SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended May 3, 1997 or
[ ] Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the
transition period from ______________ to ______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
(State ofIncorporation) (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) 427-2000
_______________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value New York Stock Exchange, Inc.
(Title of class) Pacific Stock Exchange, Inc.
(Name of each exchange where registered)
Securities registered pursuant to Section 12(g) of the Act: None
_______________________
Indicate by check mark whether Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest
practicable date.
Common Stock, $0.05 par value, 269,476,100 shares as of June 13, 1997
<TABLE>
PART 1 THE GAP, INC. AND SUBSIDIARIES
ITEM 1 CONSOLIDATED BALANCE SHEETS
($000) May 3, February 1, May 4,
1997 1997 1996
(Unaudited) (See Note 1) (Unaudited)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and equivalents $ 244,643 $ 485,644 $ 552,729
Short-term investments 112,268 135,632 79,819
Merchandise inventory 628,693 578,765 489,719
Prepaid expenses and other 151,132 129,214 146,791
Total Current Assets 1,136,736 1,329,255 1,269,058
Property and equipment (net) 1,174,003 1,135,720 981,011
Long-term investments 64,623 36,138 41,573
Lease rights and other assets 127,053 125,814 81,672
Total Assets $ 2,502,415 $ 2,626,927 $ 2,373,314
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable 86,241 40,050 46,836
Accounts payable 296,089 351,754 204,951
Accrued expenses 213,698 282,494 214,131
Income taxes payable 58,927 91,806 13,901
Deferred lease credits and other current liabilities 8,845 8,792 7,034
Total Current Liabilities 663,800 774,896 486,853
Long-term Liabilities:
Deferred lease credits and other liabilities 219,973 197,561 156,864
219,973 197,561 156,864
Stockholders' Equity:
Common stock $.05 par value (a)
Authorized 500,000,000 shares
Issued 318,553,841, 317,864,090
and 316,892,180 shares
Outstanding 271,390,413, 274,517,331
and 287,248,358 shares 15,928 15,895 15,845
Additional paid-in capital (a) 460,322 442,049 399,619
Retained earnings 2,002,458 1,938,352 1,629,666
Foreign currency translation adjustment (7,316) (5,187) (9,830)
Restricted stock plan deferred compensation (42,897) (47,838) (43,757)
Treasury stock, at cost (809,853) (688,801) (261,946)
1,618,642 1,654,470 1,729,597
Total Liabilities and Stockholders' Equity $ 2,502,415 $ 2,626,927 $ 2,373,314
See accompanying 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 STATEMENTS OF EARNINGS
Unaudited
($000 except per share amounts) Thirteen Weeks Ended
May 3, 1997 May 4, 1996
Net Sales $ 1,231,186 $ 1,113,154
Costs and expenses
Cost of goods sold and
occupancy expenses 789,126 699,314
Operating expenses 311,911 282,627
Net interest income (4,738) (3,618)
Earnings before income taxes 134,887 134,831
Income taxes 50,583 53,258
Net earnings $ 84,304 $ 81,573
Weighted average number
of shares (a) 273,469,190 288,010,684
Earnings per share (a) $.31 $.28
Cash dividends per share (a) $.075 $.075
See accompanying 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 STATEMENTS OF CASH FLOWS
Unaudited ($000) Thirteen Weeks Ended
<S> <C> <C>
May 3, 1997 May 4, 1996
Cash Flows from Operating Activities:
Net earnings $ 84,304 $ 81,573
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization (a) 56,659 52,616
Tax benefit from exercise of stock options by
employees and from vesting of restricted stock 7,095 41,276
Change in operating assets and liabilities:
Merchandise inventory (51,018) (7,212)
Prepaid expenses and other (24,970) (18,750)
Accounts payable (53,912) (57,289)
Accrued expenses (68,504) 19,787
Income taxes payable (32,800) (52,201)
Deferred lease credits and other
long-term liabilities 25,218 6,117
Net cash provided by (used for) operating
activities (57,928) 65,917
Cash Flows from Investing Activities:
Net maturity of short-term investments 43,747 9,687
Purchase of long-term investments (48,868) (11,203)
Purchase of property and equipment (93,787) (69,186)
Acquisition of lease rights and other assets (378) (7,799)
Net cash used for investing activities (99,286) (78,501)
Cash Flows from Financing Activities:
Net increase in notes payable 46,874 24,897
Issuance of common stock 10,870 22,121
Purchase of treasury stock (121,052) (39,886)
Cash dividends paid (20,198) (21,254)
Net cash used for financing activities (83,506) (14,122)
Effect of exchange rate changes on cash (281) (131)
Net decrease in cash and equivalents (241,001) (26,837)
Cash and equivalents at beginning of year 485,644 579,566
Cash and equivalents at end of quarter $ 244,643 $ 552,729
See accompanying notes to consolidated financial statements.
(a) Includes amortization of restricted stock.
</TABLE>
THE GAP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of May 3, 1997 and May 4,
1996, and the interim consolidated statements of earnings
and the interim consolidated statements of cash flows for
the thirteen weeks ended May 3, 1997 and May 4, 1996 have
been prepared by the Company, without audit. In the opinion
of management, all adjustments (which include only normal
recurring adjustments) considered necessary to present
fairly the financial position, results of operations and
cash flows of the Company at May 3, 1997 and May 4, 1996,
and for all periods presented, have been made.
Certain information and footnote disclosures normally
included in the annual financial statements prepared in
accordance with generally accepted accounting principles
have been omitted from these interim financial statements.
It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated
financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended
February 1, 1997.
The results of operations for the thirteen weeks ended May 3,
1997 are not necessarily indicative of the operating results
that may be expected for the year ending January 31, 1998.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year-to-date 1997 and 1996 gross interest payments were $1.5
million and $0.8 million respectively; income tax payments
were $77.4 million and $64.1 million respectively.
3. TWO-FOR-ONE STOCK SPLIT
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 on March 18, 1996. Per share amounts
in the accompanying consolidated financial statements give
effect to the stock split.
Deloitte & 1111 Broadway, Suite 2100 Telephone (510)287-2700
Touche LLP Oakland, California 94607-4036 Facsimile (510)835-4888
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have reviewed the accompanying consolidated balance sheets
of The Gap, Inc. and subsidiaries as of May 3, 1997 and May 4,
1996 and the related consolidated statements of earnings and
cash flows for the thirteen week periods ended May 3, 1997 and
May 4, 1996. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such consolidated
financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
The Gap, Inc. and subsidiaries as of February 1, 1997, and the
related consolidated statements of earnings, stockholders'
equity and cash flows for the year then ended (not presented
herein); and in our report dated February 27, 1997, we
expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of
February 1, 1997 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it was
derived.
/s/ Deloitte & Touche LLP
May 14, 1997
THE GAP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net Sales
Thirteen weeks ended
May 3, May 4,
1997 1996
Net sales ($000) $1,231,186 $1,113,15
4
Total net sales growth 11 31
percentage
Comparable store sales (3) 9
growth percentage
Net sales per average 95 98
square foot
Square footage of gross 13,163 11,436
store space (000)
Fifty-two Fifty-
weeks three
ended weeks
May 3, ended
1997 May 4,
1996
Number of
New stores 230 225
Expanded stores 49 50
Closed stores 33 44
The increase in first quarter of 1997 net sales over the same
period last year was attributable to the opening of new stores
(net of stores closed) and the expansion of existing stores.
The decrease in net sales per average square foot compared with
the same period last year was primarily attributable to a
decrease in comparable store sales. The growing impact of the
Old Navy division also contributed to the decrease in net sales
per square foot, as the division's lower-priced merchandise and
significantly larger stores result in lower net sales per average
square foot when compared to other divisions.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net
sales increased to 64.1 percent for the first quarter of 1997
from 62.8 percent for the same period in 1996. The resulting 1.3
percentage point decrease in gross margin net of occupancy
expenses was attributable to a 1.1 percentage point decrease in
merchandise margin as a percentage of net sales and a .2
percentage point increase in occupancy expenses as a percentage
of net sales.
The decrease in merchandise margin as a percentage of net sales
was primarily attributable to a greater percentage of merchandise
sold at markdown when compared to the same period last year.
Margin achieved on marked-down goods was also lower than that of
last year. The increase in occupancy expense as a percentage of
net sales was primarily attributable to a lack of sales leverage
resulting from negative comparable store sales.
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 markdowns and amount of
inventory affected.
Operating Expenses
Operating expenses as a percentage of net sales were basically
flat at 25.3 percent for the first quarter of 1997 and the same
period in 1996. A planned increase in advertising/marketing
costs to support the Company's brands offset a decrease in
incentive bonus expense as a percentage of net sales. The
Company accrued for larger bonuses in the first quarter of 1996
due to stronger earnings performance measured against the annual
target.
Net Interest Income/Expense
Net interest income was approximately $4.7 million for the first
quarter of 1997 compared to $3.6 million for the same period last
year.
Income Taxes
The effective tax rate was 37.5 and 39.5 percent for the thirteen
weeks ended May 3, 1997 and May 4, 1996, respectively. The
decrease in the effective tax rate was a result of the impact
from tax planning initiatives.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's
liquidity:
Thirteen weeks
ended
May 3, May 4,
1997 1996
Cash provided by (used for) operating ($57,928) $ 65,917
activities ($000)
Working capital ($000) $472,936 $ 782,205
Current ratio 1.71:1 2.61:1
For the thirteen weeks ended May 3, 1997, the decrease in cash
flows from operating activities was attributable to an increased
investment in merchandise inventory, increased activity under the
Company's share repurchase program, and the timing of income tax
payments.
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.
The Company has an agreement which provides for a $250 million
revolving credit facility through June 30, 2001. In addition, the
credit agreement provides for the issuance of letters of credit
up to $450 million at any one time. The Company has additional
uncommitted credit of $260 million available for the issuance of
letters of credit. The Company had outstanding letters of credit
of approximately $536 million at May 3, 1997.
For the thirteen weeks ended May 3, 1997, capital expenditures,
net of construction allowances and dispositions, totaled
approximately $88 million. These expenditures included the
addition of 69 new stores, the expansion of 17 stores and the
remodeling of certain stores resulting in a net increase in store
space of approximately 518,000 square feet or 4 percent since
February 1, 1997.
For fiscal 1997, the Company expects capital expenditures to
total approximately $450 million, net of construction allowances,
representing the addition of at least 275 new stores, the
expansion of approximately 65 to 75 stores, and the remodeling of
certain stores. Planned expenditures also include amounts for
administrative office facilities, distribution centers, and
equipment. The Company expects to fund such capital expenditures
with cash flow from operations. Square footage growth is
expected to be approximately 18 percent before store closings.
New stores are generally expected to be leased.
Included in the capital expenditures projection for fiscal 1997
is the cost to complete an office building at the Company's San
Bruno campus. The Company also continues to explore alternatives
for office facilities growth in San Francisco, California.
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.
In October 1996, the Board of Directors approved a program under
which the Company may repurchase up to 30 million shares of its
outstanding common stock in the open market over a three-year
period. During the first quarter, the Company acquired 3.8
million shares for approximately $121 million. To date under
this program, 8.5 million shares have been repurchased for
approximately $261 million.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial
Information
(27) Financial Data Schedule
b) The Company did not file any reports on Form 8-K during
the three months ended May 3, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE GAP, INC.
Date: June 13, 1997 By /s/ Warren R. Hashagen
Warren R. Hashagen
Chief Financial Officer
(Principal financial officer of
the registrant)
Date: June 13, 1997 By /s/ Millard S. Drexler
Millard S. Drexler
President and Chief Executive Officer
EXHIBIT INDEX
(11) Computation of Earnings per Share
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
THE GAP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Thirteen Weeks Ended
May 3, 1997 May 4, 1996
.
Net earnings ($000) $ 84,304 $81,573
Weighted average shares of
common stock outstanding
during the period 273,469,190 288,010,684
Add incremental shares
from assumed exercise of stock
options (primary) 4,058,358 3,314,299
277,527,548 291,324,983
Primary earnings per share $ 0.30 $ 0.28
Weighted average shares of
common stock outstanding
during the period 273,469,190 288,010,684
Add incremental shares from
assumed exercise of stock
options (fully-diluted) 4,061,282 3,808,505
277,530,472 291,819,189
Fully-diluted earnings
per share $ 0.30 $ 0.28
NOTE:
(1 The information provided above is presented in accordance with Regulation
S-K,Item 601(b)(11), while net earnings per share on the Consolidated
Statements of Earnings is presented in accordance with APB Opinion 15.
The information in this exhibit is not required under APB Opinion 15,
as the difference between primary and fully-diluted earnings per share
and earnings per share calculated on a weighted average share bases is
less than 3%.
(2 All share and per share data have been restated to reflect the 2-for-1
split of common stock in the form of a stock dividend effective April 10,
1996.
Deloitte & 1111 Broadway, Suite 2100 Telephone (510)287-2700
Touche LLP Oakland, California 94607-4036 Facsimile (510)835-4888
To the Board of Directors and Stockholders of
The Gap, Inc.:
We have made reviews, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim consolidated financial statements of The
Gap, Inc. and subsidiaries for the thirteen week periods ended
May 3, 1997 and May 4, 1996, as indicated in our report dated
May 14, 1997; because we did not perform an audit, we expressed
no opinion on that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended May 3, 1997, is incorporated by reference in Post
Effective Amendment No. 1 to Registration Statement
No. 2-72586, Registration Statement No. 2-60029, Registration
Statement No. 33-39089, Registration Statement No. 33-40505,
Registration Statement No. 33-54686, Registration Statement
No. 33-54688, Registration Statement No. 33-54690, Registration
Statement No. 33-56021, Registration Statement No. 333-00417,
and Registration Statement No. 333-12337.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered
a part of the Registration Statement prepared or certified by
an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
June 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 244,643
<SECURITIES> 112,268
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 628,693
<CURRENT-ASSETS> 1,136,736
<PP&E> 1,980,305
<DEPRECIATION> 806,302
<TOTAL-ASSETS> 2,502,415
<CURRENT-LIABILITIES> 663,800
<BONDS> 0
0
0
<COMMON> 15,928
<OTHER-SE> 1,602,714
<TOTAL-LIABILITY-AND-EQUITY> 2,502,415
<SALES> 1,231,186
<TOTAL-REVENUES> 1,231,186
<CGS> 789,126
<TOTAL-COSTS> 311,911
<OTHER-EXPENSES> (4,738)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 134,887
<INCOME-TAX> 50,583
<INCOME-CONTINUING> 84,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,304
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
