UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~October 28, 2017~~July 31, 2021



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

For the transition period from to

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)



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

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

Two Folsom Street

San Francisco, California 94105

(Address of principal executive offices and zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

~~Yes~~ ☐ No ☑

The number of shares of the registrant’s common stock outstanding as of ~~November 15, 2017~~August 20, 2021 was ~~388,857,073.~~

376,105,065.

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 impact of recent accounting pronouncements;

•the ~~adoption~~timing of ~~new accounting standards;~~

revenue recognition of revenue deferrals;

•our new credit card program with Barclays and Mastercard, as well as our program with Synchrony Financial;

•compliance with applicable covenants under the Notes and the ABL Facility (each as defined below);

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

~~the impact of the potential settlement of outstanding tax matters;~~

•the impact of losses due to indemnification obligations;

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

claims, including the impact of ~~continuing depreciation~~such actions on our financial results;

•our Power Plan 2023 strategy and our ability to execute against it;

•our omni-channel capabilities;

•our Gap Home venture with Walmart.com and other existing and potential future partnerships;

•the expected timing, cost, and scope of ~~certain foreign currencies on gross margins~~the strategic review of our operating model in Europe;

•the impact of the divestitures of our Janie and Jack and Intermix businesses;

•the impact of our expected lease buyout amounts;

•our ability to reach agreements with our landlords regarding suspended rent payments for our ~~foreign subsidiaries;~~temporarily closed stores;

~~current cash balances~~•the impact of COVID-related store closures and ~~cash flows being sufficient~~supply chain challenges;

•our plans to rationalize the Gap and Banana Republic brands in North America, including the targeted closures of North American Gap and Banana Republic stores together with the number and timing thereof and costs associated therewith;

•creating product that offers value to our customers through a combination of fit, quality, brand and price;

•investing in our four purpose-led lifestyle brands to drive relevance and gain market share;

•growing our online business;

•attracting and retaining strong talent in our businesses and functions;

•reducing our fixed cost structure to fuel demand generation investments;

•leveraging our scale to navigate constraints in supply chain;

•managing inventory to support a healthy merchandise margin;

•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;

•continuing to integrate social and environmental sustainability into business practices;

•our ~~business operations, including growth initiatives~~investments in demand generation and ~~planned capital expenditures;~~the benefits associated therewith;

•our ability to supplement near-term liquidity, if necessary, with ~~our $500 million revolving credit facility~~the ABL Facility or other available market instruments;

•the ability of our cash flows from our operations, current cash balances, the Notes and the ABL Facility to support our business operations;

•the impact of seasonality and COVID-19 recovery on our operations;

•the ~~seasonality~~importance of our ~~operations;~~sustained ability to generate free cash flow, which is a non-GAAP financial measure and is defined and discussed in more detail in Item 1 of Part 1 of this Form 10-Q below;

•our dividend ~~payments in fiscal 2017;~~policy, including the potential timing and amounts of future dividends; 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 failure to maintain, enhance and protect our brand image could have an adverse effect on our results of operations;

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

•engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;

•the risk that our investments in customer, digital, and omni-channel shopping initiatives may not deliver the results we anticipate;

•the risk that the failure to manage key executive succession and retention and to continue to attract ~~and retain key~~qualified 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 digital and customer 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 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 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 risks~~a failure of, or updates or changes to, our ~~business, including~~information technology 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 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 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 changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;

•the risk that we will not be successful in defending various proceedings, lawsuits, disputes, and claims;

•the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations;

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

•the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives;

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

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

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

~~the risk that~~ adoption of new accounting pronouncements will impact future results; and

•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.~~program.

Additional information regarding factors that could cause results to differ can be found in our Annual Report on Form 10-K for the fiscal year ended January ~~28, 2017~~30, 2021 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, and we~~August 27, 2021. 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.~~30, 2021.

THE GAP, INC.

TABLE OF CONTENTS


					Page
			PART I - FINANCIAL INFORMATION

				~~Page~~
Item 1.	~~PART I - FINANCIAL INFORMATION~~

~~Item 1.~~	Financial Statements	1

			Condensed Consolidated Balance Sheets as of ~~October 28, 2017,~~July 31 , 2021, January ~~28, 2017,~~30, 2021, and ~~October 29, 2016~~August 1 , 2020		1

			Condensed Consolidated Statements of ~~Income~~Operations for the Thirteen Weeks and ~~Thirty-Nine~~Twenty-six Weeks Ended ~~October 28, 2017~~July 31 , 2021 and ~~October 29, 2016~~August 1 , 2020		2

			Condensed Consolidated Statements of Comprehensive Income (Loss) for the Thirteen Weeks and ~~Thirty-Nine~~Tw ent y-six Weeks Ended ~~October 28, 2017~~July 31 , 2021 and ~~October 29, 2016~~August 1 , 2020		3

			Condensed Consolidated Statements of Stockholders' Equity for the Thirteen Weeks a nd Twen ty-six Weeks Ended July 31 , 2021 and August 1 , 2020		4

			Condensed Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~ Twenty-si x Weeks Ended ~~October 28, 2017~~July 31 , 2021 and ~~October 29, 2016~~August 1 , 2020		46

			Notes to Condensed Consolidated Financial Statements		57

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

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		2225

Item 4.			Controls and Procedures		2225

			PART II - OTHER INFORMATION

Item 1.			Legal Proceedings		2326

Item 1A.			Risk Factors		2326

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		2326

Item 6.			Exhibits		2427

PART I – FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements.~~

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)	July 31, 2021		January 30, 2021		August 1, 2020
ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	1,353	$	1,783	$	1,522	Cash and cash equivalents	$	2,375	$	1,988	$	2,188
Short-term investments							Short-term investments	337		410		25
Merchandise inventory	2,476		1,830		2,398		Merchandise inventory	2,281		2,451		2,242
Other current assets	654		702		751		Other current assets	1,201		1,159		882
Total current assets	4,483		4,315		4,671		Total current assets	6,194		6,008		5,337
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 $5,603, $5,608 and $5,933							Property and equipment, net of accumulated depreciation of $5,603, $5,608 and $5,933	2,897		2,841		2,895
Operating lease assets							Operating lease assets	3,975		4,217		4,689
Other long-term assets	726		679		674		Other long-term assets	693		703		795
Total assets	$	7,895	$	7,610	$	8,007	Total assets	$	13,759	$	13,769	$	13,716
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	$	1,583	$	1,743	$	1,629
Accrued expenses and other current liabilities	1,132		1,113		1,059		Accrued expenses and other current liabilities	1,252		1,276		1,124
Current portion of operating lease liabilities							Current portion of operating lease liabilities	789		831		856
Income taxes payable	134		32		19		Income taxes payable	27		34		40
Total current liabilities	2,596		2,453		2,915		Total current liabilities	3,651		3,884		3,649
Long-term liabilities:							Long-term liabilities:
Long-term debt	1,248		1,248		1,320		Long-term debt	2,220		2,216		2,212
Lease incentives and other long-term liabilities	1,027		1,005		1,046
Long-term operating lease liabilities							Long-term operating lease liabilities	4,348		4,617		5,179
Other long-term liabilities							Other long-term liabilities	520		438		423
Total long-term liabilities	2,275		2,253		2,366		Total long-term liabilities	7,088		7,271		7,814
Commitments and contingencies (see Note 11)
Commitments and contingencies (see Note 9)							Commitments and contingencies (see Note 9)	0		0		0
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 376, 374, and 374 shares							Authorized 2,300 shares for all periods presented; Issued and Outstanding 376, 374, and 374 shares	19		19		19
Additional paid-in capital	—		81		57		Additional paid-in capital	114		85		39
Retained earnings	2,965		2,749		2,621		Retained earnings	2,879		2,501		2,173
Accumulated other comprehensive income	40		54		28		Accumulated other comprehensive income	8		9		22
Total stockholders’ equity	3,024		2,904		2,726		Total stockholders’ equity	3,020		2,614		2,253
Total liabilities and stockholders’ equity	$	7,895	$	7,610	$	8,007	Total liabilities and stockholders’ equity	$	13,759	$	13,769	$	13,716

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(Unaudited)


	13 Weeks Ended						39 Weeks Ended							13 Weeks Ended				26 Weeks Ended
($ and shares in millions except per share amounts)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			($ and shares in millions except per share amounts)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net sales	$	3,838		$	3,798		$	11,077		$	11,087		Net sales	$	4,211	$	3,275	$	8,202	$	5,382
Cost of goods sold and occupancy expenses	2,313			2,305			6,770			6,948			Cost of goods sold and occupancy expenses	2,388		2,126		4,749		3,965
Gross profit	1,525			1,493			4,307			4,139			Gross profit	1,823		1,149		3,453		1,417
Operating expenses	1,147			1,104			3,224			3,249			Operating expenses	1,414		1,076		2,804		2,588
Operating income	378			389			1,083			890
Operating income (loss)													Operating income (loss)	409		73		649		(1,171)
Loss on extinguishment of debt													Loss on extinguishment of debt	—		58		—		58
Interest expense	18			20			53			57			Interest expense	51		58		105		77
Interest income	(4		)	(3		)	(11		)	(6		)	Interest income	(1)		(2)		(2)		(6)
Income before income taxes	364			372			1,041			839
Income (loss) before income taxes													Income (loss) before income taxes	359		(41)		546		(1,300)
Income taxes	135			168			398			383			Income taxes	101		21		122		(306)
Net income	$	229		$	204		$	643		$	456
Net income (loss)													Net income (loss)	$	258	$	(62)	$	424	$	(994)
Weighted-average number of shares - basic	391			399			395			398			Weighted-average number of shares - basic	378		374		377		373
Weighted-average number of shares - diluted	393			400			397			400			Weighted-average number of shares - diluted	386		374		385		373
Earnings per share - basic	$	0.59		$	0.51		$	1.63		$	1.15
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	$	0.68	$	(0.17)	$	1.12	$	(2.66)
Earnings (loss) per share - diluted													Earnings (loss) per share - diluted	$	0.67	$	(0.17)	$	1.10	$	(2.66)

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

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


	13 Weeks Ended				26 Weeks Ended
($ in millions)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net income (loss)	$	258	$	(62)	$	424	$	(994)
Other comprehensive income (loss), net of tax
Foreign currency translation	1		(10)		(2)		(19)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $—, $(1), $—, and $1	—		(8)		(7)		11
Reclassification adjustment for losses (gains) on derivative financial instruments, net of (tax) tax benefit of $1, $(1), $1, and $(1)	5		(6)		8		(10)
Other comprehensive income (loss), net of tax	6		(24)		(1)		(18)
Comprehensive income (loss)	$	264	$	(86)	$	423	$	(1,012)

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares	Amount								Total
Balance as of May 1, 2021	377	$	19	$	118	$	2,667	$	2	$	2,806
Net income for the thirteen weeks ended July 31, 2021						258				258
Other comprehensive income, net of tax
Foreign currency translation								1		1
Change in fair value of derivative financial instruments								—		—
Amounts reclassified from accumulated other comprehensive income								5		5
Repurchases and retirement of common stock	(2)	—		(55)						(55)
Issuance of common stock related to stock options and employee stock purchase plans	1	—		16						16
Issuance of common stock and withholding tax payments related to vesting of stock units	—	—		—						—
Share-based compensation, net of forfeitures				35						35
Common stock dividends declared and paid ($0.12 per share)						(46)				(46)
Balance as of July 31, 2021	376	$	19	$	114	$	2,879	$	8	$	3,020

Balance as of May 2, 2020	373	$	19	$	17	$	2,235	$	46	$	2,317

Net loss for the thirteen weeks ended August 1, 2020						(62)				(62)
Other comprehensive loss, net of tax
Foreign currency translation								(10)		(10)
Change in fair value of derivative financial instruments								(8)		(8)
Amounts reclassified from accumulated other comprehensive income								(6)		(6)

Issuance of common stock related to stock options and employee stock purchase plans	—	—		6						6
Issuance of common stock and withholding tax payments related to vesting of stock units	1	—		(1)						(1)
Share-based compensation, net of forfeitures				17						17
Common stock dividends						—				—
Balance as of August 1, 2020	374	$	19	$	39	$	2,173	$	22	$	2,253

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares	Amount								Total
Balance as of January 30, 2021	374	$	19	$	85	$	2,501	$	9	$	2,614
Net income for the twenty-six weeks ended July 31, 2021						424				424
Other comprehensive income (loss), net of tax
Foreign currency translation								(2)		(2)
Change in fair value of derivative financial instruments								(7)		(7)
Amounts reclassified from accumulated other comprehensive income								8		8
Repurchases and retirement of common stock	(2)	—		(55)						(55)
Issuance of common stock related to stock options and employee stock purchase plans	2	—		41						41
Issuance of common stock and withholding tax payments related to vesting of stock units	2	—		(32)						(32)
Share-based compensation, net of forfeitures				75						75
Common stock dividends declared and paid ($0.12 per share)						(46)				(46)
Balance as of July 31, 2021	376	$	19	$	114	$	2,879	$	8	$	3,020

Balance as of February 1, 2020	371	19		—		3,257		40		3,316

Net loss for the twenty-six weeks ended August 1, 2020						(994)				(994)
Other comprehensive income (loss), net of tax
Foreign currency translation								(19)		(19)
Change in fair value of derivative financial instruments								11		11
Amounts reclassified from accumulated other comprehensive income								(10)		(10)

Issuance of common stock related to stock options and employee stock purchase plans	1	—		12						12
Issuance of common stock and withholding tax payments related to vesting of stock units	2	—		(8)						(8)
Share-based compensation, net of forfeitures				35						35
Common stock dividends ($0.2425 per share) (1)						(90)				(90)
Balance as of August 1, 2020	374	19		39		2,173		22		2,253

__________

(1) On March 4, 2020, the Company declared a first quarter fiscal year 2020 dividend of $0.2425 per share. The dividend payable amount was estimated based upon the shareholders of record as of August 1, 2020. The dividend was paid on April 28, 2021 to shareholders of record at the close of business on April 7, 2021.

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	39 Weeks Ended							26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			($ in millions)	July 31, 2021		August 1, 2020
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)	$	424	$	(994)
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	244		256
Amortization of lease incentives	(46		)	(47		)

Share-based compensation	60			55			Share-based compensation	72		35
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	6		361
Impairment of store assets							Impairment of store assets	1		127

Loss on extinguishment of debt							Loss on extinguishment of debt	—		58
Amortization of debt issuance costs							Amortization of debt issuance costs	8		4
Non-cash and other items	9			12			Non-cash and other items	14		—
Loss on divestiture activity							Loss on divestiture activity	59		—

Deferred income taxes	(50		)	(10		)	Deferred income taxes	28		(125)
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Merchandise inventory	(636		)	(513		)	Merchandise inventory	156		(91)
Other current assets and other long-term assets	(60		)	(52		)	Other current assets and other long-term assets	(98)		134

Accounts payable	55			294			Accounts payable	(168)		467
Accrued expenses and other current liabilities	(46		)	10			Accrued expenses and other current liabilities	83		(40)
Income taxes payable, net of prepaid and other tax-related items	188			80
Lease incentives and other long-term liabilities	48			(18		)
Net cash provided by operating activities	600			800
Income taxes payable, net of receivables and other tax-related items							Income taxes payable, net of receivables and other tax-related items	(55)		(232)
Other long-term liabilities							Other long-term liabilities	57		1
Operating lease assets and liabilities, net							Operating lease assets and liabilities, net	(39)		(48)
Net cash provided by (used for) operating activities							Net cash provided by (used for) operating activities	792		(87)
Cash flows from investing activities:							Cash flows from investing activities:
Purchases of property and equipment	(463		)	(383		)	Purchases of property and equipment	(269)		(208)
Insurance proceeds related to loss on property and equipment	60			—

Purchases of short-term investments							Purchases of short-term investments	(427)		(59)
Proceeds from sales and maturities of short-term investments							Proceeds from sales and maturities of short-term investments	500		325
Net cash paid for divestiture activity							Net cash paid for divestiture activity	(21)		—
Other	(3		)	(1		)	Other	—		2
Net cash used for investing activities	(406		)	(384		)
Net cash provided by (used for) investing activities							Net cash provided by (used for) investing activities	(217)		60
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)
Proceeds from issuance of long-term debt							Proceeds from issuance of long-term debt	—		2,250
Payments to extinguish debt							Payments to extinguish debt	—		(1,307)
Payments for debt issuance costs							Payments for debt issuance costs	—		(61)
Proceeds from issuances under share-based compensation plans	23			25			Proceeds from issuances under share-based compensation plans	41		12
Withholding tax payments related to vesting of stock units	(15		)	(18		)	Withholding tax payments related to vesting of stock units	(32)		(8)
Repurchases of common stock	(300		)	—			Repurchases of common stock	(55)		—
Excess tax benefit from exercise of stock options and vesting of stock units	—			1

Cash dividends paid	(272		)	(275		)	Cash dividends paid	(137)		—
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	(183)		886
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	(1)		1
Net increase in cash, cash equivalents, and restricted cash							Net increase in cash, cash equivalents, and restricted cash	391		860
Cash, cash equivalents, and restricted cash at beginning of period							Cash, cash equivalents, and restricted cash at beginning of period	2,016		1,381
Cash, cash equivalents, and restricted cash at end of period							Cash, cash equivalents, and restricted cash at end of period	$	2,407	$	2,241


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	$	102	$	39
Cash paid for income taxes during the period, net of refunds	$	260		$	318		Cash paid for income taxes during the period, net of refunds	$	147	$	53

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~~In the opinion of~~October 28, 2017~~ ~~and~~ ~~October 29, 2016~~, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended October 28, 2017 and October 29, 2016, and the Condensed Consolidated Statements of Cash Flows for the ~~thirty-nine weeks endedOctober 28, 2017~~ ~~and~~ ~~October 29, 2016~~ ~~have been prepared by~~ The Gap, Inc. (the “Company,” “we,” and “our”)~~. In~~ management, the ~~opinion of management, such statements include~~accompanying unaudited Condensed Consolidated Financial Statements contain 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, 2017~~July 31, 2021 and ~~October 29, 2016~~August 1, 2020 and for all periods presented. The Condensed Consolidated Balance Sheet as of January ~~28, 2017~~30, 2021 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~~.30, 2021.

The results of operations for the thirteen and ~~thirty-nine~~twenty-six weeks ended~~October 28, 2017~~ July 31, 2021 are not necessarily indicative of the operating results that may be expected for the ~~53-week~~52-week period ending ~~February 3, 2018~~.January 29, 2022.

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. Fiscal 2020 results were significantly impacted as we temporarily closed a large number of our stores globally. During the first half of fiscal 2021, there continued to be residual impacts from store closures in international markets and in our supply chain as a result of COVID-19. We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements.

~~Note 2. Recent~~ Restricted Cash

As of July 31, 2021, restricted cash primarily included consideration that serves as collateral for our insurance obligations. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the total shown on our Condensed Consolidated Statements of Cash Flows:


($ in millions)	July 31, 2021		January 30, 2021		August 1, 2020
Cash and cash equivalents, per Condensed Consolidated Balance Sheets	$	2,375	$	1,988	$	2,188
Restricted cash included in other current assets	—		4		33
Restricted cash included in other long-term assets	32		24		20
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows	$	2,407	$	2,016	$	2,241

Accounting Pronouncements Recently Adopted

~~Except~~In April 2020, the Financial Accounting Standards Board ("FASB") provided guidance on accounting for rent concessions resulting from the COVID-19 pandemic. We considered the FASB's guidance regarding lease modifications as ~~noted below,~~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. The impact of applying the temporary practical expedient was not material to our Condensed Consolidated Financial Statements for the thirteen and twenty-six weeks ended July 31, 2021 or August 1, 2020.

ASU No. 2019-12, Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued accounting standards update ("ASU") No. 2019-12, Simplifying the Accounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance in Accounting Standards Codification Topic 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company adopted this ASU on January 31, 2021 on a prospective basis and the adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

Accounting Pronouncements Not Yet Adopted

The Company has considered all recent accounting pronouncements and ~~has~~ concluded that there are no recent accounting pronouncements that may have a material impact on ~~its~~our Condensed Consolidated Financial Statements, based on current information.

~~Recent Accounting Pronouncements Related~~

Note 2. Revenue

Disaggregation of Net Sales

We disaggregate our net sales between stores and online and also by brand and region. 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.

Net sales disaggregated for stores and online sales are as follows:


	13 Weeks Ended				26 Weeks Ended
($ in millions)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020

Store sales (1)	$	2,828	$	1,642	$	5,212	$	2,750
Online sales (2)	1,383		1,633		2,990		2,632
Total net sales	$	4,211	$	3,275	$	8,202	$	5,382

__________

(1)Store sales primarily include sales made at our Company-operated stores and franchise sales.

(2)Online sales primarily include sales originating from our online channel including those that are picked up or shipped from stores.

Net sales disaggregated by brand and region are as follows:


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
13 Weeks Ended July 31, 2021
U.S. (1)	$	2,177	$	615	$	428	$	340	$	11	$	3,571
Canada	191		79		43		—		—		313
Europe	—		116		1		1		—		118
Asia	—		135		19		—		—		154
Other regions	22		29		4		—		—		55
Total	$	2,390	$	974	$	495	$	341	$	11	$	4,211


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
13 Weeks Ended August 1, 2020
U.S. (1)	$	1,726	$	473	$	236	$	267	$	61	$	2,763
Canada	145		63		27		—		—		235
Europe	—		70		2		—		—		72
Asia	2		158		14		—		—		174
Other regions	8		19		4		—		—		31
Total	$	1,881	$	783	$	283	$	267	$	61	$	3,275


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
26 Weeks Ended July 31, 2021
U.S. (1)	$	4,276	$	1,171	$	761	$	687	$	100	$	6,995
Canada	350		147		77		—		—		574
Europe	—		185		4		1		—		190
Asia	1		298		35		—		—		334
Other regions	43		59		7		—		—		109
Total	$	4,670	$	1,860	$	884	$	688	$	100	$	8,202


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
26 Weeks Ended August 1, 2020
U.S. (1)	$	2,675	$	784	$	481	$	472	$	112	$	4,524
Canada	222		97		51		—		—		370
Europe	—		124		5		—		—		129
Asia	3		266		26		—		—		295
Other regions	19		36		9		—		—		64
Total	$	2,919	$	1,307	$	572	$	472	$	112	$	5,382

__________

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

(2)Previously, net sales for the Athleta brand were grouped within the "Other" column. Beginning in fiscal 2021, we have made a change for all periods presented to ~~Revenue Recognition~~break out Athleta net sales into its own column.

~~In May 2014,~~(3)The "Other" column primarily consists of net sales for 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 revenueIntermix and ~~create common revenue recognition guidance between U.S. GAAP~~Janie 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,Jack brands, as well as sales ~~where we ship~~from the ~~merchandise to~~business-to-business program. The sale of Janie and Jack was completed on April 8, 2021. The sale of Intermix was completed on May 21, 2021. Net sales for the ~~customer from a distribution center or store. Additionally, under~~thirteen and twenty-six weeks ended August 1, 2020 also included net sales for 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.~~Hill City brand, which was closed in January 2021.

Deferred Revenue

We defer revenue when cash payments are ~~currently evaluating~~received in advance of performance for unsatisfied obligations related to our gift cards, credit vouchers, licensing agreements, outstanding loyalty points, and reimbursements of loyalty program discounts associated with our credit card agreement. For the ~~classification~~thirteen weeks ended July 31, 2021, the opening balance of ~~income earned~~deferred revenue for these obligations was $222 million, of which $81 million was recognized as revenue during the period. For the twenty-six weeks ended July 31, 2021, the opening balance of deferred revenue for these obligations was $231 million, of which $125 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $239 million as of July 31, 2021.

We expect that the majority of our revenue deferrals as of the quarter ended July 31, 2021, will be recognized as revenue in ~~connection~~the next twelve months as our performance obligations are satisfied.

For the thirteen weeks ended August 1, 2020, the opening balance of deferred revenue for these obligations was $198 million, of which $63 million was recognized as revenue during the period. For the twenty-six weeks ended August 1, 2020, the opening balance of deferred revenue for these obligations was $226 million, of which $118 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $189 million as of August 1, 2020.

During the twenty-six weeks ended July 31, 2021, the Company entered into agreements with Barclays and Mastercard relating to a new long-term credit card program that is expected to begin in the second quarter of fiscal 2022. Accordingly, our private label ~~and co-branded~~ credit ~~cards. We are also evaluating expanded disclosures regarding~~card program with Synchrony Financial will be discontinued upon the ~~nature, amount, timing, and uncertainty~~launch of ~~revenue and cash flows arising from contracts with customers.~~

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

~~Other Recent Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU No. 2016-02, Leases. Under~~ the new ~~guidance, lessees will be required~~long-term credit card program. During the twenty-six weeks ended July 31, 2021, the Company received $50 million relating to ~~recognize a lease liability and a right-of-use asset for all leases (with~~ the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are still assessing the impact of this ASUnew agreements, which was recorded in other long-term liabilities on our Condensed Consolidated ~~Financial Statements, but it will result in a substantial increase in our long-term assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.~~

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. 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 earningsBalance Sheet 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.July 31, 2021.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this ASU for the interim goodwill impairment test in the first quarter of fiscal 2017. The adoption of this ASU did not have any impact on the Consolidated Financial Statements.

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

Note 3. Debt and Credit Facilities

Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:


($ in millions)	July 31, 2021		January 30, 2021		August 1, 2020

2023 Notes	500		500		500
2025 Notes	750		750		750
2027 Notes	1,000		1,000		1,000
Less: Unamortized debt issuance costs	(30)		(34)		(38)
Total long-term debt	$	2,220	$	2,216	$	2,212

($ 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
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~~,July 31, 2021, the aggregate estimated fair value of ~~our~~ ~~$1.25 billion~~ ~~aggregate principal amount of~~ ~~5.95 percent~~the notes ~~(the~~due 2023 ("2023 Notes"), 2025 (“2025 Notes”), and 2027 (“2027 Notes”) (collectively, the “Notes”) ~~due~~ ~~April 2021~~was ~~$1.35~~$2.53 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 ~~October 29, 2016. The Term Loan was repaid in full in January 2017. Interest was payable~~the unamortized debt issuance cost.

In May 2020, we entered into the senior secured asset-based revolving credit agreement (the "ABL Facility"), which has a $1.8675 billion borrowing capacity and bears interest at ~~least quarterly based on an interest~~a base rate ~~equal to the London Interbank Offered Rate~~(typically LIBOR) plus a ~~fixed margin.~~

~~We have a~~ ~~$500 million~~, ~~five-year, unsecured revolving credit facility (the “Facility”), which~~margin depending on borrowing base availability. The ABL Facility is scheduled to expire in May ~~2020. There were~~ no ~~borrowings and no material outstanding~~2023. We also have the ability to issue letters of credit on our ABL Facility. As of July 31, 2021, we had $52 million in standby letters of credit issued under the ABL Facility. There were no borrowings under the ABL Facility as of ~~October 28, 2017.~~July 31, 2021.

As of July 31, 2021, we were in compliance with theapplicable 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”). ~~These~~The Foreign Facilities are uncommitted and ~~are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The~~had a total capacity of ~~the Foreign Facilities was $47~~$49 million as of ~~October 28, 2017.~~July 31, 2021. As of ~~October 28, 2017,~~July 31, 2021, there were no borrowings under the Foreign Facilities. There were ~~$14~~$10 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of ~~October 28, 2017.~~July 31, 2021.

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 July 31, 2021.

On June 6, 2020, we redeemed our $1.25 billion aggregate principal amount of 5.95 percent notes due April 2021 ("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. Following the redemption, our obligations under the 2021 Notes were discharged.

Note 4. Fair Value Measurements

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

There were no material purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and ~~thirty-nine~~twenty-six weeks ended~~October 28, 2017~~ July 31, 2021 or ~~October 29, 2016~~.August 1, 2020. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 23 during the thirteen and ~~thirty-nine~~twenty-six weeks ended~~October 28, 2017~~ July 31, 2021 or ~~October 29, 2016~~.August 1, 2020.

Financial Assets and Liabilities

Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:


			Fair Value Measurements at Reporting Date Using									Fair Value Measurements at Reporting Date Using
($ in millions)	October 28, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		($ in millions)	July 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:									Assets:
Cash equivalents	$	389	$	28	$	361	$	—	Cash equivalents	$	476	$	1	$	475	$	—
Short-term investments									Short-term investments	337		304		33		—
Derivative financial instruments	31		—		31		—		Derivative financial instruments	9		—		9		—
Deferred compensation plan assets	46		46		—		—		Deferred compensation plan assets	51		51		—		—
Other assets									Other assets	4		—		—		4
Total	$	466	$	74	$	392	$	—	Total	$	877	$	356	$	517	$	4
Liabilities:									Liabilities:
Derivative financial instruments	$	20	$	—	$	20	$	—	Derivative financial instruments	$	16	$	—	$	16	$	—
			Fair Value Measurements at Reporting Date Using									Fair Value Measurements at Reporting Date Using
($ in millions)	January 28, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		($ in millions)	January 30, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:									Assets:
Cash equivalents	$	697	$	256	$	441	$	—	Cash equivalents	$	375	$	25	$	350	$	—
Short-term investments									Short-term investments	410		342		68		—
Derivative financial instruments	58		—		58		—		Derivative financial instruments	5		—		5		—
Deferred compensation plan assets	40		40		—		—		Deferred compensation plan assets	43		43		—		—
Other assets									Other assets	2		—		—		2
Total	$	795	$	296	$	499	$	—	Total	$	835	$	410	$	423	$	2
Liabilities:									Liabilities:
Derivative financial instruments	$	21	$	—	$	21	$	—	Derivative financial instruments	$	21	$	—	$	21	$	—
			Fair Value Measurements at Reporting Date Using									Fair Value Measurements at Reporting Date Using
($ in millions)	October 29, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		($ in millions)	August 1, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:									Assets:
Cash equivalents	$	596	$	106	$	490	$	—	Cash equivalents	$	368	$	—	$	368	$	—
Short-term investments									Short-term investments	25		—		25		—
Derivative financial instruments	62		—		62		—		Derivative financial instruments	6		—		6		—
Deferred compensation plan assets	41		41		—		—		Deferred compensation plan assets	46		46		—		—
Other assets									Other assets	2		—		—		2
Total	$	699	$	147	$	552	$	—	Total	$	447	$	46	$	399	$	2
Liabilities:									Liabilities:
Derivative financial instruments	$	49	$	—	$	49	$	—	Derivative financial instruments	$	19	$	—	$	19	$	—

We have highly liquid fixed and variable income investments classified as cash ~~equivalents, which are placed primarily in time deposits and money market funds. We~~equivalents. 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 July 31, 2021, January 30, 2021, and August 1, 2020, the Company held $337 million, $410 million, and $25 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 July 31, 2021 and January 30, 2021, the Company held $363 million and $90 million, respectively, of available-for-sale debt securities with maturities of three months or less at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheet. As of August 1, 2020, the Company held no material available-for-sale debt securities with maturities of three months or less 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 July 31, 2021 and August 1, 2020.

The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and twenty-six weeks ended July 31, 2021 or August 1, 2020, 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 the~~See Note 6 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 in~~Financial 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 to~~receipt 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. The fair value of the long-lived assets is determined using level 3 inputs and based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores is ~~primarily~~ at the store level.

~~During~~There were no material impairment charges recorded for long-lived assets during the thirteen weeks ended ~~October 28, 2017, we~~July 31, 2021 or August 1, 2020.

During the twenty-six weeks ended July 31, 2021, the Company recorded ~~a charge for the~~ impairment of ~~long-lived~~operating lease assets of ~~$4 million, which~~$6 million. The impairment of the operating lease assets reduced the ~~then~~ carrying amount of the applicable long-lived assets of $5$16 million to their estimated fair value of $1$10 million. The impairment ~~charge was~~charges were recorded in operating expenses inon the Condensed Consolidated Statement of ~~Income.~~Operations. There were no material impairment charges recorded for store assets during the twenty-six weeks ended July 31, 2021.

During fiscal 2020, the ~~thirty-nine~~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. During the twenty-six weeks ended ~~October 28, 2017, we~~August 1, 2020, the Company recorded ~~a charge for the~~ impairment of ~~long-lived~~store assets of ~~$17~~$127 million ~~which~~and 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 ~~$18~~$131 million to their estimated fair value of $1$4 million. The impairment ~~charge was recorded in~~of the operating ~~expenses in~~lease assets reduced the ~~Condensed Consolidated Statement~~carrying amount 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 ofapplicable long-lived assets of $2$1,369 million ~~related~~ to ~~the announced store closures, and an additional $31 million for long-lived assets that were unrelated to the announced measures.~~their estimated fair value of $1,008 million. 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 no impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~July 31, 2021 or ~~October 29, 2016.~~August 1, 2020.

Note 5. Income Taxes

The effective income tax rate was 28.1 percent for the thirteen weeks ended July 31, 2021, compared with negative 51.2 percent for the thirteen weeks ended August 1, 2020. The increase in the effective tax rate is primarily due to the net operating loss carryback provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act during the second quarter of fiscal 2020 as well as changes in the geographical mix of pretax earnings.

The effective income tax rate was 22.3 percent for the twenty-six weeks ended July 31, 2021, compared with 23.5 percent for the twenty-six weeks ended August 1, 2020. The decrease in the effective tax rate for the first half of fiscal 2021 compared with the first half of fiscal 2020 is primarily due to the tax benefit resulting from divestiture activity during the first half of fiscal 2021 as well as the impact of the CARES Act in the first half of fiscal 2020, partially offset by changes in the geographical mix of pretax earnings.

Note 6. 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)~~(2) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, ~~intercompany royalty payments,~~ and intercompany revenue transactions generally have terms of up to 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized ininto 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 also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries.

Other Derivatives Not Designated as Hedging Instruments

We ~~enter into~~use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments that represent economic hedges, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses inon the Condensed Consolidated Statements of ~~Income~~Operations 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)	July 31, 2021		January 30, 2021		August 1, 2020
Derivatives designated as cash flow hedges	$	673	$	508	$	214
Derivatives not designated as hedging instruments	733		811		727
Total	$	1,406	$	1,319	$	941

($ 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)	July 31, 2021		January 30, 2021		August 1, 2020
Derivatives designated as cash flow hedges:							Derivatives designated as cash flow hedges:
Other current assets	$	16	$	28	$	35	Other current assets	$	3	$	—	$	3
Other long-term assets	$	4	$	16	$	13

Accrued expenses and other current liabilities	$	11	$	10	$	26	Accrued expenses and other current liabilities	10		12		1
Lease incentives and other long-term liabilities	$	2	$	1	$	8
Other long-term liabilities							Other long-term liabilities	1		—		—

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	6		5		3
Other long-term assets	$	—	$	1	$	—
Accrued expenses and other current liabilities	$	5	$	10	$	14	Accrued expenses and other current liabilities	5		9		18
Lease incentives and other long-term liabilities	$	—	$	—	$	1

Total derivatives in an asset position	$	31	$	58	$	62	Total derivatives in an asset position	$	9	$	5	$	6
Total derivatives in a liability position	$	20	$	21	$	49	Total derivatives in a liability position	$	16	$	21	$	19

The majority of the unrealized gains and losses from designated cash flow hedges as of ~~October 28, 2017~~July 31, 2021 will be recognized ininto net income within the next 12twelve months at the then-current values, which may differ from the fair values as of ~~October 28, 2017~~July 31, 2021 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~~pre-tax amounts recognized in ~~cash flow hedging and~~ net ~~investment hedging relationships recorded in other comprehensive~~ income ~~and the Condensed Consolidated Statements of Income, on a pre-tax basis,~~(loss) related to derivative instruments are as follows:


	Location and Amount of (Gain) Loss Recognized in Net Income (Loss)
	13 Weeks Ended July 31, 2021				13 Weeks Ended August 1, 2020
($ in millions)	Cost of goods sold and occupancy expenses		Operating expenses		Cost of goods sold and occupancy expenses		Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded	$	2,388	$	1,414	$	2,126	$	1,076

(Gain) loss recognized in net income (loss)
Derivatives designated as cash flow hedges	6		—		(7)		—

Derivatives not designated as hedging instruments	—		(6)		—		32
Total (gain) loss recognized in net income (loss)	$	6	$	(6)	$	(7)	$	32

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 )


	Location and Amount of (Gain) Loss Recognized in Net Income (Loss)
	26 Weeks Ended July 31, 2021				26 Weeks Ended August 1, 2020
($ in millions)	Cost of goods sold and occupancy expenses		Operating expenses		Cost of goods sold and occupancy expenses		Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded	$	4,749	$	2,804	$	3,965	$	2,588

(Gain) loss recognized in net income (loss)
Derivatives designated as cash flow hedges	9		—		(11)		—

Derivatives not designated as hedging instruments	—		5		—		(11)
Total (gain) loss recognized in net income (loss)	$	9	$	5	$	(11)	$	(11)

~~For the~~ ~~thirteen and thirty-nine weeks endedOctober 28, 2017~~ ~~and~~ ~~October 29, 2016, there were~~ no amounts of gains or losses reclassified from accumulated other comprehensive income into net income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.

~~Gains and losses on foreign exchange forward contracts not designated as hedging instruments recorded in the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:~~

13 Weeks Ended 39 Weeks Ended
($ in millions) October 28,
2017 October 29,
2016 October 28,
2017 October 29,
2016
Gain (loss) recognized in operating expenses $ 10
$ 12
$ (13 ) $ (5 )

Note 6.7. Share Repurchases

Share repurchase activity is as follows:


	13 Weeks Ended				26 Weeks Ended
($ and shares in millions except average per share cost)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Number of shares repurchased (1)	1.8		—		1.8		—
Total cost	$	55	$	—	$	55	$	—
Average per share cost including commissions	$	31.55	$	—	$	31.55	$	—

_________

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

13 Weeks Ended 39 Weeks Ended
($ and shares in millions except average per share cost) October 28,
2017 October 29,
2016 October 28,
2017 October 29,
2016
Number of shares repurchased (1) 3.8
—
12.5
—
Total cost $ 100
$ —
$ 300
$ —
Average per share cost including commissions $ 26.64
$ —
$ 24.21
$ —

~~__________~~


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

In February ~~2016, we announced that~~2019, the Board of Directors approved a $1.0 billion share repurchase authorization ~~of which $700~~(the "February 2019 repurchase program"). The February 2019 repurchase program had $745 million ~~was~~ remaining as of ~~October 28, 2017.~~July 31, 2021.

All of the share repurchases were paid for as of ~~October 28, 2017.~~July 31, 2021. All common stock repurchased is immediately retired.

~~Note 7. Accumulated Other Comprehensive Income~~

~~Changes in accumulated other comprehensive income by component, net of tax, are as follows:~~

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

($ in millions) Foreign Currency Translation Cash Flow Hedges Total
Balance at January 30, 2016 $ 22
$ 63
$ 85
13 Weeks Ended April 30, 2016:
Foreign currency translation 31
—
31
Change in fair value of derivative financial instruments —
(89 ) (89 )
Amounts reclassified from accumulated other comprehensive income —
(7 ) (7 )
Other comprehensive income (loss), net of tax 31
(96 ) (65 )
Balance at April 30, 2016 53
(33 ) 20
13 Weeks Ended July 30, 2016:
Foreign currency translation (22 ) —
(22 )
Change in fair value of derivative financial instruments —
(7 ) (7 )
Amounts reclassified from accumulated other comprehensive income —
8
8
Other comprehensive income (loss), net of tax (22 ) 1
(21 )
Balance at July 30, 2016 31
(32 ) (1 )
13 Weeks Ended October 29, 2016:
Foreign currency translation (10 ) —
(10 )
Change in fair value of derivative financial instruments —
39
39
Amounts reclassified from accumulated other comprehensive income —
—
—
Other comprehensive income (loss), net of tax (10 ) 39
29
Balance at October 29, 2016 $ 21
$ 7
$ 28

~~See~~ ~~Note 5~~ of Notes to Condensed Consolidated Financial Statements for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Condensed Consolidated Statements of Income.

Note 8. ~~Share-Based Compensation~~

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

13 Weeks Ended 39 Weeks Ended
($ 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 Taxes~~

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

The Company is in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions in the normal course of business. As of October 28, 2017, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $6 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statement of Income would not be material.

~~Note 10.~~ Earnings (Loss) Per Share

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


	13 Weeks Ended		26 Weeks Ended
(shares in millions)	July 31, 2021	August 1, 2020	July 31, 2021	August 1, 2020
Weighted-average number of shares - basic	378	374	377	373
Common stock equivalents (1)	8	—	8	—
Weighted-average number of shares - diluted	386	374	385	373

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 thirteen and twenty-six weeks ended August 1, 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 periods.

The ~~above computations of weighted-average number of shares – diluted exclude 9 million and 8 million~~anti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 3 million and 16 million for the thirteen weeks ended ~~October 28, 2017~~ July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively, and 93 million and 715 million ~~shares related to stock options and other stock awards~~ for the ~~thirty-nine~~twenty-six weeks ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, 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~~,July 31, 2021, 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~~, July 31, 2021, January ~~28, 2017~~,30, 2021, and ~~October 29, 2016~~,August 1, 2020, 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, 2016~~was not material for any individual Action or in ~~total.~~total for all periods presented. Subsequent to ~~October 28, 2017~~July 31, 2021, 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,~~July 31, 2021, our operating segments ~~included Gap Global,~~included: Old Navy Global, Gap Global, Banana Republic Global, ~~Athleta,~~ and ~~Intermix.~~Athleta. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customer demand through stores and online channels, leveraging our omni-channel capabilities that allow customers to shop seamlessly across all of our brands. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into ~~one~~1 reportable segment as of ~~October 28, 2017.~~July 31, 2021. 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~~See Note 2 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue for stores and online and by brand and ~~region are as follows:~~region.

Note 11. Divestitures

($ in millions) Gap Global Old Navy Global
Banana
Republic Global
Other (2) Total Percentage of Net Sales
13 Weeks Ended October 28, 2017
U.S. (1) $ 750
$ 1,587
$ 467
$ 200
$ 3,004
79 %
Canada 109
143
57
1
310
8
Europe 154
—
4
—
158
4
Asia 278
13
21
—
312
8
Other regions 31
15
8
—
54
1
Total $ 1,322
$ 1,758
$ 557
$ 201
$ 3,838
100 %

($ 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 %

~~__________~~


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


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


~~(3)~~	~~Includes Athleta and Intermix.~~

~~Net sales by region are allocated based~~The Company completed the sale of its Janie and Jack and Intermix brands during the twenty-six weeks ended July 31, 2021. The sale of Janie and Jack was completed on April 8, 2021 and the sale of Intermix was completed on May 21, 2021. As a result of these transactions, the Company recognized a pre-tax loss of $59 million within operating expenses on the ~~location~~Condensed Consolidated Statements of Operations for the ~~store where the customer paid for~~twenty-six weeks ended July 31, 2021.

Item 2. Management's Discussion and ~~received the merchandise or the distribution center or store from which the products were shipped.~~

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 retailer~~collection 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, ~~Athleta, Intermix,~~ and ~~Weddington Way~~Athleta brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, ~~Hong Kong,~~ Taiwan, and Mexico. We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. Our products are ~~also~~ available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, Old Navy, and Athleta throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we ~~also~~ use our omni-channel capabilities to bridge the digital world and physical stores to further enhance our shopping experience for our customers. Our omni-channel services, including 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 ~~mobile~~mobile-enabled experiences, are tailored uniquely across our ~~portfolio~~collection of brands. Most of the products sold under our brand names are designed by us and manufactured by independent sources. ~~We also sell products that are designed and manufactured by branded third parties, primarily at our Intermix brand.~~

OVERVIEW

~~Results~~We unveiled our Power Plan 2023 strategy during fiscal 2020, which reflects long-term plans to grow and strengthen the Company. Since then, we have focused on our key initiatives, including growing Old Navy and Athleta, repositioning and transforming Gap and Banana Republic and expanding into new categories. As we have progressed through fiscal 2021, we have executed on our strategy by expanding into new categories such as GapHome on Walmart.com and more recently we announced the launch of our inclusive sizing shopping experience, BODEQUALITY, at Old Navy. Our efforts to scale strategic partnerships to amplify our brands across product categories, markets, and channels have led to increased brand awareness and are paving the foundation for sustainable growth.

During the ~~first three quarters~~second quarter of fiscal ~~2017 include~~2021, we continued strengthening our digital presence and increasing customer loyalty with the launch of our new integrated rewards program across the U.S. and Puerto Rico. The enhancement of our loyalty program aims to attract new customers and create enduring relationships by turning customers into lifelong loyalists. Additionally, Athleta launched AthletaWell, an immersive digital platform designed to build loyalty, engagement, and a ~~gain from insurance proceeds~~community of ~~$64~~empowered women.

In June 2021, we made progress on the strategic review of our operating model in Europe and shared our plan to close all Company-operated stores in the United Kingdom and the Republic of Ireland during the third quarter of fiscal 2021. Additionally, we shared that we are in discussions with third parties to move to a partnership model in France and Italy. We intend to maintain an online presence in Europe. As a result of these strategic changes, we incurred $16 million ~~related to~~of pre-tax costs during the ~~fire that occurred in one~~second quarter of ~~the buildings at a Company-owned distribution center campus in Fishkill, New York on August 29, 2016 (“the Fishkill fire”),~~fiscal 2021 primarily consisting of employee-related costs, which ~~was~~were recorded inwithin operating expenses inon the Condensed Consolidated Statement of ~~Income. During~~Operations.

Additionally, as part of our strategic review of the ~~third quarter~~Company's brands and businesses, we made the decision to sell the Janie and Jack and Intermix brands during the first half of fiscal ~~2017, we also received $20~~2021. The sale of Janie and Jack was completed on April 8, 2021. The sale of Intermix was completed on May 21, 2021. We believe these divestitures will allow the Company to prioritize its strategic focus and resources on growing our four purpose-led, lifestyle brands. We recognized a pre-tax loss of $59 million ~~in insurance proceeds related to business interruption, which were recorded as a reduction to cost of goods sold and occupancy~~within operating expenses inon the Condensed Consolidated Statement of ~~Income. Fiscal 2016 results were impacted~~Operations during the first half of fiscal 2021 in conjunction with these transactions.

In March 2020, the World Health Organization declared COVID-19 a global pandemic resulting in temporary closures for a large number of our stores globally with the majority of these stores reopening by the ~~previously announced measures~~end of the second quarter of fiscal 2020. We suspended rent payments for those temporarily closed stores and are continuing to ~~better align talent and financial resources against~~work through negotiations with our ~~most important priorities~~landlords relating to ~~position~~those leases. There were no material rent abatement benefits recorded on our Condensed Consolidated Statement of Operations for the Company for improved business performance and long-term success. In connection with these measures, the Company incurred $29 million and $179 million in restructuring costs during the thirteen and thirty-nine weeks ended October 29, 2016, respectively, on a pre-tax basis.

~~Financial~~first half of fiscal 2020 or 2021. Our results for the ~~third quarter~~first half of fiscal ~~2017 are as follows:~~2021 reflect continued domestic recovery from the effects of the pandemic and progress toward our digital transformation; however, there continues to be residual impacts from temporary store closures in international markets and in our supply chain.

~~Net sales for~~

The Company remains focused on our plans to reduce the ~~third quarter~~number of Gap and Banana Republic stores in North America by approximately 350 stores from the beginning of fiscal ~~2017 increased 1 percent compared with~~2020 to the ~~third quarter~~end of fiscal ~~2016.~~

~~Comparable sales for~~2023. The majority of the ~~third quarter~~select stores being considered have leases that expired in fiscal 2020 or will expire in fiscal 2021, which allows us to exit underperforming stores with a minimal net impact to our Consolidated Statement of Operations. As of July 31, 2021, we have closed, net of openings, 213 Gap and Banana Republic stores in North America since the beginning 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.2020.

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.~~

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

Our business priorities for fiscal ~~2017 remain~~2021 are as follows:

~~offering~~•creating product that ~~is consistently brand-appropriate~~offers value to our customers through a combination of fit, quality, brand and ~~on-trend with high customer acceptance, with a focus on expanding our advantage in loyalty categories;~~price;

•investing in ~~digital~~our four purpose-led lifestyle brands to drive relevance and ~~customer capabilities~~gain market share;

•growing our online business;

•reducing our fixed cost structure to fuel demand generation investments;

•leveraging our scale to navigate constraints in supply chain;

•managing inventory to support ~~growth;~~a healthy merchandise margin;

~~creating a unique~~•rationalizing the Gap and ~~differentiated customer experience that builds loyalty, with focus on both the physical~~Banana Republic store fleet;

•prioritizing asset-light growth through licensing, online, and ~~digital expressions of our brands;~~franchise partnerships globally;

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

~~leveraging our scale~~•continuing to ~~improve the effectiveness~~integrate social and ~~efficiency of our processes.~~environmental sustainability into business practices to support long-term growth.

~~In fiscal 2017, we are focused~~We believe focusing on ~~investing strategically~~these priorities in the ~~business while also maintaining operating expense discipline. One~~near term will propel the Company to execute against its Power Plan 2023 strategy, including leveraging:

•The Power of ~~our primary objectives is~~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 ~~continue transforming our product to market process,~~both enable growth, such as through competitive omni-channel capabilities, as well as cost synergies, fueled by its scaled operations.

Financial results for the second quarter of fiscal 2021 are as follows:

•Net sales for the second quarter of fiscal 2021 increased 29 percent compared with the ~~development~~second 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 2020.

•Online sales for the second quarter of fiscal 2021 decreased 15 percent compared with the second quarter of fiscal 2020 and ~~IT initiatives underway. Further, we expect to continue our investment in customer experience, both in stores and online, to drive higher customer engagement and loyalty, resulting in market~~store sales for the second quarter of fiscal 2021 increased 72 percent compared with the second quarter of fiscal 2020.

•Gross profit for the second quarter of fiscal 2021 was $1.82 billion compared with $1.15 billion for the second quarter of fiscal 2020. Gross margin for the second quarter of fiscal 2021 was 43.3 percent compared with 35.1 percent for the second quarter of fiscal 2020.

•Operating income for the second quarter of fiscal 2021 was $409 million compared with $73 million for the second quarter of fiscal 2020.

•The effective income tax rate for the second quarter of fiscal 2021 was 28.1 percent, compared with negative 51.2 percent for the second quarter of fiscal 2020.

•Net income for the second quarter of fiscal 2021 was $258 million compared with net loss of $(62) million for the second quarter of fiscal 2020.

•Diluted earnings per share ~~gains. Finally, we will continue to invest in strengthening brand awareness, customer acquisition, and digital capabilities.~~was $0.67 for the second quarter of fiscal 2021 compared with diluted loss per share of $(0.17) for the second quarter of fiscal 2020.

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 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”~~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 Athleta and Intermix but~~ excludes the results of our franchise business.

A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.

A store is considered non-comparable ~~(“Non-comp”~~("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”~~"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 July 31, 2021 and August 1, 2020, any stores temporarily closed for more than three days as a result of COVID-19 were excluded from the Comp Sales calculations. After 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 Count~~The percentage change in Comp Sales by global brand and ~~Square Footage Information~~

~~Net sales per average square foot are~~for The Gap, Inc. is as follows:

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

~~__________~~


~~(1)~~	~~Excludes net sales associated with our online and franchise businesses.~~13 Weeks Ended
	July 31, 2021
Old Navy Global	—	%
Gap Global	(5)	%
Banana Republic Global	41	%
Athleta	13	%
The Gap, Inc.	3	%


	13 Weeks Ended
	August 1, 2020 (1)
Old Navy Global	24	%
Gap Global	12	%
Banana Republic Global	(27)	%
Athleta	19	%
The Gap, Inc.	13	%

__________

(1)Comp Sales for the thirteen weeks ended August 1, 2020 reflect an increase in online sales as a result of COVID-19.

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


	January 30, 2021	26 Weeks Ended July 31, 2021		July 31, 2021
	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	1,220	30	5	1,245		20.0

Gap North America	556	1	15	542		5.7
Gap Asia	340	9	10	339		2.9
Gap Europe	117	1	28	90		0.7
Banana Republic North America	471	1	11	461		3.9
Banana Republic Asia	47	3	2	48		0.2

Athleta North America	199	13	—	212		0.9
Intermix North America (2)	31	—	—	—		—
Janie and Jack North America (2)	119	—	—	—		—
Company-operated stores total	3,100	58	71	2,937		34.3
Franchise	615	40	98	557		N/A
Total	3,715	98	169	3,494		34.3
Decrease over prior year				(8.4)	%	(4.2)	%

	February 1, 2020	26 Weeks Ended August 1, 2020		August 1, 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	14	8	1,213		19.5
Old Navy Asia	17	—	17	—		—
Gap North America	675	2	66	611		6.5
Gap Asia	358	10	10	358		3.2
Gap Europe	137	3	11	129		1.1
Banana Republic North America	541	2	45	498		4.2
Banana Republic Asia	48	4	5	47		0.2

Athleta North America	190	8	2	196		0.8
Intermix North America	33	—	1	32		0.1
Janie and Jack North America	139	—	8	131		0.2
Company-operated stores total	3,345	43	173	3,215		35.8
Franchise	574	35	10	599		N/A
Total	3,919	78	183	3,814		35.8
Decrease over prior year				(1.6)	%	(3.5)	%

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.

(2)On April 8, 2021, the Company completed the sale of the Janie and ~~Banana Republic outlet~~Jack brand. The 119 stores sold are not included as store closures or in the ending balance for fiscal 2021. On May 21, 2021, the Company completed the sale of the Intermix business. The 31 stores sold are not included as store closures or in the ending balance for fiscal 2021.

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 $40 million, or 1 percent, compared with the~~ ~~third quarter of fiscal 2016~~ ~~primarily driven by an increase in net sales at Old Navy, partially offset by a decrease in net sales at Gap and Banana Republic. The increase in Comp Sales of 3 percent for the~~ ~~third quarter of fiscal 2017~~ ~~was offset by the impact of lost sales primarily from international store closures in fiscal 2016.~~

Our net sales for the ~~first three quarters~~second quarter of fiscal ~~2017 decreased $10~~2021 increased $936 million, or 29 percent, compared with the second quarter of fiscal 2020 and increased $2.82 billion, or 52 percent, during the first half of fiscal 2021 compared with the first ~~three quarters~~half of fiscal ~~2016~~2020, driven primarily ~~driven~~ by a decrease in net sales at Gap and Banana Republic, as well as an unfavorable impact of foreign exchange of $49 million, partially offset by an increase in net sales at Old Navy. The unfavorable impact of foreign exchange was primarilytemporary closures across our fleet during fiscal 2020 due to the ~~weakening~~COVID-19 pandemic. As our domestic stores reopened, store traffic returned across all our brands reflecting the benefits 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 increaseour investments 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.~~demand generation.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						26 Weeks Ended
($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Cost of goods sold and occupancy expenses	$	2,388		$	2,126		$	4,749		$	3,965
Gross profit	$	1,823		$	1,149		$	3,453		$	1,417
Cost of goods sold and occupancy expenses as a percentage of net sales	56.7		%	64.9		%	57.9		%	73.7		%
Gross margin	43.3		%	35.1		%	42.1		%	26.3		%

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 occupancy expenses decreased ~~0.4 percent~~8.2 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2021 compared with the ~~third~~second quarter of fiscal ~~2016~~.2020.

•Cost of goods sold ~~was flat~~decreased 3.8 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2021 compared with the ~~third~~second 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~~2020, due to a decrease in online shipping costs due to lower ship-from-store fulfillment as well as stronger demand generation which drove lower promotional activity across all ~~global brands.~~

brands as retail traffic increased.

•Occupancy expenses decreased~~0.4 percent~~ 4.4 percentage points as a percentage of net sales in the ~~third~~second quarter of fiscal ~~2017~~2021 compared with the ~~third~~second quarter of fiscal ~~2016~~,2020, primarily driven by an increase in ~~online~~net sales ~~without~~largely due to temporary store closures as a ~~corresponding increase in occupancy expenses and~~result of COVID-19 during the ~~closure~~second quarter 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.~~

2020.

Cost of goods sold and occupancy expenses decreased~~1.6 percent as a~~ 15.8 percentage ~~of net sales during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016.~~

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

~~Occupancy expenses decreased~~0.4 percent as a percentage of net sales during the first three quarters of fiscal 2017 compared with the first three quarters of fiscal 2016, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses and the closure of international stores in fiscal 2016, partially offset by real estate expenses incurred for new stores at the Times Square, New York location for Gap and Old Navy.

~~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~~points as a percentage of net sales in the ~~third quarter~~first half of fiscal ~~2017~~2021 compared with the ~~third quarter~~first half of fiscal ~~2016. The increase~~2020.

•Cost of goods sold decreased 7.6 percentage points as a percentage of net sales in ~~operating expenses for~~ the ~~third quarter~~first half of fiscal ~~2017~~2021 compared with the ~~third quarter~~first half of fiscal ~~2016~~ ~~was~~2020, primarily due to stronger demand generation which drove lower promotional activity across all brands, higher inventory impairment recognized in the ~~following:~~first half of fiscal 2020 due to store closures as a result of COVID-19, and lower online shipping costs as a result of lower ship-from-store fulfillment as retail traffic increased.

~~an increase~~•Occupancy expenses decreased 8.2 percentage points as a percentage of net sales in ~~payroll-related expenses~~the first half of fiscal 2021 compared with the first half of fiscal 2020, 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~~net sales largely due to temporary store closures as a result of ~~restructuring costs incurred in~~COVID-19 during the ~~third quarter~~first half of fiscal ~~2016; and~~2020 as well as online sales growth during the first half of fiscal 2021 which has minimal impact on fixed occupancy expenses.

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

Operating Expenses


	13 Weeks Ended						26 Weeks Ended
($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Operating expenses	$	1,414		$	1,076		$	2,804		$	2,588
Operating expenses as a percentage of net sales	33.6		%	32.9		%	34.2		%	48.1		%
Operating margin	9.7		%	2.2		%	7.9		%	(21.8)		%

Operating expenses ~~decreased $25~~increased $338 million or ~~0.2 percent~~0.7 percentage points as a percentage of net sales ~~during~~in the ~~first three quarters~~second quarter of fiscal ~~2017~~2021 compared with the ~~first three quarters~~second quarter 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~~2020 primarily due to the following:

~~$171 million of restructuring costs incurred~~•an increase in store payroll and benefits and other store operating expenses due to COVID-19 temporary store closures 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;~~2020;

•an increase in performance-based compensation;

•an increase in advertising expense to generate demand across all purpose-led lifestyle brands; and

•an increase related to digital innovation costs to fuel the growth priorities of the business.

Operating expenses increased $216 million but decreased 13.9 percentage points as a percentage of net sales in the first half of fiscal 2021 compared with the first half of fiscal 2020 primarily due to the following:

•an increase in store payroll and benefits and other store operating expenses due to COVID-19 temporary store closures during the first half of fiscal 2020;

•an increase in advertising expense to generate demand across all purpose-led lifestyle brands;

•an increase in performance-based compensation;

•a loss on divestiture activity related to the Janie and Jack and Intermix brands; and

•an increase related to digital innovation costs to fuel the growth priorities of the business; partially offset by

•a decrease of ~~$18~~$481 million ~~of store asset~~due to impairment charges ~~unrelated~~related to ~~restructuring activities; partially offset by~~store assets and operating lease assets during the first half of fiscal 2020 primarily due to the impact of COVID-19.

~~an increase in payroll-related expenses~~Loss on Extinguishment of Debt

On May 7, 2020, the Company completed the issuance of the Notes for $2.25 billion and used the proceeds to redeem the 2021 Notes. We incurred a loss on extinguishment of debt of $58 million, primarily ~~driven by an increase in bonus expense; and~~related to the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations during the second quarter of fiscal 2020.

~~an increase in marketing and investments in digital and customer initiatives.~~

Interest Expense


	13 Weeks Ended				39 Weeks Ended					13 Weeks Ended				26 Weeks Ended
($ in millions)	October 28, 2017		October 29, 2016		October 28, 2017		October 29, 2016		($ in millions)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Interest expense	$	18	$	20	$	53	$	57	Interest expense	$	51	$	58	$	105	$	77

Interest expense ~~for the third quarter and the first three quarters of fiscal 2017 and fiscal 2016~~ primarily includes interest on overall borrowings and obligations ~~mainly~~primarily related to ~~our $1.25 billion 5.95~~the Notes. Interest expense increased $28 million or 36 percent during the first half of fiscal 2021 compared with the first half of fiscal 2020 as a result of the May 2020 issuance of the new Notes, which bear interest at higher interest rates than the previous 2021 Notes.

Income Taxes


	13 Weeks Ended						39 Weeks Ended							13 Weeks Ended						26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			October 28, 2017			October 29, 2016			($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Income taxes	$	135		$	168		$	398		$	383		Income taxes	$	101		$	21		$	122		$	(306)
Effective tax rate	37.1		%	45.2		%	38.2		%	45.6		%	Effective tax rate	28.1		%	(51.2)		%	22.3		%	23.5		%

The ~~decrease~~increase in the effective tax rate for the ~~third~~second quarter ~~and first three quarters~~ of fiscal ~~2017~~2021 compared with the ~~third~~second quarter ~~and first three quarters~~ of fiscal ~~2016 was~~2020 is primarily due to the ~~impact~~net operating loss carryback provisions of ~~restructuring costs incurred for foreign subsidiaries~~the CARES Act during the ~~third~~second quarter of fiscal ~~2016 and resulting valuation allowances on certain foreign deferred tax assets.~~2020 as well as changes in the geographical mix of pretax earnings. The decrease in the effective tax rate for the first ~~three quarters~~half of fiscal ~~2017~~2021 compared with the first ~~three quarters~~half of fiscal ~~2016 was partially offset by~~2020 is primarily due to the tax benefit resulting from divestiture activity during the first half of fiscal 2021 as well as the impact of the ~~adoption~~CARES Act in the first half of ~~ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting~~fiscal 2020, partially offset by changes in ~~fiscal 2017. See Note 2~~the geographical mix of ~~Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for additional disclosures on the adoption of the accounting standard.~~pretax earnings.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2021, 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	$	2,375	$	—	$	2,375
Short-term investments	337		—		337

Debt
8.375 percent 2023 Notes	500		500		—
8.625 percent 2025 Notes	750		750		—
8.875 percent 2027 Notes	1,000		1,000		—
Total	$	4,962	$	2,250	$	2,712

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, lease and 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~~our existing balances of cash, ~~balances~~cash equivalents, and short-term investments, along with our cash flows from ~~our~~ operations, ~~will be sufficient to support~~and instruments mentioned above, provide ample funds for our business operations ~~including growth initiatives and planned~~as well as capital expenditures, ~~for~~dividends, share repurchases, and other liquidity requirements associated with our business operations over 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 was $792 million during the first ~~three quarters~~half of fiscal ~~2017 decreased $200 million~~2021 compared with $87 million of cash used for operating activities during the first ~~three quarters~~half of fiscal ~~2016,~~2020, primarily due to the following:

Net Income (Loss)

•Net income

~~an increase of $187 million~~ compared with net loss in ~~net income.~~prior comparable period;

Non-cash ~~items~~item

•a decrease of ~~$72~~$481 million ~~related~~due to ~~store asset~~lower non-cash impairment charges for operating lease assets and store assets during the first ~~three quarters~~half of fiscal ~~2017~~2021 compared with the first ~~three quarters~~half of fiscal ~~2016 primarily due to restructuring activities in fiscal 2016.~~2020;

Changes in operating assets and liabilities

•an increase of $247 million related to merchandise inventory in part due to the utilization of seasonal inventory stored at our distribution center since fiscal 2020 as a result of the COVID-19 pandemic and impacts from divestiture activities during the first half of fiscal 2021; and

•an increase of $177 million related to income taxes payable, net of receivables and other tax-related items, resulting from the net operating loss carrybacks attributable to the first half of fiscal 2020 as well as the timing of tax-related payments; partially offset by

•a decrease of ~~$239~~$635 million related to accounts payable primarily due to the ~~timing~~suspension of ~~lease payments~~rent for stores closed temporarily during the first half of fiscal 2020 as a result of COVID-19 as well as a change in payment terms; and ~~other non-merchandise payables;~~

•a decrease of ~~$123~~$232 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~~assets and long-term assets due to the timing of ~~severance~~ payments ~~as a result of fiscal 2016 restructuring activities; partially offset by~~

~~an increase of $108 million~~ related to ~~income taxes payable, net of prepaid~~rent and ~~other tax-related items, primarily due to an increase in taxable income~~divestiture activities during the first ~~three quarters~~half of fiscal ~~2017 compared with the first three quarters of fiscal 2016 as well as the timing of tax payments.~~2020.

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 residual impact of COVID-19 and strategic initiatives, 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 was $217 million during the first ~~three quarters~~half of fiscal ~~2017 increased $22 million~~2021 compared with $60 million of cash provided by investing activities during the first ~~three quarters~~half of fiscal ~~2016,~~2020, primarily due to the following:

•$80193 million higher net purchases of available-for-sale debt securities during the first half of fiscal 2021 compared with the first half of fiscal 2020; and

•$61 million more ~~in property and equipment~~ 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~~half of fiscal ~~2017 related to the Fishkill fire~~2021 compared with ~~no insurance proceeds allocated during~~ the first ~~three quarters~~half of fiscal ~~2016.~~

2020.

Cash Flows from Financing Activities

Net cash used for financing activities was $183 million during the first ~~three quarters~~half of fiscal ~~2017 increased $364 million~~2021 compared with $886 million of cash provided by financing activities during the first ~~three quarters~~half of fiscal ~~2016,~~2020, primarily due to the following:

•$~~300~~2,250 million in proceeds related to the issuance of ~~cash used for repurchases of common stock~~debt during the first ~~three quarters~~half of fiscal ~~2017 compared with no repurchases~~2020; and

•$137 million in payments of ~~common stock~~dividends during the first ~~three quarters~~half of fiscal ~~2016; and~~2021; partially offset by

•$671,307 million in payments related to the ~~repayment~~extinguishment of debt during the ~~Japan Term Loan in full in June 2017.~~first half 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~~expenditures. We require regular capital expenditures including technology improvements to ~~build~~automate processes, engage with customers, and ~~maintain stores~~optimize our supply chain in addition to building and ~~purchase new equipment to improve our business.~~maintaining stores. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results. Free cash flow for the first three quarters of fiscal 2017 is further adjusted for insurance proceeds allocated to loss on property and equipment, as our cash used for purchases of property and equipment for the first three quarters of fiscal 2017 includes certain capital expenditures related to the rebuilding of the Company-owned distribution center which was impacted by the Fishkill fire.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.


	39 Weeks Ended							26 Weeks Ended
($ in millions)	October 28, 2017			October 29, 2016			($ in millions)	July 31, 2021		August 1, 2020
Net cash provided by operating activities	$	600		$	800
Net cash provided by (used for) operating activities							Net cash provided by (used for) operating activities	$	792	$	(87)
Less: Purchases of property and equipment	(463		)	(383		)	Less: Purchases of property and equipment	(269)		(208)
Add: Insurance proceeds related to loss on property and equipment	60			—

Free cash flow	$	197		$	417		Free cash flow	$	523	$	(295)

Debt and Credit Facilities

~~Certain~~For financial information about the Company’s debt and credit facilities ~~is set forth under the heading “Debt and Credit Facilities” in~~as of July 31, 2021 see Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Dividend Policy

In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.

We paid a dividend of ~~$0.23~~$0.12 per share during ~~each of~~ the ~~first three quarters~~second quarter of fiscal ~~2017 and~~ ~~fiscal 2016. Including the dividend paid during the first three quarters~~2021. In August 2021, our board of ~~fiscal 2017 of $0.69 per share, we intend to pay an annual~~directors authorized a dividend of ~~$0.92~~$0.12 per share for the third quarter of fiscal ~~2017, consistent with the annual dividend for fiscal 2016.~~2021.

Share Repurchases

Certain financial information about the Company’s share repurchases is set forth ~~under the heading “Share Repurchases”~~ in Note 67 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Summary Disclosures about Contractual Cash Obligations and Commercial Commitments

There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of January ~~28, 2017~~,30, 2021, 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~~.30, 2021. 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, 2017~~30, 2021, is disclosed in our Annual Report on Form 10-K and has not significantly changed. See Notes 3, 4, and 56 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q for disclosures on our debt and credit facilities, investments, and derivative financial instruments.

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 Rule 13a-15(e) under the Securities Exchange Act ~~Rule 13a-15(e))~~of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s ~~third~~second quarter of fiscal ~~2017~~2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings.~~

Item 1. Legal Proceedings.

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

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact ~~income~~operations 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.


~~Item 1A.~~	~~Risk Factors.~~

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January ~~28, 2017~~.30, 2021.

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 ended~~October 28, 2017~~ July 31, 2021 by ~~The Gap, Inc.~~the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act ~~Rule 10b-18(a)(3):~~of 1934, as amended:

Total
Number of
Shares
Purchased (1)

Average
Price Paid
Per Share
Including
Commissions

Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs

Maximum
Number (or
approximate
dollar amount) of
Shares that May
Yet be Purchased
Under the Plans
or Programs (2)
Month #1 (July 30 - August 26) 539,800
$ 23.15
539,800
$ 788 million
Month #2 (August 27 - September 30) 2,249,992
$ 26.66
2,249,992
$ 728 million
Month #3 (October 1 - October 28) 963,538
$ 28.57
963,538
$ 700 million
Total 3,753,330
$ 26.64
3,753,330


	Total Number of Shares Purchased (1)	Average Price Paid Per Share Including Commissions		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar amount) of Shares that May Yet be Purchased Under the Plans or Programs (2)
Month #1 (May 2 - May 29)	—	$	—	—	$ 800 million
Month #2 (May 30 - July 3)	1,070,200	$	32.36	1,070,200	$ 765 million
Month #3 (July 4 - July 31)	681,828	$	30.27	681,828	$ 745 million
Total	1,752,028	$	31.55	1,752,028

__________


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


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

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

(2)In February 2019, we announced that the Board of Directors approved a $1 billion share repurchase authorization, which has no expiration date.


~~Item 6.~~	~~Exhibits.~~



~~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)

~~__________~~


~~(1)~~	~~Filed herewith.~~


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

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

3.2

Certificate of Amendment of Amended and Restated Certificate of Incorporation

10-K

1-7562

3.2

April 4, 2000

3.3

Amended and Restated Bylaws (effective March 23, 2020)

8-K

1-7562

3.1

March 5, 2020

10.1†

The Gap, Inc. 2016 Long-Term Incentive Plan (as amended and restated effective May 11, 2021)

DEF 14A

1-7562

App. B

March 30, 2021

10.2

Amendment No. 1 to Third Amended and Restated Revolving Credit Agreement dated as of July 12, 2021

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)

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)

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

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

101

The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2021, formatted in Inline 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

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

_____________________________

(P) This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.

† Indicates management contract or compensatory plan or arrangement.

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:	August 27, 2021	~~THE GAP, INC.~~By	/s/ Sonia Syngal
			Sonia Syngal
~~Date:~~	~~November 22, 2017~~	By	~~/s/ Arthur Peck~~
	~~Arthur Peck~~
	Chief Executive Officer
			(Principal Executive Officer)
~~Date:~~	~~November 22, 2017~~	By	~~/s/ Teri List-Stoll~~
Date:	August 27, 2021	By	~~Teri List-Stoll~~/s/ Katrina O'Connell
			Katrina O'Connell
			Executive Vice President and Chief Financial Officer

~~Exhibit Index~~




~~10.1~~		~~Agreement with Shawn Curran dated September 29, 2017~~(Principal Financial 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) Accounting Officer)

~~_____________________________~~


~~(1)~~	~~Filed herewith.~~


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

2627



	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	)%



	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