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| GPS > SEC Filings for GPS > Form 10-K on 27-Mar-2009 | All Recent SEC Filings |
27-Mar-2009
Annual Report
Overview
We are a global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from us, under our brand names. In addition, our U.S. customers can shop online at www.gap.com, www.oldnavy.com, www.bananarepublic.com, www.piperlime.com, and www.athleta.com. 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.
In September 2008, we acquired all of the outstanding capital stock of Athleta, Inc. ("Athleta"), a women's sports and active apparel company based in Petaluma, California, for an aggregate purchase price of $148 million. The acquisition will allow us to enhance our presence in the growing women's active apparel sector in the United States. We believe this acquisition complements our brands and allows us to leverage our online platform to expand into this significant retail sector. See Note 3 of Notes to the Consolidated Financial Statements.
We identify our operating segments according to how our business activities are managed and evaluated. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.
Fiscal 2008 and 2007 had 52 weeks versus 53 weeks in fiscal 2006. Net sales numbers for the fourth quarter and year for fiscal 2006 include this additional week; however, comparable store sales calculations exclude the 53rd week.
Financial highlights include:
• Net sales for fiscal 2008 were $14.5 billion compared with $15.8 billion for fiscal 2007, and comparable store sales decreased 12 percent compared with a decrease of 4 percent last year.
• Net earnings for fiscal 2008 increased 16 percent to $967 million, or $1.34 per share on a diluted basis, compared with $833 million, or $1.05 per share on a diluted basis for fiscal 2007.
• Net earnings from continuing operations for fiscal 2008 increased 12 percent to $967 million, or $1.34 per share on a diluted basis, compared with $867 million, or $1.09 per share on a diluted basis for fiscal 2007.
• Our Direct sales for fiscal 2008 increased 14 percent to $1.0 billion, compared with $903 million for fiscal 2007. Our Direct segment includes our online business and, beginning in September 2008 with the acquisition of Athleta, our catalog business.
• We generated cash flows from operating activities of $1.4 billion during fiscal 2008. Our capital expenditures in fiscal 2008 were $431 million.
• In fiscal 2008, we generated free cash flow of $981 million compared with free cash flow of $1.4 billion in fiscal 2007. Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure, see the Liquidity and Capital Resources section.
• We repurchased approximately 46 million shares of our common stock for a total of $745 million under our share repurchase program in fiscal 2008. We also declared and paid a cash dividend of $0.34 per share in fiscal 2008.
• We opened 101 new stores and closed 119 stores in fiscal 2008.
18 GAP INC. FORM 10-K
Macroeconomic conditions deteriorated in the third quarter of fiscal 2008 and continued in the fourth quarter. Net sales for the fourth quarter of fiscal 2008 were down 13 percent from the prior year comparable period. Despite this, our cash flow generation remains healthy and we have a strong balance sheet. As of January 31, 2009, cash, cash equivalents, and restricted cash were $1.8 billion and long-term debt of $50 million, classified as current, was repaid in March 2009. We believe our cash balances and cash flows from operations will be sufficient for the foreseeable future. During this challenging economic environment we are focused on the following priorities:
• consistently delivering product that aligns with our target customers;
• improving customer experience and continuing to invest in the store fleet in a manner that supports improvement in return on invested capital;
• managing inventory to support a healthy merchandise margin;
• maintaining a focus on cost management; and
• generating strong free cash flow.
Results of Operations
Net Sales
Net Sales by Brand, Region, and Reportable Segment
Net sales primarily consist of retail sales, online sales, and shipping fees received from customers for delivery of merchandise. Outlet retail sales are reflected within the respective results of each brand. Fiscal years ended January 31, 2009 (fiscal 2008) and February 2, 2008 (fiscal 2007) had 52 weeks. Fiscal year ended February 3, 2007 (fiscal 2006) had 53 weeks. Net sales numbers for the fourth quarter and year for fiscal 2006 include this additional week; however, comparable store sales calculations exclude the 53rd week. Net sales for the additional week in fiscal 2006 were approximately $200 million.
We identify our operating segments according to how our business activities are managed and evaluated. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.
Net sales by brand, region, and reportable segment are as follows:
($ in millions) Banana
Fiscal Year 2008 Gap Old Navy Republic Other (3) Total
U.S. (1) $ 3,840 $ 4,840 $ 2,221 $ - $ 10,901
Canada 329 392 146 - 867
Europe 724 - 23 33 780
Asia 732 - 101 47 880
Other Regions - - - 68 68
Total Stores reportable segment 5,625 5,232 2,491 148 13,496
Direct reportable segment (2) 333 475 145 77 1,030
Total $ 5,958 $ 5,707 $ 2,636 $ 225 $ 14,526
Sales Growth (Decline) (5 )% (14 )% (3 )% 84 % (8 )%
Banana
Fiscal Year 2007 Gap Old Navy Republic Other (3) Total
U.S. (1) $ 4,146 $ 5,776 $ 2,351 $ - $ 12,273
Canada 364 461 147 - 972
Europe 822 - - 5 827
Asia 613 - 89 36 738
Other Regions - - - 50 50
Total Stores reportable segment 5,945 6,237 2,587 91 14,860
Direct reportable segment (2) 308 428 136 31 903
Total $ 6,253 $ 6,665 $ 2,723 $ 122 $ 15,763
Sales Growth (Decline) (4 )% (2 )% 7 % 213 % (1 )%
Banana
Fiscal Year 2006 Gap Old Navy Republic Other (3) Total
U.S. (1) $ 4,494 $ 6,042 $ 2,251 $ - $ 12,787
Canada 379 442 119 - 940
Europe 792 - - 1 793
Asia 581 - 61 7 649
Other Regions - - - 24 24
Total Stores reportable segment 6,246 6,484 2,431 32 15,193
Direct reportable segment (2) 261 345 117 7 730
Total $ 6,507 $ 6,829 $ 2,548 $ 39 $ 15,923
Sales Growth (Decline) (5 )% - 11 % 56 % (1 )%
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(1) U.S. includes the United States and Puerto Rico.
(2) U.S. only. Direct includes Athleta beginning September 2008.
(3) Other includes our wholesale business, franchise business, Piperlime, and, beginning September 2008, Athleta.
Comparable Store Sales
The percentage change in comparable store sales by brand and region and for
total Company for fiscal 2008 and 2007 are as follows:
Fiscal Year
2008 2007
Gap North America (8 )% (5 )%
Old Navy North America (17 )% (7 )%
Banana Republic North America (10 )% 1 %
International (4 )% (1 )%
The Gap, Inc. (12 )% (4 )%
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20 GAP INC. FORM 10-K
The comparable store sales calculation excludes sales from our Direct reportable segment and our wholesale and franchise businesses. Outlet comparable store sales are reflected within the respective results of each brand.
A store is included in comparable store sales ("Comp") when it has been open for at least 12 months and the square footage has not changed by 15 percent or more within the past year. A store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from Comp until the first day they have comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year Comp store sales to achieve a consistent basis for comparison.
A store is considered non-comparable ("Non-comp") when it has been open for less than 12 months or it has changed its square footage by 15 percent or more within the past year. Non-store sales such as online and catalog revenues are also considered Non-comp.
A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or 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 then the store will be in Non-comp status for the same days in the following year.
Store Count and Square Footage Information
Net sales per average square foot is as follows:
Fiscal Year 2008 2007 2006 Net sales per average square foot (1) $ 336 $ 376 $ 395
(1) Excludes net sales associated with the Direct segment and our wholesale and franchise businesses. Computation also excludes net sales and average square footage associated with the discontinued operation of Forth & Towne.
Store count, openings, closings, and square footage for our wholly owned stores are as follows:
February 2, 2008 Fiscal 2008 January 31, 2009
Number of Number of Stores Number of Stores Number of Square Footage
Store Locations Opened Closed Store Locations (in millions)
Gap North America 1,249 13 69 1,193 11.8
Gap Europe 173 9 9 173 1.5
Gap Asia 110 8 5 113 1.0
Old Navy North America 1,059 34 26 1,067 20.1
Banana Republic North America 555 28 10 573 4.9
Banana Republic Asia 21 6 - 27 0.2
Banana Republic Europe - 3 - 3 -
Total 3,167 101 119 3,149 39.5
Decrease over prior year (0.6 %) (0.3 %)
February 3, 2007 Fiscal 2007 February 2, 2008
Number of Number of Stores Number of Stores Number of Square Footage
Store Locations (2) Opened (1) Closed (1) (2) Store Locations (in millions)
Gap North America 1,293 29 73 1,249 12.2
Gap Europe 168 12 7 173 1.5
Gap Asia 105 9 4 110 1.1
Old Navy North America 1,012 113 66 1,059 20.0
Banana Republic North America 521 43 9 555 4.7
Banana Republic Asia 13 8 - 21 0.1
Banana Republic Europe - - - - -
Total 3,112 214 159 3,167 39.6
Increase over prior year (2) 1.8 % 2.3 %
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(1) Includes conversion of 45 Old Navy Outlet stores to Old Navy.
(2) Excludes store locations, number of stores closed, and square footage associated with the discontinued operation of Forth & Towne.
Outlet stores are reflected in each of the respective brands. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia, Europe, Latin America, and the Middle East. There were 121 and 68 franchise stores that were open as of January 31, 2009 and February 2, 2008, respectively.
Net Sales Discussion
Our fiscal 2008 net sales decreased $1.2 billion, or 8 percent, compared with fiscal 2007 primarily due to a decrease in net sales of $1.4 billion related to our Stores reportable segment offset by an increase in net sales of $127 million related to our Direct reportable segment.
• For the Stores reportable segment, our fiscal 2008 net sales decreased $1.4 billion, or 9 percent, compared with fiscal 2007. The decrease was primarily due to a decline in net sales at all of our brands due to the weakening retail environment and declines in traffic, offset by an increase in net sales from our franchise business, and the favorable impact of foreign exchange of $19 million. The foreign exchange impact is the translation impact if fiscal 2007 sales were translated at fiscal 2008 exchange rates.
• For the Direct reportable segment, our fiscal 2008 net sales increased $127 million, or 14 percent, compared with fiscal 2007 due to the growth in our online business across all brands and the acquisition of Athleta in September 2008.
Our fiscal 2007 net sales decreased $160 million, or 1 percent, compared with fiscal 2006 primarily due to a decrease in net sales of $333 million related to our Stores reportable segment offset by an increase in net sales of $173 million related to our Direct reportable segment.
• For the Stores reportable segment, our fiscal 2007 net sales decreased $333 million, or 2 percent, compared with fiscal 2006. The decrease was primarily due to a decline in net sales at Old Navy and Gap, offset by an increase in net sales at Banana Republic, our franchise business, and the favorable impact of foreign exchange of $146 million. The foreign exchange impact is the translation impact if fiscal 2006 sales were translated at fiscal 2007 exchange rates. Note that fiscal 2006 consisted of 53 weeks and the additional week contributed approximately $200 million of net sales.
• For the Direct reportable segment, our fiscal 2007 net sales increased $173 million, or 24 percent, compared with fiscal 2006 primarily due to the growth in our online business across all brands.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses include:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
• freight charges;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to store operations, distribution centers, and certain corporate functions.
22 GAP INC. FORM 10-K
The classification of these expenses varies across the retail industry.
Fiscal Year
($ in millions) 2008 2007 2006
Cost of Goods Sold and Occupancy Expenses $ 9,079 $ 10,071 $ 10,266
Gross Profit $ 5,447 $ 5,692 $ 5,657
Cost of Goods Sold and Occupancy Expenses as a
Percentage of Net Sales 62.5 % 63.9 % 64.5 %
Gross Margin 37.5 % 36.1 % 35.5 %
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Cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.4 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold decreased $1.1 billion, or 3.1 percentage points as a percentage of net sales, in fiscal 2008 compared with fiscal 2007. Occupancy expenses increased $60 million, or 1.7 percentage points as a percentage of net sales, in fiscal 2008 compared with fiscal 2007.
• For the Stores reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.4 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold decreased 3.3 percentage points as a percentage of net sales in fiscal 2008 compared with fiscal 2007. The decrease was driven by higher margins achieved for both regular price and marked down merchandise primarily as a result of reduced cost of merchandise from our cost management efforts. Occupancy expenses increased 1.9 percentage points as a percentage of sales in fiscal 2008 compared with fiscal 2007 primarily driven by lower net sales in fiscal 2008 and, to a lesser extent, an increase in certain occupancy expenses.
• For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales increased 0.9 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold as a percentage of net sales was relatively flat in fiscal 2008 compared with fiscal 2007. Occupancy expenses, consisting primarily of depreciation and amortization expense, increased 0.7 percentage points as a percentage of sales in fiscal 2008 compared with fiscal 2007 primarily driven by higher depreciation expense for new information technology systems and applications.
Cost of goods sold and occupancy expenses as a percentage of net sales decreased 0.6 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased $307 million, or 1.4 percentage points as a percentage of net sales, in fiscal 2007 compared with fiscal 2006. Occupancy expenses increased $112 million, or 0.8 percentage points as a percentage of net sales, in fiscal 2007 compared with fiscal 2006.
• For the Stores reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 0.4 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased 1.5 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006. The decrease was primarily driven by an increase in selling at regular price and a higher margin achieved for marked down merchandise. Occupancy expenses increased 1.1 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006.
• For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.3 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased 0.7 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006 primarily driven by the write-off of discontinued merchandise in fiscal 2006 that did not occur in fiscal 2007. Occupancy expenses, consisting primarily of depreciation and amortization expense, decreased 0.6 percentage points as a percentage of sales in fiscal 2007 compared with fiscal 2006 primarily driven by higher net sales.
As a general business practice, we review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear the majority of this merchandise.
Operating Expenses
Operating expenses include:
• payroll and related benefits (for our store operations, field management, distribution centers, and corporate functions);
• advertising;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers and stores;
• distribution center general and administrative expenses;
• rent, occupancy, depreciation, and amortization for corporate facilities; and
• other expense (income).
The classification of these expenses varies across the retail industry.
Fiscal Year
($ in millions) 2008 2007 2006
Operating Expenses $ 3,899 $ 4,377 $ 4,432
Operating Expenses as a Percentage of Net Sales 26.8 % 27.8 % 27.8 %
Operating Margin 10.7 % 8.3 % 7.7 %
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Operating expenses decreased $478 million, or 1.0 percent as a percentage of net sales, in fiscal 2008 compared with fiscal 2007 primarily due to the following:
• $195 million in decreased corporate and divisional overhead expenses, primarily related to bonus, payroll, and employee benefits;
• $141 million in decreased store payroll and benefits;
• $88 million in decreased store-related expenses associated with fewer remodels, fewer fixture rollouts, and less packaging and supplies; and
• $41 million in decreased marketing expenses, primarily for Gap and Old Navy.
Operating expenses as a percentage of net sales were flat, but decreased $55 million in fiscal 2007 compared with fiscal 2006 primarily due to the following:
• $97 million in decreased marketing expenses, primarily for Gap and Old Navy; offset by
• $32 million of expenses, the majority of which were severance payments, recognized in fiscal 2007 as a result of our cost reduction initiatives not included in fiscal 2006;
• $31 million of income recognized in fiscal 2006 related to the change in our estimate of the elapsed time for recording income associated with unredeemed gift cards not included in fiscal 2007; and
• $14 million of income recognized in fiscal 2006 related to the Visa/Mastercard litigation settlement.
24 GAP INC. FORM 10-K
The remaining decrease is due to lower payroll and other expenses across the organization.
Interest Expense
The decrease in interest expense for fiscal 2008 compared with fiscal 2007 was primarily due to the maturity of our $326 million, 6.90 percent notes repaid in September 2007 and the reduction of interest accruals resulting primarily from foreign tax audits occurring in fiscal 2008.
The decrease of $15 million in interest expense for fiscal 2007, compared with fiscal 2006, was primarily due to the maturity of our $326 million, 6.90 percent notes repaid in September 2007 and the reduction of interest accruals resulting from the resolutions of tax audits and outstanding tax contingencies completed in fiscal 2007.
Interest Income . . .
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