Business Context and Reporting Period
This Form 10-Q covers The Gap, Inc. for the quarterly period ended October 29, 1994, and the thirty-nine weeks ended on that date. The company operates retail clothing stores, including the Gap and Old Navy divisions. The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.
Key Financial Metrics
| Metric | 13 Weeks Ended Oct 29, 1994 | 39 Weeks Ended Oct 29, 1994 | 39 Weeks Ended Oct 30, 1993 |
|---|---|---|---|
| Net Sales ($000) | $988,346 | $2,513,147 | $2,235,449 |
| Net Earnings ($000) | $93,647 | $201,477 | $149,079 |
| Earnings Per Share | $0.64 | $1.38 | $1.03 |
| Cash and Equivalents ($000) | $223,654 | $223,654 | $267,441 |
| Working Capital ($000) | $498,785 | $498,785 | $435,266 |
| Current Ratio | 1.97:1 | 1.97:1 | 2.03:1 |
| Long-Term Debt ($000) | $0 | $0 | $75,000 |
| Net Cash from Operating Activities ($000) | N/A | $195,164 | $201,086 |
Margins: Gross margin net of occupancy expenses improved to 38.3% for the quarter (from 37.8% prior year) and 37.1% year-to-date (from 34.0% prior year). Operating expenses were 23.0% of sales for the quarter and 24.1% year-to-date.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% for the quarter and 12% year-to-date compared to the prior year, driven primarily by the opening of 143 new stores and expansion of 93 existing stores.
- Comparable Store Sales: Comparable store sales grew only 2% for the quarter and 0% year-to-date. The Gap division experienced negative comparable store sales, offsetting growth in the Old Navy division.
- Profitability: Net earnings rose 19% for the quarter and 35% year-to-date. This was aided by higher merchandise margins and a shift from net interest expense to net interest income.
- Debt Reduction: The company repaid $75 million of long-term debt in June 1994, resulting in zero long-term debt on the balance sheet as of October 29, 1994.
- Cash Flow: Net cash provided by operating activities decreased slightly year-to-date ($195.2M vs $201.1M) due to increased inventory purchases and higher income tax payments.
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects fiscal 1994 capital expenditures to total approximately $250 million. For fiscal 1995, guidance is set at $300 to $350 million to support the addition of 250 to 275 new stores and 75 store expansions.
- Margin Outlook: Management expects fourth-quarter merchandise margins to be lower than the same period last year due to the challenging comparison against near-record levels achieved in the prior year.
- Stock Repurchase: On October 25, 1994, the Board approved a program to repurchase up to 9 million shares of common stock over two years.
- Risks: The company notes that markdowns used to clear slow-moving merchandise or broken assortments may adversely impact earnings. Additionally, occupancy expenses are expected to remain higher as a percentage of net sales for the remainder of 1994 due to the store expansion program.
Investor Verification Checklist
- Verify the sustainability of comparable store sales growth given the negative performance in the core Gap division.
- Confirm the impact of the aggressive store expansion program (15% square footage growth YTD) on future occupancy expense ratios.
- Monitor the execution of the new $9 million share repurchase program and its effect on earnings per share.
- Assess the company's ability to maintain merchandise margins in the fourth quarter as management anticipates a decline.
- Review the utilization of the $250 million revolving credit facility, noting $289 million in outstanding letters of credit as of the period end.