SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended November 3, 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, 864,847,941 shares as of December 1, 2001
------------------------------------------------------------------------
GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
($000 except share and par value) November 3, February 3, October 28,
2001 2001 2000
----------------- ----------------- -----------------
ASSETS
Current Assets:
Cash and equivalents $ 799,510 $ 408,794 $ 352,201
Merchandise inventory 2,589,230 1,904,153 2,567,502
Other current assets 355,478 335,103 475,605
---------------- ---------------- ----------------
Total Current Assets 3,744,218 2,648,050 3,395,308
Property and equipment, net 4,241,924 4,007,685 3,621,474
Lease rights and other assets 355,975 357,173 344,677
---------------- ---------------- ----------------
Total Assets $ 8,342,117 $ 7,012,908 $ 7,361,459
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,029,250 $ 779,904 $ 1,482,356
Current maturities of long-term debt 250,000 250,000 -
Accounts payable 1,156,302 1,067,207 1,032,095
Accrued expenses and other current liabilities 1,008,075 702,033 724,804
---------------- ---------------- ----------------
Total Current Liabilities 3,443,627 2,799,144 3,239,255
Long-Term Liabilities:
Long-term debt 1,273,025 780,246 1,003,542
Deferred lease credits and other liabilities 571,838 505,279 498,496
---------------- ---------------- ----------------
Total Long-Term Liabilities 1,844,863 1,285,525 1,502,038
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares;
Issued 947,326,739; 939,222,871
and 935,383,203 shares;
Outstanding 863,096,998; 853,996,984
and 849,838,923 shares 47,366 46,961 46,768
Additional paid-in capital 453,543 294,967 220,924
Retained earnings 4,943,789 4,974,773 4,721,976
Accumulated other comprehensive earnings (losses) (41,074) (20,173) 379
Deferred compensation (9,262) (12,162) (15,154)
Treasury stock, at cost (2,340,735) (2,356,127) (2,354,727)
--------------- ---------------- ----------------
Total Shareholders' Equity 3,053,627 2,928,239 2,620,166
--------------- ---------------- ----------------
Total Liabilities and Shareholders' Equity $ 8,342,117 $ 7,012,908 $ 7,361,459
=============== ================ ================
See accompanying notes to condensed consolidated financial statements.
2
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
($000 except share and per share amounts)
--------------------------- ------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- ------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 3,333,373 $ 3,414,668 $ 9,758,248 $ 9,094,372
Costs and expenses
Cost of goods sold and occupancy expenses 2,382,734 2,157,461 6,641,353 5,596,430
Operating expenses 946,882 943,262 2,740,066 2,502,859
Interest expense 23,748 22,407 76,649 47,736
Interest income (5,408) (1,924) (8,436) (6,581)
------------ ------------ ------------ ------------
Earnings/(losses) before income taxes (14,583) 293,462 308,616 953,928
Income taxes 164,254 107,114 282,222 348,184
------------ ------------ ------------ ------------
Net earnings/(losses) $ (178,837) $ 186,348 $ 26,394 $ 605,744
============ ============ ============ ============
- -------------------------------------------------------------------------------------------------------------
Weighted average number of shares - basic 862,420,054 848,754,207 858,808,170 849,574,768
Weighted average number of shares - diluted/1/ 862,420,054 871,570,698 876,068,384 880,583,218
Earnings/(losses) per share - basic $ (0.21) $ 0.22 $ 0.03 $ 0.71
Earnings/(losses) per share - diluted/1/ $ (0.21) $ 0.21 $ 0.03 $ 0.69
Cash dividends per share $ 0.02 $ 0.02 $ 0.07/(a)/ $ 0.07/(b)/
- -------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
/(a)/ Includes a dividend of $0.02 per share declared in January 2001 but paid
in first quarter of fiscal 2001.
/(b)/ Includes a dividend of $0.02 per share declared in January 2000 but paid
in first quarter of fiscal 2000.
/1/ Diluted losses per share for the thirteen weeks ended November 3, 2001 is
computed using the basic weighted average number of shares outstanding and
excludes 11,411,379 dilutive shares as their effect is antidilutive when applied
to losses.
3
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
($000) Thirty-nine Weeks Ended
-----------------------------------------
November 3, 2001 October 28, 2000
---------------- ----------------
Cash Flows from Operating Activities:
Net earnings $ 26,394 $ 605,744
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 589,626 423,336
Tax benefit from exercise of stock options
and vesting of restricted stock 54,481 101,140
Changes in operating assets and liabilities:
Merchandise inventory (693,170) (1,116,677)
Other current assets (32,842) (207,371)
Accounts payable 95,508 206,857
Accrued expenses 307,147 (17,081)
Deferred lease credits and other liabilities 45,726 53,150
----------- -----------
Net cash provided by operating activities 392,870 49,098
----------- -----------
Cash Flows from Investing Activities:
Net purchase of property and equipment (796,258) (1,325,612)
Acquisition of lease rights and other assets (6,505) (40,995)
----------- -----------
Net cash used for investing activities (802,763) (1,366,607)
----------- -----------
Cash Flows from Financing Activities:
Net increase in notes payable 252,136 1,324,543
Issuance of long-term debt 495,886 250,000
Issuance of common stock 114,245 73,960
Net purchase of treasury stock - (357,176)
Cash dividends paid (57,176) (56,619)
----------- -----------
Net cash provided by financing activities 805,091 1,234,708
----------- -----------
Effect of exchange rate fluctuations on cash (4,482) (15,350)
----------- -----------
Net increase (decrease) in cash and equivalents 390,716 (98,151)
Cash and equivalents at beginning of period 408,794 450,352
----------- -----------
Cash and equivalents at end of period $ 799,510 $ 352,201
=========== ===========
- --------------------------------------------------------------------------------
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 November 3, 2001 and October 28,
2000 and the interim condensed consolidated statements of operations for the
thirteen and thirty-nine weeks ended November 3, 2001 and October 28, 2000 and
cash flows for the thirty-nine week periods ended November 3, 2001 and October
28, 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 November 3,
2001 and October 28, 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 thirty-nine weeks ended November 3, 2001 are
not necessarily indicative of the operating results that may be expected for the
year ending February 2, 2002.
2. REVENUE RECOGNITION
-------------------
The Company recognizes revenue for store sales at the point the customer pays at
the register. For online and catalog sales, the Company recognizes revenue at
the time goods are shipped. Allowances for returns are recorded for store sales
as well as online and catalog sales.
3. COMPREHENSIVE EARNINGS (LOSSES)
-------------------------------
Comprehensive earnings (losses) include net earnings (losses) 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 (losses) for the
thirteen and thirty-nine weeks ended November 3, 2001 and October 28, 2000 were
as follows (in thousands):
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
------------------------ ------------------------
Net (losses) earnings $(178,837) $ 186,348 $ 26,394 $ 605,744
Other comprehensive (losses) earnings (1,254) (9,624) (20,901) 7,138
---------------------- ----------------------
Comprehensive (losses) earnings $(180,091) $ 176,724 $ 5,493 $ 612,882
====================== ======================
5
4. EARNINGS (LOSSES) PER SHARE
---------------------------
Basic earnings (losses) 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, unvested shares of restricted
stock and certain put options. The following summarizes the incremental shares
from the potentially dilutive securities, calculated using the treasury stock
method.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------- -------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Weighted-average number of shares - basic 862,420,054 848,754,207 858,808,170 849,574,768
Incremental shares resulting from:
Stock options - 22,399,787 17,256,826 30,443,522
Restricted stock - 402,175 3,388 564,928
Put options - 14,529 - -
------------------------------ ------------------------------
Weighted-average number of shares - diluted 862,420,054 871,570,698 876,068,384 880,583,218
============================== ==============================
Excluded from the above computations of weighted-average shares for diluted
earnings (losses) per share were options to purchase 67,812,169 and 27,883,642
shares of common stock during the thirteen and thirty-nine weeks ended November
3, 2001, respectively, and 27,666,897 and 18,593,628 shares during the thirteen
and thirty-nine weeks ended October 28, 2000, respectively. Additionally, put
options to repurchase 800,000 shares during the thirty-nine weeks ended October
28, 2000 were also excluded from the above computations. Issuance or repurchase
of these securities would have resulted in an antidilutive effect on earnings
(losses) per share. In addition, diluted losses per share for the thirteen weeks
ended November 3, 2001 is computed using the basic weighted average number of
shares outstanding and excludes all dilutive shares as their effect is
antidilutive when applied to losses.
5. 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 net of unamortized discount.
In connection with the debt issuance, the Company entered into forward rate
agreements in order to reduce interest rate risk. The agreements were settled in
the first quarter and the net losses of approximately $2.2 million associated
with these agreements will be amortized over the life of the debt securities.
6. WORKFORCE REDUCTIONS AND OTHER ACTIONS
--------------------------------------
On June 21, 2001, the Company announced workforce reductions to streamline
headquarters staffing and improve organizational efficiencies.
6
The workforce reductions resulted in the elimination of approximately 1,600
positions consisting of approximately 970 lay offs of headquarters and Banana
Republic field employees and the elimination of approximately 630 open
positions.
In addition to these reductions, the Company plans to close distribution
facilities in Ventura, California and London. Operations at those facilities
will be consolidated at new facilities in Fresno, California and Rugby, England.
The consolidation will be completed by the first quarter of fiscal 2002. As of
November 3, 2001, these facilities remained in operation. Approximately 425
employees affected by these changes have the opportunity to apply for positions
at the new locations.
The Company also plans to relocate its London headquarters to the new Rugby
facility. This move will be completed by the first quarter of fiscal 2002.
Approximately 125 employees affected by this move have the opportunity to
transfer to Rugby or apply for other positions at Rugby.
As a result of the workforce reductions and other actions, as described above,
the Company recorded a charge of approximately $30 million during the second
quarter of fiscal 2001 which was included in operating expenses. Of this charge,
the Company recorded a liability for employee termination pay of approximately
$27 million in the second quarter of fiscal 2001 of which approximately $1
million was outstanding as of November 3, 2001.
7. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not expect that the adoption of SFAS 141 will have any impact
on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
all fiscal years beginning after December 15, 2001. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company does not expect that the adoption
of SFAS 142 will have a significant impact on its financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which is
effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
financial accounting and reporting for obligations and retirement costs related
to the retirement of tangible long-lived assets. The Company does not expect
that the adoption of SFAS 143 will have a significant impact on its financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement No 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board
7
Opinion No. 30. The Company does not expect that the adoption of SFAS 144 will
have a significant impact on its financial statements.
8. SUBSEQUENT EVENT
----------------
On November 21, 2001, the Company issued $200 million of debt securities at a
fixed annual interest rate of 8.15 percent, due December 15, 2005 and $500
million of debt securities at a fixed annual interest rate of 8.8 percent, due
December 15, 2008. Interest on both of the notes is payable semi-annually. The
interest rate payable on the notes of each series will be subject to adjustment
from time to time if either Moody's or Standard & Poor's reduces the rating
ascribed to the notes below Baa2, in the case of Moody's, or below BBB+, in the
case of Standard & Poor's. In this event, the interest rate payable on the notes
will be increased by 0.25% for each rating category downgrade by either rating
agency. In addition, if Moody's or Standard & Poor's subsequently increases the
rating ascribed to the notes, the interest rate then payable on the notes will
be decreased by 0.25% for each rating category upgrade by either rating agency
up to Baa2, in the case of Moody's, and BBB+, in the case of Standard & Poor's,
but in no event will the interest rate be reduced below the initial interest
rate payable on the notes. There is no limit to the number of times the interest
rate payable on the notes can be adjusted.
8
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 November 3, 2001 and October 28, 2000, and the
related condensed consolidated statements of operations for the thirteen and
thirty-nine week periods ended November 3, 2001 and October 28, 2000 and
condensed consolidated statements of cash flows for the thirty-nine week periods
ended November 3, 2001 and October 28, 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, shareholders' equity, and cash flows for the fiscal 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
November 28, 2001
9
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," "may" 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, including as a result of the September 11th
terrorist attack and its aftermath, 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 Thirty-nine Weeks Ended
------------------------------------------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net sales ($000) $3,333,373 $3,414,668 $9,758,248 $9,094,372
Total net sales (decrease) increase percentage (2) 12 7 17
Comparable store sales (decrease) percentage (17) (8) (11) (4)
Net sales per average square foot $ 93 $ 118 $ 283 $ 339
Square footage of gross store space -
at end of period (000) 36,033 29,978
Number of Stores:
Beginning of Year 3,676 3,018
New stores 535 564
Expanded stores/(1)/ 142 143
Closed stores 64 40
End of Period 4,147 3,542
- ---------------------------------------------------------------------------------------------------------------------------
/(1)/Expanded stores do not change store count.
Store count and square footage at quarter end for fiscal 2001 and 2000 were as
follows:
November 3, 2001 October 28, 2000
- ------------------------------------------------------------------------------------------------------
Number of Sq. Ft. Number of Sq. Ft.
Stores (millions) Stores (millions)
- ------------------------------------------------------------------------------------------------------
Gap Domestic 2,279 13.0 2,002 11.5
Gap International/(2)/ 630 3.5 503 2.8
Banana Republic/(3)/ 442 3.5 389 3.1
Old Navy/(4)/ 796 16.0 648 12.6
- ------------------------------------------------------------------------------------------------------
Total 4,147 36.0 3,542 30.0
======================================================================================================
Increase 17% 20% 23% 32%
/(2)/ Includes stores in the following countries:
United Kingdom: 223 and 177 stores in 2001 and 2000, respectively.
Canada: 191 and 154 stores in 2001 and 2000, respectively.
Japan: 140 and 96 stores in 2001 and 2000, respectively.
France: 56 and 55 stores in 2001 and 2000, respectively.
Germany: 20 and 21 stores in 2001 and 2000, respectively.
/(3)/ Includes 16 and 13 stores in Canada in 2001 and 2000, respectively.
/(4)/ Includes 17 stores in Canada for 2001; all stores were located in US for
2000.
Net sales for the third quarter decreased $81 million compared to the same
period last year. Comparable store sales declined $504 million offset by a $423
million increase in non-comparable store sales. The non-comparable store sales
increase was primarily due to the increase in retail selling space, both through
the opening of new stores (net of stores closed) and the expansion of existing
stores.
Net sales for year-to-date 2001 increased $664 million over the same period last
year. Non-comparable store sales increased $1,581 million offset by a $917
million decline in comparable store sales.
The decreases in comparable store sales for the third quarter and year-to-date
2001 were driven by poor product acceptance by customers and an increasingly
promotional environment.
The Company's third quarter comparable store sales by division were as follows:
. Gap Domestic had negative high-teens versus a negative low-single digit
last year
. Gap International had negative low-teens versus a negative low-single digit
last year
. Banana Republic had negative low-teens versus a negative low-single digit
last year
. Old Navy had negative high-teens versus negative high-teens last year
The Company's year-to-date comparable store sales by division were as follows:
. Gap Domestic had a negative low-double digit versus a negative low-single
digit last year
. Gap International had a negative high-single digit versus a positive
low-single digit last year
. Banana Republic had a negative high-single digit versus a flat comp last
year
. Old Navy had negative mid-teens versus a negative low-double digit last
year
A store is included in comparable store sales ("Comp") when it has been open at
least one year and it has not been expanded by more than 15% or permanently
relocated within that year. Therefore, a store is included in Comp on the first
day it has comparable prior year sales. Stores where square footage is expanded
by 15% or more are excluded from Comp until the first day they have comparable
prior year sales.
Numerical ranges of comparable store sales (whether positive or negative) are
described as follows:
11
Descriptors Numerical Range (%)
- ----------- -------------------
Flat 0 - 0.4
Low-single digit 0.5 - 3.4
Mid-single digit 3.5 - 6.4
High-single digit 6.5 - 9.4
Low-double digits 9.5 - 12.4
Low-teens 12.5 - 13.4
Mid-teens 13.5 - 16.4
High-teens 16.5 - 19.4
Low twenties 19.5 - 23.4
Mid twenties 23.5 - 26.4
High twenties 26.5 - 29.4
Low thirties 29.5 - 33.4
The decreases in net sales per average square foot for the third quarter and
year-to-date 2001 were 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
8.3 percentage points in the third quarter from the same period in fiscal 2000.
The increase was driven by decreased merchandise margin and increased occupancy
expenses of 5.3 and 3.0 percentage points, respectively.
Of the 5.3 percentage points decline in merchandise margin, 3.7 percentage
points was primarily attributable to lower margins from regular-priced goods and
a greater percentage of merchandise sold at markdown. After a thorough review of
the Company's merchandise programs for the fourth quarter and the first quarter
of fiscal 2002, the Company cancelled certain product orders. This resulted in a
$52 million charge which accounted for the remaining 1.6 percentage points
decline in merchandise margin. The Company chose to cancel these programs in
order to manage its inventory levels consistent with current business and also
as a result of making changes to the product assortment for the fourth quarter
and fiscal 2002.
Cost of goods sold and occupancy expenses as a percentage of net sales increased
6.6 percentage points year-to-date 2001 from the same period in fiscal 2000. The
increase was driven by decreased merchandise margin and increased occupancy
expenses of 4.4 and 2.2 percentage points, respectively.
Of the 4.4 percentage points decline in merchandise margin, 3.7 percentage
points was primarily attributable to lower margins from regular-priced goods and
a greater percentage of merchandise sold at markdown and the $52 million charge
for cancelled product orders accounted for 0.5 percentage points of the
merchandise margin decline.
The increases in occupancy expenses as a percentage of net sales for the third
quarter and year-to-date 2001 were due to negative comparable store sales.
Operating Expenses
The majority of the Company's operating expenses are variable and are managed in
line with sales levels. Operating expenses as a percentage of net sales,
increased 0.8 percentage points for the third quarter from the same period in
fiscal 2000. The increase was attributable to negative comparable store sales.
Higher store payroll and advertising costs were offset by lower headquarters
payroll and benefits, travel and entertainment and other personnel expenses.
Operating expenses as a percentage of net sales, including charges recorded in
the second quarter in the amount of approximately $30 million primarily
representing workforce reductions (refer to Note 6 for further discussion),
increased 0.6 percentage points for year-to-date 2001 from the same period in
fiscal 2000. Excluding the charges, operating expenses as a percentage of net
sales, increased 0.3 percentage points for year-to-date 2001 from the same
period in fiscal 2000. The increase was also attributable to negative comparable
store sales. Higher store and headquarters payroll as
12
well as headquarters depreciation expenses were partially offset by lower
advertising costs, travel and entertainment and other personnel expenses.
Due to expense management initiatives undertaken, the Company expects the dollar
amount of total operating expenses for the fourth quarter to be flat from the
same period in fiscal 2000. The Company anticipates advertising spending in the
fourth quarter to be about the same as the same period in fiscal 2000. As a
result, the Company expects advertising costs for the full year of fiscal 2001
to decrease about 10 percent from the same period in fiscal 2000.
Interest Expense
The increases in interest expense in the third quarter and year-to-date 2001 as
compared to the same periods in fiscal 2000 were primarily due to an increase in
long-term borrowing and a decrease in interest capitalized as a result of fewer
construction projects, partially offset by lower average short-term borrowings.
Interest Income
The increases in interest income in the third quarter and year-to-date 2001 as
compared to the same periods in fiscal 2000 were primarily due to increases in
average cash available for investment. The average cash balances increased due
to the debt issuance in April 2001 and improved cash flows compared to prior
year. The Company attained a higher cash position in advance of repayment of
debt maturing in the third and fourth quarters of fiscal year 2001.
Income Taxes
During the third quarter of fiscal year 2001, the Company recorded a tax charge
of $131 million. This amount primarily reflects the Company's current estimate
of probable settlements of foreign and domestic tax audits. The charge also
includes adjustments relating to prior-year tax provisions that were based on
earlier estimates. Any cash amounts ultimately owed would be paid over the next
several years and are not expected to be material in any one year.
Since the Company provided for taxes at a 36.5 percent effective tax rate during
the first half of fiscal 2001, the Company recorded $40 million in higher tax
expense during the third quarter to bring the tax rate for the first half in
line with the estimate of the Company's estimated effective tax rate for fiscal
2001.
The effective tax rates were 49 percent (excluding the $131 million tax charge)
for the third quarter and year-to-date 2001, and 36.5 percent for the third
quarter and year-to-date 2000. The increase in tax rate resulted from recent
earnings performance and near-term earnings outlook that were below earlier
expectations. The Company's tax-planning measures are less effective at these
levels and mix of earnings. The level and mix of earnings have caused the
Company's tax rate to increase well above earlier expectations. As a result, the
Company currently estimates that its effective tax rate for fiscal 2001,
excluding the $131 million tax charge, will be in the area of 49 percent.
However, this estimate is extremely sensitive to even small changes in the
Company's earnings outlook for the year and the rate would rise rapidly if the
earnings outlook were to decline below the Company's current expectations.
The Company also expects the effective tax rate for future years to be highly
sensitive to the level of earnings. At historical levels of performance, the
Company would expect an effective tax rate in the range of 38 percent to 40
percent.
Recent Development
The company's comparable store sales for November 2001 were down 25 percent,
compared to a 1 percent decrease in November 2000. The company's year-to-date
comparable store sales decreased 13 percent compared to a decrease of 4 percent
in the prior year.
Looking at the remainder of the fourth quarter, it is reasonable to expect that
the negative trends in comparable store sales and gross margins could continue.
On that basis, fourth quarter earnings per share would be considerably worse
than the six cent loss reported in the third quarter, excluding the tax related
charge.
13
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
- ----------------------------------------------------------------------------------------------------
Thirty-nine Weeks Ended
--------------------------------------------
November 3, 2001 October 28, 2000
- ----------------------------------------------------------------------------------------------------
Cash provided by operating activities ($000) $392,870 $ 49,098
Working capital ($000) $300,591 $156,053
Current ratio 1.09:1 1.05:1
- ----------------------------------------------------------------------------------------------------
For the thirty-nine weeks ended November 3, 2001, the increase in cash 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 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.
At November 3, 2001, the Company had various committed and uncommitted credit
facilities which provided backup for the issuance of up to $1.55 billion in
letters of credit and up to $1.45 billion for the Company's commercial paper
program. The Company has committed credit facilities totaling $1.45 billion,
consisting of a $1.30 billion, 364-day revolving credit facility through June
2002, and a $150 million, 5-year revolving credit facility through June 2005.
These credit facilities provide backup for the issuance of up to $600 million in
letters of credit and up to $850 million for the Company's commercial paper
program. At November 3, 2001, $200 million of the amount reserved for letters of
credit was reallocated to provide backup for the Company's commercial paper
program increasing the total amount of commercial paper backup to $1.05 billion.
The Company also has a credit facility effective September 17, 2001 to December
17, 2001 to provide backup of up to $400 million for the Company's commercial
paper program over its peak borrowing period. The Company has additional
uncommitted credit facilities of $1.15 billion for the issuance of letters of
credit.
At November 3, 2001, the Company had outstanding letters of credit and
commercial paper of $1.13 billion and $777 million, respectively. In addition,
the Company had uncommitted unused lines of credit of $244 million available
only for international operations at November 3, 2001.
In response to the deterioration in the Company's operating profitability,
Moody's Investors Service ("Moody's") and Standard and Poor's Rating Services
("Standard & Poor's") reduced their credit ratings of the Company. On April 18,
2001, Moody's lowered their credit ratings of the Company from A2 to A3 for
senior unsecured debt and from P-1 to P-2 for short-term debt. On August 9,
2001, Standard and Poor's placed the Company on CreditWatch with negative
implications. On August 21, 2001, Moody's confirmed the ratings of the Company
but changed the rating outlook from stable to negative. On October 29, 2001,
Moody's and Standard & Poor's lowered their credit ratings of the Company's
long-term debt from A3 to Baa2 and from A to BBB+, respectively. Standard &
Poor's also lowered their credit rating of the Company's short-term debt from
A-1 to A-2 while Moody's confirmed the Company's short-term rating of P-2.
Moody's confirmed its negative rating outlook while Standard & Poor's changed
its rating outlook from negative to stable. On December 11, 2001, Moody's placed
the Company's ratings on review for possible downgrade on short-term and
long-term debt.
The recent downgrades may affect the Company's ability to raise financing. At
lower credit ratings, the number of potential investors may become smaller and
the cost of financing tends to be higher.
14
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 net of unamortized discount.
In connection with the debt issuance, the Company entered into forward rate
agreements in order to reduce interest rate risk. The agreements were settled in
the first quarter and the net losses of approximately $2.2 million associated
with these agreements will be amortized over the life of the debt securities.
On November 21, 2001, the Company issued $200 million of debt securities at a
fixed annual interest rate of 8.15 percent, due December 15, 2005 and $500
million of debt securities at a fixed annual interest rate of 8.8 percent, due
December 15, 2008. Interest on both of the notes is payable semi-annually. The
interest rate payable on the notes of each series will be subject to adjustment
from time to time if either Moody's or Standard & Poor's reduces the rating
ascribed to the notes below Baa2, in the case of Moody's, or below BBB+, in the
case of Standard & Poor's. In this event, the interest rate payable on the notes
will be increased by 0.25% for each rating category downgrade by either rating
agency. In addition, if Moody's or Standard & Poor's subsequently increases the
rating ascribed to the notes, the interest rate then payable on the notes will
be decreased by 0.25% for each rating category upgrade by either rating agency
up to Baa2, in the case of Moody's, and BBB+, in the case of Standard & Poor's,
but in no event will the interest rate be reduced below the initial interest
rate payable on the notes. There is no limit to the number of times the interest
rate payable on the notes can be adjusted.
For the thirty-nine weeks ended November 3, 2001, capital expenditures, net of
construction allowances, totaled approximately $760 million. The majority of
these expenditures were used for expansion of the store base, headquarter
buildings, distribution facilities and equipment and information technology. For
year-to-date 2001, the Company experienced a net increase in store space of
approximately 5 million square feet, or 15 percent, due to a net addition of 471
stores, the expansion of 142 stores and the remodeling of certain stores.
For fiscal 2001, the Company expects capital expenditures to be in the range of
$1.1 to $1.2 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 buildings,
distribution facilities 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 at the low
end of 17 to 20 percent range for fiscal 2001. New stores are generally expected
to be leased.
During the third quarter of fiscal 2001, the Company revised its planned annual
square footage growth for fiscal 2002 to approximately 5 percent, compared to a
previously stated growth rate of approximately 10 percent. For fiscal 2003, the
Company is not committing to new real estate deals at this time and will make a
decision on square footage growth in the first half of fiscal 2002.
For fiscal 2002, the Company expects capital expenditures to be in the range of
$600 to $650 million, net of construction allowances. However, the Company is
still in the process of completing the fiscal 2002 budget with an objective to
lower the range of capital expenditures even further. Store capital is estimated
to be about 60 percent of total capital expenditures. The remainder of the
capital spending is primarily for information technology. The Company expects to
fund such capital expenditures with cash flows from operations and other sources
of financing. New stores are generally expected to be leased.
The Company's store growth plans for fiscal 2001 and fiscal 2002 are as follows:
Fiscal 2001 Fiscal 2002
- -----------------------------------------------------------------------------------------------------
New Store Growth Net Sq. Ft. Range* New Store Growth Net Sq. Ft. Range*
- -----------------------------------------------------------------------------------------------------
Gap Domestic 270-290 11-14% 90-100 1-3%
Gap International 100-120 20-25% 55-65 4-6%
Banana Republic 40-60 13-17% 20-30 6-8%
Old Navy 140-160 23-27% 75-85 6-8%
- -----------------------------------------------------------------------------------------------------
Total 550-630 17-20% 240-280 About 5%
=====================================================================================================
* Net of store closures
During fiscal 1998, the Company purchased land in San Francisco to construct an
additional headquarters facility. 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 was completed during the
third quarter of fiscal 2001 and the total project cost was approximately $235
million.
15
The Company commenced construction on several distribution facilities in the
second quarter and third quarter of fiscal 2000. All facilities except one were
opened during the third quarter of fiscal 2001. The estimated remaining cost for
the distribution facility still under construction is approximately $25 million.
Of this amount, approximately 40 percent will be incurred during the fourth
quarter of fiscal 2001 and the remaining 60 percent will be incurred in fiscal
2002. This distribution facility is estimated to be open during the second
quarter of fiscal 2002.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not expect that the adoption of SFAS 141 will have any impact
on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
all fiscal years beginning after December 15, 2001. SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company does not expect that the adoption
of SFAS 142 will have a significant impact on its financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which is
effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
financial accounting and reporting for obligations and retirement costs related
to the retirement of tangible long-lived assets. The Company does not expect
that the adoption of SFAS 143 will have a significant impact on its financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement No 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. The Company does not
expect that the adoption of SFAS 144 will have a significant impact on its
financial statements.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The market risk of the Company's financial instruments as of November 3, 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 1. Legal Proceedings
In 1999, the Company was named as a defendant in two lawsuits relating
to sourcing of products from Saipan (Commonwealth of the Northern
Mariana Islands). A complaint was filed on January 13, 1999 in
California Superior Court in San Francisco by the Union of Needletrades
Industrial and Textile Employees, AFL-CIO; Global Exchange; Sweatshop
Watch; and Asian Law Caucus against the Company and 17 other parties.
The plaintiffs allege violations of California's unlawful, fraudulent
and unfair business practices and untrue and misleading advertising
statutes in connection with labeling of product and labor practices
regarding workers of factories that make product for the Company in
Saipan. The plaintiffs seek injunctive relief, restitution,
disgorgement of profits and other damages. Trial has not been set in
the state case. On October 31, 2001, the Company filed a motion for
summary judgment, or in the alternative, for summary adjudication. The
hearing date for the motion is set for March 1, 2002.
A second complaint was filed on January 13, 1999, in Federal District
Court, Central District of California, by various unidentified worker
plaintiffs against the Company and 27 other parties. Those unidentified
worker plaintiffs seek class-action status and allege, among other
things, that the Company (and other defendants) violated the Racketeer
Influenced and Corrupt Organizations Act in connection with the labor
practices and treatment of workers of factories in Saipan that make
product for the Company. The plaintiffs seek injunctive relief as well
as actual and punitive damages. On September 29, 1999, the action was
transferred to the United States District Court, State of Hawaii. On
April 28, 2000, plaintiffs filed a First Amended Complaint adding 22
new defendants. On June 23, 2000, the United States District Court,
State of Hawaii, ordered the case transferred to the United States
District Court, District of the Mariana Islands. On March 23, 2001, the
Ninth Circuit Court of Appeals denied Plaintiffs' writ of mandamus
requesting that the action either be transferred back to the District
Court in Hawaii or to the Central District of California. On October
29, 2001, the District Court of the Mariana Islands issued an order
granting in part and denying in part the motion to dismiss. On November
9, 2001, plaintiffs filed a motion for reconsideration of the Court's
order.
The Company continues to defend itself in both lawsuits and believes
the claims against the Company are without merit. At this time the
Company is unable to assess the likelihood of the outcome of these
cases and cannot estimate the amount or range of potential loss, if
any.
17
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.1) Nonemployee Director Deferred Compensation Plan of The Gap, Inc., as
amended and restated on October 30, 2001
(10.2) Form of Amended and Restated Non-qualified Stock Option Agreement
dated October 19, 2001, amending option agreement dated January 23,
2001, between Registrant and John M. Lillie
(10.3) Form of Non-qualified Stock Option Agreement under Registrant's 1996
Stock Option and Award 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 November 3, 2001.
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GAP, INC.
Date: December 13, 2001 By /s/ Heidi Kunz
----------------------------------
Heidi Kunz
Chief Financial Officer
(Principal financial officer of
the registrant)
Date: December 13, 2001 By /s/ Millard S. Drexler
----------------------------------
Millard S. Drexler
President and Chief Executive
Officer
19
EXHIBIT INDEX
(10.1) Nonemployee Director Deferred Compensation Plan of The Gap, Inc., as
amended and restated on October 30, 2001
(10.2) Form of Amended and Restated Non-qualified Stock Option Agreement
dated October 19, 2001, amending option agreement dated January 23,
2001, between Registrant and John M. Lillie
(10.3) Form of Non-qualified Stock Option Agreement under Registrant's 1996
Stock Option and Award Plan
(15) Letter re: Unaudited Interim Financial Information
20