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 28,
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, 143,859,338 shares as of December 8, 1995
PART 1 THE GAP, INC. AND SUBSIDIARIES ITEM 1
CONSOLIDATED BALANCE SHEETS
($000) October 28, January 28, October 29,
1995 1995 1994
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 324,182 $ 414,487 $ 223,654
Short-term investments 116,357 173,543 159,077
Merchandise inventory 704,847 370,638 537,343
Prepaid expenses and other 106,724 97,019 90,626
Total Current Assets 1,252,110 1,055,687 1,010,700
Property and equipment (net) 926,165 828,777 801,554
Long- term investments 7,059 32,097 62,418
Lease rights and other assets 101,436 87,683 73,632
Total Assets $ 2,286,770 $ 2,004,244 $ 1,948,304
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 17,781 $ 2,478 $ 2,936
Accounts payable 358,394 263,724 304,703
Accrued expenses 213,942 185,375 169,552
Income taxes payable 55,934 41,156 28,043
Deferred lease credits and other current liabilities 6,784 7,127 6,681
Total Current Liabilities 652,835 499,860 511,915
Long-term Liabilities:
Deferred lease credits and other liabilities 146,260 129,152 119,719
146,260 129,152 119,719
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 157,790,787, 156,972,777
and 156,661,757 shares
Outstanding 143,486,359, 144,764,749
and 145,927,229 shares 7,891 7,849 7,834
Additional paid-in capital 332,553 298,413 285,096
Retained earnings 1,431,433 1,282,301 1,180,442
Foreign currency translation adjustment (6,347) (8,320) (4,521)
Restricted stock plan deferred compensation (54,392) (54,265) (49,695)
Treasury stock, at cost (223,463) (150,746) (102,486)
1,487,675 1,375,232 1,316,670
Total Liabilities and Stockholders' Equity $ 2,286,770 $ 2,004,244 $ 1,948,304
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Thirty-nine Weeks Ended
Unaudited October 28, October 29, October 28, October 29,
($000 except per share amounts) 1995 1994 1995 1994
Net sales $ 1,155,929 $ 988,346 $ 2,873,131 $ 2,513,147
Costs and expenses
Cost of goods sold and 697,879 609,498 1,875,331 1,579,705
occupancy expenses
Operating expenses 266,939 227,728 679,557 605,777
Net interest income (2,066) (3,669) (11,345) (5,355)
Earnings before income taxes 193,177 154,789 329,588 333,020
Income taxes 76,302 61,142 130,186 131,543
Net earnings $ 116,875 $ 93,647 $ 199,402 $ 201,477
Weighted average number
of shares 144,210,859 145,850,581 144,066,284 145,650,754
Earnings per share $ .81 $ .64 $ 1.38 $ 1.38
Cash dividends per share $ .12 $ .12 $ .36 $ .34
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirty-Nine Weeks Ended
October 28, 1995 October 29, 1994
Cash Flows from Operating Activities:
Net earnings $199,402 $201,477
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 147,114 123,574
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 9,325 15,562
Deferred income taxes - (7,331)
Change in operating assets and liabilities:
Merchandise inventory (334,197) (205,157)
Prepaid expenses and other (19,567) (6,712)
Accounts payable 95,925 87,236
Accrued expenses 28,526 5,870
Income taxes payable 14,647 (42,137)
Deferred lease credits and other
long-term liabilities 16,541 22,782
Net cash provided by operating activities 157,716 195,164
Cash Flows from Investing Activities:
Maturity (purchase) of short-term
investments - net 82,224 (52,329)
Purchase of long-term investments - (85,669)
Purchases of property and equipment (223,024) (164,170)
Acquisition of lease rights and other assets (7,378) (4,560)
Net cash used for investing activities (148,178) (306,728)
Cash Flows from Financing Activities:
Net (decrease) increase in notes payable 15,303 (5,765)
Payment on long-term debt - (75,000)
Issuance of common stock 7,297 12,770
Purchase of treasury stock (72,717) (10,032)
Cash dividends paid (50,270) (47,870)
Net cash used for financing activities (100,387) (125,897)
Effect of exchange rate changes on cash 544 783
Net (decrease) increase in cash and equivalents (90,305) (236,678)
Cash and equivalents at beginning of year 414,487 460,332
Cash and equivalents at end of quarter $324,182 $223,654
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 28, 1995 and October 29, 1994,
and the interim consolidated statements of earnings for the thirteen and
thirty-nine weeks ended October 28, 1995 and October 29, 1994 and the interim
consolidated statements of cash flows for the thirty-nine weeks ended October
28, 1995 and October 29, 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
October 28, 1995 and October 29, 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 thirty-nine weeks ended October 28, 1995 are
not necessarily indicative of the operating results that may be expected for
the year ending February 3, 1996.
Certain reclassifications have been made to the 1994 financial statements to
conform to classifications used in 1995.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1995 and 1994 gross interest payments were $3.4 million and $7.4
million respectively; income tax payments were $105.5 million and $155.1
million respectively.
Deloitte &
Touche LLP 2101 Webster Street Telephone:(510)287-2700
Oakland, California 94612 Facsimile:(510)835-4888
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed that accompanying consolidated balance sheets of The Gap,
Inc. and subsidiaries as of October 28, 1995 and October 29, 1994 and the
related consolidated statements of earnings for the thirteen week and thirty-
nine week periods ended October 28, 1995 and October 29, 1994 and of cash
flows for the thirty-nine week periods ending October 28, 1995 and October 29,
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 previous 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 sheet as of
January 28, 1995 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it was derived.
November 8, 1995
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 28, October 29, October 28, October 29,
1995 1994 1995 1994
Net sales ($000) 1,155,929 988,346 2,873,131 2,513,147
Total net
sales growth
percentage 17 10 14 12
Comparable
store sales
growth
percentage 0 <2> <2> 2
Net sales
per average
square foot 111 115 290 310
Fifty-two Weeks Ended
October 28, October 29,
1995 1994
Number of:
New stores 209 143
Expanded stores 61 93
Closed stores 43 51
The increases in third quarter and year-to-date 1995 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.
The declines in third quarter and year-to-date net sales per average square
foot from the same periods last year were attributable to increases in the
average size of new stores in connection with the Company's store expansion
program and continued store growth in the Old Navy division with lower priced
merchandise and significantly larger stores.
For the four week period ended November 25, 1995, net sales increased 19
percent over the same period last year. Comparable store sales increased 1
percent in both November 1995 and November 1994. However, comparable store
sales for the last week of November 1995 (the first week of the Christmas
selling season) were disappointing. The retail sales environment continues to
be challenging and results for the fourth quarter will be dependent upon
Christmas holiday period sales.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 60.4 percent for the third quarter of 1995 from 61.7 percent for
the same period in 1994. The resulting 1.3 percentage point increase in gross
margin net of occupancy expenses was attributable to higher merchandise
margins due to increased regular priced selling.
Cost of goods sold and occupancy expenses as a percentage of net sales
increased to 65.3 percent for the year-to-date period from 62.9 percent for
the same period in 1994. The resulting 2.4 percentage point decrease in gross
margin net of occupancy expenses was attributable to a 2.1 percentage point
decrease in merchandise margin as a percentage of net sales and a .3
percentage point increase in occupancy expenses as a percentage of net sales.
The decrease in merchandise margin as a percentage of net sales was driven by
a decline in initial merchandise margin, primarily in the first half. The
increase in occupancy expenses as a percentage of net sales was primarily
attributable to a lack of sales leverage resulting from negative comparable
store sales.
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 markdowns
and amount of inventory affected.
Operating Expenses
Operating expenses were essentially flat as a percentage of net sales at 23.1
percent for the third quarter of 1995 compared to 23.0 percent for the same
period last year.
Operating expenses decreased as a percentage of net sales to 23.6 percent
year-to-date compared to 24.1 percent for the same period last year. The .5
percentage point decrease was primarily attributable to a decrease in
incentive bonus expense as a percentage of net sales. Due to the Company's
performance relative to financial targets, less bonus expense was recognized
this year.
Net Interest Income
Net interest income was approximately $2.1 million for the third quarter
compared to net interest income of $3.7 million for the same period last year.
The decrease was primarily attributable to additional interest expense
recognized for various other obligations, partially offset by an increase in
income from higher average interest rates.
For the thirty-nine weeks ended October 28, 1995, net interest income was
approximately $11.3 million compared to net interest income of $5.4 million
last year. The change was attributable to an increase in income from higher
average interest rates and reductions in interest expense resulting from the
June 1994 repayment of long-term debt.
Income Taxes
The effective income tax rate was 39.5 percent for the first nine months of
both 1995 and 1994. The Company does not anticipate any changes in the
effective tax rate for the remainder of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirty-nine weeks ended
October 28, 1995 October 29, 1994
Cash provided by operating
activities ($000) $157,716 $195,164
Working capital ($000) $599,275 $498,785
Current ratio 1.92:1 1.97:1
For the thirty-nine weeks ended October 28, 1995, the decrease in cash flows
from operating activities was attributable to an increased investment in
inventory partially offset by a decrease in income tax payments. 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 operating activities and
normal trade credit arrangements. The Company's business follows a seasonal
pattern, peaking over a period of about ten weeks during the late summer and
holiday months.
For the thirty-nine weeks ended October 28, 1995, capital expenditures, net
of construction allowances and dispositions, totalled approximately $214
million. These expenditures included the addition of 162 new stores, the
expansion of 44 stores and the remodeling of certain stores resulting in a net
increase in store space of approximately 1.5 million square feet or 16
percent since January 28, 1995.
For fiscal year 1995, the Company expects capital expenditures to total
approximately $300 million, net of construction allowances, representing the
addition of approximately 200 to 225 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. The Company
expects to fund such capital expenditures with cash flow from operations.
For fiscal year 1996, the Company currently expects capital expenditures to
total approximately $300 to $350 million, net of construction allowances.
These expenditures include the addition of approximately 200 new stores, and
the expansion of approximately 55 stores. Square footage growth is expected
to be approximately 15 to 20 percent after accounting for store closings. The
amounts above include planned expenditures for administrative facilities,
distribution centers and equipment.
The Company continues to explore alternatives for additional office space in
San Francisco and San Bruno, California. The Company has commenced
construction of a distribution center in Gallatin, Tennessee for an estimated
cost at completion of $45 to $55 million. The facility is expected 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 $500 million at any one time. The
Company had outstanding letters of credit of approximately $417 million at
October 28, 1995.
During the third quarter of 1995, the Company acquired 828,100 shares of its
common stock for $30,739,000. The shares were purchased under a program
announced in October 1994 to repurchase up to 9 million shares of the
Company's outstanding common stock. To date under this program, 3,569,900
shares have been repurchased for $120,977,000.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Credit Agreement, dated as of August 1, 1995, among
Registrant and Citicorp USA Inc.; Bank of America
National Trust & Savings Texas, N.A.; The Royal Bank
of Canada; Bank of Montreal; Societe Generale; The
Fuji Bank, Limited; U.S. National Bank of Oregon;
Morgan Guaranty Trust Company of New York; The
Sumitomo Bank Limited; and Citibank, N.A.
(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 28, 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: December 8, 1995 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of the registrant)
Date: December 8, 1995 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief
Executive Officer
EXHIBIT INDEX
(10) Credit Agreement, dated as of August 1, 1995, among Registrant and
Citicorp USA Inc.; Bank of America National Trust & Savings
Association; National Westminster Bank PLC; Nationsbank of Texas,
N.A.; The Royal Bank of Canada; Bank of Montreal; Societe Generale;
The Fuji Bank, Limited; U.S. National Bank of Oregon; Morgan Guaranty
Trust Company of New York; The Sumitomo Bank Limited; and Citibank, N.A.
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule