The Gap, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended May 4, 2013, compared with the 13 weeks ended April 28, 2012. Although the request metadata says “2012 Q1,” the filing itself reports fiscal 2013 first-quarter results. Gap is a global apparel retailer operating Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix. Beginning in fiscal 2013, the company combined its operating segments into one reportable segment.
Fiscal 2013 has 52 weeks versus 53 weeks in fiscal 2012. Management said the calendar shift positively affected first-quarter fiscal 2013 results and is expected to negatively affect fourth-quarter results.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $3.729 billion | $3.487 billion |
| Gross profit / gross margin | $1.544 billion / 41.4% | $1.375 billion / 39.4% |
| Operating income / operating margin | $530 million / 14.2% | $395 million / 11.3% |
| Net income | $333 million | $233 million |
| Diluted EPS | $0.71 | $0.47 |
| Cash from operating activities | $356 million | $364 million |
| Capital expenditures | $151 million | $148 million |
| Free cash flow (company-defined, non-GAAP) | $205 million | $216 million |
Comparable sales rose 2%, versus 4% growth in the prior-year quarter; comparable online sales contributed 2 percentage points to company comparable-sales growth. Online sales were $509 million, up from $402 million. Gross margin improved primarily due to lower cotton costs and sales leverage on occupancy expenses. Operating expenses rose $34 million in dollars but declined as a share of sales, to 27.2% from 28.1%.
At May 4, 2013, cash and cash equivalents were $1.610 billion, merchandise inventory was $1.723 billion, and total current assets and current liabilities were $4.131 billion and $2.102 billion, respectively. Long-term debt was $1.247 billion, consisting of 5.95% notes due April 2021; there was no term-loan balance. The $500 million revolving facility had no borrowings and $474 million of net availability after letters of credit.
Material changes and unusual items
- Sales increased 7%, primarily from online sales, new stores, and the calendar shift; foreign exchange reduced sales by $45 million, mainly from the weaker Japanese yen.
- Net income and EPS growth included an $18 million reversal of interest expense following favorable resolution of tax matters. Reported interest expense was $1 million, versus $23 million a year earlier; the reversal is an unusual item to distinguish from underlying operating performance.
- Cash from operations was down $8 million year over year, with management citing payment timing, higher bonus payouts, and changes in liabilities, partly offset by higher net income and other asset collections.
- The company repurchased 1.7 million shares for $58 million and paid a quarterly dividend of $0.15 per share. $917 million remained under the new $1 billion repurchase authorization at quarter-end.
- The revolving credit facility was amended May 1, 2013, extending its maturity to May 2018 and improving pricing. The IBM services agreement was amended to extend through February 2018 while reducing the scope of services; expected payments over the remaining five years were approximately $200 million.
Outlook, risks, and contingencies
Management forecast fiscal 2013 diluted EPS of $2.52–$2.60, an operating margin of about 13%, and an effective tax rate of about 39%. It expected approximately $675 million of capital expenditures, $475 million of depreciation and amortization net of lease-incentive amortization, about 80 net openings of company-operated stores, and roughly 1% growth in company-operated store square footage. The company intended to pay $0.60 per share in annual dividends for fiscal 2013, up 20% from fiscal 2012.
Management said cash balances and operating cash flows should support operations, growth initiatives, and planned capital expenditures for the next 12 months and beyond. Key risks include consumer spending and apparel-trend uncertainty, competition, sourcing and shipment disruptions, international expansion, comparable-sales and margin volatility, foreign exchange, information-technology disruption and cybersecurity, and litigation or tax matters. The company reported no material change in risk factors, no material impairment charges, and no material recorded liability for legal actions; it cautioned that litigation outcomes remain uncertain. A possible approximately $20 million decrease in gross unrecognized tax benefits within 12 months was described as reasonably possible, with no material expected income-statement impact.
Important facts for investors to verify
- Confirm the period: the filing is for Q1 fiscal 2013, ended May 4, 2013, notwithstanding the “2012 Q1” request metadata.
- Assess how much reported earnings growth reflects the $18 million tax-related interest reversal, the calendar shift, and lower merchandise costs, versus durable underlying trends.
- Track comparable-sales momentum: company growth slowed to 2% from 4%, while Banana Republic Global was flat and Gap Global and Old Navy Global each grew 3%.
- Compare cash generation with investment and shareholder returns: operating cash flow and free cash flow declined year over year despite higher net income.
- Monitor delivery against full-year EPS, margin, tax-rate, capital-spending, store-opening, and dividend expectations, as well as exposure to foreign exchange and seasonal cash-flow swings.