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 May 4,
1996 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, 286,822,510 shares as of June 14, 1996
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) May 4, February 3, April 29,
1996 1996 1995
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 552,729 $ 579,566 $ 298,218
Short-term investments 79,819 89,506 157,498
Merchandise inventory 489,719 482,575 408,952
Prepaid expenses and other 146,791 128,398 113,894
Total Current Assets 1,269,058 1,280,045 978,562
Property and equipment (net) 981,011 957,752 852,824
Long-term investments 41,573 30,370 16,949
Lease rights and other assets 81,672 74,901 86,393
Total Assets $ 2,373,314 $ 2,343,068 $ 1,934,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable 46,836 21,815 -
Accounts payable 204,951 262,505 233,194
Accrued expenses 214,131 194,426 153,142
Income taxes payable 13,901 66,094 30,786
Deferred lease credits and other current 7,034 6,904 5,707
liabilities
Total Current Liabilities 486,853 551,744 422,829
Long-term Liabilities:
Deferred lease credits and other liabilities 156,864 150,851 127,753
156,864 150,851 127,753
Stockholders' Equity:
Common stock $.05 par value
Authorized 500,000,000 shares
Issued 316,892,180, 315,971,306
and 314,786,422 shares
Outstanding 287,248,358, 287,747,984
and 287,833,766 shares 15,845 15,799 15,739
Additional paid-in capital 399,619 335,193 312,788
Retained earnings 1,629,666 1,569,347 1,315,707
Foreign currency translation adjustment (9,830) (9,071) (6,612)
Restricted stock plan deferred compensation (43,757) (48,735)
(60,753)
Treasury stock, at cost (261,946) (222,060) (192,723)
1,729,597 1,640,473 1,384,146
Total Liabilities and Stockholders' Equity $ 2,373,314 $ 2,343,068 $ 1,934,728
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
May 4, 1996 April 29, 1995
Net Sales $ 1,113,154 $ 848,688
Costs and expenses
Cost of goods sold and
occupancy expenses 699,314 568,131
Operating expenses 282,627 202,575
Net interest income (3,618) (4,849)
Earnings before income taxes 134,831 82,831
Income taxes 53,258 32,718
Net earnings $ 81,573 $ 50,113
Weighted average number
of shares 288,010,684 287,744,200
Earnings per share $ .28 $ .17
Cash dividends per share $ .08 $ .06
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirteen Weeks Ended
May 4, 1996 April 29, 1995
Cash Flows from Operating Activities:
Net earnings $ 81,573 $ 50,113
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization (a) 52,616 45,429
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 41,276 6,765
Change in operating assets and liabilities:
Merchandise inventory (7,212) (37,370)
Prepaid expenses and other (18,750) (17,132)
Accounts payable (57,289) (31,204)
Accrued expenses 19,787 (32,400)
Income taxes payable (52,201) (10,606)
Deferred lease credits and other
long-term liabilities 6,117 (3,339)
Net cash provided by (used for) operating
activities 65,917 (29,744)
Cash Flows from Investing Activities:
Net maturity of short-term investments 9,687 31,193
Purchase of long-term investments (11,203) -
Purchase of property and equipment (69,186) (60,693)
(Acquisition) Disposition of lease rights
and other assets (7,799) 1,012
Net cash used for investing activities (78,501) (28,488)
Cash Flows from Financing Activities:
Net increase (decrease) in notes payable 24,897 (3,517)
Issuance of common stock 22,121 3,452
Purchase of treasury stock (39,886) (41,977)
Cash dividends paid (21,254) (16,707)
Net cash used for financing activities (14,122) (58,749)
Effect of exchange rate changes on cash (131) 712
Net increase (decrease) in cash and equivalents (26,837) (116,269)
Cash and equivalents at beginning of year 579,566 414,487
Cash and equivalents at end of quarter $ 552,729 $ 298,218
See accompanying notes to consolidated financial statements.
(a) Includes amortization of restricted stock.
THE GAP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of May 4, 1996 and April 29,
1995, and the interim consolidated statements of earnings and the
interim consolidated statements of cash flows for the thirteen weeks
ended May 4, 1996 and April 29, 1995 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 May 4, 1996 and April 29, 1995, 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 February 3, 1996.
The results of operations for the thirteen weeks ended May 4, 1996
are not necessarily indicative of the operating results that may be
expected for the year ending February 1, 1997.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1996 and 1995 gross interest payments were $0.8
million and $0.5 million respectively; income tax payments were $64.1
million and $36.4 million respectively.
3. TWO-FOR-ONE STOCK SPLIT
On February 27, 1996, the Company's Board of Directors authorized
a two-for-one split of its common stock effective April 10, 1996, in the
form of a stock dividend for stockholders of record on March 18, 1996.
Per share amounts in the accompanying consolidated financial statements
give effect to the stock split.
Deloitte & 2101 Webster Street Telephone (510)287-2700
Touche Oakland, California 94612-3027 Facsimile (510)835-4888
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed the accompanying consolidated balance sheets of The
Gap, Inc. and subsidiaries as of May 4, 1996 and April 29, 1995 and the
related consolidated statements of earnings and cash flows for the
thirteen week periods ended May 4, 1996 and April 29, 1995. These
financial statements are the responsibility of the Company's management.
We conducted our reviews 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 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 February 3, 1996, 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 February 29,
1996 (except for the effects of the stock split, as to which the date is
April 10, 1996), 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 February 3,
1996 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it was derived.
/S/ Deloitte & Touche LLP
May 16, 1996
THE GAP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales Thirteen weeks ended
May 4, 1996 April 29, 1995
Net sales ($000) $1,113,154 $848,688
Total net sales growth percentage 31 13
Comparable store sales growth percentage
(Based on a comparable 13 - week period) 9 <2>
Net sales per average square foot 98 90
Average square footage of gross store space (000) 11,334 9,392
Fifty-three Fifty-two
weeks ended weeks ended
May 4, 1996 April 29, 1995
Number of
New stores 225 176
Expanded stores 50 77
Closed stores 44 39
The increase in first quarter fiscal 1996 net sales over the same period
last year was attributable to the opening of new stores (net of stores
closed), an increase in comparable store sales, and the expansion of
existing stores.
The increase in net sales per average square foot compared with the same
period last year was primarily attributable to an increase in comparable
stores sales partially offset by the growing impact of the Old Navy
division where lower priced merchandise and significantly larger stores
result in lower net sales per average square foot when compared to other
divisions .
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 62.8 percent for the first quarter of fiscal 1996 from 66.9
percent for the same period in fiscal 1995. The resulting 4.1
percentage point increase in gross margin net of occupancy expenses was
attributable to a 2.4 percentage point increase in merchandise margins
as a percentage of net sales and a 1.7 percentage point decrease in
occupancy expenses as a percentage of net sales.
The increase in merchandise margins as a percentage of net sales was
primarily attributable to higher initial merchandise margins. The
decrease in occupancy expense as a percentage of net sales was primarily
attributable to sales leverage resulting from positive comparable store
sales growth. The growth of the Old Navy division with lower occupancy
expenses as a percentage of net sales per average square foot when
compared to other divisions also contributed to the decrease 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.
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 as a percentage of net sales increased to 25.4
percent for first quarter of fiscal 1996 compared to 23.9 percent for
the same period last year.
The 1.5 percentage point increase in operating expenses was primarily
attributable to a 1.1 percentage point increase in incentive bonus
expense as a percentage of net sales. No incentive bonus expense was
recognized in the first quarter of fiscal 1995 . Insurance recoveries
received in the first quarter last year for business interruption losses
resulted in a .4 percentage point unfavorable comparison this year as a
percentage of net sales.
Net Interest Income/Expense
Net interest income was approximately $3.6 million for the first quarter
of fiscal 1996 compared to $4.8 million for the same period last year.
Income Taxes
The effective tax rate was 39.5 percent for the thirteen weeks ended
May 4, 1996 and April 29, 1995 .
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirteen weeks ended
May 4, 1996 April 29, 1995
Cash provided by (used for) operating activities
($000) $ 65,917 $(29,744)
Working capital ($000) $782,205 $555,733
Current ratio 2.61:1 2.31:1
For the thirteen weeks ended May 4, 1996, the increase in cash provided
by operating activities was primarily attributable to 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 operations and normal trade
credit arrangements. The Company's business follows a seasonal pattern,
peaking over a total of about ten to twelve weeks during the late summer
and holiday periods.
For the thirteen weeks ended May 4, 1996, capital expenditures, net of
construction allowances and dispositions, totaled approximately $66
million. These expenditures included the addition of 40 new stores, the
expansion of 9 stores and the remodeling of certain stores resulting in
a net increase in store space of approximately 336,000 square feet or 3
percent since February 3, 1996.
For fiscal 1996, the Company expects capital expenditures to total
approximately $300 to $350 million, net of construction allowances,
representing the addition of approximately 175 to 200 new stores, the
expansion of approximately 40 to 50 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 15
percent before store closings. New stores are generally expected to be
leased.
During fiscal 1995, the Company 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
fiscal 1996. Additionally in May 1996, the Company exercised an option
to purchase land and a building in the Netherlands to relocate its
European distribution center. The building was under construction at
the time of purchase and is estimated to be operational by Summer 1996.
Estimated cost at completion for the land and building is approximately
$10 million. This move will result in a more centralized shipping
location to the European continent and will support store growth in
Europe.
In February 1996, the Company exercised an option to purchase land for
$9 million in San Bruno, California to expand its headquarters
facilities. Construction commenced in April 1996 for an estimated cost
at completion of $55 to $60 million. The facility is expected to be in
operation in late fiscal 1997.
On February 27, 1996, the Company's Board of Directors authorized a two-
for-one split of its common stock effective April 10, 1996, in the form
of a stock dividend for stockholders of record at the close of business
on March 18, 1996. Per share amounts in the accompanying consolidated
financial statements give effect to the stock split.
The Company has a credit agreement which provides for a $250 million
revolving credit facility through June 30, 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 $412 million at May 4, 1996.
Under a program announced in October 1994 to repurchase up to 18 million
shares of the Company's outstanding common stock, the Company acquired
1,420,500 shares during the first quarter of 1996 for approximately $40
million. To date under this program, 8,560,300 shares have been
repurchased for approximately $161 million.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.1) Form of Non-Qualified Stock Option Agreement for
employees under Registrant's 1996 Stock Option and Award Plan
(10.2) Form of Non-Qualified Stock Option Agreement for non-employee
directors under Registrant's 1996 Stock Option and Award Plan
(10.3) Form of Restricted Stock Agreement under
Registrant's 1996 Stock Option and Award 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 May 4, 1996.
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 14, 1996 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial
officer of the registrant)
Date: June 14, 1996 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief
Executive Officer
EXHIBIT INDEX
(10.1) Form of Non-Qualified Stock Option Agreement for employees
under Registrant's 1996 Stock Option and Award Plan
(10.2) Form of Non-Qualified Stock Option Agreement for non-employee
directors under Registrant's 1996 Stock Option and Award Plan
(10.3) Form of Restricted Stock Agreement under Registrant's 1996
Stock Option and Award Plan
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule