SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 1994 or
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
San Francisco, California 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 952-4400
_______________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value New York Stock Exchange, Inc.
(Title of class) Pacific Stock Exchange, Inc.
(Name of each exchange where registered)
Securities registered pursuant to Section 12(g) of the Act: None
_______________________
Indicate by check mark whether 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 X No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $0.05 par value, 145,738,648 shares as of June 10, 1994
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) April 30, January 29, May 1,
1994 1994 1993
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 323,139 $ 460,332 $ 216,747
Short-term investments 176,393 83,497 -
Accounts receivable 18,420 15,225 8,103
Merchandise inventory 346,544 331,155 361,403
Prepaid expenses and other 78,409 66,229 86,245
Total Current Assets 942,905 956,438 672,498
Property and equipment (net) 749,368 740,422 667,498
Long-term investments 19,944 - -
Lease rights and other assets 68,415 66,257 40,134
Total Assets $ 1,780,632 $ 1,763,117 $ 1,380,130
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 75,000 $ - $ -
Notes payable 4,516 7,603 -
Accounts payable 214,289 216,664 163,053
Accrued expenses 145,786 163,350 113,104
Income taxes payable 39,757 70,431 11,485
Current deferred lease credits 4,432 4,196 3,046
Total Current Liabilities 483,780 462,244 290,688
Long-term Liabilities:
Long-term debt - 75,000 75,000
Other liabilities 9,281 11,353 12,133
Deferred lease credits 94,695 88,045 68,328
subtotal 103,976 174,398 155,461
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 156,450,680, 155,733,256
and 155,245,578 shares
Outstanding 145,716,152, 145,248,728
and 144,761,050 shares 7,823 7,787 7,762
Additional paid-in capital 278,919 240,655 231,704
Retained earnings 1,076,279 1,026,836 851,840
Foreign currency translation adjustment (8,975) (8,314) (5,959)
Restricted stock plan deferred compensation (58,684) (48,035) (58,912)
Treasury stock, at cost (102,486) (92,454) (92,454)
subtotal 1,192,876 1,126,475 933,981
Total Liabilities and Stockholders' Equity $ 1,780,632 $ 1,763,117 $ 1,380,130
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
($000 except per share amounts) Thirteen Weeks Ended
April 30, May 1,
1994 1993
Net Sales $ 751,670 $ 643,580
Costs and expenses
Cost of goods sold and
occupancy expenses 462,087 423,956
Operating expenses 185,724 151,913
Interest expense (income), net (1,063) 767
Earnings before income taxes 104,922 66,944
Income taxes 41,444 25,439
Net earnings $ 63,478 $ 41,505
Weighted average number
of shares 144,361,013 144,357,362
Earnings per share $ .44 $ .29
Cash dividends per share $ .10 $ .08
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirteen Weeks Ended
April 30, 1994 May 1, 1993
Cash Flows from Operating Activities:
Net earnings $ 63,478 $ 41,505
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 39,020 32,013
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 13,670 5,230
Deferred income taxes - (1,908)
Change in operating assets and liabilities:
Accounts receivable (3,195) 1,783
Merchandise inventory (15,886) 4,289
Prepaid expenses and other (13,568) (15,793)
Accounts payable (1,987) (30,673)
Accrued expenses (17,498) (15,339)
Income taxes payable (30,436) 946
Other long-term liabilities (2,073) (1,892)
Deferred lease credits 7,358 4,618
Net cash provided by operating activities 38,883 24,779
Cash Flows from Investing Activities:
Purchase of short-term investments (92,896) -
Purchase of long-term investments (19,944) -
Net purchases of property and equipment (43,585) (43,232)
Acquisition of lease rights (683) (1,052)
Other assets (1,077) (1,285)
Net cash used for investing activities (158,185) (45,569)
Cash Flows from Financing Activities:
Net decrease in notes payable (2,979) -
Issuance of common stock, net of cancellations 9,407 5,229
Purchase of treasury stock (10,032) -
Cash dividends paid (14,035) (11,118)
Net cash used for financing activities (17,639) (5,889)
Effect of exchange rate changes on cash (252) 124
Net decrease in cash and equivalents (137,193) (26,555)
Cash and equivalents at beginning of year 460,332 243,302
Cash and equivalents at end of quarter $323,139 $216,747
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of April 30, 1994 and May 1, 1993, and the
consolidated statements of earnings and cash flows for the thirteen weeks ended
April 30, 1994 and May 1, 1993 have been prepared by the Company, without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows of the Company at April 30, 1994
and May 1, 1993, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted from these interim financial statements. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended January 29, 1994.
The results of operations for the thirteen weeks ended April 30, 1994 are not
necessarily indicative of the operating results that may be expected for the
year ending January 28, 1995.
2. INVESTMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, as of January
30, 1994. The Company's short and long-term investments consist primarily of
debt securities which have been classified as held to maturity and are carried
at amortized cost. The adoption of SFAS No. 115 had no material effect on the
Company's consolidated financial statements.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1994 and 1993 gross interest payments were $2.1 million and $1.9
million respectively; income tax payments were $58.3 million and $22.2 million
respectively.
Deloitte & Touche
2101 Webster Street Telephone: (510) 287-2700
Oakland, California 94612-3027 Telefax: (510) 835-4888
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed the accompanying consolidated balance sheets of
The Gap, Inc. and subsidiaries as of April 30, 1994 and May 1,
1993, the related consolidated statements of earnings and cash
flows for the thirteen-week periods then ended. These
consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Gap,
Inc. and subsidiaries as of January 29, 1994, and the related
consolidated statements of earnings, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated March 3, 1994, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of January 29, 1994 is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it was derived.
/S/ Deloitte & Touche
May 10, 1994
Item 2
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Thirteen weeks ended
April 30, 1994 May 1, 1993
Net Sales ($000) $751,670 $643,580
Total net sales growth percentage 17 9
Comparable store sales growth percentage 7 (1)
Fifty-two weeks ended
April 30, 1994 May 1, 1993
Number of:
New Stores 131 104
Expanded Stores 120 102
Closed Stores 52 21
The increase in first quarter 1994 sales is attributable to the opening of new
stores (net of stores closed), the expansion of existing stores and also the
increase in comparable store sales.
Over the past five years, the Company has increased the average size of its
new stores and expanded existing stores as a long-term investment. New and
expanded store growth resulted in a net increase in total store square footage
of 17 percent since the end of last year's first quarter. As a result, net
sales per average square foot was flat at approximately $97 for the first
quarter of 1994 when compared to the same period in 1993. The leverage
obtained from first quarter sales growth was offset by the square footage
increase resulting from the Company's store expansion program.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 61.4 percent for the first quarter of 1994 from 65.9 percent for
the same period in 1993. The corresponding 4.5 percentage point increase in
gross margin net of occupancy expenses was attributable to a combination of
higher initial merchandise margins and more merchandise being sold at regular
prices.
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.
Occupancy costs as a percentage of net sales were flat for the first quarter
of 1994 when compared to the same period in 1993. Sales leverage achieved
from comparable stores and a decrease in pre-opening rent expense offset the
increase in occupancy costs associated with the opening of new stores and the
expansion of existing stores.
Operating Expenses
Operating expenses as a percentage of net sales increased to 24.7 percent for
the first quarter of 1994 from 23.6 percent for the same period in 1993.
The 1.1 percentage point increase was primarily attributable to increases in
bonus and store payroll expense of 0.5 percentage points each. Bonus expense
is accrued quarterly, based on year-to-date performance against established
targets. Due to strong first quarter earnings, bonus expense was recognized
during the first quarter of 1994 against minimal expense in the comparable
period last year. Fiscal year 1994 store payroll expense was higher than last
year as an investment to increase the focus on customer service.
Net Interest Income/Expense
Net interest income was approximately $1 million for the first quarter of 1994
compared to net interest expense of $767,000 for the same period in 1993. The
change is primarily attributable to an increase in gross average investments,
including cash equivalents and short-term and long-term investments.
Income Taxes
The effective tax rate was 39.5 percent in 1994 compared to 38.0 percent in
1993. The 1.5 percentage point increase occurred in the second quarter last
year to reflect changes in federal income tax law. The Company expects the
effective income tax rate to be 39.5 percent for fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirteen weeks ended
April 30, 1994 May 1, 1993
Cash provided by operating
activities ($000) $38,883 $24,779
Working capital ($000) $459,125 $381,810
Current ratio 1.95:1 2.31:1
The Company's improved cash flow and working capital is primarily the result
of an increase in net earnings exclusive of depreciation expense and improved
inventory management, offset by an increase in income tax payments. Improved
inventory management continues to result in higher inventory turnover and
lower inventory levels per square foot, resulting in increased working capital
and improved cash flows. (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.
Capital expenditures, net of construction allowances and dispositions,
totalled approximately $40 million for the quarter ended April 30, 1994.
These expenditures included the addition of 36 new stores, the expansion of 19
stores and the remodeling of certain stores resulting in a net increase in
store space of approximately 300,000 square feet or 4 percent since January
29, 1994.
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. Square footage
growth is expected to be approximately 15 to 20 percent after accounting for
store closings. The Company expects to fund such capital expenditures with
cash flow from operations. New stores are generally expected to be leased.
The Company continues to explore alternatives for 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 and therefore have been classified as current.
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.
The Company has a credit agreement which provides 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 $208 million at
April 30, 1994.
During the first quarter of 1994, the Company repurchased 250,000 shares of
its common stock for $10,032,000 from a senior executive of the Company.
PART II
OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
a) On May 24, 1994, the Annual Meeting of Stockholders of
the Company was held in San Francisco, California. There were
145,635,552 shares of common stock outstanding on the record date
and entitled to vote at the Annual Meeting.
b) The following directors were elected:
Votes In Favor Votes Withheld
John G. Bowes 124,721,914 1,549,912
Millard S. Drexler 125,093,254 1,178,572
Donald G. Fisher 125,089,536 1,182,290
Doris F. Fisher 125,091,400 1,180,426
Robert J. Fisher 125,091,689 1,180,137
William A. Hasler 125,092,996 1,178,830
John M. Lillie 125,092,196 1,179,630
Charles R. Schwab 125,094,188 1,177,638
Brooks Walker, Jr. 125,090,802 1,181,024
There were no abstentions and no broker non-votes.
c) The approval of the Executive Management Incentive Cash
Award Plan was ratified with 122,342,666 votes in favor, 3,066,350
votes against, 862,810 abstentions and no broker non-votes.
d) The selection of Deloitte & Touche as independent
auditors for the fiscal year ending January 28, 1995 was ratified
with 126,134,848 votes in favor, 51,412 votes against, 85,563 abstentions
and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Fourth Amendment to Credit Agreement, dated as of
February 4, 1994
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
b) The Company did not file any reports on Form 8-K during
the three months ended April 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE GAP, INC.
Date: June 10, 1994 By /s/ Robert J. Fisher
Robert J. Fisher
Executive Vice President and
Chief Financial Officer
(Principal financial officer
of the registrant)
Date: June 10, 1994 By /s/ Donald G. Fisher
Donald G. Fisher
Chairman and Chief Executive
Officer
EXHIBIT INDEX
(10) Fourth Amendment to Credit Agreement, dated as of February 4, 1994
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information