The Gap, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended October 31, 2020, compared with the periods ended November 2, 2019. The request metadata says “2019 Q3,” but the supplied filing is for 2020 Q3.
Business context and results
Gap operates Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City through stores, online channels, and franchise partners. COVID-19 store closures sharply affected first-half results; most stores had reopened during the quarter, though some European stores closed again amid new lockdowns.
| Metric | 13 weeks ended Oct. 31, 2020 | 13 weeks ended Nov. 2, 2019 | 39 weeks ended Oct. 31, 2020 | 39 weeks ended Nov. 2, 2019 |
|---|---|---|---|---|
| Net sales | $3.994 billion | $3.998 billion | $9.376 billion | $11.709 billion |
| Gross profit / margin | $1.620 billion / 40.6% | $1.559 billion / 39.0% | $3.037 billion / 32.4% | $4.459 billion / 38.1% |
| Operating income (loss) | $175 million | $221 million | $(996) million | $819 million |
| Net income (loss) | $95 million | $140 million | $(899) million | $535 million |
| Diluted EPS | $0.25 | $0.37 | $(2.41) | $1.41 |
Financial position, cash flow, and debt
- At October 31, 2020, cash and cash equivalents were $2.471 billion and short-term investments were $178 million. Total current assets were $6.362 billion; total current liabilities were $4.431 billion.
- Long-term debt was $2.214 billion, net of debt issuance costs; outstanding note principal totaled $2.25 billion. Long-term operating lease liabilities were $4.899 billion.
- For the 39-week period, operating cash flow was $399 million, investing cash outflow was $175 million, and financing cash inflow was $890 million. Free cash flow, a non-GAAP measure, was $111 million versus $5 million in the prior period.
- The company issued $2.25 billion of secured notes at rates of 8.375% to 8.875%, redeemed $1.25 billion of 2021 notes, and recorded a $58 million debt-extinguishment loss. It had no ABL borrowings at quarter-end and reported $1.8675 billion of ABL capacity, subject to facility terms and availability.
Material changes and management commentary
- Third-quarter sales were essentially flat year over year as online sales rose 61% and store sales fell 20%. Third-quarter comparable sales increased 5%; stores temporarily closed for more than three days due to COVID-19 were excluded from the comparable-sales calculation.
- For the first 39 weeks, sales declined 20%. Operating results included $127 million of store-asset impairment and $361 million of operating-lease-asset impairment. The company also recorded $235 million of inventory-related impairment costs in the first quarter.
- Third-quarter gross margin improved to 40.6%, helped by lower occupancy costs relative to sales and reduced promotions at Old Navy and Athleta; higher online shipping costs partly offset these benefits. Nine-month margin declined to 32.4%, reflecting higher shipping costs, inventory impairments, and store-closure effects.
- Management plans to reduce Gap and Banana Republic North American stores by approximately 350 from the beginning of fiscal 2020 through fiscal 2023. It is reviewing its European operating model, including 122 company-operated stores, and was targeting a decision in early fiscal 2021. The review could lead to lease, inventory, and employee-related costs.
- The company reported $67 million in payroll-related credits for the 39 weeks under COVID-related government relief measures. It suspended share repurchases and regular quarterly dividends through fiscal 2020; a previously declared first-quarter dividend was deferred until on or after April 28, 2021, subject to further deferral.
Outlook, risks, and contingencies
Management said it could not reasonably estimate future COVID-19 impacts on results, cash flows, or liquidity. It believed cash balances and operating cash flows would support operations for the next 12 months, with the ABL facility or other market instruments available as potential additional liquidity. The company was in compliance with applicable financial covenants and expected to remain so over the next 12 months. Key uncertainties include renewed store closures, consumer demand, inventory management and margins, landlord negotiations and rent, supply-chain disruption, and the outcomes and costs of the Europe review and store rationalization. The filing reports ordinary-course legal matters but states that currently known actions were not expected to have a material financial effect.
Important facts for investors to verify
- Confirm the intended reporting year: the request says 2019 Q3, while this filing is for the quarter ended October 31, 2020.
- Track online growth against store recovery, comparable-sales trends, and the sustainability of the third-quarter gross-margin improvement.
- Assess whether cash generation can support operations and debt service, particularly given the notes’ high coupon rates and lease obligations.
- Monitor further COVID-19 closures, landlord rent settlements or lease buyouts, store-closure costs, and outcomes of the European strategic review.
- Review the timing and conditions of the deferred dividend and any change to the suspension of dividends or share repurchases.