The Gap, Inc. — Form 10-Q Summary
Period: 13 and 26 weeks ended August 3, 2013, compared with periods ended July 28, 2012. The filing itself is for 2013 Q2; this conflicts with the request metadata identifying 2012 Q2.
Business context and results
Global apparel retailer operating Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix, through stores, online channels, and franchises. Beginning in fiscal 2013, the company reports one aggregated segment; brand and regional sales are disclosed separately.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $3.868B | $3.575B | $7.597B | $7.062B |
| Gross profit | $1.567B | $1.427B | $3.111B | $2.802B |
| Operating income | $521M | $425M | $1.051B | $820M |
| Net income | $303M | $243M | $636M | $476M |
| Diluted EPS | $0.64 | $0.49 | $1.35 | $0.97 |
Financial position, cash flow, and liquidity
- Q2 gross margin was 40.5%, up from 39.9%; operating margin was 13.5%, up from 11.9%. First-half gross margin was 41.0% versus 39.7%, and operating margin was 13.8% versus 11.6%.
- First-half operating cash flow was $857M versus $970M. Capital expenditures were $315M versus $297M; company-defined free cash flow was $542M versus $673M.
- At August 3, cash and cash equivalents were $1.925B; inventory was $1.837B; current assets were $4.586B and current liabilities $2.278B.
- Debt was $1.247B, consisting of 5.95% notes due April 2021. The $500M revolving facility had no borrowings and $477M net availability.
- First-half dividends paid were $0.30 per share. The company repurchased 2.3M shares for $85M; $890M remained under its $1B authorization.
Material changes and management commentary
- Q2 sales increased 8% reported and 10% excluding foreign-exchange effects; first-half sales increased 8% reported and 9% excluding FX. FX reduced sales by $56M in Q2 and $101M in the first half, primarily reflecting yen weakness.
- Company comparable sales rose 5% in Q2 and 4% in the first half. Q2 comps were up 6% at Gap Global and Old Navy Global, but down 1% at Banana Republic Global.
- Management attributed Q2 margin improvement mainly to lower occupancy costs as a share of sales; increased promotions partly offset the benefit. First-half merchandise costs benefited from lower cotton prices in Q1.
- First-half net income included an $18M reversal of interest expense following favorable resolution of tax matters. The 2013 fiscal year has 52 weeks versus 53 in 2012; management said the calendar shift benefited first-half comparisons and is expected to weigh on Q4.
Guidance, risks, and contingencies
- Fiscal 2013 outlook: operating margin about 13%; diluted EPS $2.57–$2.65; effective tax rate about 39%; capital expenditures about $675M; depreciation and amortization, net of lease-incentive amortization, about $475M. Management expected about 80 net new company-operated stores and roughly 1% company-operated square-footage growth.
- After quarter-end, the company announced an intended increase in the annual dividend from $0.60 to $0.80 per share beginning in Q3; it expected $0.70 per share for fiscal 2013.
- Key risks cited include consumer spending and fashion trends, competition, sourcing and shipment disruption, international expansion and franchise execution, currency movements, store leases, cybersecurity and IT disruption, and litigation. Ordinary-course legal matters were not considered individually or collectively material; outcomes remain uncertain.
- Management stated cash and operating cash flows should fund operations and planned investment, but interim results may be affected by seasonality. No material changes to disclosed contractual obligations or risk factors were reported.
Important facts for investors to verify
- Confirm the intended filing period: the source is the quarter ended August 3, 2013, not 2012 Q2.
- Assess whether sales, comps, and margin gains persist, especially at Banana Republic, and separate underlying performance from FX and fiscal-calendar effects.
- Evaluate the decline in operating cash flow and free cash flow against rising earnings and planned capital spending.
- Review execution of the stated EPS and operating-margin outlook, store expansion plans, dividend increase, and remaining share-repurchase authorization.
- Monitor tax settlements, currency exposures, inventory levels, and litigation developments.