<PAGE>
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 April 29, 2000 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1697231
-------------------------- -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Harrison
San Francisco, California 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 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 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, 850,084,219 shares as of May 26, 2000
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1
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GAP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(In thousands, except par value) April 29, January 29, May 1,
2000 2000 1999
----------------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 436,172 $ 450,352 $ 456,107
Merchandise inventory 1,652,049 1,462,045 1,198,497
Other current assets 315,709 285,393 263,927
----------------- ------------------ ------------------
Total Current Assets 2,403,930 2,197,790 1,918,531
Property and equipment, net 2,905,064 2,715,315 1,997,900
Lease rights and other assets 348,597 275,651 211,441
----------------- ------------------ ------------------
Total Assets $ 5,657,591 $ 5,188,756 $ 4,127,872
================= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 631,461 $ 168,961 $ 97,834
Accounts payable 728,121 805,945 617,597
Accrued expenses and other current liabilities 669,455 777,973 682,108
----------------- ------------------ ------------------
Total Current Liabilities 2,029,037 1,752,879 1,397,539
Long-Term Liabilities:
Long-term debt 769,287 784,925 545,045
Deferred lease credits and other liabilities 431,473 417,907 347,517
----------------- ------------------ ------------------
Total Long-Term Liabilities 1,200,760 1,202,832 892,562
Shareholders' Equity:
Common stock $.05 par value
Authorized 2,300,000 shares
Issued 930,925; 1,007,357
and 1,001,818 shares
Outstanding 851,345; 850,499
and 860,031 shares 46,546 50,368 50,091
Additional paid-in capital 140,797 669,490 520,818
Retained earnings 4,408,281 4,172,796 3,323,831
Accumulated other comprehensive earnings (losses) 6,013 (6,759) (20,479)
Deferred compensation (22,512) (23,150) (33,846)
Treasury stock, at cost (2,151,331) (2,629,700) (2,002,644)
----------------- ------------------ ------------------
Total Shareholders' Equity 2,427,794 2,233,045 1,837,771
----------------- ------------------ ------------------
Total Liabilities and Shareholders' Equity $ 5,657,591 $ 5,188,756 $ 4,127,872
================= ================== ==================
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
GAP INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
-------------------------------------------------
(In thousands, except share and per share amounts)
April 29, 2000 May 1, 1999
---------------------- ----------------------
<S> <C> <C>
Net sales $ 2,731,990 $ 2,277,734
Costs and expenses
Cost of goods sold and occupancy expenses 1,601,905 1,334,155
Operating expenses 750,303 615,149
Net interest expense 8,953 4,638
-------------- -------------
Earnings before income taxes 370,829 323,792
Income taxes 135,353 121,422
-------------- -------------
Net earnings $ 235,476 $ 202,370
============== =============
-------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares - basic 850,325,670 854,464,568
Weighted average number of shares - diluted 888,020,166 900,043,739
Earnings per share - basic $ 0.28 $ 0.24
Earnings per share - diluted $ 0.27 $ 0.22
Cash dividends per share $ 0.02/(a)/ $ 0.02/(b)/
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
/(a)/ Represents a dividend of $0.02 per share declared in January 2000 but paid
in first quarter of fiscal 2000.
/(b)/ Represents a dividend of $0.02 per share declared in January 1999 but
paid in first quarter of fiscal 1999.
3
<PAGE>
GAP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(In thousands) Thirteen Weeks Ended
----------------------------------------------------
April 29, 2000 May 1, 1999
--------------------- ----------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 235,476 $ 202,370
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 132,016 94,998
Tax benefit from exercise of stock options
and vesting of restricted stock 65,912 134,312
Changes in operating assets and liabilities:
Merchandise inventory (194,586) (143,079)
Other current assets (32,461) (15,074)
Accounts payable (71,718) (66,858)
Accrued expenses (52,006) 41,056
Income taxes payable (36,825) (115,898)
Deferred lease credits and other current liabilities (5,476) 10,153
--------------------- ----------------------
Net cash provided by operating activities 40,332 141,980
--------------------- ----------------------
Cash Flows from Investing Activities:
Net purchase of property and equipment (321,103) (218,973)
Acquisition of lease rights and other assets (50,779) (2,769)
--------------------- ----------------------
Net cash used for investing activities (371,882) (221,742)
--------------------- ----------------------
Cash Flows from Financing Activities:
Net increase in notes payable 468,252 12,481
Net issuance of long-term debt - 48,346
Issuance of common stock 38,632 30,226
Net purchase of treasury stock (163,266) (100,251)
Cash dividends paid (18,872) (18,946)
--------------------- ----------------------
Net cash provided by (used for) financing activities 324,746 (28,144)
--------------------- ----------------------
Effect of exchange rate fluctuations on cash (7,376) (1,240)
--------------------- ----------------------
Net decrease in cash and equivalents (14,180) (109,146)
Cash and equivalents at beginning of year 450,352 565,253
--------------------- ----------------------
Cash and equivalents at end of quarter $ 436,172 $ 456,107
===================== ======================
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
GAP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated balance sheets as of April 29, 2000 and May 1, 1999
and the interim condensed consolidated statements of earnings and cash flows for
the thirteen weeks ended April 29, 2000 and May 1, 1999 have been prepared by
the Company, without audit. In the opinion of management, such statements
include all adjustments (which include only normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and cash flows of the Company at April 29, 2000 and May 1, 1999 and
for all periods presented.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted from these interim financial statements. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 29, 2000.
The condensed consolidated balance sheet as of January 29, 2000 was derived from
the Company's January 29, 2000 balance sheet included in the Company's 1999
Annual Report on Form 10-K.
The results of operations for the thirteen weeks ended April 29, 2000 are not
necessarily indicative of the operating results that may be expected for the
year ending February 3, 2001.
2. COMPREHENSIVE EARNINGS
----------------------
Comprehensive earnings include net earnings and other comprehensive earnings
(losses). Other comprehensive earnings (losses) include foreign currency
translation adjustments and fluctuations in the fair market value of certain
financial instruments. Comprehensive earnings for the thirteen weeks ended April
29, 2000 and May 1, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------------
April 29, 2000 May 1, 1999
---------------------------------------
<S> <C> <C>
Net earnings $ 235,476 $ 202,370
Other comprehensive earnings (losses) 12,772 (7,961)
---------------------------------------
Total comprehensive earnings $ 248,248 $ 194,409
=======================================
</TABLE>
5
<PAGE>
3. EARNINGS PER SHARE
------------------
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share
includes the additional dilutive effect of the Company's potentially dilutive
securities, which include certain stock options and unvested shares of
restricted stock. The following summarizes the incremental shares from these
potentially dilutive securities, calculated using the treasury stock method.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------------
April 29, 2000 May 1, 1999
------------------ -----------------
<S> <C> <C>
Weighted-average number of shares - basic 850,325,670 854,464,568
Incremental shares resulting from:
Stock options 36,951,619 42,431,804
Restricted stock 742,877 3,147,367
------------------ -----------------
Weighted-average number of shares - diluted 888,020,166 900,043,739
================== =================
</TABLE>
Excluded from the above computation of weighted-average shares for diluted
earnings per share were options to purchase 2,475,924 and 236,906 shares of
common stock during the thirteen weeks ended April 29, 2000 and May 1, 1999,
respectively. Additionally, put options to repurchase 750,000 shares during the
thirteen weeks ended April 29, 2000 were excluded from the above computations.
Issuance or repurchase of these securities would have resulted in an
antidilutive effect on earnings per share.
4. PUT OPTIONS
-----------
At the end of the first quarter of fiscal 2000, the Company was obligated under
various put option contracts to repurchase up to 750,000 shares of the Company's
stock. The contracts have exercise prices ranging from $37.00 to $40.00 per
share, with expiration dates through October 2000.
5. TREASURY SHARES RETIREMENT
--------------------------
In March 2000, the Company retired approximately 81 million treasury shares with
a cost basis of approximately $642 million. The retirement of such treasury
shares did not affect results of operations.
6. SUBSEQUENT EVENT
----------------
In May 2000, the Company issued $250 million of debt securities at a rate per
annum, reset quarterly, equal to the three-month LIBOR plus 0.125%, due November
15, 2001.
6
<PAGE>
Deloitte & Touche LLP
50 Fremont Street Telephone: (415) 783-4000
San Francisco, California 94105-2230 Facsimile: (415) 783-4329
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of The Gap, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The
Gap, Inc. and subsidiaries as of April 29, 2000 and May 1, 1999, and the related
condensed consolidated statements of earnings and cash flows for the thirteen
week periods ended April 29, 2000 and May 1, 1999. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of The
Gap, Inc. and subsidiaries as of January 29, 2000, 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 23, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 29, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
May 22, 2000
Deloitte Touche
Tohmatsu
International
7
<PAGE>
GAP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------------
The information below contains certain forward-looking statements which reflect
the current view of Gap Inc. (the "Company") with respect to future events and
financial performance. Wherever used, the words "expect," "plan," "anticipate,"
"believe," and similar expressions identify forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties and
the Company's actual results of operations could differ materially from
historical results or current expectations. Some of these risks include, without
limitation, ongoing competitive pressures in the apparel industry, risks
associated with challenging international retail environments, changes in the
level of consumer spending or preferences in apparel, trade restrictions and
political or financial instability in countries where the Company's goods are
manufactured, and/or other factors that may be described in the Company's Annual
Report on Form 10-K and/or other filings with the Securities and Exchange
Commission. Future economic and industry trends that could potentially impact
revenues and profitability are difficult to predict.
It is suggested that this document be read in conjunction with the Management's
Discussion and Analysis included in the Company's Annual Report on Form 10-K for
the year ended January 29, 2000.
The Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Net Sales
-------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
-----------------------------------------
April 29, 2000 May 1, 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales ($000) $2,731,990 $2,277,734
Total net sales growth percentage 20 32
Comparable store sales (decrease) increase percentage (2) 11
Net sales per average square foot $109 $118
Square footage of gross store space (000) 25,519 19,517
Number of Stores:
Beginning of Year 3,018 2,466
New stores 133 112
Expanded stores/(1)/ 24 6
Closed stores 6 4
End of Period 3,145 2,574
-------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Expanded stores do not change store count.
8
<PAGE>
Store count and square footage at quarter end for fiscal 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
April 29, 2000 May 1, 1999
-------------------------------------------------------------------------------------------------------
Number of Sq. Ft. Number of Sq. Ft.
Stores (millions) Stores (millions)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gap Domestic 1,812 10.6 1,533 9.1
Gap International 433 2.4 326 1.6
Banana Republic 354 2.7 295 2.1
Old Navy 546 9.8 420 6.7
-------------------------------------------------------------------------------------------------------
Total 3,145 25.5 2,574 19.5
=======================================================================================================
Increase 22% 31% 16% 22%
</TABLE>
The increase in net sales for the first quarter of fiscal 2000 over the same
period last year was primarily attributable to the increase in retail selling
space, both through the opening of new stores (net of stores closed) and the
expansion of existing stores.
The decrease in net sales per average square foot for the first quarter of
fiscal 2000 was primarily attributable to a decrease in comparable store sales
and the growing impact of the Old Navy division. Old Navy division's
lower-priced merchandise and significantly larger stores result in lower net
sales per average square foot when compared to other divisions.
During the first quarter, the company's comparable store sales by division were
as follows: Gap Domestic turned in a negative mid-single digit versus a positive
mid-single digit last year, Gap International had a positive mid-single digit
versus positive high-twenties last year, Banana Republic had a positive
mid-single digit versus positive low-teens last year, Old Navy turned in a
negative low-single digit versus positive low-twenties last year.
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses as a percentage of net sales for the
first quarter of fiscal 2000 was unchanged from the same period in 1999.
Improvements in merchandise margin as a percentage of net sales were offset by
an increase in occupancy expenses as a percentage of net sales.
The increase in merchandise margin as a percentage of net sales was primarily
attributable to a greater percentage of merchandise sold at regular price and
higher margins from regular-priced goods when compared to the same period last
year. The increase in occupancy expenses as a percentage of net sales was
primarily attributable to the decrease in net sales per average square foot.
Operating Expenses
Operating expenses as a percentage of net sales increased 0.5 percentage points
for the first quarter of fiscal 2000 as compared to the same period in 1999. The
increase was primarily attributable to higher store payroll as a percentage of
net sales partially offset by lower advertising costs as a percentage of net
sales.
9
<PAGE>
Net Interest Expense
The increase in net interest expense in the first quarter of fiscal 2000 as
compared to the same period in 1999 was primarily due to increased interest
costs from an increase in short-term borrowings and the issuance of long-term
debt during the third quarter of fiscal 1999 to support the Company's
international expansion plans, partially offset by additional interest
capitalized during the first quarter of fiscal 2000.
Income Taxes
The effective tax rate was 36.5 percent and 37.5 percent for the first quarter
of fiscal 2000 and fiscal 1999, respectively. The decrease in the tax rate
resulted from the Company's implementation of global tax planning initiatives
based on long-term business needs.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth certain measures of the Company's liquidity:
--------------------------------------------------------------------------------
Thirteen Weeks Ended
----------------------------------
April 29, 2000 May 1, 1999
--------------------------------------------------------------------------------
Cash provided by operating activities ($000) $40,332 $141,980
Working capital ($000) $374,893 $520,992
Current ratio 1.18:1 1.37:1
--------------------------------------------------------------------------------
For the thirteen weeks ended April 29, 2000, the decrease in cash flows provided
by operating activities, compared to the same period in the prior year, was
attributable to the increase in merchandise inventory and the decrease in the
relative growth in accounts payable and accrued expenses compared to the same
period in the prior year partially offset by an increase in net earnings
exclusive of depreciation and amortization.
The Company funds inventory expenditures during normal and peak periods through
a combination of cash flows provided by operations and short-term financing
arrangements. The Company's business follows a seasonal pattern, peaking over a
total of about 13 weeks during the Back-to-School and Holiday periods.
The Company has committed credit facilities totaling $1 billion, consisting of
an $850 million, 364-day revolving credit facility, and a $150 million, 5-year
revolving credit facility through June 28, 2003. These credit facilities provide
for the issuance of up to $500 million in letters of credit and provide backup
for the Company's $500 million commercial paper program. The Company has
additional uncommitted credit facilities of $520 million for the issuance of
letters of credit. At April 29, 2000, the Company had outstanding letters of
credit totaling approximately $959 million. The Company had $471 million of
commercial paper outstanding at April 29, 2000.
In May 2000, the Company issued $250 million of debt securities at a rate per
annum, reset quarterly, equal to the three-month LIBOR plus 0.125%, due November
15, 2001.
For the thirteen weeks ended April 29, 2000, capital expenditures, net of
construction allowances and dispositions, totaled approximately $319 million.
The majority of these expenditures were used for expansion of the store base,
headquarter and distribution facilities. During the first quarter of fiscal
2000, the Company experienced a net increase in store space of approximately
1,541,000 square feet, or 6 percent, due to the addition of 133 new stores, the
expansion of 24 stores and the remodeling of certain stores.
For fiscal 2000, the Company expects capital expenditures to exceed $1.6
billion, net of construction allowances. This represents the addition of 600 to
660 new stores, the expansion of approximately 200 stores, the remodeling of
certain stores, as well as amounts for headquarters facilities, distribution
centers and equipment. The Company expects to fund such capital expenditures
with cash flow from operations and other sources of financing. Square footage
growth is expected to be in the mid-20 percent range. By division, the 600 to
660 new stores are expected to be: Gap Domestic 320 to 340 stores, Banana
Republic 40 to 60 stores, Old Navy 120 to 130 stores and Gap International 120
to 130 stores. New stores are generally expected to be leased.
During 1998, the Company purchased land on which to construct additional
headquarter facilities in San Francisco and San Bruno, California. The estimated
total project costs are approximately $240 million and $100 million,
respectively. Construction commenced on the San Francisco facility during the
third quarter of 1998 and is estimated to continue through early 2001.
Construction commenced during the first quarter of 1999 on the San Bruno
facility and is estimated to continue through late 2000.
11
<PAGE>
The Company commenced construction on several distribution facilities in 1999.
The estimated total cost for the remaining facilities is approximately $215
million. Majority of the expenditures will be incurred during fiscal 2000. The
facilities are expected to be open in mid-2000.
The Company took possession of a distribution site and building in Ontario,
Canada during the first quarter of fiscal 2000 to support the initial
international expansion plans for the Old Navy business. The Company will spend
the next year remodeling the facility prior to its anticipated opening date in
mid-2001. The estimated total project cost is approximately $89 million.
During the first quarter of fiscal 2000, under the 67.5 million share repurchase
program approved in October 1998, the Company acquired approximately 3.8 million
shares for approximately $163 million.
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations. The Company's risk
management policy is to hedge substantially all merchandise purchases for
foreign operations through the use of foreign exchange forward contracts to
minimize this risk.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The market risk of the Company's financial instruments as of April 29, 2000 has
not significantly changed since January 29, 2000.
The market risk profile of the Company on January 29, 2000 is disclosed in the
Company's 1999 Annual Report on Form 10-K.
The net change in fair value of the Company's foreign exchange contracts and
long-term debt since January 29, 2000 was an unrealized gain of $30 million.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------
On March 3, 2000, the Company sold 101,250 shares of common stock at
$6.87037 per share to Arnell Group Ltd. pursuant to the exercise of a
stock option. The aggregate sale price was $695,624.96. The Company
claims exemption from registration under (S)4(2) of the Securities Act
of 1933, as a transaction not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a) Exhibits
(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 April 29, 2000.
13
<PAGE>
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:May 30, 2000 By /s/ Heidi Kunz
---------------------------------
Heidi Kunz
Chief Financial Officer
(Principal financial officer of the registrant)
Date:May 30, 2000 By /s/ Millard S. Drexler
----------------------------------
Millard S. Drexler
President and Chief Executive Officer
14
<PAGE>
EXHIBIT INDEX
-------------
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
15
