The Gap, Inc. — Form 10-Q Summary
Period note: The request metadata says 2019 Q1, but the filing is for the thirteen weeks ended May 2, 2020 (fiscal 2020 Q1), compared with the thirteen weeks ended May 4, 2019.
Business context
Gap operates Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City through stores, online channels, and franchise arrangements. COVID-19 led to temporary closures of North American stores and many stores in Asia and Europe, sharply reducing store sales. Online sales continued to grow. More than 1,500 stores had reopened worldwide by June 4, 2020.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $2.107 billion | $3.706 billion |
| Gross profit / gross margin | $268 million / 12.7% | $1.344 billion / 36.3% |
| Operating income (loss) | $(1.244) billion | $316 million |
| Net income (loss) | $(932) million | $227 million |
| Diluted EPS | $(2.51) | $0.60 |
| Operating cash flow | $(940) million | $29 million |
| Free cash flow | $(1.062) billion | $(136) million |
Net sales fell 43%. Store sales declined to $1.108 billion from $2.823 billion, while online sales rose 13% to $999 million from $883 million. Comparable sales were not considered meaningful because of widespread store closures.
At May 2, 2020, cash and cash equivalents were $1.028 billion and short-term investments were $51 million; inventory was $2.217 billion. Current liabilities were $3.431 billion, including a $500 million revolving-credit draw. Long-term debt was $1.250 billion. Operating lease liabilities totaled $6.217 billion, current and long-term combined.
Material changes and unusual items
- COVID-19-related inventory impairment costs were $235 million. Store-asset and operating-lease-asset impairment charges totaled $484 million ($124 million and $360 million, respectively).
- Operating expenses included $35 million of severance related to corporate workforce reductions. Prior-year results included a gain on sale of a building.
- Management drew the full $500 million under its revolving credit facility in March. On May 7, after quarter-end, Gap issued $2.25 billion of senior secured notes at interest rates of 8.375%–8.875%, paid approximately $43 million in fees, repaid the $500 million revolver balance, and entered an undrawn ABL facility with capacity of up to $1.8675 billion. The 2021 Notes were redeemed on June 6; the filing does not state the redemption payment amount here.
- Moody’s and S&P downgraded Gap’s credit ratings during the period, both with negative outlooks.
Outlook, liquidity and risks
Management said it could not reasonably estimate the future effects of the pandemic, citing uncertainty in customer demand, store reopenings, and supply chains. It believed cash balances, operating cash flows, and proceeds from the subsequent notes issuance would support operations for the next 12 months, with the ABL facility or other market instruments available as potential additional liquidity. The filing provides no financial guidance.
Gap suspended share repurchases and its regular quarterly cash dividend through fiscal 2020, reduced planned capital expenditures, reviewed operating expenses, furloughed most North American store teams during closures, and suspended rent payments on closed North American stores. A previously declared $0.2425-per-share dividend was deferred to be payable on or after April 28, 2021, subject to further deferral. Suspended rent was approximately $115 million per month in North America; negotiations with landlords could result in disputes, litigation, lease terminations, or accelerated rent claims.
Investor verification priorities
- Track store reopening progress, consumer demand, online sales, and any return to meaningful comparable-sales reporting.
- Verify cash burn, working-capital movements, inventory valuation, and the timing or terms of rent deferrals and settlements.
- Review debt-service costs, ABL borrowing availability, collateral and covenant requirements, and the effect of credit-rating changes.
- Monitor further impairments, restructuring actions, store closures, and the status of the deferred dividend and suspended repurchases.