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 2, 1998 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, 392,842,829 shares as of May 30, 1998
PART 1 GAP INC.
ITEM 1 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value) May 2, January 31, May 3,
1998 1998 1997
ASSETS
Current Assets:
Cash and equivalents $ 836,314 $ 913,169 $ 244,643
Short-term investments - - 112,268
Merchandise inventory 823,305 733,174 628,693
Prepaid expenses and other current assets 184,815 184,604 151,132
Total Current Assets 1,844,434 1,830,947 1,136,736
Property and equipment, net 1,475,099 1,365,246 1,174,003
Long-term investments - - 64,623
Lease rights and other assets 162,193 141,309 127,053
Total Assets $ 3,481,726 $ 3,337,502 $ 2,502,415
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 97,264 $ 84,794 $ 86,241
Accounts payable 376,413 416,976 296,089
Accrued expenses 438,514 389,412 213,698
Income taxes payable 71,009 83,597 58,927
Deferred lease credits and other 15,824 16,769 8,845
current liabilities
Total Current Liabilities 999,024 991,548 663,800
Long-term Liabilities:
Long-term debt 496,147 496,044 -
Deferred lease credits and other liabilities 291,999 265,924 219,973
Total Long-Term Liabilities 788,146 761,968 219,973
Shareholders' Equity:
Common stock $.05 par value
Authorized 1,500,000 shares
Issued 441,074, 439,923
and 477,831 shares
Outstanding 392,721, 393,133
and 407,086 shares 22,054 21,996 23,892
Additional paid-in capital 376,050 317,674 452,358
Retained earnings 2,509,420 2,392,750 2,002,458
Foreign currency translation adjustments (12,722) (15,230) (7,316)
Deferred compensation (36,965) (38,167) (42,897)
Treasury stock, at cost (1,163,281) (1,095,037) (809,853)
Total Shareholders' Equity 1,694,556 1,583,986 1,618,642
Total Liabilities and Shareholders' Equity $ 3,481,726 $ 3,337,502 $ 2,502,415
See accompanying notes to condensed consolidated financial statements.
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited Thirteen Weeks Ended
($000 except per share amounts)
May 2, 1998 May 3, 1997
Net sales $ 1,719,712 $ 1,231,186
Costs and expenses
Cost of goods sold and
occupancy expenses 1,031,004 789,126
Operating expenses 472,144 311,911
Net interest income (1,141) (4,738)
Earnings before income taxes 217,705 134,887
Income taxes 81,639 50,583
Net earnings $ 136,066 $ 84,304
Weighted average number of shares - basic 388,650,880 402,803,539
Weighted average number of shares - diluted 405,000,437 413,316,480
Earnings per share - basic $.35 $.21
Earnings per share - diluted $.34 $.20
Cash dividends per share $.05 $.05
See accompanying notes to condensed consolidated financial statements.
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirteen Weeks Ended
May 2, 1998 May 3, 1997
Cash Flows from Operating Activities:
Net earnings $ 136,066 $ 84,304
Adjustments to reconcile net earnings to net
provided by operating activities:
Depreciation and amortization (a) 74,801 56,659
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 42,624 7,095
Change in operating assets and liabilities:
Merchandise inventory (90,016) (51,018)
Prepaid expenses and other (2,966) (24,970)
Accounts payable (38,685) (53,912)
Accrued expenses 49,019 (68,504)
Income taxes payable (12,587) (32,800)
Deferred lease credits and other
long-term liabilities 22,440 25,218
Net cash provided by (used for) operating activities 180,696 (57,928)
Cash Flows from Investing Activities:
Net proceeds from maturity of short-term investments 0 43,747
Net purchase of long-term investments 0 (48,868)
Net purchase of property and equipment (174,156) (93,787)
Acquisition of lease rights and other assets (19,700) (378)
Net cash used for investing activities (193,856) (99,286)
Cash Flows from Financing Activities:
Net increase in notes payable 12,677 46,874
Issuance of common stock 11,191 10,870
Net purchase of treasury stock (68,244) (121,052)
Cash dividends paid (19,396) (20,198)
Net cash used for financing activities (63,772) (83,506)
Effect of exchange rate changes on cash 77 (281)
Net decrease in cash and equivalents (76,855) (241,001)
Cash and equivalents at beginning of year 913,169 485,644
Cash and equivalents at end of quarter $ 836,314 $ 244,643
See accompanying notes to condensed consolidated financial statements.
(a) Includes amortization of restricted stock, discounted stock options
and discount on long-term debt.
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheets as of May 2, 1998 and May 3,
1997 and the interim condensed consolidated statements of earnings and
cash flows for the thirteen weeks ended May 2, 1998 and May 3, 1997 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 May 2, 1998 and May 3, 1997, 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 January 31, 1998.
The condensed consolidated balance sheet as of January 31, 1998 was
derived from the Company's January 31, 1998 balance sheet included in the
1997 Annual Report.
The results of operations for the thirteen weeks ended May 2, 1998 are
not necessarily indicative of the operating results that may be expected
for the year ending January 30, 1999.
2. COMPREHENSIVE EARNINGS
During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
This Statement requires that all components of comprehensive earnings be
reported prominently in the financial statements. For the Company, other
comprehensive earnings includes only the foreign currency translation
adjustments. Total comprehensive earnings for the first quarter of 1998
and 1997 were as follows (in thousands):
Thirteen Thirteen
Weeks Ended Weeks Ended
May 2, 1998 May 3, 1997
Net earnings $136,066 $84,304
Foreign currency translation adjustments 2,508 (2,129)
Total comprehensive earnings $138,574 $82,175
3. FINANCIAL INSTRUMENTS
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 first quarter, the Company had various put option
contracts to repurchase up to 1,550,000 shares of Gap stock. The
contracts have exercise prices ranging from $34.67 to $38.37, with
expiration dates ranging from May 1998 through August 1998.
4. EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a
basic and diluted basis. The Company's granting of certain stock options
and restricted stock resulted in potential dilution of basic EPS. The
following summarizes the effects of the assumed issuance of dilutive
securities on weighted-average shares for basic EPS.
Thirteen Thirteen
Weeks Weeks
Ended Ended
May 2, 1998 May 3, 1997
Weighted-average number of shares - basic 388,650,880 402,803,539
Incremental shares from assumed
issuance of:
Stock options 13,119,936 5,863,800
Restricted stock 3,229,621 4,649,141
Weighted-average number of shares - diluted 405,000,437 413,316,480
The number of incremental shares from the assumed issuance of stock
options and restricted stock is calculated applying the treasury stock
method.
Excluded from the above computation of weighted-average shares for
diluted EPS were options to purchase 3,401,193 shares of common stock
during the first quarter of fiscal 1998 and 6,921,979 during the first
quarter of fiscal 1997. Issuance of these securities would have resulted
in an antidilutive effect on EPS.
Deloitte & 50 Fremont Street Telephone (415)247-4000
Touche LLP 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 May 2, 1998 and May 3, 1997 and the
related condensed consolidated statements of earnings and cash flows for the
thirteen- week periods ended May 2, 1998 and May 3, 1997. 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 January 31, 1998, 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, 1998, 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 31, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it was derived.
/s/ Deloitte & Touche LLP
May 12, 1998
GAP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information below contains certain forward-looking statements which
reflect the current view of Gap Inc. (the "Company") 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,
risks associated with challenging international retail environments, changes
in the level of consumer spending or preferences in apparel, and/or trade
restrictions and political or financial instability in countries where the
Company's goods are manufactured and other factors that may be described in
the Company's Annual Report on Form 10-K and/or other 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
May 2, 1998 May 3, 1997
Net sales ($000) $1,719,712 $1,231,186
Total net sales growth percentage 40 11
Comparable store sales growth percentage 17 <3>
Net sales per average square foot $109 $95
Square footage of gross store space (000) 15,975 13,163
Fifty-two Fifty-two
weeks ended weeks ended
May 2, 1998 May 3, 1997
Number of
New stores 298 230
Expanded stores 112 49
Closed stores 18 33
The total net sales growth in the first quarter of 1998 over the same period
last year was attributable primarily to the increase in retail selling space,
both through the opening of new stores (net of stores closed) and the
expansion of existing stores, as well as to the increase in comparable store
sales.
The increase in net sales per average square foot for the first quarter of
1998 was primarily attributable to increases in comparable store sales.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales
decreased to 60.0 percent for the first quarter of 1998 from 64.1 percent for
the same period in 1997. The resulting 4.1 percentage point increase in gross
margin net of occupancy expenses was attributable to a 2.7 percentage point
increase in merchandise margin as a percentage of net sales and a 1.4
percentage point decrease in occupancy expenses as a percentage of net sales.
The increase in merchandise margin as a percentage of net sales was primarily
attributable to a greater percentage of merchandise sold at regular prices
when compared to the same period last year. Margin achieved on marked-down
goods was also higher than that of last year. The decrease in occupancy
expense as a percentage of net sales was primarily attributable to leverage
achieved from the increase in comparable store sales.
The Company continually 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 were 27.4 percent for the
first quarter of 1998 compared to 25.3 percent in 1997.
The 2.1 percentage point increase was primarily attributable to a 1.1
percentage point increase in advertising/marketing costs as part of the
Company's brand development efforts. An increase in incentive bonus expense
of 1.3 percentage points also contributed to the increase. The Company
increased its rate of accrual for bonus due to the stronger earnings
performance measured against the annual target. The increase in operating
expense from advertising and bonus was partially offset by the leverage
from comparable store sales growth.
Net Interest Income/Expense
Net interest income was approximately $1.1 million for the first quarter of
1998 compared to $4.7 million for the same period last year. The decrease in
1998 was due to the interest expense related to the long-term debt securities
issued during the third quarter of 1997, a decrease in gross average
investments and a decrease in investment interest rates.
Income Taxes
The effective tax rate was 37.5 percent for both of the thirteen weeks ended
May 2, 1998 and May 3, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
Thirteen weeks ended
May 2, 1998 May 3, 1997
Cash provided by (used for) operating activities ($000) $180,696 ($57,928)
Working capital ($000) $845,410 $472,936
Current ratio 1.85:1 1.71:1
For the thirteen weeks ended May 2, 1998, the increase in cash flows provided
by operating activities was attributable to the timing of certain payables, an
increase in net earnings, and an increase in tax benefit from the vesting of
restricted stock.
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 Back-to-School
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 May 2, 1998, the Company had outstanding
letters of credit of approximately $582 million.
To provide financial flexibility, the Company issued $500 million of 6.9
percent, 10-year debt securities in fiscal 1997. The proceeds from this
issuance are being 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 thirteen weeks ended May 2, 1998, capital expenditures, net of
construction allowances and dispositions, totaled approximately $173 million.
These expenditures resulted in a net increase in store space of approximately
662,000 square feet or 4 percent due to the addition of 69 new stores, the
expansion of 31 stores and the remodeling of certain stores.
For 1998, the Company expects capital expenditures to total approximately $700
million, net of construction allowances. This represents the addition of 300
to 350 new stores, the expansion of approximately 80 to 90 stores, the
remodeling of certain stores, as well as amounts for headquarters facilities,
a distribution center, equipment and a catalogue facility for the Banana
Republic division. The Company expects to fund such capital expenditures
with cash flow from operations and other sources of financing. Square
footage growth is expected to be 18 to 20 percent before store closings.
New stores are generally expected to be leased.
To further support its growth, the Company continues to explore alternatives
for additional headquarters facilities in San Francisco and San Bruno,
California. The Company acquired the rights to purchase land in San Francisco
and acquired additional land in San Bruno.
During 1997 the Company commenced construction on a distribution center for an
estimated cost at completion of $60 million. The majority of the expenditures
for this facility will be incurred this fiscal year and is thus included in
the projected capital expenditures above. 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 45 million shares of its outstanding common stock
in the open market over a three-year period. During the first quarter, the
Company acquired 1.6 million shares for approximately $72 million. To
date under this program, 29.7 million shares have been repurchased for
approximately $816 million.
During the first quarter of 1998, the Company held various put option
contracts in connection with the share repurchase program to hedge against
stock price fluctuations. The Company also continued to enter into foreign
exchange forward contracts to reduce exposure to foreign currency exchange
risk involved in its commitments to purchase merchandise for foreign
operations. Additional information on these contracts and agreements is
presented in the Notes to Condensed Consolidated Financial Statements
(Note 3).
The Company is addressing the need to ensure that its operations will not be
adversely impacted by software or other system failures related to year 2000.
A program office was established in 1997 to coordinate the identification,
evaluation and implementation of any necessary changes to computer systems,
applications, and business processes. The costs associated with this effort
are expected to be incurred through 1999 and are not expected to have a
material impact on the results of operations, cash flows or financial
condition in any given year. However, no assurances can be given that the
Company will be able to completely identify or address all year 2000
compliance issues, or that third parties with whom the Company does
business will not experience system failures as a result of the year 2000
issues, nor can the Company fully predict the consequences of noncompliance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of the Company's financial instruments as of May 2, 1998
has not significantly changed since January 31, 1998. The market risk profile
on January 31, 1998 is disclosed in the Company's 1997 Annual Report.
PART II
OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
a) On April 28, 1998 the Annual Meeting of Stockholders of the
Company was held in San Francisco, California. There were 393,500,175
shares of common stock outstanding on the record date and entitled to vote
at the Annual Meeting.
b) The following directors were elected:
Vote For Vote Withheld
Adrian D.P. Bellamy 348,053,603 570,254
John G. Bowes 348,052,103 571,754
Millard S. Drexler 348,053,780 570,077
Donald G. Fisher 348,035,560 588,297
Doris F. Fisher 348,052,403 571,454
Robert J. Fisher 348,053,903 569,954
John M. Lillie 348,053,903 569,954
Charles R. Schwab 322,738,625 25,885,232
Brooks Walker, Jr. 348,051,953 571,904
Sergio Zyman 348,053,303 570,554
There were no abstentions and no broker non-votes.
c) The amendment to the Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock was
approved with 284,038,802 votes in favor and 64,309,322 against.
There were 213,938 abstentions and 61,794 broker non-votes.
d) The selection of Deloitte & Touche, LLP as independent auditors
for the fiscal year ending January 30, 1999 was ratified with 347,622,959
votes in favor and 796,099 against.
There were 204,799 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Certificate of Amendment of Amended and Restated
Certificate of Incorporation
(10) Amended and Restated GapShare Plan
(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 2, 1998.
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 10, 1998 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of the registrant)
Date: June 10, 1998 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(3) Certificate of Amendment of Amended and
Restated Certificate of Incorporation
(10) Amended and Restated GapShare Plan
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule