Notes to Consolidated Financial Statements
For the Fiscal Years Ended
January 28, 2017
,
January 30, 2016
, and
January 31, 2015
Note 1
. Organization and Summary of Significant Accounting Policies
Organization
The Gap, Inc., a Delaware corporation, is a global omni-channel retailer offering apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and beginning in October 2015, Mexico. We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in approximately 40 other countries around the world. In addition, our products are available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. In December 2016, the Company acquired the net assets of Weddington Way, which does not have a material impact on our Consolidated Financial Statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of The Gap, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
Fiscal Year and Presentation
Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to January 31. The fiscal years ended
January 28, 2017
(
fiscal 2016
),
January 30, 2016
(
fiscal 2015
), and
January 31, 2015
(
fiscal 2014
) consisted of 52 weeks. The fiscal year ending February 3, 2018 (fiscal 2017) will consist of 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash includes funds deposited in banks and amounts in transit from banks for customer credit card and debit card transactions that process in less than seven days.
All highly liquid investments with original maturities of 91 days or less are classified as cash equivalents. Our cash equivalents are placed primarily in time deposits and money market funds. We value these investments at their original purchase prices plus interest that has accrued at the stated rate. Income related to these securities is recorded in interest income in the Consolidated Statements of Income.
Merchandise Inventory
We value inventory at the lower of cost or market, with cost determined using the weighted-average cost method and market value determined based on the estimated net realizable value. We record an adjustment when future estimated selling price is less than cost. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes or colors) and use promotions and markdowns to clear merchandise. In addition, we estimate and accrue shortage for the period between the last physical count and the balance sheet date.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value in the Consolidated Balance Sheets as other current assets, other long-term assets, accrued expenses and other current liabilities, or lease incentives and other long-term liabilities.
For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income (“OCI”) and is recognized in income in the period in which the underlying transaction impacts the income statement. For derivative financial instruments that are designated and qualify as net investment hedges, the effective portion of the gain or loss on the derivative financial instruments is reported as a component of OCI and is reclassified into income in the period or periods during which the hedged subsidiary is either sold or liquidated (or substantially liquidated). Gains and losses on the derivative financial instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, if any, are recognized in current income. For derivative financial instruments not designated as hedging instruments, the gain or loss on the derivative financial instruments is recorded in operating expenses in the Consolidated Statements of Income. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are as follows:
|
|
|
|
Category
|
|
Term
|
Leasehold improvements
|
|
Shorter of remaining lease term or economic life, up to 15 years
|
Furniture and equipment
|
|
Up to 15 years
|
Software
|
|
3 to 7 years
|
Buildings and building improvements
|
|
Up to 39 years
|
When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts, with any resulting gain or loss recorded in operating expenses in the Consolidated Statements of Income. Costs of maintenance and repairs are expensed as incurred.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company’s asset retirement obligations are primarily associated with leasehold improvements that we are contractually obligated to remove at the end of a lease to comply with the lease agreement. We recognize asset retirement obligations at the inception of a lease with such conditions if a reasonable estimate of fair value can be made. Asset retirement obligations are recorded in accrued expenses and other current liabilities and lease incentives and other long-term liabilities in the Consolidated Balance Sheets and are subsequently adjusted for changes in estimated asset retirement obligations. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life.
Revenue Recognition
Revenue is recognized for sales transacted at stores when the customer receives and pays for the merchandise at the register. For sales where we ship the merchandise to the customer from a distribution center or store, revenue is recognized at the time we estimate the customer receives the product. Amounts related to shipping and handling that are billed to customers are recorded in net sales, and the related costs are recorded in cost of goods sold and occupancy expenses in the Consolidated Statements of Income. Revenues are presented net of estimated returns and any taxes collected from customers and remitted to governmental authorities. Allowances for estimated returns are recorded based on estimated margin using our historical return patterns.
We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to franchisees at the time merchandise ownership is transferred to the franchisee, which generally occurs when the merchandise reaches the franchisee’s predesignated turnover point. These sales are recorded in net sales, and the related cost of goods sold is recorded in cost of goods sold and occupancy expenses in the Consolidated Statements of Income. We also receive royalties from franchisees primarily based on a percentage of the total merchandise purchased by the franchisee, net of any refunds or credits due them. Royalty revenue is recognized primarily when merchandise ownership is transferred to the franchisee and is recorded in net sales in the Consolidated Statements of Income.
Classification of Expenses
Cost of goods sold and occupancy expenses include the following:
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•
|
the cost of merchandise;
|
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|
•
|
inventory shortage and valuation adjustments;
|
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|
•
|
online shipping and packaging costs;
|
|
|
•
|
costs associated with our sourcing operations, including payroll, benefits, and other administrative expenses;
|
|
|
•
|
gains and losses associated with foreign currency exchange contracts related to hedging of merchandise purchases and intercompany revenue transactions; and
|
|
|
•
|
rent, occupancy, depreciation, and amortization related to our store operations, distribution centers, and certain corporate functions.
|
Operating expenses include the following:
|
|
•
|
payroll, benefits, and other administrative expenses for our store operations and field management;
|
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•
|
payroll, benefits, and other administrative expenses for our distribution centers;
|
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•
|
payroll, benefits, and other administrative expenses for our corporate functions, including product design and development;
|
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•
|
information technology maintenance costs and expenses;
|
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•
|
rent, occupancy, depreciation, and amortization for our corporate facilities;
|
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|
•
|
third party credit card processing fees; and
|
|
|
•
|
other expenses (income).
|
Payroll, benefits, and other administrative expenses for our distribution centers recorded in operating expenses were
$254 million
,
$254 million
, and
$255 million
in
fiscal 2016
,
2015
, and
2014
, respectively. We receive payments from third parties that provide our customers with private label credit cards and/or co-branded credit cards. The majority of such income earned is recorded in other income, which is a component of operating expenses, and the remaining portion of income is recognized as a reduction to cost of goods sold and occupancy expenses.
The classification of expenses varies across the apparel retail industry. Accordingly, our cost of goods sold and occupancy expenses and operating expenses may not be comparable to those of other companies.
Rent Expense
Minimum rent expense is recognized over the term of the lease, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amounts payable under the lease as a short-term or long-term deferred rent liability. We also receive tenant allowances upon entering into certain leases, which are recorded as a short-term or long-term tenant allowance liability and amortized using the straight-line method as a reduction to rent expense over the term of the lease. Costs related to common area maintenance, insurance, real estate taxes, and other occupancy costs the Company is obligated to pay are excluded from minimum rent expense.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level and/or rent increase based on a change in the consumer price index or fair market value. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated.
Impairment of Long-Lived Assets
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. Events that result in an impairment review include a significant decrease in the operating performance of the long-lived asset, or the decision to close a store, corporate facility, or distribution center. Long-lived assets are considered impaired if the carrying amount exceeds the estimated undiscounted future cash flows of the asset or asset group. For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value, which is recorded in operating expenses in the Consolidated Statements of Income. The estimated fair value of the asset or asset group is based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the related 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.
Goodwill and Intangible Assets
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events that result in an impairment review include significant changes in the business climate, declines in our operating results, or an expectation that the carrying amount may not be recoverable. We assess potential impairment by considering present economic conditions as well as future expectations.
We review goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the two-step test is performed to identify potential goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. Based on certain circumstances, we may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. The first step of the two-step goodwill impairment test compares the fair value of the reporting unit to its carrying amount, including goodwill. The second step includes hypothetically valuing all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.
A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We have deemed Athleta and Intermix to be the reporting units at which goodwill is tested for Athleta and Intermix, respectively.
A trade name is considered impaired if the carrying amount exceeds its estimated fair value. If a trade name is considered impaired, we recognize a loss equal to the difference between the carrying amount and the estimated fair value of the trade name. The fair value of a trade name is determined using the relief from royalty method, which requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates and royalty rates.
Goodwill and other indefinite-lived intangible assets, including the trade names, are recorded in other long-term assets in the Consolidated Balance Sheets.
Pre-Opening Costs
Pre-opening and start-up activity costs, which include rent and occupancy, supplies, advertising, and payroll expenses incurred prior to the opening of a new store or other facility, are expensed in the period in which they occur.
Advertising
Costs associated with the production of advertising, such as writing, copy, printing, and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as television and magazine costs, are expensed when the advertising event takes place. Advertising expense was
$601 million
,
$578 million
, and
$639 million
in
fiscal 2016
,
2015
, and
2014
, respectively, and is recorded in operating expenses in the Consolidated Statements of Income.
Share-Based Compensation
Share-based compensation expense for stock options and other stock awards is determined based on the grant-date fair value. We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options, which requires the input of subjective assumptions regarding the expected term, expected volatility, dividend yield, and risk-free interest rate. For units granted whereby one share of common stock is issued for each unit as the unit vests (“Stock Units”), the fair value is determined based on the Company’s stock price on the date of grant less future expected dividends during the vesting period. For stock options and Stock Units, we recognize share-based compensation cost net of estimated forfeitures and revise the estimates in subsequent periods if actual forfeitures differ from the estimates. We estimate the forfeiture rate based on historical data as well as expected future behavior. Share-based compensation expense is recorded primarily in operating expenses in the Consolidated Statements of Income over the period during which the employee is required to provide service in exchange for stock options and Stock Units.
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers
Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of these instruments is not redeemed. We determine breakage income for gift cards, gift certificates, and credit vouchers based on historical redemption patterns. Breakage income is recorded in other income, which is a component of operating expenses in the Consolidated Statements of Income, when we can determine the portion of the liability where redemption is remote. Based on our historical information, three years after the gift card, gift certificate, or credit voucher is issued, we can determine the portion of the liability where redemption is remote. When breakage income is recorded, a liability is recognized for any legal obligation to remit the unredeemed portion to relevant jurisdictions. Substantially all of our gift cards, gift certificates, and credit vouchers have no expiration dates.
Credit Cards
We have credit card agreements with third parties to provide our customers with private label credit cards and/or co-branded credit cards (collectively, the “Credit Cards”). Each private label credit card bears the logo of Gap, Banana Republic, Old Navy, or Athleta and can be used at any of our U.S. or Canadian store locations and online. The co-branded credit card is a VISA credit card bearing the logo of Gap, Banana Republic, Old Navy, or Athleta and can be used everywhere VISA credit cards are accepted. The Credit Card programs offer incentives to cardholders in the form of reward certificates upon the cumulative purchase of an established amount.
Synchrony Financial ("Synchrony"), a third-party financing company, is the sole owner of the accounts and underwrites the credit issued under the Credit Card programs. We receive income from Synchrony in accordance with a revenue sharing arrangement and based on usage of the Credit Cards, which we recognize when the amounts are fixed or determinable and collectibility is reasonably assured.
The majority of income from the Credit Card programs is recorded in other income and is partially offset by the administrative costs related to the programs, including payroll, marketing expenses, and other direct costs, all of which are recorded in operating expenses in the Consolidated Statements of Income.
The cost associated with redemption of reward certificates is partially offset by income that we recognize as a reduction to cost of goods sold and occupancy expenses in our Consolidated Statements of Income. The cost associated with reward points and certificates is accrued as the rewards are earned by the cardholder and is recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Earnings per Share
Basic earnings per share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed as net income divided by the weighted-average number of common shares outstanding for the period including common stock equivalents. Common stock equivalents consist of shares subject to share-based awards with exercise prices less than the average market price of our common stock for the period, to the extent their inclusion would be dilutive. Stock options and other stock awards that contain performance conditions are not included in the calculation of common stock equivalents until such performance conditions have been achieved.
Foreign Currency
Our international subsidiaries primarily use local currencies as their functional currency and translate their assets and liabilities at the current rate of exchange in effect at the balance sheet date. Revenue and expenses from their operations are translated using rates that approximate those in effect during the period in which the transactions occur. The resulting gains and losses from translation are recorded in the Consolidated Statements of Comprehensive Income and in accumulated OCI in the Consolidated Statements of Stockholders’ Equity. Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated OCI. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the Consolidated Statements of Income.
The aggregate transaction gains and losses recorded in operating expenses in the Consolidated Statements of Income are as follows:
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Fiscal Year
|
($ in millions)
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency transaction loss
|
|
$
|
(18
|
)
|
|
$
|
(6
|
)
|
|
$
|
(34
|
)
|
Realized and unrealized gain from certain derivative financial instruments
|
|
10
|
|
|
25
|
|
|
28
|
|
Net foreign exchange gain (loss)
|
|
$
|
(8
|
)
|
|
$
|
19
|
|
|
$
|
(6
|
)
|
Income Taxes
Deferred income taxes are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Our income tax expense includes changes in our estimated liability for exposures associated with our various tax filing positions. At any point in time, many tax years are subject to or in the process of being audited by various taxing authorities. To the extent our estimates of settlements change or the final tax outcome of these matters is different from the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties related to unrecognized tax benefits in operating expenses in the Consolidated Statements of Income.
Recent Accounting Pronouncements
Recent Accounting Pronouncements Related to Revenue Recognition
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.
While we do not expect the adoption of these ASUs to have a material impact on our Consolidated Financial Statements, we expect the adoption to result in change in the timing of recognizing revenue for sales where we ship the merchandise to the customer from a distribution center or store, breakage income for gift cards, gift certificates, and credit vouchers, and credit card reward points and certificate liability. Under the new guidance, we expect to recognize revenue for sales where we ship the merchandise to the customer from a distribution center or store on the basis of control of the merchandise, rather than at the time the risk of loss is transferred. Additionally, the adoption is expected to result in change in the timing of recognition and classification of breakage income for gift cards, gift certificates, and credit vouchers. Our credit card incentive program is expected to be accounted for differently under the new guidance as the reward points and certificates are considered a separate performance obligation requiring the standalone value to be deferred until redemption or expiration. We currently do not defer any portion of revenue related to reward points and certificates and recognize cost associated with reward points and certificates as the rewards are earned and based on estimated redemption patterns. Additionally, under the new guidance, we expect to recognize allowances for estimated sales returns on a gross basis rather than net basis on the Consolidated Balance Sheets.
We are still evaluating our method of adoption (full retrospective or modified retrospective). We will adopt these ASUs beginning in the first quarter of fiscal 2018.
Other Recent Accounting Pronouncements
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. We adopted ASU No. 2015-17 prospectively effective January 30, 2016.
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 do not expect the adoption of this ASU to have a material impact on our 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 still assessing the impact of this ASU on our Consolidated Financial Statements, but we expect that it will result in a substantial increase in our long-term assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.
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 will adopt the provisions of this ASU in the first quarter of fiscal 2017. The ASU is expected to have an impact on our current accounting and reporting for share-based compensation, primarily related to income taxes. Additionally, we plan to make the policy election to account for forfeitures when they occur beginning in the first quarter of fiscal 2017. The significance of this ASU to the Company's financial statements is largely dependent on the Company's stock price and employee terminations and could vary in the future. However, we do not currently expect the adoption of this ASU to have a material impact on our 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 do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance for eight specific cash flow issues and are intended to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We will adopt the presentation and disclosure provisions of this ASU in the first quarter of fiscal 2018.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interests Held through Related Parties That Are Under Common Control. The amendments change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We will adopt the presentation and disclosure provisions of this ASU in the first quarter of fiscal 2018.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The Company would apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. Under the new guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company recorded a goodwill impairment charge related to Intermix under the existing FASB Accounting Standards Codification No. 350 Intangibles - Goodwill and Other as the annual impairment test was performed prior to January 1, 2017. See
Note 4
of Notes to Consolidated Financial Statements. We will early adopt this ASU for goodwill impairment tests beginning in the first quarter of fiscal 2017.
In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The ASU was issued to clarify the scope of the previous standard and to add guidance for partial sales of nonfinancial assets. 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 Consolidated Financial Statements.
Note 2
. Additional Financial Statement Information
Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
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|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Cash (1)
|
|
$
|
1,086
|
|
|
$
|
853
|
|
Bank certificates of deposit and time deposits
|
|
416
|
|
|
313
|
|
Money market funds
|
|
256
|
|
|
204
|
|
Domestic commercial paper
|
|
25
|
|
|
—
|
|
Cash equivalents
|
|
697
|
|
|
517
|
|
Cash and cash equivalents
|
|
$
|
1,783
|
|
|
$
|
1,370
|
|
__________
|
|
(1)
|
Cash includes
$58 million
and
$64 million
of amounts in transit from banks for customer credit card and debit card transactions as of
January 28, 2017
and
January 30, 2016
, respectively.
|
Other Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Accounts receivable
|
|
$
|
335
|
|
|
$
|
282
|
|
Prepaid minimum rent and occupancy expenses
|
|
154
|
|
|
155
|
|
Prepaid income taxes
|
|
89
|
|
|
142
|
|
Derivative financial instruments
|
|
41
|
|
|
85
|
|
Other
|
|
83
|
|
|
78
|
|
Other current assets
|
|
$
|
702
|
|
|
$
|
742
|
|
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Leasehold improvements
|
|
$
|
3,099
|
|
|
$
|
3,252
|
|
Furniture and equipment
|
|
2,508
|
|
|
2,603
|
|
Software
|
|
1,600
|
|
|
1,433
|
|
Land, buildings, and building improvements
|
|
1,000
|
|
|
1,019
|
|
Construction-in-progress
|
|
222
|
|
|
187
|
|
Property and equipment, at cost
|
|
8,429
|
|
|
8,494
|
|
Less: Accumulated depreciation
|
|
(5,813
|
)
|
|
(5,644
|
)
|
Property and equipment, net of accumulated depreciation
|
|
$
|
2,616
|
|
|
$
|
2,850
|
|
Depreciation expense for property and equipment was
$590 million
,
$588 million
, and
$560 million
for
fiscal 2016
,
2015
, and
2014
, respectively.
Interest of
$9 million
,
$8 million
, and
$7 million
related to assets under construction was capitalized in
fiscal 2016
,
2015
, and
2014
, respectively.
We recorded a charge for the impairment of long-lived assets of
$107 million
,
$54 million
, and
$10 million
for
fiscal 2016
,
2015
, and
2014
, respectively, related to store assets which is recorded in operating expenses in the Consolidated Statements of Income.
Other Long-Term Assets
Other long-term assets consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Long-term income tax-related assets
|
|
$
|
282
|
|
|
$
|
189
|
|
Goodwill
|
|
109
|
|
|
180
|
|
Trade names
|
|
95
|
|
|
92
|
|
Other
|
|
193
|
|
|
177
|
|
Other long-term assets
|
|
$
|
679
|
|
|
$
|
638
|
|
In fiscal 2016, we recorded a charge for the impairment of goodwill related to the Intermix reporting unit of
$71 million
, which is recorded in operating expenses in the Consolidated Statement of Income.
No
goodwill impairment charges were recorded in fiscal 2015 or 2014. See Note 4 of Notes to Consolidated Financial Statements for additional disclosures on goodwill and other intangible assets.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Accrued compensation and benefits
|
|
$
|
312
|
|
|
$
|
230
|
|
Unredeemed gift cards, gift certificates, and credit vouchers, net of breakage
|
|
256
|
|
|
254
|
|
Short-term deferred rent and tenant allowances
|
|
99
|
|
|
100
|
|
Accrued advertising
|
|
46
|
|
|
31
|
|
Other
|
|
400
|
|
|
364
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,113
|
|
|
$
|
979
|
|
No other individual items accounted for greater than five percent of total current liabilities as of
January 28, 2017
or
January 30, 2016
.
Lease Incentives and Other Long-Term Liabilities
Lease incentives and other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Long-term deferred rent and tenant allowances
|
|
$
|
748
|
|
|
$
|
776
|
|
Long-term asset retirement obligations
|
|
51
|
|
|
70
|
|
Long-term income tax-related liabilities
|
|
32
|
|
|
49
|
|
Other
|
|
174
|
|
|
188
|
|
Lease incentives and other long-term liabilities
|
|
$
|
1,005
|
|
|
$
|
1,083
|
|
The activity related to asset retirement obligations includes adjustments to the asset retirement obligation balance and fluctuations in foreign currency exchange rates.
Sales Return Allowance
A summary of activity in the sales return allowance account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Balance at beginning of fiscal year
|
|
$
|
27
|
|
|
$
|
29
|
|
|
$
|
26
|
|
Additions
|
|
861
|
|
|
865
|
|
|
896
|
|
Returns
|
|
(858
|
)
|
|
(867
|
)
|
|
(893
|
)
|
Balance at end of fiscal year
|
|
$
|
30
|
|
|
$
|
27
|
|
|
$
|
29
|
|
Sales return allowances are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
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 resulted in the closure of its fleet of
53
Old Navy stores in Japan, the closure of select international stores, primarily for Banana Republic in Europe, and the creation of a more efficient global brand structure. Including the Old Navy closures in Japan, the Company closed
67
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
$197 million
in restructuring costs, on a pre-tax basis, during
fiscal 2016
. The measures were substantially completed in
fiscal 2016
and the summary of the costs incurred are as follows:
|
|
|
|
|
($ in millions)
|
Costs Incurred in Fiscal 2016
|
Costs recorded in cost of goods sold and occupancy expenses:
|
|
Accelerated depreciation, net of reversal of depreciation expense related to asset retirement obligations
|
$
|
(9
|
)
|
Employee related costs
|
14
|
|
Accelerated recognition of deferred rent
|
(8
|
)
|
Other
|
3
|
|
Total costs recorded in cost of goods sold and occupancy expenses
|
—
|
|
|
|
Costs recorded in operating expenses:
|
|
Lease termination fees and lease losses
|
77
|
|
Employee related costs
|
50
|
|
Store asset impairment
|
54
|
|
Other
|
16
|
|
Total costs recorded in operating expenses
|
197
|
|
Total restructuring costs
|
$
|
197
|
|
In addition to the total pre-tax amount incurred above, there was an unfavorable tax impact related to the restructuring costs incurred in certain foreign subsidiaries for which the Company was not able to recognize any tax benefit.
The following table summarizes activities related to certain restructuring costs that will be settled with cash payments and the related liability balances as of
January 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Lease Termination Fees and Lease Losses
|
|
Employee Related Costs
|
|
Other
|
|
Total
|
Balance at January 30, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Provision
|
80
|
|
|
69
|
|
|
22
|
|
|
171
|
|
Adjustments
|
(3
|
)
|
|
(5
|
)
|
|
—
|
|
|
(8
|
)
|
Settlements through existing lease deposits
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Cash payments
|
(66
|
)
|
|
(32
|
)
|
|
(18
|
)
|
|
(116
|
)
|
Balance at January 28, 2017
|
$
|
1
|
|
|
$
|
32
|
|
|
$
|
4
|
|
|
$
|
37
|
|
The remaining liability balances are expected to settle with cash payments during
fiscal 2017
.
Note 4
. Goodwill and Trade Names
The following goodwill and trade names are included in other long-term assets in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Goodwill
|
|
$
|
109
|
|
|
$
|
180
|
|
Trade names
|
|
$
|
95
|
|
|
$
|
92
|
|
Goodwill
Goodwill consists of
$99 million
and
$10 million
related to Athleta and Intermix, respectively, as of
January 28, 2017
and
$99 million
and
$81 million
related to Athleta and Intermix, respectively as of
January 30, 2016
.
We assess whether events or circumstances indicate the goodwill is impaired every quarter and evaluate goodwill impairment annually in the fourth quarter of the fiscal year. At the end of each of the first three quarters of
fiscal 2016
, given the information available at the time of those assessments, we determined that there were no events or circumstances that indicated impairment for goodwill related to Intermix prior to the annual impairment test in the fourth quarter of
fiscal 2016
.
During the fourth quarter of fiscal 2016, management updated the fiscal 2017 budget and financial projections beyond fiscal 2017. There were several factors that arose during the fourth quarter of
fiscal 2016
, which caused the financial projections and estimates of Intermix to significantly decrease from the previous estimates. Such factors included: poor fourth quarter of fiscal 2016 holiday performance at Intermix stores, the decision to reduce future store openings, the approval of additional store closures in fiscal 2017, and the budgeting of additional headcount required to support increased focus on the online business. These factors arising in the fourth quarter of fiscal 2016 had a significant and negative impact on the estimated fair value of the Intermix reporting unit, and we have determined that the carrying value of the reporting unit for Intermix exceeded its fair value as of the date of our annual impairment review. The fair value of the Intermix reporting unit was determined using level 3 inputs and a combination of an income approach using the estimated discounted cash flow and a market-based valuation methodology. In the second step of the goodwill impairment test, we performed a hypothetical acquisition and purchase price allocation and measured the implied fair value of goodwill related to Intermix. The second step of the goodwill impairment test resulted in an impairment charge of
$71 million
for goodwill related to the Intermix reporting unit in fiscal 2016. This impairment charge was recorded in operating expenses in the Consolidated Statement of Income and reduced the
$81 million
of purchase price allocated to goodwill in connection with the acquisition of Intermix in December 2012 to
$10 million
as of January 28, 2017.
We did not recognize any impairment charge for goodwill related to Athleta.
Trade Names
Trade names primarily consist of
$54 million
and
$38 million
related to Athleta and Intermix, respectively, as of
January 28, 2017
and
January 30, 2016
. During the fourth quarter of
fiscal 2016
, we completed our annual impairment test of trade names and we did not recognize any impairment charges.
Note 5
. Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
January 28,
2017
|
|
January 30,
2016
|
Notes
|
|
$
|
1,248
|
|
|
$
|
1,248
|
|
Japan Term Loan
|
|
65
|
|
|
83
|
|
Total debt
|
|
1,313
|
|
|
1,331
|
|
Less: Current portion of Japan Term Loan
|
|
(65
|
)
|
|
(21
|
)
|
Total long-term debt
|
|
$
|
1,248
|
|
|
$
|
1,310
|
|
We have
$1.25 billion
aggregate principal amount of
5.95 percent
notes (the "Notes") due
April 2021
. Interest is payable
semi-annually
on April 12 and October 12 of each year, and we have an option to call the Notes in whole or in part at any time, subject to a make-whole premium. The Notes agreement is unsecured and does not contain any financial covenants. The amount recorded in long-term debt in the Consolidated Balance Sheets for the Notes is equal to the aggregate principal amount of the Notes, net of the unamortized discount. As of
January 28, 2017
and
January 30, 2016
, the estimated fair value of the Notes was
$1.32 billion
and
$1.29 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 year.
In January 2014, we entered into a
15 billion
Japanese yen,
four
-year, unsecured term loan due
January 2018
. Repayments of
2.5 billion
Japanese yen were payable on January 15 of each year. A final repayment of
7.5 billion
Japanese yen (
$65 million
as of
January 28, 2017
) is due on
January 15, 2018
. In addition, interest is payable at least
quarterly
based on an interest rate equal to the Tokyo Interbank Offered Rate plus a fixed margin. The average interest rate for
fiscal 2016
was
1 percent
. The carrying amount of the Japan Term Loan as of
January 28, 2017
and
January 30, 2016
approximated its fair value, as the interest rate varies depending on quoted market rates (level 1 inputs). The Japan Term Loan agreement contains certain requirements, including that the covenants in our
$500 million
,
five
-year, unsecured revolving credit facility are upheld. As of
January 28, 2017
, we were in compliance with all such covenants. Violation of these covenants would result in a default under the Japan Term Loan agreement, which, at the bank's discretion, could require the immediate repayment of outstanding amounts.
In October 2015, we entered into a
$400 million
unsecured Term Loan. The Term Loan was originally scheduled to mature 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. In January 2017, the Term Loan was repaid in full. Interest was payable at least
quarterly
based on an interest rate equal to the London Interbank Offered Rate ("LIBOR") plus a fixed margin. The average interest rate for
fiscal 2016
was
1 percent
.
Note 6
. Credit Facilities
We have a
$500 million
,
five
-year, unsecured revolving credit facility (the "Facility"), which was set to expire in May 2018. On May 20, 2015, the Facility was amended under substantially similar terms to extend the expiration date to
May 2020
. The Facility is available for general corporate purposes including working capital, trade letters of credit, and standby letters of credit. The Facility fees fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio. If we were to draw on the Facility, interest would be a base rate (typically LIBOR) plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio on the unpaid principal amount. To maintain availability of funds under the Facility, we pay a facility fee on the full facility amount, regardless of usage. As of
January 28, 2017
, there were
no
borrowings and
no
material outstanding standby letters of credit under the Facility.
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
$46 million
as of
January 28, 2017
. As of
January 28, 2017
, there were
no
borrowings under the Foreign Facilities. There were
$12 million
in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of
January 28, 2017
.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of
January 28, 2017
, we had
$16 million
in standby letters of credit issued under these agreements.
The Facility contains financial and other covenants including, but not limited to, limitations on liens and subsidiary debt, as well as the maintenance of two financial ratios—a minimum annual fixed charge coverage ratio of
2.00
and a maximum annual leverage ratio of
2.25
. As of
January 28, 2017
, we were in compliance with all such covenants. Violation of these covenants could result in a default under the Facility and Japan Term Loan, which would permit the participating banks to terminate our ability to access the Facility for letters of credit and advances and require the immediate repayment of any outstanding advances under the Facility or Japan Term Loan.
Note 7
. Fair Value Measurements
There were
no
purchases, sales, issuances, or settlements related to recurring level 3 measurements during
fiscal 2016
or
2015
. There were
no
transfers into or out of level 1 and level 2 during
fiscal 2016
or
2015
.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents held at amortized cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
|
January 28, 2017
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
697
|
|
|
$
|
256
|
|
|
$
|
441
|
|
|
$
|
—
|
|
Derivative financial instruments
|
|
58
|
|
|
—
|
|
|
58
|
|
|
—
|
|
Deferred compensation plan assets
|
|
40
|
|
|
40
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
795
|
|
|
$
|
296
|
|
|
$
|
499
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper. 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 principal currencies hedged against changes in the U.S. dollar are Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, 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 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 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 directed by participants and are recorded at market value and 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 Consolidated Balance Sheets.
Nonfinancial Assets
In May 2016, the Company announced measures that resulted in the closure of its fleet of 53 Old Navy stores in Japan and select Banana Republic stores, primarily internationally. In fiscal 2016, we recorded a charge for the impairment of long-lived assets of
$54 million
related to the announced store closures, and an additional
$53 million
for long-lived assets that were unrelated to the announced measures.
In June 2015, the Company announced a series of strategic actions to position Gap brand for improved business performance in the future, including its plan to close about 175 Gap brand specialty stores in North America and a limited number of stores in Europe and Asia over the next few years. As a result of the strategic actions, in fiscal 2015, we recorded an impairment charge of
$38 million
related to long-lived assets. We also recorded an impairment charge of
$16 million
for long-lived assets that were unrelated to the Gap brand strategic actions.
As discussed above and in
Note 2
of Notes to Consolidated Financial Statements, we recorded a total charge for the impairment of long-lived assets of
$107 million
,
$54 million
, and
$10 million
in
fiscal 2016
,
2015
, and
2014
, respectively. The impairment charge reduced the then carrying amount of the applicable long-lived assets of
$125 million
,
$62 million
, and
$11 million
to their fair value of
$18 million
,
$8 million
, and
$1 million
during
fiscal 2016
,
2015
, and
2014
, respectively. The fair value of the long-lived assets was determined using level 3 inputs and the valuation techniques discussed in
Note 1
of Notes to Consolidated Financial Statements.
In fiscal 2015, we also recorded an impairment charge of
$5 million
related to an indefinite-lived intangible asset as a result of the strategic actions discussed above. The impairment charge was recorded in operating expenses in the Consolidated Statement of Income and reduced the then carrying amount of the applicable indefinite-lived intangible asset of
$6 million
to its fair value of
$1 million
during fiscal 2015. There were
no
impairment charges recorded for other indefinite-lived intangible assets for fiscal
2016
or
2014
.
As discussed in
Note 4
of Notes to Consolidated Financial Statements, we recorded an impairment charge of
$71 million
for Intermix goodwill in
fiscal 2016
. The fair value of the Intermix reporting unit was determined using level 3 inputs and valuation techniques discussed in
Note 4
of Notes to Consolidated Financial Statements. There were
no
impairment charges recorded for goodwill for fiscal
2015
or
2014
.
Note 8
. 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 principal currencies hedged against changes in the U.S. dollar are Japanese yen, Canadian dollars, British pounds, Euro, Mexican pesos, Chinese yuan, and Taiwan dollars.
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.
There were
no
material amounts recorded in the Consolidated Statements of Income for
fiscal 2016
,
2015
, or
2014
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 for
fiscal 2016
,
2015
, or
2014
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 Consolidated Statements of Income for
fiscal 2016
,
2015
, or
2014
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 use 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 of the underlying intercompany balances, is recorded in operating expenses in the Consolidated Statements of Income in the same period and generally offset.
Outstanding Notional Amounts
As of
January 28, 2017
and
January 30, 2016
, we had foreign exchange forward contracts outstanding in the following notional amounts:
|
|
|
|
|
|
|
|
|
($ in millions)
|
January 28,
2017
|
|
January 30,
2016
|
Derivatives designated as cash flow hedges
|
$
|
1,101
|
|
|
$
|
1,220
|
|
Derivatives designated as net investment hedges
|
31
|
|
|
30
|
|
Derivatives not designated as hedging instruments
|
618
|
|
|
324
|
|
Total
|
$
|
1,750
|
|
|
$
|
1,574
|
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
|
|
|
|
|
|
|
|
|
($ in millions)
|
January 28,
2017
|
|
January 30,
2016
|
Derivatives designated as cash flow hedges:
|
|
|
|
Other current assets
|
$
|
28
|
|
|
$
|
71
|
|
Other long-term assets
|
$
|
16
|
|
|
$
|
8
|
|
Accrued expenses and other current liabilities
|
$
|
10
|
|
|
$
|
1
|
|
Lease incentives and other long-term liabilities
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
Derivatives designated as net investment hedges:
|
|
|
|
Other current assets
|
$
|
—
|
|
|
$
|
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
|
$
|
13
|
|
|
$
|
13
|
|
Other long-term assets
|
$
|
1
|
|
|
$
|
—
|
|
Accrued expenses and other current liabilities
|
$
|
10
|
|
|
$
|
1
|
|
Lease incentives and other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Total derivatives in an asset position
|
$
|
58
|
|
|
$
|
93
|
|
Total derivatives in a liability position
|
$
|
21
|
|
|
$
|
3
|
|
The majority of the unrealized gains and losses from designated cash flow hedges as of
January 28, 2017
will be recognized in income within the next 12 months at the then-current values, which may differ from the fair values as of
January 28, 2017
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 Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are
$18 million
and
$2 million
as of
January 28, 2017
and
January 30, 2016
, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be
$40 million
and
$91 million
and the net amounts of the derivative financial instruments in a liability position would be
$3 million
and
$1 million
as of
January 28, 2017
and
January 30, 2016
, respectively.
See
Note 7
of Notes to Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in OCI and the Consolidated Statements of Income, on a pre-tax basis, are as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
($ in millions)
|
2016
|
|
2015
|
|
2014
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
(28
|
)
|
|
$
|
81
|
|
|
$
|
166
|
|
Gain reclassified into cost of goods sold and occupancy expenses
|
$
|
31
|
|
|
$
|
135
|
|
|
$
|
53
|
|
Gain (loss) reclassified into operating expenses
|
$
|
(8
|
)
|
|
$
|
9
|
|
|
$
|
8
|
|
|
|
|
|
|
|
Derivatives in net investment hedging relationships:
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
For
fiscal 2016
,
2015
, and
2014
, there were
no
amounts of gain or loss reclassified from accumulated OCI into 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 Consolidated Statements of Income, on a pre-tax basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
($ in millions)
|
2016
|
|
2015
|
|
2014
|
Gain recognized in operating expenses
|
$
|
18
|
|
|
$
|
16
|
|
|
$
|
20
|
|
Note 9
. Common Stock
Common and Preferred Stock
The Company is authorized to issue
2.3 billion
shares of common stock and
60 million
shares of Class B common stock, which is convertible into shares of common stock on a share-for-share basis. Transfer of the Class B shares is restricted. In addition, the holders of the Class B common stock have
six
votes per share on most matters and are entitled to a lower cash dividend.
No
Class B shares have been issued as of
January 28, 2017
.
The Company is authorized to issue
30 million
shares of one or more series of preferred stock, which has a par value of
$0.05
per share, and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features, and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the stockholders.
No
preferred shares have been issued as of
January 28, 2017
.
Treasury Stock
The Company retired all existing treasury stock as of March 1, 2014. All common stock repurchased subsequent to March 1, 2014 is immediately retired and all shares related to stock options and other stock awards are now issued from authorized but unissued common stock.
Share Repurchases
Share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
($ and shares in millions except average per share cost)
|
|
2016
|
|
2015
|
|
2014
|
Number of shares repurchased
|
|
—
|
|
|
30
|
|
|
30
|
|
Total cost
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
1,164
|
|
Average per share cost including commissions
|
|
$
|
—
|
|
|
$
|
33.90
|
|
|
$
|
39.28
|
|
Between November 2013 and October 2014, the Board of Directors authorized a total of
$1.5 billion
for share repurchases, 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 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
January 28, 2017
, as there were no shares repurchased during
fiscal 2016
.
All except
$15 million
of the share repurchases were paid for as of January 31, 2015.
Note 10
. Accumulated Other Comprehensive Income
Changes in accumulated OCI by component, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at January 30, 2016
|
$
|
22
|
|
|
$
|
63
|
|
|
$
|
85
|
|
Foreign currency translation
|
7
|
|
|
—
|
|
|
7
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(26
|
)
|
|
(26
|
)
|
Amounts reclassified from accumulated OCI
|
—
|
|
|
(12
|
)
|
|
(12
|
)
|
Other comprehensive income (loss), net
|
7
|
|
|
(38
|
)
|
|
(31
|
)
|
Balance at January 28, 2017
|
$
|
29
|
|
|
$
|
25
|
|
|
$
|
54
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at January 31, 2015
|
$
|
60
|
|
|
$
|
105
|
|
|
$
|
165
|
|
Foreign currency translation
|
(38
|
)
|
|
—
|
|
|
(38
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
60
|
|
|
60
|
|
Amounts reclassified from accumulated OCI
|
—
|
|
|
(102
|
)
|
|
(102
|
)
|
Other comprehensive loss, net
|
(38
|
)
|
|
(42
|
)
|
|
(80
|
)
|
Balance at January 30, 2016
|
$
|
22
|
|
|
$
|
63
|
|
|
$
|
85
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at February 1, 2014
|
$
|
107
|
|
|
$
|
28
|
|
|
$
|
135
|
|
Foreign currency translation
|
(47
|
)
|
|
—
|
|
|
(47
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
118
|
|
|
118
|
|
Amounts reclassified from accumulated OCI
|
—
|
|
|
(41
|
)
|
|
(41
|
)
|
Other comprehensive income (loss), net
|
(47
|
)
|
|
77
|
|
|
30
|
|
Balance at January 31, 2015
|
$
|
60
|
|
|
$
|
105
|
|
|
$
|
165
|
|
See
Note 8
of Notes to 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 Consolidated Statements of Income.