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 1, 1997 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)427-2000
_______________________
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, 263,791,121 shares as of December 8, 1997
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONDENSED CONSOLIDATED BALANCE SHEETS
($000) November 1, February 1, November 2,
1997 1997 1996
(Unaudited) (See Note 1) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 627,760 $ 485,644 $ 477,272
Short-term investments - 135,632 109,340
Merchandise inventory 980,531 578,765 711,934
Prepaid expenses and other 154,670 129,214 140,033
Total Current Assets 1,762,961 1,329,255 1,438,579
Property and equipment, net 1,319,462 1,135,720 1,067,607
Long-term investments - 36,138 37,966
Lease rights and other assets 142,653 125,814 84,004
Total Assets $ 3,225,076 $ 2,626,927 $ 2,628,156
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 115,245 $ 40,050 $ 86,333
Accounts payable 433,313 351,754 390,206
Accrued expenses 349,999 282,494 271,418
Income taxes payable 93,395 91,806 61,432
Deferred lease credits and other current liabilities 15,170 8,792 9,829
Total Current Liabilities 1,007,122 774,896 819,218
Long-term Liabilities:
Long-term debt 495,941 - -
Deferred lease credits and other liabilities 249,151 197,561 176,712
745,092 197,561 176,712
Stockholders' Equity:
Common stock $.05 par value:
Authorized 500,000,000 shares
Issued 318,761,298, 317,864,090
and 317,515,944 shares
Outstanding 263,441,719, 274,517,331
and 278,743,066 shares 15,938 15,895 15,877
Additional paid-in capital 495,063 442,049 420,271
Retained earnings 2,196,647 1,938,352 1,787,708
Foreign currency translation adjustments (7,790) (5,187) (3,036)
Restricted stock plan deferred compensation (43,908) (47,838) (42,132)
Treasury stock, at cost (1,183,088) (688,801) (546,462)
1,472,862 1,654,470 1,632,226
Total Liabilities and Stockholders' Equity $ 3,225,076 $ 2,626,927 $ 2,628,156
See accompanying notes to condensed consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Thirty-nine Weeks Ended
Unaudited November 1, November 2, November 1, November 2,
($000 except per share amounts) 1997 1996 1997 1996
Net sales $ 1,765,939 $ 1,382,996 $ 4,342,346 $ 3,616,485
Costs and expenses
Cost of goods sold and 1,044,673 837,775 2,716,885 2,257,254
occupancy expenses
Operating expenses 453,977 328,434 1,118,350 906,442
Net interest (income)/expense 4,052 (5,213) (2,145) (12,787)
Earnings before income taxes 263,237 222,000 509,256 465,576
Income taxes 98,714 87,690 190,971 183,903
Net earnings $ 164,523 $ 134,310 $ 318,285 $ 281,673
Weighted average number
of shares 266,784,436 281,746,335 269,982,251 285,302,456
Earnings per share $ 0.62 $ 0.48 $ 1.18 $ 0.99
Cash dividends per share $ 0.075 $ 0.075 $ 0.225 $ 0.225
See accompanying notes to condensed consolidated financial statements
THE GAP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirty-nine Weeks Ended
November 1, 1997 November 2, 1996
Cash Flows from Operating Activities:
Net earnings $ 318,285 $ 281,673
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization (a) 194,571 156,699
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 16,047 45,559
Change in operating assets and liabilities:
Merchandise inventory (401,827) (226,535)
Prepaid expenses and other (32,789) (13,274)
Accounts payable 81,647 124,472
Accrued expenses 67,138 76,493
Income taxes payable 1,598 (4,893)
Deferred lease credits and other
long-term liabilities 52,462 33,973
Net cash provided by operating activities 297,132 474,167
Cash Flows from Investing Activities:
Net maturity of short-term investments 174,709 4,181
Purchase of long-term investments (2,939) (31,611)
Purchases of property and equipment (352,745) (246,831)
Acquisition of lease rights and other assets (13,223) (9,880)
Net cash used for investing activities (194,198) (284,141)
Cash Flows from Financing Activities:
Net increase in notes payable 73,031 63,291
Issuance of long-term debt 495,890
Issuance of common stock 23,838 28,853
Purchase of treasury stock (494,287) (324,402)
Cash dividends paid (59,990) (63,312)
Net cash provided by/(used) for financing activities 38,482 (295,570)
Effect of exchange rate changes on cash 700 3,250
Net increase/(decrease) in cash and equivalents 142,116 (102,294)
Cash and equivalents at beginning of year 485,644 579,566
Cash and equivalents at end of quarter $ 627,760 $ 477,272
See accompanying notes to condensed consolidated financial statements.
(a) Includes amortization of restricted stock, discounted stock options,
and discount on long-term debt.
THE GAP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheets as of November 1, 1997 and
November 2, 1996, and the interim condensed consolidated statements of
earnings and the interim condensed consolidated statements of cash flows
for the thirteen and thirty-nine weeks ended November 1, 1997 and
November 2, 1996 have been prepared by the Company, without audit. In
the opinion of management, such statements include 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 1, 1997 and November 2, 1996, and for
all periods presented.
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 1, 1997.
The results of operations for the thirty-nine weeks ended November 1,
1997 are not necessarily indicative of the operating results that may be
expected for the year ending January 31, 1998.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1997 and 1996 gross interest payments were $4.6 million and
$4.0 million respectively; income tax payments were $174.2 million and
$142.7 million respectively.
3. DERIVATIVES
The Company enters into foreign exchange contracts to reduce exposure to
foreign currency exchange risk. These contracts are primarily designated
and effective as hedges of commitments to purchase merchandise. The
market value gains and losses on these contracts are deferred and
recognized as part of the underlying cost to purchase the merchandise.
At the end of the third quarter, the Company had various put option
contracts to repurchase up to 2,000,000 shares of Gap stock. The
contracts have exercise prices ranging from $38.74 to $52.03, with
expiration dates ranging from November 1997 through April 1998.
In the second quarter, the Company entered into interest rate swaps in
order to reduce interest rate risk on a substantial portion of its
issuance of its long-term debt. The swap agreements, which were issued
at an aggregate notional amount of $400 million, settled in the third
quarter at an interest rate of 6.7 percent. The Company is amortizing
net gains associated with these swaps of approximately $2.9 million over
the life of the debt securities.
4. RECLASSIFICATION OF INVESTMENTS
Prior to the second quarter, investments were classified as held to
maturity and were carried at amortized cost. During the second quarter
the Company sold short- and long-term debt securities prior to their
maturity. The Company used the proceeds for general corporate purposes.
Consequently, any investments held subsequent to the second quarter are
classified as available for sale and are reported at fair market value.
The gains and losses on investments are deferred and recorded in equity.
5. DEBT OBLIGATIONS
On September 17, 1997, the Company issued $500 million of 6.9 percent
unsecured notes, due September 15, 2007. Interest on the notes is
payable semi-annually. The balance of the debt obligations at November
1, 1997 is net of unamortized discount.
6. SUBSEQUENT EVENT
On November 24, 1997, the Company's Board of Directors authorized a
three-for-two split of its common stock effective December 22, 1997, in
the form of a stock dividend for stockholders of record at the close of
business on December 8, 1997.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which requires that an enterprise report, by major components and
as a single total, the change in its net assets during the period from
non-owner sources; and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these standards will not impact the Company's
consolidated financial position, results of operations or cash flows, and
any effect will be limited to the form and content of its disclosures.
Both statements are effective for fiscal years beginning after December
15, 1997, with earlier application permitted.
Deloitte &
Touche LLP
50 Fremont Street Telephone:(415) 247-4000
San Francisco, California 94105-2230 Facsimile:(415) 247-4329
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of
The Gap, Inc. and subsidiaries as of November 1, 1997 and November 2, 1996
and the related condensed consolidated statements of earnings for the
thirteen week and thirty-nine week periods ended and consolidated statements
of cash flows for the thirty-nine week periods ended November 1, 1997 and
November 2, 1996. 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 condensed 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 1, 1997, 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 27, 1997, 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 1, 1997 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it was derived.
/s/ Deloitte & Touche LLP
December 4, 1997
THE GAP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information below contains certain forward-looking statements which reflect
the Company's current view with respect to future events and financial
performance. Wherever used, the words "expect," "plan," "anticipate,"
"believe," and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties that
could cause the Company's actual results of operations to differ materially
from historical results or current expectations. Some of these risks include,
without limitation, ongoing competitive pressures in the apparel industry, a
continuation or exacerbation of the current over-capacity problem affecting the
industry, and/or changes in the level of consumer spending or preferences in
apparel, and other factors that may be described in the Company's filings with
the Securities and Exchange Commission. Future economic and industry trends
that could potentially impact revenues and profitability remain difficult to
predict.
The Company does not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make it clear that any
projected results expressed or implied therein will not be realized.
RESULTS OF OPERATIONS
Net Sales
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Net sales ($000) 1,765,939 1,382,996 4,342,346 3,616,485
Total net sales growth 28 20 20 26
Comparable store sales 9 1 4 6
growth percentage
Net sales per average 123 114 319 308
square foot ($)
Square footage of gross store 14,679 12,348
space at period end (000)
Fifty-two Fifty-three
weeks ended weeks ended
November 1, 1997 November 2, 1996
Number of:
New stores 281 220
Expanded stores 76 43
Closed stores 27 43
The increases in third quarter and year-to-date 1997 net sales over the same
periods last year were attributable to the increase in retail selling space,
both through the opening of new stores (net of stores closed) and the expansion
of existing stores. Growth in comparable store sales also contributed to the
increase.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 59.2 percent for the third quarter of 1997 from 60.6 percent for
the same period in 1996. The 1.4 percentage point increase in gross margin net
of occupancy expenses was primarily attributable to a decrease in occupancy
expenses as a percentage of net sales. Merchandise margin for the quarter was
essentially flat compared to that for the same period last year. Decreases in
initial merchandise margins were offset by increases in the percentage of
merchandise sold at regular prices.
For the year-to-date period of 1997, cost of goods sold and occupancy expenses
as a percentage of net sales increased to 62.6 percent from 62.4 percent for
the same period in 1996. The .2 percentage point decrease in gross margin net
of occupancy expenses was attributable to a .9 percentage point decrease in
merchandise margins as a percentage of net sales offset by a .7 percentage
point decrease in occupancy expenses as a percentage of net sales.
For the year-to-date period, the decreases in merchandise margins as a
percentage of net sales resulted from decreases in both initial margins and
margins achieved on marked-down goods.
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 third quarter and year-to-date period of 1997, occupancy expenses
decreased as a percentage of net sales when compared to the same periods last
year. The decrease in occupancy expenses as a percentage of net sales for both
periods was primarily attributable to leverage achieved through increases in
comparable store sales. The growth of the Old Navy division with lower
occupancy expenses when compared to other divisions also contributed to the
decrease.
Operating Expenses
Operating expenses as a percentage of net sales increased to 25.7 percent for
the third quarter of 1997 from 23.7 percent for the same period in 1996. The
2.0 percentage point increase was primarily attributable to a .8 percentage
point increase in advertising/marketing costs and a 1.0 percentage point
increase in the write-off of leasehold improvements and fixtures associated
with the remodeling, relocation and closing of certain stores planned for the
next fiscal year.
For the year-to-date period, operating expenses as a percentage of net sales
increased to 25.7 percent from 25.1 percent when compared to the same period in
1996. The .6 percentage point increase was attributable to a .7 percentage
point increase in advertising/marketing costs and a .5 percentage point
increase in the write-off of leasehold improvements and fixtures. These
expenses were partially offset by decreases in payroll expense as a percentage
of sales due to leverage from increased sales.
Net Interest Income/Expense
Net interest expense was approximately $4.1 million for the third quarter
compared to net interest income of $5.2 million for the same period in 1996.
For the year-to-date period, net interest income was $2.1 million compared to
$12.8 million for the same period in 1996. The change in 1997 from 1996 was
due to the issuance of long-term debt securities during the quarter, as well as
to a decrease in average net investments for the quarter and year-to-date
periods.
Income Taxes
The effective tax rate was 37.5 percent for year-to-date 1997 compared to 39.5
percent for the same period of 1996. The decrease in the effective tax rate
was a result of the impact from tax planning initiatives to support changing
business needs.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirty-nine weeks ended
November 1, 1997 November 2, 1996
Cash provided by operating
activities ($000) $297,132 $474,167
Working capital ($000) $755,839 $619,361
Current ratio 1.75:1 1.76:1
For the thirty-nine weeks ended November 1, 1997, the decrease in cash flows
provided by operating activities was attributable to an increased investment in
inventory and the timing of certain payables, offset in part by an increase in
net earnings and depreciation.
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 committed credit facilities totaling $950 million, consisting
of an $800 million, 364-day revolving credit facility, and a $150 million, 5-
year revolving credit facility through June 30, 2002. These credit facilities
provide for the issuance of up to $450 million in letters of credit. The
Company has additional uncommitted credit facilities of $300 million for the
issuance of letters of credit. At November 1, 1997, the Company had
outstanding letters of credit of approximately $450 million.
To provide financial flexibility, management issued $500 million of 6.9
percent, 10-year debt securities in the third quarter. The proceeds from this
issuance are intended to be used for general corporate purposes, including
store expansion, brand investment, development of additional distribution
channels and repurchases of the Company's common stock pursuant to its ongoing
repurchase program.
For the thirty-nine weeks ended November 1, 1997, capital expenditures net of
construction allowances and dispositions, totaled approximately $344 million.
These expenditures included the addition of 237 new stores, the expansion of 67
stores and the remodeling of certain stores, resulting in a net increase in
store space of approximately 2.0 million square feet or 16 percent since
February 1, 1997.
For 1997, the Company expects capital expenditures to total at least $450
million, net of construction allowances, representing the addition of at least
275 new stores, the expansion of at least 75 stores, and the remodeling of
certain stores. Planned expenditures also include amounts for corporate
offices, distribution centers, and equipment. The Company expects to fund such
capital expenditures through a combination of cash flow from operations and
other sources of financing. Square footage growth is expected to be
approximately 20 percent before store closings. New stores are generally
expected to be leased.
During the quarter, the Company completed construction of a corporate office
facility in San Bruno, California. The estimated cost of completion is
included above in the capital expenditures expected for 1997. The Company
continues to explore alternatives for additional corporate office facilities in
San Francisco and San Bruno, California.
During the quarter, the Company commenced construction on a distribution center
in Fresno, California for an estimated cost at completion of $60 million. The
majority of the expenditures for this facility will be incurred in 1998. The
facility is expected to begin operations in early 1999.
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. During the third quarter, the
Company acquired 4.8 million shares for approximately $243 million. To date
under this program, 16.8 million shares have been repurchased for approximately
$635 million.
During the year, the Company entered into various put option contracts, foreign
exchange contracts, and interest rate swaps to hedge against stock price
fluctuations, foreign currency exchange risk, and interest rate risk,
respectively. Additional information on these contracts and agreements is
presented in the Notes to Condensed Consolidated Financial Statements (Note 4).
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(4) Indenture, dated September 1, 1997, between the Registrant and Harris
Trust Company of California
(10.1) Amendment No. 5 to GapShare
(10.2) The Gap, Inc. Nonemployee Director Deferred Compensation Plan, filed
as exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Commission File No. 333-36265
(10.3) Form of Discounted Stock Option Agreement under the Nonemployee
Director Deferred Compensation Plan, filed as exhibit 4.5 to
Registrant's Registration Statement on Form S-8, Commission
File No. 333-36265
(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 1, 1997.
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 12, 1997 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of the registrant)
Date: December 12, 1997 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief
Executive Officer
EXHIBIT INDEX
(4) Indenture, dated September 1, 1997, between the Registrant and Harris
Trust Company of California
(10.1) Amendment No. 5 to GapShare
(10.2) The Gap, Inc. Nonemployee Director Deferred Compensation Plan, filed as
exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Commission File No. 333-36265
(10.3) Form of Discounted Stock Option Agreement under the Nonemployee
Director Deferred Compensation Plan, filed as exhibit 4.5 to
Registrant's Registration Statement on Form S-8, Commission File
No. 333-36265
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule