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 October 29, 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, 145,071,709 shares as of December 9, 1994
PART 1 THE GAP,INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) October 29, January 29, October 30,
1994 1994 1993
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 223,654 $ 460,332 $ 267,441
Short-term investments 159,077 83,497 -
Accounts receivable 13,965 15,225 16,700
Merchandise inventory 537,343 331,155 496,647
Prepaid expenses and other 76,661 66,229 77,267
Total Current Assets 1,010,700 956,438 858,055
Property and equipment (net) 801,554 740,422 722,452
Long-term investments 62,418 - -
Lease rights and other assets 73,632 66,257 36,182
Total Assets $1,948,304 $1,763,117 $1,616,689
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 2,936 $ 7,603 $ 19,024
Accounts payable 304,703 216,664 231,960
Accrued expenses 169,552 163,350 137,241
Income taxes payable 28,043 70,431 30,575
Deferred lease credits & other 6,681 4,196 3,989
Total Current Liabilities 511,915 462,244 422,789
Long-term Liabilities:
Long-term debt - 75,000 75,000
Other liabilities 9,758 11,353 13,018
Deferred lease credits 109,961 88,045 82,235
subtotal 119,719 174,398 170,253
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 156,661,757, 155,733,256
and 155,546,473 shares
Outstanding 145,927,229, 145,248,728
and 145,061,945 shares 7,834 7,787 7,777
Additional paid-in capital 285,096 240,655 238,367
Retained earnings 1,180,442 1,026,836 931,479
Foreign currency translation adjustment (4,521) (8,314) (9,794)
Restricted stock plan deferred compensation (49,695) (48,035) (51,728)
Treasury stock, at cost (102,486) (92,454) (92,454)
subtotal 1,316,670 1,126,475 1,023,647
Total Liabilities and Stockholders' Equity $1,948,304 $1,763,117 $1,616,689
See accompanying notes to interim consolidated financial
statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Unaudited October 29, October 30, October 29, October 30,
($000 except per share amounts) 1994 1993 1994 1993
Net sales $ 988,346 $ 898,677 $ 2,513,147 $ 2,235,449
Costs and expenses
Cost of goods sold and 609,498 558,836 1,579,705 1,475,442
occupancy expenses
Operating expenses 227,728 209,084 605,777 514,317
Interest expense (income), net (3,669) 318 (5,355) 1,539
Earnings before income taxes 154,789 130,439 333,020 244,151
Income taxes 61,142 51,524 131,543 95,072
Net earnings $ 93,647 $ 78,915 $ 201,477 $ 149,079
Weighted average
number of shares 145,850,581 144,990,026 145,650,754 144,738,922
Earnings per share $ .64 $ .54 $ 1.38 $ 1.03
Cash dividends per share $ .12 $ .10 $ .34 $ .28
See accompanying notes to interim consolidated financial
statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirty-Nine Weeks Ended
October 29, October 30,
1994 1993
Cash Flows from Operating Activities:
Net earnings $ 201,477 $ 149,079
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 123,574 103,152
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 15,562 7,317
Deferred income taxes (7,331) (1,526)
Change in operating assets and liabilities:
Merchandise inventory (205,157) (131,799)
Prepaid expenses and other (6,712) (7,663)
Accounts payable 87,236 34,687
Accrued expenses 5,870 9,108
Income taxes payable (42,137) 19,868
Other long-term liabilities (1,595) (1,007)
Deferred lease credits 24,377 19,870
Net cash provided by operating activities 195,164 201,086
Cash Flows from Investing Activities:
Purchase of short-term investments, net (75,580) -
Purchase of long-term investments, net (62,418) -
Net purchases of property and equipment (164,170) (161,612)
Acquisition of lease rights and other assets (4,560) (3,594)
Net cash used for investing activities (306,728) (165,206)
Cash Flows from Financing Activities:
Net (decrease) increase in notes payable (5,765) 19,182
Payment on long-term debt (75,000) -
Issuance of common stock, net of cancellations 12,770 8,367
Purchase of treasury stock (10,032) -
Cash dividends paid (47,870) (39,053)
Net cash used for financing activities (125,897) (11,504)
Effect of exchange rate changes on cash 783 (237)
Net (decrease) increase in cash and equivalents (236,678) 24,139
Cash and equivalents at beginning of year 460,332 243,302
Cash and equivalents at end of quarter $223,654 $ 267,441
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 October 29, 1994 and
October 30, 1993, and the interim consolidated statements of
earnings for the thirteen and thirty-nine weeks ended October 29,
1994 and October 30, 1993 and the interim consolidated statements
of cash flows for the thirty-nine weeks ended October 29, 1994
and October 30, 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 October 29, 1994 and October 30,
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 thirty-nine weeks ended October
29, 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 $7.4
million and $5.7 million respectively; income tax payments were
$155.1 million and $69.8 million respectively.
Deloitte &
Touche LLP
2101 Webster Street Telephone: (510) 287-2700
Oakland, California 94612-3027 Facsimile: (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 October 29, 1994 and October
30, 1993 and the related interim consolidated statements of
earnings for the thirteen-week and thirty-nine week periods ended
October 29, 1994 and October 30, 1993 and the interim consolidated
statements of cash flows for the thirty-nine weeks ended October 29,
1994 and October 30, 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 reviews, 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, stockholder's 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 LLP
November 8, 1994
Deloitte Touche
Tohmatsu
International
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 29, 1994 October 30, 1993 October 29, 1994 October 30, 1993
Net sales ($000) 988,346 898,677 2,513,147 2,235,449
Total net
sales growth
percentage 10 9 12 10
Comparable
store sales
growth
percentage <2> <1> 2 0
Sales dollar
per average
square foot 115 123 310 322
Fifty-two Weeks Ended
October 29, 1994 October 30, 1993
Number of:
New stores 143 114
Expanded
stores 93 121
Closed
stores 51 24
The increases in third quarter and year-to-date 1994 net sales over the same
periods last year were primarily attributable to the opening of new stores
(net of stores closed) and the expansion of existing stores, partially offset
by a decrease in third quarter comparable store sales. The decrease in
comparable store sales is primarily attributable to negative comparable store
sales in the Gap division.
The decrease in third quarter and year-to-date sales per average square foot
over the same periods last year was partially attributable to the expansion
of new and existing stores in connection with the Company's store expansion
program. In addition negative third quarter comparable store sales as well
as continued store growth in the Old Navy division, with lower priced
merchandise and significantly larger stores, contributed to the decrease in
sales per average square foot.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 61.7 percent for the third quarter of 1994 from 62.2 percent for
the same period in 1993. The corresponding .5 percentage point increase in
gross margin net of occupancy expenses was attributable to a 1.1 percentage
point increase in merchandise margin as a percentage of net sales partially
offset by a .6 percentage point increase in occupancy expenses as a percentage
of net sales.
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 62.9 percent for the year-to-date period from 66.0 percent for
the same period in 1993. The corresponding 3.1 percentage point increase in
gross margin net of occupancy expenses was attributable to a 3.6 percentage
point increase in merchandise margin as a percentage of net sales partially
offset by a .5 percentage point increase in occupancy expenses as a percentage
of net sales.
During the third quarter, higher initial merchandise margins were achieved
when compared to the same period last year. This was partially offset by a
larger percentage of merchandise sold at markdown. Merchandise margins
achieved on markdown goods were higher than last year. For the year-to-date
period, higher initial merchandise margins were achieved and a larger
percentage of merchandise was sold at regular prices when compared to the same
period last year.
Over the past five quarters, the Company has operated at near record levels
of merchandise margin when compared to the same periods of previous years,
making future comparisons more challenging. The Company expects fourth
quarter merchandise margins to be lower than the same period last year.
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 third quarter and year-to-date periods, occupancy expenses increased
as a percentage of net sales when compared to the same periods in 1993. The
increases in occupancy expenses are primarily due to the opening of new stores
and the expansion of existing stores. Based upon the Company's current
expansion plans, occupancy expenses are expected to remain higher as a
percentage of net sales than last year for the remainder of 1994.
Operating Expenses
Operating expenses decreased as a percentage of net sales to 23.0 percent for
the third quarter of 1994 compared to 23.3 percent for the same period last
year. The decrease was primarily attributable to a beneficial comparison from
last year's third quarter when $10 million of expense was recognized to
support a store refixturing program. This was partially offset by an increase
in 1994 third quarter payroll expense as investments were made to support the
Old Navy and International divisions.
Operating expenses increased as a percentage of net sales to 24.1 percent
year-to-date compared to 23.0 percent for the same period last year. The 1.1
percentage point increase is primarily attributable to a .5 percentage point
increase in store payroll costs as a percentage of net sales and a .4
percentage point increase for incentive bonus as a percentage of net sales.
These increases were offset by a .3 percentage point decrease in a provision
for the write-off of certain store fixtures.
Net Interest Income/Expense
Net interest income was approximately $3.7 million for the third quarter
compared to net interest expense of $318,000 for the same period last year.
The change is primarily attributable to an increase in gross average
investments and a reduction in interest expense from lower average borrowings
compared to the same period last year.
For the thirty-nine weeks ended October 29, 1994, net interest income was
approximately $5.4 million compared to net interest expense of $1.5 million
last year. The change is primarily attributable to earnings from an increase
in gross average investments which were partially offset by a $1.7 million
interest payment in connection with the early repayment of long-term debt
obligations during the second quarter of 1994.
Income Taxes
For the third quarter and year-to-date periods, the effective income tax rate
was 39.5 percent compared to 39.5 and 38.9 percent for the same periods last
year. At the end of the second quarter last year the Company increased its
estimated annual effective income tax rate to 39.5 percent to reflect changes
in federal income tax law. The Company expects the effective income tax rate
to remain at 39.5 percent for the fourth quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirty-nine weeks ended
October 29, 1994 October 30, 1993
Cash provided by operating
activities ($000) $195,164 $201,086
Working capital ($000) $498,785 $435,266
Current ratio 1.97:1 2.03:1
For the thirty-nine weeks ended October 29, 1994, the decrease in cash
provided by operating activities resulted primarily from increases in
inventory purchases and income tax payments which more than offset an
increase in net earnings exclusive of depreciation expense.
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 thirty-nine weeks ended October 29, 1994, capital expenditures, net
of construction allowances and dispositions, totalled approximately $154
million. These expenditures included the addition of 125 new stores, the
expansion of 65 stores and the remodeling of certain stores resulting in a net
increase in store space of approximately 1.1 million square feet or 15 percent
since January 29, 1994.
For fiscal year 1994, the Company expects capital expenditures to total
approximately $250 million, net of construction allowances, representing the
addition of approximately 170 to 180 new stores, the expansion of
approximately 90 stores, and the remodeling of certain stores. Square footage
growth is expected to be approximately 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.
For fiscal year 1995, the Company currently expects capital expenditures to
total approximately $300 to $350 million, net of construction allowances.
These expenditures include the addition of approximately 250 to 275 new
stores, and the expansion of approximately 75 stores. Square footage growth
is expected to be approximately 25 percent before accounting for store
closings.
The Company continues to explore alternatives for headquarters facilities
growth in San Francisco and San Bruno, California. The amounts above do not
include any expenditures related to headquarters facilities.
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 $289 million at
October 29, 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.
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.
On October 25, 1994, the Board of Directors approved a program, under which
the Company may repurchase up to 9 million shares of its outstanding common
stock in the open market over a two year period.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Employee Stock Purchase Plan
(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 October 29, 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: December 9, 1994 By /s/ Robert J. Fisher
Robert J. Fisher
Executive Vice President and
Chief Financial Officer
(Principal financial officer of the registrant)
Date: December 9, 1994 By /s/ Donald G. Fisher
Donald G. Fisher
Chairman and Chief Executive Officer
EXHIBIT INDEX
Exhibit Number
(10) Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrants's
Registration Statement on Form S-8, Commission File No. 33-56021.
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule