SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended May 5, 2001 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ___________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware 94-1697231 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) One Harrison San Francisco, California 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 952-4400 _______________ Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value New York Stock Exchange, Inc. (Title of class) Pacific Exchange, Inc. (Name of each exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None _______________ Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $0.05 par value, 859,493,042 shares as of June 2, 2001 -------------------------------------------------------------------- 1
GAP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> ($000 except share and par value) May 5, February 3, April 29, 2001 2001 2000 ---- ---- ---- <S> <C> <C> <C> ASSETS Current Assets: Cash and equivalents $ 663,089 $ 408,794 $ 436,172 Merchandise inventory 2,048,822 1,904,153 1,652,049 Other current assets 350,144 335,103 315,709 ---------------- ---------------- ---------------- Total Current Assets 3,062,055 2,648,050 2,403,930 Property and equipment, net 4,120,883 4,007,685 2,905,064 Lease rights and other assets 352,485 357,173 348,597 ---------------- ---------------- ---------------- Total Assets $ 7,535,423 $ 7,012,908 $ 5,657,591 ================ ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 781,224 $ 779,904 $ 631,461 Current maturities of long-term debt 250,000 250,000 - Accounts payable 912,215 1,067,207 728,121 Accrued expenses and other current liabilities 715,557 702,033 669,455 ---------------- ---------------- ---------------- Total Current Liabilities 2,658,996 2,799,144 2,029,037 Long-Term Liabilities: Long-term debt 1,270,289 780,246 769,287 Deferred lease credits and other liabilities 531,100 505,279 431,473 ---------------- ---------------- ---------------- Total Long-Term Liabilities 1,801,389 1,285,525 1,200,760 Shareholders' Equity: Common stock $.05 par value Authorized 2,300,000 shares Issued 941,407,614; 939,222,871 and 930,924,579 shares, Outstanding 856,199,748; 853,996,984 and 851,344,890 shares 47,070 46,961 46,546 Additional paid-in capital 338,468 294,967 140,797 Retained earnings 5,090,262 4,974,773 4,408,281 Accumulated other comprehensive earnings (losses) (32,332) (20,173) 6,013 Deferred compensation (12,577) (12,162) (22,512) Treasury stock, at cost (2,355,853) (2,356,127) (2,151,331) ---------------- ---------------- ---------------- Total Shareholders' Equity 3,075,038 2,928,239 2,427,794 ---------------- ---------------- ---------------- Total Liabilities and Shareholders' Equity $ 7,535,423 $ 7,012,908 $ 5,657,591 ================ ================ ================ </TABLE> See accompanying notes to condensed consolidated financial statements. 2
GAP INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Thirteen Weeks Ended -------------------- ($000 except share and per share amounts) May 5, 2001 April 29, 2000 ----------- -------------- <S> <C> <C> Net sales $ 3,179,656 $ 2,731,990 Costs and expenses Cost of goods sold and occupancy expenses 2,054,482 1,601,905 Operating expenses 920,412 750,303 Interest expense 24,038 11,529 Interest income (1,135) (2,576) ------------- ------------- Earnings before income taxes 181,859 370,829 Income taxes 66,379 135,353 ------------- ------------- Net earnings $ 115,480 $ 235,476 ============= ============= - ------------------------------------------------------------------------------------------ Weighted average number of shares - basic 854,333,157 850,325,670 Weighted average number of shares - diluted 875,873,227 888,020,166 Earnings per share - basic $ 0.14 $ 0.28 Earnings per share - diluted $ 0.13 $ 0.27 Cash dividends paid per share $ 0.02 /(a)/ $ 0.02 /(b)/ </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. /(a)/ Represents a dividend of $0.02 per share declared in January 2001 but paid in first quarter of fiscal 2001. /(b)/ Represents a dividend of $0.02 per share declared in January 2000 but paid in first quarter of fiscal 2000. 3
GAP INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- ($000) Thirteen Weeks Ended ---------------------------------------------- May 5, 2001 April 29, 2000 ---------------------- -------------------- Cash Flows from Operating Activities: <S> <C> <C> Net earnings $ 115,480 $ 235,476 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 196,148 132,016 Tax benefit from exercise of stock options and vesting of restricted stock 16,537 65,912 Changes in operating assets and liabilities: Merchandise inventory (150,422) (194,586) Other current assets (16,154) (32,461) Accounts payable (154,359) (71,718) Accrued expenses 36,888 (52,006) Income taxes payable 1,400 (36,825) Deferred lease credits and other liabilities 20,529 (5,476) ------------------ ----------------- Net cash provided by operating activities 66,047 40,332 ------------------ ----------------- Cash Flows from Investing Activities: Net purchase of property and equipment (311,131) (321,103) Acquisition of lease rights and other assets (4,958) (50,779) ------------------ ----------------- Net cash used for investing activities (316,089) (371,882) ------------------ ----------------- Cash Flows from Financing Activities: Net increase in notes payable 5,174 468,252 Net issuance of long-term debt 495,886 - Issuance of common stock 23,155 38,632 Net purchase of treasury stock - (163,266) Cash dividends paid (18,950) (18,872) ------------------ ----------------- Net cash provided by financing activities 505,265 324,746 ------------------ ----------------- Effect of exchange rate fluctuations on cash (928) (7,376) ------------------ ----------------- Net increase (decrease) in cash and equivalents 254,295 (14,180) Cash and equivalents at beginning of year 408,794 450,352 ------------------ ----------------- Cash and equivalents at end of quarter $ 663,089 $ 436,172 ================== ================= - ----------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to condensed consolidated financial statements. 4
GAP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION --------------------- The condensed consolidated balance sheets as of May 5, 2001 and April 29, 2000 and the interim condensed consolidated statements of earnings for the thirteen weeks ended May 5, 2001 and April 29, 2000 and cash flows for the thirteen week periods ended May 5, 2001 and April 29, 2000 have been prepared by the Company, without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company at May 5, 2001 and April 29, 2000, and for all periods presented. 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 have been omitted from these interim financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. The condensed consolidated balance sheet as of February 3, 2001 was derived from the Company's February 3, 2001 balance sheet included in the Company's 2000 Annual Report on Form 10-K. The results of operations for the thirteen weeks ended May 5, 2001 are not necessarily indicative of the operating results that may be expected for the year ending February 2, 2002. 2. COMPREHENSIVE EARNINGS ---------------------- Comprehensive earnings include net earnings and other comprehensive earnings (losses). Other comprehensive earnings (losses) include foreign currency translation adjustments and fluctuations in the fair market value of certain financial instruments. Comprehensive earnings for the thirteen weeks ended May 5, 2001 and April 29, 2000 were as follows (in thousands): Thirteen Weeks Ended ----------------------------------- May 5, 2001 April 29, 2000 --------------- ------------------ Net earnings $115,480 $235,476 Other comprehensive (losses) earnings (12,159) 12,772 --------------- ------------------ Comprehensive earnings $103,321 $248,248 =============== ================== 5
3. EARNINGS PER SHARE ------------------ Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the dilutive effect of the Company's potentially dilutive securities, which include certain stock options and unvested shares of restricted stock. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method. <TABLE> <CAPTION> Thirteen Weeks Ended --------------------------------------- May 5, 2001 April 29, 2000 ------------------ ----------------- <S> <C> <C> Weighted-average number of shares - basic 854,333,157 850,325,670 Incremental shares resulting from: Stock options 21,406,811 36,951,619 Restricted stock 133,259 742,877 ----------------- ---------------- Weighted-average number of shares - diluted 875,873,227 888,020,166 ================= ================ </TABLE> Excluded from the above computations of weighted-average shares for diluted earnings per share were options to purchase 27,066,303 and 2,475,924 shares of common stock during the thirteen weeks ended May 5, 2001 and April 29, 2000, respectively. Additionally, put options to repurchase 750,000 shares during the thirteen weeks ended April 29, 2000 were excluded from the above computations. Issuance or repurchase of these securities would have resulted in an antidilutive effect on earnings per share. 4. LONG-TERM DEBT -------------- On April 27, 2001, the Company issued $500 million of debt securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is payable semi-annually. The notes are recorded in the balance sheet at their issuance amount. In connection with the debt issuance, the Company entered into interest rate swaps in order to reduce interest rate risk. The swap agreements were settled in the first quarter and the net losses of approximately $2.2 million associated with these swaps will be amortized over the life of the debt securities. 6
Deloitte & Touche LLP 50 Fremont Street San Francisco, California 94105-2230 Tel: (415) 783 4000 Fax: (415) 783 4329 www.us.deloitte.com Deloitte & Touche INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of The Gap, Inc.: We have reviewed the accompanying condensed consolidated balance sheets of The Gap, Inc. and subsidiaries as of May 5, 2001 and April 29, 2000, and the related condensed consolidated statements of earnings and cash flows for the thirteen week periods ended May 5, 2001 and April 29, 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of February 3, 2001, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 3, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP May 16, 2001 7
GAP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- The information below contains certain forward-looking statements which reflect the current view of Gap Inc. (the "Company") with respect to future events and financial performance. Wherever used, the words "expect," "plan," "anticipate," "believe," and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the Company's actual results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the Company's goods are manufactured, and/or other factors that may be described in the Company's Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict. It is suggested that this document be read in conjunction with the Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. The Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. RESULTS OF OPERATIONS <TABLE> <CAPTION> Net Sales - --------------------------------------------------------------- -------------------------------------------- Thirteen Weeks Ended -------------------------------------------- May 5, 2001 April 29, 2000 - --------------------------------------------------------------- -------------------------------------------- <S> <C> <C> Net sales ($000) $3,179,656 $2,731,990 Total net sales growth percentage 16 20 Comparable store sales decrease percentage (7) (2) Net sales per average square foot $ 96 $ 109 Square footage of gross store space - at end of period (000) 33,271 25,519 Number of Stores: Beginning of Year 3,676 3,018 New stores 195 133 Expanded stores/(1)/ 55 24 Closed stores 21 6 End of Period 3,850 3,145 - --------------------------------------------------------------- -------------------------------------------- </TABLE> (1) Expanded stores do not change store count. 8
Store count and square footage at quarter end for fiscal 2001 and 2000 were as follows: <TABLE> <CAPTION> May 5, 2001 April 29, 2000 - -------------------------------------------------------- --------------------------------- -------------------------------- Number of Sq. Ft. Number of Sq. Ft. Stores (millions) Stores (millions) - -------------------------------------------------------- ----------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Gap Domestic 2,143 12.4 1,812 10.6 Gap International 575 3.2 433 2.4 Banana Republic 415 3.3 354 2.7 Old Navy 717 14.4 546 9.8 - -------------------------------------------------------- ----------------- ---------------- ---------------- ---------------- Total 3,850 33.3 3,145 25.5 ======================================================== ================= ================ ================ ================ Increase 22% 30% 22% 31% </TABLE> The increase in net sales for the first quarter of fiscal 2001 over the same period last year was attributable to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores. The company's first quarter comparable store sales by division were as follows: Gap Domestic had a negative mid-single digit versus a negative mid-single digit last year, Gap International had a negative high-single digit versus a positive mid-single digit last year, Banana Republic had a negative high-single digit versus a positive mid-single digit last year, Old Navy had a negative high-single digit versus a negative low-single digit last year. The decrease in net sales per average square foot for the first quarter of fiscal 2001 was primarily attributable to negative comparable store sales. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales increased 6.0 percentage points in the first quarter from the same period in fiscal 2000. For the first quarter, the decrease in merchandise margin as a percentage of net sales was primarily attributable to lower margins from regular-priced goods and a greater percentage of merchandise sold at markdown when compared to the same period last year. The increase in occupancy expenses as a percentage of net sales for the first quarter was primarily attributable to negative comparable store sales. Operating Expenses Operating expenses as a percentage of net sales increased 1.4 percentage points for the first quarter of fiscal 2001, from the same period in fiscal 2000. The increase was primarily attributable to negative comparable store sales, higher medical costs and software maintenance costs as a percentage of net sales offset by lower advertising costs as a percentage of net sales. Interest Expense The increase in interest expense in the first quarter of fiscal 2001 as compared to the same period in fiscal 2000 was primarily due to an increase in average borrowings. Interest Income The decrease in interest income in the first quarter of fiscal 2001 as compared to the same period in fiscal 2000 was primarily due to a decrease in average cash available for investment. 9
Income Taxes The effective tax rate was 36.5 percent for the first quarter of fiscal 2001 and 2000. 10
LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity: - -------------------------------------------------------------------------------- Thirteen Weeks Ended -------------------- May 5, 2001 April 29, 2000 - -------------------------------------------------------------------------------- Cash provided by operating activities ($000) $ 66,047 $ 40,332 Working capital ($000) $403,059 $374,893 Current ratio 1.15:1 1.18:1 - -------------------------------------------------------------------------------- For the thirteen weeks ended May 5, 2001, the increase in cash flows provided by operating activities, compared to the same period in the prior year, was primarily attributable to a decrease in the growth of merchandise inventory and changes in other operating assets and liabilities which were primarily driven by timing of certain payments. This increase was partially offset by decreases in net earnings exclusive of depreciation and amortization and decreases in tax benefit from the exercise of stock options and vesting of restricted stock. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations as well as short-term and long-term financing arrangements. The Company's business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. The Company has committed credit facilities totaling $1.35 billion, consisting of an $1.20 billion, 364-day revolving credit facility, and a $150 million, 5- year revolving credit facility through June 27, 2005. These credit facilities provide for the issuance of up to $600 million in letters of credit and provide backup for the Company's $750 million commercial paper program. The Company has additional uncommitted credit facilities of $845 million for the issuance of letters of credit. At May 5, 2001, the Company had outstanding letters of credit and commercial paper of approximately $927 million and $42 million, respectively. The Company also had additional unused lines of credit of approximately $235 million at May 5, 2001. On April 27, 2001, the Company issued $500 million of debt securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is payable semi-annually. The notes are recorded in the balance sheet at their issuance amount. In connection with the debt issuance, the Company entered into interest rate swaps in order to reduce interest rate risk. The swap agreements were settled in the first quarter and the net losses of approximately $2.2 million associated with these swaps will be amortized over the life of the debt securities. For the thirteen weeks ended May 5, 2001, capital expenditures, net of construction allowances, totaled approximately $293 million. The majority of these expenditures were used for expansion of the store base, headquarters and distribution facilities. During the first quarter of fiscal 2001, the Company experienced a net increase in store space of approximately 1.9 million square feet, or 6 percent, due to a net addition of 174 stores, the expansion of 55 stores and the remodeling of certain stores. For fiscal 2001, the Company expects capital expenditures to be in the range of $1.3 to $1.4 billion, net of construction allowances. This represents the addition of 550 to 630 new stores, the expansion of approximately 150 stores, the remodeling of certain stores, as well as amounts for headquarter facility, distribution centers and equipment and information technology. The Company expects to fund such capital expenditures with cash flows from operations and other sources of financing. Square footage growth is expected to be in the 17 to 20 percent range for fiscal 2001. In light of the lower level of new store openings during the first quarter, the Company expects capital expenditures, new store openings and square footage growth to fall at the lower end of these ranges. New stores are generally expected to be leased. 11
During fiscal 1998, the Company purchased land in San Francisco to construct an additional headquarter facility. The estimated total project cost is approximately $240 million and approximately $55 million will be incurred during fiscal 2001. The Company commenced construction on this facility during the third quarter of fiscal 1998 and it was partially opened during the first quarter of fiscal 2001. Construction is estimated to be completed by the third quarter of fiscal 2001. The Company commenced construction on several distribution facilities in the second quarter and third quarter of fiscal 2000. The estimated total cost for these facilities is approximately $455 million. Approximately one-half of the expenditures will be incurred during fiscal 2001. The facilities are expected to be open by the fourth quarter of fiscal 2001. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The market risk of the Company's financial instruments as of May 5, 2001 has not significantly changed since February 3, 2001. The market risk profile of the Company on February 3, 2001 is disclosed on the Company's 2000 Annual Report on Form 10-K. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------ a) Exhibits (10.1) Amendment No. 6 to the 1996 Stock Option and Award Plan (10.2) Amendment No. 3 to the Nonemployee Director Deferred Compensation Plan (10.3) Amendment to the Non-Qualified Stock Option Agreements by and between The Gap, Inc. and Brooks Walker, Jr. (10.4) Form of Non-Qualified Stock Option Agreement for directors under the 1996 Stock Option and Award Plan (10.5) Form of Non-Qualified Stock Option Agreement for directors under the Nonemployee Director Deferred Compensation Plan (15) Letter re: Unaudited Interim Financial Information b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended May 5, 2001. 13
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GAP, INC. Date: June 7, 2001 By /s/ Heidi Kunz -------------------------------- Heidi Kunz Chief Financial Officer (Principal financial officer of the registrant) Date: June 7, 2001 By /s/ Millard S. Drexler -------------------------------- Millard S. Drexler President and Chief Executive Officer 14
EXHIBIT INDEX (10.1) Amendment No. 6 to the 1996 Stock Option and Award Plan (10.2) Amendment No. 3 to the Nonemployee Director Deferred Compensation Plan (10.3) Amendment to the Non-Qualified Stock Option Agreements by and between The Gap, Inc. and Brooks Walker, Jr. (10.4) Form of Non-Qualified Stock Option Agreement for directors under the 1996 Stock Option and Award Plan (10.5) Form of Non-Qualified Stock Option Agreement for directors under the Nonemployee Director Deferred Compensation Plan (15) Letter re: Unaudited Interim Financial Information