NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
. Basis of Presentation
The Condensed Consolidated Balance Sheets as of
July 30, 2016
and
August 1, 2015
, the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the
thirteen and twenty-six weeks ended
July 30, 2016
and
August 1, 2015
, and the Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended
July 30, 2016
and
August 1, 2015
have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements include all adjustments (which include normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, and cash flows as of
July 30, 2016
and
August 1, 2015
and for all periods presented. The Condensed Consolidated Balance Sheet as of
January 30, 2016
has been derived from our audited financial statements.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these interim financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
.
The results of operations for the
thirteen and twenty-six weeks ended
July 30, 2016
are not necessarily indicative of the operating results that may be expected for the 52-week period ending
January 28, 2017
.
Subsequent Event
On
August 29, 2016
, a fire caused significant damage to a company-owned distribution center in Fishkill, New York. The full extent of the damage and resulting financial statement impact are not known at the time of this filing. The Company maintains property and business interruption insurance coverage.
Note 2
. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") No. 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASUs are the same as the effective date for ASU No. 2014-09. We are currently assessing the potential impact of these ASUs on our Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, which changes how deferred taxes are classified on the balance sheet. The ASU eliminates the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is permitted under this ASU. We adopted ASU No. 2015-17 prospectively effective January 30, 2016, which resulted in a reclassification of our net current deferred tax assets to the net noncurrent deferred tax assets in our Consolidated Balance Sheet. No prior periods were retrospectively adjusted.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We are currently assessing the potential impact of this ASU on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the impact of this ASU on our Condensed Consolidated Financial Statements, but expect that it will result in a significant increase in our long-term assets and liabilities.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently assessing the potential impact of this ASU on our Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. We are currently assessing the potential impact of this ASU on our Condensed Consolidated Financial Statements.
Note 3
. Store Closing and Other Operating Charges
In May 2016, the Company announced measures to better align talent and financial resources against its most important priorities; these measures include (i) focusing each brand on geographies with the greatest potential and (ii) streamlining the Company’s operating model. The measures will result in the closure of its fleet of
53
Old Navy stores in Japan, the closure of select Banana Republic stores, primarily internationally, and the creation of a more efficient global brand structure. Including the Old Navy closures in Japan, the Company expects to close about
75
stores in total related to these measures in
fiscal 2016
.
In connection with the decision to close stores and streamline the Company's operations, the Company incurred
$150 million
in restructuring costs, on a pre-tax basis, during the
thirteen weeks ended
July 30, 2016
. The summary of the costs incurred during the
thirteen weeks ended
July 30, 2016
, as well as the Company’s current estimates of the pre-tax amount expected to be incurred during the remainder of
fiscal 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Costs Incurred
|
|
Estimated Costs to be Incurred
|
($ in millions)
|
13 Weeks Ended July 30, 2016
|
|
Remainder of Fiscal 2016
|
|
Total
|
Costs recorded in cost of goods sold and occupancy expenses:
|
|
|
|
|
|
Accelerated depreciation
|
$
|
4
|
|
|
$ 10 - 15
|
|
|
$ 15 - 20
|
|
Employee related costs
|
11
|
|
|
Less than 5
|
|
|
10 - 15
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Total costs recorded in cost of goods sold and occupancy expenses
|
15
|
|
|
10 - 20
|
|
|
25 - 35
|
|
|
|
|
|
|
|
Costs recorded in operating expenses:
|
|
|
|
|
|
Lease termination fees and lease losses
|
34
|
|
|
50 - 65
|
|
|
85 - 100
|
|
Employee related costs
|
30
|
|
|
15 - 20
|
|
|
45 - 50
|
|
Store asset impairment
|
52
|
|
|
Less than 5
|
|
|
50 - 55
|
|
Other
|
19
|
|
|
5 - 10
|
|
|
25 - 30
|
|
Total costs recorded in operating expenses
|
135
|
|
|
70 - 100
|
|
|
205 - 235
|
|
Total restructuring costs
|
$
|
150
|
|
|
$ 80 - 120
|
|
|
$ 230 - 270
|
|
In addition to the total pre-tax amount estimated above, the Company also expects to incur incremental tax expense related to the restructuring costs and resulting valuation allowances on certain foreign deferred tax assets. The Company’s estimates of future charges associated with the store closures and streamlining of its operating model could change as the Company’s plans evolve and become finalized. The actual amounts will depend on the timing of closures and negotiations on lease termination fees during the remainder of
fiscal 2016
.
The following table summarizes activity during the
thirteen weeks ended
July 30, 2016
related to certain restructuring costs that will be settled with cash payments and the related liability balances as of
July 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Lease Termination Fees and Lease Losses
|
|
Employee Related Costs
|
|
Other
|
|
Total
|
Balance at April 30, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Provision
|
34
|
|
|
41
|
|
|
12
|
|
|
87
|
|
Cash payments
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Balance at July 30, 2016
|
$
|
34
|
|
|
$
|
41
|
|
|
$
|
6
|
|
|
$
|
81
|
|
Note 4
. Debt and Credit Facilities
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
July 30,
2016
|
|
January 30,
2016
|
|
August 1,
2015
|
Notes
|
$
|
1,248
|
|
|
$
|
1,248
|
|
|
$
|
1,248
|
|
Japan Term Loan
|
97
|
|
|
83
|
|
|
100
|
|
Total long-term debt
|
1,345
|
|
|
1,331
|
|
|
1,348
|
|
Less: Current portion
|
(24
|
)
|
|
(21
|
)
|
|
(20
|
)
|
Total long-term debt, less current portion
|
$
|
1,321
|
|
|
$
|
1,310
|
|
|
$
|
1,328
|
|
As of
July 30, 2016
,
January 30, 2016
, and
August 1, 2015
, the estimated fair value of our
$1.25 billion
aggregate principal amount of
5.95 percent
notes (the "Notes”) due
April 2021
was
$1.34 billion
,
$1.29 billion
, and
$1.40 billion
, respectively, and was based on the quoted market price of the Notes (level 1 inputs) as of the last business day of the respective fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt in the Condensed Consolidated Balance Sheets, net of the unamortized discount.
As of
July 30, 2016
,
January 30, 2016
, and
August 1, 2015
, the carrying amount of our
15 billion
Japanese yen,
four
-year, unsecured term loan ("Japan Term Loan") approximated its fair value, as the interest rate varies depending on quoted market rates (level 1 inputs). Repayments of
2.5 billion
Japanese yen (
$24 million
as of
July 30, 2016
) are payable on January 15 of each year, and commenced on
January 15, 2015
, with a final repayment of
7.5 billion
Japanese yen (
$73 million
as of
July 30, 2016
) due on
January 15, 2018
. Interest is payable at least quarterly based on an interest rate equal to the Tokyo Interbank Offered Rate plus a fixed margin.
In October 2015, we entered into a
$400 million
unsecured term loan (the “Term Loan”). The Term Loan was originally scheduled to mature, and was payable in full, on
October 15, 2016
, but had an option to be extended until
October 15, 2017
. In August 2016, the Company exercised the option to extend the Term Loan. As of
July 30, 2016
, the carrying amount of our
$400 million
Term Loan approximated its fair value due to the short-term nature of the loan. Interest is payable at least quarterly based on an interest rate equal to the London Interbank Offered Rate plus a fixed margin. The Term Loan is included in current maturities of debt in the Condensed Consolidated Balance Sheet.
We have a
$500 million
,
five
-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in
May 2020
. There were
no
borrowings and
no
material outstanding standby letters of credit under the Facility as of
July 30, 2016
.
We maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). These Foreign Facilities are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The total capacity of the Foreign Facilities was
$47 million
as of
July 30, 2016
. As of
July 30, 2016
, there were
no
borrowings under the Foreign Facilities. There were
$13 million
in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of
July 30, 2016
.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of
July 30, 2016
, we had
$18 million
in standby letters of credit issued under these agreements. We also have a
$50 million
,
two
-year, unsecured committed letter of credit agreement, which expires in
September 2016
. We had
no
trade letters of credit issued under this letter of credit agreement as of
July 30, 2016
.
Note 5
. Fair Value Measurements
There were
no
purchases, sales, issuances, or settlements related to recurring level 3 measurements during the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
. There were
no
transfers of financial assets or liabilities into or out of level 1 and level 2 during the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
July 30, 2016
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
756
|
|
|
$
|
169
|
|
|
$
|
587
|
|
|
$
|
—
|
|
Derivative financial instruments
|
52
|
|
|
—
|
|
|
52
|
|
|
—
|
|
Deferred compensation plan assets
|
41
|
|
|
41
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
849
|
|
|
$
|
210
|
|
|
$
|
639
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
January 30, 2016
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
517
|
|
|
$
|
204
|
|
|
$
|
313
|
|
|
$
|
—
|
|
Derivative financial instruments
|
93
|
|
|
—
|
|
|
93
|
|
|
—
|
|
Deferred compensation plan assets
|
37
|
|
|
37
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
647
|
|
|
$
|
241
|
|
|
$
|
406
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
August 1, 2015
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
239
|
|
|
$
|
96
|
|
|
$
|
143
|
|
|
$
|
—
|
|
Derivative financial instruments
|
141
|
|
|
—
|
|
|
141
|
|
|
—
|
|
Deferred compensation plan assets
|
46
|
|
|
46
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
426
|
|
|
$
|
142
|
|
|
$
|
284
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper. These investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. We value these investments at their original purchase prices plus interest that has accrued at the stated rate.
Derivative financial instruments primarily include foreign exchange forward contracts. The currencies hedged against changes in the U.S. dollar are Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Hong Kong dollars, Chinese yuan, and Taiwan dollars. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. Derivative financial instruments in an asset position are recorded in other current assets or other long-term assets in the Condensed Consolidated Balance Sheets. Derivative financial instruments in a liability position are recorded in accrued expenses and other current liabilities or lease incentives and other long-term liabilities in the Condensed Consolidated Balance Sheets.
We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees and non-employee directors to defer compensation up to a maximum amount. Plan investments are recorded at market value and are designated for the DCP. The fair value of the Company’s DCP assets is determined based on quoted market prices, and the assets are recorded in other long-term assets in the Condensed Consolidated Balance Sheets.
Nonfinancial Assets
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.
There were
no
material impairment charges recorded for goodwill or other indefinite-lived intangible assets for the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
.
We review the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In May 2016, the Company announced measures that will result in the closure of its fleet of 53 Old Navy stores in Japan and select Banana Republic stores, primarily internationally. As a result of the announced measures, we reviewed the global Banana Republic specialty fleet for impairment during the
thirteen weeks ended
July 30, 2016
. During the
thirteen weeks ended
July 30, 2016
, we recorded charges for impairment of long-lived assets of
$52 million
related to the announced store closures, primarily related to Old Navy Japan, and an additional
$4 million
for long-lived assets that were unrelated to the announced measures. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statements of Income and reduced the then carrying amount of the applicable long-lived assets of
$68 million
to their fair value of
$12 million
.
In June 2015, the Company announced a series of strategic actions to position Gap brand for improved business performance in the future, including its decision to close about 175 Gap brand specialty stores in North America and a limited number of international stores. As a result of the announced strategic actions, we reviewed the global Gap brand specialty fleet for impairment and recorded a charge for the impairment of long-lived assets of
$37 million
for the
thirteen weeks ended
August 1, 2015
, primarily related to Gap brand. The amount was recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of
$43 million
to their fair value of
$6 million
.
The fair value of the long-lived assets was
d
etermined using level 3 inputs and based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores is primarily at the store level.
Note 6
. Derivative Financial Instruments
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We use derivative financial instruments to manage our exposure to foreign currency exchange rate risk and do not enter into derivative financial contracts for trading purposes. Consistent with our risk management guidelines, we hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. These contracts are entered into with large, reputable financial institutions that are monitored for counterparty risk. The currencies hedged against changes in the U.S. dollar are Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Hong Kong dollars, Chinese yuan, and Taiwan dollars. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.
Cash Flow Hedges
We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entities, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, intercompany royalty payments, and intercompany revenue transactions generally have terms of up to 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized in income in the period in which the underlying transaction impacts the income statement.
There were
no
material amounts recorded in the Condensed Consolidated Statements of Income for the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. There were
no
material amounts reclassified into earnings during the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
as a result of the discontinuance of cash flow hedges because the forecasted transactions were no longer probable.
Net Investment Hedges
We also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries.
There were
no
material amounts recorded in the Condensed Consolidated Statements of Income for the
thirteen and twenty-six weeks ended
July 30, 2016
or
August 1, 2015
as a result of our analysis of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness.
Other Derivatives Not Designated as Hedging Instruments
We enter into foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments that represent economic hedges, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses in the Condensed Consolidated Statements of Income in the same period and generally offset.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
July 30,
2016
|
|
January 30,
2016
|
|
August 1,
2015
|
Derivatives designated as cash flow hedges
|
$
|
1,449
|
|
|
$
|
1,220
|
|
|
$
|
1,468
|
|
Derivatives designated as net investment hedges
|
32
|
|
|
30
|
|
|
31
|
|
Derivatives not designated as hedging instruments
|
625
|
|
|
324
|
|
|
313
|
|
Total
|
$
|
2,106
|
|
|
$
|
1,574
|
|
|
$
|
1,812
|
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
July 30,
2016
|
|
January 30,
2016
|
|
August 1,
2015
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Other current assets
|
$
|
30
|
|
|
$
|
71
|
|
|
$
|
95
|
|
Other long-term assets
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
29
|
|
Accrued expenses and other current liabilities
|
$
|
38
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Lease incentives and other long-term liabilities
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
|
|
|
|
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
Other current assets
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Other long-term assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued expenses and other current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Lease incentives and other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Other current assets
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
17
|
|
Other long-term assets
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued expenses and other current liabilities
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Lease incentives and other long-term liabilities
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Total derivatives in an asset position
|
$
|
52
|
|
|
$
|
93
|
|
|
$
|
141
|
|
Total derivatives in a liability position
|
$
|
83
|
|
|
$
|
3
|
|
|
$
|
8
|
|
The majority of the unrealized gains and losses from designated cash flow hedges as of
July 30, 2016
will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of
July 30, 2016
shown above.
Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments in the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are
$11 million
,
$2 million
, and
$5 million
as of
July 30, 2016
,
January 30, 2016
, and
August 1, 2015
, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be
$41 million
,
$91 million
, and
$136 million
and the net amounts of the derivative financial instruments in a liability position would be
$72 million
,
$1 million
, and
$3 million
as of
July 30, 2016
,
January 30, 2016
and
August 1, 2015
, respectively.
See
Note 5
of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
20
|
|
|
$
|
53
|
|
|
$
|
(105
|
)
|
|
$
|
39
|
|
Gain reclassified into cost of goods sold and occupancy expenses
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
13
|
|
|
$
|
54
|
|
Gain (loss) reclassified into operating expenses
|
$
|
(6
|
)
|
|
$
|
1
|
|
|
$
|
(8
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
Derivatives in net investment hedging relationships:
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
For the
thirteen and twenty-six weeks ended
July 30, 2016
and
August 1, 2015
, there were
no
amounts of gain or loss reclassified from accumulated other comprehensive income into net income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.
Gains and losses on foreign exchange forward contracts not designated as hedging instruments recorded in the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Gain (loss) recognized in operating expenses
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
Note 7
. Share Repurchases
Share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ and shares in millions except average per share cost)
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Number of shares repurchased
|
—
|
|
|
10.0
|
|
|
—
|
|
|
15.6
|
|
Total cost
|
$
|
—
|
|
|
$
|
377
|
|
|
$
|
—
|
|
|
$
|
607
|
|
Average per share cost including commissions
|
$
|
—
|
|
|
$
|
37.60
|
|
|
$
|
—
|
|
|
$
|
38.82
|
|
In October 2014, we announced that the Board of Directors approved a
$500 million
share repurchase authorization, all of which was completed by the end of May 2015. In February 2015, we announced that the Board of Directors approved a
$1.0 billion
share repurchase authorization (the "February 2015 repurchase program"). In February 2016, we announced that the Board of Directors approved a new
$1.0 billion
share repurchase authorization (the "February 2016 repurchase program"). The February 2015 repurchase program, which had
$302 million
remaining, was superseded and replaced by the February 2016 repurchase program. The February 2016 repurchase program still had
$1.0 billion
remaining as of
July 30, 2016
, as there were no shares repurchased during the
thirteen and twenty-six weeks ended
July 30, 2016
.
All of the share repurchases were paid for as of
January 30, 2016
and
August 1, 2015
. All common stock repurchased is immediately retired.
Note 8
. Share-Based Compensation
Share-based compensation expense recognized in the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Stock units
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
29
|
|
|
$
|
34
|
|
Stock options
|
3
|
|
|
3
|
|
|
5
|
|
|
6
|
|
Employee stock purchase plan
|
1
|
|
|
2
|
|
|
2
|
|
|
3
|
|
Share-based compensation expense
|
21
|
|
|
21
|
|
|
36
|
|
|
43
|
|
Less: Income tax benefit
|
(11
|
)
|
|
(8
|
)
|
|
(17
|
)
|
|
(16
|
)
|
Share-based compensation expense, net of tax
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
19
|
|
|
$
|
27
|
|
Note 9
. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at January 30, 2016
|
$
|
22
|
|
|
$
|
63
|
|
|
$
|
85
|
|
13 Weeks Ended April 30, 2016:
|
|
|
|
|
|
Foreign currency translation
|
31
|
|
|
—
|
|
|
31
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(89
|
)
|
|
(89
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Other comprehensive income (loss), net
|
31
|
|
|
(96
|
)
|
|
(65
|
)
|
Balance at April 30, 2016
|
53
|
|
|
(33
|
)
|
|
20
|
|
13 Weeks Ended July 30, 2016:
|
|
|
|
|
|
Foreign currency translation
|
(22
|
)
|
|
—
|
|
|
(22
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
8
|
|
|
8
|
|
Other comprehensive income (loss), net
|
(22
|
)
|
|
1
|
|
|
(21
|
)
|
Balance at July 30, 2016
|
$
|
31
|
|
|
$
|
(32
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at January 31, 2015
|
$
|
60
|
|
|
$
|
105
|
|
|
$
|
165
|
|
13 Weeks Ended May 2, 2015:
|
|
|
|
|
|
Foreign currency translation
|
6
|
|
|
—
|
|
|
6
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(21
|
)
|
|
(21
|
)
|
Other comprehensive income (loss), net
|
6
|
|
|
(31
|
)
|
|
(25
|
)
|
Balance at May 2, 2015
|
66
|
|
|
74
|
|
|
140
|
|
13 Weeks Ended August 1, 2015:
|
|
|
|
|
|
Foreign currency translation
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
36
|
|
|
36
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
Other comprehensive income (loss), net
|
(13
|
)
|
|
17
|
|
|
4
|
|
Balance at August 1, 2015
|
$
|
53
|
|
|
$
|
91
|
|
|
$
|
144
|
|
See
Note 6
of Notes to Condensed Consolidated Financial Statements for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Condensed Consolidated Statements of Income.
Note 10
. Income Taxes
The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, the United Kingdom, China, Hong Kong, Japan, and India. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we are also no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2008.
The Company engages in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions in the normal course of business. As of
July 30, 2016
, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to
$2 million
, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statement of Income would not be material.
The effective income tax rate was
52.5 percent
for the
thirteen weeks ended
July 30, 2016
, compared with
38.0 percent
for the
thirteen weeks ended
August 1, 2015
. The increase in the effective tax rate was primarily due to the impact of restructuring costs incurred for foreign subsidiaries during the
thirteen weeks ended
July 30, 2016
and resulting valuation allowances on certain foreign deferred tax assets.
Note 11
. Earnings Per Share
Weighted-average number of shares used for earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
(shares in millions)
|
July 30,
2016
|
|
August 1,
2015
|
|
July 30,
2016
|
|
August 1,
2015
|
Weighted-average number of shares - basic
|
398
|
|
|
417
|
|
|
398
|
|
|
419
|
|
Common stock equivalents
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Weighted-average number of shares - diluted
|
399
|
|
|
418
|
|
|
399
|
|
|
421
|
|
The above computations of weighted-average number of shares – diluted exclude
11 million
and
3 million
shares related to stock options and other stock awards for the
thirteen weeks ended
July 30, 2016
and
August 1, 2015
, respectively, and
8 million
and
3 million
shares related to stock options and other stock awards for the
twenty-six weeks ended
July 30, 2016
and
August 1, 2015
, respectively, as their inclusion would have an anti-dilutive effect on earnings per share.
Note 12
. Commitments and Contingencies
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated, and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our Condensed Consolidated Financial Statements taken as a whole.
As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of
July 30, 2016
, Actions filed against us included commercial, intellectual property, customer, employment, and data privacy claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages and some are covered in part by insurance. As of
July 30, 2016
,
January 30, 2016
, and
August 1, 2015
, we recorded a liability for an estimated loss if the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable. The liability recorded as of
July 30, 2016
,
January 30, 2016
, and
August 1, 2015
was not material for any individual Action or in total. Subsequent to
July 30, 2016
and through the filing date of this Quarterly Report on Form 10-Q, no information has become available that indicates a change is required that would be material to our Condensed Consolidated Financial Statements taken as a whole.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material effect on our Condensed Consolidated Financial Statements taken as a whole.
Note 13
. Segment Information
The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, and Intermix brands. We identify our operating segments according to how our business activities are managed and evaluated. As of
July 30, 2016
, our operating segments included Gap Global, Old Navy Global, Banana Republic Global, Athleta, and Intermix. The operating results for the
twenty-six weeks ended
August 1, 2015
also include Piperlime, which was discontinued as of the first quarter of fiscal 2015. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into
one
reportable segment as of
July 30, 2016
.
Net sales by brand and region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (2)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended July 30, 2016
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
749
|
|
|
$
|
1,500
|
|
|
$
|
523
|
|
|
$
|
200
|
|
|
$
|
2,972
|
|
|
77
|
%
|
Canada
|
|
92
|
|
|
129
|
|
|
57
|
|
|
—
|
|
|
278
|
|
|
7
|
|
Europe
|
|
159
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
176
|
|
|
5
|
|
Asia
|
|
280
|
|
|
66
|
|
|
29
|
|
|
—
|
|
|
375
|
|
|
10
|
|
Other regions
|
|
33
|
|
|
10
|
|
|
7
|
|
|
—
|
|
|
50
|
|
|
1
|
|
Total
|
|
$
|
1,313
|
|
|
$
|
1,705
|
|
|
$
|
633
|
|
|
$
|
200
|
|
|
$
|
3,851
|
|
|
100
|
%
|
Sales growth (decline)
|
|
(4
|
)%
|
|
2
|
%
|
|
(6
|
)%
|
|
12
|
%
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (2)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended August 1, 2015
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
795
|
|
|
$
|
1,500
|
|
|
$
|
563
|
|
|
$
|
177
|
|
|
$
|
3,035
|
|
|
78
|
%
|
Canada
|
|
88
|
|
|
124
|
|
|
59
|
|
|
1
|
|
|
272
|
|
|
7
|
|
Europe
|
|
176
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
196
|
|
|
5
|
|
Asia
|
|
270
|
|
|
49
|
|
|
27
|
|
|
—
|
|
|
346
|
|
|
9
|
|
Other regions
|
|
39
|
|
|
2
|
|
|
8
|
|
|
—
|
|
|
49
|
|
|
1
|
|
Total
|
|
$
|
1,368
|
|
|
$
|
1,675
|
|
|
$
|
677
|
|
|
$
|
178
|
|
|
$
|
3,898
|
|
|
100
|
%
|
Sales growth (decline)
|
|
(7
|
)%
|
|
3
|
%
|
|
(4
|
)%
|
|
(4
|
)%
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (2)
|
|
Total
|
|
Percentage of Net Sales
|
26 Weeks Ended July 30, 2016
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
1,447
|
|
|
$
|
2,828
|
|
|
$
|
977
|
|
|
$
|
378
|
|
|
$
|
5,630
|
|
|
77
|
%
|
Canada
|
|
162
|
|
|
227
|
|
|
104
|
|
|
1
|
|
|
494
|
|
|
7
|
|
Europe
|
|
303
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
334
|
|
|
5
|
|
Asia
|
|
560
|
|
|
116
|
|
|
55
|
|
|
—
|
|
|
731
|
|
|
10
|
|
Other regions
|
|
64
|
|
|
20
|
|
|
16
|
|
|
—
|
|
|
100
|
|
|
1
|
|
Total
|
|
$
|
2,536
|
|
|
$
|
3,191
|
|
|
$
|
1,183
|
|
|
$
|
379
|
|
|
$
|
7,289
|
|
|
100
|
%
|
Sales growth (decline)
|
|
(5
|
)%
|
|
(1
|
)%
|
|
(9
|
)%
|
|
7
|
%
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
26 Weeks Ended August 1, 2015
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
1,530
|
|
|
$
|
2,903
|
|
|
$
|
1,078
|
|
|
$
|
352
|
|
|
$
|
5,863
|
|
|
78
|
%
|
Canada
|
|
157
|
|
|
226
|
|
|
111
|
|
|
2
|
|
|
496
|
|
|
6
|
|
Europe
|
|
340
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
377
|
|
|
5
|
|
Asia
|
|
555
|
|
|
92
|
|
|
54
|
|
|
—
|
|
|
701
|
|
|
9
|
|
Other regions
|
|
94
|
|
|
6
|
|
|
18
|
|
|
—
|
|
|
118
|
|
|
2
|
|
Total
|
|
$
|
2,676
|
|
|
$
|
3,227
|
|
|
$
|
1,298
|
|
|
$
|
354
|
|
|
$
|
7,555
|
|
|
100
|
%
|
Sales growth (decline)
|
|
(8
|
)%
|
|
4
|
%
|
|
(5
|
)%
|
|
(4
|
)%
|
|
(3
|
)%
|
|
|
__________
|
|
(1)
|
U.S. includes the United States, Puerto Rico, and Guam.
|
|
|
(2)
|
Includes Athleta and Intermix.
|
|
|
(3)
|
Includes Athleta, Intermix, and Piperlime, which was discontinued as of the first quarter of fiscal 2015.
|
Net sales by region are allocated based on the location of the store where the customer paid for and received the merchandise or the distribution center or store from which the products were shipped.