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 5, 2001 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: (650) 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 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, 859,493,042 shares as of June 2, 2001
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1
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($000 except share and par value) May 5, February 3, April 29,
2001 2001 2000
---- ---- ----
ASSETS
Current Assets:
Cash and equivalents $ 663,089 $ 408,794 $ 436,172
Merchandise inventory 2,048,822 1,904,153 1,652,049
Other current assets 350,144 335,103 315,709
---------------- ---------------- ----------------
Total Current Assets 3,062,055 2,648,050 2,403,930
Property and equipment, net 4,120,883 4,007,685 2,905,064
Lease rights and other assets 352,485 357,173 348,597
---------------- ---------------- ----------------
Total Assets $ 7,535,423 $ 7,012,908 $ 5,657,591
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 781,224 $ 779,904 $ 631,461
Current maturities of long-term debt 250,000 250,000 -
Accounts payable 912,215 1,067,207 728,121
Accrued expenses and other current liabilities 715,557 702,033 669,455
---------------- ---------------- ----------------
Total Current Liabilities 2,658,996 2,799,144 2,029,037
Long-Term Liabilities:
Long-term debt 1,270,289 780,246 769,287
Deferred lease credits and other liabilities 531,100 505,279 431,473
---------------- ---------------- ----------------
Total Long-Term Liabilities 1,801,389 1,285,525 1,200,760
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares
Issued 941,407,614; 939,222,871
and 930,924,579 shares,
Outstanding 856,199,748; 853,996,984
and 851,344,890 shares 47,070 46,961 46,546
Additional paid-in capital 338,468 294,967 140,797
Retained earnings 5,090,262 4,974,773 4,408,281
Accumulated other comprehensive earnings (losses) (32,332) (20,173) 6,013
Deferred compensation (12,577) (12,162) (22,512)
Treasury stock, at cost (2,355,853) (2,356,127) (2,151,331)
---------------- ---------------- ----------------
Total Shareholders' Equity 3,075,038 2,928,239 2,427,794
---------------- ---------------- ----------------
Total Liabilities and Shareholders' Equity $ 7,535,423 $ 7,012,908 $ 5,657,591
================ ================ ================
See accompanying notes to condensed consolidated financial statements.
2
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
- --------------------------------------------------------------------------------
Thirteen Weeks Ended
--------------------
($000 except share and per share amounts)
May 5, 2001 April 29, 2000
----------- --------------
Net sales $ 3,179,656 $ 2,731,990
Costs and expenses
Cost of goods sold and occupancy expenses 2,054,482 1,601,905
Operating expenses 920,412 750,303
Interest expense 24,038 11,529
Interest income (1,135) (2,576)
------------- -------------
Earnings before income taxes 181,859 370,829
Income taxes 66,379 135,353
------------- -------------
Net earnings $ 115,480 $ 235,476
============= =============
- ------------------------------------------------------------------------------------------
Weighted average number of shares - basic 854,333,157 850,325,670
Weighted average number of shares - diluted 875,873,227 888,020,166
Earnings per share - basic $ 0.14 $ 0.28
Earnings per share - diluted $ 0.13 $ 0.27
Cash dividends paid per share $ 0.02 /(a)/ $ 0.02 /(b)/
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
/(a)/ Represents a dividend of $0.02 per share declared in January 2001 but
paid in first quarter of fiscal 2001.
/(b)/ Represents a dividend of $0.02 per share declared in January 2000 but
paid in first quarter of fiscal 2000.
3
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
($000) Thirteen Weeks Ended
----------------------------------------------
May 5, 2001 April 29, 2000
---------------------- --------------------
Cash Flows from Operating Activities:
Net earnings $ 115,480 $ 235,476
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 196,148 132,016
Tax benefit from exercise of stock options
and vesting of restricted stock 16,537 65,912
Changes in operating assets and liabilities:
Merchandise inventory (150,422) (194,586)
Other current assets (16,154) (32,461)
Accounts payable (154,359) (71,718)
Accrued expenses 36,888 (52,006)
Income taxes payable 1,400 (36,825)
Deferred lease credits and other liabilities 20,529 (5,476)
------------------ -----------------
Net cash provided by operating activities 66,047 40,332
------------------ -----------------
Cash Flows from Investing Activities:
Net purchase of property and equipment (311,131) (321,103)
Acquisition of lease rights and other assets (4,958) (50,779)
------------------ -----------------
Net cash used for investing activities (316,089) (371,882)
------------------ -----------------
Cash Flows from Financing Activities:
Net increase in notes payable 5,174 468,252
Net issuance of long-term debt 495,886 -
Issuance of common stock 23,155 38,632
Net purchase of treasury stock - (163,266)
Cash dividends paid (18,950) (18,872)
------------------ -----------------
Net cash provided by financing activities 505,265 324,746
------------------ -----------------
Effect of exchange rate fluctuations on cash (928) (7,376)
------------------ -----------------
Net increase (decrease) in cash and equivalents 254,295 (14,180)
Cash and equivalents at beginning of year 408,794 450,352
------------------ -----------------
Cash and equivalents at end of quarter $ 663,089 $ 436,172
================== =================
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated balance sheets as of May 5, 2001 and April 29, 2000
and the interim condensed consolidated statements of earnings for the thirteen
weeks ended May 5, 2001 and April 29, 2000 and cash flows for the thirteen week
periods ended May 5, 2001 and April 29, 2000 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 5, 2001 and April 29, 2000, and for all periods
presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, 2001.
The condensed consolidated balance sheet as of February 3, 2001 was derived from
the Company's February 3, 2001 balance sheet included in the Company's 2000
Annual Report on Form 10-K.
The results of operations for the thirteen weeks ended May 5, 2001 are not
necessarily indicative of the operating results that may be expected for the
year ending February 2, 2002.
2. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include net earnings and other comprehensive earnings
(losses). Other comprehensive earnings (losses) include foreign currency
translation adjustments and fluctuations in the fair market value of certain
financial instruments. Comprehensive earnings for the thirteen weeks ended May
5, 2001 and April 29, 2000 were as follows (in thousands):
Thirteen Weeks Ended
-----------------------------------
May 5, 2001 April 29, 2000
--------------- ------------------
Net earnings $115,480 $235,476
Other comprehensive (losses) earnings (12,159) 12,772
--------------- ------------------
Comprehensive earnings $103,321 $248,248
=============== ==================
5
3. EARNINGS PER SHARE
------------------
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share
includes the dilutive effect of the Company's potentially dilutive securities,
which include certain stock options and unvested shares of restricted stock. The
following summarizes the incremental shares from these potentially dilutive
securities, calculated using the treasury stock method.
Thirteen Weeks Ended
---------------------------------------
May 5, 2001 April 29, 2000
------------------ -----------------
Weighted-average number of shares - basic 854,333,157 850,325,670
Incremental shares resulting from:
Stock options 21,406,811 36,951,619
Restricted stock 133,259 742,877
----------------- ----------------
Weighted-average number of shares - diluted 875,873,227 888,020,166
================= ================
Excluded from the above computations of weighted-average shares for diluted
earnings per share were options to purchase 27,066,303 and 2,475,924 shares of
common stock during the thirteen weeks ended May 5, 2001 and April 29, 2000,
respectively. Additionally, put options to repurchase 750,000 shares during the
thirteen weeks ended April 29, 2000 were excluded from the above computations.
Issuance or repurchase of these securities would have resulted in an
antidilutive effect on earnings per share.
4. LONG-TERM DEBT
--------------
On April 27, 2001, the Company issued $500 million of debt securities at a fixed
annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is
payable semi-annually. The notes are recorded in the balance sheet at their
issuance amount.
In connection with the debt issuance, the Company entered into interest rate
swaps in order to reduce interest rate risk. The swap agreements were settled in
the first quarter and the net losses of approximately $2.2 million associated
with these swaps will be amortized over the life of the debt securities.
6
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105-2230
Tel: (415) 783 4000
Fax: (415) 783 4329
www.us.deloitte.com
Deloitte
& Touche
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The
Gap, Inc. and subsidiaries as of May 5, 2001 and April 29, 2000, and the related
condensed consolidated statements of earnings and cash flows for the thirteen
week periods ended May 5, 2001 and April 29, 2000. 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of The
Gap, Inc. and subsidiaries as of February 3, 2001, 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 28, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of February 3, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
May 16, 2001
7
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 and
the Company's actual results of operations could 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, trade restrictions and
political or financial instability in countries where the Company's goods are
manufactured, and/or 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 are difficult to predict.
It is suggested that this document be read in conjunction with the Management's
Discussion and Analysis included in the Company's Annual Report on Form 10-K for
the year ended February 3, 2001.
The Company assumes no obligation 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 5, 2001 April 29, 2000
- --------------------------------------------------------------- --------------------------------------------
Net sales ($000) $3,179,656 $2,731,990
Total net sales growth percentage 16 20
Comparable store sales decrease percentage (7) (2)
Net sales per average square foot $ 96 $ 109
Square footage of gross store space - at end of period (000) 33,271 25,519
Number of Stores:
Beginning of Year 3,676 3,018
New stores 195 133
Expanded stores/(1)/ 55 24
Closed stores 21 6
End of Period 3,850 3,145
- --------------------------------------------------------------- --------------------------------------------
(1) Expanded stores do not change store count.
8
Store count and square footage at quarter end for fiscal 2001 and 2000 were as
follows:
May 5, 2001 April 29, 2000
- -------------------------------------------------------- --------------------------------- --------------------------------
Number of Sq. Ft. Number of Sq. Ft.
Stores (millions) Stores (millions)
- -------------------------------------------------------- ----------------- ---------------- ---------------- ----------------
Gap Domestic 2,143 12.4 1,812 10.6
Gap International 575 3.2 433 2.4
Banana Republic 415 3.3 354 2.7
Old Navy 717 14.4 546 9.8
- -------------------------------------------------------- ----------------- ---------------- ---------------- ----------------
Total 3,850 33.3 3,145 25.5
======================================================== ================= ================ ================ ================
Increase 22% 30% 22% 31%
The increase in net sales for the first quarter of fiscal 2001 over the same
period last year was 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.
The company's first quarter comparable store sales by division were as follows:
Gap Domestic had a negative mid-single digit versus a negative mid-single digit
last year, Gap International had a negative high-single digit versus a positive
mid-single digit last year, Banana Republic had a negative high-single digit
versus a positive mid-single digit last year, Old Navy had a negative
high-single digit versus a negative low-single digit last year.
The decrease in net sales per average square foot for the first quarter of
fiscal 2001 was primarily attributable to negative comparable store sales.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales increased
6.0 percentage points in the first quarter from the same period in fiscal 2000.
For the first quarter, the decrease in merchandise margin as a percentage of net
sales was primarily attributable to lower margins from regular-priced goods and
a greater percentage of merchandise sold at markdown when compared to the same
period last year. The increase in occupancy expenses as a percentage of net
sales for the first quarter was primarily attributable to negative comparable
store sales.
Operating Expenses
Operating expenses as a percentage of net sales increased 1.4 percentage points
for the first quarter of fiscal 2001, from the same period in fiscal 2000. The
increase was primarily attributable to negative comparable store sales, higher
medical costs and software maintenance costs as a percentage of net sales offset
by lower advertising costs as a percentage of net sales.
Interest Expense
The increase in interest expense in the first quarter of fiscal 2001 as compared
to the same period in fiscal 2000 was primarily due to an increase in average
borrowings.
Interest Income
The decrease in interest income in the first quarter of fiscal 2001 as compared
to the same period in fiscal 2000 was primarily due to a decrease in average
cash available for investment.
9
Income Taxes
The effective tax rate was 36.5 percent for the first quarter of fiscal 2001 and
2000.
10
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
- --------------------------------------------------------------------------------
Thirteen Weeks Ended
--------------------
May 5, 2001 April 29, 2000
- --------------------------------------------------------------------------------
Cash provided by operating activities ($000) $ 66,047 $ 40,332
Working capital ($000) $403,059 $374,893
Current ratio 1.15:1 1.18:1
- --------------------------------------------------------------------------------
For the thirteen weeks ended May 5, 2001, the increase in cash flows provided by
operating activities, compared to the same period in the prior year, was
primarily attributable to a decrease in the growth of merchandise inventory and
changes in other operating assets and liabilities which were primarily driven by
timing of certain payments. This increase was partially offset by decreases in
net earnings exclusive of depreciation and amortization and decreases in tax
benefit from the exercise of stock options and vesting of restricted stock.
The Company funds inventory expenditures during normal and peak periods through
a combination of cash flows provided by operations as well as short-term and
long-term financing arrangements. The Company's business follows a seasonal
pattern, peaking over a total of about 13 weeks during the Back-to-School and
Holiday periods.
The Company has committed credit facilities totaling $1.35 billion, consisting
of an $1.20 billion, 364-day revolving credit facility, and a $150 million, 5-
year revolving credit facility through June 27, 2005. These credit facilities
provide for the issuance of up to $600 million in letters of credit and provide
backup for the Company's $750 million commercial paper program. The Company has
additional uncommitted credit facilities of $845 million for the issuance of
letters of credit. At May 5, 2001, the Company had outstanding letters of credit
and commercial paper of approximately $927 million and $42 million,
respectively. The Company also had additional unused lines of credit of
approximately $235 million at May 5, 2001.
On April 27, 2001, the Company issued $500 million of debt securities at a fixed
annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is
payable semi-annually. The notes are recorded in the balance sheet at their
issuance amount.
In connection with the debt issuance, the Company entered into interest rate
swaps in order to reduce interest rate risk. The swap agreements were settled in
the first quarter and the net losses of approximately $2.2 million associated
with these swaps will be amortized over the life of the debt securities.
For the thirteen weeks ended May 5, 2001, capital expenditures, net of
construction allowances, totaled approximately $293 million. The majority of
these expenditures were used for expansion of the store base, headquarters and
distribution facilities. During the first quarter of fiscal 2001, the Company
experienced a net increase in store space of approximately 1.9 million square
feet, or 6 percent, due to a net addition of 174 stores, the expansion of 55
stores and the remodeling of certain stores.
For fiscal 2001, the Company expects capital expenditures to be in the range of
$1.3 to $1.4 billion, net of construction allowances. This represents the
addition of 550 to 630 new stores, the expansion of approximately 150 stores,
the remodeling of certain stores, as well as amounts for headquarter facility,
distribution centers and equipment and information technology. The Company
expects to fund such capital expenditures with cash flows from operations and
other sources of financing. Square footage growth is expected to be in the 17 to
20 percent range for fiscal 2001. In light of the lower level of new store
openings during the first quarter, the Company expects capital expenditures, new
store openings and square footage growth to fall at the lower end of these
ranges. New stores are generally expected to be leased.
11
During fiscal 1998, the Company purchased land in San Francisco to construct an
additional headquarter facility. The estimated total project cost is
approximately $240 million and approximately $55 million will be incurred during
fiscal 2001. The Company commenced construction on this facility during the
third quarter of fiscal 1998 and it was partially opened during the first
quarter of fiscal 2001. Construction is estimated to be completed by the third
quarter of fiscal 2001.
The Company commenced construction on several distribution facilities in the
second quarter and third quarter of fiscal 2000. The estimated total cost for
these facilities is approximately $455 million. Approximately one-half of the
expenditures will be incurred during fiscal 2001. The facilities are expected to
be open by the fourth quarter of fiscal 2001.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The market risk of the Company's financial instruments as of May 5, 2001 has not
significantly changed since February 3, 2001.
The market risk profile of the Company on February 3, 2001 is disclosed on the
Company's 2000 Annual Report on Form 10-K.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
a) Exhibits
(10.1) Amendment No. 6 to the 1996 Stock Option and Award Plan
(10.2) Amendment No. 3 to the Nonemployee Director Deferred
Compensation Plan
(10.3) Amendment to the Non-Qualified Stock Option Agreements
by and between The Gap, Inc. and Brooks Walker, Jr.
(10.4) Form of Non-Qualified Stock Option Agreement for
directors under the 1996 Stock Option and Award Plan
(10.5) Form of Non-Qualified Stock Option Agreement for
directors under the Nonemployee Director Deferred
Compensation Plan
(15) Letter re: Unaudited Interim Financial Information
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended May 5, 2001.
13
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 7, 2001 By /s/ Heidi Kunz
--------------------------------
Heidi Kunz
Chief Financial Officer
(Principal financial officer of
the registrant)
Date: June 7, 2001 By /s/ Millard S. Drexler
--------------------------------
Millard S. Drexler
President and Chief Executive
Officer
14
EXHIBIT INDEX
(10.1) Amendment No. 6 to the 1996 Stock Option and Award Plan
(10.2) Amendment No. 3 to the Nonemployee Director Deferred
Compensation Plan
(10.3) Amendment to the Non-Qualified Stock Option Agreements by
and between The Gap, Inc. and Brooks Walker, Jr.
(10.4) Form of Non-Qualified Stock Option Agreement for directors
under the 1996 Stock Option and Award Plan
(10.5) Form of Non-Qualified Stock Option Agreement for directors
under the Nonemployee Director Deferred Compensation Plan
(15) Letter re: Unaudited Interim Financial Information