UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~August 1, 2020~~July 31, 2021



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-7562

THE GAP, ~~INC~~.INC.

(Exact name of registrant as specified in its charter)



Delaware						94-1697231
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

Two Folsom Street

San Francisco,, California94105

(Address of principal executive ~~offices)~~offices and zip code)

Registrant’s telephone number, including area code: (~~415~~) (415) 427-0100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.05 par value

GPS

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of the registrant’s common stock outstanding as of August ~~24, 2020~~20, 2021 was ~~373,593,071.~~376,105,065.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following:

•the potential impact of COVID-19 on the assumptions and estimates used when preparing the quarterly financial statements, and on our results of operations, financial position, and liquidity;

~~the potential impact if economic conditions caused by COVID-19 were to worsen beyond what is currently estimated by management;~~

•the impact of recent accounting pronouncements;

•the timing of revenue recognition of revenue ~~deferrals~~deferrals;

•our new credit card program with Barclays and Mastercard, as ~~revenue;~~well as our program with Synchrony Financial;

•compliance with applicable ~~financial~~ covenants under the ~~2023 Notes, 2025 Notes, 2027~~ Notes and the ABL ~~Facility;~~Facility (each as defined below);

•unrealized gains and losses from designated cash flow hedges;

~~total gross unrecognized tax benefits;~~

•the impact of losses due to indemnification obligations;

•the outcome of proceedings, lawsuits, disputes, and claims, including the impact of such actions on our financial results;

•our Power Plan 2023 strategy and our ability to execute against it;

•our omni-channel capabilities;

•our Gap Home venture with Walmart.com and other existing and potential future partnerships;

•the ~~ability~~expected timing, cost, and scope of the strategic review of our ~~new capital structure to provide sufficient liquidity to continue to navigate the COVID-19 pandemic;~~operating model in Europe;

~~the ability to supplement near-term liquidity, if necessary, with our $1.8675 billion asset-based revolving credit facility or other available market instruments;~~

~~current cash balances and cash flows from our operations and from issuance of the 2023 Notes, 2025 Notes, 2027 Notes being sufficient to support our business operations;~~

•the impact of the ~~seasonality~~divestitures of our ~~operations;~~Janie and Jack and Intermix businesses;

~~offering product that is consistently brand-appropriate and on-trend with high customer acceptance;~~•the impact of our expected lease buyout amounts;

~~growing and operating~~ •our ~~global online business;~~

~~realigning inventory with customer demand;~~

~~increasing focus on improving operational discipline and efficiency by streamlining operations and processes and leveraging scale;~~

~~managing inventory~~ability to ~~support a healthy merchandise margin;~~

~~the expectation that we will~~ reach ~~additional~~ agreements with our landlords regarding suspended rent payments for our temporarily closed ~~stores in~~ stores;

•the ~~next several months;~~impact of COVID-related store closures and supply chain challenges;

~~rationalizing~~•our plans to rationalize the Gap and Banana Republic brands in North America, including the targeted closures of North American Gap and Banana Republic stores together with ~~emphasis on~~ the ~~specialty fleet globally,~~number and timing thereof and costs associated therewith;

•creating product that offers value to ~~create~~our customers through a ~~healthier~~combination of fit, quality, brand and price;

•investing in our four purpose-led lifestyle brands to drive relevance and gain market share;

•growing our online business;

•attracting and retaining strong talent in our businesses and functions;

•reducing our fixed cost structure to fuel demand generation investments;

•leveraging our scale to navigate constraints in supply chain;

•managing inventory to support a healthy merchandise margin;

•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;

•continuing to integrate social and environmental sustainability into business practices;

~~increased interest expense~~•our investments in demand generation and the benefits associated therewith;

•our ability to supplement near-term liquidity, if necessary, with the ABL Facility or other available market instruments;

•the ability of our cash flows from our operations, current cash balances, the Notes and the ABL Facility to support our business operations;

•the impact of seasonality and COVID-19 recovery on our operations;

•the importance of our sustained ability to generate free cash flow, which is a non-GAAP financial measure and is defined and discussed in more detail in Item 1 of Part 1 of this Form 10-Q below;

•our dividend policy, including the potential timing and amounts of future ~~borrowings caused by any future reductions in our credit ratings;~~dividends; and

•the impact of changes in internal control over financial reporting.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:

•the overall global economic environment and risks associated with the COVID-19 pandemic;

•the risk that we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;

~~the highly competitive nature of our business in the United States and internationally;~~

~~the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;~~

~~engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;~~

•the risk that failure to maintain, enhance and protect our brand image could have an adverse effect on our results of operations;

•the highly competitive nature of our business in the United States and internationally;

•engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;

•the risk that our investments in customer, digital, and omni-channel shopping initiatives may not deliver the results we anticipate;

•the risk that the failure to manage key executive succession and retention and to continue to attract qualified personnel could have an adverse impact on our results of operations;

~~the risk that our investments in customer, digital, and omni-channel shopping initiatives may not deliver the results we anticipate;~~

•the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected;

•the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;

•the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct;

•the risk that we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation;

•the risk that a failure of, or updates or changes to, our information technology ~~("IT")~~ systems may disrupt our operations;

•the risks to our efforts to expand internationally, including our ability to operate in regions where we have less experience;

•the risk that we or our franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively;

~~the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct;~~

•the risk that our franchisees’ operation of franchise stores is not directly within our control and could impair the value of our brands;

•the risk that trade matters could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations;

•the risk that foreign currency exchange rate fluctuations could adversely impact our financial results;

•the risk that comparable sales and margins will experience fluctuations;

~~the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives;~~

~~the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations;~~

•the risk that natural disasters, public health crises (similar to and including the ongoing COVID-19 pandemic), political crises, negative global climate patterns, or other catastrophic events could adversely affect our operations and financial results, or those of our franchisees or vendors;

•the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;

•the risk that we will not be successful in defending various proceedings, lawsuits, disputes, and claims;

•the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations;

•the risk that reductions in income and cash flow from our credit card arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows;

•the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives;

•the risk that the adoption of new accounting pronouncements will impact future results; and

•the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase ~~program; and~~

~~the risk that we will not be successful in defending various proceedings, lawsuits, disputes, and claims.~~program.

Additional information regarding factors that could cause results to differ can be found in ~~this Quarterly~~our Annual Report on Form ~~10-Q~~10-K for the fiscal year ended January 30, 2021 and our other filings with the U.S. Securities and Exchange Commission.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of August ~~31, 2020, and we~~27, 2021. We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

We suggest that this document be read in conjunction with ~~Management’s Discussion and Analysis included in~~ our Annual Report on Form 10-K for the fiscal year ended ~~February 1, 2020.~~January 30, 2021.

THE GAP, INC.

TABLE OF CONTENTS


					Page
			PART I - FINANCIAL INFORMATION

				~~Page~~
Item 1.	~~PART I - FINANCIAL INFORMATION~~

~~Item 1.~~	Financial Statements	1

			Condensed Consolidated Balance Sheets as of July 31 , 2021, January 30, 2021, and August 1 , 2020 ~~February 1, 2020, and August 3, 2019~~		1

			Condensed Consolidated Statements of Operations for the Thirteen Weeks and ~~Twenty-Six~~Twenty-six Weeks Ended July 31 , 2021 and August 1 , 2020 ~~and August 3, 2019~~		2

			Condensed Consolidated Statements of Comprehensive Income (Loss) for the Thirteen Weeks and ~~Twenty-Six~~Tw ent y-six Weeks Ended July 31 , 2021 and August 1 , 2020 ~~and August 3, 2019~~		3

			Condensed Consolidated Statements of Stockholders' Equity for the Thirteen Weeks a nd Twen ty-six Weeks Ended July 31 , 2021 and ~~Twenty-Six Weeks Ended~~ August 1 , 2020 ~~and August 3, 2019~~		4

			Condensed Consolidated Statements of Cash Flows for the ~~Twenty-Six~~ Twenty-si x Weeks Ended July 31 , 2021 and August 1 , 2020 ~~and August 3, 2019~~		6

			Notes to Condensed Consolidated Financial Statements		7

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		1918

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		2725

Item 4.			Controls and Procedures		2825

			PART II - OTHER INFORMATION

Item 1.			Legal Proceedings		2926

Item 1A.			Risk Factors		2926

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		2926

Item 6.			Exhibits		3027

PART I – FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements.~~

Item 1. Financial Statements.

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	August 1, 2020		February 1, 2020		August 3, 2019		($ and shares in millions except par value)	July 31, 2021		January 30, 2021		August 1, 2020
ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	2,188	$	1,364	$	1,177	Cash and cash equivalents	$	2,375	$	1,988	$	2,188
Short-term investments	25		290		294		Short-term investments	337		410		25
Merchandise inventory	2,242		2,156		2,326		Merchandise inventory	2,281		2,451		2,242
Other current assets	882		706		770		Other current assets	1,201		1,159		882
Total current assets	5,337		4,516		4,567		Total current assets	6,194		6,008		5,337
Property and equipment, net of accumulated depreciation of $5,933, $5,839 and $5,926	2,895		3,122		3,141
Property and equipment, net of accumulated depreciation of $5,603, $5,608 and $5,933							Property and equipment, net of accumulated depreciation of $5,603, $5,608 and $5,933	2,897		2,841		2,895
Operating lease assets	4,689		5,402		5,807		Operating lease assets	3,975		4,217		4,689
Other long-term assets	795		639		528		Other long-term assets	693		703		795
Total assets	$	13,716	$	13,679	$	14,043	Total assets	$	13,759	$	13,769	$	13,716
LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:							Current liabilities:

Accounts payable	$	1,629	$	1,174	$	1,246	Accounts payable	$	1,583	$	1,743	$	1,629
Accrued expenses and other current liabilities	1,124		1,067		908		Accrued expenses and other current liabilities	1,252		1,276		1,124
Current portion of operating lease liabilities	856		920		946		Current portion of operating lease liabilities	789		831		856
Income taxes payable	40		48		34		Income taxes payable	27		34		40
Total current liabilities	3,649		3,209		3,134		Total current liabilities	3,651		3,884		3,649
Long-term liabilities:							Long-term liabilities:
Long-term debt	2,212		1,249		1,249		Long-term debt	2,220		2,216		2,212
Long-term operating lease liabilities	5,179		5,508		5,644		Long-term operating lease liabilities	4,348		4,617		5,179
Lease incentives and other long-term liabilities	423		397		391
Other long-term liabilities							Other long-term liabilities	520		438		423
Total long-term liabilities	7,814		7,154		7,284		Total long-term liabilities	7,088		7,271		7,814
Commitments and contingencies (see Note 9)							Commitments and contingencies (see Note 9)	0		0		0
Stockholders’ equity:							Stockholders’ equity:
Common stock $0.05 par value							Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued and Outstanding 374, 371, and 376 shares	19		19		19
Authorized 2,300 shares for all periods presented; Issued and Outstanding 376, 374, and 374 shares							Authorized 2,300 shares for all periods presented; Issued and Outstanding 376, 374, and 374 shares	19		19		19
Additional paid-in capital	39		0		0		Additional paid-in capital	114		85		39
Retained earnings	2,173		3,257		3,551		Retained earnings	2,879		2,501		2,173
Accumulated other comprehensive income	22		40		55		Accumulated other comprehensive income	8		9		22
Total stockholders’ equity	2,253		3,316		3,625		Total stockholders’ equity	3,020		2,614		2,253
Total liabilities and stockholders’ equity	$	13,716	$	13,679	$	14,043	Total liabilities and stockholders’ equity	$	13,759	$	13,769	$	13,716

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	13 Weeks Ended						26 Weeks Ended							13 Weeks Ended				26 Weeks Ended
($ and shares in millions except per share amounts)	August 1, 2020			August 3, 2019			August 1, 2020			August 3, 2019			($ and shares in millions except per share amounts)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net sales	$	3,275		$	4,005		$	5,382		$	7,711		Net sales	$	4,211	$	3,275	$	8,202	$	5,382
Cost of goods sold and occupancy expenses	2,126			2,449			3,965			4,811			Cost of goods sold and occupancy expenses	2,388		2,126		4,749		3,965
Gross profit	1,149			1,556			1,417			2,900			Gross profit	1,823		1,149		3,453		1,417
Operating expenses	1,076			1,274			2,588			2,302			Operating expenses	1,414		1,076		2,804		2,588
Operating income (loss)	73			282			(1,171		)	598			Operating income (loss)	409		73		649		(1,171)
Loss on extinguishment of debt	58			0			58			0			Loss on extinguishment of debt	—		58		—		58
Interest expense	58			19			77			39			Interest expense	51		58		105		77
Interest income	(2		)	(8		)	(6		)	(14		)	Interest income	(1)		(2)		(2)		(6)
Income (loss) before income taxes	(41		)	271			(1,300		)	573			Income (loss) before income taxes	359		(41)		546		(1,300)
Income taxes	21			103			(306		)	178			Income taxes	101		21		122		(306)
Net income (loss)	$	(62	)	$	168		$	(994	)	$	395		Net income (loss)	$	258	$	(62)	$	424	$	(994)
Weighted-average number of shares - basic	374			378			373			378			Weighted-average number of shares - basic	378		374		377		373
Weighted-average number of shares - diluted	374			379			373			380			Weighted-average number of shares - diluted	386		374		385		373
Earnings (loss) per share - basic	$	(0.17	)	$	0.44		$	(2.66	)	$	1.04		Earnings (loss) per share - basic	$	0.68	$	(0.17)	$	1.12	$	(2.66)
Earnings (loss) per share - diluted	$	(0.17	)	$	0.44		$	(2.66	)	$	1.04		Earnings (loss) per share - diluted	$	0.67	$	(0.17)	$	1.10	$	(2.66)

See Accompanying Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See Accompanying Notes to Condensed Consolidated Financial Statements

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Condensed Consolidated Financial Statements

Common Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income
($ and shares in millions except per share amounts) Shares Amount Total
Balance as of February 1, 2020 371
$ 19
$ 0
$ 3,257
$ 40
$ 3,316
Net loss for the twenty-six weeks ended August 1, 2020 (994 ) (994 )
Other comprehensive income (loss), net of tax
Foreign currency translation (19 ) (19 )
Change in fair value of derivative financial instruments 11
11
Amounts reclassified from accumulated other comprehensive income (10 ) (10 )
Issuance of common stock related to stock options and employee stock purchase plans 1
0
12
12
Issuance of common stock and withholding tax payments related to vesting of stock units 2
0
(8 ) (8 )
Share-based compensation, net of forfeitures 35
35
Common stock dividends ($0.2425 per share) (1) (90 ) (90 )
Balance as of August 1, 2020 374
$ 19
$ 39
$ 2,173
$ 22
$ 2,253

Balance as of February 2, 2019 378
$ 19
$ 0
$ 3,481
$ 53
$ 3,553
Cumulative effect of a change in accounting principle related to leases (86 ) (86 )
Net income for the twenty-six weeks ended August 3, 2019 395
395
Other comprehensive income (loss), net of tax
Foreign currency translation (1 ) (1 )
Change in fair value of derivative financial instruments 10
10
Amounts reclassified from accumulated other comprehensive income (7 ) (7 )
Repurchases and retirement of common stock (5 ) 0
(44 ) (56 ) (100 )
Issuance of common stock related to stock options and employee stock purchase plans 1
0
17
17
Issuance of common stock and withholding tax payments related to vesting of stock units 2
0
(20 ) (20 )
Share-based compensation, net of forfeitures 47
47
Common stock dividends declared and paid ($0.485 per share) (183 ) (183 )
Balance as of August 3, 2019 376
$ 19
$ 0
$ 3,551
$ 55
$ 3,625

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(1) On March 4, 2020, the Company declared a first quarter fiscal year 2020 dividend of $0.2425 per share. ~~On March 26, 2020, the Company announced that the dividend will be payable on or after April 28, 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 dividend was paid on April 28, 2021 to shareholders of record at the close of business on April 7, 2021.

See Accompanying Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Accounting Policies

Basis of Presentation

The results of operations for the thirteen and twenty-six weeks ended ~~August 1, 2020~~July 31, 2021 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January ~~30, 2021.~~29, 2022.

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 ~~significant~~large number of our stores globally. ~~In May 2020, we began~~During the first half of fiscal 2021, there continued to ~~safely reopen~~be residual impacts from store closures in international markets and in our ~~temporarily closed stores in accordance with local government guidelines.~~supply chain as a result of COVID-19. We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements.

As of July 31, 2021, restricted cash primarily included consideration that serves as collateral for our insurance obligations. The ~~Company also implemented several actions during the thirteen weeks ended August 1, 2020, to enhance~~following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our liquidity position such as completing the issuance of our Senior Secured Notes for $2.25 billion 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 to Condensed Consolidated ~~Financial~~Balance 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)	July 31, 2021		January 30, 2021		August 1, 2020
Cash and cash equivalents, per Condensed Consolidated Balance Sheets	$	2,375	$	1,988	$	2,188
Restricted cash included in other current assets	—		4		33
Restricted cash included in other long-term assets	32		24		20
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows	$	2,407	$	2,016	$	2,241

Accounting Pronouncements Recently Adopted

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~~thirteen 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 evolvestwenty-six weeks ended July 31, 2021 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.

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~~ August 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:

($ 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 Adopted~~2020.

ASU No. ~~2018-15, Customer's~~2019-12, Simplifying the Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~Income Taxes

Accounting Pronouncements Not Yet Adopted

~~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.

~~The Company’s revenues include merchandise~~Disaggregation of Net Sales

We disaggregate our net sales atbetween stores and online and ~~through~~also 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.

Net sales disaggregated for stores and online sales are as follows:

(1)Store sales primarily include sales made at our Company-operated stores and franchise ~~agreements,~~sales.

(2)Online sales primarily include sales originating from our online channel including those that are picked up or shipped from stores.


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
13 Weeks Ended July 31, 2021
U.S. (1)	$	2,177	$	615	$	428	$	340	$	11	$	3,571
Canada	191		79		43		—		—		313
Europe	—		116		1		1		—		118
Asia	—		135		19		—		—		154
Other regions	22		29		4		—		—		55
Total	$	2,390	$	974	$	495	$	341	$	11	$	4,211


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
13 Weeks Ended August 1, 2020
U.S. (1)	$	1,726	$	473	$	236	$	267	$	61	$	2,763
Canada	145		63		27		—		—		235
Europe	—		70		2		—		—		72
Asia	2		158		14		—		—		174
Other regions	8		19		4		—		—		31
Total	$	1,881	$	783	$	283	$	267	$	61	$	3,275


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
26 Weeks Ended July 31, 2021
U.S. (1)	$	4,276	$	1,171	$	761	$	687	$	100	$	6,995
Canada	350		147		77		—		—		574
Europe	—		185		4		1		—		190
Asia	1		298		35		—		—		334
Other regions	43		59		7		—		—		109
Total	$	4,670	$	1,860	$	884	$	688	$	100	$	8,202


($ in millions)	Old Navy Global		Gap Global		Banana Republic Global		Athleta (2)		Other (3)		Total
26 Weeks Ended August 1, 2020
U.S. (1)	$	2,675	$	784	$	481	$	472	$	112	$	4,524
Canada	222		97		51		—		—		370
Europe	—		124		5		—		—		129
Asia	3		266		26		—		—		295
Other regions	19		36		9		—		—		64
Total	$	2,919	$	1,307	$	572	$	472	$	112	$	5,382

(1)U.S. includes the United States, Puerto Rico, and Guam.

(2)Previously, net sales for 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)The "Other" column primarily consists of net sales for the Intermix and Janie and Jack brands, as well as the newly introduced business-to-business ("B2B") program. We also receive revenue sharing 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 assumptions that management believes to be reasonable. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

~~Our credit card agreement provides for certain payments to be made to us, including a share of revenue~~ from the ~~performance~~business-to-business program. The sale of Janie and Jack was completed on April 8, 2021. The sale of Intermix was completed on May 21, 2021. Net sales for the ~~credit card portfolios~~thirteen and reimbursements of loyalty program discounts. We have identified separate performance obligations related to our credit card agreement that include both providing a license 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 within net sales on our Condensed Consolidated Statements of Operations.

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 quartertwenty-six weeks ended August 1, 2020 ~~and August 3, 2019, there were 0 material contract liabilities related to our franchise agreements.~~also included net sales for the Hill City brand, which was closed in January 2021.

We expect that the majority of our revenue deferrals as of the quarter ended July 31, 2021, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.

For the thirteen weeks ended August 1, 2020, the opening balance of deferred revenue for these obligations was $198 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 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $189 million as of August 1, 2020.

~~We expect that the majority of our revenue deferrals as of the quarter ended August 1, 2020, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.~~

~~For the thirteen weeks ended August 3, 2019, the opening balance of deferred revenue for these obligations was $206 million, of which $71 million was recognized as revenue during the period. For~~During the twenty-six weeks ended ~~August 3, 2019,~~July 31, 2021, the ~~opening balance~~Company entered into agreements with Barclays and Mastercard relating to a new long-term credit card program that is expected to begin in the second quarter of ~~deferred revenue for these obligations was $227 million,~~fiscal 2022. Accordingly, our private label credit card program with Synchrony Financial will be discontinued upon the launch of ~~which $134 million was recognized as revenue during~~ the ~~period. The closing balance of deferred revenue for these obligations was $195 million as of August 3, 2019.~~

~~Net sales disaggregated for stores and online sales for~~new long-term credit card program. During the ~~thirteen and~~ twenty-six weeks ended ~~August 1, 2020 and August 3, 2019~~July 31, 2021, the Company received $50 million relating to the new agreements, which was ~~as follows:~~

~~See Note 10 of Notes to~~ Condensed Consolidated ~~Financial Statements for further disaggregation~~Balance Sheet as of ~~revenue by brand and by region.~~July 31, 2021.

Note 3. Debt and Credit Facilities

Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:


($ in millions)	July 31, 2021		January 30, 2021		August 1, 2020

2023 Notes	500		500		500
2025 Notes	750		750		750
2027 Notes	1,000		1,000		1,000
Less: Unamortized debt issuance costs	(30)		(34)		(38)
Total long-term debt	$	2,220	$	2,216	$	2,212

($ 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 billion~~As of July 31, 2021, the aggregate ~~principal amount~~estimated fair value of ~~5.95 percent~~the notes due ~~April 2021 (the "2021~~2023 ("2023 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”~~), 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:~~

~~As of August 1, 2020, the estimated fair value of the Notes~~ was ~~$2.50~~$2.53 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 Facility~~In 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 ~~August 1, 2020,~~July 31, 2021, we had ~~$48~~$52 million in standby letters of credit issued under the ABL Facility. There were 0no borrowings under the ABL Facility as of ~~August 1, 2020.~~July 31, 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 ~~August 1, 2020,~~July 31, 2021, we were in compliance with theapplicable financial covenants and expect to maintain compliance for the next twelve months.

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 ~~August 1, 2020.~~July 31, 2021. As of ~~August 1, 2020,~~July 31, 2021, there were 0no borrowings under the Foreign Facilities. There were ~~$15~~$10 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of ~~August 1, 2020.~~July 31, 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 ~~August 1, 2020.~~July 31, 2021.

On June 6, 2020, we redeemed our $1.25 billion aggregate principal amount of 5.95 percent notes due April 2021 ("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. Following the redemption, our obligations under the 2021 Notes were discharged.

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.

Financial Assets and Liabilities

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)	July 31, 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	$	476	$	1	$	475	$	—
Short-term investments	337		304		33		—
Derivative financial instruments	9		—		9		—
Deferred compensation plan assets	51		51		—		—
Other assets	4		—		—		4
Total	$	877	$	356	$	517	$	4
Liabilities:
Derivative financial instruments	$	16	$	—	$	16	$	—
			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	$	—
Short-term investments	410		342		68		—
Derivative financial instruments	5		—		5		—
Deferred compensation plan assets	43		43		—		—
Other assets	2		—		—		2
Total	$	835	$	410	$	423	$	2
Liabilities:
Derivative financial instruments	$	21	$	—	$	21	$	—
			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	$	—
Short-term investments	25		—		25		—
Derivative financial instruments	6		—		6		—
Deferred compensation plan assets	46		46		—		—
Other assets	2		—		—		2
Total	$	447	$	46	$	399	$	2
Liabilities:
Derivative financial instruments	$	19	$	—	$	19	$	—

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 July 31, 2021, January 30, 2021, and August 1, 2020, ~~and August 3, 2019,~~ the Company held ~~$25~~$337 million, $410 million, and ~~$294~~$25 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 ~~August 1, 2020,~~July 31, 2021 and January 30, 2021, the Company held ~~0 material~~$363 million and $90 million, respectively, of available-for-sale debt securities with maturities of ~~less than~~ three months or less at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheet. As of August ~~3, 2019,~~1, 2020, the Company held ~~$15 million~~no material available-for-sale debt securities with maturities of ~~less than~~ three months or less 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 ~~immaterial~~not material as of July 31, 2021 and August 1, ~~2020 and August 3, 2019.~~2020.

The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and twenty-six weeks ended July 31, 2021 or August 1, 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.

There were no material impairment charges recorded for long-lived assets during the thirteen weeks ended July 31, 2021 or August 1, 2020.

During the twenty-six weeks ended July 31, 2021, the Company recorded impairment of operating lease assets of $6 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $16 million to their estimated 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 assets during the twenty-six weeks ended July 31, 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 during the thirteen weeks ended August 1, 2020.~~ During the twenty-six weeks ended August 1, 2020, the Company recorded impairment of store assets of $127 million and impairment of operating lease assets of $361 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $131 million to their estimated fair value of $4 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $1,369 million to their estimated fair value of $1,008 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 0no impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and twenty-six weeks ended July 31, 2021 or August 1, 2020.

Note 5. Income Taxes

The effective income tax rate was 22.3 percent for the twenty-six weeks ended July 31, 2021, compared with 23.5 percent for the twenty-six weeks ended August ~~3, 2019.~~1, 2020. The decrease in the effective tax rate for the first half of fiscal 2021 compared with the first half of fiscal 2020 is primarily due to the tax benefit resulting from divestiture activity during the first half of fiscal 2021 as well as the impact of the CARES Act in the first half of fiscal 2020, partially offset by changes in the geographical mix of pretax earnings.

Note 5.6. Derivative Financial Instruments

~~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

Outstanding Notional Amounts

Quantitative Disclosures about Derivative Financial Instruments

~~All~~The majority of the unrealized gains and losses from designated cash flow hedges as of ~~August 1, 2020~~July 31, 2021 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 ~~August 1, 2020~~July 31, 2021 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.

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 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)
	26 Weeks Ended July 31, 2021				26 Weeks Ended August 1, 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	$	4,749	$	2,804	$	3,965	$	2,588

(Gain) loss recognized in net income (loss)
Derivatives designated as cash flow hedges	9		—		(11)		—

Derivatives not designated as hedging instruments	—		5		—		(11)
Total (gain) loss recognized in net income (loss)	$	9	$	5	$	(11)	$	(11)

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


	13 Weeks Ended				26 Weeks Ended
($ and shares in millions except average per share cost)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Number of shares repurchased (1)	1.8		—		1.8		—
Total cost	$	55	$	—	$	55	$	—
Average per share cost including commissions	$	31.55	$	—	$	31.55	$	—

_________

~~__________~~(1)Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.


~~(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~~$745 million remaining as of ~~August 1, 2020. On March 12, 2020, the Company announced its decision to suspend share repurchases through fiscal 2020.~~July 31, 2021.

All of the share repurchases were paid for as of ~~February 1, 2020 and August 3, 2019.~~July 31, 2021. All common stock 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 for the thirteen weeks ended August 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").

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		26 Weeks Ended
(shares in millions)	July 31, 2021	August 1, 2020	July 31, 2021	August 1, 2020
Weighted-average number of shares - basic	378	374	377	373
Common stock equivalents (1)	8	—	8	—
Weighted-average number of shares - diluted	386	374	385	373

__________


~~(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 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.

The anti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 163 million and 1716 million for the thirteen weeks ended July 31, 2021 and August 1, 2020, ~~and August 3, 2019,~~ respectively, and 153 million and 1315 million for the twenty-six weeks ended July 31, 2021 and August 1, 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 ~~Actions~~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. As of ~~August 1, 2020~~,July 31, 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 July 31, 2021, January 30, 2021, and August 1, 2020,, ~~February 1, 2020, and~~ ~~August 3, 2019~~, 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 ~~August 1, 2020~~,July 31, 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 ~~August 1, 2020,~~July 31, 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 ~~customers~~customer demand through ~~its store~~stores and online channels, ~~allowing us to execute on~~leveraging our omni-channel ~~strategy where~~capabilities that allow customers ~~can~~to 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 ~~August 1, 2020.~~July 31, 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 sales~~See 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.~~


~~(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.


~~(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 Closing~~Divestitures

The Company completed the sale of its Janie and ~~Other Operating Cost~~

~~In fiscal 2019,~~Jack and Intermix brands during the twenty-six weeks ended July 31, 2021. The sale of Janie and Jack was completed on April 8, 2021 and the sale of Intermix was completed on May 21, 2021. As a result of these transactions, the Company ~~announced plans to restructure~~recognized a pre-tax loss of $59 million within operating expenses on the ~~specialty fleet and revitalize~~Condensed Consolidated Statements of Operations for the Gap brand during fiscal 2019 and fiscal 2020. The Company believes these actions will drive a healthier specialty fleet and will serve a more appropriate foundation for brand revitalization. In response to COVID-19, the Company shifted its focus towards adapting to the COVID-19 challenges and as a result the restructuring costs were not material in the first half of fiscal 2020.

twenty-six weeks ended July 31, 2021.


~~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 retailer~~collection 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, ~~stores~~and 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 ~~mobile~~mobile-enabled experiences, are tailored uniquely across our ~~portfolio~~collection of brands. Most of the products sold under our brand names are designed by us and manufactured by independent sources.

OVERVIEW

We ~~also sell products~~unveiled our Power Plan 2023 strategy during fiscal 2020, which reflects long-term plans to grow and strengthen the Company. Since then, we have focused on our key initiatives, including growing Old Navy and Athleta, repositioning and transforming Gap and Banana Republic and expanding into new categories. As we have progressed through fiscal 2021, we have executed on our strategy by expanding into new categories such as GapHome on Walmart.com and more recently we announced the launch of our inclusive sizing shopping experience, BODEQUALITY, at Old Navy. Our efforts to scale strategic partnerships to amplify our brands across product categories, markets, and channels have led to increased brand awareness and are paving the foundation for sustainable growth.

During the second quarter of fiscal 2021, we continued strengthening our digital presence and increasing customer loyalty with the launch of our new integrated rewards program across the U.S. and Puerto Rico. The enhancement of our loyalty program aims to attract new customers and create enduring relationships by turning customers into lifelong loyalists. Additionally, Athleta launched AthletaWell, an immersive digital platform designed to build loyalty, engagement, and a community of empowered women.

In June 2021, we made progress on the strategic review of our operating model in Europe and shared our plan to close all Company-operated stores in the United Kingdom and the Republic of Ireland during the third quarter of fiscal 2021. Additionally, we shared that we are ~~designed and manufactured by branded~~in discussions with third parties to move to a partnership model in France and Italy. We intend to maintain an online presence in Europe. As a result of these strategic changes, we incurred $16 million of pre-tax costs during the second quarter of fiscal 2021 primarily atconsisting of employee-related costs, which were recorded within operating expenses on the Condensed Consolidated Statement of Operations.

Additionally, as part of our strategic review of the Company's brands and businesses, we made the decision to sell the Janie and Jack and Intermix ~~brand.~~

~~OVERVIEW~~brands during the first half of fiscal 2021. The sale of Janie and Jack was completed on April 8, 2021. The sale of Intermix was completed 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 $59 million within operating expenses on the Condensed Consolidated Statement of Operations during the first half of fiscal 2021 in conjunction with these transactions.

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~~resulting in temporary closures for a large number of our stores ~~globally. We have temporarily implemented a work-from-home policy for most~~globally with the majority of ~~our corporate employees. In May 2020, we began to safely reopen our~~these stores ~~with industry-leading safety measures for customers and employees, and as~~reopening by the end 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 by leveraging our omni fulfillment capabilities, including curbside pick-up and ship-from-store, to serve customer demand.

In the second quarter of fiscal ~~2020, the Company announced the launch of a B2B program focused on offering large organizations high-quality reusable, non-medical grade cloth face masks to supply to their employees.~~2020. We ~~have leveraged our deep supply chain relationships and agile operations to provide these masks to companies in both the private and public sector.~~

We implemented several actions during the first half of fiscal 2020 to enhance our liquidity position in response to COVID-19. 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 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 to our~~for those temporarily closed stores and are ~~now working~~continuing to work through negotiations with our landlords relating to those leases. ~~To date, we’ve negotiated agreements~~There were no material rent abatement benefits recorded on ~~a number of~~ our ~~leases and more agreements are anticipated over the next several months.~~

During the twenty-six weeks ended August 1, 2020, the Company recorded impairment of store assets of $127 million and operating lease assets of $361 million, primarily due to lower cash flows from stores and the reduced estimated fair value of real estate, particularly in mall locations, as a result of COVID-19. See Note 4 of Notes to the Condensed Consolidated ~~Financial Statements included in Part I, Item 1~~Statement of ~~this Form 10-Q,~~Operations for ~~further information regarding impairments.~~

During the first quarter of fiscal 2020, the Company recorded inventory related impairment costs of $235 million, primarily related 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 garment 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, the Company moved through a significant amount of inventory and no material inventory related impairment costs were recorded during the second quarter of fiscal 2020. Additionally, to strategically manage inventory through COVID-19, select summer product is being stored at an off-site facility and our distribution centers and expected to be sold during fiscal 2021.

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~~or 2021. Our results for the first half of fiscal ~~2020.~~2021 reflect continued domestic recovery from the effects of the pandemic and progress toward our digital transformation; however, there continues to be residual impacts from temporary store closures in international markets and in our supply chain.

~~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~~The Company remains focused on our plans to reduce the ~~following strategic priorities:~~number of Gap and Banana Republic stores in North America by approximately 350 stores from the beginning of fiscal 2020 to the 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 Consolidated Statement of Operations. As of July 31, 2021, we have closed, net of openings, 213 Gap and Banana Republic stores in North America since the beginning of fiscal 2020.

~~offering~~Our business priorities for fiscal 2021 are as follows:

•creating product that ~~is consistently brand-appropriate~~offers value to our customers through a combination of fit, quality, brand and ~~on-trend with high customer acceptance~~price;

•investing in our four purpose-led lifestyle brands to drive relevance and ~~appropriate value perception;~~gain market share;

•growing ~~and operating~~ our ~~global~~ online business;

~~realigning~~•reducing our fixed cost structure to fuel demand generation investments;

•leveraging our scale to navigate constraints in supply chain;

•managing inventory ~~with customer demand;~~to support a healthy merchandise margin;

•rationalizing the Gap and Banana Republic store fleet;

•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;

•attracting and retaining strong talent in our businesses and functions; and

~~increasing the focus on improving operational discipline and efficiency by streamlining operations and processes throughout the organization and leveraging our scale;~~

~~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; and~~

•continuing to integrate social and environmental sustainability into business practices to support long-term growth.

We ~~continue to monitor~~believe focusing on these priorities in 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,near term will propel the Company ~~cannot reasonably estimate~~to execute against its Power Plan 2023 strategy, including leveraging:

•The Power of its Brands, reflected by the ~~impacts~~Company’s four purpose-led, lifestyle brands: Old Navy, Gap, Banana Republic and Athleta;

•The Power of ~~COVID-19 on our results~~its Portfolio, which enables growth synergies across key customer categories; and

•The Power of ~~operations, cash flows and liquidity in~~its Platform, which leverages the ~~future.~~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.

Financial results for the second quarter of fiscal ~~2020 and the~~ ~~second quarter of fiscal 2019~~2021 are as follows:

•Net sales for the second quarter of fiscal ~~2020 decreased 18~~2021 increased 29 percent compared with the second quarter of fiscal ~~2019.~~2020.

•Online sales for the second quarter of fiscal ~~2020 increased 95~~2021 decreased 15 percent compared with the second quarter of fiscal ~~2019~~2020 and store sales for the second quarter of fiscal ~~2020 decreased 48~~2021 increased 72 percent compared with the second quarter of fiscal ~~2019.~~2020.

•Gross profit for the second quarter of fiscal ~~2020~~2021 was ~~$1.15~~$1.82 billion compared with ~~$1.56~~$1.15 billion for the second quarter of fiscal ~~2019.~~2020. Gross margin for the second quarter of fiscal ~~2020~~2021 was ~~35.1~~43.3 percent compared with ~~38.9~~35.1 percent for the second quarter of fiscal ~~2019.~~2020.

•Operating income for the second quarter of fiscal ~~2020~~2021 was ~~$73~~$409 million compared with ~~$282~~$73 million for the second quarter of fiscal ~~2019.~~2020.

•

~~The effective income tax rate for the second quarter of fiscal 2020~~

•The effective income tax rate for the second quarter of fiscal 2021 was 28.1 percent, compared with negative 51.2 ~~percent, compared with 38.0~~ percent for the second quarter of fiscal 2020.

•Net income for the second quarter of fiscal 2021 was $258 million compared with net loss of $(62) million for the second quarter of fiscal 2020.

•Diluted earnings per share was $0.67 for the second quarter of fiscal 2021 compared with diluted loss per share of $(0.17) for the second quarter of fiscal 2020.

~~second quarter of fiscal 2019~~.


•	~~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~~.


•	~~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~~.

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 July 31, 2021 and August 1, 2020, any stores temporarily closed for more than three days as a result of COVID-19 were excluded from the Comp Sales calculations. After 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.

The percentage change in Comp Sales by global brand and for The Gap, Inc. 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	%

~~__________~~


~~(1)~~	~~Comp Sales for the thirteen weeks ended August 1, 2020 reflect an increase in online sales, see Net Sales discussion for further details.~~



	July 31, 2021
Old Navy Global	—	%
Gap Global	(5)	%
Banana Republic Global	41	%
Athleta	13	%
The Gap, Inc.	3	%


	13 Weeks Ended
	August 3, 20191, 2020 (1)
Old Navy Global	(524	)%
Gap Global	(712	)%
Banana Republic Global	(3(27)	)%
Athleta	1019	%
The Gap, Inc.	(413	)%

__________

~~We have historically reported net~~(1)Comp Sales for the thirteen weeks ended August 1, 2020 reflect an increase in online 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.~~COVID-19.

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		26 Weeks Ended July 31, 2021				July 31, 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		30		5		1,245			20.0
Old Navy Asia	17	—	17	—		—

Gap North America	675	2	66	611		6.5		Gap North America	556		1		15		542			5.7
Gap Asia	358	10	10	358		3.2		Gap Asia	340		9		10		339			2.9
Gap Europe	137	3	11	129		1.1		Gap Europe	117		1		28		90			0.7
Banana Republic North America	541	2	45	498		4.2		Banana Republic North America	471		1		11		461			3.9
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		13		—		212			0.9
Intermix North America	33	—	1	32		0.1
Intermix North America (2)								Intermix North America (2)	31		—		—		—			—
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		58		71		2,937			34.3
Franchise	574	35	10	599		N/A		Franchise	615		40		98		557			N/A
Total	3,919	78	183	3,814		35.8		Total	3,715		98		169		3,494			34.3
Decrease over prior year				(1.6	)%	(3.5	)%	Decrease over prior year							(8.4)	%		(4.2)	%

	February 2, 2019	26 Weeks Ended August 3, 2019		August 3, 2019					February 1, 2020		26 Weeks Ended August 1, 2020				August 1, 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		14		8		1,213			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		2		66		611			6.5
Gap Asia	332	29	19	342		3.1		Gap Asia	358		10		10		358			3.2
Gap Europe	152	1	2	151		1.3		Gap Europe	137		3		11		129			1.1
Banana Republic North America	556	5	7	554		4.7		Banana Republic North America	541		2		45		498			4.2
Banana Republic Asia	45	3	1	47		0.2		Banana Republic Asia	48		4		5		47			0.2

Athleta North America	161	10	—	171		0.7		Athleta North America	190		8		2		196			0.8
Intermix North America	36	—	1	35		0.1		Intermix North America	33		—		1		32			0.1
Janie and Jack North America (2)	—	—	—	140		0.2
Janie and Jack North America								Janie and Jack North America	139		—		8		131			0.2
Company-operated stores total	3,194	81	59	3,356		37.1		Company-operated stores total	3,345		43		173		3,215			35.8
Franchise	472	66	17	521		N/A		Franchise	574		35		10		599			N/A
Total	3,666	147	76	3,877		37.1		Total	3,919		78		183		3,814			35.8
Increase over prior year				6.9	%	1.4	%
Decrease over prior year								Decrease over prior year							(1.6)	%		(3.5)	%

__________


~~(1)~~	~~This represents stores that have been permanently closed, not stores temporarily closed as a result of COVID-19.~~


~~(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.

(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. On May 21, 2021, the Company completed the sale of the Intermix business. The 31 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~~2021 increased $936 million, or 1829 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~~and increased $2.82 billion, or 52 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~~during the first half of fiscal ~~2020 decreased $2.3 billion or 30 percent,~~2021 compared with the first half of fiscal ~~2019~~2020, driven primarily by temporary ~~store~~ closures across our fleet during fiscal 2020 due to ~~COVID-19. Although~~the COVID-19 ~~and resulting temporary closure~~pandemic. As our domestic stores reopened, store traffic returned across all our brands reflecting the benefits of our stores negatively affected our financial results for the first half of fiscal 2020, our online sales increased significantly for the first half of fiscal 2020 compared with the first half of fiscal 2019.investments in demand generation.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						26 Weeks Ended
($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Cost of goods sold and occupancy expenses	$	2,388		$	2,126		$	4,749		$	3,965
Gross profit	$	1,823		$	1,149		$	3,453		$	1,417
Cost of goods sold and occupancy expenses as a percentage of net sales	56.7		%	64.9		%	57.9		%	73.7		%
Gross margin	43.3		%	35.1		%	42.1		%	26.3		%

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~~decreased 8.2 percentage points as a percentage of net sales in the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020.

•Cost of goods sold decreased 3.8 percentage points as a percentage of net sales in the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020, due to a decrease in online shipping costs due to lower ship-from-store fulfillment as well as stronger demand generation which drove lower promotional activity across all brands as retail traffic increased.

• ~~compared with~~Occupancy expenses decreased 4.4 percentage points as a percentage of net sales in the second quarter of fiscal ~~2019~~.2021 compared with the second quarter of fiscal 2020, primarily driven by an increase in net sales largely due to temporary store closures as a result of COVID-19 during the second quarter of fiscal 2020.

•

~~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.

•

~~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 11.3~~decreased 15.8 percentage points as a percentage of net sales in the first half of fiscal ~~2020~~2021 compared with the first half of fiscal ~~2019.~~2020.

•Cost of goods sold ~~increased 6.9~~decreased 7.6 percentage points as a percentage of net sales in the first half of fiscal ~~2020~~2021 compared with the first half of fiscal ~~2019,~~2020, primarily ~~driven by~~due to stronger demand generation which drove lower promotional activity across all brands, higher inventory impairment recognized in the first half of fiscal 2020 due to store closures as a result of COVID-19, and lower online shipping costs as a result of ~~growth in online sales~~lower ship-from-store fulfillment as ~~well as higher inventory impairment due to store closures and decreased~~ retail traffic ~~as a result of COVID-19.~~increased.

•Occupancy expenses ~~increased 4.4~~decreased 8.2 percentage points as a percentage of net sales in the first half of fiscal ~~2020~~2021 compared with the first half of fiscal ~~2019~~2020, primarily driven by ~~a decrease~~an increase in ~~store~~net sales largely due to ~~COVID-19~~temporary store closures ~~with minimal decrease in fixed occupancy expenses, partially offset by an increase in~~as a result of COVID-19 during the first half of fiscal 2020 as well as online sales ~~with~~growth during the first half of fiscal 2021 which has minimal impact on fixed occupancy expenses.

Operating Expenses


	13 Weeks Ended						26 Weeks Ended							13 Weeks Ended						26 Weeks Ended
($ in millions)	August 1, 2020			August 3, 2019			August 1, 2020			August 3, 2019			($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Operating expenses	$	1,076		$	1,274		$	2,588		$	2,302		Operating expenses	$	1,414		$	1,076		$	2,804		$	2,588
Operating expenses as a percentage of net sales	32.9		%	31.8		%	48.1		%	29.9		%	Operating expenses as a percentage of net sales	33.6		%	32.9		%	34.2		%	48.1		%
Operating margin	2.2		%	7.0		%	(21.8		)%	7.8		%	Operating margin	9.7		%	2.2		%	7.9		%	(21.8)		%

~~a decrease~~•an increase in store payroll and benefits and other store operating expenses ~~as a result of~~due to COVID-19 temporary store closures ~~across all brands; and~~

•an increase in performance-based compensation;

•an increase in advertising expense to generate demand across all purpose-led lifestyle brands; and

•an increase related to digital innovation costs to fuel the growth priorities of the business.

•an increase in store payroll and benefits and other store operating expenses due to COVID-19 temporary store closures during the first half of fiscal 2020;

•an increase in advertising expense to generate demand across all purpose-led lifestyle brands;

•an increase in performance-based compensation;

•a loss on divestiture activity related to the Janie and Jack and Intermix brands; and

•an increase related to digital innovation costs to fuel the growth priorities of the business; partially offset by

•a decrease of $481 million due to impairment charges related to store assets and operating lease assets ~~of $488 million incurred~~ during the first half of fiscal 2020 primarily due to the impact of ~~COVID-19;~~

Loss on Extinguishment of Debt

~~Interest Expense~~

~~Interest expense increased $39 million or 205 percent~~Operations during the second quarter of fiscal ~~2020 compared with~~ ~~second quarter of fiscal 2019~~2020.


	13 Weeks Ended				26 Weeks Ended
($ in millions)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Interest expense	$	51	$	58	$	105	$	77

Interest expense primarily includes interest on overall borrowings and obligations primarily related to the Notes. Interest expense increased ~~$38~~$28 million or 9736 percent during the first half of fiscal ~~2020~~2021 compared with the first half of fiscal ~~2019 primarily due to higher total outstanding debt and higher interest rates~~2020 as a result of the May 7, 2020 issuance of the ~~Notes. The total outstanding principal related to our~~new Notes, ~~increased from $1.25 billion as of August 3, 2019, to $2.25 billion as of August 1, 2020. Additionally, the new Notes~~which bear interest at ~~8.375 percent, 8.625 percent, and 8.875 percent compared with our~~higher interest rates than the previous ~~5.95 percent~~ 2021 Notes.

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						26 Weeks Ended
($ in millions)	July 31, 2021			August 1, 2020			July 31, 2021			August 1, 2020
Income taxes	$	101		$	21		$	122		$	(306)
Effective tax rate	28.1		%	(51.2)		%	22.3		%	23.5		%

The ~~decrease~~increase in the effective tax rate for the second quarter of fiscal ~~2020 and first half~~2021 compared with the second quarter of fiscal 2020 ~~compared with the respective periods of fiscal 2019~~ is primarily due to the net operating loss carryback provisions of the CARES Act during the second quarter of fiscal 2020 as well as changes in the geographical mix of pretax ~~income between domestic and international operations and~~earnings. The decrease in the effective tax rate for the first half of fiscal ~~2019 impact of an adjustment for additional guidance issued regarding the TCJA.~~

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~We continue to manage through the impacts of COVID-19 in fiscal 2020 and the impact it has on our operations and liquidity. During~~2021 compared with the first half of fiscal 2020 ~~we have taken several actions~~is primarily due 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~~tax benefit resulting from divestiture activity during the first half of fiscal 2021 as well as the impact of the CARES Act in the first half of fiscal ~~year.~~2020, partially offset by changes in the geographical mix of pretax earnings.

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.

LIQUIDITY AND CAPITAL RESOURCES

As of ~~August 1, 2020,~~July 31, 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	$	2,375	$	—	$	2,375
Short-term investments	337		—		337

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	$	4,962	$	2,250	$	2,712

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 ~~that current~~our existing balances of cash, ~~balances~~cash equivalents, and short-term investments, along with our cash flows from ~~our~~ operations, ~~will be sufficient to support~~and instruments mentioned above, provide ample funds for our business operations ~~for~~as well as capital expenditures, dividends, share repurchases, and other liquidity requirements associated with our business operations over the next twelve months.

Cash Flows from Operating Activities

•Net income compared with net loss in prior comparable period;

•a decrease of $481 million due to lower non-cash impairment charges for operating lease assets and store assets during the first half of fiscal 2021 compared with the first half of fiscal ~~2019, primarily due to the following:~~

~~Net Income (Loss)~~

Changes in operating assets and liabilities

•an increase of ~~$320~~$247 million related to merchandise inventory in part due to the utilization of seasonal inventory stored at our distribution center since fiscal 2020 as a result of the COVID-19 pandemic and impacts from divestiture activities during the first half of fiscal 2021; and

•an increase of $177 million related to income taxes payable, net of receivables and other tax-related items, resulting from the net operating loss carrybacks attributable to the first half of fiscal 2020 as well as the timing of tax-related payments; partially offset by

•a decrease of $635 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 $232 million related to other current assets and long-term assets due to the timing of ~~tax-related payments.~~payments related to rent and divestiture activities during the first half of fiscal 2020.

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 ~~effect~~residual 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

•$193 million higher net purchases of available-for-sale debt securities during the first half of fiscal 2021 compared with the first half of fiscal ~~2019, primarily due to the following:~~2020; and

•$~~270~~61 million ~~higher net proceeds from available-for-sale securities during the first half of fiscal 2020 compared with the first half of fiscal 2019;~~

Cash Flows from Financing Activities

•$2,250 million in proceeds ~~received~~ related to the issuance of ~~long-term~~ debt during the first half of fiscal 2020; and

~~an increase~~•$137 million in payments of ~~$283 million due to the suspension of both cash~~ dividends ~~and share repurchases~~ during the first half of fiscal ~~2020;~~2021; partially offset by

•$1,307 million ~~payment for~~in payments related to the extinguishment of debt during the first half of fiscal 2020.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.


	26 Weeks Ended
($ in millions)	July 31, 2021		August 1, 2020
Net cash provided by (used for) operating activities	$	792	$	(87)
Less: Purchases of property and equipment	(269)		(208)

Free cash flow	$	523	$	(295)

Debt and Credit Facilities

For ~~additional~~ financial information about the Company’s debt and credit facilities as of ~~August 1, 2020~~July 31, 2021 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.

~~On March 26, 2020,~~We paid a dividend of $0.12 per share during the ~~Company announced that~~second quarter of fiscal 2021. In August 2021, our board of directors authorized a dividend of $0.12 per share for the ~~previously declared first~~third quarter ~~dividend will now be payable on or after April 28, 2021 to shareholders~~ of record at the close of business on April 7, 2021, subject to the right of the Company to further defer 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.2021.

~~In March 2020, the Company announced its decision to suspend share repurchases through fiscal 2020 due to the economic uncertainty stemming from a number of factors, including COVID-19.~~

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

Critical Accounting Policies and Estimates

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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:

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.

Evaluation of Disclosure Controls and Procedures

Changes in Internal Control over Financial Reporting

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended~~August 1, 2020~~ July 31, 2021 by the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act ~~Rule 10b-18(a)(3):~~of 1934, as amended:

(1)Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.

(2)In February 2019, we announced that the Board of Directors approved a $1 billion share repurchase authorization, which has no expiration date.

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 —
$ —
—

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
3.2
   Certificate of Amendment of Amended and Restated Certificate of Incorporation 10-K 1-7562 3.2 April 4, 2000
3.3
   Amended and Restated Bylaws (effective March 23, 2020) 8-K 1-7562 3.1 March 5, 2020
4.1
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
10.1*
Third Amended and Restated Revolving Credit Agreement dated as of May 7, 2020 8-K 1-7562 10.1 May 8, 2020
10.2†
Agreement and Release dated June 12, 2020 by and between Teri List-Stoll and the Registrant X
31.1
   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
31.2
   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
32.1
   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
32.2
   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

3.2

Certificate of Amendment of Amended and Restated Certificate of Incorporation

10-K

1-7562

3.2

April 4, 2000

3.3

Amended and Restated Bylaws (effective March 23, 2020)

8-K

1-7562

3.1

March 5, 2020

10.1†

The Gap, Inc. 2016 Long-Term Incentive Plan (as amended and restated effective May 11, 2021)

DEF 14A

1-7562

App. B

March 30, 2021

10.2

Amendment No. 1 to Third Amended and Restated Revolving Credit Agreement dated as of July 12, 2021

31.1

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)

31.2

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)

32.1

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

32.2

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

101

The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 31, 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

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

_____________________________

(P) This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.

† Indicates management contract or compensatory plan or arrangement.


	26 Weeks Ended							26 Weeks Ended
($ in millions)	August 1, 2020			August 3, 2019			($ in millions)	July 31, 2021		August 1, 2020
Cash flows from operating activities:							Cash flows from operating activities:
Net income (loss)	$	(994	)	$	395		Net income (loss)	$	424	$	(994)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:							Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	256			277			Depreciation and amortization	244		256

Share-based compensation	35			47			Share-based compensation	72		35
Impairment of operating lease assets	361			0			Impairment of operating lease assets	6		361
Impairment of store assets	127			3			Impairment of store assets	1		127

Loss on extinguishment of debt	58			0			Loss on extinguishment of debt	—		58
Amortization of debt issuance costs	4			1			Amortization of debt issuance costs	8		4
Non-cash and other items	0			6			Non-cash and other items	14		—
Gain on sale of building	0			(191		)
Loss on divestiture activity							Loss on divestiture activity	59		—

Deferred income taxes	(125		)	46			Deferred income taxes	28		(125)
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Merchandise inventory	(91		)	(166		)	Merchandise inventory	156		(91)
Other current assets and other long-term assets	134			29			Other current assets and other long-term assets	(98)		134

Accounts payable	467			147			Accounts payable	(168)		467
Accrued expenses and other current liabilities	(40		)	(14		)	Accrued expenses and other current liabilities	83		(40)
Income taxes payable, net of receivables and other tax-related items	(232		)	43			Income taxes payable, net of receivables and other tax-related items	(55)		(232)
Lease incentives and other long-term liabilities	1			24
Other long-term liabilities							Other long-term liabilities	57		1
Operating lease assets and liabilities, net	(48		)	(64		)	Operating lease assets and liabilities, net	(39)		(48)
Net cash provided by (used for) operating activities	(87		)	583			Net cash provided by (used for) operating activities	792		(87)
Cash flows from investing activities:							Cash flows from investing activities:
Purchases of property and equipment	(208		)	(324		)	Purchases of property and equipment	(269)		(208)
Purchase of building	0			(343		)
Proceeds from sale of building	0			220

Purchases of short-term investments	(59		)	(150		)	Purchases of short-term investments	(427)		(59)
Proceeds from sales and maturities of short-term investments	325			146			Proceeds from sales and maturities of short-term investments	500		325
Purchase of Janie and Jack	0			(69		)
Net cash paid for divestiture activity							Net cash paid for divestiture activity	(21)		—
Other	2			0			Other	—		2
Net cash provided by (used for) investing activities	60			(520		)	Net cash provided by (used for) investing activities	(217)		60
Cash flows from financing activities:							Cash flows from financing activities:

Proceeds from revolving credit facility	500			—			Proceeds from revolving credit facility	—		500
Payments for revolving credit facility	(500		)	0			Payments for revolving credit facility	—		(500)
Proceeds from issuance of long-term debt	2,250			0			Proceeds from issuance of long-term debt	—		2,250
Payments to extinguish debt	(1,307		)	0			Payments to extinguish debt	—		(1,307)
Payments for debt issuance costs	(61		)	0			Payments for debt issuance costs	—		(61)
Proceeds from issuances under share-based compensation plans	12			17			Proceeds from issuances under share-based compensation plans	41		12
Withholding tax payments related to vesting of stock units	(8		)	(20		)	Withholding tax payments related to vesting of stock units	(32)		(8)
Repurchases of common stock	0			(100		)	Repurchases of common stock	(55)		—

Cash dividends paid	0			(183		)	Cash dividends paid	(137)		—

Net cash provided by (used for) financing activities	886			(286		)	Net cash provided by (used for) financing activities	(183)		886
Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash	1			(2		)	Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash	(1)		1
Net increase (decrease) in cash, cash equivalents, and restricted cash	860			(225		)
Net increase in cash, cash equivalents, and restricted cash							Net increase in cash, cash equivalents, and restricted cash	391		860
Cash, cash equivalents, and restricted cash at beginning of period	1,381			1,420			Cash, cash equivalents, and restricted cash at beginning of period	2,016		1,381
Cash, cash equivalents, and restricted cash at end of period	$	2,241		$	1,195		Cash, cash equivalents, and restricted cash at end of period	$	2,407	$	2,241

Supplemental disclosure of cash flow information:							Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	39		$	38		Cash paid for interest during the period	$	102	$	39
Cash paid for income taxes during the period, net of refunds	$	53		$	90		Cash paid for income taxes during the period, net of refunds	$	147	$	53



	Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance as of May 2, 2020	373		$	19	$	17		$	2,235		$	46		$	2,317
Net loss for the thirteen weeks ended August 1, 2020								(62		)				(62		)
Other comprehensive loss, net of tax
Foreign currency translation											(10		)	(10		)
Change in fair value of derivative financial instruments											(8		)	(8		)
Amounts reclassified from accumulated other comprehensive income											(6		)	(6		)
Issuance of common stock related to stock options and employee stock purchase plans	0		0		6									6
Issuance of common stock and withholding tax payments related to vesting of stock units	1		0		(1		)							(1		)
Share-based compensation, net of forfeitures					17									17
Common stock dividends (1)								0						0
Balance as of August 1, 2020	374		$	19	$	39		$	2,173		$	22		$	2,253

Balance as of May 4, 2019	378		$	19	$	0		$	3,495		$	57		$	3,571
Net income for the thirteen weeks ended August 3, 2019								168						168
Other comprehensive income (loss), net of tax
Foreign currency translation											0			0
Change in fair value of derivative financial instruments											1			1
Amounts reclassified from accumulated other comprehensive income											(3		)	(3		)
Repurchases and retirement of common stock	(3	)	0		(29		)	(21		)				(50		)
Issuance of common stock related to stock options and employee stock purchase plans	0		0		7									7
Issuance of common stock and withholding tax payments related to vesting of stock units	1		0		(1		)							(1		)
Share-based compensation, net of forfeitures					23									23
Common stock dividends declared and paid ($0.2425 per share)								(91		)				(91		)
Balance as of August 3, 2019	376		$	19	$	0		$	3,551		$	55		$	3,625


~~(1)~~	~~Store sales primarily include sales made at~~recorded 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.


~~(1)~~	~~Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium.~~


	Location and Amount of (Gain) Loss Recognized in Net Income (Loss)												Location and Amount of (Gain) Loss Recognized in Net Income (Loss)
	13 Weeks Ended August 1, 2020					13 Weeks Ended August 3, 2019							13 Weeks Ended July 31, 2021				13 Weeks Ended August 1, 2020
($ in millions)	Cost of goods sold and occupancy expense			Operating expenses		Cost of goods sold and occupancy expense			Operating expenses			($ 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	$	2,126		$	1,076	$	2,449		$	1,274		Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded	$	2,388	$	1,414	$	2,126	$	1,076

(Gain) loss recognized in net income (loss)												(Gain) loss recognized in net income (loss)
Derivatives designated as cash flow hedges	(7		)	0		(6		)	0			Derivatives designated as cash flow hedges	6		—		(7)		—

Derivatives not designated as hedging instruments	0			32		0			(3		)	Derivatives not designated as hedging instruments	—		(6)		—		32
Total (gain) loss recognized in net income (loss)	$	(7	)	$	32	$	(6	)	$	(3	)	Total (gain) loss recognized in net income (loss)	$	6	$	(6)	$	(7)	$	32



	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	)


~~(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.~~


~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk.~~


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds.~~


	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 (2)
Month #1 (May 2 - May 29)	—	$	—	—	$ 800 million
Month #2 (May 30 - July 3)	1,070,200	$	32.36	1,070,200	$ 765 million
Month #3 (July 4 - July 31)	681,828	$	30.27	681,828	$ 745 million
Total	1,752,028	$	31.55	1,752,028



	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	—	$	—	—


*	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.


				THE GAP, INC.

Date:			August 27, 2021	~~THE GAP, INC.~~
By
~~Date:~~	~~August 31, 2020~~	By	/s/ Sonia Syngal
					Sonia Syngal
					Chief Executive Officer
					(Principal Executive Officer)
~~Date:~~
Date:			August ~~31, 2020~~27, 2021	By	/s/ Katrina O'Connell
					Katrina O'Connell
					Executive Vice President and Chief Financial Officer
					(Principal Financial and Accounting Officer)