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 November
2, 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 ofIncorporation) (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, 279,247,842 shares as of December 13, 1996
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) November 2, February 3, October 28,
1996 1996 1995
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 477,272 $ 579,566 $ 324,182
Short-term investments 109,340 89,506 116,357
Merchandise inventory 711,934 482,575 704,847
Prepaid expenses and other 140,033 128,398 106,724
Total Current Assets 1,438,579 1,280,045 1,252,110
Property and equipment (net) 1,067,607 957,752 926,165
Long-term investments 37,966 30,370 7,059
Lease rights and other assets 84,004 74,901 101,436
Total Assets $ 2,628,156 $ 2,343,068 $ 2,286,770
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable 86,333 21,815 17,781
Accounts payable 390,206 262,505 358,394
Accrued expenses 271,418 194,426 213,942
Income taxes payable 61,432 66,094 55,934
Deferred lease credits and other current liabilities 9,829 6,904 6,784
Total Current Liabilities 819,218 551,744 652,835
Long-term Liabilities:
Deferred lease credits and other liabilities 176,712 150,851 146,260
176,712 150,851 146,260
Stockholders' Equity:
Common stock $.05 par value (a)
Authorized 500,000,000 shares
Issued 317,515,944, 315,971,306
and 315,581,574 shares
Outstanding 278,743,066, 287,747,984
and 286,972,718 shares 15,877 15,799 15,779
Additional paid-in capital (a) 420,271 335,193 324,665
Retained earnings 1,787,708 1,569,347 1,431,433
Foreign currency translation adjustment (3,036) (9,071) (6,347)
Restricted stock plan deferred compensation (42,132) (48,735) (54,392)
Treasury stock, at cost (546,462) (222,060) (223,463)
1,632,226 1,640,473 1,487,675
Total Liabilities and Stockholders' Equity $ 2,628,156 $ 2,343,068 $ 2,286,770
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 Thirty-nine Weeks Ended
Unaudited November 2, October 28, November 2, October 28,
($000 except per share amounts 1996 1995 1996 1995
Net sales $ 1,382,996 $ 1,155,929 $ 3,616,485 $ 2,873,131
Costs and expenses
Cost of goods sold and 837,775 697,879 2,257,254 1,875,331
occupancy expenses
Operating expenses 328,434 266,939 906,442 679,557
Net interest income (5,213) (2,066) (12,787) (11,345)
Earnings before income taxes 222,000 193,177 465,576 329,588
Income taxes 87,690 76,302 183,903 130,186
Net earnings $ 134,310 $ 116,875 $ 281,673 $ 199,402
Weighted average number
of shares (a) 281,746,335 288,421,718 285,302,456 288,132,568
Earnings per share (a) $ 0.48 $ 0.41 $ 0.99 $ 0.69
Cash dividends per share (a) $ 0.075 $ 0.06 $ 0.225 $ 0.18
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) Thirty-nine Weeks Ended
November 2, 1996 October 28, 1995
Cash Flows from Operating Activities:
Net earnings $281,673 $199,402
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization (a) 156,699 147,114
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 45,559 9,325
Change in operating assets and liabilities:
Merchandise inventory (226,535) (334,197)
Prepaid expenses and other (13,274) (19,567)
Accounts payable 124,472 95,925
Accrued expenses 76,493 28,526
Income taxes payable (4,893) 14,647
Deferred lease credits and other
long-term liabilities 33,973 16,541
Net cash provided by operating activities 474,167 157,716
Cash Flows from Investing Activities:
Net maturity of short-term investments 4,181 82,224
Purchase of long-term investments (31,611) -
Purchases of property and equipment (246,831) (223,024)
Acquisition of lease rights and other assets (9,880) (7,378)
Net cash used for investing activities (284,141) (148,178)
Cash Flows from Financing Activities:
Net increase (decrease) in notes payable 63,291 15,303
Issuance of common stock 28,853 7,297
Purchase of treasury stock (324,402) (72,717)
Cash dividends paid (63,312) (50,270)
Net cash used for financing activities (295,570) (100,387)
Effect of exchange rate changes on cash 3,250 544
Net decrease in cash and equivalents (102,294) (90,305)
Cash and equivalents at beginning of year 579,566 414,487
Cash and equivalents at end of quarter $477,272 $324,182
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 November 2, 1996 and
October 28, 1995, and the interim consolidated statements of
earnings and the interim consolidated statements of cash
flows for the thirteen and thirty-nine weeks ended November
2, 1996 and October 28, 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 November 2, 1996 and October 28, 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 thirty-nine weeks ended
November 2, 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 $4.0
million and $3.4 million respectively; income tax payments
were $142.7 million and $105.5 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
1111 Broadway #2100 Telephone:(510) 287-2700
Oakland, California 94607-4036 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 November 2, 1996 and October 28, 1995
and the related consolidated statements of earnings for the thirteen
and thirty-nine week periods ended November 2, 1996 and October 28,
1995 and consolidated statements of cash flows for the thirty-nine
week periods ending November 2, 1996 and October 28, 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 previous 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 and the
1996 stock option and award plan, 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
November 13, 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 Thirty-nine Weeks Ended
November October November October
2, 1996 28, 1995 2, 1996 28, 1995
Net sales ($000) 1,382,996 1,155,929 3,616,485 2,873,131
Total net sales growth 20 17 26 14
percentage
Comparable store sales 1 0 6 <2>
growth percentage
Net sales dollars per 114 111 308 290
average square foot
Average square footage of 12,166 10,430 11,736 9,908
gross store space (000)
Fifty- Fifty-two
three weeks
weeks ended
ended October
November 28, 1995
2, 1996
Number of
New stores 220 209
Expanded stores 43 61
Closed stores 43 43
The increases in third quarter and year-to-date 1996 net sales over the same
periods last year were primarily attributable to the opening of new stores
(net of stores closed) and an increase in comparable stores sales.
The increases in third quarter and year-to-date net sales per average square
foot from the same periods last year were primarily attributable to increases
in comparable stores sales aided by the smaller size of new stores.
Cost of Goods Sold and Occupancy Expenses
For the third quarter of 1996, cost of goods sold and occupancy expenses as a
percentage of net sales increased to 60.6 from 60.4 percent for the same
period in 1995. The .2 percentage point decrease in gross margin net of
occupancy expense was attributable to a 1.0 percentage point decrease in
merchandise margins offset by a .8 percentage point decrease in occupancy
expenses as a percentage of net sales. The increases in initial merchandise
margins were more than offset by declines in the percentage of merchandise
sold at regular price and in the margins achieved on marked down goods when
compared to the same period last year. The decrease in occupancy expenses as
a percentage of net sales resulted from the growth of the Old Navy division
which carries lower occupancy expenses as a percentage of net sales when
compared to other divisions.
For the year-to-date period of 1996, cost of goods sold and occupancy
expenses as a percentage of net sales decreased to 62.4 from 65.3 for the
same period in 1995. The 2.9 percentage point increase in gross margin net
of occupancy expense was attributable to a 1.5 percentage point increase in
merchandise margins and a 1.4 percentage point decrease in occupancy expenses
as a percentage of net sales. The increases in merchandise margins as a
percentage of net sales was driven by higher initial merchandise margins and
a larger percentage of merchandise sold at regular prices when compared to
the same period last year. Margins achieved on marked down goods were also
higher than last year. The decrease in occupancy expenses as a percentage of
net sales was primarily attributable to the effect of the growth of the Old
Navy division and leverage achieved through comparable store sales growth.
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 23.7 percent for
the third quarter of 1996 from 23.1 percent for the same period in 1995. The
.6 percentage point increase was primarily due to a .4 percentage point
increase in advertising/marketing costs to support the Company's brands and a
.2 percentage point increase in incentive bonus expense.
For the year-to-date period, operating expenses as a percentage of net sales
increased to 25.1 percent from 23.6 percent for the same period in 1995. The
1.5 percentage point increase was primarily attributable to a .7 percentage
point increase in incentive bonus expense and a .3 percentage point increase
in advertising to support the Company's brands.
Net Interest Income
Net interest income was $5.2 million and $12.8 million for the third quarter
and year-to-date periods respectively compared to net interest income of $2.1
million and $11.3 million for the same periods in 1995. The change in 1996
from 1995 was primarily attributable to an increase in average investments
for the quarter and year-to-date periods.
Income Taxes
The Company's effective tax rate was 39.5 percent for the first nine months
of both 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirty-nine weeks ended
November 2, October 28,
1996 1995
Cash provided by operating $474,167 $157,716
activities ($000)
Working capital ($000) $619,361 $599,275
Current ratio 1.76:1 1.92:1
For the thirty-nine weeks ended November 2, 1996, the increase in cash flows
provided by operating activities was primarily attributable to an increase in
net earnings exclusive of depreciation expense and a decreased investment in
inventory resulting from improved inventory management and a planned shift in
the receipt of holiday merchandise.
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.
The company has a credit agreement which provides for $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 $516 million
at November 2, 1996.
For the thirty-nine weeks ended November 2, 1996, capital expenditures
totaled approximately $237 million, net of disposals. These expenditures
included the addition of 157 new stores, the expansion of 32 stores and the
remodeling of certain stores resulting in a net increase in store space of
approximately 1.2 million square feet or 11% since February 3, 1996.
For 1996, the Company expects capital expenditures to total approximately
$350 million before dispositions, representing the addition of approximately
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 1996, the Company completed construction of a distribution center in
Gallatin, Tennessee for approximately $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
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 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.
In October 1996, The Board of Directors approved a program under which the
Company may repurchase up to 30 million shares of its outstanding common
stock in the open market over a three-year period. No shares were purchased
under this program during the third quarter of 1996. The program announced
in October of 1996 follows an 18 million share repurchase program which was
approved in October 1994 and completed in November 1996. Under this program,
10.8 million shares were acquired in 1996 for approximately $325 million.
The cost for the entire 18 million shares program was approximately $450
million.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(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 November 2, 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: December 13, 1996 By /s/Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of
the registrant)
Date: December 13, 1996 By /s/Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule