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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2020
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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94-1697231 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
Two Folsom Street
San Francisco, California 94105
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(415) 427-0100
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
Common Stock, $0.05 par value |
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The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing
requirements for the past 90
days. Yes ☑
No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding
as of November 18, 2020 was 374,029,098.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. All statements other than
those that are purely historical are forward-looking statements.
Words such as “expect,” “anticipate,” “believe,” “estimate,”
“intend,” “plan,” “project,” and similar expressions also identify
forward-looking statements. Forward-looking statements include, but
are not limited to, statements regarding the
following:
•the
potential impact of COVID-19 on the assumptions and estimates used
when preparing the quarterly financial statements, and on our
results of operations, financial position, and
liquidity;
•the
potential impact if economic conditions caused by COVID-19 were to
worsen beyond what is currently estimated by
management;
•the
impact of recent accounting pronouncements;
•recognition
of revenue deferrals as revenue;
•compliance
with applicable financial covenants under the 2023 Notes, 2025
Notes, 2027 Notes, and the ABL Facility;
•the
expected tax impact of our participation in the Coronavirus Aid,
Relief and Economic Security Act;
•unrealized
gains and losses from designated cash flow hedges;
•total
gross unrecognized tax benefits;
•the
impact of losses due to indemnification obligations;
•the
outcome of proceedings, lawsuits, disputes, and claims, including
the impact of such actions on our financial results;
•the
ability of our new capital structure to provide sufficient
liquidity to continue to navigate the COVID-19
pandemic;
•the
ability to supplement near-term liquidity, if necessary, with our
$1.8675 billion asset-based revolving credit facility or other
available market instruments;
•current
cash balances and cash flows from our operations and from issuance
of the 2023 Notes, 2025 Notes, 2027 Notes being sufficient to
support our business operations;
•the
impact of the seasonality of our operations;
•offering
product that is consistently brand-appropriate and on-trend with
high customer acceptance;
•the
impact of adopting the accounting standards update No. 2019-12 on
January 31 2021;
•growing
and operating our global online business and our newly introduced
business-to-business program;
•realigning
inventory with customer demand;
•increasing
focus on improving operational discipline and efficiency by
streamlining operations and processes and leveraging
scale;
•managing
inventory to support a healthy merchandise margin;
•the
expected timing, cost and scope of the strategic review of our
operating model in Europe;
•the
expectation that we will reach additional agreements with our
landlords regarding suspended rent payments for our temporarily
closed stores;
•rationalizing
the Gap and Banana Republic brands, with emphasis on the specialty
fleet globally, to create a healthier business while prioritizing
asset-light growth through licensing and franchise partnerships in
international markets;
•the
impact of our expected lease buyouts related to a small population
of stores in the future;
•continuing
to integrate social and environmental sustainability into business
practices;
•increased
interest expense on future borrowings caused by any future
reductions in our credit ratings; and
•the
impact of changes in internal control over financial
reporting.
Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause our
actual results to differ materially from those in the
forward-looking statements. These factors include, without
limitation, the following:
•the
overall global economic environment and risks associated with the
COVID-19 pandemic;
•the
risk that we or our franchisees will be unsuccessful in gauging
apparel trends and changing consumer preferences;
•the
highly competitive nature of our business in the United States and
internationally;
•the
risk that changes in global economic conditions or consumer
spending patterns could adversely impact our results of
operations;
•engaging
in or seeking to engage in strategic transactions that are subject
to various risks and uncertainties;
•the
risk that failure to maintain, enhance and protect our brand image
could have an adverse effect on our results of
operations;
•the
risk that the failure to manage key executive succession and
retention and to continue to attract qualified personnel could have
an adverse impact on our results of operations;
•the
risk that our investments in customer, digital, and omni-channel
shopping initiatives may not deliver the results we
anticipate;
•the
risk that if we are unable to manage our inventory effectively, our
gross margins will be adversely affected;
•the
risks to our business, including our costs and supply chain,
associated with global sourcing and manufacturing;
•the
risk that we are subject to data or other security breaches that
may result in increased costs, violations of law, significant legal
and financial exposure, and a loss of confidence in our security
measures, which could have an adverse effect on our results of
operations and our reputation;
•the
risk that a failure of, or updates or changes to, our information
technology ("IT") systems may disrupt our operations;
•the
risks to our efforts to expand internationally, including our
ability to operate in regions where we have less
experience;
•the
risk that we or our franchisees will be unsuccessful in
identifying, negotiating, and securing new store locations and
renewing, modifying, or terminating leases for existing store
locations effectively;
•the
risks to our reputation or operations associated with importing
merchandise from foreign countries, including failure of our
vendors to adhere to our Code of Vendor Conduct;
•the
risk that our franchisees’ operation of franchise stores is not
directly within our control and could impair the value of our
brands;
•the
risk that trade matters could increase the cost or reduce the
supply of apparel available to us and adversely affect our
business, financial condition, and results of
operations;
•the
risk that foreign currency exchange rate fluctuations could
adversely impact our financial results;
•the
risk that comparable sales and margins will experience
fluctuations;
•the
risk that changes in our credit profile or deterioration in market
conditions may limit our access to the capital markets and
adversely impact our financial position or our business
initiatives;
•the
risk that changes in the regulatory or administrative landscape
could adversely affect our financial condition and results of
operations;
•the
risk that natural disasters, public health crises (similar to and
including the ongoing COVID-19 pandemic), political crises,
negative global climate patterns, or other catastrophic events
could adversely affect our operations and financial results, or
those of our franchisees or vendors;
•the
risk that reductions in income and cash flow from our credit card
arrangement related to our private label and co-branded credit
cards could adversely affect our operating results and cash
flows;
•the
risk that the adoption of new accounting pronouncements will impact
future results;
•the
risk that we do not repurchase some or all of the shares we
anticipate purchasing pursuant to our repurchase program;
and
•the
risk that we will not be successful in defending various
proceedings, lawsuits, disputes, and claims.
Additional information regarding factors that could cause results
to differ can be found in this Quarterly Report on Form 10-Q and
our other filings with the U.S. Securities and Exchange
Commission.
Future economic and industry trends that could potentially impact
net sales and profitability are difficult to predict. These
forward-looking statements are based on information as of
November 25, 2020, and we assume no obligation to publicly
update or revise our forward-looking statements even if experience
or future changes make it clear that any projected results
expressed or implied therein will not be realized.
We suggest that this document be read in conjunction with
Management’s Discussion and Analysis included in our Annual Report
on Form 10-K for the fiscal year ended February 1,
2020.
THE GAP, INC.
TABLE OF CONTENTS
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
THE GAP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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($ and shares in millions except par value) |
October 31,
2020 |
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February 1,
2020 |
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November 2,
2019 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
2,471 |
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$ |
1,364 |
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$ |
788 |
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Short-term investments |
178 |
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290 |
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294 |
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Merchandise inventory |
2,747 |
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2,156 |
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2,720 |
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Other current assets |
966 |
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|
706 |
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|
770 |
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Total current assets |
6,362 |
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4,516 |
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|
4,572 |
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Property and equipment, net of accumulated depreciation of $5,891,
$5,839 and $5,999
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2,846 |
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3,122 |
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|
3,225 |
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Operating lease assets |
4,460 |
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|
5,402 |
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5,796 |
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Other long-term assets |
705 |
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|
639 |
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|
525 |
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Total assets |
$ |
14,373 |
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$ |
13,679 |
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$ |
14,118 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
2,284 |
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$ |
1,174 |
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$ |
1,241 |
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Accrued expenses and other current liabilities |
1,283 |
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|
1,067 |
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|
974 |
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Current portion of operating lease liabilities |
823 |
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|
920 |
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|
934 |
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Income taxes payable |
41 |
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48 |
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43 |
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Total current liabilities |
4,431 |
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3,209 |
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3,192 |
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Long-term liabilities: |
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Long-term debt |
2,214 |
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1,249 |
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1,249 |
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Long-term operating lease liabilities |
4,899 |
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5,508 |
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5,650 |
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Lease incentives and other long-term liabilities |
458 |
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397 |
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393 |
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Total long-term liabilities |
7,571 |
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7,154 |
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7,292 |
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Commitments and contingencies (see Note 9) |
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Stockholders’ equity: |
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Common stock $0.05 par value
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Authorized 2,300 shares for all periods presented; Issued and
Outstanding 374, 371, and 373 shares
|
19 |
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19 |
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19 |
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Additional paid-in capital |
60 |
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— |
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— |
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Retained earnings |
2,268 |
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|
3,257 |
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|
3,573 |
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Accumulated other comprehensive income |
24 |
|
|
40 |
|
|
42 |
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Total stockholders’ equity |
2,371 |
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|
3,316 |
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|
3,634 |
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Total liabilities and stockholders’ equity |
$ |
14,373 |
|
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$ |
13,679 |
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$ |
14,118 |
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See Accompanying Notes to Condensed Consolidated Financial
Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
($ and shares in millions except per share amounts) |
October 31,
2020 |
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November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Net sales |
$ |
3,994 |
|
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$ |
3,998 |
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$ |
9,376 |
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$ |
11,709 |
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Cost of goods sold and occupancy expenses |
2,374 |
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2,439 |
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6,339 |
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|
7,250 |
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Gross profit |
1,620 |
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|
1,559 |
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3,037 |
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4,459 |
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Operating expenses |
1,445 |
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|
1,338 |
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4,033 |
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|
3,640 |
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Operating income (loss) |
175 |
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221 |
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(996) |
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|
819 |
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Loss on extinguishment of debt |
— |
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— |
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58 |
|
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— |
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Interest expense |
55 |
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19 |
|
|
132 |
|
|
58 |
|
Interest income |
(1) |
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(7) |
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(7) |
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(21) |
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Income (loss) before income taxes |
121 |
|
|
209 |
|
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(1,179) |
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|
782 |
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Income taxes |
26 |
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|
69 |
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(280) |
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|
247 |
|
Net income (loss) |
$ |
95 |
|
|
$ |
140 |
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|
$ |
(899) |
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$ |
535 |
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Weighted-average number of shares - basic |
374 |
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|
375 |
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373 |
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|
377 |
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Weighted-average number of shares - diluted |
380 |
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|
376 |
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|
373 |
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|
379 |
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Earnings (loss) per share - basic |
$ |
0.25 |
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$ |
0.37 |
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$ |
(2.41) |
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$ |
1.42 |
|
Earnings (loss) per share - diluted |
$ |
0.25 |
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$ |
0.37 |
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$ |
(2.41) |
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$ |
1.41 |
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See Accompanying Notes to Condensed Consolidated Financial
Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
($ in millions) |
October 31,
2020 |
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November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Net income (loss) |
$ |
95 |
|
|
$ |
140 |
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|
$ |
(899) |
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$ |
535 |
|
Other comprehensive income (loss), net of tax |
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Foreign currency translation |
5 |
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(4) |
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(14) |
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(5) |
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Change in fair value of derivative financial instruments, net of
tax of $—, $—, $1, and $5
|
(2) |
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— |
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9 |
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10 |
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Reclassification adjustment for gains on derivative financial
instruments, net of tax of $(1), $—, $(2), and $(5)
|
(1) |
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(9) |
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(11) |
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(16) |
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Other comprehensive income (loss), net of tax |
2 |
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(13) |
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(16) |
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(11) |
|
Comprehensive income (loss) |
$ |
97 |
|
|
$ |
127 |
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|
$ |
(915) |
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$ |
524 |
|
See Accompanying Notes to Condensed Consolidated Financial
Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(Unaudited)
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Common Stock |
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Additional
Paid-in
Capital |
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Retained
Earnings |
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Accumulated
Other
Comprehensive
Income |
|
|
($ and shares in millions except per share amounts) |
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Shares |
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Amount |
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Total |
Balance as of August 1, 2020 |
|
374 |
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|
$ |
19 |
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|
$ |
39 |
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|
$ |
2,173 |
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$ |
22 |
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$ |
2,253 |
|
Net income for the thirteen weeks ended October 31,
2020 |
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95 |
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|
95 |
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Other comprehensive income (loss), net of tax |
|
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Foreign currency translation |
|
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5 |
|
5 |
Change in fair value of derivative financial
instruments |
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(2) |
|
(2) |
|
Amounts reclassified from accumulated other comprehensive
income |
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(1) |
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(1) |
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Issuance of common stock related to stock options and employee
stock purchase plans |
|
— |
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— |
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4 |
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4 |
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Issuance of common stock and withholding tax payments related to
vesting of stock units |
|
— |
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— |
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— |
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|
|
— |
|
Share-based compensation, net of forfeitures |
|
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17 |
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|
17 |
|
Common stock dividends (1) |
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
Balance as of October 31, 2020 |
|
374 |
|
|
$ |
19 |
|
|
$ |
60 |
|
|
$ |
2,268 |
|
|
$ |
24 |
|
|
$ |
2,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 3, 2019 |
|
376 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
3,551 |
|
|
$ |
55 |
|
|
$ |
3,625 |
|
Net income for the thirteen weeks ended November 2,
2019 |
|
|
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|
|
|
|
140 |
|
|
|
|
140 |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(4) |
|
|
(4) |
|
Change in fair value of derivative financial
instruments |
|
|
|
|
|
|
|
|
|
— |
|
|
— |
|
Amounts reclassified from accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
(9) |
|
|
(9) |
|
Repurchases and retirement of common stock |
|
(3) |
|
|
— |
|
|
(23) |
|
|
(27) |
|
|
|
|
(50) |
|
Issuance of common stock related to stock options and employee
stock purchase plans |
|
— |
|
|
— |
|
|
5 |
|
|
|
|
|
|
5 |
|
Issuance of common stock and withholding tax payments related to
vesting of stock units |
|
— |
|
|
— |
|
|
(1) |
|
|
|
|
|
|
(1) |
|
Share-based compensation, net of forfeitures |
|
|
|
|
|
19 |
|
|
|
|
|
|
19 |
|
Common stock dividends declared and paid ($0.2425 per
share)
|
|
|
|
|
|
|
|
(91) |
|
|
|
|
(91) |
|
Balance as of November 2, 2019 |
|
373 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
3,573 |
|
|
$ |
42 |
|
|
$ |
3,634 |
|
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(Unaudited)
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|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income |
|
|
($ and shares in millions except per share amounts) |
|
Shares |
|
Amount |
|
Total |
Balance as of February 1, 2020 |
|
371 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
3,257 |
|
|
$ |
40 |
|
|
$ |
3,316 |
|
Net loss for the thirty-nine weeks ended October 31,
2020 |
|
|
|
|
|
|
|
(899) |
|
|
|
|
(899) |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(14) |
|
|
(14) |
|
Change in fair value of derivative financial
instruments |
|
|
|
|
|
|
|
|
|
9 |
|
|
9 |
|
Amounts reclassified from accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
(11) |
|
|
(11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock related to stock options and employee
stock purchase plans |
|
1 |
|
|
— |
|
|
16 |
|
|
|
|
|
|
16 |
|
Issuance of common stock and withholding tax payments related to
vesting of stock units |
|
2 |
|
|
— |
|
|
(8) |
|
|
|
|
|
|
(8) |
|
Share-based compensation, net of forfeitures |
|
|
|
|
|
52 |
|
|
|
|
|
|
52 |
|
Common stock dividends ($0.2425 per share) (1)
|
|
|
|
|
|
|
|
(90) |
|
|
|
(90) |
|
Balance as of October 31, 2020 |
|
374 |
|
|
$ |
19 |
|
|
$ |
60 |
|
|
$ |
2,268 |
|
|
$ |
24 |
|
|
$ |
2,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 2, 2019 |
|
378 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
3,481 |
|
|
$ |
53 |
|
|
$ |
3,553 |
|
Cumulative effect of a change in accounting principle related to
leases |
|
|
|
|
|
|
|
(86) |
|
|
|
|
(86) |
|
Net income for the thirty-nine weeks ended November 2,
2019 |
|
|
|
|
|
|
|
535 |
|
|
|
|
535 |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(5) |
|
|
(5) |
|
Change in fair value of derivative financial
instruments |
|
|
|
|
|
|
|
|
|
10 |
|
|
10 |
|
Amounts reclassified from accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
(16) |
|
|
(16) |
|
Repurchases and retirement of common stock |
|
(8) |
|
|
— |
|
|
(67) |
|
|
(83) |
|
|
|
|
(150) |
|
Issuance of common stock related to stock options and employee
stock purchase plans |
|
1 |
|
|
— |
|
|
22 |
|
|
|
|
|
|
22 |
|
Issuance of common stock and withholding tax payments related to
vesting of stock units |
|
2 |
|
|
— |
|
|
(21) |
|
|
|
|
|
|
(21) |
|
Share-based compensation, net of forfeitures |
|
|
|
|
|
66 |
|
|
|
|
|
|
66 |
|
Common stock dividends declared and paid ($0.7275 per
share)
|
|
|
|
|
|
|
|
(274) |
|
|
|
|
(274) |
|
Balance as of November 2, 2019 |
|
373 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
3,573 |
|
|
$ |
42 |
|
|
$ |
3,634 |
|
__________
(1) On March 4, 2020, the Company declared a first quarter fiscal
year 2020 dividend of $0.2425 per share. On March 26, 2020, the
Company announced that the dividend will be payable on or after
April 28, 2021 to shareholders of record at the close of business
on April 7, 2021. The dividend payable amount was estimated based
upon the shareholders of record as of October 31,
2020.
See Accompanying Notes to Condensed Consolidated Financial
Statements
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
Cash flows from operating activities: |
|
|
|
Net income (loss) |
$ |
(899) |
|
|
$ |
535 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
Depreciation and amortization |
381 |
|
|
417 |
|
|
|
|
|
Share-based compensation |
55 |
|
|
64 |
|
Impairment of operating lease assets |
361 |
|
|
1 |
|
Impairment of store assets |
127 |
|
|
9 |
|
|
|
|
|
Loss on extinguishment of debt |
58 |
|
|
— |
|
Amortization of debt issuance costs |
8 |
|
|
1 |
|
Non-cash and other items |
— |
|
|
(4) |
|
Gain on sale of building |
— |
|
|
(191) |
|
Deferred income taxes |
(74) |
|
|
42 |
|
Changes in operating assets and liabilities: |
|
|
|
Merchandise inventory |
(590) |
|
|
(559) |
|
Other current assets and other long-term assets |
37 |
|
|
8 |
|
|
|
|
|
Accounts payable |
1,120 |
|
|
129 |
|
Accrued expenses and other current liabilities |
98 |
|
|
28 |
|
Income taxes payable, net of receivables and other tax-related
items |
(206) |
|
|
89 |
|
Lease incentives and other long-term liabilities |
54 |
|
|
19 |
|
Operating lease assets and liabilities, net |
(131) |
|
|
(60) |
|
Net cash provided by operating activities |
399 |
|
|
528 |
|
Cash flows from investing activities: |
|
|
|
Purchases of property and equipment |
(288) |
|
|
(523) |
|
Purchase of building |
— |
|
|
(343) |
|
Proceeds from sale of building |
— |
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
(237) |
|
|
(235) |
|
Proceeds from sales and maturities of short-term
investments |
348 |
|
|
231 |
|
Purchase of Janie and Jack |
— |
|
|
(69) |
|
Other |
2 |
|
|
— |
|
Net cash used for investing activities |
(175) |
|
|
(719) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
500 |
|
|
— |
|
Payments for revolving credit facility
|
(500) |
|
|
— |
|
Proceeds from issuance of long-term debt
|
2,250 |
|
|
— |
|
Payments to extinguish debt
|
(1,307) |
|
|
— |
|
Payments for debt issuance costs
|
(61) |
|
|
— |
|
Proceeds from issuances under share-based compensation
plans
|
16 |
|
|
22 |
|
Withholding tax payments related to vesting of stock
units |
(8) |
|
|
(21) |
|
Repurchases of common stock |
— |
|
|
(150) |
|
|
|
|
|
Cash dividends paid |
— |
|
|
(274) |
|
|
|
|
|
Net cash provided by (used for) financing activities |
890 |
|
|
(423) |
|
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash |
4 |
|
|
— |
|
Net increase (decrease) in cash, cash equivalents, and restricted
cash |
1,118 |
|
|
(614) |
|
Cash, cash equivalents, and restricted cash at beginning of
period |
1,381 |
|
|
1,420 |
|
Cash, cash equivalents, and restricted cash at end of
period |
$ |
2,499 |
|
|
$ |
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
Cash paid for interest during the period |
$ |
41 |
|
|
$ |
75 |
|
Cash paid for income taxes during the period, net of
refunds |
$ |
8 |
|
|
$ |
117 |
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Condensed Consolidated Financial
Statements
THE GAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Balance Sheets as of October 31,
2020 and November 2, 2019, and the Condensed Consolidated
Statements of Operations, the Condensed Consolidated Statements of
Comprehensive Income (Loss), and the Condensed Consolidated
Statements of Stockholders' Equity for the thirteen and thirty-nine
weeks ended October 31, 2020 and November 2, 2019, and
the Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 31, 2020 and November 2,
2019, have been prepared by The Gap, Inc. (the “Company,” “we,” and
“our”). In the opinion of management, such statements contain all
normal and recurring adjustments (except as otherwise disclosed)
considered necessary to present fairly our financial position,
results of operations, comprehensive income (loss), stockholders'
equity, and cash flows as of October 31, 2020 and
November 2, 2019 and for all periods presented. The Condensed
Consolidated Balance Sheet as of February 1, 2020 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 February 1, 2020.
The results of operations for the thirteen and thirty-nine weeks
ended October 31, 2020 are not necessarily indicative of the
operating results that may be expected for the 52-week period
ending January 30, 2021.
COVID-19
In March 2020, the World Health Organization declared the
coronavirus disease ("COVID-19") a global pandemic and recommended
containment and mitigation measures worldwide. As a result, we
temporarily closed our North America retail stores and a large
number of our stores globally. In May 2020, we began to safely
reopen our temporarily closed stores in accordance with local
government guidelines and most stores were open during the thirteen
weeks ended October 31, 2020. Beginning in late October 2020,
several European countries instituted new lockdown mandates to
contain surging COVID-19 cases and as a result we have temporarily
closed certain stores in Europe. We will continue to monitor
regional mandates for additional temporary store closures as they
arise.
During the thirty-nine weeks ended October 31, 2020, the
Company implemented several actions including completing the
issuance of our Senior Secured Notes for $2.25 billion due 2023
(“2023 Notes”), 2025 (“2025 Notes”), and 2027 (“2027 Notes”)
(collectively, the “Notes”) and entering into a third amended and
restated senior secured asset-based revolving credit agreement (the
"ABL Facility") in May 2020. See Note 3 of Notes to Condensed
Consolidated Financial Statements for further details related to
our debt and credit facilities. Additionally, we suspended share
repurchases and dividends and deferred the first quarter of fiscal
2020 dividend in March 2020.
As a result of COVID-19, we suspended rent payments beginning in
April 2020 due to our temporarily closed stores and are continuing
to work through negotiations with our landlords relating to those
leases. We considered the Financial Accounting Standards Board's
("FASB") guidance regarding lease modifications as a result of the
effects of COVID-19 and elected to apply the temporary practical
expedient to account for lease changes as variable rent unless an
amendment results in a substantial change in the Company's lease
obligations. As of October 31, 2020, the impact of applying
the temporary practical expedient was not material to our Condensed
Consolidated Financial Statements.
In response to COVID-19, various governments worldwide have
enacted, or are in the process of enacting, measures to provide
relief to businesses negatively affected by the pandemic. On March
27, 2020, the Coronavirus Aid, Relief and Economic Security Act
("CARES Act") was signed into law in the United States. The CARES
Act provides relief to U.S. corporations through financial
assistance programs and modifications to certain payroll and income
tax provisions. In connection with CARES Act and other financial
relief measures worldwide, the Company has recognized $67 million
of payroll related credits for the thirty-nine weeks ended October
31, 2020. The payroll related credits are recorded as a reduction
within operating expenses in the Condensed Consolidated Statements
of Operations. The Company is also considering certain other
beneficial provisions of the CARES Act, including the net operating
loss carryback provision. See Note 7 of Notes to Condensed
Consolidated Financial Statements for more information on the
estimated income tax impact of the CARES Act.
We continue to consider the impact of COVID-19 on the assumptions
and estimates used when preparing these quarterly financial
statements including inventory valuation, lease accounting impacts,
income taxes, and the impairment of long-lived store assets and
operating lease assets. These assumptions and estimates may change
as the current situation evolves or new events occur and additional
information is obtained. If the economic conditions caused by
COVID-19 worsen beyond what is currently estimated by management,
such future changes may have an adverse impact on the Company's
results of operations, financial position, and
liquidity.
Restricted Cash
Any cash that is legally restricted from use is classified as
restricted cash. If the purpose of restricted cash is related to
acquiring a long-term asset, liquidating a long-term liability, or
is otherwise unavailable for a period longer than one year from the
balance sheet date, the restricted cash is included within other
long-term assets on our Condensed Consolidated Balance Sheets.
Otherwise, restricted cash is included within other current assets
on our Condensed Consolidated Balance Sheets.
As of October 31, 2020, restricted cash primarily included
consideration that serves as collateral for certain obligations
occurring in the normal course of business and our insurance
obligations. The following table provides a reconciliation of cash,
cash equivalents, and restricted cash reported within our Condensed
Consolidated Balance Sheets to the total shown on our Condensed
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
October 31,
2020 |
|
February 1,
2020 |
|
November 2,
2019 |
Cash and cash equivalents, per Condensed Consolidated Balance
Sheets |
$ |
2,471 |
|
|
$ |
1,364 |
|
|
$ |
788 |
|
Restricted cash included in other current assets |
4 |
|
|
— |
|
|
— |
|
Restricted cash included in other long-term assets |
24 |
|
|
17 |
|
|
18 |
|
Total cash, cash equivalents, and restricted cash, per Condensed
Consolidated Statements of Cash Flows |
$ |
2,499 |
|
|
$ |
1,381 |
|
|
$ |
806 |
|
Accounting Pronouncements Recently Adopted
ASU No. 2018-15, Customer's Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service
Contract
In August 2018, the FASB issued accounting standards update ("ASU")
No. 2018-15, Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service
Contract. The ASU is intended to align the requirements for
capitalization of implementation costs incurred in a cloud
computing arrangement that is a service contract with the existing
guidance for internal-use software. We adopted this ASU on a
prospective basis on February 2, 2020. The adoption of this
standard did not have a material impact on our Condensed
Consolidated Financial Statements or related
disclosures.
Accounting Pronouncements Not Yet Adopted
Except as noted below, the Company has considered all recent
accounting pronouncements and concluded that there are no recent
accounting pronouncements that may have a material impact on our
Condensed Consolidated Financial Statements, based on current
information.
ASU No. 2019-12, Simplifying the Accounting for Income
Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes. The ASU is intended to enhance and
simplify aspects of the income tax accounting guidance in ASC 740
as part of the FASB's simplification initiative. This guidance is
effective for fiscal years and interim periods within those years
beginning after December 15, 2020 with early adoption permitted.
The Company will adopt this ASU on January 31, 2021 and does not
expect there to be a material impact on our Condensed Consolidated
Financial Statements.
Note 2. Revenue
The Company’s revenues include merchandise sales at stores, online,
and through franchise agreements, as well as the newly introduced
business-to-business ("B2B") program. We also receive revenue
sharing from our credit card agreement for private label and
co-branded credit cards, and breakage revenue related to our gift
cards, credit vouchers, and outstanding loyalty points. Breakage
revenue is recognized based upon historical redemption patterns.
For online sales, the Company has elected to treat shipping and
handling as fulfillment activities and not as a separate
performance obligation. Accordingly, we recognize revenue for our
single performance obligation related to online sales at the time
control of the merchandise passes to the customer, which is
generally at the time of shipment. We also record an allowance for
estimated returns based on our historical return patterns and
various other assumptions that management believes to be
reasonable. Revenues are presented net of any taxes collected from
customers and remitted to governmental authorities.
Our credit card agreement provides for certain payments to be made
to us, including a share of revenue from the performance of the
credit card portfolios and reimbursements of loyalty program
discounts. We have identified separate performance obligations
related to our credit card agreement that include both providing a
license and an obligation to redeem loyalty points issued under the
loyalty rewards program. Our obligation to provide a license is
satisfied when the subsequent sale or usage occurs and our
obligation to redeem loyalty points is deferred until those loyalty
points are redeemed. Income related to our credit card agreement is
classified within net sales on our Condensed Consolidated
Statements of Operations.
We also have franchise agreements with unaffiliated franchisees to
operate Gap, Banana Republic, Old Navy, and Athleta stores in a
number of countries throughout Asia, Europe, Latin America, the
Middle East, and Africa. Under these agreements, third parties
operate, or will operate, stores that sell apparel and related
products under our brand names. We have identified separate
performance obligations related to our franchise agreements that
include both providing our franchise partners with a license and an
obligation to supply franchise partners with our merchandise. Our
obligation to provide a license is satisfied when the subsequent
sale or usage occurs and our obligation to supply franchise
partners with our merchandise is satisfied when control of the
merchandise transfers. There were no material contract liabilities
related to our franchise agreements for all periods
presented.
We defer revenue when cash payments are received in advance of
performance for unsatisfied obligations related to our gift cards,
credit vouchers, outstanding loyalty points, and reimbursements of
loyalty program discounts associated with our credit card
agreement. For the thirteen weeks ended October 31, 2020, the
opening balance of deferred revenue for these obligations was $189
million, of which $68 million was recognized as revenue during the
period. For the thirty-nine weeks ended October 31, 2020, the
opening balance of deferred revenue for these obligations was $226
million, of which $140 million was recognized as revenue during the
period. The closing balance of deferred revenue for these
obligations was $191 million as of October 31,
2020.
We expect that the majority of our revenue deferrals as of the
quarter ended October 31, 2020, will be recognized as revenue
in the next twelve months as our performance obligations are
satisfied.
For the thirteen weeks ended November 2, 2019, the opening
balance of deferred revenue for these obligations was $195 million,
of which $78 million was recognized as revenue during the period.
For the thirty-nine weeks ended November 2, 2019, the opening
balance of deferred revenue for these obligations was $227 million,
of which $161 million was recognized as revenue during the period.
The closing balance of deferred revenue for these obligations was
$189 million as of November 2, 2019.
Net sales disaggregated for stores and online sales for the
thirteen and thirty-nine weeks ended October 31, 2020 and
November 2, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31, 2020 |
|
November 2, 2019 |
|
October 31, 2020 |
|
November 2, 2019 |
|
|
|
|
|
|
|
|
Store sales (1) |
$ |
2,379 |
|
|
$ |
2,992 |
|
|
$ |
5,129 |
|
|
$ |
8,981 |
|
Online sales (2) |
1,615 |
|
|
1,006 |
|
|
4,247 |
|
|
2,728 |
|
Total net sales |
$ |
3,994 |
|
|
$ |
3,998 |
|
|
$ |
9,376 |
|
|
$ |
11,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________
(1)Store
sales primarily include sales made at our Company-operated stores
and franchise sales. Fiscal 2020 store sales were negatively
impacted by COVID-19. See Note 1 of Notes to Condensed Consolidated
Financial Statements for further details.
(2)Online
sales primarily include sales made through our online channels
including curbside pick-up, ship-from-store sales, buy online
pick-up in store sales, and order-in-store sales. Additionally,
beginning in the second quarter of fiscal 2020, sales from the B2B
program are also included.
See Note 10 of Notes to Condensed Consolidated Financial Statements
for further disaggregation of revenue by brand and by
region.
Note 3. Debt and Credit Facilities
Long-term debt recorded on the Condensed Consolidated Balance
Sheets consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
October 31,
2020 |
|
February 1,
2020 |
|
November 2,
2019 |
2021 Notes |
$ |
— |
|
|
$ |
1,249 |
|
|
$ |
1,249 |
|
2023 Notes |
500 |
|
|
— |
|
|
— |
|
2025 Notes |
750 |
|
|
— |
|
|
— |
|
2027 Notes |
1,000 |
|
|
— |
|
|
— |
|
Less: Unamortized debt issuance costs |
(36) |
|
|
— |
|
|
— |
|
Total long-term debt |
$ |
2,214 |
|
|
$ |
1,249 |
|
|
$ |
1,249 |
|
In June 2020, we redeemed our $1.25 billion aggregate principal
amount of 5.95 percent notes due April 2021 (the "2021 Notes"). We
incurred a loss on extinguishment of debt of $58 million, primarily
related to the make-whole premium, which was recorded on the
Condensed Consolidated Statement of Operations. Prior to redeeming
our 2021 Notes, the aggregate principal amount of the 2021 Notes
was recorded in long-term debt on the Condensed Consolidated
Balance Sheets, net of the unamortized discount. Following the
redemption, our obligations under the 2021 Notes were
discharged.
In May 2020, we completed the issuance of the Notes in a private
placement to qualified buyers and received gross proceeds of $2.25
billion. Concurrently with the issuance of the Notes, the Company
amended the existing unsecured revolving credit facility with the
ABL Facility which is scheduled to expire in May 2023. During the
second quarter of fiscal 2020, we paid and recorded debt issuance
costs related to the Notes and ABL Facility within long-term debt
and other long-term assets on the Condensed Consolidated Balance
Sheet, which will continue to be amortized through interest expense
over the life of the related instrument.
The scheduled maturity of the Notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturity ($ in millions) |
Principal |
|
Interest Rate |
|
Interest Payments |
Senior Secured Notes (1) |
|
|
|
|
|
May 15, 2023 |
$ |
500 |
|
|
8.375 |
% |
|
Semi-Annual |
May 15, 2025 |
750 |
|
|
8.625 |
% |
|
Semi-Annual |
May 15, 2027 |
1,000 |
|
|
8.875 |
% |
|
Semi-Annual |
Total issuance |
$ |
2,250 |
|
|
|
|
|
__________
(1)Includes
an option to call the Notes in whole or in part at any time,
subject to a make-whole premium.
As of October 31, 2020, the estimated fair value of the
Notes was $2.54 billion and was based on the quoted market price
for each of the Notes (level 1 inputs) as of the last business day
of the fiscal quarter. The aggregate principal amount of the Notes
is recorded in long-term debt on the Condensed Consolidated Balance
Sheet, net of the unamortized debt issuance cost.
The ABL Facility has a $1.8675 billion borrowing capacity and bears
interest at a base rate (typically LIBOR) plus a margin depending
on borrowing base availability. We also have the ability to issue
letters of credit on our ABL Facility. As of October 31, 2020,
we had $48 million in standby letters of credit issued under the
ABL Facility. There were no borrowings under the ABL Facility as of
October 31, 2020.
The Notes are secured by the Company's real and intellectual
property and equipment and intangibles. The Notes contain covenants
that limit the Company’s ability to, among other things: (i) grant
or incur liens on the collateral; (ii) incur, assume or guarantee
additional indebtedness; (iii) enter into sale and lease-back
transactions; (iv) sell or otherwise dispose of assets that are
collateral; and (v) make certain restricted payments or other
investments. The Notes are also subject to certain provisions
related to default that, if triggered, could result in acceleration
of the maturity of the Notes.
The ABL Facility agreement is secured by specified assets,
including a first lien on inventory, accounts receivable and bank
accounts. The Notes are also secured by a second priority lien on
certain assets securing the ABL Facility, which includes security
interests in inventory, accounts receivable and bank accounts,
subject to certain exceptions and permitted liens. In addition, the
ABL Facility agreement is secured by a second lien on certain
assets securing the Notes. The ABL Facility contains customary
covenants restricting the Company's activities, as well as those of
its subsidiaries, including limitations on the ability to sell
assets, engage in mergers, or other fundamental changes, enter into
capital leases or certain leases not in the ordinary course of
business, enter into transactions involving related parties or
derivatives, incur or prepay indebtedness, grant liens or negative
pledges on its assets, make loans or other investments, pay
dividends or repurchase stock or other securities, guarantee
third-party obligations, engage in sale and lease-back transactions
and make changes in its corporate structure. There are exceptions
to these covenants, and some are only applicable when unused
availability falls below specified thresholds. In addition, the ABL
Facility includes, as a financial covenant, a springing fixed
charge coverage ratio which arises when availability falls below a
specified threshold.
As of October 31, 2020, we were in compliance with the
applicable financial covenants and expect to maintain compliance
for the next twelve months.
We also maintain multiple agreements with third parties that make
unsecured revolving credit facilities available for our operations
in foreign locations (the “Foreign Facilities”). The Foreign
Facilities are uncommitted and had a total capacity of $58 million
as of October 31, 2020. As of October 31, 2020, there
were no borrowings under the Foreign Facilities. There were $19
million in bank guarantees issued and outstanding primarily related
to store leases under the Foreign Facilities as of October 31,
2020.
We have bilateral unsecured standby letter of credit agreements
that are uncommitted and do not have expiration dates. There were
no material standby letters of credit issued under these agreements
as of October 31, 2020.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at
fair value on a recurring basis, including derivatives and
available-for-sale debt securities. The Company categorizes
financial assets and liabilities recorded at fair value based upon
a three-level hierarchy that considers the related valuation
techniques.
There were no purchases, sales, issuances, or settlements related
to recurring level 3 measurements during the thirteen and
thirty-nine weeks ended October 31, 2020 or November 2,
2019. There were no transfers of financial assets or liabilities
into or out of level 1, level 2, and level 3 during the thirteen
and thirty-nine weeks ended October 31, 2020 or
November 2, 2019.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a
recurring basis and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
($ in millions) |
October 31, 2020 |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
Assets: |
|
|
|
|
|
|
|
Cash equivalents |
$ |
678 |
|
|
$ |
178 |
|
|
$ |
500 |
|
|
$ |
— |
|
Short-term investments |
178 |
|
|
119 |
|
|
59 |
|
|
— |
|
Derivative financial instruments |
6 |
|
|
— |
|
|
6 |
|
|
— |
|
Deferred compensation plan assets |
44 |
|
|
44 |
|
|
— |
|
|
— |
|
Other assets |
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Total |
$ |
908 |
|
|
$ |
341 |
|
|
$ |
565 |
|
|
$ |
2 |
|
Liabilities: |
|
|
|
|
|
|
|
Derivative financial instruments |
$ |
7 |
|
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
— |
|
|
|
|
Fair Value Measurements at Reporting Date Using |
($ in millions) |
February 1, 2020 |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
Assets: |
|
|
|
|
|
|
|
Cash equivalents |
$ |
311 |
|
|
$ |
19 |
|
|
$ |
292 |
|
|
$ |
— |
|
Short-term investments |
290 |
|
|
117 |
|
|
173 |
|
|
— |
|
Derivative financial instruments |
10 |
|
|
— |
|
|
10 |
|
|
— |
|
Deferred compensation plan assets |
51 |
|
|
51 |
|
|
— |
|
|
— |
|
Other assets |
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Total |
$ |
664 |
|
|
$ |
187 |
|
|
$ |
475 |
|
|
$ |
2 |
|
Liabilities: |
|
|
|
|
|
|
|
Derivative financial instruments |
$ |
10 |
|
|
$ |
— |
|
|
$ |
10 |
|
|
$ |
— |
|
|
|
|
Fair Value Measurements at Reporting Date Using |
($ in millions) |
November 2, 2019 |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
Assets: |
|
|
|
|
|
|
|
Cash equivalents |
$ |
238 |
|
|
$ |
3 |
|
|
$ |
235 |
|
|
$ |
— |
|
Short-term investments |
294 |
|
|
131 |
|
|
163 |
|
|
— |
|
Derivative financial instruments |
12 |
|
|
— |
|
|
12 |
|
|
— |
|
Deferred compensation plan assets |
53 |
|
|
53 |
|
|
— |
|
|
— |
|
Other assets |
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Total |
$ |
599 |
|
|
$ |
187 |
|
|
$ |
410 |
|
|
$ |
2 |
|
Liabilities: |
|
|
|
|
|
|
|
Derivative financial instruments |
$ |
10 |
|
|
$ |
— |
|
|
$ |
10 |
|
|
$ |
— |
|
We have highly liquid investments classified as cash equivalents.
With the exception of our available-for-sale investments noted
below, we value these investments at their original purchase prices
plus interest that has accrued at the stated rate. Our investments
in cash equivalents are placed primarily in time deposits, money
market funds, and debt securities.
Our available-for-sale securities are comprised of investments in
debt securities and are recorded in both short-term investments and
cash and cash equivalents on the Condensed Consolidated Balance
Sheets. These securities are recorded at fair value using market
prices. As of October 31, 2020 and November 2, 2019, the
Company held $178 million and $294 million, respectively, of
available-for-sale debt securities with maturity dates greater than
three months and less than two years within short-term investments
on the Condensed Consolidated Balance Sheets. In addition, as of
October 31, 2020 and November 2, 2019, the Company held
$222 million and $17 million available-for-sale debt securities
with maturities of less than three months at the time of purchase
within cash and cash equivalents on the Condensed Consolidated
Balance Sheet. Unrealized gains and losses on available-for-sale
debt securities included within accumulated other comprehensive
income were not material as of October 31, 2020 and
November 2, 2019.
The Company regularly reviews its available-for-sale debt
securities for other-than-temporary impairment. For the thirteen
and thirty-nine weeks ended October 31, 2020 or
November 2, 2019, the Company did not consider any of its
securities to be other-than-temporarily impaired and, accordingly,
did not recognize any impairment loss.
Derivative financial instruments primarily include foreign exchange
forward contracts. The fair value of the Company’s derivative
financial instruments is determined using pricing models based on
current market rates. See Note 5 of Notes to Condensed Consolidated
Financial Statements for information regarding currencies hedged
against the U.S. dollar.
We maintain the Gap, Inc. Deferred Compensation Plan (“DCP”), which
allows eligible employees to defer base compensation and bonus up
to a maximum percentage, and non-employee directors to defer
receipt of a portion of their Board fees. 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 on 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, including
recently shared strategic plans. 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 at the store level.
The impact of COVID-19 resulted in a qualitative indication of
impairment related to our store long-lived assets. For store
locations, we analyzed our store asset recoverability. There were
no material impairment charges recorded for long-lived assets
during the thirteen weeks ended October 31, 2020. During the
thirty-nine weeks ended October 31, 2020, the Company recorded
impairment of store assets of $127 million and impairment of
operating lease assets of $361 million. The impairment of the store
assets reduced the carrying amount of the applicable long-lived
assets of $131 million to their fair value of $4 million. The
impairment of the operating lease assets reduced the carrying
amount of the applicable long-lived assets of $1,369 million to
their fair value of $1,008 million. The impairment charges were
recorded in operating expenses on the Condensed Consolidated
Statement of Operations.
There were no material impairment charges recorded for long-lived
assets during the thirteen weeks ended November 2, 2019.
During the thirty-nine weeks ended November 2, 2019, the
Company recorded impairment of store assets of $9 million and
impairment of operating lease assets of $1 million. The impairment
of the store assets reduced the carrying amount of the applicable
long-lived assets of $10 million to their fair value of $1 million.
The impairment of the operating lease assets reduced the carrying
amount of the applicable long-lived assets of $61 million to their
fair value of $60 million. The impairment charges were recorded in
operating expenses on the Condensed Consolidated Statement of
Operations.
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 31, 2020 or November 2,
2019.
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
dollar, Japanese yen, British pound, Euro, Mexican peso, Taiwan
dollar, and Chinese yuan. Cash flows from derivative financial
instruments are classified as cash flows from operating activities
on 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 into net income (loss)
during the period in which the underlying transaction impacts the
Condensed Consolidated Statements of Operations.
Net Investment Hedges
We may 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
these subsidiaries.
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 impact of the underlying intercompany balances,
is recorded in operating expenses on the Condensed Consolidated
Statements of Operations in the same period and generally offset
each other.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the
following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
October 31,
2020 |
|
February 1,
2020 |
|
November 2,
2019 |
Derivatives designated as cash flow hedges |
$ |
474 |
|
|
$ |
501 |
|
|
$ |
640 |
|
Derivatives not designated as hedging instruments |
539 |
|
|
689 |
|
|
706 |
|
Total |
$ |
1,013 |
|
|
$ |
1,190 |
|
|
$ |
1,346 |
|
Quantitative Disclosures about Derivative Financial
Instruments
The fair values of foreign exchange forward contracts are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
October 31,
2020 |
|
February 1,
2020 |
|
November 2,
2019 |
Derivatives designated as cash flow hedges: |
|
|
|
|
|
Other current assets |
$ |
2 |
|
|
$ |
6 |
|
|
$ |
7 |
|
Other long-term assets |
— |
|
|
— |
|
|
1 |
|
Accrued expenses and other current liabilities |
1 |
|
|
2 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
Other current assets |
4 |
|
|
4 |
|
|
4 |
|
Accrued expenses and other current liabilities |
6 |
|
|
8 |
|
|
8 |
|
|
|
|
|
|
|
Total derivatives in an asset position |
$ |
6 |
|
|
$ |
10 |
|
|
$ |
12 |
|
Total derivatives in a liability position |
$ |
7 |
|
|
$ |
10 |
|
|
$ |
10 |
|
Substantially all of the unrealized gains and losses from
designated cash flow hedges as of October 31, 2020 will be
recognized into net income (loss) within the next twelve months at
the then-current values, which may differ from the fair values as
of October 31, 2020 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 on the Condensed
Consolidated Balance Sheets, and as such, the fair values shown
above represent gross amounts. The amounts subject to enforceable
master netting arrangements were not material for all periods
presented.
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 designated in a cash flow hedging relationship
recorded in other comprehensive income, on a pre-tax basis, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Gain (loss) recognized in other comprehensive income |
$ |
(2) |
|
|
$ |
— |
|
|
$ |
10 |
|
|
$ |
15 |
|
The pre-tax amounts recognized in net income (loss) related to
derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of (Gain) Loss Recognized in Net
Income |
|
13 Weeks Ended
October 31, 2020 |
|
13 Weeks Ended
November 2, 2019 |
($ in millions) |
Cost of goods sold and occupancy expense |
|
Operating expenses |
|
Cost of goods sold and occupancy expense |
|
Operating expenses |
Total amount of expense line items presented in the Condensed
Consolidated Statements of Operations in which the effects of
derivatives are recorded |
$ |
2,374 |
|
|
$ |
1,445 |
|
|
$ |
2,439 |
|
|
$ |
1,338 |
|
|
|
|
|
|
|
|
|
(Gain) loss recognized in net income |
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges |
(2) |
|
|
— |
|
|
(9) |
|
|
— |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
— |
|
|
4 |
|
|
— |
|
|
8 |
|
Total (gain) loss recognized in net income |
$ |
(2) |
|
|
$ |
4 |
|
|
$ |
(9) |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain Recognized in Net Income
(Loss) |
|
39 Weeks Ended
October 31, 2020 |
|
39 Weeks Ended
November 2, 2019 |
($ in millions) |
Cost of goods sold and occupancy expense |
|
Operating expenses |
|
Cost of goods sold and occupancy expense |
|
Operating expenses |
Total amount of expense line items presented in the Condensed
Consolidated Statements of Operations in which the effects of
derivatives are recorded |
$ |
6,339 |
|
|
$ |
4,033 |
|
|
$ |
7,250 |
|
|
$ |
3,640 |
|
|
|
|
|
|
|
|
|
Gain recognized in net income (loss) |
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges |
(13) |
|
|
— |
|
|
(21) |
|
|
— |
|
Derivative not designated as hedging instruments |
— |
|
|
(7) |
|
|
— |
|
|
(4) |
|
Total gain recognized in net income (loss) |
$ |
(13) |
|
|
$ |
(7) |
|
|
$ |
(21) |
|
|
$ |
(4) |
|
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 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Number of shares repurchased (1) |
— |
|
|
2.9 |
|
|
— |
|
|
7.5 |
|
Total cost |
$ |
— |
|
|
$ |
50 |
|
|
$ |
— |
|
|
$ |
150 |
|
Average per share cost including commissions |
$ |
— |
|
|
$ |
17.17 |
|
|
$ |
— |
|
|
$ |
19.85 |
|
__________
(1)Excludes
shares withheld to settle employee statutory tax withholding
related to the vesting of stock units.
In February 2019, the Board of Directors approved a new $1.0
billion share repurchase authorization (the "February 2019
repurchase program"). The February 2019 repurchase program had $800
million remaining as of October 31, 2020. On March 12, 2020,
the Company announced its decision to suspend share repurchases
through fiscal 2020.
All of the share repurchases were paid for as of February 1,
2020 and November 2, 2019. All common stock repurchased is
immediately retired.
Note 7. Income Taxes
On March 27, 2020, the CARES Act was signed into law in the United
States. The CARES Act includes certain provisions that affect our
income taxes, including temporary five-year net operating loss
carryback provisions, modifications to the interest deduction
limitations, and the technical correction for depreciation of
qualified leasehold improvements.
The effective income tax rate was 21.5 percent for the thirteen
weeks ended October 31, 2020, compared with 33.0 percent for
the thirteen weeks ended November 2, 2019. The decrease in the
effective tax rate is primarily due to changes in the mix of pretax
income between domestic and international operations, partially
offset by the impacts of the net operating loss carryback
provisions of the CARES Act.
The effective income tax rate was 23.7 percent for the thirty-nine
weeks ended October 31, 2020, compared with 31.6 percent for
the thirty-nine weeks ended November 2, 2019. The decrease in
the effective tax rate is primarily due to changes in the mix of
pretax income between domestic and international operations and the
fiscal 2019 impact of an adjustment for additional guidance issued
regarding the Tax Cuts and Jobs Act of 2017 ("TCJA"), partially
offset by the impacts of the net operating loss carryback
provisions of the CARES Act.
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 2010.
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 31, 2020, it
is reasonably possible that we will recognize a decrease in gross
unrecognized tax benefits within the next twelve months of up to $3
million, primarily due to the closing of audits. If we do recognize
such a decrease, the net impact on the Condensed Consolidated
Statements of Operations would not be material.
Note 8. Earnings (Loss) Per Share
Weighted-average number of shares used for earnings (loss) per
share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
(shares in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Weighted-average number of shares - basic |
374 |
|
|
375 |
|
|
373 |
|
|
377 |
|
Common stock equivalents (1) |
6 |
|
|
1 |
|
|
— |
|
|
2 |
|
Weighted-average number of shares - diluted |
380 |
|
|
376 |
|
|
373 |
|
|
379 |
|
__________
(1)For
the thirty-nine weeks ended October 31, 2020, the dilutive
impact of outstanding options and awards was excluded from dilutive
shares as a result of the Company’s net loss for the respective
period.
The anti-dilutive shares related to stock options and other stock
awards excluded from the computation of weighted-average number of
shares – diluted were 12 million and 17 million for the
thirteen weeks ended October 31, 2020 and November 2,
2019, respectively, and 16 million and 14 million for the
thirty-nine weeks ended October 31, 2020 and November 2,
2019, respectively, as their inclusion would have an anti-dilutive
effect on earnings (loss) per share.
Note 9. 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 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 31, 2020, 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 31, 2020, February 1, 2020, and
November 2, 2019, 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 was not material for any individual Action or in total for
all periods presented. Subsequent to October 31, 2020,
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. However, we do not believe that the outcome of any
current Action would have a material effect on our Condensed
Consolidated Financial Statements taken as a whole.
Note 10. Segment Information
We identify our operating segments according to how our business
activities are managed and evaluated. As of October 31, 2020,
our operating segments included: Old Navy Global, Gap Global,
Banana Republic Global, Athleta, and Intermix. Each operating
segment has a brand president who is responsible for various
geographies and channels. Each of our brands serves customers
through its store and online channels, allowing us to execute on
our omni-channel strategy where customers can shop seamlessly
across all of our brands in retail stores and online through
desktop or mobile devices. 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 31, 2020. We continually monitor and review our
segment reporting structure in accordance with authoritative
guidance to determine whether any changes have occurred that would
impact our reportable segments.
Net sales by brand and region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Old Navy Global |
|
Gap Global |
|
Banana Republic Global |
|
Other (3) |
|
Total |
|
|
13 Weeks Ended October 31, 2020 |
|
|
|
|
|
|
U.S. (1) |
|
$ |
2,034 |
|
|
$ |
611 |
|
|
$ |
323 |
|
|
$ |
370 |
|
|
$ |
3,338 |
|
|
|
Canada |
|
193 |
|
|
86 |
|
|
39 |
|
|
3 |
|
|
321 |
|
|
|
Europe |
|
— |
|
|
115 |
|
|
3 |
|
|
— |
|
|
118 |
|
|
|
Asia |
|
1 |
|
|
169 |
|
|
18 |
|
|
— |
|
|
188 |
|
|
|
Other regions |
|
14 |
|
|
12 |
|
|
3 |
|
|
— |
|
|
29 |
|
|
|
Total |
|
$ |
2,242 |
|
|
$ |
993 |
|
|
$ |
386 |
|
|
$ |
373 |
|
|
$ |
3,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Old Navy Global |
|
Gap Global |
|
Banana Republic Global (2) |
|
Other (4) |
|
Total |
|
|
13 Weeks Ended November 2, 2019 |
|
|
|
|
|
|
U.S. (1) |
|
$ |
1,769 |
|
|
$ |
689 |
|
|
$ |
532 |
|
|
$ |
274 |
|
|
$ |
3,264 |
|
|
|
Canada |
|
151 |
|
|
97 |
|
|
55 |
|
|
1 |
|
|
304 |
|
|
|
Europe |
|
— |
|
|
128 |
|
|
3 |
|
|
— |
|
|
131 |
|
|
|
Asia |
|
9 |
|
|
220 |
|
|
21 |
|
|
— |
|
|
250 |
|
|
|
Other regions |
|
18 |
|
|
24 |
|
|
7 |
|
|
— |
|
|
49 |
|
|
|
Total |
|
$ |
1,947 |
|
|
$ |
1,158 |
|
|
$ |
618 |
|
|
$ |
275 |
|
|
$ |
3,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Old Navy Global |
|
Gap Global |
|
Banana Republic Global |
|
Other (3) |
|
Total |
|
|
39 Weeks Ended October 31, 2020 |
|
|
|
|
|
|
U.S. (1) |
|
$ |
4,709 |
|
|
$ |
1,395 |
|
|
$ |
804 |
|
|
$ |
954 |
|
|
$ |
7,862 |
|
|
|
Canada |
|
415 |
|
|
183 |
|
|
90 |
|
|
3 |
|
|
691 |
|
|
|
Europe |
|
— |
|
|
239 |
|
|
8 |
|
|
— |
|
|
247 |
|
|
|
Asia |
|
4 |
|
|
435 |
|
|
44 |
|
|
— |
|
|
483 |
|
|
|
Other regions |
|
33 |
|
|
48 |
|
|
12 |
|
|
— |
|
|
93 |
|
|
|
Total |
|
$ |
5,161 |
|
|
$ |
2,300 |
|
|
$ |
958 |
|
|
$ |
957 |
|
|
$ |
9,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Old Navy Global |
|
Gap Global |
|
Banana Republic Global (2) |
|
Other (4) |
|
Total |
|
|
39 Weeks Ended November 2, 2019 |
|
|
|
|
|
|
U.S. (1) |
|
$ |
5,204 |
|
|
$ |
1,942 |
|
|
$ |
1,549 |
|
|
$ |
891 |
|
|
$ |
9,586 |
|
|
|
Canada |
|
427 |
|
|
251 |
|
|
155 |
|
|
2 |
|
|
835 |
|
|
|
Europe |
|
— |
|
|
380 |
|
|
10 |
|
|
— |
|
|
390 |
|
|
|
Asia |
|
30 |
|
|
654 |
|
|
70 |
|
|
— |
|
|
754 |
|
|
|
Other regions |
|
57 |
|
|
69 |
|
|
18 |
|
|
— |
|
|
144 |
|
|
|
Total |
|
$ |
5,718 |
|
|
$ |
3,296 |
|
|
$ |
1,802 |
|
|
$ |
893 |
|
|
$ |
11,709 |
|
|
|
__________
(1)U.S.
includes the United States, Puerto Rico, and Guam.
(2)Banana
Republic Global fiscal year 2019 net sales include the Janie and
Jack brand beginning March 4, 2019.
(3)Primarily
consists of net sales for the Athleta, Intermix, and Hill City
brands. Beginning in fiscal year 2020, Janie and Jack net sales are
also included. Net sales for Athleta for the thirteen and
thirty-nine weeks ended October 31, 2020 were $292 million and
$764 million, respectively.
(4)Primarily
consists of net sales for the Athleta, Intermix, and Hill City
brands as well as a portion of income related to our credit card
agreement. Net sales for Athleta for the thirteen and thirty-nine
weeks ended November 2, 2019 were $216 million and $691
million, respectively.
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.
Note 11. Store Closing and Other Operating Cost
In fiscal 2019, the Company announced plans to restructure the
specialty fleet and revitalize the Gap brand during fiscal 2019 and
fiscal 2020. In fiscal 2020, the Company shifted its focus towards
adapting to the COVID-19 challenges and a broader scope of
strategic initiatives. As a result, restructuring costs were not
material in fiscal 2020. See Overview of Management's Discussion
and Analysis included in Part I, Item 2 of this Form 10-Q, for
more detail on some of the strategic initiatives being undertaken
by the Company.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
OUR BUSINESS
We are a collection of purpose-led, lifestyle brands offering
apparel, accessories, and personal care products for men, women,
and children under the Old Navy, Gap, Banana Republic, and Athleta
brands. We also offer an assortment of products for men, women, and
children through our Intermix, Janie and Jack, and Hill City
brands. We have Company-operated stores in the United States,
Canada, the United Kingdom, France, Ireland, Japan, Italy, China,
Hong Kong, Taiwan, and Mexico. Our products are also available to
customers online through Company-owned websites and through the use
of third parties that provide logistics and fulfillment services.
We have franchise agreements with unaffiliated franchisees to
operate Gap, Banana Republic, Old Navy, and Athleta stores
throughout Asia, Europe, Latin America, the Middle East, and
Africa. Under these agreements, third parties operate, or will
operate, stores that sell apparel and related products under our
brand names. In addition to operating in the specialty, outlet,
online, and franchise channels, we also use our omni-channel
capabilities to bridge the digital world and physical stores to
further enhance our shopping experience for our customers. Our
omni-channel services, including curbside pick-up, buy online
pick-up in store, order-in-store, find-in-store, and
ship-from-store, as well as enhanced mobile-enabled experiences,
are tailored uniquely across our collection of brands. Most of the
products sold under our brand names are designed by us and
manufactured by independent sources. We also sell products that are
designed and manufactured by branded third parties, primarily at
our Intermix brand.
OVERVIEW
In March 2020, the World Health Organization declared COVID-19 a
global pandemic and recommended containment and mitigation measures
worldwide. As a result, we temporarily closed our North America
retail stores and a large number of our stores globally. In May
2020, we began to safely reopen our temporarily closed stores with
industry-leading safety measures for customers and employees and
most stores were open during the thirteen weeks ended October 31,
2020. Beginning in late October 2020, several European countries
instituted new lockdown mandates to contain surging COVID-19 cases
and as a result we have temporarily closed certain stores in
Europe. We will continue to monitor regional mandates for
additional temporary store closures as they arise. Although the
pandemic has caused a significant reduction in store sales, our
online sales have increased significantly by leveraging our omni
fulfillment capabilities, including curbside pick-up and
ship-from-store, to serve customer demand.
On October 20, 2020, we shared plans to strategically review our
operating model in Europe, which includes 122 Company-operated
stores. As part of the review, we are considering the possibility
of leveraging the strength of our franchise business model and
transferring elements of the business to interested partners. We
are also reviewing the strategies of our warehouse and distribution
model and our Company-owned e-commerce sites for Gap and Banana
Republic in Europe. While no decisions have been made, such plans
could result in additional costs to the Company including charges
related to leases and inventory, and employee-related costs. We are
targeting early fiscal 2021 to finalize our plans.
Additionally, on October 22, 2020, the Company shared its strategic
focus to reduce the number of Gap and Banana Republic stores in
North America by approximately 350 stores from the beginning of
fiscal 2020 to the end of fiscal 2023. The majority of the select
stores being considered have leases that expire in fiscal 2020 and
fiscal 2021 which allows us to exit underperforming stores with a
minimal net impact to our Consolidated Statement of Operations. As
of October 31, 2020, we have closed, net of openings, 143 Gap and
Banana Republic stores in North America in fiscal
2020.
As a result of COVID-19, we suspended rent payments beginning in
April 2020 due to our temporarily closed stores and are continuing
to work through negotiations with our landlords relating to those
leases. As result of the negotiations with our landlords, the
Company executed several cash buyout agreements during the third
quarter of fiscal 2020 totaling approximately $57 million. The net
impact of these buyouts was not material to our Condensed
Consolidated Statement of Operations for the thirteen weeks ended
October 31, 2020. The Company expects substantial cash lease buyout
amounts in the future relating to a small population of stores we
intend to close across multiple brands but we expect these buyouts
to have a minimal net impact to our Consolidated Statements of
Operations.
In July 2020, the Company announced the launch of a B2B
program focused on offering large organizations high-quality
reusable, non-medical grade cloth face masks to
supply to their employees. We
have leveraged our deep supply chain relationships
and agile operations to provide these masks to
companies in both the private and public
sector.
We implemented several actions during fiscal 2020 to enhance our
liquidity position in response to COVID-19. In May 2020, the
Company completed the issuance of the Notes for $2.25 billion. We
also entered into the ABL Facility, with an initial aggregate
principal amount of up to $1.8675 billion. Proceeds from the
issuance of the Notes were used to redeem our 2021 Notes. We
incurred a loss on extinguishment of debt of $58 million, primarily
related to the make-whole premium, which was recorded on the
Condensed Consolidated Statement of Operations. Additionally,
during the second quarter of fiscal 2020, we repaid the $500
million that was outstanding under our previous unsecured revolving
credit facility. Refer to the "Liquidity and Capital Resources"
section for further discussion.
During the thirty-nine weeks ended October 31, 2020, the
Company recorded impairment of store assets of $127 million and
operating lease assets of $361 million, primarily due to lower cash
flows from stores and the reduced estimated fair value of real
estate, particularly in mall locations, as a result of COVID-19.
See Note 4 of Notes to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q, for
further information regarding impairments.
During the first quarter of fiscal 2020, the Company recorded
inventory related impairment costs of $235 million, primarily
related to seasonal inventory that was stranded in stores when
closures occurred or seasonal inventory in distribution centers
that was planned for store sales. The costs also included impaired
garment and fabric commitment costs for future seasonal product.
Additionally, to strategically manage inventory through COVID-19,
select summer product is being stored at an off-site facility and
our distribution centers and expected to be sold during fiscal
2021.
As we continue to face a period of uncertainty regarding the
ongoing impact of COVID-19 on both our projected customer demand
and supply chain, we remain focused on the following strategic
priorities in the near-term:
•offering
product that is consistently brand-appropriate and on-trend with
high customer acceptance and appropriate value
perception;
•growing
and operating our global online business;
•realigning
inventory with customer demand;
•attracting
and retaining strong talent in our businesses and
functions;
•increasing
the focus on improving operational discipline and efficiency by
streamlining operations and processes throughout the organization
and leveraging our scale;
•managing
inventory to support a healthy merchandise margin;
•rationalizing
the Gap and Banana Republic brands, to create a healthier business
while prioritizing asset-light growth through licensing and
franchise partnerships in international markets; and
•continuing
to integrate social and environmental sustainability into business
practices to support long-term growth.
We believe focusing on these priorities in the near term will
propel the Company to execute against the Power Plan 2023 strategy,
including leveraging:
•The
Power of its Brands, reflected by the Company’s four purpose-led,
lifestyle brands, Old Navy, Gap, Banana Republic and
Athleta;
•The
Power of its Portfolio, which enables growth synergies across key
customer categories; and
•The
Power of its Platform, which leverages the company’s powerful
platform to both enable growth, such as through competitive
omni-channel capabilities, as well as cost synergies, fueled by its
scaled operations.
We continue to monitor the rapidly evolving pandemic situation and
guidance from international and domestic authorities, including
federal, state, and local public health authorities and may take
additional actions based on their recommendations. In these
circumstances, there may be developments outside our control
requiring us to adjust our operating plan. As such, given the
dynamic nature of the situation, the Company cannot reasonably
estimate the impacts of COVID-19 on our results of operations, cash
flows and liquidity in the future.
Financial results for the third quarter of fiscal 2020 are as
follows:
•Net
sales for the third quarter of fiscal 2020 were flat compared with
the third quarter of fiscal 2019.
•Online
sales for the third quarter of fiscal 2020 increased 61 percent
compared with the third quarter of fiscal 2019 and store sales for
the third quarter of fiscal 2020 decreased 20 percent compared with
the third quarter of fiscal 2019.
•Gross
profit for the third quarter of fiscal 2020 was $1.62 billion
compared with $1.56 billion for the third quarter of fiscal 2019.
Gross margin for the third quarter of fiscal 2020 was 40.6 percent
compared with 39.0 percent for the third quarter of fiscal
2019.
•Operating
income for the third quarter of fiscal 2020 was $175 million
compared with $221 million for the third quarter of fiscal
2019.
•The
effective income tax rate for the third quarter of fiscal 2020 was
21.5 percent, compared with 33.0 percent for the third quarter of
fiscal 2019.
•Net
income for the third quarter of fiscal 2020 was $95 million
compared with $140 million for the third quarter of fiscal
2019.
•Diluted
earnings per share was $0.25 for the third quarter of fiscal 2020
compared with $0.37 for the third quarter of fiscal
2019.
RESULTS OF OPERATIONS
Net Sales
See Note 2 and Note 10 of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q, for
net sales disaggregation.
Comparable Sales (“Comp Sales”)
Comp Sales include the results of Company-operated stores and sales
through online channels. The calculation of Gap Inc. Comp Sales
includes the results of Intermix, Janie and Jack, and Hill City,
but excludes the results of our franchise business.
A store is included in the Comp Sales calculations when it has been
open and operated by the Company for at least one year and the
selling square footage has not changed by 15 percent or more within
the past year. A store is included in the Comp Sales calculations
on the first day it has comparable prior year sales. Stores in
which the selling square footage has changed by 15 percent or more
as a result of a remodel, expansion, or reduction are excluded from
the Comp Sales calculations until the first day they have
comparable prior year sales.
A store is considered non-comparable (“Non-comp”) when it has been
open and operated by the Company for less than one year or has
changed its selling square footage by 15 percent or more within the
past year.
A store is considered “Closed” if it is temporarily closed for
three or more full consecutive days or it is permanently closed.
When a temporarily closed store reopens, the store will be placed
in the Comp/Non-comp status it was in prior to its closure. If a
store was in Closed status for three or more days in the prior
year, the store will be in Non-comp status for the same days the
following year.
Current year foreign exchange rates are applied to both current
year and prior year Comp Sales to achieve a consistent basis for
comparison.
For the thirteen weeks ended October 31, 2020, any stores
temporarily closed for more than three days as a result of COVID-19
were excluded from the Comp Sales calculations. After temporarily
closed stores reopened, subsequent sales were included in the
Comp/Non-comp status they were in prior to temporary closure.
Online sales continued to be included in the Comp Sales calculation
for each period.
The percentage change in Comp Sales by global brand and for The
Gap, Inc. is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
|
|
October 31,
2020 (1) |
|
|
|
|
|
|
Old Navy Global |
17 |
% |
|
|
|
|
|
|
Gap Global |
(5) |
% |
|
|
|
|
|
|
Banana Republic Global |
(30) |
% |
|
|
|
|
|
|
Athleta |
37 |
% |
|
|
|
|
|
|
The Gap, Inc. |
5 |
% |
|
|
|
|
|
|
__________
(1)Comp
Sales for the thirteen weeks ended October 31, 2020 reflect an
increase in online sales, see Net Sales discussion for further
details.
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
|
|
November 2,
2019 |
|
|
|
|
|
|
Old Navy Global |
(4) |
% |
|
|
|
|
|
|
Gap Global |
(7) |
% |
|
|
|
|
|
|
Banana Republic Global |
(3) |
% |
|
|
|
|
|
|
Athleta |
1 |
% |
|
|
|
|
|
|
The Gap, Inc. |
(4) |
% |
|
|
|
|
|
|
We have historically reported net sales per average square foot,
but as a result of the extensive temporary store closures due to
COVID-19 and shift in focus to online, this metric is not
meaningful for the first three quarters of fiscal 2020 and
therefore we have omitted it.
Store count, openings, closings, and square footage for our stores
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2020 |
|
39 Weeks Ended October 31, 2020 |
|
October 31, 2020 |
|
Number of
Store Locations |
|
Number of
Stores Opened |
|
Number of
Stores Closed (1) |
|
Number of
Store Locations |
|
Square Footage
(in millions) |
Old Navy North America |
1,207 |
|
|
30 |
|
|
12 |
|
|
1,225 |
|
|
19.7 |
|
Old Navy Asia |
17 |
|
|
— |
|
|
17 |
|
|
— |
|
|
— |
|
Gap North America |
675 |
|
|
1 |
|
|
92 |
|
|
584 |
|
|
6.2 |
|
Gap Asia |
358 |
|
|
11 |
|
|
19 |
|
|
350 |
|
|
3.1 |
|
Gap Europe |
137 |
|
|
4 |
|
|
19 |
|
|
122 |
|
|
1.0 |
|
Banana Republic North America |
541 |
|
|
3 |
|
|
55 |
|
|
489 |
|
|
4.1 |
|
Banana Republic Asia |
48 |
|
|
5 |
|
|
5 |
|
|
48 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Athleta North America |
190 |
|
|
10 |
|
|
2 |
|
|
198 |
|
|
0.8 |
|
Intermix North America |
33 |
|
|
— |
|
|
1 |
|
|
32 |
|
|
0.1 |
|
Janie and Jack North America |
139 |
|
|
— |
|
|
9 |
|
|
130 |
|
|
0.3 |
|
Company-operated stores total |
3,345 |
|
|
64 |
|
|
231 |
|
|
3,178 |
|
|
35.5 |
|
Franchise |
574 |
|
|
50 |
|
|
17 |
|
|
607 |
|
|
N/A |
Total |
3,919 |
|
|
114 |
|
|
248 |
|
|
3,785 |
|
|
35.5 |
|
Decrease over prior year |
|
|
|
|
|
|
(3.9) |
% |
|
(5.3) |
% |
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019 |
|
39 Weeks Ended November 2, 2019 |
|
November 2, 2019 |
|
Number of
Store Locations |
|
Number of
Stores Opened |
|
Number of
Stores Closed |
|
Number of
Store Locations |
|
Square Footage
(in millions) |
Old Navy North America |
1,139 |
|
|
60 |
|
|
2 |
|
|
1,197 |
|
|
19.4 |
|
Old Navy Asia |
15 |
|
|
4 |
|
|
1 |
|
|
18 |
|
|
0.2 |
|
Gap North America |
758 |
|
|
3 |
|
|
34 |
|
|
727 |
|
|
7.5 |
|
Gap Asia |
332 |
|
|
46 |
|
|
27 |
|
|
351 |
|
|
3.2 |
|
Gap Europe |
152 |
|
|
3 |
|
|
12 |
|
|
143 |
|
|
1.2 |
|
Banana Republic North America |
556 |
|
|
8 |
|
|
10 |
|
|
554 |
|
|
4.7 |
|
Banana Republic Asia |
45 |
|
|
4 |
|
|
2 |
|
|
47 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Athleta North America |
161 |
|
|
24 |
|
|
— |
|
|
185 |
|
|
0.8 |
|
Intermix North America |
36 |
|
|
— |
|
|
1 |
|
|
35 |
|
|
0.1 |
|
Janie and Jack North America (2) |
— |
|
|
— |
|
|
— |
|
|
139 |
|
|
0.2 |
|
Company-operated stores total |
3,194 |
|
|
152 |
|
|
89 |
|
|
3,396 |
|
|
37.5 |
|
Franchise |
472 |
|
|
94 |
|
|
24 |
|
|
542 |
|
|
N/A |
Total |
3,666 |
|
|
246 |
|
|
113 |
|
|
3,938 |
|
|
37.5 |
|
Increase over prior year |
|
|
|
|
|
|
6.8 |
% |
|
1.6 |
% |
__________
(1)Represents
stores that have been permanently closed, not stores temporarily
closed as a result of COVID-19.
(2)On
March 4, 2019, we acquired select assets of Gymboree Group, Inc.
related to Janie and Jack. The 140 stores acquired were not
included as store openings for fiscal 2019; however, they are
included in the ending number of store locations as of
November 2, 2019, net of one closure that occurred in the
third quarter of fiscal 2019.
Outlet and factory stores are reflected in each of the respective
brands.
Net Sales
Our net sales for the third quarter of fiscal 2020 were flat,
decreasing $4 million, compared with the third quarter of fiscal
2019, reflecting a 61% increase in online sales, offset by a 20%
decline in store sales. Net sales increased at Old Navy Global and
Athleta and decreased at Gap Global and Banana Republic Global for
the third quarter of fiscal 2020 compared with the third quarter of
fiscal 2019.
Our net sales for the first three quarters of fiscal 2020 decreased
$2.3 billion or 20 percent, compared with the first three quarters
of fiscal 2019 driven primarily by temporary store closures due to
COVID-19. Although COVID-19 and resulting temporary closure of our
stores negatively affected our financial results for the first
three quarters of fiscal 2020, our online sales increased
significantly compared with the first three quarters of fiscal
2019.
Cost of Goods Sold and Occupancy Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Cost of goods sold and occupancy expenses |
$ |
2,374 |
|
|
$ |
2,439 |
|
|
$ |
6,339 |
|
|
$ |
7,250 |
|
Gross profit |
$ |
1,620 |
|
|
$ |
1,559 |
|
|
$ |
3,037 |
|
|
$ |
4,459 |
|
Cost of goods sold and occupancy expenses as a percentage of net
sales
|
59.4 |
% |
|
61.0 |
% |
|
67.6 |
% |
|
61.9 |
% |
Gross margin |
40.6 |
% |
|
39.0 |
% |
|
32.4 |
% |
|
38.1 |
% |
Cost of goods sold and occupancy expenses decreased 1.6 percentage
points as a percentage of net sales in the third quarter of fiscal
2020 compared with the third quarter of fiscal 2019.
•Cost
of goods sold increased 2.0 percentage points as a percentage of
net sales in the third quarter of fiscal 2020 compared with the
third quarter of fiscal 2019, primarily driven by higher online
shipping costs as a result of growth in online sales partially
offset by lower promotional activity at Old Navy and
Athleta.
•Occupancy
expenses decreased 3.6 percentage points as a percentage of net
sales in the third quarter of fiscal 2020 compared with the third
quarter of fiscal 2019 primarily driven by an increase in online
sales with minimal impact on fixed occupancy expenses, as well as a
decrease in fixed occupancy expenses as a result of permanent store
closures and the impact of lease terminations and
amendments.
Cost of goods sold and occupancy expenses increased 5.7 percentage
points as a percentage of net sales in the first three quarters of
fiscal 2020 compared with the first three quarters of fiscal
2019.
•Cost
of goods sold increased 4.7 percentage points as a percentage of
net sales in the first three quarters of fiscal 2020 compared with
the first three quarters of fiscal 2019, primarily driven by higher
online shipping costs as a result of growth in online sales as well
as higher inventory impairment due to store closures and decreased
retail traffic as a result of COVID-19.
•Occupancy
expenses increased 1.0 percentage points as a percentage of net
sales in the first three quarters of fiscal 2020 compared with the
first three quarters of fiscal 2019 primarily driven by a decrease
in net sales largely due to store closures as a result of COVID-19
without a corresponding decrease in occupancy expenses, partially
offset by an increase in online sales with minimal impact on fixed
occupancy expenses.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Operating expenses |
$ |
1,445 |
|
|
$ |
1,338 |
|
|
$ |
4,033 |
|
|
$ |
3,640 |
|
Operating expenses as a percentage of net sales |
36.2 |
% |
|
33.5 |
% |
|
43.0 |
% |
|
31.1 |
% |
Operating margin |
4.4 |
% |
|
5.5 |
% |
|
(10.6) |
% |
|
7.0 |
% |
Operating expenses increased $107 million or 2.7 percentage points
as a percentage of net sales in the third quarter of fiscal 2020
compared with the third quarter of fiscal 2019 primarily due to the
following:
•increase
in advertising expenses due to higher investment in marketing
support across all purpose-led lifestyle brands;
•additional
store payroll and other store related costs to support health and
safety measures in stores;
•increase
in lease termination fees incurred in fiscal 2020; partially offset
by
•separation-related
costs incurred in the third quarter of fiscal 2019.
Operating expenses increased $393 million or 11.9 percentage points
as a percentage of net sales in the first three quarters of fiscal
2020 compared with the first three quarters of fiscal 2019
primarily due to the following:
•impairment
charges related to store assets and operating lease assets of $488
million incurred during the first three quarters of fiscal 2020
primarily due to the impact of COVID-19;
•a
gain that occurred during the first quarter of fiscal 2019 related
to the sale of a building;
•increase
in advertising expenses due to higher investment in marketing
support across all purpose-led lifestyle brands;
•increase
in lease termination fees incurred in fiscal 2020; and
•severance
costs related to reductions in headquarters workforce; partially
offset by
•a
decrease in store payroll and benefits and other store operating
expenses as a result of COVID-19 temporary store closures across
all brands which was partially offset by additional costs incurred
to support health and safety measures as we reopened stores;
and
•separation-related
and specialty fleet restructuring costs incurred in the first three
quarters of fiscal 2019.
Loss on Extinguishment of Debt
In May 2020, the Company completed the issuance of the Notes for
$2.25 billion and used the proceeds to redeem our 2021 Notes.
We incurred a loss on extinguishment of debt of $58 million,
primarily related to the make-whole premium, which was recorded on
the Condensed Consolidated Statement of Operations.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Interest expense |
$ |
55 |
|
|
$ |
19 |
|
|
$ |
132 |
|
|
$ |
58 |
|
Interest expense increased $36 million or 189 percent during the
third quarter of fiscal 2020 compared with third quarter of fiscal
2019 and increased $74 million or 128 percent during the first
three quarters of fiscal 2020 compared with the first three
quarters of fiscal 2019 primarily due to higher total outstanding
debt and higher interest rates as a result of the May 2020 issuance
of the Notes. The total outstanding principal related to our Notes
increased from $1.25 billion as of November 2, 2019, to $2.25
billion as of October 31, 2020. Additionally, the new Notes
bear interest at 8.375 percent, 8.625 percent, and 8.875 percent
compared with our previous 5.95 percent 2021 Notes.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
|
October 31,
2020 |
|
November 2,
2019 |
Income taxes |
$ |
26 |
|
|
$ |
69 |
|
|
$ |
(280) |
|
|
$ |
247 |
|
Effective tax rate |
21.5 |
% |
|
33.0 |
% |
|
23.7 |
% |
|
31.6 |
% |
On March 27, 2020, the CARES Act was enacted into law, which
included certain provisions that affect our income taxes, including
temporary five-year net operating loss carryback provisions,
modifications to the interest deduction limitations, and the
technical correction for depreciation of qualified leasehold
improvements.
The decrease in the effective tax rate for the third quarter of
fiscal 2020 compared with the third quarter of fiscal 2019 is
primarily due to changes in the mix of pretax income between
domestic and international operations, partially offset by the
impacts of the net operating loss carryback provisions of the CARES
Act.
The decrease in the effective tax rate for the first three quarters
of fiscal 2020 compared with the respective period of fiscal 2019
is primarily due to changes in the mix of pretax income between
domestic and international operations and the fiscal 2019 impact of
an adjustment for additional guidance issued regarding the TCJA,
partially offset by the impacts of the net operating loss carryback
provisions of the CARES Act.
LIQUIDITY AND CAPITAL RESOURCES
We continue to manage through the impacts of COVID-19 in fiscal
2020 and the impact it has on our operations and liquidity. During
the first three quarters of fiscal 2020, we have taken several
actions to improve our financial profile and increase our
liquidity, including entering into new debt financing, decreasing
capital expenditures, and suspending quarterly cash dividends and
share repurchases for the remainder of the fiscal
year.
In May 2020, we completed the issuance of our Notes and received
gross proceeds of $2.25 billion. Concurrently with the issuance of
the Notes, the Company entered into the ABL Facility with an
initial aggregate principal amount of up to $1.8675 billion which
is scheduled to expire in May 2023. Additionally, in May 2020, we
repaid the $500 million that was previously outstanding
under our previous unsecured revolving credit facility and did not
borrow any funds under the ABL Facility. In June 2020, we redeemed
our 2021 Notes. The Company currently believes its new capital
structure provides sufficient liquidity to continue to navigate
COVID-19.
As of October 31, 2020, we consider the following to be our
primary measures of liquidity and capital resources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
Source of Liquidity |
|
Outstanding Indebtedness |
|
Total Available Liquidity |
Cash and cash equivalents (1) |
$ |
2,471 |
|
|
$ |
— |
|
|
$ |
2,471 |
|
Short-term investments (1) |
178 |
|
|
— |
|
|
178 |
|
|
|
|
|
|
|
2023 Notes |
500 |
|
|
500 |
|
|
— |
|
2025 Notes |
750 |
|
|
750 |
|
|
— |
|
2027 Notes |
1,000 |
|
|
1,000 |
|
|
— |
|
Total |
$ |
4,899 |
|
|
$ |
2,250 |
|
|
$ |
2,649 |
|
__________
(1)As
of October 31, 2020, the majority of our cash, cash
equivalents, and short-term investments were held in the United
States and are generally accessible without any
limitations.
We are also able to supplement near-term liquidity, if necessary,
with our ABL Facility or other available market
instruments.
Our largest source of operating cash flows is cash collections from
the sale of our merchandise. Our primary uses of cash include
merchandise inventory purchases, occupancy costs, personnel-related
expenses, purchases of property and equipment, and payment of
taxes. We believe that current cash balances and cash flows from
our operations will be sufficient to support our business
operations for the next twelve months.
Cash Flows from Operating Activities
Net cash provided by operating activities decreased by $129 million
during the first three quarters of fiscal 2020 compared with the
first three quarters of fiscal 2019, primarily due to the
following:
Net Income (Loss)
•Net
loss compared with net income in prior comparable
period;
Non-cash items
•an
increase of $478 million due to non-cash impairment charges of
store assets and operating lease assets during the first three
quarters of fiscal 2020 compared with the first three quarters of
2019; and
•an
increase of $191 million due to a gain that occurred during the
first three quarters of fiscal 2019 resulting from sale of a
building;
Changes in operating assets and
liabilities
•an
increase of $991 million related to accounts payable primarily due
to a change in payment terms and the suspension of rent payments
for stores closed temporarily as a result of the COVID-19;
partially offset by
•a
decrease of $295 million related to income taxes payable, net of
receivables and other tax-related items, resulting from a net
income tax receivable primarily due to the taxable loss carryback
estimated for the first three quarters of fiscal 2020 as well as
timing of tax-related payments.
We fund inventory expenditures during normal and peak periods
through cash flows from operating activities and available cash.
Our business typically follows a seasonal pattern, with sales
peaking during the end-of-year holiday period. The seasonality of
our operations, in addition to the impact of COVID-19, may lead to
significant fluctuations in certain asset and liability accounts
between fiscal year-end and subsequent interim
periods.
Cash Flows from Investing Activities
Net cash used for investing activities during the first three
quarters of fiscal 2020 decreased $544 million compared with the
first three quarters of fiscal 2019, primarily due to the
following:
•$235
million fewer purchases of property and equipment during the first
three quarters of fiscal 2020 compared with the first three
quarters of 2019;
•an
increase of $123 million due to the net activity related to the
purchase and sale of buildings during the first three quarters of
fiscal 2019; and
•$115
million higher net proceeds from available-for-sale securities
during the first three quarters of fiscal 2020 compared with the
first three quarters of fiscal 2019.
Cash Flows from Financing Activities
Net cash provided by financing activities during the first three
quarters of fiscal 2020 increased $1,313 million compared with the
first three quarters of fiscal 2019, primarily due to the
following:
•$2,250
million proceeds received related to the issuance of long-term debt
during the first three quarters of fiscal 2020; and
•an
increase of $424 million due to the suspension of cash dividends
and share repurchases during the first three quarters of fiscal
2020; partially offset by
•$1,307
million payment for the extinguishment of long-term debt during the
first three quarters of fiscal 2020.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free
cash flow is an important metric because it represents a measure of
how much cash a company has available for discretionary and
non-discretionary items after the deduction of capital
expenditures, as we require regular capital expenditures to build
and maintain stores and purchase new equipment to improve our
business and infrastructure. We use this metric internally, as we
believe our sustained ability to generate free cash flow is an
important driver of value creation. However, this non-GAAP
financial measure is not intended to supersede or replace our GAAP
results.
The following table reconciles free cash flow, a non-GAAP financial
measure, from a GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
($ in millions) |
October 31,
2020 |
|
November 2,
2019 |
Net cash provided by operating activities |
$ |
399 |
|
|
$ |
528 |
|
Less: Purchases of property and equipment (1) |
(288) |
|
|
(523) |
|
|
|
|
|
Free cash flow |
$ |
111 |
|
|
$ |
5 |
|
__________
(1)Fiscal
2019 excludes the purchase of a building.
Debt and Credit Facilities
For financial information about the Company’s debt and credit
facilities as of October 31, 2020 see “Debt and Credit
Facilities” in Note 3 of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form
10-Q.
Dividend Policy
In determining whether and at what level to declare a dividend, we
consider a number of factors including sustainability, operating
performance, liquidity, and market conditions.
On March 26, 2020, the Company announced that the previously
declared first quarter dividend will now be payable on or after
April 28, 2021 to shareholders of record at the close of business
on April 7, 2021, subject to the right of the Company to further
defer the record and payment dates. Further deferral could depend
upon, among other factors, the progression of COVID-19, business
performance, and the macroeconomic environment. Additionally, the
Company suspended its regular quarterly cash dividend through
fiscal 2020. The Company determined that taking these actions was
in the best interest of the Company in order to preserve liquidity
in the context of the ongoing and uncertain duration and impact of
COVID-19 on its operations.
Share Repurchases
In March 2020, the Company announced its decision to suspend share
repurchases through fiscal 2020 due to the economic uncertainty
stemming from a number of factors, including COVID-19.
Certain financial information about the Company’s share repurchases
is set forth under the heading “Share Repurchases” in Note 6 of
Notes to Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q.
Summary Disclosures about Contractual Cash Obligations and
Commercial Commitments
Other than the debt financing discussed in Note 3 of Notes to
Condensed Consolidated Financial Statements included in Part I,
Item 1 of this Form 10-Q, there have been no material changes
to our contractual obligations and commercial commitments as
disclosed in our Annual Report on Form 10-K as of February 1,
2020, other than those which occur in the normal course of
business. See Note 9 of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q, for
disclosures on commitments and contingencies.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting
policies and estimates as discussed in our Annual Report on Form
10-K for the fiscal year ended February 1, 2020. See Note 1 of
Notes to Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q, for disclosures on
accounting policies.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Our market risk profile as of February 1, 2020, is disclosed
in our Annual Report on Form 10-K and has not significantly changed
other than as noted below. See Notes 3, 4, and 5 of Notes to
Condensed Consolidated Financial Statements included in Part I,
Item 1, of this Form 10-Q for disclosures on our debt,
investments, and derivative financial instruments.
In May 2020, we completed the issuance of our Notes and received
gross proceeds of $2.25 billion. The Notes have a fixed interest
rate and are exposed to interest rate risk that is limited to
changes in fair value. Changes in interest rates do not impact our
cash flows. The scheduled maturity of the Notes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturity ($ in millions) |
Principal |
|
Interest Rate |
|
Interest Payments |
Senior Secured Notes (1) |
|
|
|
|
|
May 15, 2023 |
$ |
500 |
|
|
8.375 |
% |
|
Semi-Annual |
May 15, 2025 |
750 |
|
|
8.625 |
% |
|
Semi-Annual |
May 15, 2027 |
1,000 |
|
|
8.875 |
% |
|
Semi-Annual |
Total issuance |
$ |
2,250 |
|
|
|
|
|
__________
(1)Includes
an option to call the Notes in whole or in part at any time,
subject to a make-whole premium.
In conjunction with our financings, we obtained new long-term
senior unsecured credit ratings from Moody's. On March 26, 2020,
Moody's downgraded our senior unsecured rating from Baa2 to Ba1 and
changed their outlook from stable to negative. On April 23, 2020,
Moody's downgraded our corporate credit ratings from Ba1 to Ba2
with negative outlook, and Standard & Poor's downgraded our
credit ratings from BB to BB- with negative outlook. Any future
reduction in the Moody's and Standard & Poor's ratings would
potentially result in an increase to our interest expense on future
borrowings.
Item 4. Controls and
Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures are
effective.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over
financial reporting that occurred during the Company’s third
quarter of fiscal 2020 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal
control over financial reporting. We have not experienced any
material impact to our internal controls over financial reporting
despite the fact that most of our employees are working remotely
due to COVID-19. We are continually monitoring and assessing the
COVID-19 impact on our internal controls to minimize the impact on
their design and operating effectiveness.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
As a multinational company, we are subject to various proceedings,
lawsuits, disputes, and claims arising in the ordinary course of
our business. Many of these Actions raise complex factual and legal
issues and are subject to uncertainties. Actions filed against us
from time to time include 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.
We cannot predict with assurance the outcome of Actions brought
against us. Accordingly, developments, settlements, or resolutions
may occur and impact operations 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
financial results.
Item 1A. Risk Factors.
There have been no material changes in our risk factors from those
disclosed in Part II, Item 1A of our Quarterly Report on Form
10-Q for the quarterly period ended May 2, 2020.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
The following table presents information with respect to purchases
of common stock of the Company made during the thirteen weeks ended
October 31, 2020 by the Company or any affiliated purchaser,
as defined in Exchange Act Rule 10b-18(a)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number of
Shares
Purchased (1) |
|
Average
Price Paid
Per Share
Including
Commissions |
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs |
|
Maximum
Number (or
approximate
dollar amount) of
Shares that May
Yet be Purchased
Under the Plans
or Programs |
Month #1 (August 2 - August 29) |
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
800 |
million |
Month #2 (August 30 - October 3) |
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
800 |
million |
Month #3 (October 4 - October 31) |
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
800 |
million |
Total |
— |
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$ |
— |
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— |
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__________
(1) Excludes shares withheld to settle
employee statutory tax withholding related to the vesting of stock
units.
Item 5.
Other Information.
We entered into agreements to extend the existing severance
provisions contained in the letter agreements with certain
executive officers: on November 20, 2020 with Mr. Curran, Ms.
Green, Ms. Gruber, Ms. O’Connell, and Ms. Peters and on November
23, 2020 with Mr. Breitbard and Ms. Syngal. In summary, as
extended, the severance provisions provide that upon involuntary
termination for reasons other than cause prior to June 30, 2024,
the Company will provide, subject to a release of claims, the
executive’s then-current salary for up to 18 months, payment of a
portion of COBRA healthcare continuation, reimbursement for costs
to maintain financial counseling the Company provides to senior
executives, a prorated bonus in the year of termination if the
executive worked at least three months of the fiscal year if earned
based on actual fiscal results achieved in the year of termination
and assuming a 100% standard for any nonfinancial component,
accelerated vesting (but not settlement) of restricted stock units
and performance shares or units that remain subject to only time
vesting conditions scheduled to vest prior to April 1 following the
end of the fiscal year of termination. Copies of the agreements
extending such severance provisions are attached hereto as Exhibits
10.4 through 10.10.
Item 6. Exhibits.
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Incorporated by Reference |
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Exhibit No. |
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Exhibit Description |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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Filed/
Furnished
Herewith |
3.1 |
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Amended and Restated Certificate of Incorporation (P) |
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10-K |
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1-7562 |
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3.1 |
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April 26, 1993 |
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Certificate of Amendment of Amended and Restated Certificate of
Incorporation |
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10-K |
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1-7562 |
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3.2 |
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April 4, 2000 |
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Amended and Restated Bylaws (effective March 23, 2020) |
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8-K |
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1-7562 |
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3.1 |
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March 5, 2020 |
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Letter Agreement dated March 6, 2020 by and between Sheila Peters
and the Registrant |
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X |
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Letter Agreement dated March 9, 2020 by and between Shawn Curran
and the Registrant |
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X |
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Letter Agreement dated October 5, 2020 by and between Nancy Green
and the Registrant |
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X |
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Amendment, dated November 23, 2020, to the Letter Agreement dated
March 9, 2020 by and between Mark Breitbard and the
Registrant |
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X |
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Amendment, dated November 20, 2020, to the Letter Agreement dated
March 9, 2020 by and between Shawn Curran and the
Registrant |
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X |
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Amendment, dated November 20, 2020, to the Letter Agreement dated
October 5, 2020 by and between Nancy Green and the
Registrant |
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X |
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Amendment, dated November 20, 2020, to the Letter Agreement dated
March 10, 2020 by and between Julie Gruber and the
Registrant |
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X |
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Amendment, dated November 20, 2020, to the Letter Agreement dated
March 10, 2020 by and between Katrina O’Connell and the
Registrant |
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X |
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Amendment, dated November 20, 2020, to the Letter Agreement dated
March 6, 2020 by and between Sheila Peters and the
Registrant |
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X |
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Amendment, dated November 23, 2020, to the Letter Agreement dated
March 4, 2020 by and between Sonia Syngal and the
Registrant |
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X |
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Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of
2002) |
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X |
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Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of
2002) |
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X |
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Certification of the Chief Executive Officer of The Gap, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
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X |
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Certification of the Chief Financial Officer of The Gap, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
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X |
101 |
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The following materials from The Gap, Inc.’s Quarterly Report on
Form 10-Q for the quarter ended October 31, 2020, formatted in XBRL
(eXtensible Business Reporting Language): (i) the Condensed
Consolidated Balance Sheets, (ii) the Condensed Consolidated
Statements of Operations, (iii) the Condensed Consolidated
Statements of Comprehensive Income (Loss), (iv) the Condensed
Consolidated Statements of Stockholders' Equity; (v) the Condensed
Consolidated Statements of Cash Flows; and (vi) Notes to Condensed
Consolidated Financial Statements |
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X |
_____________________________
(P) This Exhibit was originally filed in
paper format. Accordingly, a hyperlink has not been
provided.
† Indicates management contract or
compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
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THE GAP, INC. |
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Date: |
November 25, 2020 |
By |
/s/ Sonia Syngal |
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Sonia Syngal |
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Chief Executive Officer |
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Date: |
November 25, 2020 |
By |
/s/ Katrina O'Connell |
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Katrina O'Connell |
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Executive Vice President and Chief Financial Officer |