Business Context and Reporting Period
This Form 10-Q covers The Gap, Inc. for the quarterly period ended August 4, 2001, and the twenty-six weeks ended on that date. The company operates retail stores under the Gap, Banana Republic, and Old Navy banners. As of September 1, 2001, there were 862,435,229 shares of common stock outstanding.
Key Financial Metrics
| Metric | 13 Weeks Ended Aug 4, 2001 | 26 Weeks Ended Aug 4, 2001 | 26 Weeks Ended July 29, 2000 |
|---|---|---|---|
| Net Sales ($000) | $3,245,219 | $6,424,875 | $5,679,704 |
| Net Earnings ($000) | $89,751 | $205,231 | $419,396 |
| Earnings Per Share (Diluted) | $0.10 | $0.23 | $0.47 |
| Operating Cash Flow ($000) | N/A | $442,447 | $68,773 |
| Cash and Equivalents ($000) | $722,952 | $722,952 | $327,860 |
| Total Debt ($000) | $1,959,706 | $1,959,706 | $1,882,319 |
| Working Capital ($000) | $481,432 | $481,432 | $383,630 |
Note: Total Debt includes Notes Payable ($691,670), Current Maturities of Long-Term Debt ($250,000), and Long-Term Debt ($1,268,036) as of August 4, 2001.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% in the quarter and 13% year-to-date compared to the prior year, driven primarily by a 21% increase in store count and 28% increase in square footage.
- Profitability Decline: Despite sales growth, Net Earnings dropped 51% in the quarter and 51% year-to-date. Earnings per share (diluted) fell from $0.21 to $0.10 for the quarter.
- Comparable Store Sales: Comparable store sales decreased 9% in the quarter and 8% year-to-date, contrasting with 2% decreases in the prior year periods.
- Margins: Cost of goods sold and occupancy expenses as a percentage of net sales increased by 5.6 percentage points in the quarter, driven by lower merchandise margins and higher occupancy costs relative to sales.
- Debt Issuance: The company issued $500 million in debt securities in April 2001, increasing total debt levels.
Guidance, Outlook, and Risks
- Restructuring Charges: The company recorded a $30 million charge in the second quarter for workforce reductions (approx. 1,600 positions) and facility consolidations. Approximately $27 million is a liability for employee termination pay.
- Capital Expenditures: Full-year capital expenditures are expected to be $1.3 to $1.4 billion. Due to lower new store openings in the first half, the company expects to be at the lower end of this range.
- Growth Revision: Planned annual square footage growth for fiscal 2002 and 2003 was revised down to approximately 10% from a previously stated 15%.
- Credit Rating Actions: Moody's lowered the credit rating from A2 to A3 in April 2001 and changed the outlook to negative in August 2001. Standard & Poor's placed the company on credit watch negative in August 2001 due to disappointing sales.
- Legal Proceedings: The company is a defendant in lawsuits regarding labor practices in Saipan. The company cannot currently estimate the potential loss.
Investor Verification Checklist
- Verify the sustainability of the 9% decline in comparable store sales across all divisions (Gap Domestic, International, Banana Republic, Old Navy).
- Confirm the timeline and cost impact of the $30 million restructuring charge and facility consolidations.
- Monitor the impact of the credit rating downgrades on the cost of borrowing and access to credit facilities.
- Assess the effectiveness of cost-cutting measures (advertising down 39%, travel down 30%) in offsetting margin compression.
- Review the status of the Saipan labor practice lawsuits for potential contingent liabilities.