Business context and reporting period
The Gap, Inc. is a global apparel retailer operating Gap, Banana Republic, Old Navy, Athleta, Intermix and Piperlime, through stores, online channels and franchises. Despite the request metadata referencing 2013 Q4, this filing is the Form 10-K for fiscal 2014, the 52 weeks ended January 31, 2015; fiscal 2013 is the comparable prior year. The filing also reports fourth-quarter results.
Financial performance
| Metric | Fiscal 2014 | Fiscal 2013 | Change or context |
|---|---|---|---|
| Net sales | $16.435 billion | $16.148 billion | Up 2% reported; up 3% excluding foreign exchange |
| Comparable sales | Flat | Up 2% | Gap Global down 5%; Old Navy Global up 5%; Banana Republic Global flat |
| Gross profit / margin | $6.289 billion / 38.3% | $6.293 billion / 39.0% | Margin down 0.7 percentage point, primarily from promotions and markdowns, foreign exchange and occupancy costs |
| Operating income / margin | $2.083 billion / 12.7% | $2.149 billion / 13.3% | Operating income down about 3% |
| Net income | $1.262 billion | $1.280 billion | Down about 1% |
| Diluted EPS | $2.87 | $2.74 | Up 5%, primarily reflecting share repurchases |
| Operating cash flow | $2.129 billion | $1.705 billion | Up $424 million; affected by timing of credit-card receipts, lease incentives and inventory receipts, among other items |
| Capital expenditures / free cash flow | $714 million / $1.415 billion | $670 million / $1.035 billion | Free cash flow is a company-defined non-GAAP measure: operating cash flow less property and equipment purchases |
| Cash and cash equivalents | $1.515 billion | $1.510 billion | Working capital $2.083 billion; current ratio 1.93 |
| Total debt | $1.353 billion | $1.394 billion | Includes $1.25 billion of 5.95% notes due 2021 and a yen-denominated term loan |
| Dividends and repurchases | $383 million dividends; $1.164 billion repurchases | $321 million dividends; $979 million repurchases | Returned about $1.6 billion to shareholders in fiscal 2014 |
Fourth-quarter fiscal 2014 sales were $4.708 billion versus $4.575 billion; net income was $319 million versus $307 million, and diluted EPS was $0.75 versus $0.68.
Material changes versus the prior period
- Revenue grew modestly, led by Old Navy and Athleta, while Gap sales weakened. Foreign exchange reduced reported fiscal 2014 sales by about $130 million.
- Comparable sales slowed from 2% growth to flat, with Gap Global falling from 3% growth to a 5% decline.
- Gross and operating margins declined, despite expense discipline; increased promotional activity and markdowns were important pressures.
- Net income edged lower while diluted EPS rose, supported by a lower weighted-average share count from repurchases.
- Operating cash flow and free cash flow increased. The filing attributes much of the operating cash flow improvement to timing-related working-capital and credit-card-program items.
Outlook, commentary, risks and unusual items
- Fiscal 2015 priorities include improving product consistency and trend relevance, advancing digital and omnichannel shopping, developing talent, and expanding globally. The filing does not provide a clear fiscal 2015 earnings or revenue forecast.
- Management expected about 115 net new company-operated stores, approximately 2.5% growth in company-operated store square footage, and about 35 new franchise stores in fiscal 2015. Planned capital spending was about $800 million.
- Management expected fiscal 2015 foreign exchange headwinds, particularly from the Canadian dollar and Japanese yen, to pressure reported sales and foreign subsidiary gross margins. West Coast port delays were also expected to materially affect fiscal 2015 results and product availability.
- The company planned to raise its annual dividend to $0.92 per share for fiscal 2015. A new $1 billion share-repurchase authorization was approved in February 2015.
- Piperlime was scheduled to close, including its online platform and New York store, by the end of the first half of fiscal 2015. Senior leadership changes included Arthur Peck becoming CEO in February 2015.
- Fiscal 2014 included a $473 million distribution of certain foreign earnings and an approximately $41 million net tax benefit, primarily from foreign tax credits. The company also recorded $10 million of long-lived-asset impairment charges and a $121 million gain from selling a building.
- Key risks include consumer and fashion demand, inventory markdowns, competition, currency movements, sourcing and supply-chain disruptions, port delays, cybersecurity, execution of international and omnichannel investments, and leadership transitions. The company reported ordinary-course legal matters but said no current action was expected to materially affect its consolidated financial statements.
- Auditors gave unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether Gap’s product and comparable-sales performance improves, and whether Old Navy and Athleta sustain growth.
- How foreign exchange and port-related shipping delays affect fiscal 2015 sales, margins, inventory and cash flow.
- Whether stronger reported cash generation persists after considering the timing-related items identified by management.
- Execution of store expansion and the planned $800 million capital program, alongside lease commitments of $6.251 billion.
- The sustainability of shareholder returns, including the planned dividend increase and new repurchase authorization, relative to operating cash generation and liquidity needs.
- The impact of Piperlime’s closure, leadership transitions, and ongoing tax and legal matters; review the full filing for detailed terms and contingencies.