SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended February 3, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1996 was approximately $5,970,295,366, based upon
the last price reported for such date in the NYSE-Composite transactions.
The number of shares of the Registrant's Common Stock outstanding as of
March 25, 1996 was 288,377,346 (restated to reflect a 2-for-1 stock split in
the form of a stock dividend to stockholders of record on March 18, 1996).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 21, 1996 (hereinafter referred to as the "1996
Proxy Statement") are incorporated into Parts I and III.
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended February 3, 1996 (hereinafter referred to as the "1995 Annual Report
to Stockholders") are incorporated into Parts II and IV.
PART I
Item 1 - BUSINESS
General
The Gap, Inc. (hereinafter referred to as the "Company") is an
international specialty retailer which operates stores selling casual apparel,
shoes and other accessories for men, women and children under a number of trade
names, including: Gap, GapKids, babyGap, Banana Republic, and Old Navy Clothing
Co. The Company was incorporated in the State of California in July 1969 and
was reincorporated under the laws of the State of Delaware in May 1988. On
March 25, 1996, the Company operated 1,701 stores, including 907 Gap, 444
GapKids, 211 Banana Republic, and 139 Old Navy Clothing Co. stores (55 of the
Gap and GapKids stores are located in the United Kingdom, 95 in Canada, 12 in
France, 6 in Japan and 2 in Germany; 5 of the Banana Republic stores are
located in Canada).
Virtually all of the Company's merchandise is private label. The Gap
stores offer casual clothing for men and women. GapKids was introduced in 1986
to provide well-designed, comfortable clothing for boys and girls ages 2-12.
The babyGap line, offering mostly natural fiber clothing for infants and
toddlers, was added in 1990 and is sold in all GapKids stores. Banana Republic
offers classic, casual fashions for men and women. Old Navy Clothing Co. was
introduced in 1993 and offers casual basic and fashion clothing and various
accessories and gift items for men, women and children at lower price points.
Recent Developments
During fiscal 1995, the Company's efforts emphasized the development of
its two newest growth vehicles: Old Navy Clothing Co. and the International
division. It is anticipated that this emphasis will continue in fiscal 1996.
Old Navy Clothing Co., whose stores average 15,300 square feet,
experienced a rapid expansion during fiscal 1995 (from 59 stores at the
beginning of the period to 131 at the end), accounting for about 18% of the
Company's total store space. This rapid rate of expansion has involved
infrastructure and new-store opening expenses. Although Old Navy Clothing Co.
is profitable even in its second year of operations, the risk remains that this
rapid rate of expansion could adversely impact profitability. In addition, the
discount-store segment in which Old Navy operates is subject to particularly
intense competitive pressures. Old Navy competes with a wide variety of
regional and national discount stores, many of whom are larger and have
significantly greater financial, marketing and other resources than Old Navy.
The Company's International division also experienced accelerated growth
in fiscal 1995, notably opening Gap and GapKids stores in two new markets,
Japan and Germany. The Company has very limited or no operating history in
these markets and is faced with competition from established regional and
national chains. Operations in international markets such as Germany and Japan
involve special risks. If such expansion is not successful, the Company's
results of operations could be adversely affected.
Merchandise Inventory, Replenishment and Distribution
The retail apparel business fluctuates according to changes in customer
preferences dictated in part by fashion and season. These fluctuations
especially affect the inventory owned by apparel retailers, since merchandise
usually must be ordered well in advance of the season and sometimes before
fashion trends are evidenced by customer purchases. The Company is also
vulnerable to changing fashion trends. In addition, the cyclical nature of the
retail business requires the Company to carry a significant amount of
inventory, especially prior to peak selling seasons when the Company and other
retailers generally build up their inventory levels. The Company must enter
into contracts for the purchase and manufacture of apparel well in advance of
the applicable selling season. As a result, the Company is vulnerable to
demand and pricing shifts and to errors in selection and timing of merchandise
purchases.
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 may use markdowns to clear merchandise. Markdowns may be
used if inventory exceeds customer demand for reasons of style, seasonal
adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, or if it is determined that the inventory in stock will not sell
at its currently marked price. Such markdowns may have an adverse impact on
earnings, depending on their extent and the amount of inventory affected.
Because the Company does not carry much replenishment inventory in its
stores, replenishment inventory is maintained in the Company's distribution
centers in California, Kentucky, Maryland and Canada and in a distribution
center owned and operated by a third party in the United Kingdom, and then
shipped to the stores.
Store Operations and Expansion
The Company's stores offer a shopper-friendly environment with a select
assortment of casual clothing and accessories which emphasize style, quality
and good value. The range of apparel displayed in each store varies
significantly depending on the selling season and the size of the store.
The Company's stores generally are open seven days per week (where
permitted by law), three to six nights per week and most holidays. All sales
are made for cash, personal checks or on credit cards issued by others.
The Company opened 225 new stores and expanded 55 stores during the 1995
fiscal year; the Company anticipates that it will open approximately 175 to 200
new stores and expand approximately 30 to 40 stores during the 1996 fiscal
year. Over the past five years, the Company has increased the average size of
its new stores and expanded the size of existing stores. For fiscal year 1995,
the average size of new stores was about 7,100 square feet for Gap, 4,300
square feet for GapKids, 7,000 square feet for Banana Republic, and 15,600
square feet for Old Navy Clothing Co. Expanded stores are excluded from
comparable store calculations until they have been open over one year in their
new size.
The Company's continued success depends, in part, upon its ability to
increase sales at existing store locations, to open new stores and to operate
stores on a profitable basis. There can be no assurance that the Company's
growth will result in enhanced profitability or that it will continue at the
same rate in future years. In addition, the Company's strategy of expanding
domestically through new concepts (such as Old Navy Clothing Co.) and new
product lines (such as personal care items), and internationally in countries
in which the Company has no, or limited, operating history could result in
reduced profitability if such expansion is not successful. Currently, the
Company is planning to open 4-6 Gap and GapKids stores in Japan and 2 Gap and
GapKids stores in Germany during fiscal 1996.
Suppliers
The Company purchases merchandise from over 1,000 suppliers located
domestically and overseas. No supplier accounted for more than 5% of the
Company's fiscal 1995 purchases. Of the Company's merchandise sold worldwide
during fiscal 1995, approximately 31% was produced domestically while the
remaining 69% was made overseas. Approximately 14% of the Company's total
merchandise was from Hong Kong, with the remainder coming from 50 other
countries. Any event causing a sudden disruption of imports from Hong Kong,
including the imposition of additional import restrictions, could have a
materially adverse effect on the Company's operations. Substantially all of
the Company's foreign purchases are negotiated and paid for in U.S. dollars.
The Company cannot predict whether any of the foreign countries in which
its products currently are manufactured or may be manufactured in the future
will be subject to trade restrictions imposed by the U.S. government, including
the likelihood, type or effect of any such restrictions. Trade restrictions,
including increased tariffs or quotas, or both, against apparel items could
increase the cost or reduce the supply of apparel available to the Company and
adversely affect the Company's business, financial condition and results of
operations. In addition, the Company's import operations may be adversely
affected by political instability resulting in the disruption of trade from
exporting countries, significant fluctuation in the value of the U.S. dollar
against foreign currencies, restrictions on the transfer of funds and/or other
trade disruptions.
Seasonal Business
The Company's business follows a seasonal pattern, peaking over a total
of about 12 weeks during the late summer (late August through September) and
holiday (Thanksgiving through Christmas) periods. During fiscal year 1995,
these periods accounted for approximately 34% of the Company's annual sales.
Competition
The Company's business is highly competitive. The Company's stores
compete with national and local department, specialty and discount store chains
and independent retail stores which handle similar lines of merchandise. Some
competitors have larger sales and assets than the Company.
Depth of selection in sizes, colors and styles of merchandise,
merchandise procurement and pricing, ability to anticipate fashion trends and
customer preferences, inventory control, reputation, quality of merchandise,
store design and location, advertising and customer service are all important
factors in competing successfully in the retail industry. Given the large
number of companies in the retail industry, the Company cannot estimate the
number of its competitors or its relative competitive position.
The performance of the Company in recent years has increased imitation by
other retailers. Such imitation has made and will continue to make the retail
environment in which the Company operates more competitive. In addition, the
success of the Company's operations depends upon a number of factors relating
to consumer spending, including future economic conditions affecting disposable
consumer income such as employment, business conditions, interest rates and
taxation. A decline in consumer spending could adversely affect the Company's
net sales and profitability.
Advertising
The Company's marketing strategy primarily involves advertising in major
metropolitan newspapers and their Sunday magazines and in major news weeklies,
with smaller amounts of print advertising in lifestyle and fashion magazines.
Other advertising media include various outdoor venues, such as bus shelters,
mass transit posters, billboards, telephone kiosks and exterior bus panels,
including double-decker London buses.
Employees
On February 3, 1996, the Company had a work force of approximately 60,000
employees. Additionally, the Company hires temporary employees during the peak
late summer and holiday seasons. The Company considers its employee relations
to be good.
Trademarks and Service Marks
The trademarks and service marks for Gap, GapKids, babyGap, Banana
Republic and Old Navy Clothing Co., and certain other trademarks either have
been registered, or have trademark applications pending, with the United States
Patent and Trademark Office and with the registries of many foreign countries.
Executive Officers of the Registrant
The Chairman of the Company is Donald G. Fisher. Millard S. Drexler is
the President and Chief Executive Officer of the Company and of the operating
divisions. Robert J. Fisher is Executive Vice President and Chief Operating
Officer of the Company. Each of Messrs. Donald G. Fisher, Robert J. Fisher and
Drexler is a director of the Company and the required information with respect
to each of them is set forth in the table located in the Section entitled
"Nominees for Election as Directors" of the 1996 Proxy Statement and is
incorporated by reference herein. The following are also executive officers of
the Company:
Name Age Position
Magdalene Gross 47 Executive Vice President - Advertising
Anne B. Gust 38 Senior Vice President - General Counsel
Warren R. Hashagen 45 Senior Vice President - Finance and Chief
Financial Officer
Richard M. Lyons 39 Executive Vice President, The Gap, Inc.
and President, Gap/GapKids Division
Ms. Gross joined the Company in 1984 and has served as Executive Vice
President - Advertising, Gap Division since April 1992. From 1989 to 1992, she
was Senior Vice President - Advertising.
Ms. Gust joined the Company in 1991 and has served as Senior Vice
President - General Counsel since April 1994. From April 1993 to April 1994
she was Vice President - General Counsel; from June 1992 until April 1993, she
was Associate General Counsel and Managing Attorney and from August 1991 until
May 1992 she was Associate General Counsel. From 1986 until August 1991, she
was associated with the law firm of Brobeck, Phleger & Harrison.
Mr. Hashagen joined the Company in 1982 and has served as Senior Vice
President - Finance and Chief Financial Officer since November 1995. From
April 1992 to October 1995 he was Senior Vice President - Finance, and from
February 1991 to April 1992, he was Senior Vice President - Finance and
Treasurer.
Mr. Lyons was promoted to Executive Vice President of the Company in
March 1995, in charge of Gap and GapKids Divisions. He joined the Company in
1984 and has served as President, Gap Division since July 1993. From August
1992 to July 1993 he was Executive Vice President, GapKids Division and from
November 1989 to August 1992 he was Senior Vice President - General Merchandise
Manager, GapKids Division.
Item 2 - PROPERTIES
During fiscal year 1995, the Company opened 225 stores and closed 53.
The newly-opened stores include 59 Gap stores (including 3 stores in the United
Kingdom, 8 stores in Canada, 5 stores in France, 2 stores in Japan and 1 store
in Germany), 68 GapKids stores (including 3 stores in the United Kingdom, 11
stores in Canada, 4 stores in France, 2 stores in Japan and 1 store in
Germany), 26 Banana Republic stores (including 5 stores in Canada), and 72 Old
Navy Clothing Co. stores. In addition, during fiscal year 1995, the Company
expanded 55 stores. The expanded stores include 34 Gap stores, 17 GapKids
stores (including 1 in the United Kingdom and 2 in Canada), 3 Banana Republic
stores and 1 Old Navy Clothing Co. store. The 1,680 stores operating on
February 3, 1996 aggregated approximately 11.1 million square feet. The
Company leases virtually all of its store premises for terms generally ranging
from 12 to 15 years. Most leases provide for additional rent based on a
percentage of store sales above a certain level in addition to or in lieu of
minimum rentals, as well as for the payment of certain other expenses. Some
leases contain cancellation clauses in favor of the Company if specified sales
levels are not achieved. In the United States, the Company's stores are
located in all of the 50 largest metropolitan statistical areas.
During fiscal year 1996, the Company plans to increase store space by
approximately 15%, before taking into account store closings. This increase is
expected to include the opening of approximately 175 to 200 new stores
worldwide and the expansion of approximately 30 to 40 of the Company's existing
stores.
The Company leases its headquarters and regional office buildings, as
well as its Eastern Distribution Center (EDC) and Kentucky Distribution Center
(KDC). The EDC/KDC in Erlanger, Kentucky together consist of approximately
1,220,000 square feet. They distribute Gap, GapKids, Banana Republic and Old
Navy merchandise and their lease term runs through February 28, 2003, with
options to extend the lease for an additional 30 years. In order to capitalize
on synergies with the nearby EDC/KDC, the Company has entered into a lease for
19 acres of land and a 320,000 square foot structure for
consolidation/deconsolidation purposes in Hebron, Kentucky. The facility is
expected to be in operation in the second quarter of fiscal year 1996.
The Company owns its Canadian Distribution Center located in Brampton,
Ontario. It consists of approximately 150,000 square feet and distributes Gap,
GapKids and Banana Republic merchandise. The Company also owns its Western
Distribution Center (WDC) located in Ventura, California. This facility, which
is approximately 344,000 square feet, distributes Gap and GapKids merchandise.
The Company also owns an adjacent five acre parcel for possible future
expansion. The Atlantic Distribution Center (ADC), a facility owned by the
Company in Edgewood, Maryland, covers approximately 745,000 square feet and
distributes Gap, GapKids and Banana Republic merchandise. The Company also
owns 156 adjacent acres, portions of which could be used for potential
expansion of the ADC.
During 1995, the Company acquired land in Gallatin, Tennessee and began
construction on a 640,000 square foot distribution center for an estimated cost
at completion of approximately $45-55 million. The Company expects the
facility to be in operation in late 1996.
The Company has entered into negotiations to purchase land in Roosendaal,
Netherlands for the purpose of constructing a distribution center to serve its
European stores. The Company expects the facility to be in operation by the
second quarter of fiscal 1996.
The Company also owns and operates a data center located on seven acres
of land in Rocklin, California; it covers approximately 40,000 square feet and
serves as a corporate computer processing center.
In February 1996, the Company exercised an option to purchase a 12-acre
parcel of land in San Bruno, California to expand its headquarters facilities.
Construction is expected to begin in late Spring 1996 for an estimated cost at
completion of $55-60 million. The facility is expected to be in operation in
late 1997.
Item 3 - LEGAL PROCEEDINGS
The Company is a party to routine litigation incident to its business.
Some of the lawsuits to which the Company is a party are covered by insurance
and are being defended by the Company's insurance carriers. The Company has
established reserves which management believes are adequate to cover any
litigation losses which may occur.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
to page 23 of the 1995 Annual Report to Stockholders filed as Exhibit 13 to
this Annual Report on Form 10-K.
Item 6 - SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to pages 20 and 21 of the 1995 Annual Report to Stockholders filed as Exhibit
13 to this Annual Report on Form 10-K.
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference
to pages 22 and 23 of the 1995 Annual Report to Stockholders filed as Exhibit
13 to this Annual Report on Form 10-K.
The Management's Discussion and Analysis incorporated by reference herein
as well as other portions of this report and of the annual report to
stockholders contain a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. In these reports the words "expect," "plan," "anticipate,"
"believe" and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results of operations to
differ materially from historical results or current expectations. Some of
these risks already have been discussed under Item 1 of this report; other
risks include, without limitation, ongoing competitive pressures in the apparel
industry, a continuation or exacerbation of the current over-capacity problem
affecting the industry, and/or changes in the level of consumer spending or
preferences in apparel. Future economic and industry trends that could
potentially impact revenue and profitability remain difficult to predict.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
($000) February 3, 1996 January 28, 1995
Accrued Payroll $39,331 $32,624
The remaining information required by this item is incorporated herein by
reference to pages 24-34 of the 1995 Annual Report to Stockholders filed as
Exhibit 13 to this Annual Report on Form 10-K.
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Section entitled "Nominees for Election as Directors" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the 1996 Proxy
Statement. See also Item 1 above.
Item 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Sections entitled "Compensation of Directors," "Executive Compensation"
and "Employment Contracts and Termination of Employment Arrangements" in the
1996 Proxy Statement.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Section entitled "Beneficial Ownership of Shares" in the 1996 Proxy
Statement.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Sections entitled "Other Reportable Transactions" in the 1996 Proxy
Statement.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
A. The following consolidated financial statements, schedules and
exhibits are filed as part of this report or are incorporated herein as
indicated.
(1) Financial Statements
(i) Independent Auditors' Report. Incorporated by
reference to Page 24 of the 1995 Annual Report to
Stockholders filed as Exhibit 13 to this Annual Report
on Form 10-K.
(ii) The consolidated balance sheets as of February 3, 1996
and January 28, 1995 and the related consolidated
statements of earnings, cash flows, and stockholders'
equity for each of the three fiscal years in the period
ended February 3, 1996 are incorporated by reference to
pages 25-34 of the 1995 Annual Report to Stockholders
filed as Exhibit 13 to this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedules have been omitted because they are not required or are
not applicable or because the information required to be set forth therein
either is not material or is included in the financial statements or notes
thereto.
Individual financial statements of the Company have been omitted
since the Company is primarily an operating Company and the indebtedness of the
wholly owned subsidiaries to any person other than the Company does not exceed
five percent of the total assets.
(3) Exhibits
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index which begins on sequentially numbered page 11 of
this Report.
(4) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed for the
last quarter of the fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 15, 1996 By /s/ Millard S. Drexler
Millard S. Drexler
Chief Executive Officer
(Principal Executive Officer)
Date: April 15, 1996 By /s/ Warren R. Hashagen
Warren R. Hashagen, Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 15, 1996 By /s/ Adrian D. P. Bellamy
Adrian D. P. Bellamy, Director
Date: April 15, 1996 By /s/ John G. Bowes
John G. Bowes, Director
Date: April 15, 1996 By /s/ Millard S. Drexler
Millard S. Drexler, Director
Date: April 15, 1996 By /s/ Donald G. Fisher
Donald G. Fisher, Director
Date: April 15, 1996 By /s/ Doris F. Fisher
Doris F. Fisher, Director
Date: April 15, 1996 By /s/ Robert J. Fisher
Robert J. Fisher, Director
Date: April 15, 1996 By /s/ Lucie J. Fjeldstad
Lucie J. Fjeldstad, Director
Date: April 15, 1996 By /s/ William A. Hasler
William A. Hasler, Director
Date: April 15, 1996 By /s/ John M. Lillie
John M. Lillie, Director
Date: April 12, 1996 By /s/ Charles R. Schwab
Charles R. Schwab, Director
Date: April 15, 1996 By /s/ Brooks Walker, Jr.
Brooks Walker, Jr., Director
THE GAP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED FEBRUARY 3, 1996
EXHIBIT INDEX
3.1 Registrant's Amended and Restated Certificate of
Incorporation, filed as Exhibit 3.1 to Registrant's Annual
Report on Form 10-K for the year ended January 30, 1993,
Commission File No. 1-7562.
3.2 Registrant's By-Laws, filed as Exhibit C to Registrant's
definitive proxy statement for its annual meeting of
stockholders held on May 24, 1988, Commission File No. 1-7562.
3.3 Amended Article IV of Registrant's By-Laws, filed as Exhibit 4.4 to
Registrant's Registration Statement on Form S-8, Commission File No.
333-00417.
10.1 Credit Agreement, dated as of August 1, 1995, among Registrant
and Citicorp USA Inc.; Bank of America National Trust & Savings
Association; National Westminster Bank PLC; Nationsbank of Texas;
The Royal Bank of Canada; Bank of Montreal; Societe Generale; The
Fuji Bank, Limited; U.S. National Bank of Oregon; Morgan Guaranty
Trust Company of New York; The Sumitomo Bank Limited; and
Citibank, N.A., filed as Exhibit 10 to Registrant's Quarterly Report on
Form 10-Q for the period ended October 28, 1995, Commission File No.
1-7562.
10.2 Lease Agreement (Eastern Distribution Center), dated as of
July 6, 1979, between Registrant and Corporate Property
Associates, filed as Exhibit 10.8 to Registrant's Annual
Report on Form 10-K for the year ended February 3, 1980,
Commission File No. 1-7562.
10.3 Amendment to Lease Agreement (Eastern Distribution Center),
dated as of October 10, 1986, filed as Exhibit 10.10 to
Registrant's Annual Report on Form 10-K for the year ended
January 30, 1988, Commission File No. 1-7562.
10.4 Second Amendment to Lease Agreement (Eastern Distribution
Center), dated as of February 16, 1988, filed as Exhibit 10.11
to Registrant's Annual Report on Form 10-K for the year ended
January 30, 1988, Commission File No. 1-7562.
10.5 Lease Agreement (Kentucky Distribution Center), dated as of
February 16, 1988, between Registrant and Corporate Property
Associates 7, filed as Exhibit 10.12 to Registrant's Annual
Report on Form 10-K for the year ended January 30, 1988,
Commission File No. 1-7562.
10.6 Lease Agreement (One Harrison, San Francisco), dated as
of September 1, 1987, between Registrant's wholly-owned
subsidiary, Banana Republic, Inc. ("Banana Republic"),
and JMC Associates Limited Partnership, filed as Exhibit
10.13 to Registrant's Annual Report on Form 10-K for the
year ended January 30, 1988, Commission File No. 1-7562.
10.7 First Amendment to Lease Agreement (One Harrison, San
Francisco), dated as of December 21, 1987, filed as
Exhibit 10.14 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992, Commission File No.
1-7562.
10.8 Second Amendment to Lease Agreement (One Harrison, San
Francisco), dated as of October 16, 1991, filed as
Exhibit 10.15 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992, Commission File No.
1-7562.
10.9 Sublease Agreement (One Harrison, San Francisco), dated
as of December 21, 1987, between Registrant's wholly-
owned subsidiary, Banana Republic, Inc. and Hillman
Properties West, Inc., filed as Exhibit 10.14 to
Registrant's Annual Report on Form 10-K for the year
ended January 30, 1988, Commission File No. 1-7562.
10.10 First Amendment to Sublease Agreement (One Harrison, San
Francisco), dated as of December 17, 1990, filed as
Exhibit 10.17 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992, Commission File No.
1-7562.
10.11 Second Amendment to Sublease Agreement (One Harrison, San
Francisco), dated as of September 30, 1991, filed as
Exhibit 10.18 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992, Commission File No.
1-7562.
10.12 Third Amendment to Sublease Agreement (One Harrison, San
Francisco), dated as of October 16, 1991, filed as
Exhibit 10.19 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992, Commission File No.
1-7562.
10.13 Lease Agreement (Two Harrison, San Francisco), dated as
of May 31, 1991, between Registrant and Harrison Plaza,
Ltd., a California limited partnership, filed as Exhibit
10.20 to Registrant's Annual report on Form 10-K for the
year ended February 1, 1992, Commission File No. 1-7562.
10.14 Purchase Agreement (Atlantic Distribution Center), dated
as of April 9, 1990, between Registrant and Greater
Harford Industrial Park Partnership, filed as Exhibit
10.13 to Registrant's Annual Report on Form 10-K for the
year ended February 3, 1990, Commission File No. 1-7562.
10.15 Purchase and Installation Agreement (Materials Handling
Equipment for Atlantic Distribution Center), dated as of
December 18, 1990, between Registrant and Computer Aided
Systems, Inc. filed as Exhibit 10.17 to Registrant's
Annual Report on Form 10-K for the year ended February 2,
1991, Commission File No. 1-7562.
10.16 Construction Agreement (Atlantic Distribution Center),
dated as of July 31, 1990, between Registrant and Robert
A. Kinsley, Inc., filed as Exhibit 10.18 to Registrant's
Annual Report on Form 10-K for the year ended February 2,
1991, Commission File No. 1-7562.
10.17 Purchase Agreement (Rocklin Data Center), dated as of
November 20, 1990, between Registrant and Stanford Ranch,
Inc., filed as Exhibit 10.19 to Registrant's Annual
Report on Form 10-K for the year ended February 2, 1991,
Commission File No. 1-7562.
10.18 Construction Agreement (Rocklin Data Center), dated as of
January 11, 1991, between Registrant and The Austin
Company, filed as Exhibit 10.20 to Registrant's Annual
Report on Form 10-K for the year ended February 2, 1991,
Commission File No. 1-7562.
10.19 Purchase Agreement (Canadair Corporate Jet), dated as of
July 11, 1991, between Registrant and Canadair
Challenger, Inc., a Delaware corporation, filed as
Exhibit 10.26 to Registrant's Annual report on Form 10-K
for the year ended February 1, 1992,
10.20 Construction Agreement, dated as of January 1, 1992,
between Registrant and Fisher Development, Inc., filed as
Exhibit 10.26 to Registrant's Annual Report on Form 10-K
for the year ended January 30, 1993, Commission File No.
1-7562.
10.21 Letter Agreement, dated as of December 17, 1992, amending
the Restated Construction Agreement between Registrant
and Fisher Development, Inc., filed as Exhibit 10.27 to
Registrant's Annual Report on Form 10-K for the year
ended January 30, 1993, Commission File No. 1-7562.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.22 1981 Stock Option Plan, filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-8,
Commission File No. 33-54690.
10.23 Form of Nonqualified Stock Option Agreement under
Registrant's 1981 Stock Option Plan, filed as Exhibit 4.2
to Registrant's Registration Statement on Form S-8,
Commission File No. 33-54690.
10.24 Management Incentive Restricted Stock Plan II, filed as
Exhibit 4.1 to Registrant's Registration Statement on
Form S-8, Commission File No. 33-54686.
10.25 Form of Restricted Stock Agreement under Registrant's
Management Incentive Restricted Stock Plan II, filed as
Exhibit 4.2 to Registrant's Registration Statement on
Form S-8, Commission File No. 33-54686.
10.26 GapShare, filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-8, Commission File No.
333-00417.
10.27 Description of Management Incentive Cash Award Plan filed
as Exhibit 10.34 to Registrant's Annual Report on Form
10-K for the year ended January 29, 1994, Commission File
No. 1-7562.
10.28 Employee Stock Purchase Plan, filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-8,
Commission File No. 33-56021.
10.29 Amended and Restated Executive Management Incentive Cash
Award Plan, filed as Exhibit B to the Registrant's
definitive proxy statement for its annual meeting of
stockholders held on May 23, 1995, Commission File No.
1-7562.
10.30 Deferred Compensation Plan filed as Exhibit 10.36 to
Registrant's Annual Report on Form 10-K for the year
ended January 29, 1994, Commission File No. 1-7562.
10.31 Executive Capital Accumulation Plan filed as Exhibit 10.36
to Registrant's Annual Report on Form 10-K for the year
ended January 28, 1995, Commission File No. 1-7562.
10.32 1996 Stock Option and Award Plan, filed as Exhibit A
to the Registrant's definitive proxy statement for its annual
meeting of stockholders held on May 21, 1996, Commission
File No. 1-7562.
10.33 Executive Long-Term Cash Award Plan, filed as Exhibit B
to the Registrant's definitive proxy statement for its annual
meeting of stockholders held on May 21, 1996, Commission
File No. 1-7562.
10.34 Relocation Loan Plan, filed as Exhibit A to Registrant's
definitive proxy statement for its annual meeting of
stockholders held on October 25, 1977, Commission File
No. 1-7562.
10.35 Certificate of Corporate Resolution amending the
Relocation Loan Plan, adopted by the Board of Directors
on November 27, 1990, filed as Exhibit 10.34 to
Registrant's Annual Report on Form 10-K for the year
ended February 2, 1991, Commission File No. 1-7562.
10.36 Agreement, dated as of October 22, 1985, between
Registrant and Millard S. Drexler, together with an
amendment thereto dated as of November 21, 1985, filed as
Exhibits 19.1 and 19.2, respectively, to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
November 2, 1985, Commission File No. 1-7562.
10.37 Amendment to the Agreement between Registrant, Millard
Drexler and Donald Fisher, dated October 23, 1992, filed
as Exhibit 10.38 to Registrant's Annual Report on Form
10-K for the year ended January 30, 1993, Commission File
No. 1-7562.
10.38 Amended and Restated Restricted Stock Agreement, dated
January 30, 1992, between Registrant and Millard Drexler,
filed as Exhibit 10.39 to Registrant's Annual Report on
Form 10-K for the year ended January 30, 1993, Commission
File No. 1-7562.
10.39 First Amendment to the Amended and Restated Restricted
Stock Agreement, dated October 23, 1992, between
Registrant and Millard Drexler, filed as Exhibit 10.40 to
Registrant's Annual Report on Form 10-K for the year
ended January 30, 1993, Commission File No. 1-7562.
10.40 Restricted Stock Award Agreement, dated April 13, 1992,
between Registrant and Millard Drexler, filed as Exhibit
10.41 to Registrant's Annual Report on Form 10-K for the
year ended January 30, 1993, Commission File No. 1-7562.
10.41 First Amendment to Restricted Stock Award Agreement,
dated October 23, 1992, between Registrant and Millard
Drexler, filed as Exhibit 10.42 to Registrant's Annual
Report on Form 10-K for the year ended January 30, 1993,
Commission File No. 1-7562.
10.42 Non-Employee Director Retirement Plan, dated October 27,
1992, filed as Exhibit 10.43 to Registrant's Annual
Report on Form 10-K for the year ended January 30, 1993,
Commission File No. 1-7562.
11 Computation of Earnings per Share.
13 Registrant's annual report to security holders for the fiscal
year ended February 3, 1996.
21 Subsidiaries of Registrant.
23 Consent of Deloitte & Touche.
27 Financial Data Schedule
THE GAP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Fifty-three Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
February 3, 1996 January 28, 1995 January 29, 1994
Net earnings ($000) $354,039 $320,240 $258,424
Weighted average shares of
common stock outstanding
during the period 288,062,430 291,141,076 289,682,274
Add incremental shares from
from assumed exercise of stock
options (primary) 1,292,990 1,148,118 1,374,018
289,355,420 292,289,194 291,056,292
Primary earnings per share $ 1.22 $ 1.10 $ 0.89
Weighted average shares of
common stock outstanding
during the period 288,062,430 291,141,076 289,682,274
Add incremental shares from
assumed exercise of stock
options (fully-diluted) 2,311,716 1,178,832 1,946,744
290,374,146 292,319,908 291,629,018
Fully-diluted earnings
per share $ 1.22 $ 1.10 $ 0.89
NOTE:
(1) The information provided above is presented in accordance with Regulation
S-K, Item 604(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 share bases is
less than 3%.
(2) All per share data reflects the 2-for-1 split of common stock in the form
of a stock dividend to stockholders of record on March 18, 1996.
<TABLE>
<CAPTION>
The Gap, Inc. and Subsidiaries
ten-year selected financial data
Fiscal Years 1995 1994 1993 1992
53 weeks 52 weeks 52 weeks 52 weeks
<S> <C> <C> <C> <C>
Operating Results ($000)
Net sales $4,395,253 $3,722,940 $3,295,679 $2,960,409
Cost of goods sold and occupancy
expenses, excluding depreciation
and amortization 2,645,736 2,202,133 1,996,929 1,856,102
Percentage of net sales 60.2% 59.2% 60.6% 62.7%
Depreciation and amortization(a) 175,719 148,863 124,860 99,451
Operating expenses 1,004,396 853,524 748,193 661,252
Net interest (income) expense (15,797) (10,902) 809 3,763
Earnings before income taxes(b) 585,199 529,322 424,888 339,841
Percentage of net sales 13.3% 14.2% 12.9% 11.5%
Income taxes 231,160 209,082 166,464 129,140
Net earnings 354,039 320,240 258,424 210,701
Percentage of net sales 8.1% 8.6% 7.8% 7.1%
Cash dividends 66,993 64,775 53,041 44,106
Capital expenditures(c) 309,599 236,616 215,856 213,659
Per Share Data(d)
Net earnings(e) $1.23 $1.10 $ .89 $ .73
Cash dividends .24 .23 .19 .16
Stockholders' equity (book value)(f) 5.70 4.75 3.88 3.08
Financial Position ($000)
Property and equipment (net) $ 957,752 $ 828,777 $ 740,422 $ 650,368
Merchandise inventory 482,575 370,638 331,155 365,692
Total assets 2,343,068 2,004,244 1,763,117 1,379,248
Working capital 728,301 555,827 494,194 355,649
Current ratio 2.32:1 2.11:1 2.07:1 2.06:1
Total debt, less current installments - - 75,000 75,000
Ratio of long-term debt to N/A N/A .07:1 .08:1
stockholders' equity
Stockholders' equity 1,640,473 1,375,232 1,126,475 887,839
Return on average assets 16.3% 17.0% 16.4% 16.7%
Return on average stockholders' equity 23.5% 25.6% 25.7% 26.9%
Statistics
Number of stores opened 225 172 108 117
Number of stores expanded 55 82 130 94
Number of stores closed 53 34 45 26
Number of stores open at year-end 1,680 1,508 1,370 1,307
Net increase in number of stores 11.4% 10.1% 4.8% 7.5%
Comparable store sales growth
(52-week basis) 0.0% 1.0% 1.0% 5.0%
Sales per square foot(g)
(52-week basis) $425 $444 $463 $489
Square footage of gross store
space at year-end 11,100,200 9,165,900 7,546,300 6,509,200
Percentage increase in square feet 21.1% 21.5% 15.9% 15.4%
Number of employees at year-end 60,000 55,000 44,000 39,000
Weighted average number 288,062,430 291,141,076 289,682,274 287,345,848
of shares outstanding(d)
Number of shares outstanding at
year-end, net of treasury stock(d) 287,747,984 289,529,498 290,497,456 288,370,476
(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 2-for-1 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) Based on weighted average gross square footage.
1991 1990 1989 1988 1987 1986
52 weeks 52 weeks 53 weeks 52 weeks 52 weeks 52 weeks
Net sales $2,518,893 $1,933,780 $1,586,596 $1,252,097 $1,062,021 $848,009
Cost of goods sold and occupancy
expenses, excluding depreciation
and amortization 1,496,156 1,187,644 1,006,647 814,028 654,361 479,033
Percentage of net sales 59.4% 61.4% 63.4% 65.0% 61.6% 56.5%
Depreciation and amortization(a) 72,765 53,599 39,589 31,408 24,869 20,943
Operating expenses 575,686 454,180 364,101 277,429 254,209 209,165
Net interest (income) expense 3,523 1,435 2,760 3,416 3,860 1,640
Earnings before income taxes(b) 370,763 236,922 162,714 125,816 124,722 137,228
Percentage of net sales 14.7% 12.3% 10.3% 10.0% 11.7% 16.2%
Income taxes 140,890 92,400 65,086 51,585 55,127 69,129
Net earnings 229,873 144,522 97,628 74,231 69,595 68,099
Percentage of net sales 9.1% 7.5% 6.2% 5.9% 6.6% 8.0%
Cash dividends 41,126 29,625 22,857 18,244 17,328 10,621
Capital expenditures(c) 244,323 199,617 94,266 68,153 67,307 48,112
Per Share Data(d)
Net earnings(e) $ .81 $ .51 $ .35 $.26 $.24 $.24
Cash dividends .15 .11 .09 .07 .06 .04
Stockholders' equity (book value)(f) 2.38 1.65 1.20 .98 .95 .74
Financial Position ($000)
Property and equipment (net) $ 547,740 $ 383,548 $ 238,103 $ 191,257 $ 156,639 $117,185
Merchandise inventory 313,899 247,462 243,482 193,268 194,886 146,021
Total assets 1,147,414 776,900 579,483 481,148 434,231 363,862
Working capital 235,537 101,518 129,139 106,210 129,988 111,154
Current ratio 1.71:1 1.39:1 1.69:1 1.70:1 2.01:1 1.93:1
Total debt, less current installments 80,000 17,500 20,000 22,000 18,500 15,000
Ratio of long-term debt
to stockholders' equity .12:1 .04:1 .06:1 .08:1 .05:1 .07:1
Stockholders' equity 677,788 465,733 337,972 276,399 272,912 211,953
Return on average assets 23.9% 21.3% 18.4% 16.2% 17.4% 21.4%
Return on average stockholders' equity 40.2% 36.0% 31.8% 27.0% 28.7% 37.5%
Statistics
Number of stores opened 139 152 98 106 110 86
Number of stores expanded 79 56 7 N/A N/A N/A
Number of stores closed 15 20 38 21 19 10
Number of stores open at year-end 1,216 1,092 960 900 815 724
Net increase in number of stores 11.4% 13.8% 6.7% 10.4% 12.6% 11.7%
Comparable store sales growth
(52-week basis) 13.0% 14.0% 15.0% 8.0% 9.0% 12.0%
Sales per square foot(g)
(52-week basis) $481 $438 $389 $328 $292 $250
Square footage of gross store
space at year-end 5,638,400 4,762,300 4,056,600 3,879,300 3,644,500 3,376,100
Percentage increase in square feet 18.4% 17.4% 4.6% 6.4% 8.0% 8.4%
Number of employees at year-end 32,000 26,000 23,000 20,000 16,000 12,000
Weighted average number
of shares outstanding(d) 284,279,154 283,001,776 282,160,400 289,178,240 285,836,104 282,390,080
Number of shares outstanding at
year-end, net of treasury stock(d) 285,046,668 282,528,060 281,102,808 281,050,912 286,959,704 284,569,000
</TABLE>
management's discussion and analysis of results of operations and financial
condition
Results of Operations
Net Sales
Fiscal Year Ended
Feb. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
(Fiscal 1995) (Fiscal 1994) (Fiscal 1993)
53 Weeks 52 Weeks 52 Weeks
Net sales ($000) $4,395,253 $3,722,940 $3,295,679
Total net sales growth
percentage
(52-week basis) 18 13 11
Comparable store sales
growth percentage
(52-week basis) 0 1 1
Net sales per average
square foot 425 444 463
Average square footage
of gross store space (000) 10,201 8,380 7,115
Number of
New stores 225 172 108
Expanded stores 55 82 130
Closed stores 53 34 45
The total net sales growth reflected above for fiscal 1995 and 1994 was
primarily attributable to the opening of new stores (net of stores closed)
and the expansion of existing stores. An additional week of operations
during fiscal 1995 compared to fiscal 1994 contributed one percent to sales
growth.
Net sales per average square foot were $425 in 1995, $444 in 1994, and $463
in 1993. 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. The decline in net
sales per average square foot in 1994 compared to 1993 was primarily the
result of the Company's expansion program. Over the past six years the
Company has 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
64.2 percent in 1995, 63.2 percent in 1994, and 64.4 percent in 1993.
The resulting 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 margins 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 margins 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 1.2 percentage point increase in gross margin net of occupancy expenses
in 1994 from 1993 was attributable to a 1.6 percentage point increase in
merchandise margins as a percentage of net sales offset by a .4 percentage
point increase in occupancy expenses as a percentage of net sales. The
increase in merchandise margins in 1994 from 1993 was primarily attributable
to higher initial merchandise margins partially offset by a larger
percentage of merchandise sold at markdown prices.
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 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.
The increase in occupancy expenses as a percentage of net sales between 1994
and 1993 was primarily attributable to the addition of larger new stores and
the expansion of existing stores.
Operating Expenses
Operating expenses as a percentage of net sales were 22.9 percent for fiscal
years 1995 and 1994, and 22.7 percent for fiscal 1993.
During fiscal 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 our brands and included marketing expense relative to the opening of
stores in Germany, Japan, and the Old Navy store in Manhattan. The Company
expects advertising costs to increase in 1996. Due to the Company's
performance relative to financial targets, less bonus expense was recognized
in 1995.
The .2 percentage point increase in 1994 from 1993 was primarily
attributable to investments in payroll and advertising costs to support the
growth of the Old Navy and International divisions and an increased focus on
customer service for all divisions. These increases were partially offset by
a beneficial comparison from 1993 when $10 million of expense was recognized
to support a store refixturing program.
Net Interest Income/Expense
Net interest income was $15.8 and $10.9 million for fiscal years 1995 and
1994 compared to net interest expense of $809,000 for fiscal 1993. The
change in 1995 from 1994 was primarily attributable to an increase in income
from higher average interest rates. The change in 1994 from 1993 was
attributable to an increase in gross average investments including long-term
investments and higher average interest rates.
Income Taxes
The effective tax rate was 39.5 percent in 1995 and 1994 compared with 39.2
percent in 1993. The increase in the effective tax rate for 1994 reflects
changes in federal income tax laws at the end of the second quarter in
fiscal 1993.
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
Fiscal Year
1995 1994 1993
Cash provided by operating
activities ($000) $489,087 $504,450 $551,298
Working capital ($000) 728,301 555,827 494,194
Current ratio 2.32:1 2.11:1 2.07:1
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 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. For 1994, the decrease in cash provided
by operating activities was primarily attributable to increased income tax
payments and increases in inventory purchases resulting from the Company's
expansion into the Old Navy and International divisions. The Company's
overall cash and liquidity position continues to be strong (see accompanying
consolidated financial statements).
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 1995 and 1994, these periods accounted for
approximately 34 and 30 percent of the Company's annual sales respectively.
Capital expenditures net of construction allowances and dispositions,
totaled approximately $291 million in 1995. These expenditures resulted in a
net increase in store space of approximately 1.9 million square feet or 21
percent due to the addition of 225 new stores, the expansion of 55 stores,
and the remodeling of certain stores. Capital expenditures for 1994 and 1993
were $220 million and $200 million respectively, resulting in a net increase
in store space of approximately 1.6 million square feet or 21 percent in
1994, and approximately 1 million square feet or 16 percent in 1993.
Expenditures in 1995, 1994, and 1993 included costs for administrative
facilities and equipment.
For fiscal 1996, the Company expects capital expenditures to total
approximately $300 to $350 million, net of construction allowances,
representing the addition of approximately 175 to 200 new stores, the
expansion of approximately 30 to 40 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, although it is
considering financing certain administrative facilities. Square footage
growth is expected to be approximately 15 percent before store closings. New
stores are generally expected to be leased.
During 1995, the Company commenced construction of a distribution center in
Gallatin, Tennessee for an estimated cost at completion of $45 to $55
million. The facility is expected to be in operation in late 1996. In
February 1996, the Company exercised an option to purchase land for $9
million in San Bruno, California to expand its headquarters facilities.
Construction is expected to commence in April 1996 for an estimated cost at
completion of $55 to $60 million. The facility is expected to be in
operation in late 1997.
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 Company has a credit agreement which provides for a $250 million
revolving credit facility through June 30, 1998. In addition, the credit
agreement provides for the issuance of letters of credit up to $500 million
at any one time. The Company had outstanding letters of credit of
approximately $423 million at February 3, 1996.
In June 1994, the Company repaid $75 million of long-term debt which had
been outstanding since February 1991, with an original maturity date of
February 1995.
In October 1994, the Board of Directors approved a program under which the
Company may repurchase up to 18,000,000 shares of its outstanding common
stock in the open market over a two year period. During 1995, 4,192,800
shares were repurchased for approximately $73 million and under the program
to date, 7,139,800 shares have been repurchased for approximately $121
million.
Per Share Data
Market Prices Cash Dividends
Fiscal 1995 1994 1995 1994
High Low High Low
1st Quarter $17 3/4 $15 3/8 $24 3/4 $20 $.06 $.05
2nd Quarter 18 3/4 14 7/8 24 1/2 19 .06 .06
3rd Quarter 20 1/4 15 7/8 22 3/8 15 1/8 .06 .06
4th Quarter 25 1/2 19 1/4 19 3/8 14 1/2 .06 .06
Year $.24 $.23
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 25, 1996 was 5,864.
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 judgements.
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 judgements 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 in the Annual Report, 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 auditor's 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 3, 1996 and January 28, 1995, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended February 3,
1996. 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 audits 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 3, 1996 and January 28, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended February 3, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 29, 1996, except for Note A paragraph two, and Note G paragraph
seven, as to which the date is April 10, 1996.
<TABLE>
<CAPTION>
The Gap, Inc. and Subsidiaries
consolidated statements of earnings
Fifty-three Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000 except per share amounts) February 3, 1996 January 28, 1995 January 29, 1994
<S> <C> <C> <C> <C> <C> <C>
Net sales $4,395,253 100.0% $3,722,940 100.0% $3,295,679 100.0%
Costs and expenses
Cost of goods sold and
occupancy expenses 2,821,455 64.2% 2,350,996 63.2% 2,121,789 64.4%
Operating expenses 1,004,396 22.9% 853,524 22.9% 748,193 22.7%
Net interest (income) expense (15,797) (0.4%) (10,902) (0.3%) 809 -
Earnings before income taxes 585,199 13.3% 529,322 14.2% 424,888 12.9%
Income taxes 231,160 5.2% 209,082 5.6% 166,464 5.1%
Net earnings $ 354,039 8.1% $ 320,240 8.6% $ 258,424 7.8%
Weighted average
number of shares(a) 288,062,430 291,141,076 289,682,274
Earnings per share(a) $ 1.23 $ 1.10 $ 0.89
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.
</TABLE>
The Gap, Inc. and Subsidiaries
consolidated balance sheets
($000) February 3, 1996 January 28, 1995
Assets
Current Assets
Cash and equivalents $ 579,566 $ 414,487
Short-term investments 89,506 173,543
Merchandise inventory 482,575 370,638
Prepaid expenses and other 128,398 97,019
Total Current Assets 1,280,045 1,055,687
Property and Equipment
Leasehold improvements 736,879 639,801
Furniture and equipment 763,673 620,104
Construction-in-progress 62,030 34,989
1,562,582 1,294,894
Accumulated depreciation and amortization (604,830) (466,117)
957,752 828,777
Long-term investments 30,370 32,097
Lease rights and other assets 74,901 87,683
Total Assets $2,343,068 $2,004,244
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 21,815 $ 2,478
Accounts payable 262,505 263,724
Accrued expenses 194,426 185,375
Income taxes payable 66,094 41,156
Deferred lease credits and 6,904 7,127
other current liabilities
Total Current Liabilities 551,744 499,860
Long-Term Liabilities
Deferred lease credits and other liabilities 150,851 129,152
150,851 129,152
Stockholders' Equity
Common stock $.05 par value(a)
Authorized 500,000,000 shares; issued
315,971,306 and 313,945,554 shares;
outstanding 287,747,984 and 289,529,498
shares 15,799 15,697
Additional paid-in capital(a) 335,193 290,565
Retained earnings 1,569,347 1,282,301
Foreign currency translation adjustment (9,071) (8,320)
Restricted stock plan deferred compensation (48,735) (54,265)
Treasury stock, at cost (222,060) (150,746)
1,640,473 1,375,232
Total Liabilities and Stockholders' Equity $2,343,068 $2,004,244
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.
<TABLE>
<CAPTION>
The Gap, Inc. and Subsidiaries
consolidated statements of cash flows
Fifty-three Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended
($000) February 3, January 28, January 29,
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $354,039 $320,240 $258,424
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization(a) 197,440 168,220 141,758
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 11,444 19,384 6,491
Deferred income taxes (2,477) (24,431) (22,360)
Change in operating assets and liabilities
Merchandise inventory (113,021) (39,860) 33,910
Prepaid expenses and other (15,278) (10,989) (7,315)
Accounts payable 1,183 46,031 23,877
Accrued expenses 9,427 21,953 35,143
Income taxes payable 24,806 (29,241) 56,164
Deferred lease credits and other long-term liabilities 21,524 33,143 25,206
Net cash provided by operating activities 489,087 504,450 551,298
Cash Flows from Investing Activities
Net maturity (purchase) of short-term investments 116,134 (36,474) (83,497)
Purchase of long-term investments (30,370) (85,669) -
Purchase of property and equipment (302,260) (232,776) (212,340)
Acquisition of lease rights and other assets (6,623) (4,938) (3,687)
Net cash used for investing activities (223,119) (359,857) (299,524)
Cash Flows from Financing Activities
Net increase (decrease) in notes payable 20,787 (4,583) 7,632
Payments on long-term debt - (75,000) -
Issuance of common stock 17,096 12,849 10,768
Purchase of treasury stock (71,314) (58,292) -
Cash dividends paid (66,993) (64,775) (53,041)
Net cash used for financing activities (100,424) (189,801) (34,641)
Effect of exchange rate changes on cash (465) (637) (103)
Net increase (decrease) in cash and equivalents 165,079 (45,845) 217,030
Cash and equivalents at beginning of year 414,487 460,332 243,302
Cash and equivalents at end of year $579,566 $414,487 $460,332
See notes to consolidated financial statements.
(a) Includes amortization of restricted stock.
</TABLE>
<TABLE>
<CAPTION>
consolidated statements of
stockholders' equity
Foreign
Additional Currency
Common Stock Paid-in Retained Translation
($000 except per share amounts) Shares Amount Capital(a) Earnings Adjustment
<S> <C> <C> <C> <C> <C>
Balance at January 30, 1993 309,339,532 $15,467 $202,342 $ 821,453 ($7,410)
Issuance of common stock pursuant
to stock option plans 1,311,490 65 9,044
Net issuance of common stock pursuant to
management incentive restricted stock plans 815,490 41 14,992
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 6,491
Foreign currency translation adjustment (904)
Amortization of restricted stock
Net earnings 258,424
Cash dividends ($.19 per share) (53,041)
Balance at January 29, 1994 311,466,512 $15,573 $232,869 $1,026,836 ($8,314)
Issuance of common stock pursuant
to stock option plans 1,249,612 63 10,842
Net issuance of common stock pursuant to
management incentive restricted stock plans 1,229,430 61 27,470
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 19,384
Foreign currency translation adjustment (6)
Amortization of restricted stock
Purchase of treasury stock
Net earnings 320,240
Cash dividends ($.23 per share) (64,775)
Balance at January 28, 1995 313,945,554 $15,697 $290,565 $1,282,301 ($8,320)
Issuance of common stock pursuant
to stock option plans 994,372 50 9,616
Net issuance of common stock pursuant to
management incentive restricted stock plans 1,031,380 52 19,556
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 11,444
Foreign currency translation adjustment (751)
Amortization of restricted stock
Purchase of treasury stock
Reissuance of treasury stock 4,012
Net earnings 354,039
Cash dividends ($.24 per share) (66,993)
Balance at February 3, 1996 315,971,306 $15,799 $335,193 $1,569,347 ($9,071)
consolidated statements of
stockholders' equity
Restricted
Stock Plan
Deferred Treasury Stock
($000 except per share amounts) Compensation Shares(a) Amount Total
Balance at January 30, 1993 ($51,559) (20,969,056) ($ 92,454) $ 887,839
Issuance of common stock pursuant to
stock option plans 9,109
Net issuance of common stock pursuant to
management incentive restricted stock plans (13,374) 1,659
Tax benefit from exercise of stock options
by employees and from vesting of restricted stock 6,491
Foreign currency translation adjustment (904)
Amortization of restricted stock 16,898 16,898
Net earnings 258,424
Cash dividends ($.19 per share) (53,041)
Balance at January 29, 1994 ($48,035) (20,969,056) ($ 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)
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 ($54,265) (24,416,056) ($ 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)
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 ($48,735) (28,223,322) ($ 222,060) $ 1,640,473
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.
</TABLE>
The Gap, Inc. and Subsidiaries
notes to consolidated financial statements
For the Fifty-Three Weeks ended February 3, 1996, and the Fifty-Two Weeks
ended January 28, 1995 and January 29, 1994.
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 $64 million, $44 million, and $38
million in fiscal 1995, 1994, and 1993 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 is required to adopt Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation in fiscal 1996. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans. Under SFAS No. 123 the Company may
either adopt the new fair value based accounting method or continue the
intrinsic value based method under APB 25, Accounting for Stock Issued to
Employees and provide pro forma disclosures of net earnings and earnings per
share as if the accounting provisions of SFAS No. 123 had been adopted. The
Company plans to adopt only the disclosure requirements of SFAS No. 123;
therefore such adoption will have no effect on the Company's consolidated net
earnings or cash flows.
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 1993 financial
statements to conform with the 1995 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 through June 30, 1998. 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 for the issuance of letters of
credit through July 2, 1996 of up to $500 million at any one time.
At February 3, 1996, the Company had outstanding letters of credit totaling
$423,474,000.
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, $1,139,863,000 of
retained earnings were available for the payment of cash dividends at February
3, 1996.
Gross interest payments were $2,274,000, $7,032,000, and $7,654,000 in fiscal
1995, 1994, and 1993 respectively.
Note C: Income Taxes
Income taxes consisted of the following:
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
($000) Feb. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
Currently Payable
Federal income taxes $180,597 $182,811 $150,517
Less tax credits (4,397) (12,692) (11,484)
176,200 170,119 139,033
State income taxes 40,111 45,807 38,992
Foreign income taxes 17,348 17,587 10,799
233,659 233,513 188,824
Deferred
Federal (7,169) (19,911) (16,084)
State 4,670 (4,520) (6,276)
(2,499) (24,431) (22,360)
Total provision $231,160 $209,082 $166,464
The foreign component of pretax earnings before eliminations and corporate
allocations in fiscal 1995, 1994, and 1993 was $71,545,000, $66,701,000, and
$47,589,000 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 $98,300,000 at
February 3, 1996) 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-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
Feb. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
Federal tax rate 35.0 % 35.0 % 35.0 %
State income taxes,
less federal benefit 5.0 5.1 5.0
Other (.5) (.6) (.8)
Effective tax rate 39.5 % 39.5 % 39.2 %
Deferred tax assets (liabilities) consisted of the following at February 3,
1996, and January 28, 1995:
($000) February 3, 1996 January 28, 1995
Compensation and benefits accruals $ 28,872 $ 29,360
Scheduled rent 34,077 29,856
Inventory capitalization 13,243 11,035
Nondeductible accruals 17,011 20,890
Other 10,022 14,176
Gross deferred tax assets 103,225 105,317
Depreciation (14,318) (18,507)
Other (4,957) (5,359)
Gross deferred tax liabilities (19,275) (23,866)
Net deferred tax assets $ 83,950 $ 81,451
Income tax payments were $197,802,000, $232,869,000, and $128,347,000 in
fiscal 1995, 1994, and 1993 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 3, 1996 are as follows:
Fiscal Year ($000)
1996 $ 304,605
1997 298,641
1998 293,688
1999 288,876
2000 281,492
Thereafter 1,734,998
Total minimum lease commitment $3,202,300
For leases which 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 expense charged to income and
amounts payable under the leases as deferred lease credits. At February 3,
1996 and January 28, 1995 this liability amounted to $93,081,000 and
$70,448,000 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 3, 1996 contain
renewal options for periods ranging up to 20 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-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
($000) Feb. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
Minimum rentals $300,171 $255,202 $216,446
Contingent rentals 22,464 20,955 26,574
$322,635 $276,157 $243,020
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 3, 1996, the Company had contracts maturing at various dates through
1996, to purchase the equivalent of $57,280,000 in foreign currencies
(34,242,000 Canadian dollars through July 3, 1996, 14,440,000 British pounds
through July 3, 1996, 35,501,000 French francs through July 3, 1996, and
311,080,000 Japanese yen through May 30, 1996) at the contracted rates. The
deferred gains and losses on the Company's foreign exchange contracts at
February 3, 1996 are immaterial.
Note F: 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 may repurchase up to 18,000,000 shares of its outstanding common stock
in the open market over a two year period. During 1995, 4,192,800 shares were
repurchased for $72,717,000 and under the program to date, 7,139,800 shares
have been repurchased for $120,977,000.
Stock Options
Under the Company's Stock Option Plan, non-qualified options to purchase
common stock are granted to officers and key employees at prices not less than
the fair market value at the date of grant. Outstanding options at February 3,
1996 have expiration dates ranging from March 30, 1996 to January 23, 2004 and
represent grants to 1,579 key employees. At February 3, 1996, the Company
reserved 15,831,026 shares of its common stock for the exercise of stock
options. There were 190,602 and 9,078,854 shares available for granting of
options at February 3, 1996 and January 28, 1995. Options for 2,946,164 and
2,962,324 shares were exercisable as of February 3, 1996 and January 28, 1995.
Shares Average Price Per Share
Balance at
January 30, 1993 6,878,930 $10.64
Granted 2,002,740 14.38
Exercised (1,311,490) 6.95
Cancelled (419,094) 14.76
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
Note G: 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. In addition, a non-
qualified Supplemental Executive Retirement Plan (SERP) was established in
1988 which allows eligible employees to defer additional compensation up to a
maximum amount defined in the plan. Under both plans, 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. The non-qualified Supplemental Executive Retirement Plan
(SERP) was frozen on December 31, 1993 and no further employee or Company
contributions have been made to the plan. Company contributions to the
retirement plan and the Supplemental Executive Retirement Plan in fiscal 1995,
1994, and 1993 were $9,839,000, $8,281,000, and $6,731,000 respectively.
A non-qualified Executive Deferred Compensation Plan (EDCP) was established on
January 1, 1994 and a non-qualified Executive Capital Accumulation Plan (ECAP)
was established on April 1, 1994. Both plans allow eligible employees to defer
additional compensation up to a maximum amount defined in each plan. There are
no Company matching contributions.
Employee Benefits Plan
The Company has an Employee Benefits Plan (the 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.
Incentive awards can also be made in the form of restricted shares of the
Company's stock, under the Management Incentive Restricted Stock Plan II
(MIRSP). Restrictions on shares generally lapse in one to five years.
Compensation expense is recorded during the vesting period.
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 Company-
wide or divisional earnings goals for that fiscal year.
In January 1996, the Board of Directors approved an Executive Long-Term Cash
Award Performance Plan (ELCAPP) subject to stockholder approval at the annual
meeting of stockholders in May 1996. The ELCAPP empowers the Compensation and
Stock Option Committee to award compensation in the form of cash for key
officers, based on the achievement of multi-year 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.
In March 1996, the Board of Directors approved the 1996 Stock Option and Award
Plan (the Plan), effective March 26, 1996 subject to stockholder approval at
the annual meeting of stockholders in May 1996. The Board authorized
20,000,000 shares for issuance under the Plan. If approved, this Plan will
supersede the MICAP and MIRSP Plans. The Plan empowers the Compensation and
Stock Option Committee to award compensation primarily in the form of
non-qualified stock options or restricted stock based upon the achievement
of the individual award agreement. Non-qualified stock options may be
issued at prices less than the fair market value at the date of grant. The
accounting for the issuance of stock options and other awards will be in
accordance with the recognition provisions of APB 25, Accounting for Stock
Issued to Employees.
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% 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 to 15 percent. There were 385,534
shares issued under the plan during fiscal 1995 and all shares were acquired
from reissued treasury stock. At February 3, 1996 there were 3,614,466 shares
reserved for future subscriptions.
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. During fiscal 1995, 1994, and 1993, FDI acted as
general contractor for 204, 159, and 104 new stores' leasehold improvements
and fixtures. In addition, FDI supervised construction of 54, 79, and 128
expansions, as well as remodels of existing stores, in fiscal 1995, 1994, and
1993. FDI construction also included administrative offices. Total cost of
this construction was $164,820,000, $142,791,000, and $133,104,000, including
profit and overhead costs of $11,753,000, $10,738,000, and $10,095,000. At
February 3, 1996 and January 28, 1995, amounts due to FDI were $12,491,000 and
$12,298,000, 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.
<TABLE>
<CAPTION>
Note I: Quarterly Financial Information (Unaudited)
Fiscal 1995 Quarter Ended
Thirteen Thirteen Thirteen Fourteen Fifty-Three
($000 except per Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
share amounts) April 29, 1995 July 29, 1995 Oct. 28, 1995 Feb. 3, 1996 Feb. 3, 1996
<S> <C> <C> <C> <C> <C>
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
Fiscal 1994 Quarter Ended
Thirteen Thirteen Thirteen Thirteen Fifty-Two
($000 except per Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
share amounts) April 30, 1994 July 30, 1994 Oct. 29, 1994 Jan. 28, 1995 Jan. 28, 1995
Net sales $751,670 $773,131 $988,346 $1,209,793 $3,722,940
Gross profit 289,583 265,277 378,848 438,236 1,371,944
Net earnings 63,478 44,352 93,647 118,763 320,240
Net earnings per share .22 .15 .32 .41 1.10
</TABLE>
Subsidiary List
Banana Republic (H.K.) Limited, a Hong Kong corporation
Banana Republic Limited, an England and Wales corporation
Banana Republic Stores Pty. Ltd., an Australia corporation
Banana Republic, Inc., a California corporation
GPS (Bermuda) Limited, a Bermuda corporation
GPS (Delaware), Inc., a Delaware corporation
GPS (EDT), Inc., a Delaware corporation
GPS (Great Britain) Limited, an England and Wales corporation
GPS (Japan) Limited, a Delaware corporation
GPS (Maryland), Inc., a Maryland corporation
GPS (Puerto Rico) Limited, a California corporation
GPS (U.K.) Limited, a California corporation
GPS (U.S.A.) Limited, a California corporation
GPS Limited, a California corporation
Gap (Canada) Inc., a Canada corporation
Gap (France) SA, a France corporation
Gap (Deutschland) GmbH, a Germany corporation
Gap (Ireland) Limited, an Ireland corporation
Gap (Japan) K.K., a Japan corporation
Gap (Netherlands) B.V., a Netherlands corporation
Gap (Puerto Rico), Inc., a Puerto Rico corporation
Gap International Sourcing, Inc., a California corporation
Gap International Sourcing Limited, a Hong Kong corporation
Gap International Sourcing Pte. Ltd., a Singapore corporation
Gap International Sourcing (USA) Inc., a California corporation
Gap International, Inc., a California corporation
Goldhawk B.V., a Netherlands corporation
Real Estate Ventures (Glastonbury), Inc., a Delaware corporation
Real Estate Ventures (Glen Eagle), Inc., a Delaware corporation
Real Estate Ventures (Wheaton), Inc., an Illinois corporation
The Fisher Gap Stores, Inc., a California corporation
The Gap (H.K.) Limited, a Hong Kong corporation
The Gap Limited, an England and Wales corporation
The Pottery Barn West, Inc., a California corporation
Deloitte & Touche LLP
50 Fremont Street Telephone:(415)247-4000
San Francisco, California 94105-2230 Facsimile:(415)247-4329
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation 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, Registration Statement
No. 33-56021 and Registration Statement No. 333-00417 of The Gap, Inc.
on Form S-8 of our report dated February 29, 1996, except for Note A
paragraph two, and Note G paragraph seven, as to which the date is April 10,
1996 incorporated by reference in the Annual Report on Form 10-K of The
Gap, Inc. for the fiscal year ended February 3, 1996.
/S/Deloitte & Touche LLP
April 15, 1996
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