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 29, 1995 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, 144,057,151 shares as of June 9, 1995
PART 1 THE
GAP, INC. AND SUBSIDIARIES
ITEM 1
CONSOLIDATED BALANCE SHEETS
($000) April 29, January 28, April 30,
1995 1995 1994
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 298,218 $ 414,487 $ 323,139
Short-term investments 157,498 173,543 176,393
Merchandise inventory 408,952 370,638 346,544
Prepaid expenses and other 113,894 97,019 96,829
Total Current Assets 978,562 1,055,687 942,905
Property and equipment (net) 852,824 828,777 749,368
Long-term investments 16,949 32,097 19,944
Lease rights and other assets 86,393 87,683 68,415
Total Assets $ 1,934,728 $ 2,004,244 $ 1,780,632
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ - $ - $ 75,000
Notes payable - 2,478 4,516
Accounts payable 233,194 263,724 214,289
Accrued expenses 153,142 185,375 145,786
Income taxes payable 30,786 41,156 39,757
Deferred lease credits and other current liabilities 5,707 7,127 4,432
Total Current Liabilities 422,829 499,860 483,780
Long-term Liabilities:
Deferred lease credits and other liabilities 127,753 129,152 103,976
127,753 129,152 103,976
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 157,393,211, 156,972,777
and 156,450,680 shares
Outstanding 143,916,883, 144,764,749
and 145,716,152 shares 7,871 7,849 7,823
Additional paid-in capital 320,656 298,413 278,919
Retained earnings 1,315,707 1,282,301 1,076,279
Foreign currency translation adjustment (6,612) (8,320) (8,975)
Restricted stock plan deferred compensation (60,753) (54,265) (58,684)
Treasury stock, at cost (192,723) (150,746) (102,486)
1,384,146 1,375,232 1,192,876
Total Liabilities and Stockholders' Equity $ 1,934,728 $ 2,004,244 $ 1,780,632
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 29, April 30,
1995 1994
Net Sales $ 848,688 $ 751,670
Costs and expenses
Cost of goods sold and
occupancy expenses 568,131 462,087
Operating expenses 202,575 185,724
Net interest income (4,849) (1,063)
Earnings before income taxes 82,831 104,922
Income taxes 32,718 41,444
Net earnings $ 50,113 $ 63,478
Weighted average number
of shares 143,872,100 145,361,013
Earnings per share $ .35 $ .44
Cash dividends per share $ .12 $ .10
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirteen Weeks Ended
April 29, 1995 April 30, 1994
Cash Flows from Operating Activities:
Net earnings $ 50,113 $ 63,478
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 45,429 39,020
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 6,765 13,670
Change in operating assets and liabilities:
Merchandise inventory (37,370) (15,886)
Prepaid expenses and other (17,132) (16,763)
Accounts payable (31,204) (1,987)
Accrued expenses (32,400) (17,498)
Income taxes payable (10,606) (30,436)
Deferred lease credits and other
long-term liabilities (3,339) 5,285
Net cash (used for) provided by operating
activities (29,744) 38,883
Cash Flows from Investing Activities:
Maturity (purchase) of short-term investments - net 31,193 (92,896)
Purchase of long-term investments - (19,944)
Purchases of property and equipment (60,693) (43,585)
Acquisition of lease rights and other assets 1,012 (1,760)
Net cash used for investing activities (28,488) (158,185)
Cash Flows from Financing Activities:
Net decrease in notes payable (3,517) (2,979)
Issuance of common stock 3,452 9,407
Purchase of treasury stock (41,977) (10,032)
Cash dividends paid (16,707) (14,035)
Net cash used for financing activities (58,749) (17,639)
Effect of exchange rate changes on cash 712 (252)
Net decrease in cash and equivalents (116,269) (137,193)
Cash and equivalents at beginning of year 414,487 460,332
Cash and equivalents at end of quarter $ 298,218 $ 323,139
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 29, 1995 and April 30, 1994, and
the interim consolidated statements of earnings and of cash flows for the
thirteen weeks ended April 29, 1995 and April 30, 1994 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 29, 1995 and April 30, 1994, 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. It is
suggested that these condensed consolidated financial statements 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 28, 1995.
The results of operations for the thirteen weeks ended April 29, 1995 are not
necessarily indicative of the operating results that may be expected for the
year ending February 3, 1996.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1995 and 1994 gross interest payments were $0.5 million and
$2.1 million respectively; income tax payments were $36.4 million and
$58.3 million respectively.
Deloitte & Touche LLP
2101 Webster Street Telephone (510)287-2700
Oakland, Califonria 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 April 29, 1995 and April 30, 1994 and the related
consolidated statements of earnings and cash flows for the thirteen-week
periods ended April 29, 1995 and April 30, 1994. These 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 of 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 28, 1995, 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 2, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheets as of
January 28, 1995 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it was derived.
/s/ Deloitte & Touche LLP
May 9, 1995
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Thirteen weeks ended
April 29, 1995 April 30, 1994
Net sales ($000) $848,688 $751,670
Total net sales growth percentage 13 17
Comparable store sales (decline)/growth percentage <2> 7
Net sales per average square foot 90 97
Fifty-two weeks ended
April 29, 1995 April 30, 1994
Number of:
New Stores 176 131
Expanded Stores 77 120
Closed Stores 39 52
The increase in first quarter 1995 net sales was attributable to the opening
of new stores (net of stores closed) and the expansion of existing stores,
partially offset by a decrease in comparable store sales. The decrease in
comparable store sales was primarily attributable to negative comparable
store sales in the Gap division.
The decrease in first quarter net sales per average square foot compared with
the same period last year was primarily attributable to the expansion of
existing stores and an increase in the average size of new stores in
connection with the Company's store expansion program. In addition, negative
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 decline.
The Company expects that the challenging retail sales environment which was
experienced during the first quarter of 1995 will continue into the second
quarter. For the four week period ended May 27, 1995, net sales increased
14 percent over the same period last year, as compared to an 11 percent
increase in net sales for the four week period ended May 28, 1994 over the
prior year. Comparable store sales decreased 2 percent for the four weeks
ended May 27, 1995 as compared with a 1 percent increase in May 1994.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
increased to 66.9 percent for the first quarter of 1995 from 61.4 percent
for the same period in 1994. The resulting 5.5 percentage point decrease
in gross margin net of occupancy expenses was attributable to a 4.7
percentage point decrease in merchandise margins as a percentage of net
sales and a .8 percentage point increase in occupancy expenses as a
percentage of net sales.
The decrease in merchandise margins as a percentage of net sales was driven
by a decline in initial merchandise margins and an increase in markdowns
when compared to 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. During the first quarter, these
markdowns did have an adverse impact on earnings and may do so in future
quarters, depending upon the extent of the markdowns and amount of inventory
affected.
The Company expects overall merchandise margins to be lower in the second
quarter of 1995 than the very high levels achieved in the second quarter of
1994.
Occupancy expenses as a percentage of net sales increased for the first
quarter of 1995 when compared to the same period in 1994. The increase
was primarily attributable to a lack of sales leverage resulting from
negative comparable store sales.
Operating Expenses
Operating expenses as a percentage of net sales decreased to 23.9 percent
for the first quarter of 1995 compared to 24.7 percent for the same period
last year.
The .8 percentage point decrease in operating expenses was primarily
attributable to a .6 percentage point decrease in incentive bonus expense
as a percentage of net sales and a .4 percentage point decrease for
insurance recoveries for business interruption losses. Without these
favorable comparisons, operating expenses would have been unchanged as a
percentage of net sales in the first quarter of 1995 compared to the same
period last year.
Incentive bonus expense is accrued quarterly based on year-to-date
performance against established targets. Due to lower than planned earnings,
no incentive bonus expense was recognized in the first quarter of 1995.
Net Interest Income
Net interest income was approximately $5.0 million for the first quarter of
1995 compared to $1.1 million for the same period last year. The change was
attributable to an increase in income from higher average interest rates and
a reduction in interest expense resulting from the repayment of $75 million
of long-term debt in the second quarter of 1994.
Income Taxes
The effective income tax rate was 39.5 percent for the thirteen weeks ended
April 29, 1995 and April 28, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirteen weeks ended
April 29, 1995 April 30, 1994
Cash (used for) provided by operating
activities ($000) $ (29,744) $ 38,883
Working capital ($000) $ 555,733 $ 459,125
Current ratio 2.31:1 1.95:1
For the thirteen weeks ended April 29, 1995, the decrease in cash flows from
operating activities was attributable to an increased investment in inventory
to support the Company's expansion of its Old Navy and International
divisions, the timing of payment of certain year-end payables, and the
decrease in net earnings. The Company's overall cash and liquidity position
continues to be strong.
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.
For the thirteen weeks ended April 29, 1995, capital expenditures, net of
construction allowances and dispositions, totaled approximately $56 million.
These expenditures included the addition of 40 new stores, the expansion of 14
stores and the remodeling of certain stores resulting in a net increase in store
space of approximately 330,000 square feet or 4 percent since January 28, 1995.
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. Square footage growth is expected to be approximately 20 percent
after accounting for store closings. New stores are generally expected to
be leased. 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.
The Company continues to explore alternatives for headquarters facilities in
San Francisco and San Bruno, California. The Company has acquired land in
Gallatin, Tennessee for the purpose of constructing a distribution center at
an estimated total cost of $45 to $55 million. The Company expects the
facility to be in operation in late 1996.
The Company has a credit agreement which provides for a $250 million revolving
credit facility until March 1998. In addition, the credit agreement provides
for the issuance of letters of credit up to $425 million at any one time.
The Company had outstanding letters of credit of approximately $323 million at
April 29, 1995.
Under a program announced in October 1994 to repurchase up to 9 million shares
of the Company's outstanding common stock, the Company acquired 1,268,300
shares during the first quarter of 1995 for $41,978,000. Included in this
transaction was the purchase of 250,000 shares from a senior executive of
the Company for $8,438,000. To date, 2,741,800 shares have been repurchased
for $90,238,000.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Fifth Amendment to Credit Agreement, dated as of February 15, 1995
(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 April 29, 1995.
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 9, 1995 By /s/ Robert J. Fisher
Robert J. Fisher
Executive Vice President and
Chief Financial Officer
(Principal financial officer of the
registrant)
Date: June 9, 1995 By /s/ Donald G. Fisher
Donald G. Fisher
Chairman and Chief Executive Officer
EXHIBIT INDEX
(10) Fifth Amendment to Credit Agreement, dated as of
February 15, 1995
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule