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 July 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, 145,848,929 shares as of September 9, 1994
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) July 30, January 29, July 31,
1994 1994 1993
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 261,228 $ 460,332 $ 215,570
Short-term investments 122,901 83,497 -
Accounts receivable 15,409 15,225 9,694
Merchandise inventory 416,166 331,155 404,282
Prepaid expenses and other 79,159 66,229 84,968
Total Current Assets 894,863 956,438 714,514
Property and equipment (net) 772,646 740,422 700,883
Long-term investments 40,380 - -
Lease rights and other assets 67,792 66,257 40,460
Total Assets $ 1,775,681 $ 1,763,117 $ 1,455,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 13,773 $ 7,603 $ 5,825
Accounts payable 265,705 216,664 227,293
Accrued expenses 142,766 163,350 104,196
Income taxes payable 7,520 70,431 -
Deferred lease credits & other 6,699 4,196 3,387
Total Current Liabilities 436,463 462,244 340,701
Long-term Liabilities:
Long-term debt - 75,000 75,000
Other liabilities 9,427 11,353 12,639
Deferred lease credits 102,078 88,045 74,082
111,505 174,398 161,721
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 156,509,876, 155,733,256
and 155,399,807 shares
Outstanding 145,775,348, 145,248,728
and 144,915,279 shares 7,826 7,787 7,770
Additional paid-in capital 281,063 240,655 234,790
Retained earnings 1,103,722 1,026,836 866,538
Foreign currency translation adjustment (8,497) (8,314) (9,222)
Restricted stock plan deferred compensation (53,915) (48,035) (53,987)
Treasury stock, at cost (102,486) (92,454) (92,454)
1,227,713 1,126,475 953,435
Total Liabilities and Stockholders' Equity $1,775,681 $1,763,117 $1,455,857
See accompanying notes to interim consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Twenty-six Weeks Ended
Unaudited July 30, July 31, July 30, July 31,
($000 except per share amounts) 1994 1993 1994 1993
Net sales $ 773,131 $ 693,192 $ 1,524,801 $ 1,336,772
Costs and expenses
Cost of goods sold and 507,854 492,650 970,207 916,606
occupancy expenses
Operating expenses 192,362 153,320 378,049 305,233
Interest expense (income), net (394) 454 (1,686) 1,221
Earnings before income taxes 73,309 46,768 178,231 113,712
Income taxes 28,957 18,109 70,401 43,548
Net earnings $ 44,352 $ 28,659 $ 107,830 $ 70,164
Weighted average number of shares 145,741,236 144,869,960 145,551,113 144,613,661
Earnings per share $ .30 $ .20 $ .74 $ .49
Cash dividends per share $ .12 $ .10 $ .22 $ .18
See accompanying notes to interim consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Twenty-six Weeks Ended
July 30, 1994 July 31, 1993
Cash Flows from Operating Activities:
Net earnings $ 107,830 $ 70,164
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 80,930 66,183
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 14,391 6,782
Deferred income taxes - (1,414)
Change in operating assets and liabilities:
Merchandise inventory (85,403) (39,051)
Prepaid expenses and other (13,027) (14,487)
Accounts payable 49,226 33,720
Accrued expenses (20,577) (23,982)
Income taxes payable (62,680) (13,498)
Other long-term liabilities (1,926) (1,468)
Deferred lease credits and other 16,959 10,964
Net cash provided by operating activities 85,723 93,913
Cash Flows from Investing Activities:
Purchase of short-term investments, net (39,404) -
Purchase of long-term investments, net (40,380) -
Net purchases of property and equipment (101,772) (107,796)
Acquisition of lease rights and other assets (4,005) (1,956)
Net cash used for investing activities (185,561) (109,752)
Cash Flows from Financing Activities:
Net increase in notes payable 6,091 5,866
Payment on long-term debt (75,000) -
Issuance of common stock, net of cancellations 10,591 7,396
Purchase of treasury stock (10,032) -
Cash dividends paid (30,944) (25,079)
Net cash used for financing activities (99,294) (11,817)
Effect of exchange rate changes on cash 28 (76)
Net decrease in cash and equivalents (199,104) (27,732)
Cash and equivalents at beginning of year 460,332 243,302
Cash and equivalents at end of quarter $ 261,228 $ 215,570
See accompanying notes to interim consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of July 30, 1994 and July 31, 1993,
and the interim consolidated statements of earnings for the thirteen
and twenty-six weeks ended July 30, 1994 and July 31, 1993 and the
interim consolidated statements of cash flows for the twenty-six weeks
ended July 30, 1994 and July 31, 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 July 30, 1994 and July 31, 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 interim 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 twenty-six weeks ended July 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 29, 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
Interim consolidated financial statements.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1994 and 1993 gross interest payments were $6.7 million
and $3.7 million respectively; income tax payments were $118.9 million
and $52.6 million respectively.
Deloitte & Touche LLP
2101 Webster Street Telephone: (510)287-2700
Oakland, California 94612-3027 Facsimile: (510)835-4888
INDEPENDENT ACCOUNTANTS' 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 July 30, 1994 and July 31, 1993 and the related
interim consolidated statements of earnings for the thirteen week and
twenty-six week periods ended July 30, 1994 and July 31, 1993 and the interim
consolidated statements of cash flows of the twenty-six weeks ended July 30,
1994 and July 31, 1993. These interim 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 interim 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 has been derived.
/s/ Deloitte & Touche LLP
August 10, 1993
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Thirteen Weeks Ended Twenty-six Weeks Ended
July 30, 1994 July 31, 1993 July 30, 1994 July 31, 1993
Net Sales ($000) 773,131 693,192 1,524,801 1,336,772
Total net sales
growth percentage 12 13 14 11
Comparable
store sales
growth
percentage 1 1 4 0
Fifty-two Weeks Ended
July 30, 1994 July 31, 1993
Number of:
New Stores 129 108
Expanded Stores 127 94
Closed
Stores 53 23
The increases in second quarter and year-to-date 1994 net sales over the
same periods last year were attributable to the opening of new stores (net
of stores closed), the expansion of existing stores and the increase in
comparable store sales.
The second quarter and year-to-date sales growth was less than the square
footage growth resulting from the Company's store expansion program. Net sales
per average square foot decreased to $96 for the second quarter of 1994 from
$101 for the same period in 1993. Net sales per average square foot decreased
to $193 from $199 for the first half of the year. 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 second quarter.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 65.7 percent for the second quarter of 1994 from 71.1 percent for
the same period in 1993. The corresponding 5.4 percentage point increase in
gross margin net of occupancy expenses was attributable to a 6.1 percentage
point increase in merchandise margin as a percentage of net sales partially
offset by a .7 percentage point increase in occupancy expenses as a percentage
of net sales.
For the first half of 1994, cost of goods sold and occupancy expenses as a
percentage of net sales decreased to 63.6 percent from 68.6 percent for the
same period in 1993. The corresponding 5.0 percentage point increase in gross
margin net of occupancy expenses for the first half was attributable to a 5.4
percentage point increase in merchandise margin as a percentage of net sales
partially offset by a .4 percentage point increase in occupancy expenses as a
percentage of net sales.
The increase in merchandise margin as a percentage of net sales for the
quarter and first half was the result of higher initial merchandise margins
and a larger percentage of merchandise sold at regular prices when compared to
the same periods last year. The Company has operated at near record levels of
margin for the past four quarters when compared to the same periods of the
previous years which will make future comparisons more challenging.
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.
For the second quarter and first half, occupancy expenses increased as a
percentage of net sales when compared to the same periods in 1993. The
increases in occupancy costs are primarily due to the opening of new stores
and the expansion of existing stores. Based upon the Company's current
expansion plans, occupancy costs are expected to increase as a percentage of
net sales during 1994 as compared to 1993.
Operating Expenses
Operating expenses as a percentage of net sales increased to 24.9 percent for
the second quarter of 1994 from 22.1 percent for the same period in 1993. For
the first half of 1994 operating expenses as a percentage of net sales
increased to 24.8 percent from 22.8 percent for the same period in 1993.
The 2.8 percentage point increase for the second quarter and the 2.0
percentage point increase for the first half were primarily payroll related,
spread almost equally among store payroll, incentive bonus, and the investment
in new divisions.
Bonus expense is accrued quarterly based on year-to-date performance against
established targets. Due to strong second quarter and first half earnings,
bonus expense was recognized during these periods in 1994 against minimal
expense in the comparable periods last year.
Net Interest Income/Expense
Net interest income was approximately $394,000 for the second quarter and $1.7
million for the first half of 1994 compared to net interest expense of
$454,000 and $1.2 million for the same periods in 1993. The change is
primarily attributable to earnings from an increase in gross average
investments which were partially offset by payment of $1.7 million in
additional interest expense for the early repayment of long-term debt
obligations during the second quarter.
Income Taxes
For the second quarter and year-to-date periods, the effective tax rate was
39.5 percent compared to 38.7 and 38.3 percent for the same periods last year.
At the end of the second quarter last year the Company increased its estimated
annual effective tax rate to 39.5 percent to reflect changes in federal income
tax law.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Twenty-six weeks ended
July 30, 1994 July 31, 1993
Cash provided by operating
activities ($000) $ 85,723 $ 93,913
Working capital ($000) $ 458,400 $ 373,813
Current ratio 2.05:1 2.10:1
The Company's cash flow position is primarily the result of an increase in net
earnings exclusive of depreciation expense and improved inventory management,
partially offset by an increase in income tax payments. Improved inventory
management continues to result in higher inventory turnover and lower
inventory levels per store, resulting in strong 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 operating activities 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.
For the twenty-six weeks ended July 30, 1994, capital expenditures, net of
construction allowances and dispositions, totalled approximately $95 million.
These expenditures included the addition of 71 new stores, the expansion of 49
stores and the remodeling of certain stores resulting in a net increase in
store space of approximately 600,000 square feet or 8 percent since January
29, 1994.
For fiscal year 1994, the Company expects capital expenditures to total
approximately $265 to $275 million, net of construction allowances,
representing the addition of approximately 175 to 190 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 June 1994, the Company repaid $75 million of long-term debt which had been
outstanding since February 1991, with an original maturity date of February
1995. As part of this transaction, the Company also paid $1.7 million of
additional interest expense.
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 $335 million at
July 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 6. Exhibits and Reports on Form 8-K
a) Exhibits
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
b) The Company did not file any reports on Form 8-K during the three
months ended July 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: September 8, 1994 By /s/ Robert J. Fisher
Robert J. Fisher
Executive Vice President and
Chief Financial Officer
(Principal financial officer
of the registrant)
Date: September 8, 1994 By /s/ Donald G. Fisher
Donald G. Fisher
Chairman and Chief Executive Officer
EXHIBIT INDEX
Exhibit Number Description
11 Computation of Earnings per Share
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedule