ANNUAL REPORT
FIVE-YEAR SELECTED FINANCIAL DATA
Fiscal Years 1993 1992 1991 1990 1989
Operating Results ($000)
Net sales $3,295,679 $2,960,409 $2,518,893 $1,933,780 $1,586,596
Cost of goods sold and occupancy
expenses, excluding depreciation
and amortization 1,996,929 1,856,102 1,496,156 1,187,644 1,006,647
Percentage of net sales 60.6% 62.7% 59.4% 61.4% 63.4%
Depreciation and amortization<F1> 124,860 99,451 72,765 53,599 39,589
Operating expenses 748,193 661,252 575,686 454,180 364,101
Interest expense (net) 809 3,763 3,523 1,435 2,760
Earnings before income taxes 424,888 339,841 370,763 236,922 162,714
Percentage of net sales 12.9% 11.5% 14.7% 12.3% 10.3%
Income taxes 166,464 129,140 140,890 92,400 65,086
Net earnings<F2> 258,424 210,701 229,873 144,522 97,628
Percentage of net sales 7.8% 7.1% 9.1% 7.5% 6.2%
Cash dividends 53,041 44,106 41,126 29,625 22,857
Capital expenditures<F3> 215,856 213,659 244,323 199,617 94,266
Per Share Data<F4>
Net earnings<F2> $1.78 $1.47 $1.62 $1.02 $ .69
Cash dividends .38 .32 .30 .22 .17
Stockholders equity (book value)<F5> 7.76 6.16 4.76 3.30 2.40
<F1> Excludes amortization of restricted stock.
<F2> 1989 includes a non-recurring after tax charge of $6,471 ($.05 per
share) taken in the fourth quarter for costs associated with closing
the Hemisphere stores.
FIVE-YEAR SELECTED FINANCIAL DATA (continued)
Fiscal Years 1993 1992 1991 1990 1989
Financial Position ($000)
Property and equipment (net) $ 740,422 $ 650,368 $ 547,740 $ 383,548 $ 238,103
Merchandise inventory 331,155 365,692 313,899 247,462 243,482
Total assets 1,763,117 1,379,248 1,147,414 776,900 579,483
Working capital 494,194 355,649 235,537 101,518 129,139
Current ratio 2.07:1 2.06:1 1.71:1 1.39:1 1.69:1
Total debt, including current
installments 75,000 75,000 80,000 17,500 20,000
Ratio of total debt
to stockholders equity .07:1 .08:1 .12:1 .04:1 .06:1
Stockholders equity 1,126,475 887,839 677,788 465,733 337,972
Return on average stockholders
equity 25.7% 26.9% 40.2% 36.0% 31.8%
Statistics
Number of stores opened 108 117 139 152 98
Number of stores expanded 130 94 79 56 7
Number of stores closed 45 26 15 20 38
Number of stores open at year end 1,370 1,307 1,216 1,092 960
Net increase in number of stores 4.8% 7.5% 11.4% 13.8% 6.7%
Comparable store sales growth
(52-week basis) 1.0% 5.0% 13.0% 14.0% 15.0%
Sales per square foot<F6>
(52-week basis) $463 $489 $481 $438 $389
Square footage of gross store
space at year end 7,546,300 6,509,200 5,638,400 4,762,300 4,056,600
Percentage increase in square feet 15.9% 15.4% 18.4% 17.4% 4.6%
Number of employees at year end 44,000 39,000 32,000 26,000 23,000
Average number of shares
outstanding<F4> 144,841,137 143,672,924 142,139,577 141,500,888 141,080,200
Number of shrs. outstanding at yr.
end net of treasury stock<F4> 145,248,728 144,185,238 142,523,334 141,264,030 140,551,404
<F3> Includes property and equipment, as well as lease rights.
<F4> Reflects the 2-for-1 splits of common stock to stockholders of
record on June 17, 1991 and September 17, 1990.
<F5> Based on the number of shares outstanding at year end.
<F6> Based on average quarterly gross square footage.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Fiscal Year Ended
Jan. 29, 1994 Jan. 30, 1993 Feb. 1, 1992
(Fiscal 1993) (Fiscal 1992) (Fiscal 1991)
Net sales ($000) $3,295,679 $2,960,409 $2,518,893
Total net sales
growth percentage 11 18 30
Comparable store sales
growth percentage 1 5 13
Number of
New stores 108 117 139
Expanded stores 130 94 79
Closed stores 45 26 15
The sales growth reflected above for 1993, 1992 and 1991 is attributable to
the opening of new stores (net of stores closed), the expansion of existing
stores, and positive comparable store sales growth.
Net sales per average square foot was $463 in 1993, $489 in 1992, and
$481 in 1991. Over the past four years the Company has increased the
average size of its new stores and expanded existing stores as a long-term
investment which has resulted in a net increase in total store square
footage of 16 percent in 1993, 15 percent in 1992, and 18 percent in 1991.
The expansion program reduced net sales per average square foot in both
1993 and 1992. However, in 1992 the 5 percent growth of comparable store
sales caused total sales per square foot to increase 2 percent.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales was
64.4 percent in 1993, 66.1 percent in 1992 and 62.3 percent in 1991.
The resulting 1.7 percentage point increase in gross margin net of
occupancy expenses in 1993 from 1992 was attributable to a 2.5 percentage
point increase in merchandise margins as a percentage of net sales offset
by a .8 percentage point increase in occupancy expenses as a percentage of
net sales. The increase in merchandise margins in 1993 from 1992 was
primarily attributable to more merchandise being sold at regular prices and
higher initial merchandise margins.
The 3.8 percentage point decrease in gross margin net of occupancy
expenses in 1992 from 1991 was attributable to a 3.0 percentage point
decrease in merchandise margins as a percentage of net sales and a .8
percentage point increase in occupancy expenses as a percentage of net
sales. Initial merchandise margins in 1992 were lower than those in 1991
due to the reduction of retail prices on selected items during the second
half of the year. In addition, more goods were sold at markdown and margins
achieved on markdown goods were lower than in 1991.
The Company reviews its inventory levels in order to identify slow-
moving merchandise and broken assortments (items no longer in stock in a
sufficient range of sizes) and uses markdowns to clear merchandise. Such
markdowns may have an adverse impact on earnings, depending upon the extent
of the markdown and the amount of inventory affected.
The increase in occupancy expenses as a percentage of net sales
between 1993 and 1992, as well as between 1992 and 1991, was primarily
attributable to the addition of larger new stores and the expansion of
existing stores. Based on current expansion plans, occupancy expenses are
expected to continue to increase as a percentage of net sales in 1994.
Operating Expenses
Operating expenses as a percentage of net sales were 22.7 percent, 22.3
percent, and 22.9 percent for fiscal years 1993, 1992 and 1991.
The .4 percentage point increase in 1993 from 1992 was attributable to
increases, as a percentage of net sales, in bonus expense of .5 percentage
points and a provision for a write-off of certain store fixtures of .3
percentage points. These increases were offset by a .4 percentage point
decrease in advertising costs as a percentage of net sales.
The .6 percentage point decrease in operating expenses in 1992 from
1991 was primarily due to decreases, as a percentage of net sales, in payroll
costs of .4 percentage points and store closing costs of .3 percentage points.
Net Interest Expense
Net interest expense was $809,000, $3,763,000 and $3,523,000 for fiscal
years 1993, 1992 and 1991. The decrease in 1993 from 1992 of $2,954,000 was
attributable to an increase in gross average investments partially offset
by lower average investment rates. The increase in 1992 from 1991 of
$240,000 reflected a decrease in investment interest rates, partially off
set by a decrease in average borrowings.
Income Taxes
The effective tax rate was 39.2 percent in 1993 compared to 38.0 percent in
1992 and 1991. The 1.2 percentage point increase in the effective tax rate
for 1993 reflects recent changes in federal income tax law. The Company
expects the effective tax rate to be 39.5 percent for fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth material measures of the Company's liquidity:
Fiscal Year
1993 1992 1991
Cash provided by operating
activities ($000) $551,298 $306,978 $333,696
Working capital ($000) 494,194 355,649 235,537
Current ratio 2.07:1 2.06:1 1.71:1
Debt to equity ratio .07:1 .08:1 .12:1
The Company's improved cash flow and working capital from the prior year
reflects an increase in earnings before depreciation expense, an increase
in income taxes payable, as well as improved inventory management which
resulted in decreased inventory levels. At January 29, 1994, inventory
decreased 9.4 percentage points to approximately $331 million from
approximately $366 million at January 30, 1993. For 1992, the Company's
reduced cash flow was primarily due to increased income tax payments and
reduced accrued expenses. (See accompanying Consolidated Financial
Statements).
The Company funds inventory expenditures during normal and peak
periods through a combination of cash flows provided by operations and
normal trade credit arrangements. The Company's business follows a seasonal
pattern, peaking over a total of about ten weeks during the late summer and
holiday periods. During 1993, these periods accounted for approximately 30%
of the Company's annual sales. During 1992, peak periods accounted for
approximately 32% of the Company's annual sales.
Capital expenditures, net of construction allowances and dispositions,
totaled approximately $200 million in 1993. These expenditures resulted in
a net increase in store space of approximately 1 million square feet or 16
percent due to the addition of 108 new stores, the expansion of 130 stores
and the remodeling of certain stores. Also included in capital expenditures
was the purchase of computer equipment. Capital expenditures for 1992 and
1991 were $203 million and $227 million, resulting in a net increase in
store space of approximately 871,000 square feet or 15 percent in 1992 and
approximately 876,000 square feet or 18 percent in 1991. Expenditures in
1992 included costs for administrative facilities and equipment.
For fiscal year 1994, the Company expects capital expenditures to total
approximately $275 million, net of construction allowances, representing
the addition of approximately 185 to 200 new stores, the expansion of
approximately 90 stores, and the remodeling of certain stores. Planned
expenditures also include amounts for administrative facilities and
equipment. The Company expects to fund such capital expenditures with cash
flow from operations. Square footage growth is expected to be approximately
15 to 20 percent net of store closings. New stores are generally expected
to be leased.
The Company continues to explore alternatives for expanding its
headquarters facilities in San Francisco and San Bruno, California. The
amounts above do not include any expenditures related to headquarters
facilities.
In February 1991, the Company issued $75 million of 8.87 percent
Senior Notes which are due in February 1995. Interest is payable quarterly.
The Senior Notes are redeemable, in whole or in part, at any time at the
option of the Company at a premium approximately equal to the difference
between the stated interest rate and current market rates.
On February 4, 1994, the Company amended its credit agreement to provide
for a $250 million revolving credit facility until March 1997. In addition,
the credit agreement provides for the issuance of letters of credit up to
$350 million at any one time. The Company had outstanding letters of credit
of approximately $248 million at January 29, 1994.
PER SHARE DATA
Market Prices Cash Dividends
Fiscal 1993 1992 1993 1992
High Low High Low
1st Quarter $37 1/2 $28 1/2 $54 7/8 $39 1/2 $.080 $.080
2nd Quarter 37 1/4 27 1/2 43 3/8 31 3/8 .100 .080
3rd Quarter 35 3/4 25 1/2 36 1/8 28 5/8 .100 .080
4th Quarter 42 7/8 33 3/4 38 1/8 30 1/4 .100 .080
Year $.380 $.320
The principal markets on which the Company's stock is traded are the New
York and Pacific Stock Exchanges. The number of holders of record of the
Company's stock as of March 28, 1994 was 6,376.
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
Management is responsible for the integrity and consistency of all
financial information presented in the Annual Report. The financial
statements have been prepared in accordance with generally accepted
accounting principles and necessarily include certain amounts based on
Management's best estimates and judgments.
In fulfilling its responsibility for the reliability of financial
information, Management has established and maintains accounting systems
and procedures appropriately supported by internal accounting controls.
Such controls include the selection and training of qualified personnel, an
organizational structure providing for division of responsibility,
communication of requirements for compliance with approved accounting,
control and business practices and a program of internal audit. The extent
of the Company's system of internal accounting control recognizes that the
cost should not exceed the benefits derived and that the evaluation of
those factors requires estimates and judgments by Management. Although no
system can ensure that all errors or irregularities have been eliminated,
Management believes that the internal accounting controls in use provide
reasonable assurance, at reasonable cost, that assets are safeguarded
against loss from unauthorized use or disposition, that transactions are
executed in accordance with Management's authorization, and that the
financial records are reliable for preparing financial statements and
maintaining accountability for assets. The financial statements of the
Company have been audited by Deloitte & Touche, independent auditors. Their
report, which appears in the Annual Report, is based upon their audits
conducted in accordance with generally accepted auditing standards.
The Audit and Finance Committee of the Board of Directors is comprised
solely of directors who are not officers or employees of the Company. The
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with Management,
the independent auditors and the internal auditors to assure that they are
carrying out their responsibilities. The Committee also reviews and
monitors the financial, accounting and auditing procedures of the Company
in addition to reviewing the Company's financial reports. Deloitte & Touche
and the internal auditors have full and free access to the Audit and
Finance Committee, with and without Management's presence.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Gap, Inc.
We have audited the accompanying consolidated balance sheets of The
Gap, Inc. and subsidiaries as of January 29, 1994 and January 30, 1993, and
the related consolidated statements of earnings, stockholders equity and
cash flows for each of the three fiscal years in the period ended January
29, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards.Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as of January 29, 1994 and January 30, 1993, and the results
of their operations and their cash flows for each of the three fiscal years
in the period ended January 29,1994 in conformity with generally accepted
accounting principles.
/S/ Deloitte & Touche
March 3, 1994
CONSOLIDATED STATEMENTS OF EARNINGS
($000 except per share amounts) Fiscal 1993 Fiscal 1992 Fiscal 1991
Net sales $3,295,679 100.0% $2,960,409 100.0% $2,518,893 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 2,121,789 64.4% 1,955,553 66.1% 1,568,921 62.3%
Operating expenses 748,193 22.7% 661,252 22.3% 575,686 22.9%
Interest expense (net) 809 - 3,763 .1% 3,523 .1%
Earnings before income taxes 424,888 12.9% 339,841 11.5% 370,763 14.7%
Income taxes 166,464 5.1% 129,140 4.4% 140,890 5.6%
Net earnings $ 258,424 7.8% $ 210,701 7.1% $ 229,873 9.1%
Weighted average
number of shares 144,841,137 143,672,924 142,139,577
Earnings per share $ 1.78 $ 1.47 $ 1.62
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
($000) January 29, 1994 January 30, 1993
ASSETS
Current Assets
Cash and equivalents $ 460,332 $ 243,302
Short-term investments 83,497 -
Accounts receivable 15,225 9,886
Merchandise inventory 331,155 365,692
Prepaid expenses and other 66,229 71,897
Total Current Assets 956,438 690,777
Property and Equipment
Leasehold improvements 556,858 490,791
Furniture and equipment 504,952 388,219
Construction-in-progress 28,670 16,623
subtotal 1,090,480 895,633
Accumulated depreciation and amortization (350,058) (245,265)
subtotal 740,422 650,368
Lease rights and other assets 66,257 38,103
Total Assets $1,763,117 $1,379,248
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Notes payable $ 7,603 $ -
Accounts payable 216,664 193,375
Accrued expenses 163,350 128,301
Income taxes payable 70,431 10,624
Current deferred lease credits 4,196 2,828
Total Current Liabilities 462,244 335,128
Long-Term Liabilities
Long-term debt 75,000 75,000
Other liabilities 11,353 17,496
Deferred lease credits 88,045 63,785
subtotal 174,398 156,281
Stockholders Equity
Common stock $.05 par value
Authorized 500,000,000 shares; issued 155,733,256 and 154,669,766
shares; outstanding 145,248,728 and 144,185,238 shares 7,787 7,733
Additional paid-in capital 240,655 210,076
Retained earnings 1,026,836 821,453
Foreign currency translation adjustment (8,314) (7,410)
Restricted stock plan deferred compensation (48,035) (51,559)
Treasury stock, at cost (92,454) (92,454)
subtotal 1,126,475 887,839
Total Liabilities and Stockholders Equity $1,763,117 $1,379,248
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Fiscal Fiscal
($000) 1993 1992 1991
Cash Flows from Operating Activities
Net earnings $258,424 $210,701 $229,873
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 141,758 114,011 82,133
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 6,491 28,160 13,766
Deferred income taxes (22,360) (10,525) (7,045)
Change in operating assets and liabilities
Accounts receivable (5,355) (1,963) 1,643
Merchandise inventory 33,910 (51,793) (66,559)
Prepaid expenses and other (1,960) (9,007) (5,557)
Accounts payable 23,877 35,670 43,220
Accrued expenses 35,143 (6,460) 33,417
Income taxes payable 56,164 (21,775) (14,340)
Other long-term liabilities (583) (250) 420
Deferred lease credits 25,789 20,209 22,725
Net cash provided by operating activities 551,298 306,978 333,696
Cash Flows from Investing Activities
Purchase of short-term investments (83,497) - -
Purchases of property and equipment (212,340) (205,507) (236,521)
Acquisition of lease rights (3,511) (8,152) (7,802)
Other assets (176) (1,812) (1,382)
Net cash used for investing activities (299,524) (215,471) (245,705)
Cash Flows from Financing Activities
Net increase in notes payable 7,632 - -
Issuance of long-term debt - - 75,000
Payments on long-term debt - (5,000) (12,500)
Issuance of common stock, net of cancellations 10,768 8,721 20,036
Purchase of treasury stock - - (1,004)
Cash dividends paid (53,041) (44,106) (41,126)
Net cash provided by (used for) financing activities (34,641) (40,385) 40,406
Effect of exchange rate changes on cash (103) (405) (2,528)
Net increase in cash and equivalents 217,030 50,717 125,869
Cash and equivalents at beginning of year 243,302 192,585 66,716
Cash and equivalents at end of year $460,332 $243,302 $192,585
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Additional
Common Stock Paid-in Retained
($000 except per share amounts) Shares Amount Capital Earnings
Balance at February 2, 1991 151,708,098 $7,585 $ 91,185 $ 466,111
Issuance of common stock pursuant to stock option plans 899,192 45 6,625
Net issuance of common stock pursuant to
management incentive restricted stock plans 400,572 20 13,107
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 13,766
Foreign currency translation adjustment
Amortization of restricted stock
Purchase of treasury stock
Net earnings 229,873
Cash dividends ($.30 per share) (41,126)
Balance at February 1, 1992 153,007,862 $7,650 $124,683 $ 654,858
Issuance of common stock pursuant to stock option plans 609,852 30 5,749
Net issuance of common stock pursuant to
management incentive restricted stock plans 1,052,052 53 51,484
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 28,160
Foreign currency translation adjustment
Amortization of restricted stock
Net earnings 210,701
Cash dividends ($.32 per share) (44,106)
Balance at January 30, 1993 154,669,766 $7,733 $210,076 $ 821,453
Issuance of common stock pursuant to stock option plans 655,745 33 9,076
Net issuance of common stock pursuant to
management incentive restricted stock plans 407,745 21 15,012
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 6,491
Foreign currency translation adjustment
Amortization of restricted stock
Net earnings 258,424
Cash dividends ($.38 per share) (53,041)
Balance at January 29, 1994 155,733,256 $7,787 $240,655 $1,026,836
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (continued)
Foreign Restricted
Currency Stock Plan
Translation Deferred Treasury Stock
($000 except per share amounts) Adjustment Compensation Shares Amount Total
Balance at February 2, 1991 $5,667 ($13,365) (10,444,068) ($91,450) $ 465,733
Issuance of common stock pursuant to stock option plans 6,670
Net issuance of common stock pursuant to
management incentive restricted stock plans (13,527) (400)
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 13,766
Foreign currency translation adjustment (5,092) (5,092)
Amortization of restricted stock 9,368 9,368
Purchase of treasury stock (40,460) (1,004) (1,004)
Net earnings 229,873
Cash dividends ($.30 per share) (41,126)
Balance at February 1, 1992 $ 575 ($17,524) (10,484,528) ($92,454) $ 677,788
Issuance of common stock pursuant to stock option plans 5,779
Net issuance of common stock pursuant to
management incentive restricted stock plans (48,595) 2,942
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 28,160
Foreign currency translation adjustment (7,985) (7,985)
Amortization of restricted stock 14,560 14,560
Net earnings 210,701
Cash dividends ($.32 per share) (44,106)
Balance at January 30, 1993 ($7,410) ($51,559) (10,484,528) ($92,454) $ 887,839
Issuance of common stock pursuant to stock option plans 9,109
Net issuance of common stock pursuant to
management incentive restricted stock plans (13,374) 1,659
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 6,491
Foreign currency translation adjustment (904) (904)
Amortization of restricted stock 16,898 16,898
Net earnings 258,424
Cash dividends ($.38 per share) (53,041)
Balance at January 29, 1994 ($8,314) ($48,035) (10,484,528) ($92,454) $1,126,475
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-Two Weeks ended January 29, 1994 (Fiscal 1993), January
30, 1993 (Fiscal 1992), February 1, 1992 (Fiscal 1991).
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a specialty retailer which operates stores selling
casual apparel for men, women and children under a variety of brand names
including: Gap, GapKids, babyGap, Banana Republic and Old Navy Clothing Co.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
Cash and equivalents represent cash and short-term, highly liquid
investments with maturities of three months or less.
Short-term investments include investments with an original maturity
of greater than three months and a remaining maturity of less than one
year. Short-term investments are stated at cost which approximates market
value. Merchandise inventory is stated at the lower of FIFO (first-in,
first-out) cost or market.
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the related assets or lease terms, whichever is less.
Lease rights are recorded at cost and are amortized over 12 years or
the lives of the respective leases, whichever is less.
Costs associated with the opening or remodeling of stores are charged
to expense as incurred. The net book value of fixtures and leasehold
improvements for stores scheduled to be closed or expanded within the next
fiscal year is charged against current earnings.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Tax credits reduce the current provision for income taxes in
the year they are realized. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, as of
January 31, 1993. The adoption of SFAS No. 109 had no material effect on
the Company's consolidated financial statements for the year ended January
29, 1994.
Foreign currency translation adjustments result from translating
foreign subsidiaries assets and liabilities to U.S. dollars using the
exchange rates in effect at the balance sheet date. Resulting translation
adjustments are included in stockholders equity. Results of foreign
operations are translated using the average exchange rates during the
period.
Restricted stock awards represent deferred compensation and are
shown as a reduction of stockholders equity.
Earnings per share are based upon the weighted average number of
shares of common stock outstanding during the period.
The Company is required to adopt Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Debt and Equity Securities
during fiscal 1994. As of January 29, 1994 SFAS No. 115 would not have a
material impact to the Company's consolidated financial statements.
Certain reclassifications have been made to the 1992 and 1991
financial statements to conform with the classifications used in the 1993
financial statements.
NOTE B: LONG-TERM DEBT AND
OTHER CREDIT ARRANGEMENTS
Long-term debt at January 29, 1994 and January 30, 1993 consists of $75
million of 8.87 percent unsecured Senior Notes, due February 1995. Interest
on the Senior Notes is payable quarterly. At January 29, 1994 and January
30, 1993 the fair values of the Senior Notes was approximately $78 million
and $80 million respectively, based on current rates at which the Company
could borrow funds with similar remaining maturities. The excess of fair
value over the principal is due entirely to significantly lower interest
rates since the inception of the notes to January 29, 1994. The decrease in
rates used to calculate the fair value is due, in part, to a change in the
original term of four years to one year and two years respectively. The
Company has the option to redeem the Senior Notes, in whole or in part, at
any time after February 22, 1993, at an additional cost, which at January
29, 1994 was approximately $3 million.
Other Credit Arrangements
The Company has a credit agreement with a syndicated bank group which
provides for a $250 million revolving credit facility until March 2, 1996.
The revolving credit facility contains both auction and fixed spread
borrowing options and serves as a back up for the issuance of commercial
paper. In addition, the credit agreement provides for the issuance of
letters of credit until March 2, 1995 of up to $300 million at any one
time.
At January 29, 1994, the Company had outstanding letters of credit
totaling $247,581,627.
Borrowings under the Company's loan and credit agreements are subject
to the Company maintaining certain levels of tangible net worth and
financial ratios. Under the most restrictive covenant of these agreements,
$747,980,000 of retained earnings were available for the payment of cash
dividends at January 29, 1994.
Gross interest payments were $7,654,000, $7,598,000 and $7,593,000 in
fiscal 1993, 1992 and 1991.
NOTE C: INCOME TAXES
Income taxes consisted of the following:
($000) Fiscal 1993 Fiscal 1992 Fiscal 1991
Currently Payable
Federal income taxes $157,598 $118,443 $125,181
Less tax credits (11,484) (9,080) (6,879)
subtotal 146,114 109,363 118,302
State income taxes 31,911 21,330 24,354
Foreign income taxes 10,799 8,972 6,733
subtotal 188,824 139,665 149,389
Deferred
Federal (16,084) (10,120) (9,920)
State (6,276) (405) 1,421
subtotal (22,360) (10,525) (8,499)
Total provision $166,464 $129,140 $140,890
The foreign component of earnings before income taxes in fiscal 1993,
1992 and 1991 was $47,589,000, $44,417,000 and $31,174,000. Deferred
federal and applicable state income taxes, net of applicable foreign tax
credits, have not provided for the undistributed earnings of foreign
subsidiaries (approximately $57,060,000 at January 29,1994) because the
Company intends to permanently reinvest such undistributed earnings abroad.
The difference between the effective income tax rate and the United
States federal income tax rate is summarized as follows:
Fiscal Fiscal Fiscal
1993 1992 1991
Federal tax rate 35.0% 34.0% 34.0%
State income taxes,
less federal benefit 5.0% 4.9% 4.8%
Other (.8) (.9) (.8)
Effective tax rate 39.2% 38.0% 38.0%
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets (liabilities) consisted of the following at
January 29, 1994, and January 31, 1993:
($000) January 29, 1994 January 31, 1993
Depreciation ($24,848) ($24,234)
Other (4,720) (2,295)
Gross deferred tax liabilities (29,568) (26,529)
Compensation and benefit accruals 26,587 19,462
Scheduled rent 22,642 16,577
Inventory capitalization 7,933 8,751
Nondeductible accruals 17,027 10,986
Other 12,399 5,413
Gross deferred tax assets 86,588 61,189
Net deferred tax assets $57,020 $34,660
Income tax payments were $128,347,000, $135,099,000 and $135,370,000 in
fiscal 1993, 1992 and 1991.
NOTE D: LEASES
The Company leases virtually all of its store premises, office
facilities, and some of its distribution centers.
Leases relating to store premises, distribution and office facilities
expire at various dates through 2030. The aggregate minimum annual lease
payments under leases in effect on January 29, 1994 are as follows:
Fiscal Year($000)
1994 $2,232,521
1995 235,251
1996 233,742
1997 226,558
1998 217,670
Thereafter 1,085,654
Total minimum lease commitment $2,231,396
For leases which contain predetermined fixed escalations of the
minimum rentals, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the expense charged
to income and amounts payable under the leases as deferred lease credits.
At January 29, 1994 and January 30, 1993 this liability amounted to
$52,280,000 and $38,873,000.
Cash or rent abatements received upon entering into certain store
leases are recognized on a straight-line basis as a reduction to rent
expense over the lease term. The unamortized portion is included in
deferred lease credits.
Some of the leases relating to stores in operation at January 29, 1994
contain renewal options for periods ranging up to 20 years. Most leases
also provide for payment of operating expenses, real estate taxes, and for
additional rent based on a percentage of sales. No lease directly imposes
any restrictions relating to leasing in other locations (other than radius
clauses).
Rental expense for all operating leases was as follows:
($000) Fiscal 1993 Fiscal 1992 Fiscal 1991
Minimum rentals $207,249 $172,256 $137,721
Contingent rentals 26,574 30,990 30,473
$233,823 $203,246 $168,194
NOTE E: FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange contracts to reduce exposure
to foreign currency exchange risk. These contracts are designated and
effective as hedges of commitments to purchase merchandise in foreign
currencies. The market value gains and losses on these contracts are
deferred and recognized when the related merchandise commitments are
settled. At January 29, 1994, the Company had contracts maturing at various
dates through June 1994 to purchase the equivalent of $38,530,000 in
foreign currencies (26,600,000 Canadian dollars and 12,400,000 British
pounds) at the spot rates on the dates the contracts mature.
NOTE F: STOCKHOLDERS EQUITY AND STOCK OPTIONS
Common and Preferred Stock
A two-for-one common stock split was effected in the form of a 100%
stock dividend to stockholders of record on June 17, 1991; outstanding
shares increased by 71,092,469. All applicable share data appearing in the
financial statements and notes thereto have given effect to this stock
split.
The Company is authorized to issue 60,000,000 shares of Class B common
stock which is convertible into shares of common stock on a share-for-share
basis; transfer of the shares is restricted. In addition, the holders of
the Class B common stock have six votes per share on most matters and are
entitled to a lower cash dividend. No Class B shares have been issued.
The Board of Directors is authorized to issue 30,000,000 shares of one
or more series of preferred stock and to establish at the time of issuance
the issue price, dividend rate, redemption price, liquidation value,
conversion features, and such other terms and conditions of each series
(including voting rights) as the Board of Directors deems appropriate,
without further action on the part of the stockholders. No preferred shares
have been issued.
Stock Options
Under the Company's Stock Option Plan, incentive and non-qualified
options to purchase common stock are granted to officers and key employees
at prices not less than the fair market value at the date of grant.
Outstanding options at January 29, 1994 have expiration dates ranging from
March 2, 1994 to January 25, 2002 and represent grants to 1,190 key
employees. At January 29, 1994, the Company reserved 9,037,505 shares of
its common stock for the exercise of stock options. There were 5,461,962
and 6,241,785 shares available for granting of options at January 29, 1994
and January 30, 1993. Options for 1,286,925 and 678,368 shares were
exercisable as of January 29, 1994 and January 30, 1993.
Shares Average Price Per Share
Incentive Non-qualified Total Incentive Non-qualified Total
Balance at February 2, 1991 54,128 3,749,916 3,804,044 $7.04 $11.34 $11.28
Granted - 1,092,053 1,092,053 - 25.64 25.64
Exercised (54,128) (845,064) (899,192) 7.04 7.29 7.28
Cancelled - (363,558) (363,558) - 15.98 15.98
Balance at February 1, 1992 - 3,633,347 3,633,347 - $16.12 $16.12
Granted - 672,396 672,396 - 39.33 39.33
Exercised - (609,852) (609,852) - 9.48 9.48
Cancelled - (256,426) (256,426) - 23.66 23.66
Balance at January 30, 1993 - 3,439,465 3,439,465 - $21.27 $21.27
Granted - 1,001,370 1,001,370 - 28.76 28.76
Exercised - (655,745) (655,745) - 13.89 13.89
Cancelled - (209,547) (209,547) - 30.38 30.38
Balance at January 29, 1994 - 3,575,543 3,575,543 - $24.20 24.20
NOTE G: EMPLOYEE BENEFIT AND INCENTIVE PROGRAMS
Retirement Plans
The Company has a qualified defined contribution retirement plan
available to employees who meet certain age and service requirements. This
plan permits employees to make contributions up to the maximum limits
allowable under the Internal Revenue Code. In addition, a non-qualified
Supplemental Executive Retirement Plan was established in 1988 which allows
eligible employees to defer additional compensation up to a maximum amount
defined in the plan. Under both plans, the Company matches all or a portion
of the employee's contributions under a predetermined formula; the
Company's contributions vest on behalf of the employee progressively over a
seven year period. The non-qualified Supplemental Executive Retirement Plan
was frozen on December 31, 1993 and no further employee or company
contributions have been made to the plan.
Company contributions to the retirement plan and the Supplemental
Executive Retirement Plan in fiscal 1993, 1992, and 1991 were $6,731,000,
$5,572,000 and $4,216,000.
A non-qualified Executive Deferred Compensation Plan was established
on January 1, 1994. This Plan allows eligible employees to defer additional
compensation up to a maximum amount defined in the Plan. There are no
company matching contributions.
Employee Benefits Plan
The Company has established an Employee Benefits Plan (the Plan) to
provide certain health and welfare benefits. Payments made to the Plan
relating to benefits payable in future periods are included in prepaid
expenses.
Incentive Compensation Plans
The Company has a Management Incentive Cash Award Plan (MICAP) for key
management employees. The MICAP empowers the Compensation and Stock Option
Committee to award compensation, in the form of cash bonuses, to employees
based on the achievement of Company and individual performance goals.
Incentive awards can also be made in the form of restricted shares of the
Company's stock under the Management Incentive Restricted Stock Plan II.
Restrictions on shares generally lapse in one to five years. Compensation
expense is recorded during the vesting period.
NOTE H: RELATED PARTY TRANSACTIONS
The Company has an agreement with Fisher Development, Inc. (FDI),
wholly owned by the brother of the Company's chairman, setting forth the
terms under which FDI may act as general contractor in connection with the
Company's construction activities. During fiscal 1993, 1992 and 1991, FDI
acted as general contractor for 104, 111, and 128 new stores' leasehold
improvements and fixtures. In addition, FDI supervised construction of 128,
93, and 79 expansions, as well as remodels of existing stores, in fiscal
1993, 1992 and 1991. FDI construction also included administrative offices.
Total cost of this construction was $133,104,000, $134,582,000 and
$126,057,000, including profit and overhead costs of $10,095,000,
$9,687,000 and $8,234,000.
The terms and conditions of the agreement with FDI are reviewed
annually by the Audit and Finance Committee of the Board of Directors.
NOTE I: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal 1993 Quarter Ended
May 1, July 31, Oct. 30, Jan. 29, Fiscal
($000 except per share amounts) 1993 1993 1993 1994 1993
Net sales $643,580 $693,192 $898,677 $1,060,230 $3,295,679
Gross profit 219,624 200,542 339,841 413,883 1,173,890
Net earnings 41,505 28,659 78,915 109,345 258,424
Net earnings per share .29 .20 .54 .75 1.78
Fiscal 1992 Quarter Ended
May 2, Aug. 1, Oct. 31, Jan. 30, Fiscal
($000 except per share amounts) 1992 1992 1992 1993 1992
Net sales $588,864 $614,114 $827,222 $ 930,209 $2,960,409
Gross profit 208,593 201,931 291,861 302,471 1,004,856
Net earnings 45,251 37,705 62,012 65,733 210,701
Net earnings per share .32 .26 .43 .46 1.47