The Gap, Inc. — Form 10-Q summary
Reporting period: The filing covers the 13 and 39 weeks ended November 2, 2013, compared with periods ended October 27, 2012. Although the request metadata says 2012 Q3, the filing itself is for fiscal 2013 Q3. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Gap is a global apparel and accessories retailer operating Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix through stores, online channels, and franchisees. In fiscal 2013, it combined its operating segments into one reportable segment. Fiscal 2013 has 52 weeks, versus 53 in fiscal 2012; the calendar shift benefited Q1 2013 and was expected to weigh on Q4 comparisons.
Financial results
| Metric | 13 weeks ended Nov. 2, 2013 | Prior-year quarter | 39 weeks ended Nov. 2, 2013 | Prior-year period |
|---|---|---|---|---|
| Net sales | $3.976 billion | $3.864 billion | $11.573 billion | $10.926 billion |
| Gross profit / margin | $1.589 billion / 40.0% | $1.593 billion / 41.2% | $4.700 billion / 40.6% | $4.395 billion / 40.2% |
| Operating income / margin | $576 million / 14.5% | $520 million / 13.5% | $1.627 billion / 14.1% | $1.340 billion / 12.3% |
| Net income | $337 million | $308 million | $973 million | $784 million |
| Diluted EPS | $0.72 | $0.63 | $2.07 | $1.60 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $953 million | $1.225 billion |
| Capital expenditures | Not presented for the quarter | Not presented for the quarter | $487 million | $449 million |
| Free cash flow (company-defined, non-GAAP) | Not presented for the quarter | Not presented for the quarter | $466 million | $776 million |
- Quarterly sales rose 3% reported and 5% excluding foreign-exchange effects; comparable sales increased 1%, versus 6% growth a year earlier. Management attributed the $61 million unfavorable quarterly FX impact primarily to the weaker Japanese yen.
- Quarterly gross margin fell 1.2 percentage points, mainly because of increased promotions. Operating margin improved 1.0 percentage point as operating expenses declined, including lower marketing and corporate overhead.
- For the first 39 weeks, sales grew 6% reported and 8% excluding FX; comparable sales rose 3%. Online sales were $1.564 billion, up from $1.260 billion. The 39-week period also included an $18 million reversal of interest expense following favorable tax-matter resolutions.
- Operating cash flow declined $272 million year over year; management cited payment timing, higher bonus payouts, inventory timing and other liability movements. Inventory-related cash use was $723 million. Financing cash use included $875 million of repurchases and $232 million of dividends.
Financial position and capital allocation
- At November 2, 2013, cash and cash equivalents were $996 million, with no short-term investments; total current assets were $4.390 billion and current liabilities $2.631 billion. Inventory was $2.471 billion, up from $1.758 billion at fiscal year-end.
- Long-term debt was $1.247 billion, consisting principally of $1.25 billion of 5.95% notes due in April 2021. There were no borrowings under the $500 million revolving facility; net availability was $477 million. Management said cash and operating cash flows should support operations and planned investment, with the facility available for additional liquidity.
- The company repurchased 22.7 million shares for $875 million during the 39 weeks, and repurchased 20.4 million shares for $790 million in Q3. A further $100 million remained under the January 2013 authorization at quarter-end; a new $1 billion authorization was announced in November. The quarterly dividend was $0.20 per share.
Outlook, risks and unusual items
- Fiscal 2013 guidance: operating margin about 13%; diluted EPS of $2.57–$2.65; effective tax rate about 39%; capital expenditures about $675 million; depreciation and amortization, net of lease-incentive amortization, about $475 million; and approximately 80 net new company-operated stores. Management intended a fiscal-year dividend of $0.70 per share.
- Management priorities included growing sales while maintaining healthy merchandise margins, expense discipline, margin and EPS growth, shareholder returns, and expansion in Asia, outlets, franchises, and Athleta stores.
- Key risks include uncertain consumer spending and apparel trends, competition, sourcing and shipment disruptions, international expansion, currency movements, margin and comparable-sales volatility, technology and cybersecurity risks, and legal or regulatory developments.
- Routine lawsuits and claims included commercial, intellectual-property, customer, employment, and data-privacy matters. Recorded loss liabilities were not material; outcomes remain uncertain. Certain indemnification obligations cannot be reasonably quantified, though management did not expect them to materially affect the financial statements. No material impairment charges were reported.
Important facts for investors to verify
- Whether promotional activity continues to pressure gross margin, and whether operating-expense reductions can sustain operating-margin gains.
- Holiday-period sales, inventory levels, and the effect of the 52-week fiscal calendar and Q4 calendar shift.
- Whether cash generation recovers from the year-over-year decline and supports planned capital spending, dividends, and repurchases.
- Progress against EPS, operating-margin, tax-rate, store-opening, and capital-expenditure guidance.
- Effects of foreign exchange and developments in tax audits, litigation, and other contingencies.