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 August 3, 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, 283,511,071 shares as of September 13, 1996
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) August 3, February 3, July 29,
1996 1996 1995
(Unaudited) (See Note 1)(Unaudited)
ASSETS
Current Assets:
Cash and equivalents 514,213 579,566 249,217
Short-term investments 74,061 89,506 143,416
Merchandise inventory 573,080 482,575 508,641
Prepaid expenses and other 142,549 128,398 111,748
Total Current Assets 1,303,903 1,280,045 1,013,022
Property and equipment (net) 1,018,729 957,752 882,949
Long-term investments 53,963 30,370 7,059
Lease rights and other assets 82,705 74,901 97,436
Total Assets 2,459,300 2,343,068 2,000,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable 67,196 21,815 -
Accounts payable 313,866 262,505 293,396
Accrued expenses 218,655 194,426 145,227
Income taxes payable 32,877 66,094 9,325
Deferred lease credits and other 8,902 6,904 6,173
current liabilities
Total Current Liabilities 641,496 551,744 454,121
Long-term Liabilities:
Deferred lease credits and other liabilities 166,395 150,851 135,985
166,395 150,851 135,985
Stockholders' Equity:
Common stock $.05 par value (a)
Authorized 500,000,000 shares
Issued 317,312,752, 315,971,306
and 315,433,286 shares
Outstanding 283,396,874, 287,747,984
and 288,480,630 shares 15,866 15,799 15,772
Additional paid-in capital (a) 415,135 335,193 322,840
Retained earnings 1,674,266 1,569,347 1,331,348
Foreign currency translation adjustment (7,468) (9,071) (6,491)
Restricted stock plan deferred compensation (46,903) (48,735) (60,386)
Treasury stock, at cost (399,487) (222,060) (192,723)
1,651,409 1,640,473 1,410,360
Total Liabilities and Stockholders' Equity 2,459,300 2,343,068 2,000,466
See accompanying notes to consolidated financial statements.
(a) Reflects the two-for-one split of common stock in the form of a stock
dividend to stockholders of record on March 18, 1996.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Twenty-six Weeks Ended
Unaudited August 3, July 29, August 3, July 29,
($000 except per share amounts) 1996 1995 1996 1995
Net sales $ 1,120,335 $ 868,514 $ 2,233,489 $ 1,717,202
Costs and expenses
Cost of goods sold and 720,165 609,321 1,419,479 1,177,452
occupancy expenses
Operating expenses 295,381 210,043 578,008 412,618
Net interest income (3,956) (4,430) (7,574) (9,279)
Earnings before income taxes 108,745 53,580 243,576 136,411
Income taxes 42,955 21,166 96,213 53,884
Net earnings $ 65,790 $ 32,414 $ 147,363 $ 82,527
Weighted average number
of shares (a) 286,179,138 288,233,222 287,092,901 287,988,160
Earnings per share (a) $ 0.23 $ 0.11 $ 0.51 $ 0.28
Cash dividends per share (a) $ 0.075 $ 0.06 $ 0.15 $ 0.12
See accompanying notes to consolidated financial statements.
(a) Reflects the two-for-one split of common stock in the form of a stock
dividend to stockholders of record on March 18, 1996.
THE GAP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Twenty-six Weeks Ended
August 3, 1996 July
29, 1995
Cash Flows from Operating Activities:
Net earnings $147,363 $ 82,527
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization (a) 105,986 95,514
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 43,526 8,710
Change in operating assets and liabilities:
Merchandise inventory (90,068) (137,186)
Prepaid expenses and other (14,973) (16,090)
Accounts payable 50,131 29,890
Accrued expenses 24,035 (40,281)
Income taxes payable (33,385) (32,006)
Deferred lease credits and other
long-term liabilities 17,392 5,518
Net cash provided by (used for) operating activities 250,007 (3,404)
Cash Flows from Investing Activities:
Net maturity of short-term investments 23,463 55,165
Purchase of long-term investments (31,611) -
Purchases of property and equipment (151,033) (134,662)
Acquisition of lease rights and other assets (8,428) (10,183)
Net cash used for investing activities (167,609) (89,680)
Cash Flows from Financing Activities:
Net increase (decrease) in notes payable 44,639 (3,590)
Issuance of common stock 26,565 6,127
Purchase of treasury stock (177,427) (41,977)
Cash dividends paid (42,444) (33,481)
Net cash used for financing activities (148,667) (72,921)
Effect of exchange rate changes on cash 916 735
Net decrease in cash and equivalents (65,353) (165,270)
Cash and equivalents at beginning of year 579,566 414,487
Cash and equivalents at end of quarter $514,213 $249,217
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 August 3, 1996 and July 29,1995, and
the interim consolidated statements of earnings and the interim consolidated
statements of cash flows for the thirteen and twenty-six weeks ended August
3, 1996 and July 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 August 3,
1996 and July 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 twenty-six weeks ended August 3, 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 $1.9 million and
$1.0 million respectively; income tax payments were $85.7 million and $76.3
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 &
Touche LLP
2101 Webster Street Telephone: (510)287-2700
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 August 3, 1996 and July 29, 1995 and the related
consolidated statements of earnings for the thirteen week and twenty-six week
periods ended August 3, 1996 and July 29, 1995 and consolidated statements of
cash flows for the twenty-six week periods ended August 3, 1996 and July 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
August 14, 1996
Deloitte Touche
Tohmatsu
International
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 Twenty-six Weeks Ended
August 3, 1996 July 29, 1995 August 3, 1996 July 29, 1995
Net sales ($000) 1,120,335 868,514 2,233,489 1,717,202
Total net sales growth percentage 29 12 30 13
Comparable store sales growth
percentage (Based on comparable 13
and 26 week periods respectively) 9 <4> 9 <3>
Net sales dollars per average
square foot 96 88 194 178
Average square footage of gross
store space (000) 11,707 9,903 11,520 9,647
Fifty-three Fifty-two
weeks ended weeks ended
August 3, 1996 July 29, 1995
Number of
New stores 219 195
Expanded stores 47 62
Closed stores 47 39
The increases in second quarter and year-to-date 1996 net sales over the same
periods last year were attributable to the opening of new stores (net of stores
closed), an increase in comparable stores sales, and the expansion of existing
stores.
The increases in second quarter and year-to-date net sales per average square
foot from the same periods last year were primarily attributable to increases
in comparable store sales partially offset by the growing impact of the Old
Navy division where lower priced merchandise and significantly larger stores
resulted in lower net sales per average square foot when compared to other
divisions.
Since the end of the second quarter, the rate of growth of total net sales has
decelerated. For the four week period ended August 31, 1996, net sales
increased 19 percent over the same period last year. Comparable store sales
for August 1996 were flat.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 64.3 percent for the second quarter of 1996 from 70.1 percent
for the same period in 1995. The resulting 5.8 percentage point increase in
gross margin net of occupancy expenses was attributable to a 3.8 percentage
point increase in merchandise margins as a percentage of net sales and a 2.0
percentage point decrease in occupancy expenses as a percentage of net sales.
For the first half of 1996, cost of goods sold and occupancy expenses as a
percentage of net sales decreased to 63.5 percent from 68.6 percent for the
same period in 1995. The resulting 5.1 percentage point increase in gross
margin net of occupancy expenses was attributable to a 3.1 percentage point
increase in merchandise margins as a percentage of net sales and a 2.0
percentage point decrease in occupancy expenses as a percentage of net sales.
For the second quarter and first half of fiscal 1996, increases in merchandise
margins as a percentage of net sales resulted from higher initial merchandise
margins and a larger percentage of merchandise sold at regular prices when
compared to the same periods last year. Margins achieved on marked down goods
were also higher than 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.
For the second quarter and first half of fiscal 1996, occupancy expenses
decreased as a percentage of net sales when compared to the same periods last
year. The decreases in occupancy expenses as a percentage of net sales were
primarily attributable to leverage achieved through increases in comparable
store sales. The growth of the Old Navy division with lower occupancy
expenses as a percentage of net sales when compared to other divisions also
contributed to the decrease.
Operating Expenses
Operating expenses as a percentage of net sales increased to 26.4 percent for
the second quarter of 1996 from 24.2 percent for the same period in 1995.
The 2.2 percentage point increase was primarily attributable to a 1.1
percentage point increase in incentive bonus expense, a .7 percentage point
increase in advertising costs to support the Company's brands, and a .4
percentage point increase in charitable contributions expense.
For the first half of 1996, operating expenses as a percentage of net sales
increased to 25.9 percent from 24.0 percent for the same period in 1995. The
1.9 percentage point increase was primarily attributable to a 1.1 percentage
point increase in incentive bonus expense, a .3 percentage point increase in
advertising costs and a .2 percentage point increase in charitable
contributions expense.
Incentive bonus expense is accrued quarterly based on year-to-date performance
measured against established targets. No incentive bonus was recognized in the
first half of 1995.
Net Interest Income/Expense
Net interest income was approximately $4.0 million for the second quarter and
$7.6 million for the first half of 1996 compared to net interest income of
$4.4 million and $9.3 million for the same periods in 1995.
Income Taxes
The Company does not anticipate any change in the effective tax rate of 39.5
percent for the remainder of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Twenty-six weeks ended
August 3, 1996 July 29, 1995
Cash provided by (used for)
operating activities ($000) $250,007 $(3,404)
Working capital ($000) $662,407 $558,901
Current ratio 2.0:1 2.2:1
For the twenty-six weeks ended August 3, 1996, the increase in cash flows
provided by operating activities was primarily attributable to an increase
in net earnings exclusive of depreciation expense, an increase in accrued
bonus expense, and improved inventory management.
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 twenty-six weeks ended August 3, 1996, capital expenditures totaled
approximately $145 million, net of disposals. These expenditures included the
addition of 88 new stores, the expansion of 21 stores and the remodeling of
certain stores resulting in a net increase in store space of approximately
705,000 square feet or 6 percent since February 3, 1996.
For fiscal 1996, the Company expects capital expenditures to total
approximately $300 to $350 million before dispositions, 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 became fully operational in September 1996.
Additionally in May 1996, the Company purchased land and a building in the
Netherlands for approximately $10 million to relocate its European
distribution center. The distribution center which began operating in June
1996 provides a central shipping location to the European continent.
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 100
percent stock dividend to 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, on a committed basis, for the issuance of letters of credit up to
$450 million at any one time. Outstanding letters of credit, including
committed and uncommitted lines of credit, totaled approximately $517 million
at August 3, 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 5,879,600
shares during the first half of 1996 for approximately $178 million. To date
under this program, 13,019,400 shares have been repurchased for approximately
$299 million.
PART II
OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
a) On May 21, 1996, the Annual Meeting of Stockholders of the Company was
held in San Francisco, California. There were 288,377,346 shares of common
stock outstanding on the record date and entitled to vote at the Annual
Meeting.
b) The following directors were elected:
Votes in favor Against
Adrian D.P. Bellamy 256,065,121 1,338,431
John G. Bowes 256,055,453 1,348,099
Millard S. Drexler 256,001,073 1,402,479
Donald G. Fisher 256,994,083 1,409,469
Doris F. Fisher 256,999,857 1,403,695
Robert J. Fisher 256,001,021 1,402,531
Lucie J. Fjeldstad 256,061,069 1,342,483
William A. Hasler 253,808,457 3,595,095
John M. Lillie 256,000,215 1,403,337
Charles R. Schwab 256,002,073 1,401,479
Brooks Walker, Jr. 256,059,251 1,344,301
There were no abstentions and no broker non-votes.
c) The adoption of the 1996 Stock Option and Award Plan was ratified with
156,655,514 votes in favor and 85,552,653 against.
There were 15,195,385 abstentions.
d) The adoption of the Executive Long-Term Cash Award Performance Plan was
ratified with 252,004,591 votes in favor and 3,392,617 against.
There were 2,006,344 abstentions.
e) the selection of Deloitte & Touche, LLP as independent auditors for
the fiscal year ending February 1, 1997 was ratified with 256,992,328 votes
in favor and 207,548 against.
There were 203,676 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) Amendment to the Credit Agreement, dated as of June 3, 1996, 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
b) The Company did not file any reports on Form 8-K during the three
months ended August 3, 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: September 13, 1996 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of the registrant)
Date: September 13, 1996 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(10) Amendment to the Credit Agreement, dated as of June 3, 1996, 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