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| GPS > SEC Filings for GPS > Form 10-Q on 3-Dec-2012 | All Recent SEC Filings |
3-Dec-2012
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," "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 impact of the adoption of the new accounting standards update on
our consolidated financial statements;
• changes in total gross unrecognized tax benefits within the next 12 months;
• the outcome of proceedings, lawsuits, disputes, and claims;
• the impact of losses due to indemnification obligations;
• earnings per share for fiscal 2012;
• improving sales with healthy merchandise margins;
• investing in our business while maintaining discipline;
• delivering earnings per share growth;
• returning excess cash to shareholders;
• improving comparable store sales;
• growing revenues;
• opening additional stores, including outlets, in Asia and Canada;
• continuing to open franchise stores worldwide;
• opening additional Athleta stores;
• the net openings of Company-operated store locations in fiscal 2012;
• square footage change in fiscal 2012;
• the number of new franchise stores, net of closures, in fiscal 2012;
• operating margin and deleveraging operating expenses in fiscal 2012;
• the effective tax rate in fiscal 2012;
• current cash balances and cash flows being sufficient to support our
business operations, including growth initiatives and planned capital
expenditures;
• ability to supplement near-term liquidity, if necessary, with our $500
million revolving credit facility;
• the impact of the seasonality of our operations on certain asset and
liability accounts;
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• depreciation and amortization expense in fiscal 2012;
• capital expenditures in fiscal 2012; and
• dividend payments in fiscal 2012.
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 adoption of new accounting pronouncements will impact
future results;
• the risk that changes in general economic conditions or consumer
spending patterns could adversely impact our results of operations;
• the highly competitive nature of our business in the United States and
internationally;
• the risk that we or our franchisees will be unsuccessful in gauging
apparel trends and changing consumer preferences;
• the risk to our business associated with global sourcing and
manufacturing, including sourcing costs, events causing disruptions in
product shipment, or an inability to secure sufficient manufacturing
capacity;
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• the risk that our efforts to expand internationally may not be successful;
• the risk that our franchisees will be unable to successfully open,
operate, and grow their franchised stores in a manner consistent with
our requirements regarding our brand identities and customer experience
standards;
• 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;
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• the risk that comparable sales and margins will experience fluctuations;
• the risk that changes in our credit profile or deterioration in market
conditions may limit our access to the capital markets and adversely
impact our financial results and our ability to service our debt while
maintaining other initiatives;
• 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 updates or changes to our information technology systems
may disrupt our operations;
• the risk that actual or anticipated cyber attacks, and other
cybersecurity risks, may cause us to incur increasing costs;
• the risk that natural disasters, public health crises, political
crises, or other catastrophic events could adversely affect our
operations and financial results;
• 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 we do not repurchase some or all of the shares we
anticipate purchasing pursuant to our share repurchase program;
• the risk that we will not be successful in defending various
proceedings, lawsuits, disputes, claims, and audits; and
• the risk that changes in the regulatory or administrative landscape
could adversely affect our financial condition, strategies, and results
of operations.
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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,
2012 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 December 3, 2012, and we assume no obligation to
publicly update or revise our forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein will not be realized.
We suggest that this document be read in conjunction with Management's
Discussion and Analysis included in our Annual Report on Form 10-K for the
fiscal year ended January 28, 2012.
OUR BUSINESS
We are a leading global specialty apparel company. We offer apparel,
accessories, and personal care products for men, women, children, and babies
under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We have
Company-operated stores in the United States, Canada, the United Kingdom,
France, Ireland, Japan, China, and Italy. 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 and related products under our brand
names. Our products are also available to customers online in over 80 countries
through Company-owned websites and using third parties that provide logistics
and fulfillment services. 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. We have two reportable segments: Stores and Direct.
OVERVIEW
Financial highlights for the third quarter of fiscal 2012 are as follows:
• Net sales for the third quarter of fiscal 2012 increased 8 percent to
$3.9 billion compared with $3.6 billion for the third quarter of fiscal
2011. Comparable sales for the third quarter of fiscal 2012, which
include the associated comparable online sales, increased 6 percent
compared with a 5 percent decrease for the third quarter of fiscal
2011.
• Direct net sales for the third quarter of fiscal 2012 increased 23
percent to $509 million compared with $414 million for the third
quarter of fiscal 2011. Our Direct reportable segment includes sales
for each of our online brands, including Piperlime and Athleta.
• Net sales outside of the U.S. and Canada (including Direct and
franchise) increased 7 percent to $564 million for the third quarter of
fiscal 2012 compared with $525 million for the third quarter of fiscal
2011.
• Gross profit for the third quarter of fiscal 2012 was $1.6 billion
compared with $1.3 billion for the third quarter of fiscal 2011. Gross
margin for the third quarter of fiscal 2012 was 41.2 percent compared
with 36.7 percent for the third quarter of fiscal 2011.
• Operating expenses for the third quarter of fiscal 2012 were $1.1
billion compared with $968 million for the third quarter of fiscal 2011
and increased 0.8 percent as a percentage of net sales.
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• Net income for the third quarter of fiscal 2012 increased 60 percent to
$308 million compared with $193 million for the third quarter of fiscal
2011, and diluted earnings per share increased 66 percent to $0.63 for
the third quarter of fiscal 2012 compared with $0.38 for the third
quarter of fiscal 2011. For fiscal 2012, we expect diluted earnings per
share to be in the range of $2.20 to $2.25.
• During the first three quarters of fiscal 2012, we generated free cash
flow of $776 million compared with free cash flow of $222 million for
the first three quarters of fiscal 2011. 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
measure, from a GAAP financial measure, see the Liquidity and Capital
Resources section.
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Our full year business and financial priorities for fiscal 2012 remain as
follows:
• improve sales with healthy merchandise margins;
• invest in our business while maintaining discipline;
• deliver earnings per share growth; and
• return excess cash to shareholders.
As we focus on improving comparable store sales in fiscal 2012, we also plan to
grow revenues through the following:
• opening additional stores, many of which will be outlets, in Asia and Canada;
• continuing to open franchise stores worldwide; and
• opening additional Athleta stores.
RESULTS OF OPERATIONS
Net Sales
Net sales primarily consist of retail sales, online sales, and franchise
revenues.
See Item 1, Financial Statements, Note 12 of Notes to Condensed Consolidated
Financial Statements for net sales by brand, region, and reportable segment.
Comparable Sales
The percentage change in comparable ("Comp") sales by brand and region and for
total Company, including the associated comparable online sales, as compared
with the preceding year, is as follows:
13 Weeks Ended 39 Weeks Ended
October 27, October 29, October 27, October 29,
2012 2011 2012 2011
Gap North America 7 % (6 )% 6 % (4 )%
Old Navy North America 9 % (4 )% 6 % (2 )%
Banana Republic North America 6 % (1 )% 6 % (1 )%
International (3 )% (10 )% (4 )% (7 )%
The Gap, Inc. 6 % (5 )% 5 % (3 )%
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The percentage change in Comp store sales by brand and region and for total
Company, excluding the associated comparable online sales, as compared with the
preceding year, is as follows:
13 Weeks Ended 39 Weeks Ended
October 27, October 29, October 27, October 29,
2012 2011 2012 2011
Gap North America 4 % (8 )% 5 % (6 )%
Old Navy North America 8 % (8 )% 4 % (5 )%
Banana Republic North America 3 % (3 )% 4 % (3 )%
International (3 )% (11 )% (5 )% (8 )%
The Gap, Inc. 4 % (7 )% 3 % (5 )%
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Only Company-operated stores are included in the calculations of Comp sales. Gap
and Banana Republic outlet Comp sales are reflected within the respective
results of each brand. The calculation of total company Comp sales excludes the
results of our franchise business, Piperlime, and Athleta.
A store is included in the Comp sales calculations when it has been open for at
least one year and the selling square footage has not changed by 15 percent or
more within the past year. A store is included in the Comp sales calculations on
the first day it has comparable prior year sales. Stores in which the selling
square footage has changed by 15 percent or more as a result of a remodel,
expansion, or reduction are excluded from the Comp sales calculations until the
first day they have comparable prior year sales.
A store is considered non-comparable ("Non-comp") when it has been open for less
than one year or has changed its selling square footage by 15 percent or more
within the past year.
A store is considered "Closed" if it is temporarily closed for three or more
full consecutive days or it is permanently closed. When a temporarily closed
store reopens, the store will be placed in the Comp/Non-comp status it was in
prior to its closure. If a store was in Closed status for three or more days in
the prior year, the store will be in Non-comp status for the same days the
following year.
Comparable online sales include sales through online channels and are reported
based on the location of the distribution center.
Current year foreign exchange rates are applied to both current year and prior
year Comp sales to achieve a consistent basis for comparison.
Store Count and Square Footage Information Net sales per average square foot is as follows:
13 Weeks Ended 39 Weeks Ended
October 27, October 29, October 27, October 29,
2012 2011 2012 2011
Net sales per average square foot (1) $ 89 $ 82 $ 255 $ 238
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Store count, openings, closings, and square footage for our stores are as follows:
January 28, 2012 39 Weeks Ended October 27, 2012 October 27, 2012
Number of Number of Number of Number of Square Footage
Store Locations Stores Opened Stores Closed Store Locations (in millions)
Gap North America 1,043 15 42 1,016 10.5
Gap Europe 193 4 1 196 1.7
Gap Asia 152 26 3 175 1.7
Old Navy North America 1,016 17 20 1,013 17.7
Old Navy Asia - 1 - 1 -
Banana Republic North America 581 15 7 589 4.9
Banana Republic Asia 31 8 2 37 0.2
Banana Republic Europe 10 - - 10 0.1
Athleta North America 10 20 - 30 0.1
Piperlime North America - 1 - 1 -
Company-operated stores total 3,036 107 75 3,068 36.9
Franchise 227 55 11 271 N/A
Total 3,263 162 86 3,339 36.9
Increase (decrease) over prior year 1.9 % (1.9 )%
January 29, 2011 39 Weeks Ended October 29, 2011 October 29, 2011
Number of Number of Number of Number of Square Footage
Store Locations Stores Opened Stores Closed Store Locations (in millions)
Gap North America 1,111 16 41 1,086 11.1
Gap Europe 184 12 5 191 1.7
Gap Asia 135 11 5 141 1.3
Old Navy North America 1,027 21 26 1,022 18.3
Banana Republic North America 576 11 4 583 4.9
Banana Republic Asia 29 1 1 29 0.2
Banana Republic Europe 5 4 - 9 0.1
Athleta North America 1 3 - 4 -
Company-operated stores total 3,068 79 82 3,065 37.6
Franchise 178 36 3 211 N/A
Total 3,246 115 85 3,276 37.6
Increase (decrease) over prior year 0.9 % (2.1 )%
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Gap and Banana Republic outlet stores are reflected in each of the respective
brands. We have franchise agreements with unaffiliated franchisees to operate
Gap and Banana Republic stores throughout Asia, Australia, Eastern Europe, Latin
America, the Middle East, and Africa.
In fiscal 2012, we expect net openings of about 15 Company-operated store
locations. We expect square footage for Company-operated stores to decrease
about 1 percent at the end of fiscal 2012 compared with the end of fiscal 2011.
We expect our franchisees to open about 50 to 75 new franchise stores, net of
closures, in fiscal 2012.
Net Sales
Our net sales for the third quarter of fiscal 2012 increased $279 million, or 8
percent, compared with the prior year comparable period due to an increase in
net sales of $184 million related to our Stores reportable segment and an
increase in net sales of $95 million related to our Direct reportable segment.
• For the Stores reportable segment, our net sales for the third quarter
of fiscal 2012 increased $184 million, or 6 percent, compared with the
prior year comparable period. The increase was primarily due to an
increase in Comp store sales, excluding the associated comparable
online sales, for the U.S. and Canada and incremental sales for new
international stores.
• For the Direct reportable segment, our net sales for the third quarter
of fiscal 2012 increased $95 million, or 23 percent, compared with the
prior year comparable period. The increase was due to growth in our
online business across all brands including the incremental sales
related to new Athleta stores.
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In the third quarter of fiscal 2012, our net sales for the U.S. and Canada
(including Direct) were $3.3 billion, an increase of $240 million, or 8 percent,
compared with $3.1 billion for the prior year comparable period. In the third
quarter of fiscal 2012, our net sales outside of the U.S. and Canada (including
Direct and franchise) were $564 million, an increase of $39 million, or 7
percent, compared with $525 million for the prior year comparable period.
Our net sales for the first three quarters of fiscal 2012 increased $660
million, or 6 percent, compared with the prior year comparable period due to an
increase in net sales of $428 million related to our Stores reportable segment
and an increase in net sales of $232 million related to our Direct reportable
segment.
• For the Stores reportable segment, our net sales for the first three
quarters of fiscal 2012 increased $428 million, or 5 percent, compared
with the prior year comparable period. The increase was primarily due
to an increase in Comp store sales, excluding the associated comparable
online sales, for the U.S. and Canada, incremental sales for new
international stores, and higher franchise net sales; partially offset
by the unfavorable impact of foreign exchange of $29 million. The
foreign exchange impact is the translation impact if net sales for the
first three quarters of fiscal 2011 were translated at exchange rates
applicable during the first three quarters of fiscal 2012.
• For the Direct reportable segment, our net sales for the first three
quarters of fiscal 2012 increased $232 million, or 22 percent, compared
with the prior year comparable period. The increase was due to growth
in our online business across all brands and the incremental sales
related to new Athleta stores.
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During the first three quarters of fiscal 2012, our net sales for the U.S. and Canada (including Direct) were $9.3 billion, an increase of $528 million, or 6 percent, compared with $8.8 billion for the prior year comparable period. During the first three quarters of fiscal 2012, our net sales outside of the U.S. and Canada (including Direct and franchise) were $1.6 billion, an increase of $132 million, or 9 percent, compared with $1.5 billion for the prior year comparable period.
Cost of Goods Sold and Occupancy Expenses
13 Weeks Ended 39 Weeks Ended
October 27, October 29, October 27, October 29,
($ in millions) 2012 2011 2012 2011
Cost of goods sold and occupancy
expenses $ 2,271 $ 2,271 $ 6,531 $ 6,397
Gross profit $ 1,593 $ 1,314 $ 4,395 $ 3,869
Cost of goods sold and occupancy
expenses as a percentage of net sales 58.8 % 63.3 % 59.8 % 62.3 %
Gross margin 41.2 % 36.7 % 40.2 % 37.7 %
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Cost of goods sold and occupancy expenses as a percentage of net sales decreased
4.5 percent in the third quarter of fiscal 2012 compared with the prior year
comparable period.
• Cost of goods sold decreased 3.3 percent as a percentage of net sales
in the third quarter of fiscal 2012 compared with the prior year
comparable period. The decrease in cost of goods sold as a percentage
of net sales was primarily driven by decreased cost of merchandise as a
result of lower cotton prices.
• Occupancy expenses decreased 1.2 percent as a percentage of net sales
in the third quarter of fiscal 2012 compared with the prior year
comparable period. The decrease in occupancy expenses as a percentage
of net sales was primarily driven by higher net sales without a
corresponding increase in occupancy expenses.
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Cost of goods sold and occupancy expenses as a percentage of net sales decreased
2.5 percent during the first three quarters of fiscal 2012 compared with the
prior year comparable period.
• Cost of goods sold decreased 1.4 percent as a percentage of net sales
during the first three quarters of fiscal 2012 compared with the prior
year comparable period. The decrease in cost of goods sold as a
percentage of net sales was primarily driven by improved product
acceptance resulting in improved average unit selling price.
• Occupancy expenses decreased 1.1 percent as a percentage of net sales
during the first three quarters of fiscal 2012 compared with the prior
year comparable period. The decrease in occupancy expenses as a
percentage of net sales was primarily driven by higher net sales
without a corresponding increase in occupancy expenses.
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Operating Expenses
13 Weeks Ended 39 Weeks Ended
October 27, October 29, October 27, October 29,
($ in millions) 2012 2011 2012 2011
. . .
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