THE GAP, INC.
THE GAP, INC.
(1) On March 4, 2020, the Company declared a first quarter fiscal year 2020 dividend of $0.2425 per share. On March 26,The dividend payable amount for the first quarter of fiscal 2020 was estimated based upon the Company announced thatshareholders of record as of May 2, 2020. The dividend was paid during the dividend will be payable on or after April 28,first quarter of fiscal 2021 to shareholders of record at the close of business on April 7, 2021. The dividend payable amount was estimated based upon the shareholders of record as of August 1, 2020.
THE GAP, INC.
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 asIn the opinion of August 1, 2020 and August 3, 2019, and the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019, and the Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 1, 2020 and August 3, 2019, have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In management, the opinion of management, such statementsaccompanying unaudited Condensed Consolidated Financial Statements contain all normal and 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 AugustMay 1, 20202021 and August 3, 2019May 2, 2020 and for all periods presented. The Condensed Consolidated Balance Sheet as of February 1, 2020January 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 February 1, 2020.January 30, 2021.
The results of operations for the thirteen and twenty-six weeks ended AugustMay 1, 20202021 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January 30, 2021.29, 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. As a result,Fiscal 2020 results were significantly impacted as we temporarily closed our North America retail stores and a significantlarge number of our stores globally. In May 2020, we began to safely reopen our temporarily closed stores in accordance with local government guidelines. The Company also implemented several actions duringDuring the thirteen weeks ended Augustending May 1, 2020,2021, there continued to enhancebe residual impacts from store closures in international markets and in our liquidity position suchsupply chain as completinga result of COVID-19. We continue to consider the issuanceimpact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements.
Restricted Cash
As of May 1, 2021, restricted cash primarily included consideration that serves as collateral for our Senior Secured Notes for $2.25 billioninsurance obligations. The following table provides a reconciliation of cash, cash equivalents, and entering into a third amended and restated senior secured asset-based revolving credit agreement (the "ABL Facility"), with an initial aggregate principal amount of up to $1.8675 billion. There were no borrowings under the ABL Facility as of August 1, 2020. See Note 3 of Notes torestricted cash reported within our Condensed Consolidated FinancialBalance Sheets to the total shown on our Condensed Consolidated Statements for further details. During the twenty-six weeks ended August 1, 2020, we also suspended share repurchases and dividends, and deferred the first quarter of fiscal 2020 dividend.Cash Flows:
We suspended rent payments under the leases for our temporarily closed stores beginning in | | | | | | | | | | | | | | | | | |
($ in millions) | May 1, 2021 | | January 30, 2021 | | May 2, 2020 |
Cash and cash equivalents, per Condensed Consolidated Balance Sheets | $ | 2,066 | | | $ | 1,988 | | | $ | 1,028 | |
Restricted cash included in other current assets | 0 | | | 4 | | | 0 | |
Restricted cash included in other long-term assets | 30 | | | 24 | | | 20 | |
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows | $ | 2,096 | | | $ | 2,016 | | | $ | 1,048 | |
Accounting Pronouncements Recently Adopted
In April 2020, and are now working through negotiations with our landlords relating to those leases. We considered the Financial Accounting Standards Board'sBoard ("FASB") recentprovided guidance on accounting for rent concessions resulting from the COVID-19 pandemic. We considered the FASB's guidance regarding lease modifications as 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. As of August 1, 2020, theThe impact of applying the temporary practical expedient was not material to our Condensed Consolidated Financial Statements.
In response to COVID-19, various governments worldwide have enacted, or are in the process of enacting, measures to provide relief to businesses negatively affected by the pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the United States. The CARES Act provides relief to U.S. corporations through financial assistance programs and modifications to certain payroll and income tax provisions. The Company is also considering certain beneficial provisions of the CARES Act, including the net operating loss carryback provision. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the estimated income tax impact of the CARES Act.
We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements including inventory valuation, lease accounting impacts, income taxes, and the impairment of long-lived store assets and operating lease assets. These assumptions and estimates may change as the current situation evolves or new events occur and additional information is obtained. If the economic conditions caused by COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.
Restricted Cash
Any cash that is legally restricted from use is classified as restricted cash. If the purpose of restricted cash is related to acquiring a long-term asset, liquidating a long-term liability, or is otherwise unavailable for a period longer than one year from the balance sheet date, the restricted cash is included within other long-term assets on our Condensed Consolidated Balance Sheets. Otherwise, restricted cash is included within other current assets on our Condensed Consolidated Balance Sheets.
As of Augustthirteen weeks ending May 1, 2020, restricted cash primarily included consideration that serves as collateral for certain obligations and fees occurring in the normal course of business and 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:
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| | | | | | | | | | | |
($ in millions) | August 1, 2020 | | February 1, 2020 | | August 3, 2019 |
Cash and cash equivalents, per Condensed Consolidated Balance Sheets | $ | 2,188 |
| | $ | 1,364 |
| | $ | 1,177 |
|
Restricted cash included in other current assets | 33 |
| | 0 |
| | 0 |
|
Restricted cash included in other long-term assets | 20 |
| | 17 |
| | 18 |
|
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows | $ | 2,241 |
| | $ | 1,381 |
| | $ | 1,195 |
|
Accounting Pronouncements Recently Adopted2021.
ASU No. 2018-15, Customer's2019-12, Simplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ContractIncome Taxes
In August 2018,December 2019, the FASB issued accounting standards update ("ASU") No. 2018-15, Customer’s2019-12, Simplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.Income Taxes. The ASU is intended to alignenhance and simplify aspects of the requirementsincome tax accounting guidance in Accounting Standards Codification Topic 740 as part of the FASB's simplification initiative. This guidance is effective for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contractfiscal years and interim periods within those years beginning after December 15, 2020 with the existing guidance for internal-use software. Weearly adoption permitted. The Company adopted this ASU on January 31, 2021 on a prospective basis on February 2, 2020. Theand the adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements or related disclosures.Statements.
Accounting Pronouncements Not Yet Adopted
Except as noted below, theThe Company has considered all recent accounting pronouncements and concluded that there are no recent accounting pronouncements that may have a material impact on our Condensed Consolidated Financial Statements, based on current information.
ASU No. 2019-12, Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued 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 ASC 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 is currently evaluating the impact this guidance may have on our Condensed Consolidated Financial Statements.
Note 2. Revenue
The Company’s revenues include merchandiseDisaggregation of Net Sales
We disaggregate our net sales atbetween stores and online and throughalso 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. The COVID-19 pandemic and resulting temporary closure of our stores negatively affected our net sales for the first quarter of fiscal 2020.
Net sales disaggregated for stores and online sales are as follows:
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
($ in millions) | May 1, 2021 | | May 2, 2020 | | | | |
| | | | | | | |
Store sales (1) | $ | 2,384 | | | $ | 1,108 | | | | | |
Online sales (2) | 1,607 | | | 999 | | | | | |
Total net sales | $ | 3,991 | | | $ | 2,107 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
__________
(1)Store sales primarily include sales made at our Company-operated stores and franchise agreements, as well as the newly introduced business-to-business ("B2B") program. We also receive revenue sharingsales.
(2)Online sales primarily include sales originating from our credit card agreement for private label and co-branded credit cards, and breakage revenue related to our gift cards, credit vouchers, and outstanding loyalty points. Breakage revenue is recognized based upon historical redemption patterns. For online sales, the Company has elected to treat shipping and handling as fulfillment activities and not as a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. We also record an allowance for estimated returns based on our historical return patterns and various other assumptionschannel including those that management believes to be reasonable. Revenues are presented net of any taxes collectedpicked up or shipped from customers and remitted to governmental authorities.
Our credit card agreement provides for certain payments to be made to us, including a share of revenuestores. Additionally, sales from the performance ofbusiness-to-business program are also included during the credit card portfoliosthirteen weeks ended May 1, 2021.
Net sales disaggregated by brand and reimbursements of loyalty program discounts. We have identified separate performance obligations related to our credit card agreement that include both providing a licenseregion are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Athleta (2) | | Other (3) | | Total | | |
13 Weeks Ended May 1, 2021 | | | | | | | |
U.S. (1) | | $ | 2,099 | | | $ | 556 | | | $ | 333 | | | $ | 347 | | | $ | 89 | | | $ | 3,424 | | | |
Canada | | 159 | | | 68 | | | 34 | | | 0 | | | 0 | | | 261 | | | |
Europe | | 0 | | | 69 | | | 3 | | | 0 | | | 0 | | | 72 | | | |
Asia | | 1 | | | 163 | | | 16 | | | 0 | | | 0 | | | 180 | | | |
Other regions | | 21 | | | 30 | | | 3 | | | 0 | | | 0 | | | 54 | | | |
Total | | $ | 2,280 | | | $ | 886 | | | $ | 389 | | | $ | 347 | | | $ | 89 | | | $ | 3,991 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Athleta (2) | | Other (4) | | Total | | |
13 Weeks Ended May 2, 2020 | | | | | | | |
U.S. (1) | | $ | 949 | | | $ | 311 | | | $ | 245 | | | $ | 205 | | | $ | 51 | | | $ | 1,761 | | | |
Canada | | 77 | | | 34 | | | 24 | | | 0 | | | 0 | | | 135 | | | |
Europe | | 0 | | | 54 | | | 3 | | | 0 | | | 0 | | | 57 | | | |
Asia | | 1 | | | 108 | | | 12 | | | 0 | | | 0 | | | 121 | | | |
Other regions | | 11 | | | 17 | | | 5 | | | 0 | | | 0 | | | 33 | | | |
Total | | $ | 1,038 | | | $ | 524 | | | $ | 289 | | | $ | 205 | | | $ | 51 | | | $ | 2,107 | | | |
__________
(1)U.S. includes the United States, Puerto Rico, and an obligation to redeem loyalty points issued under the loyalty rewards program. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to redeem loyalty points is deferred until those loyalty points are redeemed. Income related to our credit card agreement is classified withinGuam.
(2)Previously, net sales on our Condensed Consolidated Statementsfor the Athleta brand were grouped within the "Other" column. Beginning in fiscal 2021, we have made a change for all periods presented to break out Athleta net sales into its own column.
(3)Primarily consists of Operations.net sales for the Intermix brand. Also includes net sales for the Janie and Jack brand through April 7, 2021.
(4)Primarily consists of net sales for the Intermix, Janie and Jack, and Hill City brands.
We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in a number of countries throughout Asia, 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. We have identified separate performance obligations related to our franchise agreements that include both providing our franchise partners with a license and an obligation to supply franchise partners with our merchandise. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to supply franchise partners with our merchandise is satisfied when control of the merchandise transfers. As of the quarter ended August 1, 2020 and August 3, 2019, there were 0 material contract liabilities related to our franchise agreements.Deferred Revenue
We defer revenue when cash payments are 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 thirteen weeks ended AugustMay 1, 2020,2021, the opening balance of deferred revenue for these obligations was $198$231 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$89 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $189$222 million as of AugustMay 1, 2020.2021.
We expect that the majority of our revenue deferrals as of the quarter ended AugustMay 1, 2020,2021, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.
For the thirteen weeks ended August 3, 2019,May 2, 2020, the opening balance of deferred revenue for these obligations was $206$226 million, of which $71 million was recognized as revenue during the period. For the twenty-six weeks ended August 3, 2019, the opening balance of deferred revenue for these obligations was $227 million, of which $134$79 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $195$198 million as of August 3, 2019.May 2, 2020.
Net sales disaggregated for stores and online sales forDuring the thirteen and twenty-six weeks ended AugustMay 1, 20202021, the Company entered into new long-term credit card program agreements with Barclays and August 3, 2019Mastercard. Barclays will become the exclusive issuer of Gap Inc.’s co-branded and private label credit card program in the U.S. beginning in May 2022. Accordingly, our previous private label credit card program with Synchrony Financial will be discontinued in April 2022. During the thirteen weeks ended May 1, 2021, the Company received a $45 million payment relating to the new agreement, which was as follows:
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| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
($ in millions) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Store sales (1) | $ | 1,642 |
| | $ | 3,166 |
| | $ | 2,750 |
| | $ | 5,989 |
|
Online sales (2) | 1,633 |
| | 839 |
| | 2,632 |
| | 1,722 |
|
Total net sales | $ | 3,275 |
| | $ | 4,005 |
| | $ | 5,382 |
| | $ | 7,711 |
|
__________
| |
(1) | Store sales primarily include sales made atrecorded in other long-term liabilities on our Company-operated stores and franchise sales. Fiscal 2020 store sales were negatively impacted by COVID-19. See Note 1 of Notes to Condensed Consolidated Financial Statements for further details. |
| |
(2) | Online sales primarily include sales made through our online channels including curbside pick-up, ship-from-store sales, buy online pick-up in store sales, and order-in-store sales. Additionally, beginning in the second quarter of fiscal 2020, sales from the B2B program are also included. |
See Note 10 of Notes to Condensed Consolidated Financial Statements for further disaggregationBalance Sheet as of revenue by brand and by region.May 1, 2021.
Note 3. Debt and Credit Facilities
Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:
| | | | | | | | | | | | | | | | | |
($ in millions) | May 1, 2021 | | January 30, 2021 | | May 2, 2020 |
2021 Notes | $ | 0 | | | $ | 0 | | | $ | 1,250 | |
2023 Notes | 500 | | | 500 | | | 0 | |
2025 Notes | 750 | | | 750 | | | 0 | |
2027 Notes | 1,000 | | | 1,000 | | | 0 | |
Less: Unamortized debt issuance costs | (32) | | | (34) | | | 0 | |
Total long-term debt | $ | 2,218 | | | $ | 2,216 | | | $ | 1,250 | |
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| | | | | | | | | | | |
($ in millions) | August 1, 2020 | | February 1, 2020 | | August 3, 2019 |
2021 Notes | $ | 0 |
| | $ | 1,249 |
| | $ | 1,249 |
|
2023 Notes | 500 |
| | 0 |
| | 0 |
|
2025 Notes | 750 |
| | 0 |
| | 0 |
|
2027 Notes | 1,000 |
| | 0 |
| | 0 |
|
Less: Unamortized debt issuance costs | (38 | ) | | 0 |
| | 0 |
|
Total long-term debt | $ | 2,212 |
| | $ | 1,249 |
| | $ | 1,249 |
|
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.
On June 6, 2020, we redeemed our $1.25 billionAs of May 1, 2021, the aggregate principal amountestimated fair value of 5.95 percentthe notes due April 2021 (the "2021 Notes"). We incurred a loss on extinguishment of debt of $58 million, which primarily includes the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations. Prior to redeeming our 2021 Notes, the aggregate principal amount of the 2021 Notes was recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized discount. Following the redemption, our obligations under the 2021 Notes were discharged.
On May 7, 2020, we completed the issuance of our Senior Secured Notes due 2023 (“("2023 Notes”)Notes), 2025 (“2025 Notes”), and 2027 (“2027 Notes”) (collectively, the “Notes”) in a private placement to qualified buyers and received gross proceeds of $2.25 billion. Concurrently with the issuance of the Notes, the Company amended the existing unsecured revolving credit facility with the ABL Facility which is scheduled to expire in May 2023. We recorded approximately $61 million of debt issuance costs related to the Notes and ABL Facility within long-term debt and other long-term assets on the Condensed Consolidated Balance Sheet, which will be amortized through interest expense over the life of the related instrument.
The scheduled maturity of the Notes is as follows:
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| | | | | | | | |
Scheduled Maturity ($ 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 |
| | | | |
__________
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(1) | Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium. |
As of August 1, 2020, the estimated fair value of the Notes was $2.50$2.57 billion 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 on the Condensed Consolidated Balance Sheet, net of the unamortized debt issuance cost.
The ABL FacilityIn 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 a base rate (typically LIBOR) plus a margin depending on borrowing base availability. The ABL Facility is scheduled to expire in May 2023. We also have the ability to issue letters of credit on our ABL Facility. As of AugustMay 1, 2020,2021, we had $48$52 million in standby letters of credit issued under the ABL Facility. There were 0 borrowings under the ABL Facility as of AugustMay 1, 2020.2021.
The Notes are secured by the Company's real and intellectual property and equipment and intangibles. The Notes contain covenants that limit the Company’s ability to, among other things: (i) grant or incur liens on the collateral; (ii) incur, assume or guarantee additional indebtedness; (iii) enter into sale and lease-back transactions; (iv) sell or otherwise dispose of assets that are collateral; and (v) make certain restricted payments or other investments. The Notes are also subject to certain provisions related to default that, if triggered, could result in acceleration of the maturity of the Notes.
The ABL Facility agreement is secured by specified assets, including a first lien on inventory, accounts receivable and bank accounts. The Notes are also secured by a second priority lien on certain assets securing the ABL Facility, which includes security interests in inventory, accounts receivable and bank accounts, subject to certain exceptions and permitted liens. In addition, the ABL Facility agreement is secured by a second lien on certain assets securing the Notes. The ABL Facility contains customary covenants restricting the Company's activities, as well as those of its subsidiaries, including limitations on the ability to sell assets, engage in mergers, or other fundamental changes, enter into capital leases or certain leases not in the ordinary course of business, enter into transactions involving related parties or derivatives, incur or prepay indebtedness, grant liens or negative pledges on its assets, make loans or other investments, pay dividends or repurchase stock or other securities, guarantee third-party obligations, engage in sale and lease-back transactions and make changes in its corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the ABL Facility includes, as a financial covenant, a springing fixed charge coverage ratio which arises when availability falls below a specified threshold.
As of AugustMay 1, 2020,2021, we were in compliance with theapplicable financial covenants and expect to maintain compliance for the next twelve months.
We also had a $500 million, five-year, revolving credit facility, which was scheduled to expire in May 2023. On March 25, 2020, we drew down the entire amount under the revolving credit facility resulting in a total of $500 million outstanding as of May 2, 2020, which was repaid in full on May 7, 2020. The borrowings accrued interest at a base rate (typically LIBOR) plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio. The draw-down proceeds were recorded in revolving credit facility on the Condensed Consolidated Balance Sheet. There were 0 material outstanding letters of credit under the revolving credit facility as of May 2, 2020.
We also maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). The Foreign Facilities are uncommitted and had a total capacity of $56$49 million as of AugustMay 1, 2020.2021. As of AugustMay 1, 2020,2021, there were 0 borrowings under the Foreign Facilities. There were $15$11 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of AugustMay 1, 2020.2021.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. There were no0 material standby letters of credit issued under these agreements as of AugustMay 1, 2020.2021.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were 0 material purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and twenty-six weeks endedAugust May 1, 20202021 or August 3, 2019.May 2, 2020. There were 0 transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen and twenty-six weeks ended August May 1, 2020 and 2021 or May 2, 2020.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
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| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
($ 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: | | | | | | | |
Cash equivalents | $ | 368 |
| | $ | — |
| | $ | 368 |
| | $ | 0 |
|
Short-term investments | 25 |
| | 0 |
| | 25 |
| | 0 |
|
Derivative financial instruments | 6 |
| | 0 |
| | 6 |
| | 0 |
|
Deferred compensation plan assets | 46 |
| | 46 |
| | 0 |
| | 0 |
|
Other assets | 2 |
| | 0 |
| | 0 |
| | 2 |
|
Total | $ | 447 |
| | $ | 46 |
| | $ | 399 |
| | $ | 2 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 19 |
| | $ | 0 |
| | $ | 19 |
| | $ | 0 |
|
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | February 1, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 311 |
| | $ | 19 |
| | $ | 292 |
| | $ | 0 |
|
Short-term investments | 290 |
| | 117 |
| | 173 |
| | 0 |
|
Derivative financial instruments | 10 |
| | 0 |
| | 10 |
| | 0 |
|
Deferred compensation plan assets | 51 |
| | 51 |
| | 0 |
| | 0 |
|
Other assets | 2 |
| | 0 |
| | 0 |
| | 2 |
|
Total | $ | 664 |
| | $ | 187 |
| | $ | 475 |
| | $ | 2 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 10 |
| | $ | 0 |
| | $ | 10 |
| | $ | 0 |
|
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | August 3, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 312 |
| | $ | 31 |
| | $ | 281 |
| | $ | 0 |
|
Short-term investments | 294 |
| | 131 |
| | 163 |
| | 0 |
|
Derivative financial instruments | 27 |
| | 0 |
| | 27 |
| | 0 |
|
Deferred compensation plan assets | 51 |
| | 51 |
| | 0 |
| | 0 |
|
Other assets | 2 |
| | 0 |
| | 0 |
| | 2 |
|
Total | $ | 686 |
| | $ | 213 |
| | $ | 471 |
| | $ | 2 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 9 |
| | $ | 0 |
| | $ | 9 |
| | $ | 0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | May 1, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 143 | | | $ | — | | | $ | 143 | | | $ | 0 | |
Short-term investments | 475 | | | 365 | | | 110 | | | 0 | |
Derivative financial instruments | 6 | | | 0 | | | 6 | | | 0 | |
Deferred compensation plan assets | 49 | | | 49 | | | 0 | | | 0 | |
Other assets | 4 | | | 0 | | | 0 | | | 4 | |
Total | $ | 677 | | | $ | 414 | | | $ | 259 | | | $ | 4 | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 30 | | | $ | 0 | | | $ | 30 | | | $ | 0 | |
| | | Fair Value Measurements at Reporting Date Using |
($ 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: | | | | | | | |
Cash equivalents | $ | 375 | | | $ | 25 | | | $ | 350 | | | $ | 0 | |
Short-term investments | 410 | | | 342 | | | 68 | | | 0 | |
Derivative financial instruments | 5 | | | 0 | | | 5 | | | 0 | |
Deferred compensation plan assets | 43 | | | 43 | | | 0 | | | 0 | |
Other assets | 2 | | | 0 | | | 0 | | | 2 | |
Total | $ | 835 | | | $ | 410 | | | $ | 423 | | | $ | 2 | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 21 | | | $ | 0 | | | $ | 21 | | | $ | 0 | |
| | | Fair Value Measurements at Reporting Date Using |
($ in millions) | May 2, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 139 | | | $ | — | | | $ | 139 | | | $ | 0 | |
Short-term investments | 51 | | | 0 | | | 51 | | | 0 | |
Derivative financial instruments | 36 | | | 0 | | | 36 | | | 0 | |
Deferred compensation plan assets | 47 | | | 47 | | | 0 | | | 0 | |
Other assets | 2 | | | 0 | | | 0 | | | 2 | |
Total | $ | 275 | | | $ | 47 | | | $ | 226 | | | $ | 2 | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 5 | | | $ | 0 | | | $ | 5 | | | $ | 0 | |
We have highly liquid fixed and variable income investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper.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.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 AugustMay 1, 20202021, January 30, 2021, and August 3, 2019,May 2, 2020, the Company held $25$475 million, $410 million, and $294$51 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 AugustMay 1, 2021, January 30, 2021, and May 2, 2020, the Company held 0 material$25 million, $90 million and $1 million, respectively, of available-for-sale debt securities with maturities of less than three months at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheet. As of August 3, 2019, the Company held $15 million available-for-sale debt securities with maturities ofor less than three months 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 immaterialnot material as of AugustMay 1, 20202021 and August 3, 2019.May 2, 2020.
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and twenty-six weeks ended AugustMay 1, 2021 or May 2, 2020, and August 3, 2019, 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 fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. See Note 56 of Notes to Condensed Consolidated Financial Statements for information regarding currencies hedged against the 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 receipt of a 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 on 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 at the store level.
During the thirteen weeks ended May 1, 2021, the Company recorded impairment of operating lease assets of $5 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $15 million to their fair value of $10 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations. There were no material impairment charges recorded for store long-lived assets during the thirteen weeks ended May 1, 2021.
During fiscal 2020, the 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. There were 0 material impairment charges recorded for long-lived assets duringDuring the thirteen weeks ended August 1, 2020. During the twenty-six weeks ended August 1,May 2, 2020, the Company recorded impairment of store assets of $127$124 million and impairment of operating lease assets of $361$360 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $131$127 million to their fair value of $4$3 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $1,369$1,358 million to their fair value of $1,008$998 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations.
During the thirteen and twenty-six weeks ended August 3, 2019, there were 0 material impairment charges recorded for long-lived assets.
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 0 impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and twenty-six weeks ended AugustMay 1, 20202021 or August 3, 2019.May 2, 2020.
Note 5. Income Taxes
The effective income tax rate was 11.2 percent for the thirteen weeks ended May 1, 2021, compared with 26.0 percent for the thirteen weeks ended May 2, 2020. The decrease in the effective tax rate is primarily due to a tax benefit resulting from divestiture activity during the first quarter of fiscal 2021.
Note 5.6. 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 dollar, British pound, Japanese yen, British pound,Euro, Mexican peso, Euro,Taiwan dollar, and Taiwan dollar.Chinese yuan. Cash flows from derivative financial instruments are classified as cash flows from operating activities on 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 into net income (loss) during the period in which the underlying transaction impacts the Condensed Consolidated Statements of Operations.
Net Investment Hedges
We may 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 these subsidiaries.
Other Derivatives Not Designated as Hedging Instruments
We 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 on the Condensed Consolidated Statements of Operations in the same period and generally offset each other.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
| | ($ in millions) | August 1, 2020 | | February 1, 2020 | | August 3, 2019 | ($ in millions) | May 1, 2021 | | January 30, 2021 | | May 2, 2020 |
Derivatives designated as cash flow hedges | $ | 214 |
| | $ | 501 |
| | $ | 652 |
| Derivatives designated as cash flow hedges | $ | 343 | | | $ | 508 | | | $ | 319 | |
Derivatives not designated as hedging instruments | 727 |
| | 689 |
| | 1,046 |
| Derivatives not designated as hedging instruments | 683 | | | 811 | | | 785 | |
Total | $ | 941 |
| | $ | 1,190 |
| | $ | 1,698 |
| Total | $ | 1,026 | | | $ | 1,319 | | | $ | 1,104 | |
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows: | | ($ in millions) | August 1, 2020 | | February 1, 2020 | | August 3, 2019 | ($ in millions) | May 1, 2021 | | January 30, 2021 | | May 2, 2020 |
Derivatives designated as cash flow hedges: | | | | | | Derivatives designated as cash flow hedges: | | | | | |
Other current assets | $ | 3 |
| | $ | 6 |
| | $ | 15 |
| Other current assets | $ | 4 | | | $ | 0 | | | $ | 16 | |
Other long-term assets | 0 |
| | 0 |
| | 1 |
| |
| Accrued expenses and other current liabilities | 1 |
| | 2 |
| | 1 |
| Accrued expenses and other current liabilities | 19 | | | 12 | | | 0 | |
Lease incentives and other long-term liabilities | 0 |
| | 0 |
| | 1 |
| |
| | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | Derivatives not designated as hedging instruments: | |
Other current assets | 3 |
| | 4 |
| | 11 |
| Other current assets | 2 | | | 5 | | | 20 | |
Accrued expenses and other current liabilities | 18 |
| | 8 |
| | 7 |
| Accrued expenses and other current liabilities | 11 | | | 9 | | | 5 | |
| | | | | | |
Total derivatives in an asset position | $ | 6 |
| | $ | 10 |
| | $ | 27 |
| Total derivatives in an asset position | $ | 6 | | | $ | 5 | | | $ | 36 | |
Total derivatives in a liability position | $ | 19 |
| | $ | 10 |
| | $ | 9 |
| Total derivatives in a liability position | $ | 30 | | | $ | 21 | | | $ | 5 | |
All of the unrealized gains and losses from designated cash flow hedges as of AugustMay 1, 20202021 will be recognized into net income (loss) within the next twelve months at the then-current values, which may differ from the fair values as of AugustMay 1, 20202021 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 on the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements were not material as of August 1, 2020, February 1, 2020, and August 3, 2019, respectively.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 designated in a cash flow hedging relationship recorded in other comprehensive income, on a pre-tax basis, are as follows:
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
($ in millions) | August 1, 2020 |
| August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Gain (loss) recognized in other comprehensive income | $ | (9 | ) | | $ | 2 |
| | $ | 12 |
| | $ | 15 |
|
The pre-tax amounts recognized in net income (loss) related to derivative instruments are as follows: |
| | | | | | | | | | | | | | | |
| Location and Amount of (Gain) Loss Recognized in Net Income (Loss) |
| 13 Weeks Ended August 1, 2020 | | 13 Weeks Ended August 3, 2019 |
($ in millions) | Cost of goods sold and occupancy expense | | Operating expenses | | Cost of goods sold and occupancy expense | | Operating expenses |
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded | $ | 2,126 |
| | $ | 1,076 |
| | $ | 2,449 |
| | $ | 1,274 |
|
| | | | | | | |
(Gain) loss recognized in net income (loss) | | | | | | | |
Derivatives designated as cash flow hedges | (7 | ) | | 0 |
| | (6 | ) | | 0 |
|
Derivatives not designated as hedging instruments | 0 |
| | 32 |
| | 0 |
| | (3 | ) |
Total (gain) loss recognized in net income (loss) | $ | (7 | ) | | $ | 32 |
| | $ | (6 | ) | | $ | (3 | ) |
|
| | | | | | | | | | | | | | | |
| Location and Amount of Gain Recognized in Net Income (Loss) |
| 26 Weeks Ended August 1, 2020 | | 26 Weeks Ended August 3, 2019 |
($ in millions) | Cost of goods sold and occupancy expense | | Operating expenses | | Cost of goods sold and occupancy expense | | Operating expenses |
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded | $ | 3,965 |
| | $ | 2,588 |
| | $ | 4,811 |
| | $ | 2,302 |
|
| | | | | | | |
Gain recognized in net income (loss) | | | | | | | |
Derivatives designated as cash flow hedges | (11 | ) | | 0 |
| | (12 | ) | | 0 |
|
Derivatives not designated as hedging instruments | 0 |
| | (11 | ) | | 0 |
| | (12 | ) |
Total gain recognized in net income (loss) | $ | (11 | ) | | $ | (11 | ) | | $ | (12 | ) | | $ | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Location and Amount of (Gain) Loss Recognized in Net Income (Loss) |
| 13 Weeks Ended May 1, 2021 | | 13 Weeks Ended May 2, 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 | $ | 2,361 | | | $ | 1,390 | | | $ | 1,839 | | | $ | 1,512 | |
| | | | | | | |
(Gain) loss recognized in net income (loss) | | | | | | | |
Derivatives designated as cash flow hedges | 3 | | | 0 | | | (4) | | | 0 | |
| | | | | | | |
Derivatives not designated as hedging instruments | 0 | | | 11 | | | 0 | | | (43) | |
Total (gain) loss recognized in net income (loss) | $ | 3 | | | $ | 11 | | | $ | (4) | | | $ | (43) | |
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) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Number of shares repurchased (1) | 0 |
| | 2.7 |
| | 0 |
| | 4.6 |
|
Total cost | $ | 0 |
| | $ | 50 |
| | $ | 0 |
| | $ | 100 |
|
Average per share cost including commissions | $ | 0 |
| | $ | 18.41 |
| | $ | 0 |
| | $ | 21.54 |
|
__________
| |
(1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
In February 2019, the Board of Directors approved a new $1.0 billion share repurchase authorization (the "February 2019 repurchase program"). The February 2019 repurchase program had $800 million remaining as of AugustMay 1, 2020. On March 12, 2020, the Company announced its decision to suspend share repurchases through fiscal 2020.
All of the share repurchases2021. There were paid for as of February 1, 2020 and August 3, 2019. All common stock0 shares repurchased is immediately retired.
Note 7. Income Taxes
On March 27, 2020, the CARES Act was signed into law in the United States. The CARES Act includes certain provisions that affect our income taxes, including temporary five-year net operating loss carryback provisions, modifications to the interest deduction limitations, and the technical correction for depreciation of qualified leasehold improvements.
The effective income tax rate was negative 51.2 percent forduring the thirteen weeks ended AugustMay 1, 2020, compared with 38.0 percent for the thirteen weeks ended August 3, 2019. The effective income tax rate was 23.5 percent for the twenty-six weeks ended August 1, 2020, compared with 31.1 percent for the twenty-six weeks ended August 3, 2019. The decrease in the effective tax rates as compared with the respective periods of fiscal 2019 is primarily due to net operating loss carryback provisions of the CARES Act, changes in the mix of pretax income between domestic and international operations and the fiscal 2019 impact of an adjustment for additional guidance issued regarding the Tax Cuts and Jobs Act of 2017 ("TCJA").2021 or May 2, 2020.
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 August 1, 2020, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next twelve months of up to $12 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statements of Operations would not be material.
Note 8. 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) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Weighted-average number of shares - basic | 374 |
| | 378 |
| | 373 |
| | 378 |
|
Common stock equivalents (1) | 0 |
| | 1 |
| | 0 |
| | 2 |
|
Weighted-average number of shares - diluted | 374 |
| | 379 |
| | 373 |
| | 380 |
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
(shares in millions) | May 1, 2021 | | May 2, 2020 | | | | |
Weighted-average number of shares - basic | 376 | | | 372 | | | | | |
Common stock equivalents (1) | 9 | | | 0 | | | | | |
Weighted-average number of shares - diluted | 385 | | | 372 | | | | | |
__________
| |
(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. |
(1)For the thirteen weeks ended May 2, 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 period.
The anti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 167 million and 1715 million for the thirteen weeks ended August May 1, 20202021 and August 3, 2019, respectively, and 15 million and 13 million for the twenty-six weeks ended August 1,May 2, 2020, and August 3, 2019, respectively, as their inclusion would have an anti-dilutive effect on earnings (loss) per share.
Note 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 Actionsproceedings, 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. As of AugustMay 1, 2020,2021, 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 AugustMay 1, 2020, February 1, 2020,2021, January 30, 2021, and August 3, 2019,May 2, 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 August 1, 2020, February 1, 2020, and August 3, 2019, was not material for any individual Action or in total.total for all periods presented. Subsequent to AugustMay 1, 2020,2021, 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. 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.
Note 10. Segment Information
We identify our operating segments according to how our business activities are managed and evaluated. As of AugustMay 1, 2020,2021, our operating segments 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 customerscustomer demand through its storewell-located stores and digital advantaged online channels, allowing us to execute onleveraging our omni-channel strategy wherecapabilities that allow customers canto shop seamlessly across all of our brands in retail stores and online through desktop or mobile devices.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 1 reportable segment as of AugustMay 1, 2020.2021. 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 salesSee 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. |
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total |
13 Weeks Ended August 1, 2020 | | | | | |
U.S. (1) | | $ | 1,726 |
| | $ | 473 |
| | $ | 236 |
| | $ | 328 |
| | $ | 2,763 |
|
Canada | | 145 |
| | 63 |
| | 27 |
| | 0 |
| | 235 |
|
Europe | | 0 |
| | 70 |
| | 2 |
| | 0 |
| | 72 |
|
Asia | | 2 |
| | 158 |
| | 14 |
| | 0 |
| | 174 |
|
Other regions | | 8 |
| | 19 |
| | 4 |
| | 0 |
| | 31 |
|
Total | | $ | 1,881 |
| | $ | 783 |
| | $ | 283 |
| | $ | 328 |
| | $ | 3,275 |
|
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (4) | | Total |
13 Weeks Ended August 3, 2019 | | | | | |
U.S. (1) | | $ | 1,794 |
| | $ | 645 |
| | $ | 530 |
| | $ | 331 |
| | $ | 3,300 |
|
Canada | | 148 |
| | 85 |
| | 53 |
| | 0 |
| | 286 |
|
Europe | | 0 |
| | 131 |
| | 4 |
| | 0 |
| | 135 |
|
Asia | | 11 |
| | 201 |
| | 23 |
| | 0 |
| | 235 |
|
Other regions | | 19 |
| | 24 |
| | 6 |
| | 0 |
| | 49 |
|
Total | | $ | 1,972 |
| | $ | 1,086 |
| | $ | 616 |
| | $ | 331 |
| | $ | 4,005 |
|
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global | | Other (3) | | Total |
26 Weeks Ended August 1, 2020 | | | | | |
U.S. (1) | | $ | 2,675 |
| | $ | 784 |
| | $ | 481 |
| | $ | 584 |
| | $ | 4,524 |
|
Canada | | 222 |
| | 97 |
| | 51 |
| | 0 |
| | 370 |
|
Europe | | 0 |
| | 124 |
| | 5 |
| | 0 |
| | 129 |
|
Asia | | 3 |
| | 266 |
| | 26 |
| | 0 |
| | 295 |
|
Other regions | | 19 |
| | 36 |
| | 9 |
| | 0 |
| | 64 |
|
Total | | $ | 2,919 |
| | $ | 1,307 |
| | $ | 572 |
| | $ | 584 |
| | $ | 5,382 |
|
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Old Navy Global | | Gap Global | | Banana Republic Global (2) | | Other (4) | | Total |
26 Weeks Ended August 3, 2019 | | | | | |
U.S. (1) | | $ | 3,435 |
| | $ | 1,253 |
| | $ | 1,017 |
| | $ | 617 |
| | $ | 6,322 |
|
Canada | | 276 |
| | 154 |
| | 100 |
| | 1 |
| | 531 |
|
Europe | | 0 |
| | 252 |
| | 7 |
| | 0 |
| | 259 |
|
Asia | | 21 |
| | 434 |
| | 49 |
| | 0 |
| | 504 |
|
Other regions | | 39 |
| | 45 |
| | 11 |
| | 0 |
| | 95 |
|
Total | | $ | 3,771 |
| | $ | 2,138 |
| | $ | 1,184 |
| | $ | 618 |
| | $ | 7,711 |
|
__________
| |
(1) | U.S. includes the United States, Puerto Rico, and Guam. |
| |
(2) | Banana Republic Global fiscal year 2019 net sales include the Janie and Jack brand beginning March 4, 2019. |
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(3) | Primarily consists of net sales for the Athleta, Intermix, and Hill City brands. Beginning in fiscal year 2020, Janie and Jack net sales are also included. Net sales for Athleta for the thirteen and twenty-six weeks ended August 1, 2020 were $267 million and $472 million, respectively. |
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(4) | Primarily consists of net sales for the Athleta, Intermix, and Hill City brands as well as a portion of income related to our credit card agreement. Net sales for Athleta for the thirteen and twenty-six weeks ended August 3, 2019 were $252 million and $475 million, respectively. |
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.
Note 11. Store ClosingDivestitures
As part of a strategic review of the Company's brands and Other Operating Cost
In fiscal 2019,businesses, the Company announced plansentered into agreements to restructure the specialty fleetsell its Janie and revitalize the Gap brand during fiscal 2019Jack and fiscal 2020.Intermix brands. The sale of Janie and Jack was completed on April 8, 2021. The sale of Intermix was completed on May 21, 2021. The Company believesreclassified $109 million of assets and $112 million of liabilities for the Intermix brand as held for sale within other current assets and accrued expenses and other current liabilities, respectively, on the Condensed Consolidated Balance Sheet as of May 1, 2021 and measured the disposal group at its estimated fair value less costs to sell. The aggregate carrying amount of assets and liabilities for amounts classified as held for sale primarily consist of $61 million of net operating lease assets, $19 million of inventory, and $97 million of operating lease liabilities.
As a result of these actions will drive a healthier specialty fleet and will serve a more appropriate foundation for brand revitalization. In response to COVID-19,transactions, the Company shifted its focus towards adapting torecognized a pre-tax loss of $56 million within operating expenses on the COVID-19 challenges and as a resultCondensed Consolidated Statements of Operations during the restructuring costs were not material in the first half of fiscal 2020.
thirteen weeks ended May 1, 2021.
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Item 2. | Management's Discussion and 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 retailercollection of purpose-led, lifestyle brands offering apparel, accessories, and personal care products for men, women, and children under a collection of lifestyle brands -the Old Navy, Gap, Banana Republic, and Athleta Intermix, Janie and Jack, and Hill City.brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico. 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, and Old Navy, storesand 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, find-in-store, and ship-from-store, as well as enhanced mobilemobile-enabled experiences, are tailored uniquely across our portfoliocollection 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
OVERVIEW
During fiscal 2020, we unveiled our Power Plan 2023 strategy, which reflects long-term plans to grow and manufactured by branded third parties, primarilystrengthen the Company. Since then, we have focused on our key initiatives, including growing Old Navy and Athleta, repositioning and transforming Gap and Banana Republic, growing our online business, expanding into new categories such as inclusive sizing, and scaling strategic partnerships such as our recently announced venture into the Home market through the launch of Gap Home at Walmart.com, to amplify the reach of our Intermix brand.
OVERVIEWbrands to customers across product categories, markets, and channels.
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed our North America retail stores and a large number of our stores globally. We have temporarily implemented a work-from-home policy for mostglobally during the first quarter of our corporate employees. In May 2020,fiscal 2020; however, we beganinnovated ways to safely reopen our stores with industry-leading safety measures for customers and employees, and as of August 1, 2020, have reopened approximately 90% of our stores worldwide in accordance with local government guidelines. Although the pandemic has caused a significant reduction in net sales, our online sales have increased significantly byserve customer demand through leveraging our omni fulfillmentomni-fulfillment capabilities, including curbside pick-up and ship-from-store, to serve customer demand.
Inship-from-store. We re-opened the secondmajority of our stores that were temporarily closed by the beginning of the third quarter of fiscal 2020,2020. Our results for the first quarter of fiscal 2021 reflect continued domestic recovery from the effects of the COVID-19 pandemic and an ongoing shift in focus from store sales to online sales, however, there continued to be impacts from store closures in international markets and in our supply chain. Pandemic-related costs and increased shipping costs incurred to meet customer demand for our growing online business were offset by fixed cost savings gained through strategic store closures as a result of our fleet rationalization initiatives. Additionally, product acceptance from our customers has improved in response to our investments in demand generation resulting in improved product margins.
In line with our Power Plan 2023, the Company announcedshared its strategic focus to reduce the launchnumber of a B2B program focused on offering large organizations high-quality reusable, non-medical grade cloth face masks to supply to their employees. We have leveraged our deep supply chain relationshipsGap and agile operations to provide these masks to companiesBanana Republic stores in bothNorth America by approximately 350 stores from the private and public sector.
We implemented several actions during the first halfbeginning of fiscal 2020 to enhancethe end of fiscal 2023. The majority of the 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 liquidity positionConsolidated Statement of Operations. As of May 1, 2021, we have closed, net of openings, 195 Gap and Banana Republic stores in responseNorth America since the beginning of fiscal 2020.
The Company also expects substantial cash lease buyout amounts relating to COVID-19. On May 7, 2020,a small population of stores we intend to close across multiple brands; however, we expect these buyouts to have a minimal net impact to our Consolidated Statements of Operations. During the first quarter of fiscal 2021, the Company completed the issuanceexecuted store buyout agreements. The net impact of the Notes for $2.25 billion. We also entered into the ABL Facility, with an initial aggregate principal amount of upthese buyouts was not material to $1.8675 billion. Proceeds from the issuance of the Notes were used to redeem our 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. Additionally, during the second quarter of fiscal 2020, we repaid the $500 million that was outstanding under our previous unsecured revolving credit facility. Refer to the "Liquidity and Capital Resources" section for further discussion.
As a result of COVID-19, we suspended rent payments beginning in April 2020 due tofor our temporarily closed stores andstores. We are now workingcontinuing to work through negotiations with our landlords relating to those leases. To date, we’ve negotiated agreements on a numberThe rent abatement benefit was not material to our Condensed Consolidated Statement of Operations for the first quarter of fiscal 2021.
We are continuing our previously shared strategic review of our operating model in Europe. We remain focused on continuing to serve our customers in Europe with asset-light partnerships such as franchise or online. While no decisions have been made, our strategic plans could result in significant costs to the Company including charges related to leases and more agreementsinventory, and employee-related costs. We are anticipated over the next several months.targeting to finalize our plans in fiscal 2021.
During the twenty-six weeks ended August 1, 2020,On March 19, 2021, the Company recorded impairmententered into an agreement to sell the Janie and Jack brand and on April 30, 2021, entered into an agreement to sell the Intermix brand. We closed the sale of store assets of $127 millionJanie and operating lease assets of $361 million, primarily due to lower cash flows from storesJack in April 2021 and the reduced estimated fair valuesale of real estate, particularlyIntermix closed 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 $56 million for the first quarter of fiscal 2021 in mall locations, as a result of COVID-19.conjunction with these transactions. See Note 411 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for further information regarding impairments.information.
As part of fiscal 2020,our Power Plan 2023, the Company recorded inventory related impairment costs of $235 million, primarily relatedis focused on enhancing its rewards program to seasonal inventory that was stranded in stores when closures occurred or seasonal inventory in distribution centers that was planned for store sales. The costs also included impaired garmentattract new customers and fabric commitment costs for future seasonal product. As a result of the meaningful improvement in sales trends during the second quarter of fiscal 2020 compared with the first quarter of fiscal 2020,create enduring relationships to turn its customers into lifelong loyalists. In April 2021, the Company movedentered into new long-term credit card program agreements with Barclays and Mastercard. Barclays will become the exclusive issuer of Gap Inc.’s co-branded and private label credit card program in the U.S. beginning in May 2022. In addition, Gap Inc. and Barclays will issue the co-branded credit cards on the Mastercard payment network. Accordingly, our previous private label credit card program with Synchrony Financial will be discontinued in April 2022.
Our business priorities for fiscal 2021 are as follows:
•creating product that offers value to our customers through a significant amountcombination of inventoryfit, quality, brand and no material inventory related impairment costs were recorded during the second quarter of fiscal 2020. Additionally,price;
•investing in our four purpose-led lifestyle brands to strategically manage inventory through COVID-19, select summer product is being stored at an off-site facilitydrive relevance and our distribution centers and expected to be sold during fiscal 2021.gain market share;
In fiscal 2019, the Company announced plans to restructure the specialty fleet and revitalize the Gap brand during fiscal 2019 and fiscal 2020. The Company continues to believe that these actions will drive a healthier specialty fleet and will serve as a more appropriate foundation for brand revitalization. A•s a result of COVID-19 in the first half of fiscal 2020, the Company shifted its focus towards adapting to the COVID-19 challenges and as a result the restructuring costs were not material for the first half of fiscal 2020.growing our online business;
As we continue to face a period of uncertainty regarding the ongoing impact of COVID-19 on both our projected customer demand and supply chain, we remain focused on the following strategic priorities:
offering product that is consistently brand-appropriate and on-trend with high customer acceptance and appropriate value perception;
growing and operating our global online business;
realigning inventory with customer demand;
•attracting and retaining strong talent in our businesses and functions;
increasing the focus on improving operational discipline and efficiency by streamlining operations and processes throughout the organization and •reducing our fixed cost structure to fuel demand generation investments;
•leveraging our scale;scale to navigate constraints in supply chain;
•managing inventory to support a healthy merchandise margin;
•rationalizing the Gap and Banana Republic brands, with emphasis on the specialty fleet globally, to create a healthier business;brands;
•prioritizing asset-light growth through licensing, online, and franchise partnerships globally; and
•continuing to integrate social and environmental sustainability into business practices to support long-term growth.
We believe focusing on these priorities in the near term will propel the Company to execute against the Power Plan 2023 strategy, including leveraging:
•The Power of 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 both enable growth, such as through competitive omni-channel capabilities, as well as cost synergies, fueled by its scaled operations.
We continue to monitor the rapidly evolving pandemic situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our results of operations, cash flows and liquidity in the future.
Financial results for the secondfirst quarter of fiscal 2021 are as follows:
•Net sales for the first quarter of fiscal 2021 increased 89 percent compared with the first quarter of fiscal 2020.
•Online sales for the first quarter of fiscal 2021 increased 61 percent compared with the first quarter of fiscal 2020 and store sales for the secondfirst quarter of fiscal 2019 are as follows:
Net sales for the second quarter of fiscal 2020 decreased 182021 increased 115 percent compared with the secondfirst quarter of fiscal 2019.2020.
Online sales for the second quarter of fiscal 2020 increased 95 percent compared with the second quarter of fiscal 2019 and store sales for the second quarter of fiscal 2020 decreased 48 percent compared with the second quarter of fiscal 2019.
•Gross profit for the secondfirst quarter of fiscal 20202021 was $1.15 billion$1,630 million compared with $1.56 billion$268 million for the secondfirst quarter of fiscal 2019.2020. Gross margin for the secondfirst quarter of fiscal 20202021 was 35.140.8 percent compared with 38.912.7 percent for the secondfirst quarter of fiscal 2019.2020.
•Operating income for the secondfirst quarter of fiscal 20202021 was $73$240 million compared with $282operating loss of $(1,244) million for the secondfirst quarter of fiscal 2019.2020.
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• | The effective income tax rate for the second quarter of fiscal 2020 was negative 51.2 percent, compared with 38.0•The effective income tax rate for the first quarter of fiscal 2021 was 11.2 percent, compared with 26.0 percent for the first quarter of fiscal 2020. •Net income for the first quarter of fiscal 2021 was $166 million compared with net loss of $(932) million for the first quarter of fiscal 2020. •Diluted earnings per share was $0.43 for the first quarter of fiscal 2021 compared with diluted loss per share of $(2.51) for the first quarter of fiscal 2020.
second quarter of fiscal 2019.
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• | Net loss for the second quarter of fiscal 2020 was $(62) million compared with net income of $168 million for the second quarter of fiscal 2019.
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• | Diluted loss per share was $(0.17) for the second quarter of fiscal 2020 compared with diluted earnings per share of $0.44 for the second quarter of fiscal 2019.
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RESULTS OF OPERATIONS
Net Sales
See Note 2 and Note 10 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for net sales disaggregation.
Comparable Sales (“("Comp Sales”Sales")
Comp Sales include the results of Company-operated stores and sales through online channels. The calculation of Gap Inc. Comp Sales includes the results of Janie and Jack, Hill City, 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 AugustMay 1, 2020,2021, any stores temporarily closed for more than three days as a result of COVID-19 during the first quarter of fiscal 2020 were excluded from the Comp Sales calculations. After temporarily closed 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.
As a result of the extensive temporary store closures due to the COVID-19 pandemic, Comp Sales are not a meaningful metric for the thirteen weeks ended May 2, 2020. The Comp Sales for the thirteen weeks ended May 1, 2021 reflect continued recovery from the pandemic.
The percentage change in Comp Sales by global brand and for The Gap, Inc. for the thirteen weeks ended May 1, 2021 is as follows:
|
| | | | | | | | | | |
| 13 Weeks Ended |
| August 1,
2020 (1)
|
Old Navy Global | 24 | % |
Gap Global | 12 | % |
Banana Republic Global | (27 | )% |
Athleta | 19 | % |
The Gap, Inc. | 13 | % |
__________
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(1) | Comp Sales for the thirteen weeks ended August 1, 2020 reflect an increase in online sales, see Net Sales discussion for further details. |
|
| | |
| 13 Weeks EndedMay 1, 2021 | | | | | | |
| August 3, 2019 |
Old Navy Global | (535 | )% | | | | | | |
Gap Global | (729 | )% | | | | | | |
Banana Republic Global | (3(4) | )% | | | | | | |
Athleta | 1027 | % | | | | | | |
The Gap, Inc. | (428 | )% | | | | | | |
We have historically reported net sales per average square foot, but as a result of the extensive temporary store closures due to COVID-19, this metric is not meaningful for the first half of fiscal 2020 and therefore we have omitted it.
Store count, openings, closings, and square footage for our stores are as follows:
| | | February 1, 2020 | | 26 Weeks Ended August 1, 2020 | | August 1, 2020 | | January 30, 2021 | | 13 Weeks Ended May 1, 2021 | | May 1, 2021 |
| Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed (1) | | Number of Store Locations | | Square Footage (in millions) | | 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 North America | 1,220 | | | 24 | | | 2 | | | 1,242 | | | 19.9 | |
Old Navy Asia | 17 |
| | — |
| | 17 |
| | — |
| | — |
| |
| Gap North America | 675 |
| | 2 |
| | 66 |
| | 611 |
| | 6.5 |
| Gap North America | 556 | | | 1 | | | 5 | | | 552 | | | 5.8 | |
Gap Asia | 358 |
| | 10 |
| | 10 |
| | 358 |
| | 3.2 |
| Gap Asia | 340 | | | 5 | | | 8 | | | 337 | | | 2.9 | |
Gap Europe | 137 |
| | 3 |
| | 11 |
| | 129 |
| | 1.1 |
| Gap Europe | 117 | | | 1 | | | 2 | | | 116 | | | 1.0 | |
Banana Republic North America | 541 |
| | 2 |
| | 45 |
| | 498 |
| | 4.2 |
| Banana Republic North America | 471 | | | 1 | | | 3 | | | 469 | | | 4.0 | |
Banana Republic Asia | 48 |
| | 4 |
| | 5 |
| | 47 |
| | 0.2 |
| Banana Republic Asia | 47 | | | 3 | | | 2 | | | 48 | | | 0.2 | |
| Athleta North America | 190 |
| | 8 |
| | 2 |
| | 196 |
| | 0.8 |
| Athleta North America | 199 | | | 3 | | | — | | | 202 | | | 0.8 | |
Intermix North America | 33 |
| | — |
| | 1 |
| | 32 |
| | 0.1 |
| Intermix North America | 31 | | | — | | | — | | | 31 | | | 0.1 | |
Janie and Jack North America(2) | 139 |
| | — |
| | 8 |
| | 131 |
| | 0.2 |
| 119 | | | — | | | — | | | — | | | — | |
Company-operated stores total | 3,345 |
| | 43 |
| | 173 |
| | 3,215 |
| | 35.8 |
| Company-operated stores total | 3,100 | | | 38 | | | 22 | | | 2,997 | | | 34.7 | |
Franchise | 574 |
| | 35 |
| | 10 |
| | 599 |
| | N/A |
| Franchise | 615 | | | 36 | | | 77 | | | 574 | | | N/A |
Total | 3,919 |
| | 78 |
| | 183 |
| | 3,814 |
| | 35.8 |
| Total | 3,715 | | | 74 | | | 99 | | | 3,571 | | | 34.7 | |
Decrease over prior year | | | | | | | (1.6 | )% | | (3.5 | )% | Decrease over prior year | | | | | | | (8.7) | % | | (5.4) | % |
| | | | | | | | | | |
| February 2, 2019 | | 26 Weeks Ended August 3, 2019 | | August 3, 2019 | | February 1, 2020 | | 13 Weeks Ended May 2, 2020 | | May 2, 2020 |
| Number of Store Locations | | Number of Stores Opened | | Number of Stores Closed | | Number of Store Locations | | Square Footage (in millions) | | 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 | 1,139 |
| | 28 |
| | 1 |
| | 1,166 |
| | 19.0 |
| Old Navy North America | 1,207 | | | 4 | | | 3 | | | 1,208 | | | 19.5 | |
Old Navy Asia | 15 |
| | 2 |
| | — |
| | 17 |
| | 0.2 |
| Old Navy Asia | 17 | | | — | | | 17 | | | — | | | — | |
Gap North America | 758 |
| | 3 |
| | 28 |
| | 733 |
| | 7.6 |
| Gap North America | 675 | | | — | | | 8 | | | 667 | | | 7.1 | |
Gap Asia | 332 |
| | 29 |
| | 19 |
| | 342 |
| | 3.1 |
| Gap Asia | 358 | | | 5 | | | 2 | | | 361 | | | 3.2 | |
Gap Europe | 152 |
| | 1 |
| | 2 |
| | 151 |
| | 1.3 |
| Gap Europe | 137 | | | — | | | 7 | | | 130 | | | 1.1 | |
Banana Republic North America | 556 |
| | 5 |
| | 7 |
| | 554 |
| | 4.7 |
| Banana Republic North America | 541 | | | — | | | 2 | | | 539 | | | 4.5 | |
Banana Republic Asia | 45 |
| | 3 |
| | 1 |
| | 47 |
| | 0.2 |
| Banana Republic Asia | 48 | | | 1 | | | 3 | | | 46 | | | 0.2 | |
| Athleta North America | 161 |
| | 10 |
| | — |
| | 171 |
| | 0.7 |
| Athleta North America | 190 | | | 1 | | | — | | | 191 | | | 0.8 | |
Intermix North America | 36 |
| | — |
| | 1 |
| | 35 |
| | 0.1 |
| Intermix North America | 33 | | | — | | | — | | | 33 | | | 0.1 | |
Janie and Jack North America (2) | — |
| | — |
| | — |
| | 140 |
| | 0.2 |
| |
Janie and Jack North America | | Janie and Jack North America | 139 | | | — | | | 1 | | | 138 | | | 0.2 | |
Company-operated stores total | 3,194 |
| | 81 |
| | 59 |
| | 3,356 |
| | 37.1 |
| Company-operated stores total | 3,345 | | | 11 | | | 43 | | | 3,313 | | | 36.7 | |
Franchise | 472 |
| | 66 |
| | 17 |
| | 521 |
| | N/A |
| Franchise | 574 | | | 29 | | | 5 | | | 598 | | | N/A |
Total | 3,666 |
| | 147 |
| | 76 |
| | 3,877 |
| | 37.1 |
| Total | 3,919 | | | 40 | | | 48 | | | 3,911 | | | 36.7 | |
Increase over prior year | | | | | | | 6.9 | % | | 1.4 | % | |
Increase (decrease) over prior year | | Increase (decrease) over prior year | | | | | | | 1.6 | % | | (0.3) | % |
__________
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(1) | This represents stores that have been permanently closed, not stores temporarily closed as a result of COVID-19. |
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(2) | On March 4, 2019, we acquired select assets of Gymboree Group, Inc. related to Janie and Jack. The 140 stores acquired were not included as store openings for fiscal 2019; however, they are included in the ending number of store locations as of August 3, 2019. |
(1)Represents stores that have been permanently closed, not stores temporarily closed as a result of COVID-19.
(2)On April 8, 2021, the Company completed the sale of the Janie and Jack brand. The 119 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 second quarter of fiscal 2020 decreased $730 million, or 18 percent, compared with the second quarter of fiscal 2019, reflecting COVID-19-related partial closures during the second quarter of fiscal 2020 that drove a decline of 48 percent in store sales; partially offset by an increase in online sales of 95 percent as a result of leveraging our omni fulfillment capabilities to serve customer demand.
Our net sales for the first halfquarter of fiscal 2020 decreased $2.3 billion2021 increased $1,884 million, or 3089 percent, compared with the first halfquarter of fiscal 20192020, driven primarily by temporary store closures due to COVID-19. Although COVID-19 and resulting temporary closure ofacross our stores negatively affected our financial results forfleet during the first halfquarter of fiscal 2020 our onlinedue to the COVID-19 pandemic.
Store sales increased significantly for the first half of fiscal 2020115% compared with the first halfquarter of fiscal 2019.2020, primarily driven by significant increases across all brands as store traffic came back at domestic store locations the Company has reopened; partially offset by strategic store closures. Even with the return of store traffic, our investment in demand generation during the period helped drive online sales growth for the first quarter of fiscal 2021 which increased $608 million or 61 percent, compared with the first quarter of fiscal 2020 reflecting progress against executing our Power Plan 2023 strategy of digital dominance.
Cost of Goods Sold and Occupancy Expenses
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
($ in millions) | May 1, 2021 | | May 2, 2020 | | | | |
Cost of goods sold and occupancy expenses | $ | 2,361 | | | $ | 1,839 | | | | | |
Gross profit | $ | 1,630 | | | $ | 268 | | | | | |
Cost of goods sold and occupancy expenses as a percentage of net sales | 59.2 | % | | 87.3 | % | | | | |
Gross margin | 40.8 | % | | 12.7 | % | | | | |
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
($ in millions) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Cost of goods sold and occupancy expenses | $ | 2,126 |
| | $ | 2,449 |
| | $ | 3,965 |
| | $ | 4,811 |
|
Gross profit | $ | 1,149 |
| | $ | 1,556 |
| | $ | 1,417 |
| | $ | 2,900 |
|
Cost of goods sold and occupancy expenses as a percentage of net sales | 64.9 | % | | 61.1 | % | | 73.7 | % | | 62.4 | % |
Gross margin | 35.1 | % | | 38.9 | % | | 26.3 | % | | 37.6 | % |
Cost of goods sold and occupancy expenses increased 3.8 percentage points as a percentage of net sales in the second quarter of fiscal 2020 compared with the second quarter of fiscal 2019.
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• | Cost of goods sold increased 2.7 percentage points as a percentage of net sales in the second quarter of fiscal 2020 compared with the second quarter of fiscal 2019, primarily driven by higher online shipping costs as a result of growth in online sales and higher costs associated with ship-from-store fulfillment; partially offset by lower promotional activity at Gap Global, Old Navy Global, and Athleta.
|
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• | Occupancy expenses increased 1.1 percentage points as a percentage of net sales in the second quarter of fiscal 2020 compared with the second quarter of fiscal 2019 primarily driven by a decrease in store sales largely due to COVID-19 store closures with minimal decrease in fixed occupancy expenses, partially offset by an increase in online sales with minimal impact on fixed occupancy expenses.
|
Cost of goods sold and occupancy expenses increased 11.3decreased 28.1 percentage points as a percentage of net sales in the first halfquarter of fiscal 20202021 compared with the first halfquarter of fiscal 2019.2020.
•Cost of goods sold increased 6.9decreased 13.9 percentage points as a percentage of net sales in the first halfquarter of fiscal 20202021 compared with the first halfquarter of fiscal 2019,2020, primarily driven by higher online shipping costsinventory impairment recognized in the first quarter of fiscal 2020 due to store closures as a result of growthCOVID-19. Cost of goods sold as a percentage of net sales in online sales as well as higher inventory impairment due to store closures andthe first quarter of fiscal 2021 also decreased retail traffic as a result of COVID-19.improved retail traffic and lower promotional activity primarily at Old Navy Global and Gap Global.
•Occupancy expenses increased 4.4decreased 14.2 percentage points as a percentage of net sales in the first halfquarter of fiscal 20202021 compared with the first halfquarter of fiscal 20192020 primarily driven by a decreasean increase in storenet sales largely due to COVID-19temporary store closures with minimal decrease in fixed occupancy expenses, partially offset by an increase inas a result of COVID-19 during the first quarter of fiscal 2020. Additionally, during the first quarter of fiscal 2021 online sales withcontinued to grow which has minimal impact on fixed occupancy expenses.
Operating Expenses
| | | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | |
($ in millions) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 | ($ in millions) | May 1, 2021 | | May 2, 2020 | |
Operating expenses | $ | 1,076 |
| | $ | 1,274 |
| | $ | 2,588 |
| | $ | 2,302 |
| Operating expenses | $ | 1,390 | | | $ | 1,512 | | |
Operating expenses as a percentage of net sales | 32.9 | % | | 31.8 | % | | 48.1 | % | | 29.9 | % | Operating expenses as a percentage of net sales | 34.8 | % | | 71.8 | % | |
Operating margin | 2.2 | % | | 7.0 | % | | (21.8 | )% | | 7.8 | % | Operating margin | 6.0 | % | | (59.0) | % | |
Operating expenses decreased $198 million but increased 1.1 percentage points as a percentage of net sales in the second quarter of fiscal 2020 compared with the second quarter of fiscal 2019 primarily due to the following:
a decrease in store payroll and benefits and other store operating expenses as a result of COVID-19 temporary store closures across all brands; and
separation-related and specialty fleet restructuring costs incurred in the second quarter of fiscal 2019.
Operating expenses increased $286$122 million or 18.237 percentage points as a percentage of net sales in the first halfquarter of fiscal 20202021 compared with the first halfquarter of fiscal 20192020 primarily due to the following:
•a decrease due to impairment charges related to store assets and operating lease assets of $488$484 million incurredthat occurred during the first halfquarter of fiscal 2020 primarily due to the impact of COVID-19;
a gain that occurred during the first quarter of fiscal 2019 related to the sale of a building; and
severance costs of $35 million related to a reduction in headquarters workforce; partially offset by
a decrease•an increase in store payroll and benefits and other store operating expenses due to COVID-19 temporary store closures during the first quarter of fiscal 2020;
•an increase in advertising expense to fuel demand across all purpose-led lifestyle brands;
•an increase in bonus expense as a result of COVID-19 temporary store closures across all brands;improved performance; and
separation-related and specialty fleet restructuring costs incurred in the first half of fiscal 2019.
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 our 2021 Notes. We incurred •a loss on extinguishment of debt of $58 million, primarilydivestiture activity related to the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations.Janie and Jack and Intermix brands.
Interest Expense
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
($ in millions) | May 1, 2021 | | May 2, 2020 | | | | |
Interest expense | $ | 54 | | | $ | 19 | | | | | |
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
($ in millions) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Interest expense | $ | 58 |
| | $ | 19 |
| | $ | 77 |
| | $ | 39 |
|
Interest expense increased $39$35 million or 205184 percent during the secondfirst quarter of fiscal 2021 compared with the first quarter of fiscal 2020 compared with second quarter of fiscal 2019 and increased $38 million or 97 percent during the first half of fiscal 2020 compared with the first half of fiscal 2019 primarily due to higher total outstanding long-term debt and higher interest rates as a result of the May 7, 2020 issuance of the Notes. The total outstanding principal related to our Notes increased from $1.25 billion as of August 3, 2019, towas $2.25 billion as of AugustMay 1, 2021 as compared with $1.25 billion related to our previous 5.95 percent 2021 Notes as of May 2, 2020. Additionally, the new Notes bear interest at 8.375 percent, 8.625 percent, and 8.875 percent compared with our previous 5.95 percent 2021 Notes.
Income Taxes
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
($ in millions) | August 1, 2020 | | August 3, 2019 | | August 1, 2020 | | August 3, 2019 |
Income taxes | $ | 21 |
| | $ | 103 |
| | $ | (306 | ) | | $ | 178 |
|
Effective tax rate | (51.2 | )% | | 38.0 | % | | 23.5 | % | | 31.1 | % |
On March 27, 2020, the CARES Act was enacted into law, which included certain provisions that affect our income taxes, including temporary five-year net operating loss carryback provisions, modifications to the interest deduction limitations, and the technical correction for qualified leasehold improvements. | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
($ in millions) | May 1, 2021 | | May 2, 2020 | | | | |
Income taxes | $ | 21 | | | $ | (327) | | | | | |
Effective tax rate | 11.2 | % | | 26.0 | % | | | | |
The decrease in the effective tax rate for the secondfirst quarter of fiscal 2021 compared with the first quarter of fiscal 2020 and first half of fiscal 2020 compared with the respective periods of fiscal 2019 is primarily due to a tax benefit resulting from divestiture activity during the net operating loss carryback provisionsfirst quarter of fiscal 2021 as well as the impact of the CARESCoronavirus Aid, Relief, and Economic Security Act in the first quarter of fiscal 2020. This was partially offset by changes in the mix of pretax income between domestic and international operations andduring the first quarter of fiscal 2019 impact of an adjustment for additional guidance issued regarding the TCJA.2020.
LIQUIDITY AND CAPITAL RESOURCES
We continue to manage through the impacts of COVID-19, in fiscal 2020 andincluding the impact it has on our operations and liquidity. During the first half of fiscal 2020, we have taken several actions to improve our financial profile and increase our liquidity, including entering into new debt financing, decreasing capital expenditures, and suspending quarterly cash dividends and share repurchases for the remainder of the fiscal year.
On May 7, 2020, we completed the issuance of our Notes and received gross proceeds of $2.25 billion. Concurrently with the issuance of the Notes, the Company entered into the ABL Facility with an initial aggregate principal amount of up to $1.8675 billion which is scheduled to expire in May 2023. Additionally, on May 7, 2020, we repaid the $500 million that was previously outstanding under our previous unsecured revolving credit facility and did not borrow any funds under the ABL Facility. On June 6, 2020, we redeemed our 2021 Notes. The Company currently believes its new capital structure provides sufficient liquidity to continue to navigate COVID-19.
As of AugustMay 1, 2020,2021, we consider the following to be our primary measures of liquidity and capital resources: |
| | | | | | | | | | | |
($ in millions) | Source of Liquidity | | Outstanding Indebtedness | | Total Available Liquidity |
Cash and cash equivalents (1) | $ | 2,188 |
| | $ | — |
| | $ | 2,188 |
|
Short-term investments (1) | 25 |
| | — |
| | 25 |
|
2023 Notes | 500 |
| | 500 |
| | — |
|
2025 Notes | 750 |
| | 750 |
| | — |
|
2027 Notes | 1,000 |
| | 1,000 |
| | — |
|
Total | $ | 4,463 |
| | $ | 2,250 |
| | $ | 2,213 |
|
| | | | | | | | | | | | | | | | | |
($ in millions) | Source of Liquidity | | Outstanding Indebtedness | | Total Available Liquidity |
Cash and cash equivalents | $ | 2,066 | | | $ | — | | | $ | 2,066 | |
Short-term investments | 475 | | | — | | | 475 | |
| | | | | |
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 | $ | 4,791 | | | $ | 2,250 | | | $ | 2,541 | |
__________
| |
(1) | As of August 1, 2020, the majority of our cash, cash equivalents, and short-term investments was held in the United States and is generally accessible without any limitations. |
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.
We believe thatour capital structure provides sufficient liquidity and our cash flows from our operations, along with current cash balances, and cash flows from our operationsthe instruments mentioned above will be sufficient to support our business operations for the next twelve months.
Cash Flows from Operating Activities
Net cash provided by operating activities decreasedincreased by $670$1,280 million during the first halfquarter of fiscal 2021 compared with the first quarter of fiscal 2020, primarily due to the following:
Net Income (Loss)
•Net income compared with net loss in prior comparable period;
Non-cash item
•a decrease of $479 million due to higher non-cash impairment charges for operating lease assets and store assets during the first quarter of fiscal 2020 compared with the first halfquarter of fiscal 2019, primarily due to the following:
Net Income (Loss)
Net loss compared with net income in prior comparable period;
Non-cash items
an increase of $485 million due to non-cash impairment charges of store assets and operating lease assets during the first half of fiscal 2020 compared with the first half of 2019; and
an increase of $191 million due to a gain that occurred during the first half of fiscal 2019 resulting from the sale of a building;2021;
Changes in operating assets and liabilities
•an increase of $320 million related to accounts payable primarily due to the suspension of rent for stores closed temporarily as a result of COVID-19; partially offset by
a decrease of $275$304 million related to income taxes payable, net of receivables and other tax-related items resulting from athe net income tax receivable primarily dueoperating loss carrybacks attributable to the taxable loss carryback estimated for the first halfquarter of fiscal 2020 as well as timing of tax-related payments.payments;
•an increase of $148 million related to merchandise inventory primarily due to the utilization of seasonal inventory stored at our distribution center since fiscal 2020 as a result of the COVID-19 pandemic compared with higher inventory purchases during the first quarter of fiscal 2020; and
•an increase of $126 million related to accrued expenses and other current liabilities primarily due to the timing of interest payments related to our long-term debt.
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 effectresidual 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 $161 million during the first quarter of fiscal 2021 compared with $116 million of cash provided by investing activities during the first halfquarter of fiscal 2020, increased $580 million compared with the first half of fiscal 2019, primarily due to the following:
•$270303 million higher net proceeds frompurchases of available-for-sale debt securities during the first halfquarter of fiscal 20202021 compared with the first halfquarter of fiscal 2019;
an increase of $123 million due to the net activity related to the purchase and sale of buildings during the first half of fiscal 2019; and
$116 million fewer purchases of property and equipment during the first half of fiscal 2020 compared with the first half of 2019.2020.
Cash Flows from Financing Activities
Net cash used for financing activities was $98 million during the first quarter of fiscal 2021 compared with $499 million of cash provided by financing activities during the first halfquarter of fiscal 2020, increased $1,172 million compared with the first half of fiscal 2019, primarily due to the following:
•$2,250500 million in proceeds received related to the issuanceas a result of long-term debtdrawing down on our revolving credit facility during the first halfquarter of fiscal 2020; and
an increase•$91 million payment of $283 million due to the suspension of both cash dividends and share repurchasesdividend that was deferred during the first halfquarter of fiscal 2020; partially offset by
$1,307 million payment for2020 as a result of the extinguishment of debt during the first half of fiscal 2020.
COVID-19 pandemic.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business and infrastructure. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
| | | | | | | | | | | |
| 13 Weeks Ended |
($ in millions) | May 1, 2021 | | May 2, 2020 |
Net cash provided by (used for) operating activities | $ | 340 | | | $ | (940) | |
Less: Purchases of property and equipment | (124) | | | (122) | |
| | | |
Free cash flow | $ | 216 | | | $ | (1,062) | |
|
| | | | | | | |
| 26 Weeks Ended |
($ in millions) | August 1, 2020 | | August 3, 2019 |
Net cash provided by (used for) operating activities | $ | (87 | ) | | $ | 583 |
|
Less: Purchases of property and equipment (1) | (208 | ) | | (324 | ) |
Free cash flow | $ | (295 | ) | | $ | 259 |
|
__________
| |
(1) | Fiscal 2019 excludes the purchase of a building. |
Debt and Credit Facilities
On May 7, 2020, the Company completed the issuance of the Notes for $2.25 billion. We also entered into the ABL Facility, with an initial aggregate principal amount of up to $1.8675 billion. Proceeds from the sale of the Notes were used to redeem our $1.25 billion 2021 Notes.
For additional financial information about the Company’s debt and credit facilities as of AugustMay 1, 20202021 see “Debt and Credit Facilities” in 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.
On March 26, 2020,During the thirteen weeks ended May 1, 2021, the Company announced thatpaid the previously declared first quarter of fiscal 2020 dividend will now beto shareholders of record at the close of business on April 7, 2021. On May 11, 2021, the board of directors authorized a second quarter fiscal year 2021 dividend of $0.12 per share, payable on or after AprilJuly 28, 2021 to shareholders of record at the close of business on AprilJuly 7, 2021.
Share Repurchases
On May 11, 2021, subject to the right of the Company announced the resumption of its share repurchase program, which has $800 million of its $1 billion authorization remaining. Subject to further defermarket conditions and other considerations, the record and payment dates. Further deferral could depend upon, among other factors, the progression of COVID-19, business performance, and the macroeconomic environment. Additionally, the Company suspended its regular quarterly cash dividend through fiscal 2020. The Company determined that taking these actions was in the best interest of the Company in order to preserve liquidity in the context of the ongoing and uncertain duration and impact of COVID-19 on its operations. The Company intends to review its quarterly cash dividend policy as developments warrant.
Share Repurchases
In March 2020,repurchase up to $200 million of shares under the Company announced its decision to suspend share repurchases throughprogram in the remainder of fiscal 2020 due to the economic uncertainty stemming from a number of factors, including COVID-19.year 2021.
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
Other than the debt financing discussed in Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, thereThere have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of February 1, 2020,January 30, 2021, other than those which occur in the normal course of business. See Note 9 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 February 1, 2020.January 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 February 1, 2020,January 30, 2021, is disclosed in our Annual Report on Form 10-K and has not significantly changed other than as noted below.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, investments, and derivative financial instruments.
On May 7, 2020, we completed the issuance of our Notes and received gross proceeds of $2.25 billion. The Notes have a fixed interest rate and are exposed to interest rate risk that is limited to changes in fair value. Changes in interest rates do not impact our cash flows. The scheduled maturity of the Notes is as follows:
|
| | | | | | | | |
Scheduled Maturity ($ 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. |
In conjunction with our financings, we obtained new long-term senior unsecured credit ratings from Moody's. On March 26, 2020, Moody's downgraded our senior unsecured rating from Baa2 to Ba1 and changed their outlook from stable to negative. On April 23, 2020, Moody's downgraded our corporate credit ratings from Ba1 to Ba2 with negative outlook, and Standard & Poor's downgraded our credit ratings from BB to BB- with negative outlook. Any future reduction in the Moody's and Standard & Poor's ratings would potentially result in an increase to our interest expense on future borrowings.
Additionally, we sold the majority of our available-for-sale debt securities during fiscal 2020, effectively reducing our overall market risk related to our short-term investments.
| |
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 secondfirst quarter of fiscal 20202021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that mostmany of our employees are working remotely dueremotely. We continually monitor and assess the control environment for potential impacts to COVID-19. We are continually monitoring and assessing the COVID-19 impact on our internal controls to minimize the impact on their design and operating effectiveness.effectiveness of internal controls over financial reporting due to various factors, including any residual impact of COVID-19.
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 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.
There have been no material changes in our risk factors from those disclosed in Part II,I, Item 1A of our QuarterlyAnnual Report on Form 10-Q10-K for the quarterly periodfiscal year ended May 2, 2020.January 30, 2021.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table presents information with respectItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On February 26, 2019, we announced that the Board of Directors approved a $1 billion share repurchase authorization (the "February 2019 repurchase program"), which has no expiration date. There were no shares repurchased, other than shares withheld to purchasessettle employee statutory tax withholding related to the vesting of common stock of the Company madeunits, during the thirteen weeks endedAugust May 1, 2020 by the Company or any affiliated purchaser,2021. The February 2019 repurchase program had $800 million remaining as defined in Exchange Act Rule 10b-18(a)(3):of May 1, 2021.
|
| | | | | | | | | | | | | |
| 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 |
Month #1 (May 3 - May 30) | — |
| | $ | — |
| | — |
| | $ | 800 | million |
Month #2 (May 31 - July 4) | — |
| | $ | — |
| | — |
| | $ | 800 | million |
Month #3 (July 5 - August 1) | — |
| | $ | — |
| | — |
| | $ | 800 | million |
Total | — |
| | $ | — |
| | — |
| | |
__________
| |
(1) | Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units. |
|
| | | | | | | | | | | | |
| | | | 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 | | |
| | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | 10-K | | 1-7562 | | 3.2 | | April 4, 2000 | | |
| | Amended and Restated Bylaws (effective March 23, 2020) | | 8-K | | 1-7562 | | 3.1 | | March 5, 2020 | | |
| | Indenture, dated as of May 7, 2020, by and among the Registrant, the Guarantors party thereto and U.S. Bank National Association as trustee and as collateral agent | | 8-K | | 1-7562 | | 4.1 | | May 8, 2020 | | |
4.2 | | Form of 8.375% Senior Secured Notes due 2023, included in Exhibit 4.1 as Exhibit A-1 to the Indenture | | 8-K | | 1-7562 | | 4.2 | | May 8, 2020 | | |
4.3 | | Form of 8.625% Senior Secured Notes due 2025, included included in Exhibit 4.1 as Exhibit A-2 to the Indenture | | 8-K | | 1-7562 | | 4.3 | | May 8, 2020 | | |
4.4 | | Form of 8.875% Senior Secured Notes due 2027, included included in Exhibit 4.1 as Exhibit A-3 to the Indenture | | 8-K | | 1-7562 | | 4.4 | | May 8, 2020 | | |
| | Third Amended and Restated Revolving Credit Agreement dated as of May 7, 2020 | | 8-K | | 1-7562 | | 10.1 | | May 8, 2020 | | |
| | Agreement and Release dated June 12, 2020 by and between Teri List-Stoll and the Registrant | | | | | | | | | | X |
| | 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) | | | | | | | | | | X |
| | 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) | | | | | | | | | | X |
| | 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 | | | | | | | | | | X |
| | 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 | | | | | | | | | | X |
101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2020, formatted in 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 | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | |
| | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | 10-K | | 1-7562 | | 3.2 | | April 4, 2000 | | |
| | Amended and Restated Bylaws (effective March 23, 2020) | | 8-K | | 1-7562 | | 3.1 | | March 5, 2020 | | |
| | 2021 Form of Non-Qualified Stock Option Agreement under the 2016 Long-Term Incentive Plan | | 8-K | | 1-7562 | | 10.1 | | March 9, 2021 | | |
| | 2021 Form of Restricted Stock Unit Award Agreement under the 2016 Long-Term Incentive Plan | | 8-K | | 1-7562 | | 10.2 | | March 9, 2021 | | |
| | 2021 Form of Performance Share Agreement under the 2016 Long-Term Incentive Plan | | 8-K | | 1-7562 | | 10.3 | | March 9, 2021 | | |
| | Credit Card Program Agreement, dated as of April 8, 2021, by and among Registrant, Old Navy, LLC, Banana Republic, LLC, Athleta LLC and Barclays Bank Delaware | | | | | | | | | | X |
| | 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) | | | | | | | | | | X |
| | 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) | | | | | | | | | | X |
| | 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 | | | | | | | | | | X |
| | 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 | | | | | | | | | | X |
101 | | The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended May 1, 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 | | | | | | | | | | X |
104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | | | | | | | | | X |
_____________________________
| |
* | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of any omitted schedule or exhibit to the U.S. Securities and Exchange Commission upon request. |
| |
† | Indicates management contract or compensatory plan or arrangement. |
| |
(P) | (P) This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided. |
† Indicates management contract or compensatory plan or arrangement. * Certain portions of this Exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
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: | May 28, 2021 | THE GAP, INC. |
By | | | |
Date: | August 31, 2020 | By | /s/ Sonia Syngal |
| | | Sonia Syngal |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
Date: | August 31, 2020 | By | |
Date: | May 28, 2021 | By | /s/ Katrina O'Connell |
| | | Katrina O'Connell |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |