Five-Year Selected Financial Data
Fiscal Years 1994 1993 1992 1991 1990
Operating Results ($000)
Net sales $3,722,940 $3,295,679 $2,960,409 $2,518,893 $1,933,780
Cost of goods sold and occupancy
expenses, excluding depreciation
and amortization 2,202,133 1,996,929 1,856,102 1,496,156 1,187,644
Percentage of net sales 59.2% 60.6% 62.7% 59.4% 61.4%
Depreciation and amortization<F1> 148,863 124,860 99,451 72,765 53,599
Operating expenses 853,524 748,193 661,252 575,686 454,180
Net interest (income) expense (10,902) 809 3,763 3,523 1,435
Earnings before income taxes 529,322 424,888 339,841 370,763 236,922
Percentage of net sales 14.2% 12.9% 11.5% 14.7% 12.3%
Income taxes 209,082 166,464 129,140 140,890 92,400
Net earnings 320,240 258,424 210,701 229,873 144,522
Percentage of net sales 8.6% 7.8% 7.1% 9.1% 7.5%
Cash dividends 64,775 53,041 44,106 41,126 29,625
Capital expenditures<F2> 236,616 215,856 213,659 244,323 199,617
Per Share Data<F3>
Net earnings<F4> $2.20 $1.78 $1.47 $1.62 $1.02
Cash dividends .46 .38 .32 .30 .22
Stockholders' equity (book value)<F5> 9.50 7.76 6.16 4.76 3.30
<F1> Excludes amortization of restricted stock.
<F2> Includes property and equipment, as well as lease rights.
<F3> Reflects the 2-for-1 splits of common stock to stockholders of record
on June 17, 1991 and September 17, 1990.
<F4> Based on weighted average number of shares outstanding at year-end.
<F5> Based on actual number of shares outstanding at year-end.
Five-Year Selected Financial Data
Fiscal Years 1994 1993 1992 1991 1990
Financial Position ($000)
Property and equipment (net) $ 828,777 $ 740,422 $ 650,368 $ 547,740 $ 383,548
Merchandise inventory 370,638 331,155 365,692 313,899 247,462
Total assets 2,004,244 1,763,117 1,379,248 1,147,414 776,900
Working capital 555,827 494,194 355,649 235,537 101,518
Current ratio 2.11:1 2.07:1 2.06:1 1.71:1 1.39:1
Total debt, less current
installments - 75,000 75,000 80,000 17,500
Ratio of total debt
to stockholders' equity N/A .07:1 .08:1 .12:1 .04:1
Stockholders' equity 1,375,232 1,126,475 887,839 677,788 465,733
Return on average stockholders' equity 25.6% 25.7% 26.9% 40.2% 36.0%
Statistics
Number of stores opened 172 108 117 139 152
Number of stores expanded 82 130 94 79 56
Number of stores closed 34 45 26 15 20
Number of stores open at year-end 1,508 1,370 1,307 1,216 1,092
Net increase in number of stores 10.1% 4.8% 7.5% 11.4% 13.8%
Comparable store sales growth
(52-week basis) 1.0% 1.0% 5.0% 13.0% 14.0%
Sales per square foot<F6>
(52-week basis) $444 $463 $489 $481 $438
Square footage of gross store
space at year end 9,165,900 7,546,300 6,509,200 5,638,400 4,762,300
Percentage increase in square feet 21.5% 15.9% 15.4% 18.4% 17.4%
Number of employees at year end 55,000 44,000 39,000 32,000 26,000
Weighted average number of shares
outstanding<F3> 145,570,538 144,841,137 143,672,924 142,139,577 141,500,888
Number of shares outstanding
at year end, net of treasury
stock<F3> 144,764,749 145,248,728 144,185,238 142,523,334 141,264,030
<F6> Based on weighted average monthly gross square footage.
Management's Discussion and Analysis of Results
of Operations and Financial Condition
RESULTS OF OPERATIONS
Net Sales
Fiscal Year Ended
Jan. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
(Fiscal 1994) (Fiscal 1993) (Fiscal 1992)
Net sales ($000) $3,722,940 $3,295,679 $2,960,409
Total net sales
growth percentage 13 11 18
Comparable store sales
growth percentage 1 1 5
Net sales per average
square foot 444 463 489
Number of
New stores 172 108 117
Expanded stores 82 130 94
Closed stores 34 45 26
The total net sales growth reflected above for fiscal 1994 and 1993
is primarily attributable to the opening of new stores (net of stores
closed), and the expansion of existing stores.
Net sales per average square foot were $444 in 1994, $463 in 1993, and
$489 in 1992. 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 resulting in a total store square footage increase
of 21 percent in 1994, 16 percent in 1993, and 15 percent in 1992. The
expansion program negatively impacted net sales per average square foot
in 1994 and 1993. Along with the expansion program, the continued store
growth in the Old Navy division with lower priced merchandise and
significantly larger stores will put pressure on net sales per average
square foot in 1995.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
were 63.2 percent in 1994, 64.4 percent in 1993, and 66.1 percent in
1992.
The resulting 1.2 percentage point increase in gross margin net of
occupancy expenses in 1994 from 1993 was attributable to a 1.6
percentage point increase in merchandise margins as a percentage of net
sales offset by a .4 percentage point in-crease in occupancy expenses as
a percentage of net sales. The increase in merchandise margins in 1994
from 1993 was primarily attributable to higher initial merchandise
margins partially offset by a larger percentage of merchandise sold at
markdown prices. Entering 1995, inventory on hand is at a lower initial
merchandise margin than inventory on hand last year.
The 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.
Over the past two years 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. This is especially
true in the first half of 1995.
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 1994 and 1993, as well as between 1993 and 1992, was primarily
attributable to the addition of larger new stores and the expansion of
existing stores.
Operating Expenses
Operating expenses as a percentage of net sales were 22.9 percent,
22.7 percent, and 22.3 percent for fiscal years 1994, 1993, and 1992.
The .2 percentage point increase in 1994 from 1993 as a percentage of
net sales was primarily attributable to investments in payroll and
advertising expenses to support the growth of the Old Navy and
International divisions and an increased focus on customer service for
all divisions. These increases were partially offset by a beneficial
comparison to last year when $10 million of expense was recognized to
support a store refixturing program.
The .4 percentage point increase in 1993 from 1992 was attributable
to increases in bonus expense of .5 percentage points and a provision
for a write-off of certain store fixtures of .3 percentage points as a
percentage of net sales. These increases were partially offset by a .4
percentage point decrease in advertising costs as a percentage of net
sales.
Net Interest Income/Expense
Net interest income was $10.9 million for fiscal year 1994 compared
to net interest expense of $809,000 and $3.8 million for fiscal years
1993 and 1992. The change in 1994 from 1993 is attributable to an
increase in gross average investments including long-term investments
and higher average interest rates. The decrease in interest expense in
1993 from 1992 was attributable to an increase in gross average
investments partially offset by lower average interest rates.
Income Taxes
The effective tax rate was 39.5 percent in 1994 compared to 39.2
percent in 1993 and 38.0 percent in 1992. The increase in the effective
tax rate for 1994 and 1993 reflects changes in federal income tax law at
the end of the second quarter in fiscal year 1993.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain material measures of the Company's
liquidity:
Fiscal Year
1994 1993 1992
Cash provided by operating
activities ($000) $504,450 $551,298 $306,978
Working capital ($000) 555,827 494,194 355,649
Current ratio 2.11:1 2.07:1 2.06:1
For the fiscal year ended January 28, 1995, the decrease in cash
provided by operating activities was primarily attributable to increased
income tax payments and increases in inventory purchases resulting from
the Company's expansion into the Old Navy and International divisions,
which more than offset an increase in net earnings exclusive of
depreciation expense. For 1993, the Company's improved cash flow and
working capital was due to 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. (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 1994 and 1993, these periods
accounted for approximately 30% of the Company's annual sales.
Capital expenditures, net of construction allowances and
dispositions, totaled approximately $220 million in 1994. These
expenditures resulted in a net increase in store space of
approximately 1.6 million square feet or 21 percent due to the
addition of 172 new stores, the expansion of 82 stores, and the
remodeling of certain stores. Capital expenditures for 1993 and 1992
were $200 million and $203 million respectively, resulting in a net
increase in store space of approximately 1 million square feet or 16
percent in 1993 and approximately 871,000 square feet or 15 percent in
1992. Expenditures in 1994 and 1993 included costs for administrative
facilities and equipment.
For fiscal year 1995, the Company expects capital expenditures to
total approximately $275 to $300 million, net of construction
allowances, representing the addition of approximately 175 to 200 new
stores, the expansion of approximately 50 to 70 stores, and the
remodeling of certain stores. Planned expenditures also include
amounts for administrative facilities, distribution centers, and
equipment. The Company expects to fund such capital expenditures with
cash flow from operations. Square footage growth is expected to be
approximately 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 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 $260 million at January 28, 1995.
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.
During the first quarter of fiscal 1994, the Company repurchased
250,000 shares of its common stock for $10,032,000 from a senior
executive of the Company.
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.
Under this program 1,473,500 shares were repurchased for $48,260,000
in the fourth quarter of fiscal 1994.
Per Share Data
Market Prices Cash Dividends
Fiscal 1994 1993 1994 1993
High Low High Low
1st Quarter $49 3/8 $39 7/8 $37 1/2 $28 $.100 $.080
2nd Quarter 48 7/8 38 37 1/4 27 .120 .100
3rd Quarter 44 3/4 30 1/8 35 3/4 25 1/2 .120 .100
4th Quarter 38 5/8 28 7/8 42 7/8 33 3/4 .120 .100
Year $.460 $.380
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 27, 1995 was 6,646.
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 judgements.
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 requirement 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 judgements 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 LLP, 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 LLP and the internal auditors have
full and free access to the Audit and Finance Committee, with and
without Management's presence.
Independent Auditor's 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 28, 1995 and January 29, 1994,
and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three fiscal years in the period
ended January 28, 1995. 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 audits
to obtain reasonable assurance about whether the consolidated 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 28, 1995 and January 29, 1994, and the
results of their operations and their cash flows for each of the three
fiscal years in the period ended January 28, 1995 in conformity with
generally accepted accounting principles.
March 2, 1995
Consolidated Statements of Earnings
($000 except per share amounts)Fiscal 1994 Fiscal 1993 Fiscal 1992
Net sales $3,722,940 100.0% $3,295,679 100.0% $2,960,409 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 2,350,996 63.2% 2,121,789 64.4% 1,955,553 66.1%
Operating expenses 853,524 22.9% 748,193 22.7% 661,252 22.3%
Net interest (income) expense (10,902) (0.3%) 809 - 3,763 .1%
Earnings before income taxes 529,322 14.2% 424,888 12.9% 339,841 11.5%
Income taxes 209,082 5.6% 166,464 5.1% 129,140 4.4%
Net earnings $ 320,240 8.6% $ 258,424 7.8% $ 210,701 7.1%
Weighted average
number of shares 145,570,538 144,841,137 143,672,924
Earnings per share $ 2.20 $ 1.78 $ 1.47
See notes to consolidated financial statements.
Consolidated Balance Sheets
($000) January 28, 1995 January 29, 1994
Assets
Current Assets
Cash and equivalents $ 414,487 $ 460,332
Short-term investments 173,543 83,497
Merchandise inventory 370,638 331,155
Prepaid expenses and other 97,019 81,454
Total Current Assets 1,055,687 956,438
Property and Equipment
Leasehold improvements 639,801 556,858
Furniture and equipment 620,104 504,952
Construction-in-progress 34,989 28,670
1,294,894 1,090,480
Accumulated depreciation and amortization (466,117) (350,058)
828,777 740,422
Long-term investments 32,097 -
Lease rights and other assets 87,683 66,257
Total Assets $2,004,244 $1,763,117
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 2,478 $ 7,603
Accounts payable 263,724 216,664
Accrued expenses 185,375 163,350
Income taxes payable 41,156 70,431
Deferred lease credits and other current liabilities 7,127 4,196
Total Current Liabilities 499,860 462,244
Long-Term Liabilities
Long-term debt - 75,000
Deferred lease credits and other liabilities 129,152 99,398
129,152 174,398
Stockholders' Equity
Common stock $.05 par value
Authorized 500,000,000 shares; issued 156,972,777
and 155,733,256 shares; outstanding 144,764,749
and 145,248,728 shares 7,849 7,787
Additional paid-in capital 298,413 240,655
Retained earnings 1,282,301 1,026,836
Foreign currency translation adjustment (8,320) (8,314)
Restricted stock plan deferred compensation (54,265) (48,035)
Treasury stock, at cost (150,746) (92,454)
1,375,232 1,126,475
Total Liabilities and Stockholders' Equity $2,004,244 $ 1,763,117
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
($000) Fiscal 1994 Fiscal 1993 Fiscal 1992
Cash Flows from Operating Activities
Net earnings $320,240 $258,424 $210,701
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 168,220 141,758 114,011
Tax benefit from exercise of stock options
by employees and from vesting of
restricted stock 19,384 6,491 28,160
Deferred income taxes (24,431) (22,360) (10,525)
Change in operating assets and liabilities
Merchandise inventory (39,860) 33,910 (51,793)
Prepaid expenses and other (10,989) (7,315) (10,970)
Accounts payable 46,031 23,877 35,670
Accrued expenses 21,953 35,143 (6,460)
Income taxes payable (29,241) 56,164 (21,775)
Deferred lease credits and other
long-term liabilities 33,143 25,206 19,959
Net cash provided by operating activities 504,450 551,298 306,978
Cash Flows from Investing Activities
Purchase of short-term investments - net (90,046) (83,497) -
Purchase of long-term investments (32,097) - -
Purchases of property and equipment (232,776) (212,340) (205,507)
Acquisition of lease rights and other assets (4,938) (3,687) (9,964)
Net cash used for investing activities (359,857) (299,524) (215,471)
Cash Flows from Financing Activities
Net (decrease) increase in notes payable (4,583) 7,632 -
Payments on long-term debt (75,000) - (5,000)
Issuance of common stock 12,849 10,768 8,721
Purchase of treasury stock (58,292) - -
Cash dividends paid (64,775) (53,041) (44,106)
Net cash used for financing activities (189,801) (34,641) (40,385)
Effect of exchange rate changes on cash (637) (103) (405)
Net (decrease) increase in cash and equivalents (45,845) 217,030 50,717
Cash and equivalents at beginning of year 460,332 243,302 192,585
Cash and equivalents at end of year $414,487 $460,332 $243,302
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 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
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 $1,026,836
Issuance of common stock pursuant to stock option plans 624,806 31 10,874
Net issuance of common stock pursuant to management
incentive restricted stock plans 614,715 31 27,500
Tax benefit from exercise of stock options by employees and
from vesting of restricted stock
Foreign currency translation adjustment
Amortization of restricted stock
Purchase of treasury stock
Net earnings 320,240
Cash dividends ($.46 per share) (64,775)
Balance at January 28, 1995 156,972,777 $7,849 $298,413 $1,282,301
See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Foreign Restricted
Currency Stock Plan
Translation Deferred Treasury Stock
($000 except per share amounts) Adjustment Compensation Shares Amount Total
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
Issuance of common stock pursuant to stock option plans 10,905
Net issuance of common stock pursuant to management
incentive restricted stock plans (25,587) 1,944
Tax benefit from exercise of stock options by employees and
from vesting of restricted stock 19,384
Foreign currency translation adjustment (6) (6)
Amortization of restricted stock 19,357 19,357
Purchase of treasury stock (1,723,500) (58,292) (58,292)
Net earnings 320,240
Cash dividends ($.46 per share) (64,775)
Balance at January 28, 1995 ($8,320) ($54,265) (12,208,028) ($150,746) $ 1,375,232
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
For the Fifty-Two Weeks ended January 28, 1995 (Fiscal 1994), January
29, 1994 (Fiscal 1993), January 30, 1993 (Fiscal 1992).
Note A: Summary of Significant Accounting Policies
The Company is an international 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 original maturities of three months or less.
Short-term investments include investments with an original maturity
of greater than three months or a remaining maturity of less than one
year. Long-term investments include investments with an original and
remaining maturity of greater than one year and less than five years.
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 which approximates fair market value. 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 adoption of SFAS No. 115 had no material
effect on the Company's consolidated financial statements for the year
ended January 28, 1995.
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, such as
pre-opening rent and payroll, 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. The Company accounts for income taxes under
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes.
Translation adjustments result from the process of translating foreign
subsidiaries financial statements into U.S.dollars. Balance sheet
accounts are translated at exchange rates in effect at the balance sheet
date. Resulting translation adjustments are included in stockholders'
equity. Income statement accounts are translated at average exchange
rates during the year.
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 adopted Statement of Financial Accounting Standards (SFAS)
No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, as of January 30, 1994. The adoption of
SFAS No. 119 had no material effect on the Company's consolidated
financial statements for the year ended January 28, 1995.
Certain reclassifications have been made to the 1993 and 1992
financial statements to conform with the 1994 financial statements.
Note B: Long-Term Debt and Other Credit Arrangements
Long-term debt at January 29, 1994 consisted of $75 million of 8.87
percent unsecured Senior Notes, due February 1995. Interest on the
Senior Notes was payable quarterly. At January 29, 1994 the fair value
of the Senior Notes was approximately $78 million, based on current
market rates at which the Company could borrow funds with similar
remaining maturities. The excess of fair value over the principal
(unrealized loss) was due entirely to significantly lower market rates
since the inception of the notes to January 29, 1994. The decrease in
rates used to calculate the fair value was due, in part to a decline in
the original term of four years to one year. In June 1994, the Company
repaid in full the unsecured Senior Notes using cash provided by
operating activities.
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,
1997. 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, 1997 of up to $350 million
at any one time.
At January 28, 1995, the Company had outstanding letters of credit
totaling $259,945,000.
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, $957,069,000 of retained earnings were available for the
payment of cash dividends at January 28, 1995.
Gross interest payments were $7,032,000, $7,654,000, and $7,598,000
in fiscal 1994, 1993, and 1992.
Note C: Income Taxes
Income taxes consisted of the following:
($000) Fiscal 1994 Fiscal 1993 Fiscal 1992
Currently Payable
Federal income taxes $182,811 $150,517 $114,137
Less tax credits (12,692) (11,484) (9,080)
170,119 139,033 105,057
State income taxes 45,807 38,992 25,636
Foreign income taxes 17,587 10,799 8,972
233,513 188,824 139,665
Deferred
Federal (19,911) (16,084) (10,120)
State (4,520) (6,276) (405)
(24,431) (22,360) (10,525)
Total provision $209,082 $166,464 $129,140
The foreign component of U.S. taxable income in fiscal 1994, 1993, and
1992 was $46,224,000, $43,320,000, and $40,884,000. Deferred federal and
applicable state income taxes, net of applicable foreign tax credits,
have not been provided for the undistributed earnings of foreign
subsidiaries (approximately $75,912,000 at January 28, 1995) 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 1994 Fiscal 1993 Fiscal 1992
Federal tax rate 35.0% 35.0% 34.0%
State income taxes,
less federal benefit 5.1 5.0 4.9
Other (.6) (.8) (.9)
Effective tax rate 39.5% 39.2% 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 28, 1995, and January 29, 1994:
($000) January 28, 1995 January 29, 1994
Compensation and
benefits accruals $29,360 $26,587
Scheduled rent 29,856 22,642
Inventory capitalization 11,035 7,933
Nondeductible accruals 20,890 17,027
Other 14,176 12,399
Gross deferred tax assets 105,317 86,588
Depreciation (18,507) (24,848)
Other (5,359) (4,720)
Gross deferred tax liabilities (23,866) (29,568)
Net deferred tax assets $81,451 $57,020
Income tax payments were $232,869,000, $128,347,000, and $135,099,000
in fiscal 1994, 1993, and 1992.
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 28, 1995 are as follows:
Fiscal Year ($000)
1995 $ 258,672
1996 258,622
1997 251,473
1998 245,903
1999 245,854
Thereafter 1,372,776
Total minimum lease commitment $2,633,300
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 28, 1995 and January 29, 1994 this liability
amounted to $70,448,000 and $52,280,000.
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 28,
1995 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 1994 Fiscal 1993 Fiscal 1992
Minimum rentals $244,515 $207,249 $172,256
Contingent rentals 20,955 26,574 30,990
$265,470 $233,823 $203,246
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 for foreign operations. The market value gains and losses
on these contracts are deferred and recognized in the income statement
when the related merchandise commitments are settled. At January 28,
1995, the Company had contracts maturing at various dates through
1995, to purchase the equivalent of $54,134,000 in foreign currencies
(52,241,000 Canadian dollars through September 1995, 10,560,000
British pounds through May 1995, and 2,600,000 French francs through
March 1995) at the contracted rates. The deferred gains and losses on
the Company's foreign exchange contracts at January 28, 1995 are
immaterial.
Note F: Stockholders' Equity and Stock Options
Common and Preferred Stock
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.
In October 1994, the Board of Directors approved a program under
which the Company may repurchase up to 9,000,000 shares of its
outstanding common stock in the open market over a two year period.
Stock Options
Under the Company's Stock Option Plan, 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 28, 1995 have expiration dates ranging
from February 4, 1995 to December 5, 2002 and represent grants to 1,387
key employees. At January 28, 1995, the Company reserved 8,412,699 shares
of its common stock for the exercise of stock options. There were 4,539,427
and 5,461,962 shares available for granting of options at January 28,
1995 and January 29, 1994. Options for 1,481,162 and 1,286,925 shares
were exercisable as of January 28, 1995 and January 29, 1994.
Average Price
Shares Per Share
Balance at February 1, 1992 3,633,347 $16.12
Granted 672,396 39.33
Exercised (609,852) 9.48
Cancelled (256,426) 23.66
Balance at January 30, 1993 3,439,465 $21.27
Granted 1,001,370 28.76
Exercised (655,745) 13.89
Cancelled (209,547) 30.38
Balance at January 29, 1994 3,575,543 $24.20
Granted 1,155,400 44.89
Exercised (624,806) 17.45
Cancelled (232,865) 39.94
Balance at January 28, 1995 3,873,272 $30.55
Note G: Employee Benefit and Incentive Programs
Retirement Plans
The Company has a qualified defined contribution retirement plan
called GapShare, which is 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 (SERP) 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 (SERP) 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 1994, 1993, and 1992
were $8,281,000, $6,731,000, and $5,572,000.
A non-qualified Executive Deferred Compensation Plan (EDCP) was
established on January 1, 1994 and a non-qualified Executive Capital
Accumulation Plan (ECAP) was established on April 1, 1994. Both plans
allow eligible employees to defer additional compensation up to a
maximum amount defined in each 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.
An Executive Management Incentive Cash Award Plan (Executive MICAP)
was established on March 22, 1994 for key executive officers. The
Executive MICAP empowers the Compensation and Stock Option Committees
to award compensation in the form of cash bonuses to executives based
on the achievements of Company wide or divisional earnings goals for
that fiscal year.
Employee Stock Purchase Plan
In October 1994, the Board of Directors approved an Employee Stock
Purchase Plan effective December 1, 1994 subject to shareholder
approval at the annual meeting of shareholders in May 1995. Under the
Plan all eligible employees may purchase common stock of the Company
at 85% of the lower of the closing price of the Company's common stock
on the grant date or the purchase date on the New York Stock Exchange
Composite Transactions Index. Employees pay for their stock purchases
through payroll deductions at a rate equal to any whole percentage
from 1 to 15 percent. There were no shares issued under the plan at
January 28, 1995. At January 28, 1995 there were 2,000,000 shares
reserved for future subscriptions.
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 1994, 1993,
and 1992, FDI acted as general contractor for 159, 104, and 111 new
stores' leasehold improvements and fixtures. In addition, FDI
supervised construction of 79, 128, and 93 expansions, as well as
remodels of existing stores, in fiscal 1994, 1993, and 1992. FDI
construction also included administrative offices. Total cost of this
construction was $142,791,000, $133,104,000, and $134,582,000,
including profit and overhead costs of $10,738,000, $10,095,000, and
$9,687,000. At January 28, 1995 and January 29, 1994, amounts due to
FDI were $12,298,000 and $11,857,000, respectively.
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 1994 Quarter Ended
($000 except per April 30, July 30, Oct. 29, Jan. 28, Fiscal
share amounts) 1994 1994 1994 1995 1994
Net sales $751,670 $773,131 $988,346 $1,209,793 $3,722,940
Gross profit 289,583 265,277 378,848 438,236 1,371,944
Net earnings 63,478 44,352 93,647 118,763 320,240
Net earnings per share .44 .30 .64 .82 2.20
Fiscal 1993 Quarter Ended
($000 except per May 1, July 31, Oct. 30, Jan. 29, Fiscal
share amounts) 1993 1993 1993 1994 1994
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