The Gap, Inc. — Form 10-K Summary
Period clarification: The filing is for fiscal 2011, the 52 weeks ended January 28, 2012, not 2010 Q4. Fiscal 2010 is the comparable prior year. The company is a global apparel retailer operating Gap, Old Navy, Banana Republic, Piperlime, and Athleta through stores, online sales, and franchise arrangements.
Financial performance
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales | $14.549 billion | $14.664 billion |
| Gross profit / margin | $5.274 billion / 36.2% | $5.889 billion / 40.2% |
| Operating income / margin | $1.438 billion / 9.9% | $1.968 billion / 13.4% |
| Net income | $833 million | $1.204 billion |
| Diluted EPS | $1.56 | $1.88 |
| Operating cash flow | $1.363 billion | $1.744 billion |
| Capital expenditures | $548 million | $557 million |
| Free cash flow (non-GAAP) | $815 million | $1.187 billion |
Comparable sales, including associated online sales, fell 4% versus a 2% increase in fiscal 2010. Direct-segment sales rose 20% to $1.56 billion. The effective tax rate was 39.2%, versus 39.3%. Year-end cash and cash equivalents were $1.885 billion; working capital was $2.181 billion and the current ratio was 2.02:1.
Material changes and drivers
- Sales declined 1%, while net income fell about 31% and diluted EPS fell 17% year over year.
- Gross margin contracted 4.0 percentage points, principally because higher cotton and merchandise costs pressured cost of goods sold; management said margin pressure was especially acute in the second half.
- Stores-segment sales decreased $376 million, partly offset by a $261 million increase in Direct sales. North American store comparable sales excluding online fell 6%; international comparable sales including online fell 7%.
- Operating expenses declined 2% to $3.836 billion, helped by higher credit-card program income, partly offset by increased marketing expense.
- Cash from operations decreased $381 million, primarily reflecting lower net income. The company repurchased approximately 111 million shares for $2.1 billion and paid $236 million in dividends.
Debt, liquidity, outlook, and risks
- In 2011, the company issued $1.25 billion of unsecured 5.95% notes due 2021 and funded a $400 million variable-rate term loan due 2016. Total reported debt was $1.665 billion, including current maturities. It reported compliance with debt covenants.
- The $500 million revolving credit facility was undrawn, with $457 million net availability at year-end. Management said cash and operating cash flow should fund operations and planned investment for the next 12 months and beyond.
- Fiscal 2012 plans included about $600 million in capital expenditures, an approximately 39.5% effective tax rate, and a dividend increase to $0.50 per share annually. The company aimed to stabilize comparable store sales while improving sales with healthy merchandise margins.
- Fiscal 2012 store plans: open about 125 and close about 115 company-operated locations, with net company-operated square footage expected to decline about 1%; franchisees were expected to open about 50 stores. Fiscal 2012 has 53 weeks.
- Management cited a difficult promotional retail environment, high unemployment in core North American markets, European debt concerns, the Japan earthquake and tsunami, product challenges, and cotton-price inflation. Key ongoing exposures include fashion and inventory execution, competition, sourcing and trade disruption, international expansion, leases, foreign exchange, IT/cybersecurity, and litigation or tax outcomes.
- Contractual cash obligations totaled $10.969 billion, including $5.559 billion of operating leases and $3.075 billion of purchase obligations. The filing disclosed ordinary-course legal claims but said no current action was expected to have a material effect; outcomes remain uncertain.
Key facts for investors to verify
- Whether merchandise costs and markdowns ease enough to restore gross margin after the 4.0-point decline.
- Whether comparable sales stabilize and the growth of online and international sales translates into sustainable profitability.
- Cash generation relative to planned capital spending, dividends, and share repurchases, alongside the new debt-service burden.
- Execution and returns from planned store openings, closures, downsizing, and international/franchise expansion.
- Potential effects of sourcing costs, foreign-exchange movements, lease commitments, tax contingencies, and legal or technology risks.