0000039911-95-000023.txt : 19950914 0000039911-95-000023.hdr.sgml : 19950914 ACCESSION NUMBER: 0000039911-95-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950729 FILED AS OF DATE: 19950912 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAP INC CENTRAL INDEX KEY: 0000039911 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 941697231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07562 FILM NUMBER: 95573314 BUSINESS ADDRESS: STREET 1: ONE HARRISON CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159524400 MAIL ADDRESS: STREET 1: ONE HARRISON STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: GAP STORES INC DATE OF NAME CHANGE: 19850617 10-Q 1 FORM 10-Q 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 July 29, 1995 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to __________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware 94-1697231 (State of Incorporation) (I.R.S. Employer Identification No.) One Harrison San Francisco, California 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 952-4400 _______________________ Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value New York Stock Exchange, Inc. (Title of class) Pacific Stock Exchange, Inc. (Name of each exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None _______________________ Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $0.05 par value, 144,165,227 shares as of September 8, 1995
PART 1 THE GAP, INC. AND SUBSIDIARIES ITEM 1 CONSOLIDATED BALANCE SHEETS ($000) July 29, January 28, July 30, 1995 1995 1994 (Unaudited) (See Note 1) (Unaudited) ASSETS Current Assets: Cash and equivalents $ 249,217 $ 414,487 $ 261,228 Short-term investments 143,416 173,543 122,901 Merchandise inventory 508,641 370,638 416,166 Prepaid expenses and other 111,748 97,019 94,568 Total Current Assets 1,013,022 1,055,687 894,863 Property and equipment (net) 882,949 828,777 772,646 Long-term investments 7,059 32,097 40,380 Lease rights and other assets 97,436 87,683 67,792 Total Assets $ 2,000,466 $ 2,004,244 $ 1,775,681 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ - $ 2,478 $ 13,773 Accounts payable 293,396 263,724 265,705 Accrued expenses 145,227 185,375 142,766 Income taxes payable 9,325 41,156 7,520 Deferred lease credits and other current liabilities 6,173 7,127 6,699 Total Current Liabilities 454,121 499,860 436,463 Long-term Liabilities: Deferred lease credits and other liabilities 135,985 129,152 111,505 135,985 129,152 111,505 Stockholders' Equity: Common stock $.05 par value Authorized 500,000,000 shares Issued 157,716,643, 156,972,777 and 156,509,876 shares Outstanding 144,240,315, 144,764,749 and 145,775,348 shares 7,887 7,849 7,826 Additional paid-in capital 330,725 298,413 281,063 Retained earnings 1,331,348 1,282,301 1,103,722 Foreign currency translation adjustment (6,491) (8,320) (8,497) Restricted stock plan deferred compensation (60,386) (54,265) (53,915) Treasury stock, at cost (192,723) (150,746) (102,486) 1,410,360 1,375,232 1,227,713 Total Liabilities and Stockholders' Equity $ 2,000,466 $ 2,004,244 $ 1,775,681
See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Thirteen Weeks Ended Twenty-six Weeks Ended Unaudited July 29, July 30, July 29, July 30, ($000 except per share amounts) 1995 1994 1995 1994 Net sales $ 868,514 $ 773,131 $ 1,717,202 $ 1,524,801 Costs and expenses Cost of goods sold and 609,321 507,854 1,177,452 970,207 occupancy expenses Operating expenses 210,043 192,362 412,618 378,049 Net interest income (4,430) (394) (9,279) (1,686) Earnings before income taxes 53,580 73,309 136,411 178,231 Income taxes 21,166 28,957 53,884 70,401 Net earnings $ 32,414 $ 44,352 $ 82,527 $ 107,830 Weighted average number of shares 144,116,611 145,741,236 143,994,080 145,551,113 Earnings per share $ .22 $ .30 $ .57 $ .74 Cash dividends per share $ .12 $ .12 $ .24 $ .22 See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited ($000) Twenty-six Weeks Ended July 29, 1995 July 30, 1994 Cash Flows from Operating Activities: Net earnings $ 82,527 $107,830 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 95,514 80,930 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 8,710 14,391 Change in operating assets and liabilities: Merchandise inventory (137,186) (85,403) Prepaid expenses and other (16,090) (13,027) Accounts payable 29,890 49,226 Accrued expenses (40,281) (20,577) Income taxes payable (32,006) (62,680) Deferred lease credits and other long-term liabilities 5,518 15,033 Net cash (used for) provided by operating activities (3,404) 85,723 Cash Flows from Investing Activities: Maturity (purchase) of short-term investments - net 55,165 (25,353) Purchase of long-term investments - (54,431) Purchases of property and equipment (134,662) (101,772) Acquisition of lease rights and other assets (10,183) (4,005) Net cash used for investing activities (89,680) (185,561) Cash Flows from Financing Activities: Net (decrease) increase in notes payable (3,590) 6,091 Payment on long-term debt - (75,000) Issuance of common stock 6,127 10,591 Purchase of treasury stock (41,977) (10,032) Cash dividends paid (33,481) (30,944) Net cash used for financing activities (72,921) (99,294) Effect of exchange rate changes on cash 735 28 Net (decrease) increase in cash and equivalents (165,270) (199,104) Cash and equivalents at beginning of year 414,487 460,332 Cash and equivalents at end of quarter $249,217 $261,228 See accompanying notes to consolidated financial statements.
THE GAP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The consolidated balance sheets as of July 29, 1995 and July 30, 1994, and the interim consolidated statements of earnings for the thirteen and twenty-six weeks ended July 29, 1995 and July 30, 1994 and the interim consolidated statements of cash flows for the twenty-six weeks ended July 29, 1995 and July 30, 1994 have been prepared by the Company, without audit. In the opinion of management, 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 July 29, 1995 and July 30, 1994, and for all periods presented, have been made. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted from these interim financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended January 28, 1995. The results of operations for the twenty-six weeks ended July 29, 1995 are not necessarily indicative of the operating results that may be expected for the year ending February 3, 1996. Certain reclassifications have been made to the 1994 financial statements to conform to classifications used in 1995. 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Year-to-date 1995 and 1994 gross interest payments were $1.0 million and $6.7 million respectively; income tax payments were $76.3 million and $118.9 million respectively. Deloitte & 2101 Webster Street Telephone:(510)287-2700 Touche LLP Oakland, California 946-12-3027 Facsimile:(510)835-4888 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of The Gap, Inc. We have reviewed the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of July 29, 1995 and July 30, 1994 and the related consolidated statements of earnings for the thirteen week and twenty-six week periods ended July 29, 1995 and July 30, 1994 and of cash flows for the twenty-six week periods ended July 29, 1995 and July 30, 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such interim consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of January 28, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 2, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 28, 1995 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived. /S/ Deloitte & Touche LLP August 9, 1995 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net Sales Thirteen Weeks Ended Twenty-six Weeks Ended July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994 Net Sales 868,5141 773,131 1,717,202 1,524,801 ($000) Total net sales growth percentage 12 12 13 14 Comparable store sales growth percentage <4> 1 <3> 4 Net sales per average square foot 88 96 178 193 Fifty-two Weeks Ended July 29, 1995 July 30, 1994 Number of New Stores 195 129 Expanded Stores 62 127 Closed Stores 39 53 The increases in second quarter and year-to-date 1995 net sales over the same periods last year were attributable to the opening of new stores (net of stores closed) and the expansion of existing stores, partially offset by decreases in comparable store sales. The decreases in comparable store sales were primarily attributable to negative comparable store sales in the Gap division. The declines in second quarter and year-to-date net sales per average square foot from the same periods last year were primarily attributable to an increase in the average size of new stores in connection with the Company's store expansion program, negative comparable store sales, and continued store growth in the Old Navy division with lower priced merchandise and significantly larger stores. The Company expects the challenging retail sales environment experienced during the first half of 1995 to continue into the third quarter of 1995. For the four week period ended August 26, 1995, net sales increased 12 percent over the same period last year, as compared to a 6 percent increase in net sales for the four week period ended August 27, 1994 over the prior year. Comparable store sales decreased 6 percent for the four weeks ended August 26, 1995 as compared with a 5 percent decrease in August 1994. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales increased to 70.1 percent for the second quarter of 1995 from 65.7 percent for the same period in 1994. The resulting 4.4 percentage point decrease in gross margin net of occupancy expenses was attributable to a 3.7 percentage point decrease in merchandise margins as a percentage of net sales and a .7 percentage point increase in occupancy expenses as a percentage of net sales. For the first half of 1995, cost of goods sold and occupancy expenses as a percentage of net sales increased to 68.6 percent from 63.6 percent for the same period in 1994. The resulting 5.0 percentage point decrease in gross margin net of occupancy expenses was attributable to a 4.2 percentage point decrease in merchandise margins as a percentage of net sales and a .8 percentage point increase in occupancy expenses as a percentage of net sales. For the second quarter and first half of 1995, decreases in merchandise margins as a percentage of net sales were driven by a decline in initial merchandise margins. During the second quarter more goods were sold at regular price than a year ago, although the margin achieved on those markdown sales was meaningfully lower. Entering the third quarter of 1995, inventory on hand is at a lower initial merchandise margin than inventory on hand last year. The Company expects overall merchandise margins to be lower in the second half of 1995 compared to the levels achieved in the second half of 1994. 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. During the first half of 1995, these markdowns did have an adverse impact on earnings and may do so in future quarters depending upon the extent of the markdowns and amount of inventory affected. For the second quarter and first half of 1995, occupancy expenses increased as a percentage of net sales when compared to the same periods last year. The increases in occupancy expenses were primarily attributable to a lack of sales leverage resulting from negative comparable store sales. Operating Expenses Operating expenses as a percentage of net sales decreased to 24.2 percent for the second quarter of 1995 from 24.9 percent for the same period in 1994. For the first half of 1995 operating expenses as a percentage of net sales decreased to 24.0 percent from 24.8 percent for the same period in 1994. The .7 percentage point decrease for the second quarter and the .8 percentage point decrease for the first half of 1995 were primarily attributable to a decrease in incentive bonus expense as a percentage of net sales. Due to the company's performance, no incentive bonus expense was recognized in the first half of 1995. Net Interest Income Net interest income was approximately $4.4 million for the second quarter and $9.3 million for the first half of 1995 compared to net interest income of $394,000 and $1.7 million for the same periods in 1994. The increase was attributable to reductions in interest expense resulting from the June 1994 repayment of $75 million of long-term debt and the payment of $1.7 million of additional interest expense associated with the early repayment of long- term debt. Increases in income from higher average interest rates also contributed to the change. Income Taxes The effective income tax rate was 39.5 percent for the first half of both 1994 and 1995. The Company does not anticipate any change in the effective tax rate of 39.5 percent for the remainder of 1995. LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity: Twenty-six weeks ended July 29, 1995 July 30, 1994 Cash (used for) provided by operating activities ($000) $ (3,404) $ 85,723 Working capital ($000) $558,901 $458,400 Current ratio 2.23:1 2.05:1 For the twenty-six weeks ended July 29, 1995, the decrease in cash flows from operating activities was attributable to an increased investment in inventory to support the Old Navy and International divisions, the timing of certain fiscal 1994 year-end payables, and the decrease in net earnings. The Company's overall cash and liquidity position continues to be strong. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operating activities and normal trade credit arrangements. The Company's business follows a seasonal pattern, peaking over a total of about ten weeks during the late summer and holiday periods. For the twenty-six weeks ended July 29, 1995, capital expenditures, net of construction allowances and dispositions, totalled approximately $136 million. These expenditures included the addition of 94 new stores, the expansion of 29 stores and the remodeling of certain stores resulting in a net increase in store space of approximately 873,000 square feet or 10 percent since January 28, 1995. For fiscal year 1995, the Company expects capital expenditures to total approximately $275 to $300 million, net of construction allowances, representing the addition of approximately 175 to 200 new stores, the expansion of approximately 50 to 70 stores, and the remodeling of certain stores. Square footage growth is expected to be approximately 20 percent after accounting for store closings. New stores are generally expected to be leased. 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. The Company continues to explore alternatives for headquarters facilities in San Francisco and San Bruno, California. The Company plans to construct a distribution center in Gallatin,Tennessee for a total cost of approximately $45 to $55 million. The facility is expected to be in operation in late 1996. The Company has a credit agreement which provides for a $250 million revolving credit facility until March 1998. In addition, the credit agreement provides for the issuance of letters of credit up to $425 million at any one time. The Company had outstanding letters of credit of approximately $402 million at July 29, 1995. Under a program announced in October 1994 to repurchase up to 9 million shares of the Company's outstanding common stock, the Company acquired 1,268,300 shares during the first quarter of 1995 for $41,978,000. Included in this transaction was the purchase of 250,000 shares from a senior executive of the Company for $8,438,000. No shares were acquired during the second quarter of 1995. To date, 2,741,800 shares have been repurchased for $90,238,000. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits (11) Computation of Earnings per Share (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule b) The Company did not file any reports on Form 8-K during the three months ended July 29, 1995. 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: September 8, 1995 By /s/ Robert J. Fisher Robert J. Fisher Executive Vice President and Chief Financial Officer (Principal financial officer of the registrant) Date: September 8, 1995 By /s/ Donald G. Fisher Donald G. Fisher Chairman and Chief Executive Officer EXHIBIT INDEX (11) Computation of Earnings per Share (15) Letter re: Unaudited Interim Financial Information (27) Financial Data Schedule EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE GAP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Thirteen Weeks Ended Twenty-six Weeks Ended July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994 Net earnings ($000) $ 32,414 $ 44,352 $ 82,527 $ 107,830 Weighted average shares of common stock outstanding during the period 144,116,611 145,741,236 143,994,080 145,551,113 Add incremental shares from assumed exercise of stock options (primary) 301,392 729,087 234,252 831,631 144,418,003 146,470,323 144,228,332 146,382,744 Primary earnings per share $ .22 $ .30 $ .57 $ .74 Weighted average shares of common stock outstanding during the period 144,116,611 145,741,236 143,994,080 145,551,113 Add incremental shares from assumed exercise of stock options (fully-diluted) 406,491 728,973 286,785 862,052 144,523,102 146,470,209 144,280,865 146,413,165 Fully-diluted earnings per share $ .22 $ .30 $ .57 $ .74 NOTE: The information provided above is presented in accordance with Regulation S-K Item 601(b)(11), while net earnings per share on the Consolidated Statements of Earnings is presented in accordance with APB Opinion 15. The information in this exhibit is not required under APB Opinion 15, as the difference between primary and fully-diluted earnings per share and earnings per share calculated on a weighted average shares basis is less than 3%.
EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION Deloitte & 2101 Webster Street Telephone:(510)287-2700 Touche LLP Oakland, California 946-12-3027 Facsimile:(510)835-4888 To the Board of Directors and Stockholders of The Gap, Inc. We have made reviews, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim consolidated financial statements of The Gap, Inc. and subsidiaries for the thirteen week and twenty-six week periods ended July 29, 1995 and July 30, 1994, as indicated in our report dated August 9, 1995, because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended July 29, 1995, is incorporated by reference in Post Effective Amendment No. 1 to Registration Statement No. 2-72586, Registration Statement No. 2-60029, Registration Statement No. 33-39089, Registration Statement No. 33-40505, Registration Statement No. 33-54686, Registration Statement No. 33-54688, Registration Statement No. 33-54690 and Registration Statement No. 33-56021. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /S/ Deloitte & Touche LLP September 8, 1995 EX-27 4
5 6-MOS FEB-03-1996 JUL-29-1995 249,217 143,416 0 0 508,641 1,013,022 1,412,459 529,510 2,000,466 454,121 0 7,887 0 0 1,402,473 2,000,466 868,514 868,514 609,321 210,043 (4,430) 0 0 53,580 21,166 32,414 0 0 0 32,414 .22 .22