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| GPS > SEC Filings for GPS > Form 10-Q on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-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) expected amortization expense for
intangible assets; (ii) expected share repurchases from members of the Fisher
family; (iii) the decrease in unrecognized tax benefits and the impact on
financial statements; (iv) intentions with respect to undistributed earnings of
foreign subsidiaries; (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)
improving our sales trend; (xi) focus on return on invested capital;
(xii) maintaining focus on cost management and inventory discipline;
(xiii) generating strong free cash flow and returning excess cash to
shareholders; (xiv) effective tax rate for fiscal 2009; (xv) capital
expenditures in fiscal 2009; (xvi) store openings and closings in fiscal 2009;
(xvii) net square footage change in fiscal 2009; (xviii) dividends in fiscal
2009; and (xix) share repurchases in the third quarter of 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 September 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 wholly owned 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 second quarter of fiscal 2009 were $3.2 billion, down 7 percent compared with $3.5 billion for the second quarter of fiscal 2008. Comparable store sales decreased 8 percent compared with a decrease of 10 percent for the second quarter of fiscal 2008.
• Our Direct sales for the second quarter of fiscal 2009 increased 17 percent to $224 million, compared with $191 million for the second quarter of fiscal 2008. Our Direct reportable segment includes all online sales and, beginning September 2008, Athleta online and catalog sales.
• Gross margin for the second quarter of fiscal 2009 was 39.7 percent compared with 38.2 percent for the second quarter of fiscal 2008.
• Operating margin for the second quarter of fiscal 2009 was 11.6 percent compared with 10.7 percent for the second quarter of 2008.
• Net income for the second quarter of fiscal 2009 was $228 million, or $0.33 per share on a diluted basis, compared with $229 million, or $0.32 per share on a diluted basis for the second quarter of fiscal 2008.
• During the first half of fiscal 2009, we generated free cash flow of $589 million compared with free cash flow of $354 million for the first half 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.
• As of August 1, 2009, cash and cash equivalents and short-term investments were $2.1 billion with no debt outstanding. We believe our cash balances and cash flows from operations will be sufficient to fund our business operations, capital expenditures, and the payment of dividends for the foreseeable future.
Our business and financial priorities for fiscal 2009 are as follows:
• Consistently delivering product that aligns with our target customers with an overall objective of improving our sales trend;
• Improving customer experience and continuing to invest in our business with a focus on return on invested capital;
• Maintaining a focus on cost management and inventory discipline; and
• Generating strong free cash flow and returning excess cash to shareholders.
Results of Operations
Net Sales
Net Sales by Brand, Region, and Reportable Segment
Net sales primarily consist of retail sales, online sales, wholesale and franchise revenues, and shipping fees received from customers for delivery of merchandise. Outlet retail sales are reflected within the respective results of each brand.
We identify our operating segments based on the way we manage and evaluate our business activities. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.
Net sales by brand, region, and reportable segment are as follows:
($ in millions) Banana 13 Weeks Ended August 1, 2009 Gap Old Navy Republic Other (3) Total U.S. (1) $ 808 $ 1,147 $ 483 $ - $ 2,438 Canada 70 90 33 - 193 Europe 154 - 6 6 166 Asia 173 - 28 11 212 Other regions - - - 12 12 Total Stores reportable segment 1,205 1,237 550 29 3,021 Direct reportable segment (2) 57 96 26 45 224 Total $ 1,262 $ 1,333 $ 576 $ 74 $ 3,245 Sales Growth (Decline) (10 )% (4 )% (13 )% 61 % (7 )% ($ in millions) Banana 13 Weeks Ended August 2, 2008 Gap Old Navy Republic Other (3) Total U.S. (1) $ 919 $ 1,195 $ 562 $ - $ 2,676 Canada 80 103 37 - 220 Europe 185 - 6 7 198 Asia 160 - 25 12 197 Other regions - - - 17 17 Total Stores reportable segment 1,344 1,298 630 36 3,308 Direct reportable segment (2) 59 92 30 10 191 Total $ 1,403 $ 1,390 $ 660 $ 46 $ 3,499 Sales Growth (Decline) (1 )% (13 )% 2 % 84 % (5 )% ($ in millions) Banana 26 Weeks Ended August 1, 2009 Gap Old Navy Republic Other (3) Total U.S. (1) $ 1,584 $ 2,257 $ 929 $ - $ 4,770 Canada 128 162 62 - 352 Europe 289 - 11 13 313 Asia 344 - 51 23 418 Other regions - - - 28 28 Total Stores reportable segment 2,345 2,419 1,053 64 5,881 Direct reportable segment (2) 133 212 57 89 491 Total $ 2,478 $ 2,631 $ 1,110 $ 153 $ 6,372 Sales Growth (Decline) (11 )% (4 )% (12 )% 74 % (7 )% ($ in millions) Banana 26 Weeks Ended August 2, 2008 Gap Old Navy Republic Other (3) Total U.S. (1) $ 1,818 $ 2,336 $ 1,066 $ - $ 5,220 Canada 157 198 71 - 426 Europe 357 - 11 12 380 Asia 328 - 46 23 397 Other regions - - - 33 33 Total Stores reportable segment 2,660 2,534 1,194 68 6,456 Direct reportable segment (2) 135 209 63 20 427 Total $ 2,795 $ 2,743 $ 1,257 $ 88 $ 6,883 Sales Growth (Decline) (1 )% (13 )% 3 % 87 % (5 )% |
(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 reportable segment. For the Direct reportable 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 26 Weeks Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Gap North America (10 )% (6 )% (11 )% (6 )%
Old Navy North America (4 )% (16 )% (4 )% (17 )%
Banana Republic North America (15 )% (6 )% (14 )% (5 )%
International (5 )% (6 )% (5 )% (5 )%
The Gap, Inc. (8 )% (10 )% (8 )% (11 )%
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Only wholly owned stores are included in the calculation of comparable store sales. 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.
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 26 Weeks Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Net sales per average square foot (1) $ 76 $ 82 $ 148 $ 161
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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 26 Weeks Ended August 1, 2009 August 1, 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 4 18 1,179 11.7
Gap Europe 173 6 - 179 1.5
Gap Asia 113 3 - 116 1.1
Old Navy North America 1,067 2 7 1,062 20.0
Banana Republic North America 573 8 2 579 4.9
Banana Republic Asia 27 - - 27 0.2
Banana Republic Europe 3 - - 3 -
Total 3,149 23 27 3,145 39.4
Decrease from January 31, 2009 (0.1 )% (0.3 )%
February 2, 2008 26 Weeks Ended August 2, 2008 August 2, 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 7 26 1,230 12.1
Gap Europe 173 4 8 169 1.5
Gap Asia 110 5 4 111 1.0
Old Navy North America 1,059 15 8 1,066 20.1
Banana Republic North America 555 19 6 568 4.8
Banana Republic Asia 21 4 - 25 0.1
Banana Republic Europe - 1 - 1 -
Total 3,167 55 52 3,170 39.6
Increase from February 2, 2008 0.1 % - %
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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 133 and 99 franchise stores open as of August 1, 2009 and August 2, 2008, respectively.
Net Sales Discussion
Our net sales for the second quarter of fiscal 2009 decreased $254 million, or 7 percent, compared with the prior year comparable period due to a decrease in net sales of $287 million related to our Stores reportable segment offset by an increase in net sales of $33 million related to our Direct reportable segment.
• For the Stores reportable segment, our net sales for the second quarter of fiscal 2009 decreased $287 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 $39 million. The foreign exchange impact is the translation impact if net sales for the second quarter of fiscal 2008 were translated at exchange rates applicable during the second quarter of fiscal 2009.
• For the Direct reportable segment, our net sales for the second quarter of fiscal 2009 increased $33 million, or 17 percent, compared with the prior year comparable period. The increase was primarily due to the incremental sales related to the acquisition of Athleta in September 2008.
Our net sales for the first half of fiscal 2009 decreased $511 million, or 7 percent, compared with the prior year comparable period due to a decrease in net sales of $575 million related to our Stores reportable segment offset by an increase in net sales of $64 million related to our Direct reportable segment.
• For the Stores reportable segment, our net sales for the first half of fiscal 2009 decreased $575 million, or 9 percent, compared with the prior year comparable period. The decrease was primarily due to a decline in net sales across all of our brands and the unfavorable impact of foreign exchange of $111 million. The foreign exchange impact is the translation impact if net sales for the first half of fiscal 2008 were translated at exchange rates applicable during the first half of fiscal 2009.
• For the Direct reportable segment, our net sales for the first half of fiscal 2009 increased $64 million, or 15 percent, compared with the prior year comparable period. The increase was primarily due to the incremental sales related to the acquisition of Athleta in September 2008.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses include:
• the cost of merchandise;
• inventory shortage and valuation adjustments;
• freight charges;
• costs associated with our sourcing operations, including payroll and related benefits;
• production costs;
• insurance costs related to merchandise; and
• rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to our store operations, distribution centers, and certain corporate functions.
The classification of these expenses varies across the retail industry.
As a general business practice, we review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear the majority of this merchandise.
13 Weeks Ended 26 Weeks Ended
August 1, August 2, August 1, August 2,
($ in millions) 2009 2008 2009 2008
Cost of goods sold and occupancy
expenses $ 1,957 $ 2,161 $ 3,845 $ 4,203
Gross profit $ 1,288 $ 1,338 $ 2,527 $ 2,680
Cost of goods sold and occupancy
expenses as a percentage of net sales 60.3 % 61.8 % 60.3 % 61.1 %
Gross margin 39.7 % 38.2 % 39.7 % 38.9 %
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Cost of goods sold and occupancy expenses decreased $204 million, or 1.5 percentage points as a percentage of net sales, in the second quarter of fiscal 2009 compared with the prior year comparable period. Cost of goods sold decreased 2.1 percentage points as a percentage of net sales in the second quarter of fiscal 2009 compared with the prior year comparable period. Occupancy expenses increased 0.6 percentage points as a percentage of net sales in the second 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 decreased 1.1 percentage points in the second quarter of fiscal 2009 compared with the prior year comparable period. Cost of goods sold decreased 2.0 percentage points as a percentage of net sales in the second quarter of fiscal 2009 compared with the prior year comparable period. The decrease was driven primarily by reduced cost of merchandise from our cost management efforts and a decrease in selling at markdown. Occupancy expenses increased 0.9 percentage points as a percentage of net sales in the second quarter of fiscal 2009 compared with the prior year comparable period. The increase was driven primarily by lower sales related to comparable stores.
• For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 3.6 percentage points in the second quarter of fiscal 2009 compared with the prior year comparable period. Cost of goods sold decreased 4.3 percentage points as a percentage of net sales in the second 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 . . .
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