The Gap, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended January 30, 2010 (52 weeks), compared with fiscal 2008 ended January 31, 2009. Although the request metadata says “2008 Q4,” this filing is an annual report for fiscal 2009; it also reports fourth-quarter results. The company operates Gap, Old Navy, Banana Republic, Piperlime and Athleta through stores and direct channels.
Financial performance
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net sales | $14.197 billion | $14.526 billion |
| Gross margin | 40.3% | 37.5% |
| Operating income / margin | $1.815 billion / 12.8% | $1.548 billion / 10.7% |
| Net income | $1.102 billion | $967 million |
| Diluted EPS | $1.58 | $1.34 |
| Operating cash flow | $1.928 billion | $1.412 billion |
| Capital expenditures | $334 million | $431 million |
| Free cash flow (non-GAAP) | $1.594 billion | $981 million |
- Net sales fell 2%; comparable-store sales declined 3%, improving from a 12% decline in fiscal 2008. North American Old Navy comps rose 3%, while Gap North America fell 7% and Banana Republic North America fell 9%.
- Gross margin improved 2.8 percentage points, primarily from lower merchandise costs and fewer markdowns. Operating expenses increased $10 million, including higher marketing, partly offset by lower store payroll and related costs.
- Cash and cash equivalents, short-term investments and restricted cash totaled $2.591 billion at year-end; the company reported no debt. Working capital was $2.533 billion and the current ratio was 2.19:1.
- Inventory was $1.477 billion, down from $1.506 billion. Total assets were $7.985 billion and stockholders’ equity was $4.891 billion.
- The company repurchased approximately 24 million shares for $510 million and paid $234 million in dividends. Fiscal 2009 dividends were $0.34 per share.
Changes, outlook and management commentary
- Sales remained lower year over year, but the comparable-sales decline moderated substantially. Direct-segment sales increased 9%, including incremental Athleta sales; Stores-segment sales declined 3%.
- Fiscal 2009 net income rose 14%. Operating cash flow increased $516 million, with higher net income and a lower bonus payout contributing to the increase.
- Management’s fiscal 2010 priorities included improving sales trends while maintaining healthy margins, cost control, return on invested capital, strong free cash flow, shareholder returns and investment for earnings growth.
- Fiscal 2010 plans called for about $575 million in capital expenditures, approximately 65 store openings and 110 closures, and a roughly 3% reduction in net square footage. Planned expansion included first Gap stores in China and Italy, more Banana Republic stores in Europe, additional outlet locations and online sales in Canada and Europe.
- Management expected a fiscal 2010 effective tax rate of about 39% and intended to increase the annual dividend to $0.40 per share. These are forward-looking expectations, not guarantees.
- Athleta was acquired in September 2008 for $148 million. The company also changed its estimate for recognizing breakage income on gift certificates and credit vouchers from five years after issuance to three years; management said the change had no material fiscal 2009 income-statement impact.
Risks, commitments and unusual items
- Key risks include weak consumer spending and economic conditions, intense retail competition, fashion and inventory misjudgments, fluctuating comparable sales and margins, and difficulties managing store leases and fleet profitability.
- Nearly all merchandise units were sourced outside the United States; about 27% of units came from China. Trade restrictions, vendor or transport disruptions, rising freight costs and vendor compliance failures could affect supply, margins or reputation.
- International expansion, franchisee execution and IT system changes—including the long-term IBM services arrangement—carry operational and financial risks. The IBM agreement runs through March 2016; expected remaining payments were approximately $623 million.
- Contractual cash obligations totaled $6.929 billion, including $4.172 billion of operating lease commitments and $2.756 billion of purchase obligations. These commitments are not equivalent to balance-sheet debt.
- Unrecognized tax benefits totaled $132 million; $131 million of related long-term liabilities were excluded from the contractual-obligations table because payment timing could not be reasonably estimated. The company received approximately $71 million in IRS refund payments, including interest, in March 2010 and did not expect the matter to materially affect income.
- The company disclosed ordinary-course lawsuits and claims, including employment and wage-and-hour matters, but said it did not believe any current action would materially affect its results as a whole. Fiscal 2009 long-lived-asset impairment charges were $14 million; Athleta goodwill and trade name were not impaired.
Investor verification priorities
- Confirm the filing period: this is fiscal 2009, not a standalone fiscal 2008 fourth-quarter filing.
- Assess whether improving comparable-store sales and gross margins were sustainable, especially across Gap and Banana Republic.
- Review cash-flow quality and planned shareholder returns against store investment, lease obligations and the fiscal 2010 capital-expenditure plan.
- Track execution and returns from international expansion, store closures and the Athleta/direct business.
- Review tax contingencies, lease commitments, sourcing concentration and IT/IBM transition risks; distinguish reported free cash flow, a non-GAAP measure, from GAAP operating cash flow.
Audit and controls: Deloitte & Touche issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of January 30, 2010.