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| GPS > SEC Filings for GPS > Form 10-Q on 9-Jun-2009 | All Recent SEC Filings |
9-Jun-2009
Quarterly Report
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," "plan," "project," and similar expressions also identify
forward-looking statements. Forward-looking statements include, but are not
limited to, statements regarding: (i) the impact of the adoption of new
accounting standards; (ii) expected amortization expense for intangible assets;
(iii) expected share repurchases from members of the Fisher family; (iv) the
decrease in unrecognized tax benefits and the impact on financial statements;
(v) the maximum potential amount of future lease payments under assigned leases;
(vi) the impact of losses under contractual indemnifications; (vii) the maximum
exposure and cash collateralized balance for the Company's reinsurance pool in
future periods; (viii) the outcome of proceedings, lawsuits, disputes and
claims; (ix) cash balances and cash flows being sufficient to support
operations, capital expenditures, and dividends; (x) focus on return on invested
capital; (xi) maintaining focus on cost management and inventory discipline;
(xii) generating strong free cash flow; (xiii) effective tax rate for fiscal
2009; (xiv) capital expenditures in fiscal 2009; (xv) store openings and
closings in fiscal 2009; (xvi) net square footage change in fiscal 2009; and
(xvii) dividends in fiscal 2009.
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 risk that the adoption of new accounting pronouncements will impact future results; the risk that we will be unsuccessful in gauging fashion trends and changing consumer preferences; the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns will have a negative impact on our financial performance or strategies; the highly competitive nature of our business in the United States and internationally and our dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that we will be unsuccessful in identifying and negotiating new store locations and renewing leases for existing store locations effectively; the risk that comparable store sales and margins will experience fluctuations; the risk that we will be unsuccessful in implementing our strategic, operating and people initiatives; the risk that adverse changes in our credit ratings may have a negative impact on our financing costs, structure and access to capital in future periods; the risk that changes to our information technology systems may disrupt our operations; the risk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or an inability to secure sufficient manufacturing capacity may disrupt our supply chain or operations; the risk that our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands; the risk that acts or omissions by our third party vendors, including a failure to comply with our code of vendor conduct, could have a negative impact on our reputation or operations; the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations; 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; any of which could impact net sales, expenses, and/or planned strategies. 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 31, 2009 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 June 9, 2009 and we assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
We suggest that this document be read in conjunction with Management's Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
Our Business
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 gap.com, oldnavy.com, bananarepublic.com, piperlime.com, and 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.
We identify our operating segments based on the way we manage and evaluate our business activities. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.
Overview
Financial highlights include:
• Net sales for the first quarter of fiscal 2009 were $3.1 billion compared with $3.4 billion for the first quarter of fiscal 2008, and comparable store sales decreased 8 percent compared with a decrease of 11 percent for the first quarter of fiscal 2008.
• Our Direct sales for the first quarter of fiscal 2009 increased 13 percent to $267 million, compared with $236 million for the first quarter of fiscal 2008. Our Direct reportable segment includes all online sales and, beginning September 2008, Athleta online and catalog sales.
• Net earnings for the first quarter of fiscal 2009 were $215 million, or $0.31 per share on a diluted basis, compared with $249 million, or $0.34 per share on a diluted basis for the first quarter of fiscal 2008.
• Gross margin for the first quarter of fiscal 2009 was 39.6 percent compared with 39.7 percent for the first quarter of fiscal 2008.
• Operating margin for the first quarter of fiscal 2009 and fiscal 2008 was 11.3 percent.
• During the first quarter of fiscal 2009, we generated free cash flow of $139 million compared with free cash flow of $62 million for the first quarter of fiscal 2008. 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.
Net sales for the first quarter of fiscal 2009 were down 8 percent from the prior year comparable period. Despite this, our cash flow generation remains healthy and we maintain a strong balance sheet. As of May 2, 2009, cash, cash equivalents, and restricted cash were $1.7 billion with no debt outstanding. We believe our cash balances and cash flows from operations will be sufficient to fund our business operations, capital expenditures, and dividends.
Our business and financial priorities for fiscal 2009 are as follows:
• Consistently delivering product that aligns with our target customers;
• Improving customer experience and continuing to invest in our business with a focus on return on invested capital;
• Maintaining a focus on cost management and inventory discipline; and
• Generating strong free cash flow.
Results of Operations
Net Sales
Net Sales by Brand, Region, and Reportable Segment
Net sales primarily consist of retail sales, online sales, wholesale and franchise revenues, and shipping fees received from customers for delivery of merchandise. Outlet retail sales are reflected within the respective results of each brand.
We identify our operating segments based on the way we manage and evaluate our business activities. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.
Net sales by brand, region, and reportable segment are as follows:
($ in millions) Banana
13 Weeks Ended May 2, 2009 Gap Old Navy Republic Other (3) Total
U.S. (1) $ 776 $ 1,110 $ 446 $ - $ 2,332
Canada 58 72 29 - 159
Europe 135 - 5 7 147
Asia 171 - 23 12 206
Other regions - - - 16 16
Total Stores reportable segment 1,140 1,182 503 35 2,860
Direct reportable segment (2) 76 116 31 44 267
Total $ 1,216 $ 1,298 $ 534 $ 79 $ 3,127
Sales Growth (Decline) (13 )% (4 )% (11 )% 88 % (8 )%
Banana
13 Weeks Ended May 3, 2008 Gap Old Navy Republic Other (3) Total
U.S. (1) $ 899 $ 1,141 $ 504 $ - $ 2,544
Canada 77 95 34 - 206
Europe 172 - 5 5 182
Asia 168 - 21 11 200
Other regions - - - 16 16
Total Stores reportable segment 1,316 1,236 564 32 3,148
Direct reportable segment (2) 76 117 33 10 236
Total $ 1,392 $ 1,353 $ 597 $ 42 $ 3,384
Sales Growth (Decline) (1 )% (12 )% 3 % 83 % (5 )%
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(1) U.S. includes the United States and Puerto Rico.
(2) U.S. only. The Direct reportable segment includes Athleta beginning September 2008.
(3) Other includes our wholesale business and franchise business for the Stores segment. For the Direct segment, other includes Piperlime and, beginning September 2008, Athleta.
Comparable Store Sales
The percentage change in comparable store sales by brand and region and for
total Company are as follows:
13 Weeks Ended
May 2, May 3,
2009 2008
Gap North America (12 )% (7 )%
Old Navy North America (3 )% (18 )%
Banana Republic North America (13 )% (4 )%
International (4 )% (5 )%
The Gap, Inc. (8 )% (11 )%
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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 selling 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 the selling 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 selling 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 are as follows:
13 Weeks Ended
May 2, May 3,
2009 2008
Net sales per average square foot (1) $ 72 $ 79
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(1) Excludes net sales associated with the Direct reportable segment and our wholesale and franchise businesses.
Store count, openings, closings, and square footage for our wholly owned stores are as follows:
January 31, 2009 13 Weeks Ended May 2, 2009 May 2, 2009
Number of Number of Stores Number of Stores Number of Square Footage
Store Locations Opened Closed Store Locations (in millions)
Gap North America 1,193 3 8 1,188 11.8
Gap Europe 173 2 - 175 1.5
Gap Asia 113 2 - 115 1.1
Old Navy North America 1,067 1 2 1,066 20.0
Banana Republic North America 573 3 1 575 4.9
Banana Republic Asia 27 - - 27 0.1
Banana Republic Europe 3 - - 3 -
Total 3,149 11 11 3,149 39.4
Decrease over prior year (0.9 )% (0.8 )%
February 2, 2008 13 Weeks Ended May 3, 2008 May 3, 2008
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 6 10 1,245 12.2
Gap Europe 173 3 1 175 1.5
Gap Asia 110 2 4 108 1.0
Old Navy North America 1,059 11 5 1,065 20.1
Banana Republic North America 555 7 3 559 4.8
Banana Republic Asia 21 3 - 24 0.1
Banana Republic Europe - 1 - 1 -
Total 3,167 33 23 3,177 39.7
Increase over prior year 1.4 % 2.1 %
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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 130 and 87 franchise stores open as of May 2, 2009 and May 3, 2008, respectively.
Net Sales Discussion
Our net sales for the first quarter of fiscal 2009 decreased $257 million, or 8 percent, compared with the prior year comparable period due to a decrease in net sales of $288 million related to our Stores reportable segment offset by an increase in net sales of $31 million related to our Direct reportable segment.
• For the Stores reportable segment, our net sales for the first quarter of fiscal 2009 decreased $288 million, or 9 percent, compared with the prior year comparable period. The decrease was primarily due to a decline in net sales at all of our brands and the unfavorable impact of foreign exchange of $70 million. The foreign exchange impact is the translation impact if net sales for the first quarter of fiscal 2008 were translated at exchange rates applicable during the first quarter of fiscal 2009.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses include:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
• freight charges;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to our store operations, distribution centers, and certain corporate functions.
The classification of these expenses varies across the retail industry.
13 Weeks Ended
May 2, May 3,
($ in millions) 2009 2008
Cost of goods sold and occupancy expenses $ 1,888 $ 2,042
Gross profit $ 1,239 $ 1,342
Cost of goods sold and occupancy expenses as a percentage of net
sales 60.4 % 60.3 %
Gross margin 39.6 % 39.7 %
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Cost of goods sold and occupancy expenses decreased $154 million in the first quarter of fiscal 2009 but increased 0.1 percentage points as a percentage of net sales compared with the prior year comparable period. Cost of goods sold decreased 1.0 percentage points as a percentage of net sales in the first quarter of fiscal 2009 compared with the prior year comparable period. Occupancy expenses increased 1.1 percentage points as a percentage of net sales in the first quarter of fiscal 2009 compared with the prior year comparable period.
• For the Stores reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales increased 0.1 percentage points in the first quarter of fiscal 2009 compared with the prior year comparable period. Cost of goods sold decreased 1.2 percentage points as a percentage of net sales in the first quarter of fiscal 2009 compared with the prior year comparable period. The decrease was driven by an increase in selling at regular price and a higher margin achieved for marked down merchandise primarily as a result of reduced cost of merchandise from our cost management efforts. Occupancy expenses increased 1.3 percentage points as a percentage of net sales in the first quarter of fiscal 2009 compared with the prior year comparable period. The increase was driven primarily by lower sales related to comparable stores, partially offset by favorable foreign exchange impact.
• For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales increased 0.5 percentage points in the first quarter of fiscal 2009 compared with the prior year comparable period. Cost of goods sold decreased 0.4 percentage points as a percentage of net sales in the first quarter of fiscal 2009 compared with the prior year comparable period. The decrease was driven primarily by reduced cost of merchandise. Occupancy expenses, consisting primarily of depreciation and amortization expense, increased 0.9 percentage points as a percentage of net sales, in the first quarter of fiscal 2009 compared with the prior year comparable period. The increase was driven by higher depreciation expense from new information technology systems and applications.
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);
• marketing;
• 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.
13 Weeks Ended
May 2, May 3,
($ in millions) 2009 2008
Operating expenses $ 886 $ 959
Operating expenses as a percentage of net sales 28.3 % 28.3 %
Operating margin 11.3 % 11.3 %
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Operating expenses decreased $73 million, or 8 percent, in the first quarter of fiscal 2009 over the prior year comparable period. The decrease was driven primarily by lower store related expenses as a result of the decline in sales, lower corporate overhead expenses primarily related to bonus, payroll, and employee benefits, and a favorable foreign exchange impact.
Interest Expense (Reversal)
13 Weeks Ended
May 2, May 3,
($ in millions) 2009 2008
Interest expense (reversal) $ 2 $ (12 )
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In the first quarter of fiscal 2008, we recognized a reversal of $15 million interest expense from the reduction of interest expense accruals resulting primarily from foreign tax audit events occurring in the quarter.
Interest Income
13 Weeks Ended
May 2, May 3,
($ in millions) 2009 2008
Interest income $ 2 $ 13
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Interest income is earned on our cash and cash equivalents. The decrease in interest income for the first quarter of fiscal 2009 over the prior year comparable period was primarily due to lower interest rates.
Income Taxes
13 Weeks Ended
May 2, May 3,
($ in millions) 2009 2008
Income taxes $ 138 $ 159
Effective tax rate 39.1 % 39.0 %
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We currently expect the fiscal 2009 effective tax rate to be about 39 percent. The actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, the overall level of earnings, and the potential resolution of outstanding tax contingencies.
Liquidity and Capital Resources
Our largest source of cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy expenses, personnel related expenses, payment of taxes, and purchases of property and equipment.
As of May 2, 2009, cash, cash equivalents, and restricted cash were $1.7 billion. Our cash flow generation remains healthy and our cash position remains strong. We believe that current cash balances and cash flows from our operations will be adequate to support our business operations, capital expenditures, and the payment of dividends. We are also able to supplement near-term liquidity, if necessary, with the existing $500 million revolving credit facility.
Cash Flows from Operating Activities
Net cash provided by operating activities during the first quarter of fiscal 2009 increased $26 million compared with the prior year comparable period . . .
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