NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
. Basis of Presentation
The Condensed Consolidated Balance Sheets as of
October 28, 2017
and
October 29, 2016
, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the
thirteen and thirty-nine weeks ended
October 28, 2017
and
October 29, 2016
, and the Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended
October 28, 2017
and
October 29, 2016
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
October 28, 2017
and
October 29, 2016
and for all periods presented. The Condensed Consolidated Balance Sheet as of
January 28, 2017
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 (“U.S. 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 28, 2017
.
The results of operations for the
thirteen and thirty-nine weeks ended
October 28, 2017
are not necessarily indicative of the operating results that may be expected for the 53-week period ending
February 3, 2018
.
Note 2
. Recent Accounting Pronouncements
Except as noted below, the Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements that may have a material impact on its Consolidated Financial Statements, based on current information.
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. ASU No. 2014-09, as amended, is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017.
While we do not expect the adoption of ASU No. 2014-09 and related 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 breakage income for gift cards, gift certificates, and credit vouchers, credit card reward points and certificate liability, as well as sales where we ship the merchandise to the customer from a distribution center or store. 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 currently evaluating the classification of income earned in connection with our private label and co-branded credit cards. We are also evaluating expanded disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We will adopt these ASUs on a modified retrospective basis beginning in the first quarter of fiscal 2018.
Other Recent Accounting Pronouncements
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 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. We adopted the provisions of this ASU in the first quarter of fiscal 2017. Beginning in the first quarter of fiscal 2017, we have made the policy election to account for forfeitures when they occur, rather than estimating expected forfeitures, when recognizing share-based compensation cost. We adopted this provision of the ASU using a modified retrospective transition method, which resulted in the cumulative-effect adjustment of a
$3 million
increase to retained earnings as of the beginning of the first quarter of fiscal 2017. Also, all excess tax benefits and tax deficiencies related to share-based payment awards are now reflected in the Consolidated Statement of Income as a component of the provision for income taxes on a prospective basis, whereas they were recognized in equity under the previous guidance. Additionally, excess tax benefits related to share-based payment awards are now reflected in operating activities, along with other income tax related cash flows, in our Consolidated Statement of Cash Flows on a prospective basis.
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. 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. We early adopted this ASU for the interim goodwill impairment test in the first quarter of fiscal 2017. The adoption of this ASU did not have any impact on the Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the potential impact of this ASU on our Consolidated Financial Statements.
Note 3
. Debt and Credit Facilities
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
October 28,
2017
|
|
January 28,
2017
|
|
October 29,
2016
|
Notes
|
$
|
1,248
|
|
|
$
|
1,248
|
|
|
$
|
1,248
|
|
Japan Term Loan
|
—
|
|
|
65
|
|
|
96
|
|
Total debt
|
1,248
|
|
|
1,313
|
|
|
1,344
|
|
Less: Current portion of Japan Term Loan
|
—
|
|
|
(65
|
)
|
|
(24
|
)
|
Total long-term debt
|
$
|
1,248
|
|
|
$
|
1,248
|
|
|
$
|
1,320
|
|
As of
October 28, 2017
,
January 28, 2017
, and
October 29, 2016
, the estimated fair value of our
$1.25 billion
aggregate principal amount of
5.95 percent
notes (the “Notes”) due
April 2021
was
$1.35 billion
,
$1.32 billion
, and
$1.34 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
January 28, 2017
and
October 29, 2016
, 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 varied depending on quoted market rates (level 1 inputs). Repayments of
2.5 billion
Japanese yen were paid on January 15 of each year, and a final repayment of
7.5 billion
Japanese yen which was due on
January 15, 2018
was paid in full in June 2017. Interest was 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”), which was included in current maturities of debt in the Condensed Consolidated Balance Sheet as of
October 29, 2016
. The Term Loan was repaid in full in January 2017. Interest was payable at least quarterly based on an interest rate equal to the London Interbank Offered Rate plus a fixed margin.
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
October 28, 2017
.
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
October 28, 2017
. As of
October 28, 2017
, there were
no
borrowings under the Foreign Facilities. There were
$14 million
in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of
October 28, 2017
.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of
October 28, 2017
, we had
$15 million
in standby letters of credit issued under these agreements.
Note 4
. Fair Value Measurements
There were
no
purchases, sales, issuances, or settlements related to recurring level 3 measurements during the
thirteen and thirty-nine weeks ended
October 28, 2017
or
October 29, 2016
. There were
no
transfers of financial assets or liabilities into or out of level 1 and level 2 during the
thirteen and thirty-nine weeks ended
October 28, 2017
or
October 29, 2016
.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
October 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
|
$
|
389
|
|
|
$
|
28
|
|
|
$
|
361
|
|
|
$
|
—
|
|
Derivative financial instruments
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
Deferred compensation plan assets
|
46
|
|
|
46
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
466
|
|
|
$
|
74
|
|
|
$
|
392
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
|
|
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)
|
October 29, 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
|
$
|
596
|
|
|
$
|
106
|
|
|
$
|
490
|
|
|
$
|
—
|
|
Derivative financial instruments
|
62
|
|
|
—
|
|
|
62
|
|
|
—
|
|
Deferred compensation plan assets
|
41
|
|
|
41
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
699
|
|
|
$
|
147
|
|
|
$
|
552
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
49
|
|
|
$
|
—
|
|
We have highly liquid investments classified as cash equivalents, which 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.
Derivative financial instruments primarily include foreign exchange forward contracts. The currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, 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 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 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 Condensed Consolidated Balance Sheets.
Nonfinancial 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. The fair value of the long-lived assets is determined 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.
During the
thirteen weeks ended
October 28, 2017
, we recorded a charge for the impairment of long-lived assets of
$4 million
, which reduced the then carrying amount of the applicable long-lived assets of
$5 million
to their fair value of
$1 million
. The impairment charge was recorded in operating expenses in the Condensed Consolidated Statement of Income.
During the
thirty-nine weeks ended
October 28, 2017
, we recorded a charge for the impairment of long-lived assets of
$17 million
, which reduced the then carrying amount of the applicable long-lived assets of
$18 million
to their fair value of
$1 million
. The impairment charge was recorded in operating expenses in the Condensed Consolidated Statement of Income.
In May 2016, the Company announced measures to close its fleet of 53 Old Navy stores in Japan and select Banana Republic stores, primarily internationally. During the
thirteen weeks ended
October 29, 2016
, we recorded charges for impairment of long-lived assets of
$2 million
related to the announced store closures, and an additional
$31 million
for long-lived assets that were unrelated to the announced measures. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of
$34 million
to their fair value of
$1 million
.
During the
thirty-nine weeks ended
October 29, 2016
, we recorded charges for impairment of long-lived assets of
$54 million
related to the announced store closures, primarily related to Old Navy Japan, and an additional
$35 million
for long-lived assets that were unrelated to the announced measures. The impairment charges were recorded in operating expenses in the Condensed Consolidated Statement of Income and reduced the then carrying amount of the applicable long-lived assets of
$102 million
to their fair value of
$13 million
.
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
impairment charges recorded for goodwill or other indefinite-lived intangible assets for the
thirteen and thirty-nine weeks ended
October 28, 2017
or
October 29, 2016
.
Note 5
. 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 Canadian dollars, Japanese yen, British pounds, Euro, Mexican pesos, 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 entity, 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.
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.
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)
|
October 28,
2017
|
|
January 28,
2017
|
|
October 29,
2016
|
Derivatives designated as cash flow hedges
|
$
|
873
|
|
|
$
|
1,101
|
|
|
$
|
1,201
|
|
Derivatives designated as net investment hedges
|
30
|
|
|
31
|
|
|
31
|
|
Derivatives not designated as hedging instruments
|
581
|
|
|
618
|
|
|
664
|
|
Total
|
$
|
1,484
|
|
|
$
|
1,750
|
|
|
$
|
1,896
|
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
October 28,
2017
|
|
January 28,
2017
|
|
October 29,
2016
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Other current assets
|
$
|
16
|
|
|
$
|
28
|
|
|
$
|
35
|
|
Other long-term assets
|
$
|
4
|
|
|
$
|
16
|
|
|
$
|
13
|
|
Accrued expenses and other current liabilities
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
26
|
|
Lease incentives and other long-term liabilities
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
|
|
|
|
|
Derivatives designated as net investment hedges:
|
|
|
|
|
|
Other current assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Other long-term assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued expenses and other current liabilities
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Lease incentives and other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Other current assets
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
13
|
|
Other long-term assets
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Accrued expenses and other current liabilities
|
$
|
5
|
|
|
$
|
10
|
|
|
$
|
14
|
|
Lease incentives and other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
Total derivatives in an asset position
|
$
|
31
|
|
|
$
|
58
|
|
|
$
|
62
|
|
Total derivatives in a liability position
|
$
|
20
|
|
|
$
|
21
|
|
|
$
|
49
|
|
The majority of the unrealized gains and losses from designated cash flow hedges as of
October 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
October 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 Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements are
$8 million
,
$18 million
, and
$9 million
as of
October 28, 2017
,
January 28, 2017
, and
October 29, 2016
, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would be
$23 million
,
$40 million
, and
$53 million
and the net amounts of the derivative financial instruments in a liability position would be
$12 million
,
$3 million
, and
$40 million
as of
October 28, 2017
,
January 28, 2017
and
October 29, 2016
, respectively.
See
Note 4
of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts in cash flow hedging and net investment hedging relationships recorded in other comprehensive income and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
($ in millions)
|
October 28,
2017
|
|
October 29,
2016
|
|
October 28,
2017
|
|
October 29,
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
25
|
|
|
$
|
43
|
|
|
$
|
(26
|
)
|
|
$
|
(62
|
)
|
Gain (loss) reclassified into cost of goods sold and occupancy expenses
|
$
|
(5
|
)
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
15
|
|
Loss reclassified into operating expenses
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
Derivatives in net investment hedging relationships:
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
For the
thirteen and thirty-nine weeks ended
October 28, 2017
and
October 29, 2016
, there were
no
amounts of gains or losses 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
|
|
39 Weeks Ended
|
($ in millions)
|
October 28,
2017
|
|
October 29,
2016
|
|
October 28,
2017
|
|
October 29,
2016
|
Gain (loss) recognized in operating expenses
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
(13
|
)
|
|
$
|
(5
|
)
|
Note 6
. Share Repurchases
Share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
($ and shares in millions except average per share cost)
|
October 28,
2017
|
|
October 29,
2016
|
|
October 28,
2017
|
|
October 29,
2016
|
Number of shares repurchased (1)
|
3.8
|
|
|
—
|
|
|
12.5
|
|
|
—
|
|
Total cost
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
—
|
|
Average per share cost including commissions
|
$
|
26.64
|
|
|
$
|
—
|
|
|
$
|
24.21
|
|
|
$
|
—
|
|
__________
|
|
(1)
|
Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.
|
In February 2016, we announced that the Board of Directors approved a
$1.0 billion
share repurchase authorization, of which
$700 million
was remaining as of
October 28, 2017
.
All of the share repurchases were paid for as of
October 28, 2017
. All common stock repurchased is immediately retired.
Note 7
. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at January 28, 2017
|
$
|
29
|
|
|
$
|
25
|
|
|
$
|
54
|
|
13 Weeks Ended April 29, 2017:
|
|
|
|
|
|
Foreign currency translation
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Other comprehensive loss, net of tax
|
(4
|
)
|
|
(4
|
)
|
|
(8
|
)
|
Balance at April 29, 2017
|
25
|
|
|
21
|
|
|
46
|
|
13 Weeks Ended July 29, 2017:
|
|
|
|
|
|
Foreign currency translation
|
21
|
|
|
—
|
|
|
21
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(43
|
)
|
|
(43
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Other comprehensive income (loss), net of tax
|
21
|
|
|
(44
|
)
|
|
(23
|
)
|
Balance at July 29, 2017
|
46
|
|
|
(23
|
)
|
|
23
|
|
13 Weeks Ended October 28, 2017:
|
|
|
|
|
|
Foreign currency translation
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
23
|
|
|
23
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Other comprehensive income (loss), net of tax
|
(5
|
)
|
|
22
|
|
|
17
|
|
Balance at October 28, 2017
|
$
|
41
|
|
|
$
|
(1
|
)
|
|
$
|
40
|
|
|
|
|
|
|
|
($ 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 of tax
|
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 of tax
|
(22
|
)
|
|
1
|
|
|
(21
|
)
|
Balance at July 30, 2016
|
31
|
|
|
(32
|
)
|
|
(1
|
)
|
13 Weeks Ended October 29, 2016:
|
|
|
|
|
|
Foreign currency translation
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
39
|
|
|
39
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
(10
|
)
|
|
39
|
|
|
29
|
|
Balance at October 29, 2016
|
$
|
21
|
|
|
$
|
7
|
|
|
$
|
28
|
|
See
Note 5
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 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
|
|
39 Weeks Ended
|
($ in millions)
|
October 28,
2017
|
|
October 29,
2016
|
|
October 28,
2017
|
|
October 29,
2016
|
Stock units
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
47
|
|
|
$
|
43
|
|
Stock options
|
3
|
|
|
4
|
|
|
10
|
|
|
9
|
|
Employee stock purchase plan
|
1
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Share-based compensation expense
|
18
|
|
|
19
|
|
|
60
|
|
|
55
|
|
Less: Income tax benefit
|
(7
|
)
|
|
(8
|
)
|
|
(23
|
)
|
|
(25
|
)
|
Share-based compensation expense, net of tax
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
37
|
|
|
$
|
30
|
|
Note 9
. 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 is 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
October 28, 2017
, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to
$6 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.
Note 10
. Earnings Per Share
Weighted-average number of shares used for earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(shares in millions)
|
October 28,
2017
|
|
October 29,
2016
|
|
October 28,
2017
|
|
October 29,
2016
|
Weighted-average number of shares - basic
|
391
|
|
|
399
|
|
|
395
|
|
|
398
|
|
Common stock equivalents
|
2
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Weighted-average number of shares - diluted
|
393
|
|
|
400
|
|
|
397
|
|
|
400
|
|
The above computations of weighted-average number of shares – diluted exclude
9 million
and
8 million
shares related to stock options and other stock awards for the
thirteen weeks ended
October 28, 2017
and
October 29, 2016
, respectively, and
9 million
and
7 million
shares related to stock options and other stock awards for the
thirty-nine weeks ended
October 28, 2017
and
October 29, 2016
, respectively, as their inclusion would have an anti-dilutive effect on earnings per share.
Note 11
. 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
October 28, 2017
, 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
October 28, 2017
,
January 28, 2017
, and
October 29, 2016
, 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
October 28, 2017
,
January 28, 2017
, and
October 29, 2016
was not material for any individual Action or in total. Subsequent to
October 28, 2017
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.
Fire at the Fishkill Distribution Center
On August 29, 2016, a fire occurred in one of the buildings at a Company-owned distribution center campus in Fishkill, New York. The impacted building primarily held Gap and Banana Republic products for distribution to stores and fulfilled online orders for Gap and Old Navy in the Northeast region of the United States.
The Company maintains property and business interruption insurance coverage. Based on the provisions of the Company’s insurance policies, the Company recorded insurance recoveries based on the determination that recovery of certain fire-related costs is probable. During fiscal 2016, the Company incurred a total of
$133 million
in certain fire-related costs. In January of fiscal 2016, the Company agreed upon a partial settlement of
$159 million
related to the loss on inventory and recorded a gain of
$73 million
, representing the excess over the loss on inventory, which was recorded in operating expenses in the Consolidated Statement of Income. During fiscal 2016, the Company received
$174 million
of insurance proceeds. As a result, the insurance receivable balance was
$32 million
as of January 28, 2017 and was recorded in other current assets in the Consolidated Balance Sheet.
During the
thirteen and thirty-nine weeks ended
October 28, 2017
, the Company incurred immaterial costs and
$15 million
, respectively, in certain fire-related costs for which the Company recorded insurance recoveries based on the determination that recovery of these fire-related costs is probable. In June 2017, the Company also agreed upon a partial settlement and recorded a gain of
$64 million
, primarily related to property and equipment, representing the excess over the loss on fire-related recoverable costs, which was recorded in operating expenses in the Condensed Consolidated Statement of Income.
The Company received
$29 million
and
$131 million
of insurance proceeds during the
thirteen and thirty-nine weeks ended
October 28, 2017
, respectively. Included in the
$29 million
was
$20 million
in insurance proceeds related to business interruption, which were recorded as a reduction to cost of goods sold and occupancy expenses in the Condensed Consolidated Statement of Income. The remaining
$9 million
and
$111 million
of insurance proceeds received during the thirteen and thirty-nine weeks ended October 28, 2017, respectively, were recorded as a reduction to the insurance receivable balance. As a result, the insurance proceeds received in excess of expected recoveries was less than
$1 million
as of
October 28, 2017
.
We will continue to incur additional logistics costs related to the disruption to our North American supply chain network. As settlements are reached, any recoveries related to business interruption insurance will be recognized as a reduction to cost of goods sold and occupancy expenses in the Condensed Consolidated Statements of Income.
During the
thirty-nine weeks ended
October 28, 2017
, we allocated
$60 million
of insurance proceeds to the loss on property and equipment based on the partial settlement of claims reported as insurance proceeds related to loss on property and equipment, a component of cash flows from investing activities, in the Condensed Consolidated Statement of Cash Flows.
Note 12
. Segment Information
The Gap, Inc. is a global retailer that sells apparel, accessories, and personal care products under the Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way brands. We identify our operating segments according to how our business activities are managed and evaluated. As of
October 28, 2017
, our operating segments included Gap Global, Old Navy Global, Banana Republic Global, Athleta, and Intermix. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into
one
reportable segment as of
October 28, 2017
.
Net sales by brand and region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (2)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended October 28, 2017
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
750
|
|
|
$
|
1,587
|
|
|
$
|
467
|
|
|
$
|
200
|
|
|
$
|
3,004
|
|
|
79
|
%
|
Canada
|
|
109
|
|
|
143
|
|
|
57
|
|
|
1
|
|
|
310
|
|
|
8
|
|
Europe
|
|
154
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
158
|
|
|
4
|
|
Asia
|
|
278
|
|
|
13
|
|
|
21
|
|
|
—
|
|
|
312
|
|
|
8
|
|
Other regions
|
|
31
|
|
|
15
|
|
|
8
|
|
|
—
|
|
|
54
|
|
|
1
|
|
Total
|
|
$
|
1,322
|
|
|
$
|
1,758
|
|
|
$
|
557
|
|
|
$
|
201
|
|
|
$
|
3,838
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended October 29, 2016
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
756
|
|
|
$
|
1,507
|
|
|
$
|
479
|
|
|
$
|
172
|
|
|
$
|
2,914
|
|
|
77
|
%
|
Canada
|
|
102
|
|
|
131
|
|
|
55
|
|
|
1
|
|
|
289
|
|
|
8
|
|
Europe
|
|
150
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
164
|
|
|
4
|
|
Asia
|
|
296
|
|
|
55
|
|
|
25
|
|
|
—
|
|
|
376
|
|
|
10
|
|
Other regions
|
|
36
|
|
|
12
|
|
|
7
|
|
|
—
|
|
|
55
|
|
|
1
|
|
Total
|
|
$
|
1,340
|
|
|
$
|
1,705
|
|
|
$
|
580
|
|
|
$
|
173
|
|
|
$
|
3,798
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (2)
|
|
Total
|
|
Percentage of Net Sales
|
39 Weeks Ended October 28, 2017
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
2,137
|
|
|
$
|
4,609
|
|
|
$
|
1,396
|
|
|
$
|
633
|
|
|
$
|
8,775
|
|
|
79
|
%
|
Canada
|
|
277
|
|
|
387
|
|
|
156
|
|
|
2
|
|
|
822
|
|
|
8
|
|
Europe
|
|
435
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
446
|
|
|
4
|
|
Asia
|
|
780
|
|
|
34
|
|
|
69
|
|
|
—
|
|
|
883
|
|
|
8
|
|
Other regions
|
|
83
|
|
|
47
|
|
|
21
|
|
|
—
|
|
|
151
|
|
|
1
|
|
Total
|
|
$
|
3,712
|
|
|
$
|
5,077
|
|
|
$
|
1,653
|
|
|
$
|
635
|
|
|
$
|
11,077
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Gap Global
|
|
Old Navy Global
|
|
Banana
Republic Global
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
39 Weeks Ended October 29, 2016
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
2,203
|
|
|
$
|
4,335
|
|
|
$
|
1,456
|
|
|
$
|
550
|
|
|
$
|
8,544
|
|
|
77
|
%
|
Canada
|
|
264
|
|
|
358
|
|
|
159
|
|
|
2
|
|
|
783
|
|
|
7
|
|
Europe
|
|
453
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
498
|
|
|
5
|
|
Asia
|
|
856
|
|
|
171
|
|
|
80
|
|
|
—
|
|
|
1,107
|
|
|
10
|
|
Other regions
|
|
100
|
|
|
32
|
|
|
23
|
|
|
—
|
|
|
155
|
|
|
1
|
|
Total
|
|
$
|
3,876
|
|
|
$
|
4,896
|
|
|
$
|
1,763
|
|
|
$
|
552
|
|
|
$
|
11,087
|
|
|
100
|
%
|
__________
|
|
(1)
|
U.S. includes the United States, Puerto Rico, and Guam.
|
|
|
(2)
|
Includes Athleta, Intermix, and Weddington Way.
|
|
|
(3)
|
Includes Athleta and Intermix.
|
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.