these obligations was $189 million, of which $68 million was recognized as revenue during the period. For the thirty-nine weeks ended October 31, 2020, the opening balance of deferred revenue for these obligations was $226 million, of which $140 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $191 million as of October 31, 2020.
We expect that the majority of our revenue deferrals as of the quarter ended October 31, 2020, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.
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 for these obligations was $189 million as of November 2, 2019.
Net sales disaggregated for stores and online sales for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31, 2020 | | November 2, 2019 | | October 31, 2020 | | November 2, 2019 |
| | | | | | | |
| Store sales (1) | $ | 2,379 | | | $ | 2,992 | | | $ | 5,129 | | | $ | 8,981 | |
| Online sales (2) | 1,615 | | | 1,006 | | | 4,247 | | | 2,728 | |
| Total net sales | $ | 3,994 | | | $ | 3,998 | | | $ | 9,376 | | | $ | 11,709 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
__________
(1)Store sales primarily include sales made at our Company-operated stores and franchise sales. Fiscal 2020 store sales were negatively impacted by COVID-19. See Note 1 of Notes to Condensed Consolidated Financial Statements but it will resultfor further details.
(2)Online sales primarily include sales made through our online channels including curbside pick-up, ship-from-store sales, buy online pick-up in a substantial increase in our long-term assetsstore sales, and liabilities. We will adopt the ASUorder-in-store sales. Additionally, beginning in the firstsecond quarter of fiscal 2019.2020, sales from the B2B program are also included.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: ImprovementsSee Note 10 of Notes to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. We adopted the provisions of this ASU in the first quarter of fiscal 2017. Beginning in the first quarter of fiscal 2017, we have made the policy election to account for forfeitures when they occur, rather than estimating expected forfeitures, when recognizing share-based compensation cost. We adopted this provision of the ASU using a modified retrospective transition method, which resulted in the cumulative-effect adjustment of a $3 million increase to retained earnings as of the beginning of the first quarter of fiscal 2017. Also, all excess tax benefits and tax deficiencies related to share-based payment awards are now reflected in the Consolidated Statement of Income as a component of the provision for income taxes on a prospective basis, whereas they were recognized in equity under the previous guidance. Additionally, excess tax benefits related to share-based payment awards are now reflected in operating activities, along with other income tax related cash flows, in our Consolidated Statement of Cash Flows on a prospective basis.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this ASU for the interim goodwill impairment test in the first quarter of fiscal 2017. The adoption of this ASU did not have any impact on theCondensed Consolidated Financial Statements.Statements for further disaggregation of revenue by brand and by region.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the potential impact of this ASU on our Consolidated Financial Statements.
Note 3. Debt and Credit Facilities
Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | October 31,
2020 | | February 1,
2020 | | November 2,
2019 |
| 2021 Notes | $ | 0 | | | $ | 1,249 | | | $ | 1,249 | |
| 2023 Notes | 500 | | | 0 | | | 0 | |
| 2025 Notes | 750 | | | 0 | | | 0 | |
| 2027 Notes | 1,000 | | | 0 | | | 0 | |
| Less: Unamortized debt issuance costs | (36) | | | 0 | | | 0 | |
| Total long-term debt | $ | 2,214 | | | $ | 1,249 | | | $ | 1,249 | |
|
| | | | | | | | | | | |
| ($ 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 |
|
In May 2020, we completed the issuance of the Notes in a private placement to qualified buyers and received gross proceeds of $2.25 billion. Concurrently with the issuance of the Notes, the Company amended the existing unsecured revolving credit facility with the ABL Facility which is scheduled to expire in May 2023. During the second quarter of fiscal 2020, we paid and recorded debt issuance costs related to the Notes and ABL Facility within long-term debt and other long-term assets on the Condensed Consolidated Balance Sheet, which will continue to be amortized through interest expense over the life of the related instrument.
The scheduled maturity of the Notes is as follows:
| | | | | | | | | | | | | | | | | |
| Scheduled Maturity ($ in millions) | Principal | | Interest Rate | | Interest Payments |
| Senior Secured Notes (1) | | | | | |
| May 15, 2023 | $ | 500 | | | 8.375 | % | | Semi-Annual |
| May 15, 2025 | 750 | | | 8.625 | % | | Semi-Annual |
| May 15, 2027 | 1,000 | | | 8.875 | % | | Semi-Annual |
| Total issuance | $ | 2,250 | | | | | |
__________
(1)Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium.
As of October 28, 2017, January 28, 2017, and October 29, 2016,31, 2020, the estimated fair value of our $1.25the Notes was $2.54 billion aggregate principal amount of 5.95 percent notes (the “Notes”) due April 2021 was $1.35 billion, $1.32 billion, and $1.34 billion, respectively, and was based on the quoted market price for each of the Notes (level 1 inputs) as of the last business day of the respective fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt in the Condensed Consolidated Balance Sheets, net of the unamortized discount.
As of 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, asnet of the unamortized debt issuance cost.
The ABL Facility has a $1.8675 billion borrowing capacity and bears interest at a base rate (typically LIBOR) plus a margin depending on borrowing base availability. We also have the ability to issue letters of credit on our ABL Facility. As of October 29, 2016. The Term Loan was repaid31, 2020, we had $48 million 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. There were no borrowings and no material outstanding standby letters of credit issued under the ABL Facility. There were 0 borrowings under the ABL Facility as of October 28, 2017.31, 2020.
The Notes are secured by the Company's real and intellectual property and equipment and intangibles. The Notes contain covenants that limit the Company’s ability to, among other things: (i) grant or incur liens on the collateral; (ii) incur, assume or guarantee additional indebtedness; (iii) enter into sale and lease-back transactions; (iv) sell or otherwise dispose of assets that are collateral; and (v) make certain restricted payments or other investments. The Notes are also subject to certain provisions related to default that, if triggered, could result in acceleration of the maturity of the Notes.
The ABL Facility agreement is secured by specified assets, including a first lien on inventory, accounts receivable and bank accounts. The Notes are also secured by a second priority lien on certain assets securing the ABL Facility, which includes security interests in inventory, accounts receivable and bank accounts, subject to certain exceptions and permitted liens. In addition, the ABL Facility agreement is secured by a second lien on certain assets securing the Notes. The ABL Facility contains customary covenants restricting the Company's activities, as well as those of its subsidiaries, including limitations on the ability to sell assets, engage in mergers, or other fundamental changes, enter into capital leases or certain leases not in the ordinary course of business, enter into transactions involving related parties or derivatives, incur or prepay indebtedness, grant liens or negative pledges on its assets, make loans or other investments, pay dividends or repurchase stock or other securities, guarantee third-party obligations, engage in sale and lease-back transactions and make changes in its corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the ABL Facility includes, as a financial covenant, a springing fixed charge coverage ratio which arises when availability falls below a specified threshold.
As of October 31, 2020, we were in compliance with the applicable financial covenants and expect to maintain compliance for the next twelve months.
We also maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). TheseThe Foreign Facilities are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. Thehad a total capacity of the Foreign Facilities was $47$58 million as of October 28, 2017.31, 2020. As of October 28, 2017,31, 2020, there were no0 borrowings under the Foreign Facilities. There were $14$19 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of October 28, 2017.31, 2020.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of October 28, 2017, we had $15 million inThere were 0 material standby letters of credit issued under these agreements.agreements as of October 31, 2020.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no0 purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks endedOctober 28, 201731, 2020 or October 29, 2016.November 2, 2019. There were no0 transfers of financial assets or liabilities into or out of level 1, level 2, and level 23 during the thirteen and thirty-nine weeks endedOctober 28, 201731, 2020 or October 29, 2016.November 2, 2019.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| ($ in millions) | October 31, 2020 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 678 | | | $ | 178 | | | $ | 500 | | | $ | 0 | |
| Short-term investments | 178 | | | 119 | | | 59 | | | 0 | |
| Derivative financial instruments | 6 | | | 0 | | | 6 | | | 0 | |
| Deferred compensation plan assets | 44 | | | 44 | | | 0 | | | 0 | |
| Other assets | 2 | | | 0 | | | 0 | | | 2 | |
| Total | $ | 908 | | | $ | 341 | | | $ | 565 | | | $ | 2 | |
| Liabilities: | | | | | | | |
| Derivative financial instruments | $ | 7 | | | $ | 0 | | | $ | 7 | | | $ | 0 | |
| | | | Fair Value Measurements at Reporting Date Using |
| ($ in millions) | February 1, 2020 | | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 311 | | | $ | 19 | | | $ | 292 | | | $ | 0 | |
| Short-term investments | 290 | | | 117 | | | 173 | | | 0 | |
| Derivative financial instruments | 10 | | | 0 | | | 10 | | | 0 | |
| Deferred compensation plan assets | 51 | | | 51 | | | 0 | | | 0 | |
| Other assets | 2 | | | 0 | | | 0 | | | 2 | |
| Total | $ | 664 | | | $ | 187 | | | $ | 475 | | | $ | 2 | |
| Liabilities: | | | | | | | |
| Derivative financial instruments | $ | 10 | | | $ | 0 | | | $ | 10 | | | $ | 0 | |
| | | | 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 | | | $ | 0 | |
| Short-term investments | 294 | | | 131 | | | 163 | | | 0 | |
| Derivative financial instruments | 12 | | | 0 | | | 12 | | | 0 | |
| Deferred compensation plan assets | 53 | | | 53 | | | 0 | | | 0 | |
| Other assets | 2 | | | 0 | | | 0 | | | 2 | |
| Total | $ | 599 | | | $ | 187 | | | $ | 410 | | | $ | 2 | |
| Liabilities: | | | | | | | |
| Derivative financial instruments | $ | 10 | | | $ | 0 | | | $ | 10 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | |
| | | | 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. Weequivalents. 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 investments in cash equivalents are placed primarily in time deposits, money market funds, and debt securities.
Our available-for-sale securities are comprised of investments in debt securities and are recorded in both short-term investments and cash and cash equivalents on the Condensed Consolidated Balance Sheets. These securities are recorded at fair value using market prices. As of October 31, 2020 and November 2, 2019, the Company held $178 million and $294 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 October 31, 2020 and November 2, 2019, the Company held $222 million and $17 million 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 Sheet. Unrealized gains and losses on available-for-sale debt securities included within accumulated other comprehensive income were not material as of October 31, 2020 and November 2, 2019.
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019, 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 to defer base compensation and bonus up to a maximum percentage, and non-employee directors to defer compensation up toreceipt of a maximum amount.portion of their Board fees. 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.recoverable, including recently shared strategic plans. 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.
DuringThe impact of COVID-19 resulted in a qualitative indication of impairment related to our store long-lived assets. For store locations, we analyzed our store asset recoverability. There were 0 material impairment charges recorded for long-lived assets during the thirteen weeks ended October 28, 2017, we31, 2020. During the thirty-nine weeks ended October 31, 2020, the Company recorded a charge for the impairment of long-livedstore assets of $4$127 million whichand impairment of operating lease assets of $361 million. The impairment of the store assets reduced the then carrying amount of the applicable long-lived assets of $5$131 million to their fair value of $4 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $1,369 million to their fair value of $1,008 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations.
There were 0 material impairment charges recorded for long-lived assets during the thirteen weeks ended November 2, 2019. During the thirty-nine weeks ended November 2, 2019, the Company recorded impairment of store assets of $9 million and impairment of operating lease assets of $1 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $10 million to their fair value of $1 million. The impairment charge was recorded inof the 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-livedlease assets of $17 million, which reduced the then carrying amount of the applicable long-lived assets of $18$61 million to their fair value of $1$60 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 inon 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.Operations.
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 impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and thirty-nine weeks ended October 28, 201731, 2020 or October 29, 2016.November 2, 2019.
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, Euro, Mexican pesos,peso, 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 designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and intercompany revenue transactions generally have terms of up to 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized ininto net income in(loss) during the period in which the underlying transaction impacts the income statement.Condensed Consolidated Statements of Operations.
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 IncomeOperations in the same period and generally offset.offset each other.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | October 31,
2020 | | February 1,
2020 | | November 2,
2019 |
| Derivatives designated as cash flow hedges | $ | 474 | | | $ | 501 | | | $ | 640 | |
| Derivatives not designated as hedging instruments | 539 | | | 689 | | | 706 | |
| Total | $ | 1,013 | | | $ | 1,190 | | | $ | 1,346 | |
|
| | | | | | | | | | | |
| ($ 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 | ($ in millions) | October 31,
2020 | | February 1,
2020 | | November 2,
2019 |
| Derivatives designated as cash flow hedges: | | | | | | Derivatives designated as cash flow hedges: | | | | | |
| Other current assets | $ | 16 |
| | $ | 28 |
| | $ | 35 |
| Other current assets | $ | 2 | | | $ | 6 | | | $ | 7 | |
| Other long-term assets | $ | 4 |
| | $ | 16 |
| | $ | 13 |
| Other long-term assets | 0 | | | 0 | | | 1 | |
| Accrued expenses and other current liabilities | $ | 11 |
| | $ | 10 |
| | $ | 26 |
| Accrued expenses and other current liabilities | 1 | | | 2 | | | 2 | |
| 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: | | | | | | Derivatives not designated as hedging instruments: | |
| Other current assets | $ | 11 |
| | $ | 13 |
| | $ | 13 |
| Other current assets | 4 | | | 4 | | | 4 | |
| Other long-term assets | $ | — |
| | $ | 1 |
| | $ | — |
| |
| Accrued expenses and other current liabilities | $ | 5 |
| | $ | 10 |
| | $ | 14 |
| Accrued expenses and other current liabilities | 6 | | | 8 | | | 8 | |
| Lease incentives and other long-term liabilities | $ | — |
| | $ | — |
| | $ | 1 |
| |
| | | | | | | |
| Total derivatives in an asset position | $ | 31 |
| | $ | 58 |
| | $ | 62 |
| Total derivatives in an asset position | $ | 6 | | | $ | 10 | | | $ | 12 | |
| Total derivatives in a liability position | $ | 20 |
| | $ | 21 |
| | $ | 49 |
| Total derivatives in a liability position | $ | 7 | | | $ | 10 | | | $ | 10 | |
The majoritySubstantially all of the unrealized gains and losses from designated cash flow hedges as of October 28, 201731, 2020 will be recognized ininto net income (loss) within the next 12twelve months at the then-current values, which may differ from the fair values as of October 28, 201731, 2020 shown above.
Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments inon the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are $8 million, $18 million, and $9 million as of October 28, 2017, January 28, 2017, and October 29, 2016, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be $23 million, $40 million, and $53 million and the net amounts of the derivative financial instruments in a liability position would be $12 million, $3 million, and $40 million as of October 28, 2017, January 28, 2017 and October 29, 2016, respectively.were not material for all periods presented.
See Note 4 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts designated in a cash flow hedging and net investment hedging relationshipsrelationship recorded in other comprehensive income, and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Gain (loss) recognized in other comprehensive income | $ | (2) | | | $ | 0 | | | $ | 10 | | | $ | 15 | |
|
| | | | | | | | | | | | | | | |
| 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 | ) |
For the thirteen and thirty-nine weeks endedOctober 28, 2017 and October 29, 2016, there were noThe pre-tax amounts of gains or losses reclassified from accumulated other comprehensive income intorecognized in net income for(loss) related to 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Location and Amount of (Gain) Loss Recognized in Net Income |
| 13 Weeks Ended
October 31, 2020 | | 13 Weeks Ended
November 2, 2019 |
| ($ in millions) | Cost of goods sold and occupancy expense | | Operating expenses | | Cost of goods sold and occupancy expense | | Operating expenses |
| Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded | $ | 2,374 | | | $ | 1,445 | | | $ | 2,439 | | | $ | 1,338 | |
| | | | | | | |
| (Gain) loss recognized in net income | | | | | | | |
| Derivatives designated as cash flow hedges | (2) | | | 0 | | | (9) | | | 0 | |
| | | | | | | |
| Derivatives not designated as hedging instruments | 0 | | | 4 | | | 0 | | | 8 | |
| Total (gain) loss recognized in net income | $ | (2) | | | $ | 4 | | | $ | (9) | | | $ | 8 | |
| | | | | | | | | | | | Location and Amount of Gain Recognized in Net Income (Loss) |
| | 13 Weeks Ended | | 39 Weeks Ended | | 39 Weeks Ended
October 31, 2020 | | 39 Weeks Ended
November 2, 2019 |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 | ($ in millions) | Cost of goods sold and occupancy expense | | Operating expenses | | Cost of goods sold and occupancy expense | | Operating expenses |
| Gain (loss) recognized in operating expenses | $ | 10 |
| | $ | 12 |
| | $ | (13 | ) | | $ | (5 | ) | |
| Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded | | Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded | $ | 6,339 | | | $ | 4,033 | | | $ | 7,250 | | | $ | 3,640 | |
| | Gain recognized in net income (loss) | | Gain recognized in net income (loss) | |
| Derivatives designated as cash flow hedges | | Derivatives designated as cash flow hedges | (13) | | | 0 | | | (21) | | | 0 | |
| Derivative not designated as hedging instruments | | Derivative not designated as hedging instruments | 0 | | | (7) | | | 0 | | | (4) | |
| Total gain recognized in net income (loss) | | Total gain recognized in net income (loss) | $ | (13) | | | $ | (7) | | | $ | (21) | | | $ | (4) | |
Note 6. Share Repurchases
Share repurchase activity is as follows:
| | | | 13 Weeks Ended | | 39 Weeks Ended | | 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 | ($ and shares in millions except average per share cost) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Number of shares repurchased (1) | 3.8 |
| | — |
| | 12.5 |
| | — |
| Number of shares repurchased (1) | 0 | | | 2.9 | | | 0 | | | 7.5 | |
| Total cost | $ | 100 |
| | $ | — |
| | $ | 300 |
| | $ | — |
| Total cost | $ | 0 | | | $ | 50 | | | $ | 0 | | | $ | 150 | |
| Average per share cost including commissions | $ | 26.64 |
| | $ | — |
| | $ | 24.21 |
| | $ | — |
| Average per share cost including commissions | $ | 0 | | | $ | 17.17 | | | $ | 0 | | | $ | 19.85 | |
__________
| |
(1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
(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 which $700(the "February 2019 repurchase program"). The February 2019 repurchase program had $800 million was remaining as of October 28, 2017.31, 2020. On March 12, 2020, the Company announced its decision to suspend share repurchases through fiscal 2020.
All of the share repurchases were paid for as of October 28, 2017.February 1, 2020 and November 2, 2019. All common stock repurchased is immediately retired.
Note 7. Accumulated Other Comprehensive Income Taxes
ChangesOn March 27, 2020, the CARES Act was signed into law in accumulated other comprehensivethe United States. The CARES Act includes certain provisions that affect our income taxes, including temporary five-year net operating loss carryback provisions, modifications to the interest deduction limitations, and the technical correction for depreciation of qualified leasehold improvements.
The effective income tax rate was 21.5 percent for the thirteen weeks ended October 31, 2020, compared with 33.0 percent for the thirteen weeks ended November 2, 2019. The decrease in the effective tax rate is primarily due to changes in the mix of pretax income between domestic and international operations, partially offset by component,the impacts of the net operating loss carryback provisions of the CARES Act.
The effective income tax are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | Foreign Currency Translation | | Cash Flow Hedges | | Total |
| Balance at January 28, 2017 | $ | 29 |
| | $ | 25 |
| | $ | 54 |
|
| 13 Weeks Ended April 29, 2017: | | | | | |
| Foreign currency translation | (4 | ) | | — |
| | (4 | ) |
| Change in fair value of derivative financial instruments | — |
| | — |
| | — |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | (4 | ) | | (4 | ) |
| Other comprehensive loss, net of tax | (4 | ) | | (4 | ) | | (8 | ) |
| Balance at April 29, 2017 | 25 |
| | 21 |
| | 46 |
|
| 13 Weeks Ended July 29, 2017: | | | | | |
| Foreign currency translation | 21 |
| | — |
| | 21 |
|
| Change in fair value of derivative financial instruments | — |
| | (43 | ) | | (43 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (1 | ) | | (1 | ) |
| Other comprehensive income (loss), net of tax | 21 |
| | (44 | ) | | (23 | ) |
| Balance at July 29, 2017 | 46 |
| | (23 | ) | | 23 |
|
| 13 Weeks Ended October 28, 2017: | | | | | |
| Foreign currency translation | (5 | ) | | — |
| | (5 | ) |
| Change in fair value of derivative financial instruments | — |
| | 23 |
| | 23 |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | (1 | ) | | (1 | ) |
| Other comprehensive income (loss), net of tax | (5 | ) | | 22 |
| | 17 |
|
| Balance at October 28, 2017 | $ | 41 |
| | $ | (1 | ) | | $ | 40 |
|
| | | | | | |
| ($ in millions) | Foreign Currency Translation | | Cash Flow Hedges | | Total |
| Balance at January 30, 2016 | $ | 22 |
| | $ | 63 |
| | $ | 85 |
|
| 13 Weeks Ended April 30, 2016: | | | | | |
| Foreign currency translation | 31 |
| | — |
| | 31 |
|
| Change in fair value of derivative financial instruments | — |
| | (89 | ) | | (89 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | (7 | ) | | (7 | ) |
| Other comprehensive income (loss), net of tax | 31 |
| | (96 | ) | | (65 | ) |
| Balance at April 30, 2016 | 53 |
| | (33 | ) | | 20 |
|
| 13 Weeks Ended July 30, 2016: | | | | | |
| Foreign currency translation | (22 | ) | | — |
| | (22 | ) |
| Change in fair value of derivative financial instruments | — |
| | (7 | ) | | (7 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 8 |
| | 8 |
|
| Other comprehensive income (loss), net of tax | (22 | ) | | 1 |
| | (21 | ) |
| Balance at July 30, 2016 | 31 |
| | (32 | ) | | (1 | ) |
| 13 Weeks Ended October 29, 2016: | | | | | |
| Foreign currency translation | (10 | ) | | — |
| | (10 | ) |
| Change in fair value of derivative financial instruments | — |
| | 39 |
| | 39 |
|
| Amounts reclassified from accumulated other comprehensive income | — |
| | — |
| | — |
|
| Other comprehensive income (loss), net of tax | (10 | ) | | 39 |
| | 29 |
|
| Balance at October 29, 2016 | $ | 21 |
| | $ | 7 |
| | $ | 28 |
|
See Note 5rate was 23.7 percent for the thirty-nine weeks ended October 31, 2020, compared with 31.6 percent for the thirty-nine weeks ended November 2, 2019. The decrease in the effective tax rate is primarily due to changes in the mix of Notes to Condensed Consolidated Financial Statementspretax income between domestic and international operations and the fiscal 2019 impact of an adjustment for additional disclosures about reclassifications outguidance issued regarding the Tax Cuts and Jobs Act of accumulated other comprehensive income and their corresponding effects on2017 ("TCJA"), partially offset by the respective line items inimpacts of the Condensed Consolidated Statementsnet operating loss carryback provisions of Income.
Note 8. Share-Based Compensation
Share-based compensation expense recognized in the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows:
|
| | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | 39 Weeks Ended |
| ($ 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. Income TaxesCARES Act.
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 2008.2010.
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, 2017,31, 2020, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12twelve 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 IncomeOperations would not be material.
Note 10.8. Earnings (Loss) Per Share
Weighted-average number of shares used for earnings (loss) per share is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 13 Weeks Ended | | 39 Weeks Ended |
| (shares in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Weighted-average number of shares - basic | 374 | | | 375 | | | 373 | | | 377 | |
| Common stock equivalents (1) | 6 | | | 1 | | | 0 | | | 2 | |
| Weighted-average number of shares - diluted | 380 | | | 376 | | | 373 | | | 379 | |
|
| | | | | | | | | | | |
| | 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 |
|
(1)For the thirty-nine weeks ended October 31, 2020, the dilutive impact of outstanding options and awards was excluded from dilutive shares as a result of the Company’s net loss for the respective period.
The above computations of weighted-average number of shares – diluted exclude 9 million and 8 millionanti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 12 million and 17 million for the thirteen weeks ended October 28, 201731, 2020 and October 29, 2016,November 2, 2019, respectively, and 916 million and 714 million shares related to stock options and other stock awards for the thirty-nine weeks ended October 28, 201731, 2020 and October 29, 2016,November 2, 2019, respectively, as their inclusion would have an anti-dilutive effect on earnings (loss) per share.
Note 11.9. 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”)Actions arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of October 28, 2017,31, 2020, Actions filed against us included commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages and some are covered in part by insurance. As of October 28, 2017, January 28, 2017,31, 2020, February 1, 2020, and October 29, 2016,November 2, 2019, we recorded a liability for an estimated loss if the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable. The liability recorded as of October 28, 2017, January 28, 2017, and October 29, 2016was not material for any individual Action or in total.total for all periods presented. Subsequent to October 28, 201731, 2020, 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 $60 million of insurance proceeds to the loss on property and equipment based on the partial settlement of claims reported as insurance proceeds related to loss on property and equipment, a component of cash flows from investing activities, in the Condensed Consolidated Statement of Cash Flows.
Note 12.10. Segment Information
The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way brands. We identify our operating segments according to how our business activities are managed and evaluated. As of October 28, 2017,31, 2020, our operating segments included Gap Global,included: Old Navy Global, Gap Global, Banana Republic Global, Athleta, and Intermix. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customers through its store and online channels, allowing us to execute on our omni-channel strategy where customers can shop seamlessly across all of our brands in retail stores and online through desktop or mobile devices. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one1 reportable segment as of October 28, 2017.31, 2020. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.
Net sales by brand and region are as follows: | | | ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales | ($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | |
| 13 Weeks Ended October 28, 2017 | | |
| 13 Weeks Ended October 31, 2020 | | 13 Weeks Ended October 31, 2020 | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | |
| U.S. (1) | | $ | 750 |
| | $ | 1,587 |
| | $ | 467 |
| | $ | 200 |
| | $ | 3,004 |
| | 79 | % | U.S. (1) | | |
| Canada | | 109 |
| | 143 |
| | 57 |
| | 1 |
| | 310 |
| | 8 |
| Canada | | 193 | | | 86 | | | 39 | | | 3 | | | 321 | | |
| Europe | | 154 |
| | — |
| | 4 |
| | — |
| | 158 |
| | 4 |
| Europe | | 0 | | | 115 | | | 3 | | | 0 | | | 118 | | |
| Asia | | 278 |
| | 13 |
| | 21 |
| | — |
| | 312 |
| | 8 |
| Asia | | 1 | | | 169 | | | 18 | | | 0 | | | 188 | | |
| Other regions | | 31 |
| | 15 |
| | 8 |
| | — |
| | 54 |
| | 1 |
| Other regions | | 14 | | | 12 | | | 3 | | | 0 | | | 29 | | |
| Total | | $ | 1,322 |
| | $ | 1,758 |
| | $ | 557 |
| | $ | 201 |
| | $ | 3,838 |
| | 100 | % | Total | | $ | 2,242 | | | $ | 993 | | | $ | 386 | | | $ | 373 | | | $ | 3,994 | | |
| | | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales | |
| 13 Weeks Ended October 29, 2016 | | |
| U.S. (1) | | $ | 756 |
| | $ | 1,507 |
| | $ | 479 |
| | $ | 172 |
| | $ | 2,914 |
| | 77 | % | |
| Canada | | 102 |
| | 131 |
| | 55 |
| | 1 |
| | 289 |
| | 8 |
| |
| Europe | | 150 |
| | — |
| | 14 |
| | — |
| | 164 |
| | 4 |
| |
| Asia | | 296 |
| | 55 |
| | 25 |
| | — |
| | 376 |
| | 10 |
| |
| Other regions | | 36 |
| | 12 |
| | 7 |
| | — |
| | 55 |
| | 1 |
| |
| Total | | $ | 1,340 |
| | $ | 1,705 |
| | $ | 580 |
| | $ | 173 |
| | $ | 3,798 |
| | 100 | % | |
| | | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (2) | | Total | | Percentage of Net Sales | |
| 39 Weeks Ended October 28, 2017 | | |
| U.S. (1) | | $ | 2,137 |
| | $ | 4,609 |
| | $ | 1,396 |
| | $ | 633 |
| | $ | 8,775 |
| | 79 | % | |
| Canada | | 277 |
| | 387 |
| | 156 |
| | 2 |
| | 822 |
| | 8 |
| |
| Europe | | 435 |
| | — |
| | 11 |
| | — |
| | 446 |
| | 4 |
| |
| Asia | | 780 |
| | 34 |
| | 69 |
| | — |
| | 883 |
| | 8 |
| |
| Other regions | | 83 |
| | 47 |
| | 21 |
| | — |
| | 151 |
| | 1 |
| |
| Total | | $ | 3,712 |
| | $ | 5,077 |
| | $ | 1,653 |
| | $ | 635 |
| | $ | 11,077 |
| | 100 | % | |
| | | | | | | | | | | | | | |
| ($ in millions) | | Gap Global | | Old Navy Global | | Banana Republic Global | | Other (3) | | Total | | Percentage of Net Sales | |
| 39 Weeks Ended October 29, 2016 | | |
| U.S. (1) | | $ | 2,203 |
| | $ | 4,335 |
| | $ | 1,456 |
| | $ | 550 |
| | $ | 8,544 |
| | 77 | % | |
| Canada | | 264 |
| | 358 |
| | 159 |
| | 2 |
| | 783 |
| | 7 |
| |
| Europe | | 453 |
| | — |
| | 45 |
| | — |
| | 498 |
| | 5 |
| |
| Asia | | 856 |
| | 171 |
| | 80 |
| | — |
| | 1,107 |
| | 10 |
| |
| Other regions | | 100 |
| | 32 |
| | 23 |
| | — |
| | 155 |
| | 1 |
| |
| Total | | $ | 3,876 |
| | $ | 4,896 |
| | $ | 1,763 |
| | $ | 552 |
| | $ | 11,087 |
| | 100 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (4) | | Total | | |
| 13 Weeks Ended November 2, 2019 | | | | | | |
| U.S. (1) | | $ | 1,769 | | | $ | 689 | | | $ | 532 | | | $ | 274 | | | $ | 3,264 | | | |
| Canada | | 151 | | | 97 | | | 55 | | | 1 | | | 304 | | | |
| Europe | | 0 | | | 128 | | | 3 | | | 0 | | | 131 | | | |
| Asia | | 9 | | | 220 | | | 21 | | | 0 | | | 250 | | | |
| Other regions | | 18 | | | 24 | | | 7 | | | 0 | | | 49 | | | |
| Total | | $ | 1,947 | | | $ | 1,158 | | | $ | 618 | | | $ | 275 | | | $ | 3,998 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total | | |
| 39 Weeks Ended October 31, 2020 | | | | | | |
| U.S. (1) | | $ | 4,709 | | | $ | 1,395 | | | $ | 804 | | | $ | 954 | | | $ | 7,862 | | | |
| Canada | | 415 | | | 183 | | | 90 | | | 3 | | | 691 | | | |
| Europe | | 0 | | | 239 | | | 8 | | | 0 | | | 247 | | | |
| Asia | | 4 | | | 435 | | | 44 | | | 0 | | | 483 | | | |
| Other regions | | 33 | | | 48 | | | 12 | | | 0 | | | 93 | | | |
| Total | | $ | 5,161 | | | $ | 2,300 | | | $ | 958 | | | $ | 957 | | | $ | 9,376 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (4) | | Total | | |
| 39 Weeks Ended November 2, 2019 | | | | | | |
| U.S. (1) | | $ | 5,204 | | | $ | 1,942 | | | $ | 1,549 | | | $ | 891 | | | $ | 9,586 | | | |
| Canada | | 427 | | | 251 | | | 155 | | | 2 | | | 835 | | | |
| Europe | | 0 | | | 380 | | | 10 | | | 0 | | | 390 | | | |
| Asia | | 30 | | | 654 | | | 70 | | | 0 | | | 754 | | | |
| Other regions | | 57 | | | 69 | | | 18 | | | 0 | | | 144 | | | |
| Total | | $ | 5,718 | | | $ | 3,296 | | | $ | 1,802 | | | $ | 893 | | | $ | 11,709 | | | |
__________
| |
(1) | U.S. includes the United States, Puerto Rico, and Guam. |
| |
(2) | Includes Athleta, Intermix, and Weddington Way. |
| |
(3) | Includes Athleta and Intermix. |
(1)U.S. includes the United States, Puerto Rico, and Guam.
(2)Banana Republic Global fiscal year 2019 net sales include the Janie and Jack brand beginning March 4, 2019.
(3)Primarily consists of net sales for the Athleta, Intermix, and Hill City brands. Beginning in fiscal year 2020, Janie and Jack net sales are also included. Net sales for Athleta for the thirteen and thirty-nine weeks ended October 31, 2020 were $292 million and $764 million, respectively.
(4)Primarily consists of net sales for the Athleta, Intermix, and Hill City brands as well as a portion of income related to our credit card agreement. Net sales for Athleta for the thirteen and thirty-nine weeks ended November 2, 2019 were $216 million and $691 million, respectively.
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 11. Store Closing and Other Operating Cost
In fiscal 2019, the Company announced plans to restructure the specialty fleet and revitalize the Gap brand during fiscal 2019 and fiscal 2020. In fiscal 2020, the Company shifted its focus towards adapting to the COVID-19 challenges and a broader scope of strategic initiatives. As a result, restructuring costs were not material in fiscal 2020. See Overview of Management's Discussion and Analysis included in Part I, Item 2 of this Form 10-Q, for more detail on some of the strategic initiatives being undertaken by the Company.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OUR BUSINESS
We are a global retailercollection of purpose-led, lifestyle brands offering apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, Gap, Banana Republic, and Athleta brands. We also offer an assortment of products for men, women, and children through our 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. Our products are also available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy, and Athleta 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 curbside pick-up, buy online pick-up in store, order-in-store, reserve-in-store, find-in-store, and ship-from-store, as well as enhanced mobilemobile-enabled experiences, are tailored uniquely across our portfoliocollection 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
ResultsIn March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed our North America retail stores and a large number of our stores globally. In May 2020, we began to safely reopen our temporarily closed stores with industry-leading safety measures for customers and employees and most stores were open during the thirteen weeks ended October 31, 2020. Beginning in late October 2020, several European countries instituted new lockdown mandates to contain surging COVID-19 cases and as a result we have temporarily closed certain stores in Europe. We will continue to monitor regional mandates for additional temporary store closures as they arise. Although the pandemic has caused a significant reduction in store sales, our online sales have increased significantly by leveraging our omni fulfillment capabilities, including curbside pick-up and ship-from-store, to serve customer demand.
On October 20, 2020, we shared plans to strategically review our operating model in Europe, which includes 122 Company-operated stores. As part of the review, we are considering the possibility of leveraging the strength of our franchise business model and transferring elements of the business to interested partners. We are also reviewing the strategies of our warehouse and distribution model and our Company-owned e-commerce sites for Gap and Banana Republic in Europe. While no decisions have been made, such plans could result in additional costs to the Company including charges related to leases and inventory, and employee-related costs. We are targeting early fiscal 2021 to finalize our plans.
Additionally, on October 22, 2020, the Company shared its strategic focus to reduce the number of Gap and Banana Republic stores in North America by approximately 350 stores from the beginning of fiscal 2020 to the end of fiscal 2023. The majority of the select stores being considered have leases that expire in fiscal 2020 and fiscal 2021 which allows us to exit underperforming stores with a minimal net impact to our Consolidated Statement of Operations. As of October 31, 2020, we have closed, net of openings, 143 Gap and Banana Republic stores in North America in fiscal 2020.
As a result of COVID-19, we suspended rent payments beginning in April 2020 due to our temporarily closed stores and are continuing to work through negotiations with our landlords relating to those leases. As result of the negotiations with our landlords, the Company executed several cash buyout agreements during the third quarter of fiscal 2020 totaling approximately $57 million. The net impact of these buyouts was not material to our Condensed Consolidated Statement of Operations for the first three quartersthirteen weeks ended October 31, 2020. The Company expects substantial cash lease buyout amounts in the future relating to a small population of stores we intend to close across multiple brands but we expect these buyouts to have a minimal net impact to our Consolidated Statements of Operations.
In July 2020, the Company announced the launch of a B2B program focused on offering large organizations high-quality reusable, non-medical grade cloth face masks to supply to their employees. We have leveraged our deep supply chain relationships and agile operations to provide these masks to companies in both the private and public sector.
We implemented several actions during fiscal 2017 include2020 to enhance our liquidity position in response to COVID-19. In May 2020, the Company completed the issuance of the Notes for $2.25 billion. We also entered into the ABL Facility, with an initial aggregate principal amount of up to $1.8675 billion. Proceeds from the issuance of the Notes were used to redeem our 2021 Notes. We incurred a gain from insurance proceedsloss on extinguishment of $64debt of $58 million, primarily related to the fire that occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York on August 29, 2016 (“the Fishkill fire”),make-whole premium, which was recorded in operating expenses inon the Condensed Consolidated Statement of Income. DuringOperations. Additionally, during the thirdsecond quarter of fiscal 2017,2020, we also received $20repaid the $500 million in insurance proceeds relatedthat was outstanding under our previous unsecured revolving credit facility. Refer to business interruption, which were recorded as a reduction to cost of goods soldthe "Liquidity and occupancy expenses inCapital Resources" section for further discussion.
During the Condensed Consolidated Statement of Income. Fiscal 2016 results were impacted by the previously announced measures to better align talent and financial resources against our most important priorities to position the Company for improved business performance and long-term success. In connection with these measures, the Company incurred $29 million and $179 million in restructuring costs during the thirteen and thirty-nine weeks ended October 29, 2016, respectively, on31, 2020, the Company recorded impairment of store assets of $127 million and operating lease assets of $361 million, primarily due to lower cash flows from stores and the reduced estimated fair value of real estate, particularly in mall locations, as a pre-tax basis.
result of COVID-19. See Note 4 of Notes to the Condensed Consolidated Financial resultsStatements included in Part I, Item 1 of this Form 10-Q, for the third quarter of fiscal 2017 are as follows:
Net sales for the third quarter of fiscal 2017 increased 1 percent compared with the third quarter of fiscal 2016.
Comparable sales for the third quarter of fiscal 2017 increased 3 percent compared with a 3 percent decrease for the third quarter of fiscal 2016, which included an estimated negative impact from the Fishkill fire of approximately 2 percentage points.
Gross profit for the third quarter of fiscal 2017 and fiscal 2016 were $1.5 billion. Gross margin for the third quarter of fiscal 2017 was 39.7 percent compared with 39.3 percent for the third quarter of fiscal 2016.
Operating margin for the third quarter of fiscal 2017 was 9.8 percent compared with 10.2 percent for the third quarter of fiscal 2016.
Net income for the third quarter of fiscal 2017 was $229 million compared with $204 million for the third quarter 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.
further information regarding impairments.During the first three quartersquarter of fiscal 2017,2020, the Company recorded inventory related impairment costs of $235 million, primarily related to seasonal inventory that was stranded in stores when closures occurred or seasonal inventory in distribution centers that was planned for store sales. The costs also included impaired garment and fabric commitment costs for future seasonal product. Additionally, to strategically manage inventory through COVID-19, select summer product is being stored at an off-site facility and our distribution centers and expected to be sold during fiscal 2021.
As we distributed $572 millioncontinue to shareholders through share repurchasesface a period of uncertainty regarding the ongoing impact of COVID-19 on both our projected customer demand and dividends.supply chain, we remain focused on the following strategic priorities in the near-term:
Our business priorities for fiscal 2017 remain as follows:
•offering product that is consistently brand-appropriate and on-trend with high customer acceptance and appropriate value perception;
•growing and operating our global online business;
•realigning inventory with a focus on expanding our advantage in loyalty categories;customer demand;
investing in digital and customer capabilities to support growth;
creating a unique and differentiated customer experience that builds loyalty, with focus on both the physical and digital expressions of our brands;
•attracting and retaining greatstrong talent in our businesses and functions;
•increasing the focus on improving operational discipline and
efficiency by streamlining operations and processes throughout the organization and leveraging our scalescale;
•managing inventory to improvesupport a healthy merchandise margin;
•rationalizing the effectivenessGap and efficiency of our processes.Banana Republic brands, to create a healthier business while prioritizing asset-light growth through licensing and franchise partnerships in international markets; and
•continuing to integrate social and environmental sustainability into business practices to support long-term growth.
In fiscal 2017, we are focusedWe believe focusing on investing strategicallythese priorities in the business while also maintainingnear term will propel the Company to execute against the Power Plan 2023 strategy, including leveraging:
•The Power of its Brands, reflected by the Company’s four purpose-led, lifestyle brands, Old Navy, Gap, Banana Republic and Athleta;
•The Power of its Portfolio, which enables growth synergies across key customer categories; and
•The Power of its Platform, which leverages the company’s powerful platform to both enable growth, such as through competitive omni-channel capabilities, as well as cost synergies, fueled by its scaled operations.
We continue to monitor the rapidly evolving pandemic situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating expense discipline. Oneplan. As such, given the dynamic nature of the situation, the Company cannot reasonably estimate the impacts of COVID-19 on our primary objectives is to continue transforming our product to market process,results of operations, cash flows and liquidity in the future.
Financial results for the third quarter of fiscal 2020 are as follows:
•Net sales for the third quarter of fiscal 2020 were flat compared with the developmentthird quarter of a more efficient operating model, allowing us to more fully leverage our scale. To enable this, we have several product, supply chain,fiscal 2019.
•Online sales for the third quarter of fiscal 2020 increased 61 percent compared with the third quarter of fiscal 2019 and IT initiatives underway. Further, we expect to continue our investment in customer experience, both in stores and online, to drive higher customer engagement and loyalty, resulting in marketstore sales for the third quarter of fiscal 2020 decreased 20 percent compared with the third quarter of fiscal 2019.
•Gross profit for the third quarter of fiscal 2020 was $1.62 billion compared with $1.56 billion for the third quarter of fiscal 2019. Gross margin for the third quarter of fiscal 2020 was 40.6 percent compared with 39.0 percent for the third quarter of fiscal 2019.
•Operating income for the third quarter of fiscal 2020 was $175 million compared with $221 million for the third quarter of fiscal 2019.
•The effective income tax rate for the third quarter of fiscal 2020 was 21.5 percent, compared with 33.0 percent for the third quarter of fiscal 2019.
•Net income for the third quarter of fiscal 2020 was $95 million compared with $140 million for the third quarter of fiscal 2019.
•Diluted earnings per share gains. Finally, we will continue to invest in strengthening brand awareness, customer acquisition, and digital capabilities.was $0.25 for the third quarter of fiscal 2020 compared with $0.37 for the third quarter of fiscal 2019.
In fiscal 2017, we expect that gross margins for our foreign subsidiaries, net of the impact from our merchandise hedge program, will continue to be negatively impacted by the depreciation of certain foreign currencies as our merchandise purchases are primarily in U.S. dollars.
RESULTS OF OPERATIONS
Net Sales
See Note 122 and Note 10 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 inof this Form 10-Q, for net sales by brand and region.
disaggregation.
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 of Company-operated stores and sales through online channels in those countries where we have existing comparable store sales.channels. The calculation of The Gap Inc. Comp Sales includes the results of AthletaIntermix, Janie and IntermixJack, and Hill City, but excludes the results of our franchise business.
A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.
A store is considered non-comparable (“Non-comp”) when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.
A store is considered “Closed” if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.
Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.
For the thirteen weeks ended October 31, 2020, any stores temporarily closed for more than three days as a result of COVID-19 were excluded from the Comp Sales calculations. After temporarily closed stores reopened, subsequent sales were included in the Comp/Non-comp status they were in prior to temporary closure. Online sales continued to be included in the Comp Sales calculation for each period.
Store CountThe percentage change in Comp Sales by global brand and Square Footage Informationfor The Gap, Inc. is as follows:
| | | | | | | | | | | |
| 13 Weeks Ended | | | | |
| October 31,
2020 (1) | | | | | | |
| Old Navy Global | 17 | % | | | | | | |
| Gap Global | (5) | % | | | | | | |
| Banana Republic Global | (30) | % | | | | | | |
| Athleta | 37 | % | | | | | | |
| The Gap, Inc. | 5 | % | | | | | | |
__________
(1)Comp Sales for the thirteen weeks ended October 31, 2020 reflect an increase in online sales, see Net Sales discussion for further details.
| | | | | | | | | | | |
| 13 Weeks Ended | | | | |
| November 2,
2019 | | | | | | |
| Old Navy Global | (4) | % | | | | | | |
| Gap Global | (7) | % | | | | | | |
| Banana Republic Global | (3) | % | | | | | | |
| Athleta | 1 | % | | | | | | |
| The Gap, Inc. | (4) | % | | | | | | |
We have historically reported net sales per average square foot, arebut as follows:a result of the extensive temporary store closures due to COVID-19 and shift in focus to online, this metric is not meaningful for the first three quarters of fiscal 2020 and therefore we have omitted it.
|
| | | | | | | | | | | | | | |
| | 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 |
|
21
__________ | |
(1) | Excludes net sales associated with our online and franchise businesses. |
Store count, openings, closings, and square footage for our stores are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 1, 2020 | | 39 Weeks Ended October 31, 2020 | | October 31, 2020 |
| | Number of
Store Locations | | Number of
Stores Opened | | Number of
Stores Closed (1) | | Number of
Store Locations | | Square Footage
(in millions) |
| Old Navy North America | 1,207 | | | 30 | | | 12 | | | 1,225 | | | 19.7 | |
| Old Navy Asia | 17 | | | — | | | 17 | | | — | | | — | |
| Gap North America | 675 | | | 1 | | | 92 | | | 584 | | | 6.2 | |
| Gap Asia | 358 | | | 11 | | | 19 | | | 350 | | | 3.1 | |
| Gap Europe | 137 | | | 4 | | | 19 | | | 122 | | | 1.0 | |
| Banana Republic North America | 541 | | | 3 | | | 55 | | | 489 | | | 4.1 | |
| Banana Republic Asia | 48 | | | 5 | | | 5 | | | 48 | | | 0.2 | |
| | | | | | | | | |
| Athleta North America | 190 | | | 10 | | | 2 | | | 198 | | | 0.8 | |
| Intermix North America | 33 | | | — | | | 1 | | | 32 | | | 0.1 | |
| Janie and Jack North America | 139 | | | — | | | 9 | | | 130 | | | 0.3 | |
| Company-operated stores total | 3,345 | | | 64 | | | 231 | | | 3,178 | | | 35.5 | |
| Franchise | 574 | | | 50 | | | 17 | | | 607 | | | N/A |
| Total | 3,919 | | | 114 | | | 248 | | | 3,785 | | | 35.5 | |
| Decrease over prior year | | | | | | | (3.9) | % | | (5.3) | % |
| | | | | | | | | |
| | 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) |
| Old Navy North America | 1,139 | | | 60 | | | 2 | | | 1,197 | | | 19.4 | |
| Old Navy Asia | 15 | | | 4 | | | 1 | | | 18 | | | 0.2 | |
| Gap North America | 758 | | | 3 | | | 34 | | | 727 | | | 7.5 | |
| Gap Asia | 332 | | | 46 | | | 27 | | | 351 | | | 3.2 | |
| Gap Europe | 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 | % |
|
| | | | | | | | | | | | | | |
| | January 28, 2017 | | 39 Weeks Ended October 28, 2017 | | October 28, 2017 |
| | Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) |
| Gap North America | 844 |
| | 6 |
| | 15 |
| | 835 |
| | 8.6 |
|
| Gap Asia | 311 |
| | 24 |
| | 26 |
| | 309 |
| | 3.0 |
|
| Gap Europe | 164 |
| | 2 |
| | 9 |
| | 157 |
| | 1.3 |
|
| Old Navy North America | 1,043 |
| | 20 |
| | 6 |
| | 1,057 |
| | 17.6 |
|
| Old Navy Asia | 13 |
| | — |
| | — |
| | 13 |
| | 0.2 |
|
| Banana Republic North America | 601 |
| | 4 |
| | 9 |
| | 596 |
| | 5.0 |
|
| Banana Republic Asia | 48 |
| | 1 |
| | 1 |
| | 48 |
| | 0.2 |
|
| Banana Republic Europe | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Athleta North America | 132 |
| | 8 |
| | — |
| | 140 |
| | 0.6 |
|
| Intermix North America | 43 |
| | — |
| | 5 |
| | 38 |
| | 0.1 |
|
| Company-operated stores total | 3,200 |
| | 65 |
| | 72 |
| | 3,193 |
| | 36.6 |
|
| Franchise | 459 |
| | 31 |
| | 44 |
| | 446 |
| | N/A |
|
| Total | 3,659 |
| | 96 |
| | 116 |
| | 3,639 |
| | 36.6 |
|
| 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 | )% |
Gap(1)Represents stores that have been permanently closed, not stores temporarily closed as a result of COVID-19.
(2)On March 4, 2019, we acquired select assets of Gymboree Group, Inc. related to Janie and Banana Republic outletJack. 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.
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 $402020 were flat, decreasing $4 million, or 1 percent, compared with the third quarter of fiscal 2016 primarily driven by an2019, reflecting a 61% increase in netonline sales, offset by a 20% decline in store sales. Net sales increased at Old Navy partially offset by a decrease in net salesGlobal and Athleta and decreased at Gap Global and Banana Republic. The increase in Comp Sales of 3 percentRepublic Global for the third quarter of fiscal 2017 was offset by2020 compared with the impactthird quarter of lost sales primarily from international store closures in fiscal 2016.2019.
Our net sales for the first three quarters of fiscal 20172020 decreased $10 million$2.3 billion or 20 percent, compared with the first three quarters of fiscal 20162019 driven primarily by temporary store closures due to COVID-19. Although COVID-19 and resulting temporary closure of our stores negatively affected our financial results for the first three quarters of fiscal 2020, our online sales increased significantly compared with the first three quarters of fiscal 2019.
Cost of Goods Sold and Occupancy Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Cost of goods sold and occupancy expenses | $ | 2,374 | | | $ | 2,439 | | | $ | 6,339 | | | $ | 7,250 | |
| Gross profit | $ | 1,620 | | | $ | 1,559 | | | $ | 3,037 | | | $ | 4,459 | |
| Cost of goods sold and occupancy expenses as a percentage of net sales | 59.4 | % | | 61.0 | % | | 67.6 | % | | 61.9 | % |
| Gross margin | 40.6 | % | | 39.0 | % | | 32.4 | % | | 38.1 | % |
Cost of goods sold and occupancy expenses decreased 1.6 percentage points as a percentage of net sales in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019.
•Cost of goods sold increased 2.0 percentage points as a percentage of net sales in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019, primarily driven by higher online shipping costs as a result of growth in online sales partially offset by lower promotional activity at Old Navy and Athleta.
•Occupancy expenses decreased 3.6 percentage points as a percentage of net sales in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019 primarily driven by an increase in online sales with minimal impact on fixed occupancy expenses, as well as a decrease in fixed occupancy expenses as a result of permanent store closures and the impact of lease terminations and amendments.
Cost of goods sold and occupancy expenses increased 5.7 percentage points as a percentage of net sales in the first three quarters of fiscal 2020 compared with the first three quarters of fiscal 2019.
•Cost of goods sold increased 4.7 percentage points as a percentage of net sales in the first three quarters of fiscal 2020 compared with the first three quarters of fiscal 2019, primarily driven by higher online shipping costs as a result of growth in online sales as well as higher inventory impairment due to store closures and decreased retail traffic as a result of COVID-19.
•Occupancy expenses increased 1.0 percentage points as a percentage of net sales in the first three quarters of fiscal 2020 compared with the first three quarters of fiscal 2019 primarily driven by a decrease in net sales at Gap and Banana Republic,largely due to store closures as well as an unfavorable impacta result of foreign exchange of $49 million,COVID-19 without a corresponding decrease in occupancy expenses, partially offset by an increase in netonline sales at Old Navy. The unfavorablewith minimal impact of foreign exchange was primarily due to the weakening of the Japanese yen, British pound, and Chinese yuan against the U.S. dollar. The foreign exchange impact is the translation impact if net sales for the first three quarters of fiscal 2016 were translated at exchange rates applicable during the first three quarters of fiscal 2017. The increase in Comp Sales of 2 percent for the first three quarters of fiscal 2017 was offset by the impact of lost sales primarily from international store closures in fiscal 2016.on fixed occupancy expenses.
Cost of Goods Sold and OccupancyOperating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Operating expenses | $ | 1,445 | | | $ | 1,338 | | | $ | 4,033 | | | $ | 3,640 | |
| Operating expenses as a percentage of net sales | 36.2 | % | | 33.5 | % | | 43.0 | % | | 31.1 | % |
| Operating margin | 4.4 | % | | 5.5 | % | | (10.6) | % | | 7.0 | % |
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Cost of goods sold and occupancy expenses | $ | 2,313 |
| | $ | 2,305 |
| | $ | 6,770 |
| | $ | 6,948 |
|
| Gross profit | $ | 1,525 |
| | $ | 1,493 |
| | $ | 4,307 |
| | $ | 4,139 |
|
| Cost of goods sold and occupancy expenses as a percentage of net sales | 60.3 | % | | 60.7 | % | | 61.1 | % | | 62.7 | % |
| Gross margin | 39.7 | % | | 39.3 | % | | 38.9 | % | | 37.3 | % |
Cost of goods sold and occupancyOperating expenses decreased 0.4 percentincreased $107 million or 2.7 percentage points as a percentage of net sales in the third quarter of fiscal 20172020 compared with the third quarter of fiscal 2016.2019 primarily due to the following:
•increase in advertising expenses due to higher investment in marketing support across all purpose-led lifestyle brands;
Cost•additional store payroll and other store related costs to support health and safety measures in stores;
•increase in lease termination fees incurred in fiscal 2020; partially offset by
•separation-related costs incurred in the third quarter of goods sold was flatfiscal 2019.
Operating expenses increased $393 million or 11.9 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 improved average selling price per unit at Old Navy and Banana Republic, offset by higher average unit cost at all global brands.
Occupancy expenses decreased0.4 percent 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 20172020 compared with the first three quarters of fiscal 2016.2019 primarily due to the following:
Cost•impairment charges related to store assets and operating lease assets of goods sold decreased1.2 percent as a percentage of net sales$488 million incurred during the first three quarters of fiscal 20172020 primarily due to the impact of COVID-19;
•a gain that occurred during the first quarter of fiscal 2019 related to the sale of a building;
•increase in advertising expenses due to higher investment in marketing support across all purpose-led lifestyle brands;
•increase in lease termination fees incurred in fiscal 2020; and
•severance costs related to reductions in headquarters workforce; partially offset by
•a decrease in store payroll and benefits and other store operating expenses as a result of COVID-19 temporary store closures across all brands which was partially offset by additional costs incurred to support health and safety measures as we reopened stores; and
•separation-related and specialty fleet restructuring costs incurred in the first three quarters of fiscal 2019.
Loss on Extinguishment of Debt
In May 2020, the Company completed the issuance of the Notes for $2.25 billion and used the proceeds to redeem our 2021 Notes. We incurred a loss on extinguishment of debt of $58 million, primarily related to the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Interest expense | $ | 55 | | | $ | 19 | | | $ | 132 | | | $ | 58 | |
Interest expense increased $36 million or 189 percent during the third quarter of fiscal 2020 compared with third quarter of fiscal 2019 and increased $74 million or 128 percent during the first three quarters of fiscal 2020 compared with the first three quarters of fiscal 2016,2019 primarily driven bydue to higher margins achievedtotal outstanding debt and higher interest rates as a result of improved average selling price per unit at all global brands, partially offset by higher average unit cost at all global brands.
Occupancy expenses decreased0.4 percent as a percentagethe May 2020 issuance of net sales during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses and the closure of international stores in fiscal 2016, partially offset by real estate expenses incurred for new stores at the Times Square, New York location for Gap and Old Navy.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ 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.Notes. 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 2017 compared with the first three quarters of fiscal 2016 was primarily due to the following:
$171 million of restructuring costs incurred during the first three quarters of fiscal 2016;
a gain from insurance proceeds of $64 million related to the Fishkill fire recorded in the second quarter of fiscal 2017; and
a decrease of $18 million of store asset impairment charges unrelated to restructuring activities; partially offset by
an increase in payroll-related expenses primarily driven by an increase in bonus expense; and
an increase in marketing and investments in digital and customer initiatives.
Interest Expense
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Interest expense | $ | 18 |
| | $ | 20 |
| | $ | 53 |
| | $ | 57 |
|
Interest expense for the third quarter and the first three quarters of fiscal 2017 and fiscal 2016 primarily includes interest on overall borrowings and obligations mainlytotal outstanding principal related to our Notes increased from $1.25 billion as of November 2, 2019, to $2.25 billion as of October 31, 2020. Additionally, the new Notes bear interest at 8.375 percent, 8.625 percent, and 8.875 percent compared with our previous 5.95 percent 2021 Notes.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Income taxes | $ | 26 | | | $ | 69 | | | $ | (280) | | | $ | 247 | |
| Effective tax rate | 21.5 | % | | 33.0 | % | | 23.7 | % | | 31.6 | % |
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Income taxes | $ | 135 |
| | $ | 168 |
| | $ | 398 |
| | $ | 383 |
|
| Effective tax rate | 37.1 | % | | 45.2 | % | | 38.2 | % | | 45.6 | % |
The decrease in the effective tax rate for the third quarter and first three quarters of fiscal 20172020 compared with the third quarter and first three quarters of fiscal 2016 was2019 is primarily due to changes in the impactmix of restructuring costs incurred for foreign subsidiaries duringpretax income between domestic and international operations, partially offset by the third quarterimpacts of fiscal 2016 and resulting valuation allowances on certain foreign deferred tax assets. the net operating loss carryback provisions of the CARES Act.
The decrease in the effective tax rate for the first three quarters of fiscal 20172020 compared with the respective period of fiscal 2019 is primarily due to changes in the mix of pretax income between domestic and international operations and the fiscal 2019 impact of an adjustment for additional guidance issued regarding the TCJA, partially offset by the impacts of the net operating loss carryback provisions of the CARES Act.
LIQUIDITY AND CAPITAL RESOURCES
We continue to manage through the impacts of COVID-19 in fiscal 2020 and the impact it has on our operations and liquidity. During the first three quarters of fiscal 2016 was partially offset by2020, we have taken several actions to improve our financial profile and increase our liquidity, including entering into new debt financing, decreasing capital expenditures, and suspending quarterly cash dividends and share repurchases for the impactremainder of the adoptionfiscal year.
In May 2020, we completed the issuance of ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting in fiscal 2017. See Note 2our Notes and received gross proceeds of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for additional disclosures on$2.25 billion. Concurrently with the adoptionissuance of the accounting standard.Notes, the Company entered into the ABL Facility with an initial aggregate principal amount of up to $1.8675 billion which is scheduled to expire in May 2023. Additionally, in May 2020, we repaid the $500 million that was previously outstanding under our previous unsecured revolving credit facility and did not borrow any funds under the ABL Facility. In June 2020, we redeemed our 2021 Notes. The Company currently believes its new capital structure provides sufficient liquidity to continue to navigate COVID-19.
As of October 31, 2020, we consider the following to be our primary measures of liquidity and capital resources:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Source of Liquidity | | Outstanding Indebtedness | | Total Available Liquidity |
| Cash and cash equivalents (1) | $ | 2,471 | | | $ | — | | | $ | 2,471 | |
| Short-term investments (1) | 178 | | | — | | | 178 | |
| | | | | |
| 2023 Notes | 500 | | | 500 | | | — | |
| 2025 Notes | 750 | | | 750 | | | — | |
| 2027 Notes | 1,000 | | | 1,000 | | | — | |
| Total | $ | 4,899 | | | $ | 2,250 | | | $ | 2,649 | |
LIQUIDITY AND CAPITAL RESOURCES__________
(1)As of October 31, 2020, the majority of our cash, cash equivalents, and short-term investments were held in the United States and are generally accessible without any limitations.
We are also able to supplement near-term liquidity, if necessary, with our ABL Facility or other available market instruments.
Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel-related expenses, purchases of property and equipment, and payment of taxes. In addition, we may have dividend payments, debt repayments, and share repurchases. As of October 28, 2017, cash and cash equivalents were $1.4 billion, the majority of which was held in the United States and is generally accessible without any limitations.
We believe that current cash balances and cash flows from our operations will be sufficient to support our business operations including growth initiatives and planned capital expenditures, for the next 12 months and beyond. We are also able to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility or other available market instruments.twelve months.
Cash Flows from Operating Activities
Net cash provided by operating activities decreased by $129 million during the first three quarters of fiscal 2017 decreased $200 million2020 compared with the first three quarters of fiscal 2016,2019, primarily due to the following:
Net incomeIncome (Loss)
•Net loss compared with net income in prior comparable period;
Non-cash items
•an increase of $187$478 million in net income.
Non-cash items
a decreasedue to non-cash impairment charges of $72 million related to store asset impairment chargesassets and operating lease assets during the first three quarters of fiscal 20172020 compared with the first three quarters of fiscal 2016 primarily2019; and
•an increase of $191 million due to restructuring activities ina gain that occurred during the first three quarters of fiscal 2016.2019 resulting from sale of a building;
Changes in operating assets and liabilities
a decrease•an increase of $239$991 million related to accounts payable primarily due to a change in payment terms and the timingsuspension of leaserent payments and other non-merchandise payables;
a decrease of $123 million related to merchandise inventory primarily due to the volume and timing of receipts; and
a decrease of $56 million related to accrued expenses and other current liabilities in part due to the timing of severance paymentsfor stores closed temporarily as a result of fiscal 2016 restructuring activities;the COVID-19; partially offset by
an increase•a decrease of $108$295 million related to income taxes payable, net of prepaidreceivables and other tax-related items, resulting from a net income tax receivable primarily due to an increase inthe taxable income duringloss carryback estimated for the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 20162020 as well as the timing of taxtax-related payments.
We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business typically follows a seasonal pattern, with sales peaking during the end-of-year holiday period. The seasonality of our operations, in addition to the impact of COVID-19, may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.
Cash Flows from Investing Activities
Net cash used for investing activities during the first three quarters of fiscal 2017 increased $222020 decreased $544 million compared with the first three quarters of fiscal 2016,2019, primarily due to the following:
•$80235 million more in property and equipmentfewer purchases including purchases related to the rebuilding of the Company’s Fishkill, New York distribution center campus; offset by
$60 million in insurance proceeds allocated to loss on property and equipment during the first three quarters of fiscal 20172020 compared with the first three quarters of 2019;
•an increase of $123 million due to the net activity related to the Fishkill fire compared with no insurance proceeds allocatedpurchase and sale of buildings during the first three quarters of fiscal 2016.2019; and
•$115 million higher net proceeds from available-for-sale securities during the first three quarters of fiscal 2020 compared with the first three quarters of fiscal 2019.
Cash Flows from Financing Activities
Net cash used forprovided by financing activities during the first three quarters of fiscal 20172020 increased $364$1,313 million compared with the first three quarters of fiscal 2016,2019, primarily due to the following:
•$3002,250 million proceeds received related to the issuance of cash used for repurchases of common stocklong-term debt during the first three quarters of fiscal 2017 compared with no2020; and
•an increase of $424 million due to the suspension of cash dividends and share repurchases of common stock during the first three quarters of fiscal 2016; and2020; partially offset by
•$671,307 million related topayment for the repaymentextinguishment of long-term debt during the Japan Term Loan in full in June 2017.first three quarters of fiscal 2020.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business.business and infrastructure. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results. Free cash flow for the first three quarters of fiscal 2017 is further adjusted for insurance proceeds allocated to loss on property and equipment, as our cash used for purchases of property and equipment for the first three quarters of fiscal 2017 includes certain capital expenditures related to the rebuilding of the Company-owned distribution center which was impacted by the Fishkill fire.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
| | | | | | | | | | | |
| | 39 Weeks Ended |
| ($ in millions) | October 31,
2020 | | November 2,
2019 |
| Net cash provided by operating activities | $ | 399 | | | $ | 528 | |
| Less: Purchases of property and equipment (1) | (288) | | | (523) | |
| | | |
| Free cash flow | $ | 111 | | | $ | 5 | |
|
| | | | | | | |
| | 39 Weeks Ended |
| ($ in millions) | October 28,
2017 | | October 29,
2016 |
| Net cash provided by operating activities | $ | 600 |
| | $ | 800 |
|
| Less: Purchases of property and equipment | (463 | ) | | (383 | ) |
| Add: Insurance proceeds related to loss on property and equipment | 60 |
| | — |
|
| Free cash flow | $ | 197 |
| | $ | 417 |
|
(1)Fiscal 2019 excludes the purchase of a building.
Debt and Credit Facilities
CertainFor financial information about the Company’s debt and credit facilities is set forth under the headingas of October 31, 2020 see “Debt and Credit Facilities” in Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Dividend Policy
In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.
We paid aOn March 26, 2020, the Company announced that the previously declared first quarter dividend will now be payable on or after April 28, 2021 to shareholders of $0.23 per share during eachrecord at the close of business on April 7, 2021, subject to the right of the first three quartersCompany to further defer the record and payment dates. Further deferral could depend upon, among other factors, the progression of COVID-19, business performance, and the macroeconomic environment. Additionally, the Company suspended its regular quarterly cash dividend through fiscal 20172020. The Company determined that taking these actions was in the best interest of the Company in order to preserve liquidity in the context of the ongoing and fiscal 2016. Including the dividend paid during the first three quartersuncertain duration and impact of fiscal 2017 of $0.69 per share, we intend to pay an annual dividend of $0.92 per share for fiscal 2017, consistent with the annual dividend for fiscal 2016.
COVID-19 on its operations.
Share Repurchases
In March 2020, the Company announced its decision to suspend share repurchases through fiscal 2020 due to the economic uncertainty stemming from a number of factors, including COVID-19.
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
ThereOther than the debt financing discussed in Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, there have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of January 28, 2017,February 1, 2020, other than those which occur in the normal course of business. See Note 119 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.February 1, 2020. See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our market risk profile as of January 28, 2017February 1, 2020, is disclosed in our Annual Report on Form 10-K and has not significantly changed.changed other than as noted below. See Notes 3, 4, and 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q for disclosures on our debt, investments, and derivative financial instruments.
In May 2020, we completed the issuance of our Notes and received gross proceeds of $2.25 billion. The Notes have a fixed interest rate and are exposed to interest rate risk that is limited to changes in fair value. Changes in interest rates do not impact our cash flows. The scheduled maturity of the Notes is as follows:
| | | | | | | | | | | | | | | | | |
| Scheduled Maturity ($ in millions) | Principal | | Interest Rate | | Interest Payments |
| Senior Secured Notes (1) | | | | | |
| May 15, 2023 | $ | 500 | | | 8.375 | % | | Semi-Annual |
| May 15, 2025 | 750 | | | 8.625 | % | | Semi-Annual |
| May 15, 2027 | 1,000 | | | 8.875 | % | | Semi-Annual |
| Total issuance | $ | 2,250 | | | | | |
__________
(1)Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium.
In conjunction with our financings, we obtained new long-term senior unsecured credit ratings from Moody's. On March 26, 2020, Moody's downgraded our senior unsecured rating from Baa2 to Ba1 and changed their outlook from stable to negative. On April 23, 2020, Moody's downgraded our corporate credit ratings from Ba1 to Ba2 with negative outlook, and Standard & Poor's downgraded our credit ratings from BB to BB- with negative outlook. Any future reduction in the Moody's and Standard & Poor's ratings would potentially result in an increase to our interest expense on future borrowings.
| |
Item 4. | Controls and Procedures. |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s third quarter of fiscal 20172020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to COVID-19. We are continually monitoring and assessing the COVID-19 impact on our internal controls to minimize the impact on their design and operating effectiveness.
PART II – OTHER INFORMATION
| |
Item 1. | Legal Proceedings. |
Item 1. Legal Proceedings.
As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact incomeoperations in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material effect on our financial results.
Item 1A. Risk Factors.
There have been no material changes in our risk factors from those disclosed in Part I,II, Item 1A of our AnnualQuarterly Report on Form 10-K10-Q for the fiscal yearquarterly period ended January 28, 2017.May 2, 2020.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks endedOctober 28, 201731, 2020 by The Gap, Inc.the Company or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3):
|
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid Per Share Including Commissions | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or approximate dollar amount) of Shares that May Yet be Purchased Under the Plans or Programs (2) |
| Month #1 (July 30 - August 26) | 539,800 |
| | $ | 23.15 |
| | 539,800 |
| | $ | 788 | million |
| Month #2 (August 27 - September 30) | 2,249,992 |
| | $ | 26.66 |
| | 2,249,992 |
| | $ | 728 | million |
| Month #3 (October 1 - October 28) | 963,538 |
| | $ | 28.57 |
| | 963,538 |
| | $ | 700 | million |
| Total | 3,753,330 |
| | $ | 26.64 |
| | 3,753,330 |
| | |
__________
| | | | | | | | | | | | | | | | | | | | | | | |
(1) | Excludes shares withheld to settle employee statutory tax withholding related toTotal
Number of
Shares
Purchased (1) | | Average
Price Paid
Per Share
Including
Commissions | | Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs | | Maximum
Number (or
approximate
dollar amount) of
Shares that May
Yet be Purchased
Under the vesting of stock units.Plans
or Programs |
| Month #1 (August 2 - August 29) | — | | | $ | — | | | — | | | $ | 800 | million |
| Month #2 (August 30 - October 3) | — | | | $ | — | | | — | | | $ | 800 | million |
| Month #3 (October 4 - October 31) | — | | | $ | — | | | — | | | $ | 800 | million |
| Total | — | | | $ | — | | | — | | | |
(2) | On February 25, 2016, we announced that the Board of Directors approved a $1 billion share repurchase authorization, which has no expiration date. |
__________
(1) Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.
Item 5.Other Information.
We entered into agreements to extend the existing severance provisions contained in the letter agreements with certain executive officers: on November 20, 2020 with Mr. Curran, Ms. Green, Ms. Gruber, Ms. O’Connell, and Ms. Peters and on November 23, 2020 with Mr. Breitbard and Ms. Syngal. In summary, as extended, the severance provisions provide that upon involuntary termination for reasons other than cause prior to June 30, 2024, the Company will provide, subject to a release of claims, the executive’s then-current salary for up to 18 months, payment of a portion of COBRA healthcare continuation, reimbursement for costs to maintain financial counseling the Company provides to senior executives, a prorated bonus in the year of termination if the executive worked at least three months of the fiscal year if earned based on actual fiscal results achieved in the year of termination and assuming a 100% standard for any nonfinancial component, accelerated vesting (but not settlement) of restricted stock units and performance shares or units that remain subject to only time vesting conditions scheduled to vest prior to April 1 following the end of the fiscal year of termination. Copies of the agreements extending such severance provisions are attached hereto as Exhibits 10.4 through 10.10.
Item 6. Exhibits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed/
Furnished
Herewith |
| 3.1 | | Amended and Restated Certificate of Incorporation (P) | | 10-K | | 1-7562 | | 3.1 | | April 26, 1993 | | |
| | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | 10-K | | 1-7562 | | 3.2 | | April 4, 2000 | | |
| | Amended and Restated Bylaws (effective March 23, 2020) | | 8-K | | 1-7562 | | 3.1 | | March 5, 2020 | | |
| | Letter Agreement dated March 6, 2020 by and between Sheila Peters and the Registrant | | | | | | | | | | X |
| | Letter Agreement dated March 9, 2020 by and between Shawn Curran and the Registrant | | | | | | | | | | X |
| | Letter Agreement dated October 5, 2020 by and between Nancy Green and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 23, 2020, to the Letter Agreement dated March 9, 2020 by and between Mark Breitbard and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 20, 2020, to the Letter Agreement dated March 9, 2020 by and between Shawn Curran and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 20, 2020, to the Letter Agreement dated October 5, 2020 by and between Nancy Green and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 20, 2020, to the Letter Agreement dated March 10, 2020 by and between Julie Gruber and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 20, 2020, to the Letter Agreement dated March 10, 2020 by and between Katrina O’Connell and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 20, 2020, to the Letter Agreement dated March 6, 2020 by and between Sheila Peters and the Registrant | | | | | | | | | | X |
| | Amendment, dated November 23, 2020, to the Letter Agreement dated March 4, 2020 by and between Sonia Syngal and the Registrant | | | | | | | | | | X |
| | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002) | | | | | | | | | | X |
| | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002) | | | | | | | | | | X |
| | Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| 101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements | | | | | | | | | | X |
_____________________________
(P) This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.
† Indicates management contract or compensatory plan or arrangement.
|
| | |
10.1 | | Agreement with Shawn Curran dated September 29, 2017 and confirmed on October 5, 2017. (1) |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1) |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1) |
32.1 | | Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2) |
32.2 | | Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2) |
101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 28, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (1) |
__________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | THE GAP, INC. |
| | | |
| Date: | November 25, 2020 | THE GAP, INC.By | /s/ Sonia Syngal |
| | | Sonia Syngal |
Date: | November 22, 2017 | By | /s/ Arthur Peck |
| | | Arthur Peck |
| | | Chief Executive Officer |
| | | |
| Date: | November 22, 201725, 2020 | By | /s/ Teri List-StollKatrina O'Connell |
| | | Teri List-StollKatrina O'Connell |
| | | Executive Vice President and Chief Financial Officer |
Exhibit Index
|
| | |
| | |
| | Agreement with Shawn Curran dated September 29, 2017 and confirmed on October 5, 2017. (1) |
| | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1) |
| | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002). (1) |
| | Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2) |
| | Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2) |
101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 28, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. (1)
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