The Gap, Inc. (GAP) 10-Q 8 Jun 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended May. 01, 2010	Jun. 04, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-05-01
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	GPS
Entity Registrant Name	GAP INC
Entity Central Index Key	0000039911
Current Fiscal Year End Date	--01-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		650,593,147

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions	3 Months Ended May. 01, 2010	3 Months Ended May. 02, 2009	12 Months Ended Jan. 30, 2010
Current assets:
Cash and cash equivalents	$2,056	$1,708	$2,348
Short-term investments	425		225
Restricted cash	17	21	18
Merchandise inventory	1,534	1,393	1,477
Other current assets	632	647	596
Total current assets	4,664	3,769	4,664
Property and equipment, net of accumulated depreciation of $4,832, $4,799, and $4,441	2,585	2,820	2,628
Other long-term assets	696	632	693
Total assets	7,945	7,221	7,985
Current liabilities:
Accounts payable	1,052	812	1,027
Accrued expenses and other current liabilities	894	864	1,063
Income taxes payable	145	9	41
Total current liabilities	2,091	1,685	2,131
Lease incentives and other long-term liabilities	947	996	963
Commitments and contingencies (see Note 11)
Stockholders' equity:
Common stock $0.05 par value Authorized 2,300 shares; Issued 1,106, 1,106, and 1,106 shares; Outstanding 667, 676, and 696 shares	55	55	55
Additional paid-in capital	2,920	2,893	2,935
Retained earnings	11,050	10,103	10,815
Accumulated other comprehensive income	146	116	155
Treasury stock, at cost (439, 430, and 410 shares)	(9,264)	(8,627)	(9,069)
Total stockholders' equity	4,907	4,540	4,891
Total liabilities and stockholders' equity	$7,945	$7,221	$7,985

1_CONDENSED CONSOLIDATED BALANC

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Per Share data	May. 01, 2010	Jan. 30, 2010	May. 02, 2009
Property and equipment, accumulated depreciation	$4,832	$4,799	$4,441
Common stock, par value	0.05	0.05	0.05
Common stock, Authorized	2,300	2,300	2,300
Common stock, Issued	1,106	1,106	1,106
Common stock, Outstanding	667	676	696
Treasury stock, shares	439	430	410

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data	3 Months Ended May. 01, 2010	3 Months Ended May. 02, 2009
Net sales	$3,329	$3,127
Cost of goods sold and occupancy expenses	1,928	1,888
Gross profit	1,401	1,239
Operating expenses	927	886
Operating income	474	353
Interest expense (reversal)	(10)	2
Interest income	(1)	(2)
Income before income taxes	485	353
Income taxes	183	138
Net income	$302	$215
Weighted-average number of shares - basic	668	695
Weighted-average number of shares - diluted	676	697
Earnings per share - basic	0.45	0.31
Earnings per share - diluted	0.45	0.31
Cash dividends declared and paid per share	0.1	0.085

2_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions	3 Months Ended May. 01, 2010	3 Months Ended May. 02, 2009
Cash flows from operating activities:
Net income	$302	$215
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	166	162
Amortization of lease incentives	(19)	(19)
Share-based compensation	27	12
Tax benefit from exercise of stock options and vesting of stock units	7	(5)
Excess tax benefit from exercise of stock options and vesting of stock units	(8)
Non-cash and other items	13	(11)
Deferred income taxes	(14)	(2)
Changes in operating assets and liabilities:
Merchandise inventory	(58)	110
Other current assets and other long-term assets	(53)	(31)
Accounts payable	16	(155)
Accrued expenses and other current liabilities	(180)	(144)
Income taxes payable, net of prepaid and other tax-related items	132	66
Lease incentives and other long-term liabilities	(2)	4
Net cash provided by operating activities	329	202
Cash flows from investing activities:
Purchases of property and equipment	(107)	(63)
Purchases of short-term investments	(325)
Maturities of short-term investments	125
Change in restricted cash	2	18
Net cash used for investing activities	(305)	(45)
Cash flows from financing activities:
Payments of long-term debt		(50)
Proceeds from share-based compensation, net of withholding tax payments	45
Repurchases of common stock	(299)	(45)
Excess tax benefit from exercise of stock options and vesting of stock units	8
Cash dividends paid	(67)	(59)
Net cash used for financing activities	(313)	(154)
Effect of foreign exchange rate fluctuations on cash	(3)	(10)
Net decrease in cash and cash equivalents	(292)	(7)
Cash and cash equivalents at beginning of period	2,348	1,715
Cash and cash equivalents at end of period	2,056	1,708
Non-cash investing activities:
Purchases of property and equipment, not yet paid at end of period	59	21
Supplemental disclosure of cash flow information:
Cash paid for interest during the period		1
Cash paid for income taxes during the period	$56	$77

Basis of Presentation

Basis of Presentation
	3 Months Ended May. 01, 2010
Basis of Presentation	Note 1. Basis of Presentation The Condensed Consolidated Balance Sheets as of May1, 2010 and May2, 2009 and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May1, 2010 and May2, 2009 have been prepared by The Gap, Inc. (the Company, we, and our), without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, and cash flows as of May1, 2010 and May2, 2009 and for all periods presented. The Condensed Consolidated Balance Sheet as of January30, 2010 has been derived from our audited financial statements. We identify our operating segments based on the way we manage and evaluate our business activities. We have two reportable segments: Stores and Direct. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January30, 2010. The results of operations for the thirteen weeks ended May1, 2010 are not necessarily indicative of the operating results that may be expected for the fifty-two week period ending January29, 2011.

Recent Accounting Pronouncement

Recent Accounting Pronouncements
	3 Months Ended May. 01, 2010
Recent Accounting Pronouncements	Note 2. Recent Accounting Pronouncements In January 2010, the Financial Accounting Standards Board issued an accounting standards update to amend and clarify existing guidance related to fair value measurements and disclosures. This guidance adds new requirements for disclosures related totransfers into and out of level 1 and level 2 and requires separate disclosure of purchases, sales, issuances, and settlements related to level 3 measurements. It also clarifies guidance around disaggregation and disclosures of inputs and valuation techniques used to measure fair value. We adopted the provisions of this accounting standards update effective January31, 2010, except for the requirement to disclose purchases, sales, issuances, and settlements related to level 3 measurements, which we will adopt in the first quarter of fiscal 2011.

Goodwill and Intangible Assets

Goodwill and Intangible Assets
	3 Months Ended May. 01, 2010
Goodwill and Intangible Assets	Note 3. Goodwill and Intangible Assets Goodwill and intangible assets consist of the following and are included in other long-term assets: ($ in millions) May1, 2010 January30, 2010 May2, 2009 Goodwill $ 99 $ 99 $ 99 Trade name $ 54 $ 54 $ 54 Intangible assets subject to amortization $ 15 $ 15 $ 15 Less: Accumulated amortization (9 ) (8 ) (4 ) Intangible assets subject to amortization, net $ 6 $ 7 $ 11 All of the assets above have been allocated to the Direct reportable segment. During the thirteen weeks ended May1, 2010, there were no changes in the carrying amount of goodwill or the trade name. Intangible assets subject to amortization, consisting primarily of customer relationships, are being amortized over a weighted-average amortization period of four years. Amortization expense for intangible assets subject to amortization for the thirteen weeks ended May1, 2010 and May2, 2009 was $1 million and $2 million, respectively, and is recorded in operating expenses in the Condensed Consolidated Statements of Income. For the remainder of fiscal 2010, we expect amortization expense for intangible assets subject to amortization to be $3 million. As of May1, 2010, future amortization expense for intangible assets subject to amortization is $2 million and $1 million for fiscal 2011 and 2012, respectively. Subsequent to fiscal 2012, there will be no amortization expense for intangible assets subject to amortization.

Fair Value Measurements

Fair Value Measurements
	3 Months Ended May. 01, 2010
Fair Value Measurements	Note 4. Fair Value Measurements Effective January31, 2010, we adopted enhanced disclosure requirements for fair value measurements. There were no transfers into or out of level 1 and level 2 during the thirteen weeks ended May1, 2010. Financial Assets and Liabilities Financial assets and liabilities measured at fair value on a recurring basis are as follows: Fair Value Measurements at Reporting Date Using ($ in millions) May1,2010 QuotedPricesin Active Markets forIdenticalAssets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Derivative financial instruments $ 17 $ $ 17 $ Deferred compensation plan assets 25 25 Total $ 42 $ 25 $ 17 $ Liabilities: Derivative financial instruments $ 21 $ $ 21 $ Fair Value Measurements at Reporting Date Using ($ in millions) January30,2010 QuotedPricesin Active Markets for IdenticalAssets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Derivative financial instruments $ 9 $ $ 9 $ Deferred compensation plan assets 21 21 Total $ 30 $ 21 $ 9 $ Liabilities: Derivative financial instruments $ 27 $ $ 27 $ Fair Value Measurements at Reporting Date Using ($ in millions) May2,2009 QuotedPricesin Active Markets forIdenticalAssets (Level 1) Significant Other ObservableInputs (Level2) Significant Unobservable Inputs (Level 3) Assets: Derivative financial instruments $ 65 $ $ 65 $ Deferred compensation plan assets 21 21 Total $ 86 $ 21 $ 65 $ Liabilities: Derivative financial instruments $ 9 $ $ 9 $ Derivative financial instruments primarily include foreign exchange forward contracts. The principal currencies hedged against changes in the U.S.dollar are Euro, British pounds, Japanese yen, and Canadian dollars. The fair value of the Companys derivative financial instruments is determined using pricing models based on current market rates. Derivative financial instruments in an asset position are recorded in other current assets or other long-term assets in the Condensed Consolidated Balance Sheets. Derivative financial instruments in a liability position are recorded in accrued expenses and other current liabilities or lease incentives and other long-term liabilities in the Condensed Consolidated Balance Sheets. We maintain a deferred compensation plan that allows eligible employees to defer compensation up to a maximum amount. Plan investments are recorded at market value and are designated for the deferred compensation plans. The fair value of the Companys deferre

Derivative Financial Instrument

Derivative Financial Instruments
	3 Months Ended May. 01, 2010
Derivative Financial Instruments	Note 5. Derivative Financial Instruments We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign exchange risk using foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are Euro, British pounds, Japanese yen, and Canadian dollars. Until March 2009, we also used a cross-currency interest rate swap to swap the interest and principal payable of the $50million debt of our Japanese subsidiary, Gap (Japan) KK. In connection with the maturity of the debt, the swap was settled in March 2009. We do not enter into derivative financial contracts for trading purposes. Our derivative financial instruments are recorded in the Condensed Consolidated Balance Sheets at fair value determined using pricing models based on current market rates. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. Cash Flow Hedges We designate the following foreign exchange forward contracts as cash flow hedges: forward contracts used to hedge forecasted merchandise purchases denominated primarily in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies and forward contracts used to hedge forecasted intercompany royalty payments denominated in Japanese yen and Canadian dollars received by entities whose functional currencies are U.S. dollars. For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income (OCI) and is recognized in income in the period which approximates the time when the underlying transaction occurs. Gains and losses on the derivative financial instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, if any, are recognized in current income. There were no material amounts recorded in income for the thirteen weeks ended May1, 2010 or May2, 2009 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash flow hedges because the forecasted transactions were no longer probable. We make merchandise purchases on a monthly basis, and we enter into foreign exchange forward contracts to hedge forecasted merchandise purchases generally occurring in 12 to 18 months. We make intercompany royalty payments on a quarterly basis, and we enter into foreign exchange forward contracts to hedge intercompany royalty payments generally occurring in 12 to 15 months. As of May1, 2010, we had foreign exchange forward contracts outstanding to buy the notional amount of $705 million and 18million British pounds and to sell various currencies related to our forecasted merchandise purchases and f

Share Repurchases

Share Repurchases
	3 Months Ended May. 01, 2010
Share Repurchases	Note 6. Share Repurchases Share repurchases are as follows: 13 Weeks Ended ($ and shares in millions except average per share cost) May1, 2010 May2, 2009 Number of shares repurchased 14.3 0.4 Total cost $ 296 $ 5 Average per share cost including commissions $ 20.63 $ 11.34 In February 2008, the Board of Directors authorized $1 billion for share repurchases, which was fully utilized by the end of fiscal 2009. In November 2009, the Board of Directors authorized an additional $500 million for share repurchases, which was fully utilized by March 2010. In connection with these authorizations, we entered into purchase agreements with individual members of the Fisher family (related party transactions). The Fisher family shares were purchased at the same weighted-average market price that we paid for share repurchases in the open market. During the thirteen weeks ended May1, 2010 and May2, 2009, approximately 0.5million and 0.1million shares, respectively, were repurchased for $10 million and $1 million, respectively, from the Fisher family subject to these agreements. In February 2010, we announced that the Board of Directors authorized $1 billion for additional share repurchases, of which $51 million was utilized through May1, 2010. We have not entered into purchase agreements with members of the Fisher family in connection with this authorization. All of the share repurchases were paid for as of May1, 2010 and May2, 2009, respectively. As of January30, 2010, all of the share repurchases were paid for except $3 million that was payable to Fisher family members.

Share-Based Compensation

Share-Based Compensation
	3 Months Ended May. 01, 2010
Share-Based Compensation	Note 7. Share-Based Compensation Total share-based compensation expense recognized in the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows: 13 Weeks Ended ($ in millions) May1, 2010 May2, 2009 Stock units $ 22 $ 11 Stock options 4 Employee stock purchase plan 1 1 Share-based compensation expense 27 12 Less: Income tax benefit (10 ) (5 ) Share-based compensation expense, net of tax $ 17 $ 7

Comprehensive Income

Comprehensive Income
	3 Months Ended May. 01, 2010
Comprehensive Income	Note 8. Comprehensive Income Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded from net income. The components of OCI consist of foreign currency translation gains and losses and changes in the fair value of derivative financial instruments, net of tax. Comprehensive income, net of tax, is as follows: 13 Weeks Ended ($ in millions) May1, 2010 May2, 2009 Net income $ 302 $ 215 Foreign currency translation (15 ) (10 ) Change in fair value of derivative financial instruments, net of tax of $2 and $9 1 14 Reclassification adjustment for realized loss (gain) on derivative financial instruments, net of tax (tax benefit) of $(3) and $6 5 (11 ) Comprehensive income, net of tax $ 293 $ 208

Income Taxes

Income Taxes
	3 Months Ended May. 01, 2010
Income Taxes	Note 9. Income Taxes 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, Hong Kong, Japan, and the United Kingdom. With few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations for fiscal years before 2001. During the thirteen weeks ended May1, 2010, we recognized a decrease in total gross unrecognized tax benefits of $43 million, primarily due to the filing of a U.S. federal income tax accounting method change application and the resolution of the Internal Revenue Services (IRS) review of the Companys federal income tax returns and refund claims for fiscal 2001 through 2004. During the thirteen weeks ended May1, 2010, we received refund payments, including interest, from the IRS in the amount of approximately $74 million. As of May1, 2010, we did not anticipate recording any significant increases or decreases in total gross unrecognized tax benefits within the next 12 months. Except as noted below and where required by U.S. tax law, no provision was made for U.S. income taxes on the undistributed earnings of our foreign subsidiaries as we intend to utilize those earnings in the foreign operations for an indefinite period of time. During fiscal 2009, we assessed the forecasted cash needs and overall financial position of our foreign subsidiaries. As a result, we determined that approximately $200 million was in excess of the amount we expect to utilize in foreign operations for an indefinite period of time, and accordingly, we established a deferred tax liability for U.S. income taxes with respect to such earnings as of January30, 2010 and recorded related tax expense of $9 million in fiscal 2009. Of the $200 million, $117 million was repatriated during the thirteen weeks ended May1, 2010. During the thirteen weeks ended May1, 2010, we recognized an interest expense reversal of $11 million from the reduction of interest expense accruals resulting primarily from the filing of a U.S. federal income tax accounting method change application and the resolution of the IRSs review of the Companys federal income tax returns and refund claims for fiscal 2001 through 2004.

Earnings Per Share

Earnings Per Share
	3 Months Ended May. 01, 2010
Earnings Per Share	Note 10. Earnings Per Share Basic earnings per share are computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share are computed as net income divided by the weighted-average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consist of shares subject to share-based awards with exercise prices less than the average market price of our common stock for the period, to the extent their inclusion would be dilutive. Weighted-average number of shares used for earnings per share is as follows: 13 Weeks Ended (shares in millions) May1, 2010 May2, 2009 Weighted-average number of shares - basic 668 695 Common stock equivalents 8 2 Weighted-average number of shares - diluted 676 697 The above computations of weighted-average number of shares - diluted exclude 6million and 35million shares related to stock options and other stock awards for the thirteen weeks ended May1, 2010 and May2, 2009, respectively, as their inclusion would have an antidilutive effect on earnings per share.

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended May. 01, 2010
Commitments and Contingencies	Note 11. Commitments and Contingencies We have assigned certain store and corporate facility leases to third parties as of May1, 2010. Under these arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the remaining portion of our original lease obligations through 2019. The maximum potential amount of future lease payments we could be required to make is approximately $27 million as of May1, 2010. We recognize a liability for such guarantees when events or changes in circumstances indicate that the loss is probable and the amount of such loss can be reasonably estimated. The carrying amount of the liability related to the guarantees was $1 million as of May1, 2010. 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 financial condition or results of operations. As party to a reinsurance pool for workers compensation, general liability, and automobile liability, we have guarantees with a maximum exposure of $14 million as of May1, 2010, of which $0.2 million has been cash collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool diminishes. As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (Actions) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, employment, data privacy, and securities related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws. 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. If the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable, we will record a liability for the estimated loss. We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments

Segment Information

Segment Information
	3 Months Ended May. 01, 2010
Segment Information	Note 12. Segment Information We identify our operating segments according to how our business activities are managed and evaluated. All of our operating segments sell a group of similar products clothing, accessories, and personal care products. We have two reportable segments: Stores The Stores reportable segment includes the results of the retail stores for each of our brands: Gap, Old Navy, and Banana Republic. We have aggregated the results of all Stores operating segments into one reportable segment because we believe the operating segments have similar economic characteristics. Direct The Direct operating segment includes the results of the online business for each of our web-based brands: gap.com, oldnavy.com, bananarepublic.com, piperlime.com, and athleta.com. The Direct operating segment also includes Athletas catalog business. Based on the different distribution method associated with the Direct operating segment, Direct is considered a reportable segment. Net sales by brand, region, and reportable segment are as follows: ($ in millions) 13 Weeks Ended May1, 2010 Gap OldNavy Banana Republic Other(3) Total Percentage ofNetSales U.S.(1) $ 788 $ 1,163 $ 468 $ $ 2,419 73 % Canada 73 92 41 206 6 Europe 156 7 11 174 5 Asia 180 24 13 217 7 Other regions 18 18 Total Stores reportable segment 1,197 1,255 540 42 3,034 91 Direct reportable segment (2) 79 122 34 60 295 9 Total $ 1,276 $ 1,377 $ 574 $ 102 $ 3,329 100 % Sales Growth 5 % 6 % 7 % 29 % 6 % ($ in millions) 13 Weeks Ended May2, 2009 Gap OldNavy Banana Republic Other(3) Total Percentage of Net Sales U.S.(1) $ 776 $ 1,110 $ 446 $ $ 2,332 75 % Canada 58 72 29 159 5 Europe 135 5 7 147 5 Asia 171 23 12 206 6 Other regions 16 16 Total Stores reportable segment 1,140 1,182 503 35 2,860 91 Direct reportable segment (2) 76 116 31 44 267 9 Total $ 1,216 $ 1,298 $ 534 $ 79 $ 3,127 100 % Sales Growth (Decline) (13 )% (4 )% (11 )% 88 % (8 )% (1) U.S. includes the United States and Puerto Rico. (2) U.S. only. (3) Other includes our wholesale business, franchise business, Piperlime, and Athleta. Financial Information for Reportable Segments Operating income is the primary measure of profit we use to