NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Balance Sheets as of August 3, 2019 and August 4, 2018, and the Condensed Consolidated Statements of Income, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, and the Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 3, 2019 and August 4, 2018 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements include all adjustments (which include normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, stockholders' equity, and cash flows as of August 3, 2019 and August 4, 2018 and for all periods presented. The Condensed Consolidated Balance Sheet as of February 2, 2019 has been derived from our audited financial statements.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted from these interim financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
The results of operations for the thirteen and twenty-six weeks ended August 3, 2019 are not necessarily indicative of the operating results that may be expected for the 52-week period ending February 1, 2020.
Accounting Pronouncements Recently Adopted
ASU No. 2016-02, Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2016-02, Leases. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for leases at the commencement date. We adopted ASU No. 2016-02 and related amendments (collectively "ASC 842") on February 3, 2019 using the optional transition method, which allows for the prospective application of the standard. As of the effective date, we recorded a decrease to opening retained earnings of $86 million, net of tax, which consisted primarily of impairments for certain store and operating lease assets. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which allowed us to carry forward our historical lease classification, to not reassess prior conclusions related to initial direct costs, and to not reassess whether any expired or existing contracts are or contain leases. We also elected the lessee practical expedient to combine lease and nonlease components for new leases and modified leases. The adoption of ASC 842 resulted in the recording of operating lease assets and operating lease liabilities of $5.7 billion and $6.6 billion, respectively, on our Consolidated Balance Sheet as of February 3, 2019.
See Note 9 of Notes to Condensed Consolidated Financial Statements for information regarding required disclosures related to our leases.
ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, this guidance amends and expands disclosure requirements. We adopted this ASU on a prospective basis on February 3, 2019. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
See Note 5 of Notes to Condensed Consolidated Financial Statements for information regarding derivative financial instruments.
Accounting Pronouncements Not Yet Adopted
Except as noted below, the Company has considered all recent accounting pronouncements and concluded that there are no recent accounting pronouncements that may have a material impact on our Consolidated Financial Statements, based on current information.
ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU is intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. This guidance is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact this guidance may have on our Consolidated Financial Statements and related disclosures.
Restricted Cash
Any cash that is legally restricted from use is classified as restricted cash. If the purpose of restricted cash is related to acquiring a long-term asset, liquidating a long-term liability, or is otherwise unavailable for a period longer than one year from the balance sheet date, the restricted cash is included within other long-term assets on our Condensed Consolidated Balance Sheets. Otherwise, restricted cash is included within other current assets on our Condensed Consolidated Balance Sheets.
As of August 3, 2019, restricted cash primarily included consideration that serves as collateral for our insurance obligations. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the total shown on our Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
($ in millions)
|
August 3,
2019
|
|
August 4,
2018
|
Cash and cash equivalents, per Condensed Consolidated Balance Sheets
|
$
|
1,177
|
|
|
$
|
1,322
|
|
Restricted cash included in other current assets
|
—
|
|
|
—
|
|
Restricted cash included in other long-term assets
|
18
|
|
|
18
|
|
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows
|
$
|
1,195
|
|
|
$
|
1,340
|
|
Note 2. Revenue
The Company’s revenues include merchandise sales at stores, online, and through franchise agreements. We also receive revenue sharing from our credit card agreement for private label and co-branded credit cards, and breakage revenue related to our gift cards, credit vouchers, and outstanding loyalty points. Breakage revenue is recognized based upon historical redemption patterns. For online sales and catalog sales, the Company has elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales and catalog sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. We also record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
Our credit card agreement provides for certain payments to be made to us, including a share of revenue from the performance of the credit card portfolios and reimbursements of loyalty program discounts. We have identified separate performance obligations related to our credit card agreement that include both providing a license and an obligation to redeem loyalty points issued under the loyalty rewards program. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to redeem loyalty points is deferred until those loyalty points are redeemed. Income related to our credit card agreement is classified within net sales on our Condensed Consolidated Statements of Income.
We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in a number of countries throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. We have identified separate performance obligations related to our franchise agreements that include both providing our franchise partners with a license and an obligation to supply franchise partners with our merchandise. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to supply franchise partners with our merchandise is satisfied when control of the merchandise transfers. As of the quarter ended August 3, 2019 and August 4, 2018, there were no material contract liabilities related to our franchise agreements.
We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts associated with our credit card agreement. For the thirteen weeks ended August 3, 2019, the opening balance of deferred revenue for these obligations was $206 million, of which $71 million was recognized as revenue during the period. For the twenty-six weeks ended August 3, 2019, the opening balance of deferred revenue for these obligations was $227 million, of which $134 million was recognized as revenue during the period. The closing balance of deferred revenue related to gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts was $195 million as of August 3, 2019.
We expect that the majority of our revenue deferrals as of the quarter ended August 3, 2019, will be recognized as revenue in the next 12 months as our performance obligations are satisfied.
For the thirteen weeks ended August 4, 2018, the opening balance of deferred revenue for these obligations was $201 million, of which $87 million of the opening balance was recognized as revenue during the period. For the twenty-six weeks ended August 4, 2018, the opening balance of deferred revenue for these obligations was $232 million, of which $145 million of the opening balance was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $194 million as of August 4, 2018.
See Note 13 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue by brand and by region.
Note 3. Debt and Credit Facilities
As of August 3, 2019, February 2, 2019, and August 4, 2018, the estimated fair value of our $1.25 billion aggregate principal amount of 5.95 percent notes (the “Notes”) due April 2021 was $1.30 billion, $1.30 billion, and $1.31 billion, respectively, and was based on the quoted market price of the Notes (level 1 inputs) as of the last business day of the respective fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized discount.
We have a $500 million, five-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in May 2023. There were no borrowings and no material outstanding standby letters of credit under the Facility as of August 3, 2019.
We maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). These Foreign Facilities are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The total capacity of the Foreign Facilities was $56 million as of August 3, 2019. As of August 3, 2019, there were no borrowings under the Foreign Facilities. There were $17 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of August 3, 2019.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of August 3, 2019, we had $17 million in standby letters of credit issued under these agreements.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and twenty-six weeks ended August 3, 2019 or August 4, 2018. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen and twenty-six weeks ended August 3, 2019 or August 4, 2018.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
August 3, 2019
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
312
|
|
|
$
|
31
|
|
|
$
|
281
|
|
|
$
|
—
|
|
Short-term investments
|
294
|
|
|
131
|
|
|
163
|
|
|
—
|
|
Derivative financial instruments
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
Deferred compensation plan assets
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
Other assets
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
686
|
|
|
$
|
213
|
|
|
$
|
471
|
|
|
$
|
2
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
February 2, 2019
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
373
|
|
|
$
|
26
|
|
|
$
|
347
|
|
|
$
|
—
|
|
Short-term investments
|
288
|
|
|
125
|
|
|
163
|
|
|
—
|
|
Derivative financial instruments
|
20
|
|
|
—
|
|
|
20
|
|
|
—
|
|
Deferred compensation plan assets
|
48
|
|
|
48
|
|
|
—
|
|
|
—
|
|
Other assets
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
731
|
|
|
$
|
199
|
|
|
$
|
530
|
|
|
$
|
2
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
($ in millions)
|
August 4, 2018
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
481
|
|
|
$
|
21
|
|
|
$
|
460
|
|
|
$
|
—
|
|
Short-term investments
|
286
|
|
|
109
|
|
|
177
|
|
|
—
|
|
Derivative financial instruments
|
40
|
|
|
—
|
|
|
40
|
|
|
—
|
|
Deferred compensation plan assets
|
53
|
|
|
53
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
860
|
|
|
$
|
183
|
|
|
$
|
677
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper. With the exception of our available-for-sale investments noted below, we value these investments at their original purchase prices plus interest that has accrued at the stated rate.
Our available-for-sale securities are comprised of investments in debt securities. These securities are recorded at fair value using market prices. As of August 3, 2019 and August 4, 2018, the Company held $294 million and $286 million, respectively, of available-for-sale debt securities with maturity dates greater than three months and less than two years within short-term investments on the Condensed Consolidated Balance Sheets. In addition, as of August 3, 2019 and August 4, 2018, the Company held $15 million and $14 million of available-for-sale debt securities with maturities of less than three months at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheets. Unrealized gains or losses on available-for-sale debt securities included within accumulated other comprehensive income were immaterial as of August 3, 2019 and August 4, 2018.
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment loss.
Derivative financial instruments primarily include foreign exchange forward contracts. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for information regarding currencies hedged against the U.S. dollar.
We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees and non-employee directors to defer base compensation up to a maximum percentage. Plan investments are directed by participants and are recorded at market value and designated for the DCP. The fair value of the Company’s DCP assets is determined based on quoted market prices, and the assets are recorded in other long-term assets on the Condensed Consolidated Balance Sheets.
Nonfinancial Assets
We review the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value of the long-lived assets is determined using level 3 inputs and based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level.
There were no material impairment charges recorded for long-lived assets for the thirteen and twenty-six weeks ended August 3, 2019, or August 4, 2018.
As discussed in Note 1, we recorded a decrease to fiscal year 2019 opening retained earnings due to the adoption of ASC 842 related to impairments as of the effective date.
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.
There were no material impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and twenty-six weeks ended August 3, 2019, or August 4, 2018.
Note 5. Derivative Financial Instruments
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We use derivative financial instruments to manage our exposure to foreign currency exchange rate risk and do not enter into derivative financial contracts for trading purposes. Consistent with our risk management guidelines, we hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. These contracts are entered into with large, reputable, financial institutions that are monitored for counterparty risk. The currencies hedged against changes in the U.S. dollar are Canadian dollars, Japanese yen, British pounds, Mexican pesos, Euro, Chinese yuan, and Taiwan dollars. Cash flows from derivative financial instruments are classified as cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.
Cash Flow Hedges
We currently designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases and related costs denominated in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; and (2) forward contracts used to hedge forecasted intercompany revenue transactions related to merchandise sold from our regional purchasing entity, whose functional currency is the U.S. dollar, to certain international subsidiaries in their local currencies. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs, and intercompany revenue transactions generally have terms of up to 24 months. The effective portion of the gain or loss on the derivative financial instruments is reported as a component of other comprehensive income and is recognized into income during the period in which the underlying transaction impacts the Condensed Consolidated Statements of Income.
Net Investment Hedges
We may also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in these subsidiaries.
Other Derivatives Not Designated as Hedging Instruments
We use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments that represent economic hedges, as well as the remeasurement impact of the underlying intercompany balances, is recorded in operating expenses on the Condensed Consolidated Statements of Income in the same period and generally offset.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
August 3,
2019
|
|
February 2,
2019
|
|
August 4,
2018
|
Derivatives designated as cash flow hedges
|
$
|
652
|
|
|
$
|
774
|
|
|
$
|
1,052
|
|
Derivatives not designated as hedging instruments
|
1,046
|
|
|
660
|
|
|
646
|
|
Total
|
$
|
1,698
|
|
|
$
|
1,434
|
|
|
$
|
1,698
|
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
August 3,
2019
|
|
February 2,
2019
|
|
August 4,
2018
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Other current assets
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
19
|
|
Other long-term assets
|
1
|
|
|
—
|
|
|
7
|
|
Accrued expenses and other current liabilities
|
1
|
|
|
3
|
|
|
3
|
|
Lease incentives and other long-term liabilities
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Other current assets
|
11
|
|
|
5
|
|
|
14
|
|
Accrued expenses and other current liabilities
|
7
|
|
|
8
|
|
|
3
|
|
|
|
|
|
|
|
Total derivatives in an asset position
|
$
|
27
|
|
|
$
|
20
|
|
|
$
|
40
|
|
Total derivatives in a liability position
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
7
|
|
Substantially all of the unrealized gains and losses from designated cash flow hedges as of August 3, 2019, will be recognized into income within the next 12 months at the then-current values, which may differ from the fair values as of August 3, 2019, shown above.
Our foreign exchange forward contracts are subject to master netting arrangements with each of our counterparties and such arrangements are enforceable in the event of default or early termination of the contract. We do not elect to offset the fair values of our derivative financial instruments on the Condensed Consolidated Balance Sheets, and as such, the fair values shown above represent gross amounts. The amounts subject to enforceable master netting arrangements were $3 million, $4 million, and $4 million as of August 3, 2019, February 2, 2019, and August 4, 2018, respectively. If we did elect to offset, the net amounts of our derivative financial instruments in an asset position would have been $24 million, $16 million, and $36 million and the net amounts of the derivative financial instruments in a liability position would have been $6 million, $7 million, and $3 million as of August 3, 2019, February 2, 2019, and August 4, 2018, respectively.
See Note 4 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The effective portion of gains and losses on foreign exchange forward contracts designated in a cash flow hedging relationship recorded in other comprehensive income, on a pre-tax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
Gain recognized in other comprehensive income
|
$
|
2
|
|
|
$
|
21
|
|
|
$
|
15
|
|
|
$
|
43
|
|
The pre-tax amounts recognized in income related to derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of (Gain) Loss Recognized in Income
|
|
13 Weeks Ended
August 3, 2019
|
|
13 Weeks Ended
August 4, 2018
|
($ in millions)
|
Cost of goods sold and occupancy expense
|
|
Operating expenses
|
|
Cost of goods sold and occupancy expense
|
|
Operating expenses
|
Total amount of expense line items presented in the Condensed Consolidated Income Statement in which the effects of derivatives are recorded
|
$
|
2,449
|
|
|
$
|
1,274
|
|
|
$
|
2,458
|
|
|
$
|
1,229
|
|
|
|
|
|
|
|
|
|
(Gain) recognized in income
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(12
|
)
|
Total (gain) recognized in income
|
$
|
(6
|
)
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of (Gain) Loss Recognized in Income
|
|
26 Weeks Ended
August 3, 2019
|
|
26 Weeks Ended
August 4, 2018
|
($ in millions)
|
Cost of goods sold and occupancy expense
|
|
Operating expenses
|
|
Cost of goods sold and occupancy expense
|
|
Operating expenses
|
Total amount of expense line items presented in the Condensed Consolidated Income Statement in which the effects of derivatives are recorded
|
$
|
4,811
|
|
|
$
|
2,302
|
|
|
$
|
4,814
|
|
|
$
|
2,427
|
|
|
|
|
|
|
|
|
|
(Gain) recognized in income
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
(24
|
)
|
Total (gain) recognized in income
|
$
|
(12
|
)
|
|
$
|
(12
|
)
|
|
$
|
(3
|
)
|
|
$
|
(24
|
)
|
For the thirteen and twenty-six weeks ended August 3, 2019, and August 4, 2018, there were no amounts of gains or losses reclassified from accumulated other comprehensive income into net income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate any of our hedged subsidiaries during the periods.
Note 6. Share Repurchases
Share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ and shares in millions except average per share cost)
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
Number of shares repurchased (1)
|
2.7
|
|
|
3.2
|
|
|
4.6
|
|
|
6.4
|
|
Total cost
|
$
|
50
|
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
200
|
|
Average per share cost including commissions
|
$
|
18.41
|
|
|
$
|
30.95
|
|
|
$
|
21.54
|
|
|
$
|
31.08
|
|
__________
|
|
(1)
|
Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.
|
In February 2019, the Board of Directors approved a new $1.0 billion share repurchase authorization (the "February 2019 repurchase program") which superseded and replaced a February 2016 repurchase authorization. The February 2019 repurchase program had $900 million remaining as of August 3, 2019.
The February 2016 repurchase authorization had $287 million remaining as of February 2, 2019.
All of the share repurchases were paid for as of August 3, 2019, February 2, 2019, and August 4, 2018. All common stock repurchased is immediately retired.
Note 7. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at February 2, 2019
|
$
|
47
|
|
|
$
|
6
|
|
|
$
|
53
|
|
13 Weeks Ended May 4, 2019:
|
|
|
|
|
|
Foreign currency translation
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
9
|
|
|
9
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Other comprehensive income (loss), net of tax
|
(1
|
)
|
|
5
|
|
|
4
|
|
Balance at May 4, 2019
|
46
|
|
|
11
|
|
|
57
|
|
13 Weeks Ended August 3, 2019:
|
|
|
|
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
1
|
|
|
1
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Other comprehensive (loss), net of tax
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Balance at August 3, 2019
|
$
|
46
|
|
|
$
|
9
|
|
|
$
|
55
|
|
|
|
|
|
|
|
($ in millions)
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Total
|
Balance at February 3, 2018
|
$
|
64
|
|
|
$
|
(28
|
)
|
|
$
|
36
|
|
13 Weeks Ended May 5, 2018:
|
|
|
|
|
|
Foreign currency translation
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
28
|
|
|
28
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Other comprehensive income (loss), net of tax
|
(7
|
)
|
|
22
|
|
|
15
|
|
Balance at May 5, 2018
|
57
|
|
|
(6
|
)
|
|
51
|
|
13 Weeks Ended August 4, 2018:
|
|
|
|
|
|
Foreign currency translation
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
Change in fair value of derivative financial instruments
|
—
|
|
|
18
|
|
|
18
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
(16
|
)
|
|
18
|
|
|
2
|
|
Balance at August 4, 2018
|
$
|
41
|
|
|
$
|
12
|
|
|
$
|
53
|
|
See Note 5 of Notes to Condensed Consolidated Financial Statements for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects within the respective line items on the Condensed Consolidated Statements of Income.
Note 8. Share-Based Compensation
Share-based compensation expense recognized on the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
Stock units
|
$
|
17
|
|
|
$
|
22
|
|
|
$
|
36
|
|
|
$
|
38
|
|
Stock options
|
5
|
|
|
4
|
|
|
9
|
|
|
8
|
|
Employee stock purchase plan
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Share-based compensation expense
|
23
|
|
|
27
|
|
|
47
|
|
|
48
|
|
Less: Income tax benefit
|
(9
|
)
|
|
(6
|
)
|
|
(15
|
)
|
|
(12
|
)
|
Share-based compensation expense, net of tax
|
$
|
14
|
|
|
$
|
21
|
|
|
$
|
32
|
|
|
$
|
36
|
|
Note 9. Leases
The Company is a party to many agreements involving commitments to make payments to third parties. The majority of our long-term contractual obligations relate to operating leases for our retail stores. We also lease some of our corporate facilities and distribution centers. These operating leases expire at various dates through fiscal 2040. Most store leases have a five-year base period and include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed upon at lease inception. Some leases also include early termination options, which can be exercised under specific conditions. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We record our lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We recognize operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related operating lease cost on a straight-line basis over the lease term. In addition, certain of our lease agreements include variable lease payments, such as payments based on a percentage of sales that are in excess of a predetermined level and/or increases based on a change in the consumer price index or fair market value. These variable lease payments are excluded from minimum lease payments and are included in the determination of net lease cost when it is probable that the expense has been incurred and the amount can be reasonably estimated.
As of August 3, 2019, the Company's finance leases were not material to our Condensed Consolidated Financial Statements.
Net lease cost recognized on our Condensed Consolidated Statement of Income is summarized as follows:
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
($ in millions)
|
August 3,
2019
|
|
August 3,
2019
|
Operating lease cost
|
$
|
301
|
|
|
$
|
597
|
|
Variable lease cost
|
156
|
|
|
321
|
|
Sublease income
|
(1
|
)
|
|
(6
|
)
|
Net lease cost
|
$
|
456
|
|
|
$
|
912
|
|
As of August 3, 2019, the maturities of lease liabilities based on the total minimum lease commitment amount including options to extend lease terms that are reasonably certain of being exercised are as follows:
|
|
|
|
|
($ in millions)
|
|
Fiscal Year
|
|
Remainder of 2019
|
$
|
608
|
|
2020
|
1,150
|
|
2021
|
1,024
|
|
2022
|
913
|
|
2023
|
811
|
|
Thereafter
|
3,665
|
|
Total minimum lease payments
|
8,171
|
|
Less: Interest
|
(1,581
|
)
|
Present value of operating lease liabilities
|
6,590
|
|
Less: Current portion of operating lease liabilities
|
(946
|
)
|
Long-term operating lease liabilities
|
$
|
5,644
|
|
During the thirteen and twenty-six weeks ended August 3, 2019, additions of operating lease assets were $290 million and $456 million, respectively. As of August 3, 2019, the minimum lease commitment amount for operating leases signed but not yet commenced, primarily for retail stores, was $304 million.
As of August 3, 2019, the weighted-average remaining operating lease term was 8.6 years and the weighted-average discount rate was 4.7 percent for operating leases recognized on our Condensed Consolidated Financial Statements.
In accordance with Accounting Standards Codification ("ASC") 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on February 2, 2019 were as follows:
|
|
|
|
|
($ in millions)
|
|
Fiscal Year
|
|
2019
|
$
|
1,156
|
|
2020
|
1,098
|
|
2021
|
892
|
|
2022
|
730
|
|
2023
|
539
|
|
Thereafter
|
1,520
|
|
Total minimum lease commitments
|
$
|
5,935
|
|
The total minimum lease commitment amount above does not include minimum sublease income of $12 million receivable in the future under non-cancelable sublease agreements. In addition, the total minimum lease commitment amount above excludes options to extend lease terms that are reasonably certain of being exercised.
Note 10. Income Taxes
The effective income tax rate was 38.0 percent for the thirteen weeks ended August 3, 2019, compared with 23.5 percent for the thirteen weeks ended August 4, 2018. The effective income tax rate was 31.1 percent for the twenty-six weeks ended August 3, 2019, compared with 24.1 percent for the twenty-six weeks ended August 4, 2018. The increase in the effective tax rate is primarily due to adjustments to our fiscal 2017 tax liability for additional guidance issued by the U.S. Treasury Department regarding the Tax Cuts and Jobs Act of 2017 ("TCJA").
The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, the United Kingdom, China, Hong Kong, Japan, and India. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009, and with few exceptions, we are also no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2008.
The Company is in continual discussions with taxing authorities regarding tax matters in the various U.S. and foreign jurisdictions in the normal course of business. As of August 3, 2019, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next 12 months of up to $4 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statements of Income would not be material.
Note 11. Earnings Per Share
Weighted-average number of shares used for earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
(shares in millions)
|
August 3,
2019
|
|
August 4,
2018
|
|
August 3,
2019
|
|
August 4,
2018
|
Weighted-average number of shares - basic
|
378
|
|
|
387
|
|
|
378
|
|
|
388
|
|
Common stock equivalents
|
1
|
|
|
3
|
|
|
2
|
|
|
3
|
|
Weighted-average number of shares - diluted
|
379
|
|
|
390
|
|
|
380
|
|
|
391
|
|
The above computations of weighted-average number of shares – diluted exclude 17 million and 6 million shares related to stock options and other stock awards for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, and 13 million and 6 million shares related to stock options and other stock awards for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, as their inclusion would have an anti-dilutive effect on earnings per share.
Note 12. Commitments and Contingencies
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications), or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated, and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our Condensed Consolidated Financial Statements taken as a whole.
As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of August 3, 2019, Actions filed against us included commercial, intellectual property, customer, and employment claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages and some are covered in part by insurance. As of August 3, 2019, February 2, 2019, and August 4, 2018, we recorded a liability for an estimated loss if the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable. The liability recorded as of August 3, 2019, February 2, 2019, and August 4, 2018, was not material for any individual Action or in total. Subsequent to August 3, 2019, and through the filing date of this Quarterly Report on Form 10-Q, no information has become available that indicates a change is required that would be material to our Condensed Consolidated Financial Statements taken as a whole.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material effect on our Condensed Consolidated Financial Statements taken as a whole.
Note 13. Segment Information
We identify our operating segments according to how our business activities are managed and evaluated. As of August 3, 2019, our operating segments included Old Navy Global, Gap Global, Banana Republic Global, Athleta, and Intermix. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customers through its store and online channels, allowing us to execute on our omni-channel strategy where customers can shop seamlessly across all of our brands in retail stores and online through desktop or mobile devices. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments were aggregated into one reportable segment as of August 3, 2019. We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.
Net sales by brand and region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana
Republic Global (2)
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended August 3, 2019
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
1,794
|
|
|
$
|
645
|
|
|
$
|
530
|
|
|
$
|
331
|
|
|
$
|
3,300
|
|
|
83
|
%
|
Canada
|
|
148
|
|
|
85
|
|
|
53
|
|
|
—
|
|
|
286
|
|
|
7
|
|
Europe
|
|
—
|
|
|
131
|
|
|
4
|
|
|
—
|
|
|
135
|
|
|
3
|
|
Asia
|
|
11
|
|
|
201
|
|
|
23
|
|
|
—
|
|
|
235
|
|
|
6
|
|
Other regions
|
|
19
|
|
|
24
|
|
|
6
|
|
|
—
|
|
|
49
|
|
|
1
|
|
Total
|
|
$
|
1,972
|
|
|
$
|
1,086
|
|
|
$
|
616
|
|
|
$
|
331
|
|
|
$
|
4,005
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana
Republic Global
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
13 Weeks Ended August 4, 2018
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
1,816
|
|
|
$
|
728
|
|
|
$
|
514
|
|
|
$
|
264
|
|
|
$
|
3,322
|
|
|
82
|
%
|
Canada
|
|
151
|
|
|
94
|
|
|
58
|
|
|
—
|
|
|
303
|
|
|
7
|
|
Europe
|
|
—
|
|
|
145
|
|
|
3
|
|
|
—
|
|
|
148
|
|
|
4
|
|
Asia
|
|
11
|
|
|
229
|
|
|
22
|
|
|
—
|
|
|
262
|
|
|
6
|
|
Other regions
|
|
14
|
|
|
29
|
|
|
7
|
|
|
—
|
|
|
50
|
|
|
1
|
|
Total
|
|
$
|
1,992
|
|
|
$
|
1,225
|
|
|
$
|
604
|
|
|
$
|
264
|
|
|
$
|
4,085
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana
Republic Global (2)
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
26 Weeks Ended August 3, 2019
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
3,435
|
|
|
$
|
1,253
|
|
|
$
|
1,017
|
|
|
$
|
617
|
|
|
$
|
6,322
|
|
|
82
|
%
|
Canada
|
|
276
|
|
|
154
|
|
|
100
|
|
|
1
|
|
|
531
|
|
|
7
|
|
Europe
|
|
—
|
|
|
252
|
|
|
7
|
|
|
—
|
|
|
259
|
|
|
3
|
|
Asia
|
|
21
|
|
|
434
|
|
|
49
|
|
|
—
|
|
|
504
|
|
|
7
|
|
Other regions
|
|
39
|
|
|
45
|
|
|
11
|
|
|
—
|
|
|
95
|
|
|
1
|
|
Total
|
|
$
|
3,771
|
|
|
$
|
2,138
|
|
|
$
|
1,184
|
|
|
$
|
618
|
|
|
$
|
7,711
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana
Republic Global
|
|
Other (3)
|
|
Total
|
|
Percentage of Net Sales
|
26 Weeks Ended August 4, 2018
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
3,406
|
|
|
$
|
1,408
|
|
|
$
|
993
|
|
|
$
|
533
|
|
|
$
|
6,340
|
|
|
81
|
%
|
Canada
|
|
278
|
|
|
171
|
|
|
108
|
|
|
1
|
|
|
558
|
|
|
7
|
|
Europe
|
|
—
|
|
|
280
|
|
|
7
|
|
|
—
|
|
|
287
|
|
|
4
|
|
Asia
|
|
23
|
|
|
513
|
|
|
47
|
|
|
—
|
|
|
583
|
|
|
7
|
|
Other regions
|
|
30
|
|
|
57
|
|
|
13
|
|
|
—
|
|
|
100
|
|
|
1
|
|
Total
|
|
$
|
3,737
|
|
|
$
|
2,429
|
|
|
$
|
1,168
|
|
|
$
|
534
|
|
|
$
|
7,868
|
|
|
100
|
%
|
__________
|
|
(1)
|
U.S. includes the United States, Puerto Rico, and Guam.
|
|
|
(2)
|
Beginning on March 4, 2019, Banana Republic Global includes net sales for the Janie and Jack brand.
|
|
|
(3)
|
Primarily consists of net sales for the Athleta and Intermix brands, as well as a portion of income related to our credit card agreement. Beginning in the third quarter of fiscal year 2018, the Hill City brand is also included.
|
Net sales by region are allocated based on the location of the store where the customer paid for and received the merchandise or the distribution center or store from which the products were shipped.
Note 14. Acquisition
On March 4, 2019, the Company acquired select assets of Gymboree, Inc. related to Janie and Jack, a premium children's clothing brand, through a bankruptcy auction. We purchased intellectual property and property and equipment at the Janie and Jack store locations. We assumed the leases for the majority of Janie and Jack stores and entered into a separate transaction to purchase Janie and Jack inventory.
The purchase price for the net assets acquired was $69 million. The total purchase price was allocated to the net tangible and intangible assets acquired based on their estimated fair values. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets.
Amounts recorded for assets acquired and liabilities assumed on the acquisition date were as follows:
|
|
|
|
|
($ in millions)
|
As of
March 4,
2019
|
Inventory
|
$
|
34
|
|
Property and equipment
|
15
|
|
Operating lease assets
|
51
|
|
Intangible assets
|
37
|
|
Net assets acquired
|
137
|
|
Operating lease liabilities
|
(64
|
)
|
Other liabilities
|
(4
|
)
|
Total consideration paid
|
$
|
69
|
|
The results of operations for Janie and Jack since the date of acquisition were not material to the Condensed Consolidated Statement of Income.