EXHIBIT 13
THE GAP, INC.
Ten-Year Selected Financial Data
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Compound Annual Growth Rate Fiscal Year
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1996 1995 1994
3-year 5-year 10-year 52 weeks 53 weeks 52 weeks
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Operating Results ($000)
Net Sales 17.0% 16.0% 20.1% $5,284,381 $4,395,253 $3,722,940
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization - - - 3,093,709 2,645,736 2,202,133
Percentage of net sales - - - 58.5% 60.2% 59.2%
Depreciation and amortization (a) - - - 191,457 175,719 148,863
Operating expenses - - - 1,270,138 1,004,396 853,524
Net interest (income) expense - - - (19,450) (15,797) (10,902)
Earnings before income taxes (b) 20.8% 15.1% 18.5% 748,527 585,199 529,322
Percentage of net sales - - - 14.2% 13.3% 14.2%
Income Taxes - - - 295,668 231,160 209,082
Net earnings 20.6% 14.5% 20.9% 452,859 354,039 320,240
Percentage of net sales - - - 8.6% 8.1% 8.6%
Cash dividends 16.5% 15.3% 23.0% 83,854 66,993 64,775
Capital expenditures (c) - - - 375,838 309,599 236,616
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Per Share Data (d)
Net earnings (e) 21.6% 14.6% 20.9% $1.60 $1.23 $1.10
Cash dividends - - - .30 .24 .23
Stockholders' equity (book value) (f) - - - 6.03 5.70 4.75
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Financial Position ($000)
Property and equipment (net) 15.3% 15.7% 25.5% $1,135,720 $957,752 $828,777
Merchandise inventory 20.5% 13.0% 14.8% 578,765 482,575 370,638
Total assets 14.2% 18.0% 21.9% 2,626,927 2,343,068 2,004,244
Working capital 3.9% 18.7% 17.4% 554,359 728,301 555,827
Current ratio - - - 1.72:1 2.32:1 2.11:1
Total debt, less current installments - - - - - -
Ratio of total debt to stockholders' equity - - - N/A N/A N/A
Stockholders' equity 13.7% 19.5% 22.8% 1,654,470 1,640,473 1,375,232
Return on average assets - - - 18.2% 16.3% 17.0%
Return on average stockholders' equity - - - 27.5% 23.5% 25.6%
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Statistics
Number of stores opened 23.4% 7.9% 9.0% 203 225 172
Number of stores expanded - - - 42 55 82
Number of stores closed - - - 30 53 34
Number of stores open at year-end (g) 10.6% 8.8% 9.9% 1,854 1,680 1,508
Net increase in number of stores - - - 10.4% 11.4% 10.1%
Comparable store sales growth (52-week basis) - - - 5.0% 0.0% 1.0%
Sales per square foot (52-week basis) (h) - - - $441 $425 $444
Square footage of gross store space at year-end 18.8% 17.5% 14.1% 12,645,000 11,100,200 9,165,900
Percentage increase in square feet - - - 13.9% 21.1% 21.5%
Number of employees at year-end 14.5% 15.6% 18.6% 66,000 60,000 55,000
Weighted average number of shares outstanding (d) - - - 283,330,290 288,062,430 291,141,076
Number of shares outstanding
at year end, net of treasury stock (d) - - - 274,517,931 287,747,984 289,529,498
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Fiscal Year
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1993 1992 1991 1990
52 weeks 52 weeks 52 weeks 52 weeks
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Operating Results ($000)
Net Sales $3,295,679 $2,960,409 $2,518,893 $1,933,780
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 1,996,929 1,856,102 1,496,156 1,187,644
Percentage of net sales 60.6% 62.7% 59.4% 61.4%
Depreciation and amortization (a) 124,860 99,451 72,765 53,599
Operating expenses 748,193 661,252 575,686 454,180
Net interest (income) expense 809 3,763 3,523 1,435
Earnings before income taxes (b) 424,888 339,841 370,763 236,922
Percentage of net sales 12.9% 11.5% 14.7% 12.3%
Income Taxes 166,464 129,140 140,890 92,400
Net earnings 258,424 210,701 229,873 144,522
Percentage of net sales 7.8% 7.1% 9.1% 7.5%
Cash dividends 53,041 44,106 41,126 29,625
Capital expenditures (c) 215,856 213,659 244,323 199,617
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Per Share Data (d)
Net earnings (e) $ .89 $ .73 $ .81 $ .51
Cash dividends .19 .16 .15 .11
Stockholders' equity (book value) (f) 3.88 3.08 2.38 1.65
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Financial Position ($000)
Property and equipment (net) $740,422 $650,368 $547,740 $383,548
Merchandise inventory 331,155 365,692 313,899 247,462
Total assets 1,763,117 1,379,248 1,147,414 776,900
Working capital 494,194 355,649 235,537 101,518
Current ratio 2.07:1 2.06:1 1.71:1 1.39:1
Total debt, less current installments 75,000 75,000 80,000 17,500
Ratio of total debt to stockholders' equity .07:1 .08:1 .12:1 .04:1
Stockholders' equity 1,126,475 887,839 677,788 465,733
Return on average assets 16.4% 16.7% 23.9% 21.3%
Return on average stockholders' equity 25.7% 26.9% 40.2% 36.0%
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Statistics
Number of stores opened 108 117 139 152
Number of stores expanded 130 94 79 56
Number of stores closed 45 26 15 20
Number of stores open at year-end (g) 1,370 1,307 1,216 1,092
Net increase in number of stores 4.8% 7.5% 11.4% 13.8%
Comparable store sales growth (52-week basis) 1.0% 5.0% 13.0% 14.0%
Sales per square foot (52-week basis) (h) $463 $489 $481 $438
Square footage of gross store space at year-end 7,546,300 6,509,200 5,638,400 4,762,300
Percentage increase in square feet 15.9% 15.4% 18.4% 17.4%
Number of employees at year-end 44,000 39,000 32,000 26,000
Weighted average number of shares outstanding (d) 289,682,274 287,345,848 284,279,154 283,001,776
Number of shares outstanding
at year end, net of treasury stock (d) 290,497,456 288,370,476 285,046,668 282,528,060
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Fiscal Year
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1989 1988 1987
53 weeks 52 weeks 52 weeks
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Operating Results ($000)
Net Sales $1,586,596 $1,252,097 $1,062,021
Cost of goods sold and occupancy expenses,
excluding depreciation and amortization 1,006,647 814,028 654,361
Percentage of net sales 63.4% 65.0% 61.6%
Depreciation and amortization (a) 39,589 31,408 24,869
Operating expenses 364,101 277,429 254,209
Net interest (income) expense 2,760 3,416 3,860
Earnings before income taxes (b) 162,714 125,816 124,722
Percentage of net sales 10.3% 10.0% 11.7%
Income Taxes 65,086 51,585 55,127
Net earnings 97,628 74,231 69,595
Percentage of net sales 6.2% 5.9% 6.6%
Cash dividends 22,857 18,244 17,328
Capital expenditures (c) 94,266 68,153 67,307
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Per Share Data (d)
Net earnings (e) $ .35 $ .26 $ .24
Cash dividends .09 .07 .06
Stockholders' equity (book value) (f) 1.20 .98 .95
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Financial Position ($000)
Property and equipment (net) $238,103 $191,257 $156,639
Merchandise inventory 243,482 193,268 194,886
Total assets 579,483 481,148 434,231
Working capital 129,139 106,210 129,988
Current ratio 1.69:1 1.70:1 2.01:1
Total debt, less current installments 20,000 22,000 18,500
Ratio of total debt to stockholders' equity .06:1 .08:1 .05:1
Stockholders' equity 337,972 276,399 272,912
Return on average assets 18.4% 16.2% 17.4%
Return on average stockholders' equity 31.8% 27.0% 28.7%
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Statistics
Number of stores opened 98 106 110
Number of stores expanded 7 N/A N/A
Number of stores closed 38 21 19
Number of stores open at year-end (g) 960 900 815
Net increase in number of stores 6.7% 10.4% 12.6%
Comparable store sales growth (52-week basis) 15.0% 8.0% 9.0%
Sales per square foot (52-week basis) (h) $389 $328 $292
Square footage of gross store space at year-end 4,056,600 3,879,300 3,644,500
Percentage increase in square feet 4.6% 6.4% 8.0%
Number of employees at year-end 23,000 20,000 16,000
Weighted average number of shares outstanding (d) 282,160,400 289,178,240 285,836,104
Number of shares outstanding
at year end, net of treasury stock (d) 281,102,808 281,050,912 286,959,704
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(a) Excludes amortization of restricted stock.
(b) 1989 includes a non-recurring pretax charge of $10,785 ($.02 per share
after tax) taken in the fourth quarter for costs associated with closing
the Hemisphere stores. 1988 includes a non-recurring pretax charge of
$6,800 ($.01 per share after tax) taken in the first quarter for costs
associated with the restructuring of Banana Republic's operations.
(c) Includes property and equipment, as well as lease rights.
(d) Reflects the two-for-one splits of common stock in the form of a stock
dividend to stockholders of record on March 18, 1996, June 17, 1991,
September 17, 1990 and June 30, 1986.
(e) Based on weighted-average number of shares outstanding at year-end.
(f) Based on actual number of shares outstanding at year-end.
(g) Includes the conversion of a GapKids department to its own separate store.
Converted stores are not classified as new stores.
(h) Based on weighted average monthly gross square footage.
THE GAP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
Net Sales
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Fiscal Year Ended
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Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
52 Weeks 53 Weeks 52 Weeks
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Net sales ($000) $5,284,381 $4,395,253 $3,722,940
Total net sales growth
percentage 20 18 13
Comparable store sales
growth percentage 5 0 1
(52-week basis)
Net sales per average gross 441 425 444
square foot (52-week basis)
Square footage of gross 12,645 11,100 9,166
store space (000)
Number of:
New stores 203 225 172
Expanded stores 42 55 82
Closed stores 30 53 34
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The total net sales growth reflected above for 1996, 1995, and 1994 was
attributable to the opening of new stores (net of stores closed), the expansion
of existing stores, and in 1996, to an increase in comparable store sales.
During 1995, an additional week of operations compared to fiscal 1994
contributed one percent to sales growth.
Net sales per average square foot were $441 in 1996, $425 in 1995, and $444 in
1994. The increase in net sales per average square foot in 1996 compared to
1995 was primarily attributable to increases in comparable stores sales aided by
the smaller size of new stores. The decline in net sales per average square
foot in 1995 compared to 1994 was primarily attributable to continued store
growth in the Old Navy division, with lower priced merchandise and significantly
larger stores, and to increases in the average size of new stores in other
divisions in connection with the Company's store expansion program. During
1995, the Company increased the average size of its new stores and expanded
existing stores as a long-term investment.
COST OF GOODS SOLD AND OCCUPANCY EXPENSES
Cost of goods sold and occupancy expenses as a percentage of net sales were 62.2
percent in 1996, 64.2 percent in 1995, and 63.2 percent in 1994.
The resulting 2.0 percentage point increase in gross margin net of occupancy
expenses in 1996 from 1995 was attributable to a 1.2 percentage point increase
in merchandise margin as a percentage of net sales combined with a .8 percentage
point decrease in occupancy expenses as a percentage of net sales. The increase
in merchandise margin in
1996 from 1995 was driven by increases in initial merchandise margin and in the
percentage of merchandise sold at regular price.
The 1.0 percentage point decrease in gross margin net of occupancy expenses in
1995 from 1994 was attributable to a 1.2 percentage point decrease in
merchandise margin as a percentage of net sales offset by a .2 percentage point
decrease in occupancy expenses as a percentage of net sales. The decrease in
merchandise margin in 1995 from 1994 was driven by a decline in initial
merchandise margin in the first three quarters partially offset by better
regular-priced selling in the second half.
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 markdown
and the amount of inventory affected.
The decrease in occupancy expenses as a percentage of net sales between 1996 and
1995 was primarily attributable to the effect of the growth of the Old Navy
division, which carries lower occupancy expenses as a percentage of net sales
when compared to other divisions, and leverage achieved through comparable store
sales growth.
The decrease in occupancy expenses as a percentage of net sales between 1995 and
1994 was attributable to leverage obtained from the 53rd week of sales. Without
this extra week, occupancy expenses as a percentage of net sales would have been
essentially flat.
OPERATING EXPENSES
Operating expenses as a percentage of net sales were 24.0 percent for 1996 and
22.9 percent for 1995 and 1994.
During 1996, the 1.1 percentage point increase was primarily attributable to a
planned .3 percentage point increase in advertising/marketing costs to support
the Company's brands and a .5 percentage point increase in incentive bonus
expense. The Company awarded bonuses for 1996 due to strong earnings
performance measured against annual targets.
During 1995, a .3 percentage point increase in advertising costs as a percentage
of net sales was offset by a .4 percentage point decrease in bonus expense as a
percentage of net sales. Advertising costs increased to support the Company's
brands and included marketing expense related to the opening of stores in
Germany, Japan, and the Old Navy store in Manhattan. Due to the Company's
performance relative to financial targets, less bonus expense was recognized in
1995 as compared to 1994.
NET INTEREST INCOME
Net interest income was $19.5, $15.8, and $10.9 million for 1996, 1995, and
1994, respectively. The change in 1996 from 1995 was primarily attributable to
an increase in gross average investments. The change in 1995 from 1994 was
attributable to an increase in income from higher average interest rates.
INCOME TAXES
The effective tax rate was 39.5 percent in 1996 , 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
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Fiscal Year
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1996 1995 1994
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Cash provided by operating
activities ($000) $834,953 $489,087 $504,450
Working capital ($000) 554,359 728,301 555,827
Current ratio 1.72:1 2.32:1 2.11:1
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For the fiscal year ended February 1, 1997, the increase in cash provided by
operating activities was attributable to an increase in net earnings exclusive
of depreciation and the timing of certain year-end payables and accrued
expenses. For the fiscal year ended February 3, 1996, the decrease in cash
provided by operating activities was attributable to an increased investment in
inventory partially offset by a decrease in income tax payments. Merchandise
inventories at February 3, 1996 increased primarily as a result of new products,
new store growth, and early receipt of Spring merchandise to accommodate a one-
week shift in the Spring selling season.
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.
During 1996 and 1995, these periods accounted for approximately 33 and 34
percent, respectively, of the Company's annual sales.
The Company has a credit agreement which provides for a $250 million revolving
credit facility through June 30, 2001. In addition, the credit agreement
provides for the issuance of letters of credit on a committed basis up to $450
million at any one time. The Company has arrangements providing for the
issuance of letters of credit on an uncommitted basis of up to an additional
$200 million at any one time. The Company had outstanding letters of credit of
approximately $429 million at February 1, 1997.
Capital expenditures, net of construction allowances and dispositions, totaled
approximately $359 million in 1996. These expenditures resulted in a net
increase in store space of approximately 1.5 million square feet or 14 percent
due to the addition of 203 new stores, the expansion of 42 stores, and the
remodeling of certain stores. Capital expenditures for 1995 and 1994 were $291
million and $220 million, respectively, resulting in a net increase in store
space of approximately 1.9 million square feet or 21 percent in 1995, and
approximately 1.6 million square feet or 21 percent in 1994. Expenditures in
1996, 1995, and 1994 also included costs for equipment.
The increase in capital expenditures in 1996 from 1995 was primarily
attributable to the construction of two distribution centers and an
administrative facility. The increase in capital expenditures in 1995 from 1994
was due to an increase in the number of stores opened and expanded.
Expenditures in 1996, 1995 and 1994 also included costs for equipment.
For 1997, the Company expects capital expenditures to total approximately $400
to $450 million, net of construction allowances, representing the addition of at
least 275 new stores, the expansion of approximately 65 to 75 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 18 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 fiscal
1997.
On February 27, 1996, the Company's Board of Directors authorized a two-for-one
split of its common stock effective by a distribution on April 10, 1996, in the
form of a stock dividend for 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. During 1996, 4.7 million shares
were repurchased for $140 million. The program announced in October 1996
follows an earlier 18 million share repurchase program, which was completed in
November 1996. Under this program, 10.9 million shares were acquired in fiscal
1996 for approximately $329 million. The cost for the entire 18 million share
repurchase program was approximately $450 million.
PER SHARE DATA
Market Prices Cash Dividends
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Fiscal 1996 1995 1996 1995
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High Low High Low
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1st Quarter $30 1/2 $23 1/5 $17 3/4 $15 3/8 $.075 $ .06
2nd Quarter 36 1/8 27 1/4 18 3/4 14 7/8 .075 .06
3rd Quarter 36 1/2 26 20 1/4 15 7/8 .075 .06
4th Quarter 33 1/2 27 7/8 25 1/2 19 1/4 .075 .06
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Year $.30 $ .24
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The information above has been adjusted to reflect the two-for-one split of
common stock in the form of a stock dividend to stockholders of record on March
18, 1996.
The principal markets on which the Company's stock is traded are the New York
and Pacific Stock Exchanges. The number of holders of record of the Company's
stock as of March 24, 1997 was 6,785.
THE GAP, INC.
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
Management is responsible for the integrity and consistency of all financial
information presented in the Annual Report. The financial statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include certain amounts based on Management's best estimates and
judgments.
In fulfilling its responsibility for the reliability of financial information,
Management has established and maintains accounting systems and procedures
appropriately supported by internal accounting controls. Such controls include
the selection and training of qualified personnel, an organizational structure
providing for division of responsibility, communication of requirement for
compliance with approved accounting control and business practices, and a
program of internal audit. The extent of the Company's system of internal
accounting control recognizes that the cost should not exceed the benefits
derived and that the evaluation of those factors requires estimates and
judgments by Management. Although no system can ensure that all errors or
irregularities have been eliminated, Management believes that the internal
accounting controls in use provide reasonable assurance, at reasonable cost,
that assets are safeguarded against loss from unauthorized use or disposition,
that transactions are executed in accordance with Management's authorization,
and that the financial records are reliable for preparing financial statements
and maintaining accountability for assets. The financial statements of the
Company have been audited by Deloitte & Touche LLP, independent auditors. Their
report, which appears below, is based upon their audits conducted in accordance
with generally accepted auditing standards.
The Audit and Finance Committee of the Board of Directors is comprised solely of
directors who are not officers or employees of the Company. The Committee is
responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with Management, the independent
auditors, and the internal auditors to assure that they are carrying out their
responsibilities. The Committee also reviews and monitors the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. Deloitte & Touche LLP and the internal auditors
have full and free access to the Audit and Finance Committee, with and without
Management's presence.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of The Gap, Inc.
We have audited the accompanying consolidated balance sheets of The Gap, Inc.
and subsidiaries as of February 1, 1997 and February 3, 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended February 1, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of February 1, 1997 and February 3, 1996, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
February 1, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 27, 1997
THE GAP, INC.
Consolidated Statements of Earnings
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Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) February 1, 1997 February 3, 1996 January 28, 1995
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Net sales $ 5,284,381 100.0% $ 4,395,253 100.0% $ 3,722,940 100.0%
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Costs and expenses
Cost of goods sold and
occupancy expenses 3,285,166 62.2% 2,821,455 64.2% 2,350,996 63.2%
Operating expenses 1,270,138 24.0% 1,004,396 22.9% 853,524 22.9%
Net interest income (19,450) (0.4%) (15,797) (0.4%) (10,902) (0.3%)
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Earnings before income taxes 748,527 14.2% 585,199 13.3% 529,322 14.2%
Income taxes 295,668 5.6% 231,160 5.2% 209,082 5.6%
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Net earnings $ 452,859 8.6% $ 354,039 8.1% $ 320,240 8.6%
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Weighted average
number of shares (a) 283,330,290 288,062,430 291,141,076
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Earnings per share (a) $ 1.60 $ 1.23 $ 1.10
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See 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.
Consolidated Balance Sheets
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($000) February 1, 1997 February 3, 1996
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Assets
Current Assets
Cash and equivalents $ 485,644 $ 579,566
Short-term investments 135,632 89,506
Merchandise inventory 578,765 482,575
Prepaid expenses and other current assets 129,214 128,398
------------------------------
Total Current Assets 1,329,255 1,280,045
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Property and Equipment
Leasehold improvements 836,577 736,879
Furniture and equipment 960,516 763,673
Construction-in-progress 101,520 62,030
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1,898,613 1,562,582
Accumulated depreciation and amortization (762,893) (604,830)
------------------------------
1,135,720 957,752
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Long-term investments 36,138 30,370
Lease rights and other assets 125,814 74,901
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Total Assets $2,626,927 $2,343,068
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Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 40,050 $ 21,815
Accounts payable 351,754 262,505
Accrued expenses 282,494 194,426
Income taxes payable 91,806 66,094
Deferred lease credits and other current liabilities 8,792 6,904
------------------------------
Total Current Liabilities 774,896 551,744
------------------------------
Long-Term Liabilities
Deferred lease credits and other liabilities 197,561 150,851
Stockholders' Equity
Common stock $.05 par value (a)
Authorized 500,000,000 shares; issued 317,864,090
and 315,971,306 shares; outstanding 274,517,331
and 287,747,984 shares 15,895 15,799
Additional paid-in capital (a) 442,049 335,193
Retained earnings 1,938,352 1,569,347
Foreign currency translation adjustment (5,187) (9,071)
Restricted stock plan deferred compensation (47,838) (48,735)
Treasury stock, at cost (688,801) (222,060)
------------------------------
1,654,470 1,640,473
------------------------------
Total Liabilities and Stockholders' Equity $2,626,927 $2,343,068
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See 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.
Consolidated Statements of Cash Flows
($000)
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Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 1, 1997 February 3, 1996 January 28, 1995
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Cash Flows from Operating Activities
Net earnings $ 452,859 $ 354,039 $ 320,240
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization (a) 214,905 197,440 168,220
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 47,348 11,444 19,384
Deferred income taxes (28,897) (2,477) (24,431)
Change in operating assets and liabilities
Merchandise inventory (93,800) (113,021) (39,860)
Prepaid expenses and other (16,355) (15,278) (10,989)
Accounts payable 88,532 1,183 46,031
Accrued expenses 87,974 9,427 21,953
Income taxes payable 25,706 24,806 (29,241)
Deferred lease credits and other long-term liabilities 56,681 21,524 33,143
--------------------------------------------------
Net cash provided by operating activities 834,953 489,087 504,450
--------------------------------------------------
Cash Flows from Investing Activities
Net maturity (purchase) of short-term investments (11,774) 116,134 (36,474)
Purchase of long-term investments (40,120) (30,370) (85,669)
Purchase of property and equipment (371,833) (302,260) (232,776)
Acquisition of lease rights and other assets (12,206) (6,623) (4,938)
--------------------------------------------------
Net cash used for investing activities (435,933) (223,119) (359,857)
--------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in notes payable 18,445 20,787 (4,583)
Payment on long-term debt - - (75,000)
Issuance of common stock 37,053 17,096 12,849
Net purchase of treasury stock (466,741) (71,314) (58,292)
Cash dividends paid (83,854) (66,993) (64,775)
--------------------------------------------------
Net cash used for financing activities (495,097) (100,424) (189,801)
--------------------------------------------------
Effect of exchange rate changes on cash 2,155 (465) (637)
--------------------------------------------------
Net increase (decrease) in cash and equivalents (93,922) 165,079 (45,845)
Cash and equivalents at beginning of year 579,566 414,487 460,332
--------------------------------------------------
Cash and equivalents at end of year $ 485,644 $ 579,566 $ 414,487
--------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(a) Includes amortization of restricted stock
THE GAP, INC.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Common Stock/(a)/ Additional
--------------------- Paid-in Retained
($000 except per share amounts) Shares Amount Capital/(a)/ Earnings
- ---------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1994 311,466,512 $15,573 $232,869 $1,026,836
--------------------------------------------------
Issuance of common stock pursuant to stock option plans 1,249,612 63 10,842
Net issuance of common stock pursuant to management incentive
restricted stock plans 1,229,430 61 27,470
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 19,384
Foreign currency translation adjustment
Amortization of restricted stock
Purchase of treasury stock
Net earnings 320,240
Cash dividends ($.23 per share) (64,775)
--------------------------------------------------
Balance at January 28, 1995 313,945,554 $15,697 $290,565 $1,282,301
--------------------------------------------------
Issuance of common stock pursuant to stock option plans 994,372 50 9,616
Net issuance of common stock pursuant to management incentive
restricted stock plans 1,031,380 52 19,556
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 11,444
Foreign currency translation adjustment
Amortization of restricted stock
Purchase of treasury stock
Reissuance of treasury stock 4,012
Net earnings 354,039
Cash dividends ($.24 per share) (66,993)
--------------------------------------------------
Balance at February 3, 1996 315,971,306 $15,799 $335,193 $1,569,347
--------------------------------------------------
Issuance of common stock pursuant to stock option plans 1,591,174 81 19,732
Net issuance of common stock pursuant to management incentive
restricted stock plans 301,610 15 32,807
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 47,348
Foreign currency translation adjustment
Amortization of restricted stock
Purchase of treasury stock
Reissuance of treasury stock 6,969
Net earnings 452,859
Cash dividends ($.30 per share) (83,854)
--------------------------------------------------
Balance at February 1, 1997 317,864,090 $15,895 $442,049 $1,938,352
--------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Restricted
Currency Stock Plan Treasury Stock/(a)/
Translation Deferred ---------------------
($000 except per share amounts) Adjustment Compensation Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1994 ($8,314) ($48,035) (20,969,056) ($ 92,454) $1,126,475
---------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 10,905
Net issuance of common stock pursuant to management incentive
restricted stock plans (25,587) 1,944
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 19,384
Foreign currency translation adjustment (6) (6)
Amortization of restricted stock 19,357 19,357
Purchase of treasury stock (3,447,000) (58,292) (58,292)
Net earnings 320,240
Cash dividends ($.23 per share) (64,775)
---------------------------------------------------------------
Balance at January 28, 1995 ($8,320) ($54,265) (24,416,056) (150,746) $1,375,232
---------------------------------------------------------------
Issuance of common stock pursuant to stock option plans 9,666
Net issuance of common stock pursuant to management incentive
restricted stock plans (16,191) 3,417
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 11,444
Foreign currency translation adjustment (751) (751)
Amortization of restricted stock 21,721 21,721
Purchase of treasury stock (4,192,800) (72,717) (72,717)
Reissuance of treasury stock 385,534 1,403 5,415
Net earnings 354,039
Cash dividends ($.24 per share) (66,993)
---------------------------------------------------------------
Balance at February 3, 1996 ($9,071) ($48,735) (28,223,322) ($222,060) $1,640,473
---------------------------------------------------------------
Issuance of common stock pursuant to stock option plans (9,648) 10,165
Net issuance of common stock pursuant to management incentive
restricted stock plans (12,903) 19,919
Tax benefit from exercise of stock options by employees and from
vesting of restricted stock 47,348
Foreign currency translation adjustment 3,884 3,884
Amortization of restricted stock 23,448 23,448
Purchase of treasury stock (15,523,100) (468,246) (468,246)
Reissuance of treasury stock 399,663 1,505 8,474
Net earnings 452,859
Cash dividends ($.30 per share) (83,854)
---------------------------------------------------------------
Balance at February 1, 1997 ($5,187) ($47,838) ($43,346,759) ($688,801) $1,654,470
---------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
See 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fifty-two Weeks ended February 1, 1997, the Fifty-three Weeks ended
February 3, 1996 and the Fifty-two Weeks ended January 28, 1995.
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is an international specialty retailer which operates stores selling
casual apparel, shoes, and other accessories for men, women, and children under
a variety of brand names including: Gap, GapKids, babyGap, Banana Republic, and
Old Navy Clothing Co. Its principal markets consist of the United States,
Canada, Europe, and Asia with the United States being the most significant.
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 at the close of business on March 18, 1996.
Per share amounts in the accompanying consolidated financial statements give
effect to the stock split.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and equivalents represent cash and short-term, highly liquid investments
with original maturities of three months or less.
Short-term investments include investments with an original maturity of greater
than three months or a remaining maturity of less than one year. Long-term
investments include investments with an original and remaining maturity of
greater than one year and less than five years. The Company's short- and long-
term investments consist primarily of debt securities which have been classified
as held to maturity and are carried at amortized cost, which approximates fair
market value.
Merchandise inventory is stated at the lower of FIFO (first-in, first-out) cost
or market.
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets or lease terms, whichever is less.
Lease rights are recorded at cost and are amortized over 12 years or the lives
of the respective leases, whichever is less.
Costs associated with the opening or remodeling of stores, such as pre-opening
rent and payroll, are charged to expense as incurred. The net book value of
fixtures and leasehold improvements for stores scheduled to be closed or
expanded within the next fiscal year is charged against current earnings. The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of, as of January 29, 1995. The adoption of SFAS No. 121 had no
material effect on the Company's consolidated financial statements.
Costs associated with the production of advertising, such as writing copy,
printing, and other costs, are charged to expense when incurred. Costs
associated with communicating advertising that has been produced, such as
magazine and billboard space, are charged to expense when the advertising first
takes place. Advertising costs were $96 million, $64 million, and $44 million
in fiscal 1996, 1995, and 1994, respectively.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements.
Translation adjustments result from the process of translating foreign
subsidiaries' financial statements into U.S. dollars. Balance sheet accounts
are translated at exchange rates in effect at the balance sheet date. Income
statement accounts are translated at average exchange rates during the year.
Resulting translation adjustments are included in stockholders' equity.
Restricted stock awards represent deferred compensation and are shown as a
reduction of stockholders' equity. The Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, as of February 4, 1996. The Company elected to
continue the intrinsic value-based method under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and has provided
pro forma disclosures of net earnings and earnings per share in accordance with
the provisions of SFAS No. 123.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 requires dual presentation of basic earnings
per share (EPS) and diluted EPS on the face of all statements of earnings issued
after December 15, 1997, for all entities with complex capital structures.
Basic EPS is computed as net earnings divided by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock-based
compensation including stock options, restricted stock awards, warrants, and
other convertible securities. The Company does not anticipate the effect on
earnings per share to be material.
Earnings per share are based upon the weighted-average number of shares of
common stock outstanding during the period.
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 financial statements.
NOTE B: DEBT AND OTHER CREDIT ARRANGEMENTS
The Company has a credit agreement with a syndicated bank group which provides
for a $250 million revolving credit facility until June 30, 2001. The revolving
credit facility contains both auction and fixed spread borrowing options and may
serve as support for the Company's commercial paper program. In addition, the
credit agreement provides, on a committed basis, for the issuance of letters of
credit through July 1, 1997 of up to $450 million at any one time.
At February 1, 1997, the Company had outstanding letters of credit, including
committed and uncommitted lines of credit, totaling $428,600,000.
Borrowings under the Company's loan and credit agreements are subject to the
Company maintaining certain levels of tangible net worth and financial ratios.
Under the most restrictive covenant of these agreements, $1,074,062,000 of
retained earnings were available for the payment of cash dividends at February
1, 1997.
Gross interest payments were $2,800,000, $2,274,000, and $7,032,000 in fiscal
1996, 1995, and 1994, respectively.
NOTE C: INCOME TAXES
Income taxes consisted of the following:
- -----------------------------------------------------------------------------------
Fifty-two Fifty-three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
($000) Feb.1, 1997 Feb.3, 1997 Jan. 28,1995
- -----------------------------------------------------------------------------------
Currently Payable
Federal income taxes $269,648 $180,597 $182,811
Less tax credits (3,585) (4,397) (12,692)
----------------------------------------------
266,063 176,200 170,119
State income taxes 36,167 40,111 45,807
Foreign income taxes 22,335 17,348 17,587
----------------------------------------------
324,565 233,659 233,513
----------------------------------------------
Deferred
Federal (23,980) (7,169) (19,911)
State (4,917) 4,670 (4,520)
----------------------------------------------
(28,897) (2,499) (24,431)
----------------------------------------------
Total provision 295,668 $231,160 $209,082
- -----------------------------------------------------------------------------------
The foreign component of pretax earnings before eliminations and corporate
allocations in fiscal 1996, 1995, and 1994 was $82,220,000, $71,545,000, and
$66,701,000, respectively. Deferred federal and applicable state income taxes,
net of applicable foreign tax credits, have not been provided for the
undistributed earnings of foreign subsidiaries (approximately $123,489,000 at
February 1, 1997) because the Company intends to permanently reinvest such
undistributed earnings abroad.
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
- -----------------------------------------------------------------------
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
Feb. 1, 1997 Feb. 3, 1997 Jan. 28, 1997
- -----------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 35.0%
State income taxes, 4.4 5.0 5.1
less federal benefit
Other .1 (.5) (.6)
- -----------------------------------------------------------------------
Effective tax rate 39.5% 39.5% 39.5%
- -----------------------------------------------------------------------
Deferred tax assets (liabilities) consisted of the following at February 1, 1997
and February 3, 1996:
- ----------------------------------------------------------------
($000) Feb. 1, 1997 Feb. 3, 1996
- ----------------------------------------------------------------
Compensation and
benefits accruals $ 31,640 $ 28,872
Scheduled rent 40,834 34,077
Inventory capitalization 16,459 13,243
Nondeductible accruals 18,705 17,011
Other 24,224 10,022
-------------------------------
Gross deferred tax assets 131,862 103,225
-------------------------------
Depreciation (13,611) (14,318)
Other (5,404) (4,957)
-------------------------------
Gross deferred tax liabilities (19,015) (19,275)
-------------------------------
Net deferred tax assets $112,847 $ 83,950
- ----------------------------------------------------------------
Income tax payments were $249,968,000, $197,802,000, and $232,869,000 in fiscal
1996, 1995, and 1994, respectively.
NOTE D: LEASES
The Company leases virtually all of its store premises, office facilities, and
some of its distribution centers.
Leases relating to store premises, distribution centers, and office facilities
expire at various dates through 2035. The aggregate minimum annual lease
payments under leases in effect on February 1, 1997 are as follows:
- ----------------------------------------------
Fiscal Year ($000)
- ----------------------------------------------
1997 $ 335,774
1998 330,712
1999 324,824
2000 318,642
2001 311,492
Thereafter 1,740,731
- ----------------------------------------------
Total minimum lease commitment $3,362,175
- ----------------------------------------------
For leases that contain predetermined fixed escalations of the minimum rentals,
the Company recognizes the related rental expense on a straight-line basis and
records the difference between the recognized rental expense and amounts payable
under the leases as deferred lease credits. At February 1, 1997 and February 3,
1996, this liability amounted to $110,633,000 and $93,081,000, respectively.
Cash or rent abatements received upon entering into certain store leases are
recognized on a straight-line basis as a reduction to rent expense over the
lease term. The unamortized portion is included in deferred lease credits.
Some of the leases relating to stores in operation at February 1, 1997 contain
renewal options for periods ranging up to 30 years. Most leases also provide
for payment of operating expenses, real estate taxes, and for additional rent
based on a percentage of sales. No lease directly imposes any restrictions
relating to leasing in other locations (other than radius clauses).
Rental expense for all operating leases was as follows:
- -----------------------------------------------------------------------------
Fifty-two Fifty-three Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000) Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- -----------------------------------------------------------------------------
Minimum rentals $337,487 $300,171 $255,202
Contingent rentals 30,644 22,464 20,955
--------------------------------------------------------
$368,131 $322,635 $276,157
- -----------------------------------------------------------------------------
NOTE E: FOREIGN EXCHANGE CONTRACTS
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 for foreign operations. The
market value gains and losses on these contracts are deferred and recognized as
part of the underlying cost to purchase the merchandise. At February 1, 1997,
the Company had contracts maturing at various dates through 1997 to purchase the
equivalent of $60,598,000 in foreign currencies (35,900,000 Canadian dollars
through July 3, 1997, 17,100,000 British pounds through May 29, 1997, and
759,000,000 Japanese yen through July 3,1997) at the contracted rates. The
deferred gains and losses on the Company's foreign exchange contracts at
February 1, 1997 are immaterial.
NOTE F: EMPLOYEE BENEFIT AND INCENTIVE PROGRAMS
RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan, called
GapShare, which is available to employees who meet certain age and service
requirements. This plan permits employees to make contributions up to the
maximum limits allowable under the Internal Revenue Code. Under the plan, the
Company matches all or a portion of the employee's contributions under a
predetermined formula; the Company's contributions vest on behalf of the
employee progressively over a seven-year period. Company contributions to the
retirement plan in 1996, 1995, and 1994 were $11,427,000, $9,839,000, and
$8,281,000, respectively.
A nonqualified Executive Deferred Compensation Plan was established on January
1, 1994 and a nonqualified Executive Capital Accumulation Plan was established
on April 1, 1994. Both plans allow eligible employees to defer compensation up
to a maximum amount defined in each plan. The Company does not match employees'
contributions.
EMPLOYEE BENEFITS PLAN
The Company has an Employee Benefits Plan to provide certain health and welfare
benefits. Payments made to the plan relating to benefits payable in future
periods are included in prepaid expenses.
INCENTIVE COMPENSATION PLANS
The Company has a Management Incentive Cash Award Plan (MICAP) for key
management employees. The MICAP empowers the Compensation and Stock Option
Committee to award compensation, in the form of cash bonuses, to employees based
on the achievement of Company and individual performance goals. Awards can also
be made in the form of nonqualified stock options or restricted shares of the
Company's stock under the 1996 Stock Option and Award Plan. Restrictions on
shares generally lapse in one to five years. Compensation expense is recorded
during the vesting period. The nonqualified stock options generally have a
maximum term of ten years and vest over a period of three to four years.
An Executive Management Incentive Cash Award Plan (Executive MICAP) was
established on March 22, 1994 for key executive officers. The Executive MICAP
empowers the Compensation and Stock Option Committee to award
compensation in the form of cash bonuses to executives based on the achievements
of Companywide or divisional earnings goals for that fiscal year.
An Executive Long-Term Cash Award Performance Plan (ELCAPP) was established in
January 1996. The ELCAPP empowers the Compensation and Stock Option Committee
to award compensation in the form of cash bonuses to key officers based on the
achievement of multiyear financial goals, as determined by the Committee for
each participant in the plan. Payouts are determined based upon the achievement
of performance goals over a three-year period.
The 1996 Stock Option and Award Plan (the Plan), was established on March 26,
1996. The Board authorized 20,000,000 shares for issuance under the Plan. The
Plan superseded a Management Incentive Restricted Stock Plan (MIRSP) and an
earlier stock option plan established in 1981. The Plan empowers the
Compensation and Stock Option Committee to award compensation primarily in the
form of nonqualified stock options or restricted stock to key employees.
Nonqualified stock options are generally issued at fair market value but may be
issued at prices less than the fair market value at the date of grant or at
other prices as determined by the Board of Directors. Total compensation cost
for the Plan and MIRSP was $22,248,000, $23,743,000 and $20,317,000 in 1996,
1995, and 1994, respectively.
EMPLOYEE STOCK PURCHASE PLAN
An Employee Stock Purchase Plan was established on December 1, 1994. Under the
Plan all eligible employees may purchase common stock of the Company at 85
percent of the lower of the closing price of the Company's common stock on the
grant date or the purchase date on the New York Stock Exchange Composite
Transactions Index. Employees pay for their stock purchases through payroll
deductions at a rate equal to any whole percentage from 1 percent to 15 percent.
There were 399,663 shares issued under the plan during fiscal 1996 and all
shares were acquired from reissued treasury stock. At February 1, 1997, there
were 3,214,803 shares reserved for future subscriptions.
NOTE G: STOCKHOLDERS' EQUITY AND STOCK OPTIONS
COMMON AND PREFERRED STOCK
The Company is authorized to issue 60,000,000 shares of Class B common stock
which is convertible into shares of common stock on a share-for-share basis;
transfer of the shares is restricted. In addition, the holders of the Class B
common stock have six votes per share on most matters and are entitled to a
lower cash dividend. No Class B shares have been issued.
The Board of Directors is authorized to issue 30,000,000 shares of one or more
series of preferred stock and to establish at the time of issuance the issue
price, dividend rate, redemption price, liquidation value, conversion features,
and such other terms and conditions of each series (including voting rights) as
the Board of Directors deems appropriate, without further action on the part of
the stockholders. No preferred shares have been issued.
In October 1994, the Board of Directors approved a program under which the
Company repurchased 18,000,000 shares of its outstanding stock in the open
market over a two-year period. In fiscal 1996, 10,860,000 shares were acquired
for $328,695,000. All 18,000,000 shares were purchased for $449,672,000. In
October 1996, the Board of Directors approved a second share-buyback program
under which the Company may repurchase up to 30,000,000 shares of its
outstanding stock in the open market over a three-year period. Under this
program, 4,663,000 shares were repurchased for $140,031,000 in fiscal 1996.
STOCK OPTIONS
Under the Company's Stock Option Plans, nonqualified options to purchase common
stock are granted to officers and key employees at exercise prices equal to the
fair market value of the stock at the date of grant or at other prices as
determined by the Board of Directors.
Stock option activity for all employee benefit plans was as follows:
- -----------------------------------------------------------------------
Shares Weighted-Average Exercise Price
-------------------------------------------------
Balance at
January 29, 1994 7,151,086 $12.12
- -----------------------------------------------------------------------
Granted 2,310,800 22.45
Exercised (1,249,612) 8.73
Cancelled (465,730) 19.97
- -----------------------------------------------------------------------
Balance at
January 28, 1995 7,746,544 $15.27
- -----------------------------------------------------------------------
Granted 9,484,400 17.91
Exercised (994,372) 9.72
Cancelled (596,148) 18.41
- -----------------------------------------------------------------------
Balance at
February 3, 1996 15,640,424 $17.11
- -----------------------------------------------------------------------
Granted 6,242,740 30.90
Exercised (1,591,174) 12.45
Cancelled (799,072) 22.28
- -----------------------------------------------------------------------
Balance at
February 1, 1997 (19,492,918) $21.69
- -----------------------------------------------------------------------
Outstanding options at February 1, 1997 have expiration dates ranging from March
20, 1997 to January 29, 2007 and represent grants to 1,793 key employees.
At February 1, 1997, the Company reserved 34,239,852 shares of its common stock
for the exercise of stock options. There were 14,749,234 and 190,602 shares
available for granting of options at February 1, 1997 and February 3, 1996,
respectively. Options for 2,915,481 and 2,946,164 shares were exercisable as of
February 1, 1997 and February 3, 1996, respectively, and had a weighted-average
exercise price of $13.52 and $12.38 for those respective periods.
The Company accounts for its Stock Option and Award Plans in accordance with APB
Opinion No. 25, under which no compensation cost has been recognized for stock
option awards granted at fair market value. Had compensation cost for the
Company's three stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts. SFAS No. 123 does not
apply to awards prior to fiscal year 1995. Additional awards in future years
are anticipated.
- ---------------------------------------------------
1996 1995
----------------------
Net Earnings As reported $452,859 $354,039
($000) Pro forma $437,232 $348,977
- ---------------------------------------------------
Earnings As reported $ 1.60 $ 1.23
per share Pro forma $ 1.54 $ 1.21
- ---------------------------------------------------
The weighted-average fair value of the stock options granted during fiscal 1996
and 1995 was $11.21 and $6.27, respectively. The fair value of each option
granted is estimated on the date of the grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions for grants in 1996
and 1995: dividend yield of 1.0 percent for all years; expected price volatility
of 30 percent; risk-free interest rates ranging from 5.5 percent to 6.5 percent;
and expected lives between 3.5 and 6 years.
The following table summarizes information about stock options outstanding at
February 1, 1997:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Number
Exercise Outstanding Contractual Life Weighted-Average Exercisable Weighted-Average
Prices at 2/1/97 (in years) Exercise Price at 2/1/97 Exercise Price
- -------------------------------------------------------------------------------------------------------------
$4.76 to $15.69 2,825,688 4.31 $12.38 2,173,888 $11.42
15.72 to 16.94 4,001,690 6.09 16.10 97,023 16.29
17.09 to 22.59 7,186,470 6.10 20.23 593,970 19.81
22.69 to 35.44 5,479,070 9.25 32.51 50,600 24.36
- -------------------------------------------------------------------------------------------------------------
$4.76 to $35.44 19,492,918 6.72 $21.69 2,915,481 $13.52
- -------------------------------------------------------------------------------------------------------------
NOTE H: RELATED PARTY TRANSACTIONS
The Company has an agreement with Fisher Development, Inc. (FDI), wholly owned
by the brother of the Company's chairman, setting forth the terms under which
FDI may act as general contractor in connection with the Company's construction
activities. FDI acted as general contractor for 177, 204, and 159 new stores'
leasehold improvements and fixtures during fiscal 1996, 1995, and 1994,
respectively. In the same respective years, FDI supervised construction of 38,
54, and 79 expansions, as well as remodels of existing stores. FDI construction
also included administrative offices. Total cost of this construction was
$111,871,000, $164,820,000, and $142,791,000, including profit and overhead
costs of $10,751,000, $11,753,000, and $10,738,000. At February 1, 1997 and
February 3, 1996, amounts due to FDI were $6,456,000 and $12,491,000,
respectively. The terms and conditions of the agreement with FDI are reviewed
annually by the Audit and Finance Committee of the Board of Directors.
During the first quarter of fiscal 1995, the Company repurchased 250,000 shares
of its common stock for $8,438,000 from a senior executive of the Company.
NOTE I: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL 1996 QUARTER ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Thirteen Weeks Thirteen Weeks Thirteen Weeks Fifty-two
Ended May 4, Ended Aug. 3, Ended Nov. 2, Ended Feb. 1, Weeks Ended
($000 except per share amounts) 1996 1996 1996 1997 Feb. 1, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $1,113,154 $1,120,335 $1,382,996 $1,667,896 $5,284,381
Gross profit 413,840 400,170 545,221 639,984 1,999,215
Net earnings 81,573 65,790 134,310 171,186 452,859
Net earnings per share .28 .23 .48 .62 1.60
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL 1995 QUARTER ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
($000 except per share Thirteen Weeks Thirteen Weeks Thirteen Weeks Fourteen Weeks Fifty-three
amounts) Ended April 29, Ended July 29, Ended Oct. 28, Ended Feb. 3, Weeks Ended
1995 1995 1995 1996 Feb. 3, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 848,688 $ 868,514 $1,155,929 $1,522,122 $4,395,253
Gross profit 280,557 259,193 458,050 575,998 1,573,798
Net earnings 50,113 32,414 116,875 154,637 354,039
Net earnings per share .17 .11 .41 .54 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
THE GAP, INC.
Financial Highlights
- -------------------------------------------------------------------------------------------------------------
Fiscal 1996 Fiscal 1995 Fiscal 1994
($000 except per share amounts) 52 weeks 53 weeks 52 weeks
- -------------------------------------------------------------------------------------------------------------
Operating Results
Net sales $ 5,284,381 $ 4,395,253 $ 3,722,940
Earnings before income taxes 748,527 585,199 529,322
Net earnings 452,859 354,039 320,240
----------------------------------------------------
Per Share Data (a)
Net earnings $ 1.60 $1.23 $1.10
Cash dividends 0.30 0.24 0.23
----------------------------------------------------
Financial Position
Total assets 2,626,927 2,343,068 2,004,244
Long-term debt, less current installments - - -
Working capital 554,359 728,301 555,827
Current ratio 1.72:1 2.32:1 2.11:1
Stockholders' equity 1,654,470 1,640,473 1,375,232
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Statistics
Weighted average number of shares outstanding (a) 283,330,290 288,062,430 291,141,076
Number of shares outstanding at year-end,
net of treasury stock (a) 274,517,331 287,747,984 289,529,498
Net earnings as a percentage of net sales 8.6% 8.1% 8.6%
Return on average assets 18.2% 16.3% 17.0%
Return on average stockholders' equity 27.5% 23.5% 25.6%
Number of stores open at year-end 1,854 1,680 1,508
Comparable store sales growth (52-week basis) 5.0% 0.0% 1.0%
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(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.