QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware
94-1697231
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Two Folsom Street
San Francisco, California94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 427-0100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.05 par value
GPS
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding as of May 19, 2023 was 368,056,655.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following:
•the potential impact of global economic conditions on the assumptions and estimates used when preparing the Condensed Consolidated Financial Statements;
•the impact of recent accounting pronouncements;
•the timing of revenue recognition of upfront payments related to our new credit card program agreements with Barclays and Mastercard;
•costs expected to be incurred in connection with our restructuring plan and the timing of actions associated with the reduction of our workforce;
•the timing of recognition in income of unrealized gains and losses from designated cash flow hedges;
•the impact of losses due to indemnification obligations on the Condensed Consolidated Financial Statements;
•the outcome of proceedings, lawsuits, disputes, and claims, including the impact of such actions on the Condensed Consolidated Financial Statements and our financial results;
•our arrangements with third parties to operate stores and websites selling apparel and related products under our brand names;
•our plans to rationalize the Gap and Banana Republic store fleet by reducing the number of Gap and Banana Republic stores in North America;
•managing inventory to support a healthy merchandise margin;
•reducing and optimizing our fixed cost structure to improve profitability and manage through current macroeconomic challenges;
•driving sales through assortment improvements and a balanced and relevant category mix;
•driving creative excellence and delivering product that offers value to customers through a combination of fit, quality, brand, and price;
•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;
•optimizing investments in our four purpose-led lifestyle brands to drive relevance and gain market share;
•attracting and retaining strong talent in our businesses and functions;
•continuing to integrate social and environmental sustainability into business practices to support long-term growth;
•our ability to supplement near-term liquidity, if necessary, with the ABL Facility or other available market instruments;
•the impact of seasonality and global economic conditions on certain asset and liability accounts as well as cash inflows and outflows;
•the ability of our cash flows from our operations, current balances of cash and cash equivalents, the Senior Notes and the ABL Facility, and other available market instruments to support our business operations and liquidity requirements;
•the importance of our sustained ability to generate free cash flow, which is a non-GAAP financial measure and is defined and discussed in more detail in Item 2 of Part 1 of this Form 10-Q below;
•our dividend policy, including the potential timing and amounts of future dividends; and
•the impact of changes in internal control over financial reporting, and assessing the impact of our restructuring plan on our internal control over financial reporting.
Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:
•the overall global economic and geopolitical environment and the impact on consumer spending patterns;
•the risk that inflationary pressures continue to negatively impact gross margins or that we are unable to pass along price increases;
•the risk that restructuring our business may not generate the intended benefits and projected cost savings to the extent or on the timeline as expected;
•the risk that we or our franchisees may be unsuccessful in gauging apparel trends and changing consumer preferences or responding with sufficient lead time;
•the risk that we may be unable to manage or protect our inventory effectively and the resulting impact on our gross margins, sales and results of operations;
•the risk that we fail to manage key executive succession and retention and to continue to attract and retain qualified personnel;
•the risk that we fail to maintain, enhance, and protect our brand image and reputation;
•the highly competitive nature of our business in the United States and internationally;
•engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;
•the risk that our investments in customer, digital, and omni-channel shopping initiatives may not deliver the results we anticipate;
•the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;
•the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct;
•the risk of data or other security breaches or vulnerabilities that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures;
•the risk that failures of, or updates or changes to, our IT systems may disrupt our operations;
•natural disasters, public health crises, political crises, negative global climate patterns, or other catastrophic events;
•the ongoing conflict between Russia and Ukraine and the impact on global market stability;
•the risk that our efforts to expand internationally may not be successful;
•the risk that our franchisees and licensees could impair the value of our brands or fail to make payments for which we are liable;
•the risk that trade matters could increase the cost or reduce the supply of apparel available to us;
•the risk of foreign currency exchange rate fluctuations;
•the risk that our comparable sales and margins may experience fluctuations, that the seasonality of our business may experience changes, or that we may fail to meet financial market expectations;
•the risk that we or our franchisees may be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively;
•the adverse effects of climate change on our operations and those of our franchisees, vendors and other business partners;
•the risk that we will not be successful in defending various proceedings, lawsuits, disputes, and claims;
•our failure to comply with applicable laws and regulations and changes in the regulatory or administrative landscape;
•our failure to satisfy regulations and market expectations related to our ESG initiatives;
•reductions in income and cash flow from our credit card arrangement related to our private label and co-branded credit cards;
•the risk that worsening global economic and geopolitical conditions could result in changes to the assumptions and estimates used when preparing the Condensed Consolidated Financial Statements;
•the risk that changes in our business structure, our performance or our industry could result in reductions in our pre-tax income or utilization of existing tax carryforwards in future periods, and require additional deferred tax valuation allowances;
•the risk that changes in the geographic mix and level of income or losses, the expected or actual outcome of audits, changes in deferred tax valuation allowances, and new legislation could impact our effective tax rate;
•the risk that our level of indebtedness may impact our ability to operate and expand our business;
•the risk that we and our subsidiaries may be unable to meet our obligations under our indebtedness agreements;
•the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets; and
•the risk that the adoption of new accounting pronouncements will impact future results.
Additional information regarding factors that could cause results to differ can be found in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 and our other filings with the U.S. Securities and Exchange Commission.
Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of May 26, 2023. We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
We suggest that this document be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.
Property and equipment, net of accumulated depreciation of $4,878, $4,837 and $4,967
2,646
2,688
2,791
Operating lease assets
3,123
3,173
3,587
Other long-term assets
880
908
874
Total assets
$
10,932
$
11,386
$
12,257
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
1,199
$
1,320
$
1,599
Accrued expenses and other current liabilities
1,051
1,219
1,127
Current portion of operating lease liabilities
658
667
717
Income taxes payable
10
50
29
Total current liabilities
2,918
3,256
3,472
Long-term liabilities:
Revolving credit facility
350
350
350
Long-term debt
1,487
1,486
1,485
Long-term operating lease liabilities
3,453
3,517
3,921
Other long-term liabilities
539
544
575
Total long-term liabilities
5,829
5,897
6,331
Commitments and contingencies (see Note 10)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued and Outstanding 368, 366, and 369 shares
18
18
19
Additional paid-in capital
47
27
—
Retained earnings
2,067
2,140
2,389
Accumulated other comprehensive income
53
48
46
Total stockholders’ equity
2,185
2,233
2,454
Total liabilities and stockholders’ equity
$
10,932
$
11,386
$
12,257
See Accompanying Notes to Condensed Consolidated Financial Statements
1
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Weeks Ended
($ and shares in millions except per share amounts)
April 29, 2023
April 30, 2022
Net sales
$
3,276
$
3,477
Cost of goods sold and occupancy expenses
2,062
2,381
Gross profit
1,214
1,096
Operating expenses
1,224
1,293
Operating loss
(10)
(197)
Interest expense
23
20
Interest income
(13)
(1)
Loss before income taxes
(20)
(216)
Income tax benefit
(2)
(54)
Net loss
$
(18)
$
(162)
Weighted-average number of shares - basic
367
370
Weighted-average number of shares - diluted
367
370
Net loss per share - basic
$
(0.05)
$
(0.44)
Net loss per share - diluted
$
(0.05)
$
(0.44)
See Accompanying Notes to Condensed Consolidated Financial Statements
2
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Net loss
$
(18)
$
(162)
Other comprehensive income (loss), net of tax
Foreign currency translation
(1)
3
Change in fair value of derivative financial instruments, net of tax expense of $2 and $2
8
7
Reclassification adjustment for gains on derivative financial instruments, net of tax expense of $— and $(1)
(2)
(2)
Other comprehensive income, net of tax
5
8
Comprehensive loss
$
(13)
$
(154)
See Accompanying Notes to Condensed Consolidated Financial Statements
3
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)
Shares
Amount
Total
Balance as of January 28, 2023
366
$
18
$
27
$
2,140
$
48
$
2,233
Net loss for the 13 weeks ended April 29, 2023
(18)
(18)
Other comprehensive income (loss), net of tax
Foreign currency translation
(1)
(1)
Change in fair value of derivative financial instruments
8
8
Amounts reclassified from accumulated other comprehensive income
(2)
(2)
Issuance of common stock related to stock options and employee stock purchase plans
—
—
7
7
Issuance of common stock and withholding tax payments related to vesting of stock units
2
—
(10)
(10)
Share-based compensation, net of forfeitures
23
23
Common stock dividends declared and paid ($0.15 per share)
(55)
(55)
Balance as of April 29, 2023
368
$
18
$
47
$
2,067
$
53
$
2,185
Balance as of January 29, 2022
371
$
19
$
43
$
2,622
$
38
$
2,722
Net loss for the 13 weeks ended April 30, 2022
(162)
(162)
Other comprehensive income (loss), net of tax
Foreign currency translation
3
3
Change in fair value of derivative financial instruments
7
7
Amounts reclassified from accumulated other comprehensive income
(2)
(2)
Repurchases and retirement of common stock
(4)
—
(39)
(15)
(54)
Issuance of common stock related to stock options and employee stock purchase plans
1
—
7
7
Issuance of common stock and withholding tax payments related to vesting of stock units
1
—
(14)
(14)
Share-based compensation, net of forfeitures
3
3
Common stock dividends declared and paid ($0.15 per share)
(56)
(56)
Balance as of April 30, 2022
369
$
19
$
—
$
2,389
$
46
$
2,454
See Accompanying Notes to Condensed Consolidated Financial Statements
4
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Cash flows from operating activities:
Net loss
$
(18)
$
(162)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization
137
130
Share-based compensation
23
1
Impairment of store assets
1
3
Amortization of debt issuance costs
1
2
Non-cash and other items
26
(3)
Gain on sale of building
(47)
—
Deferred income taxes
5
(1)
Changes in operating assets and liabilities:
Merchandise inventory
83
(166)
Other current assets and other long-term assets
9
57
Accounts payable
(102)
(336)
Accrued expenses and other current liabilities
(22)
(236)
Income taxes payable, net of receivables and other tax-related items
(49)
369
Other long-term liabilities
(11)
20
Operating lease assets and liabilities, net
(21)
(40)
Net cash provided by (used for) operating activities
15
(362)
Cash flows from investing activities:
Purchases of property and equipment
(117)
(228)
Net proceeds from sale of building
76
333
Net proceeds from divestiture activity
11
—
Net cash provided by (used for) investing activities
(30)
105
Cash flows from financing activities:
Proceeds from revolving credit facility
—
350
Proceeds from issuances under share-based compensation plans
7
7
Withholding tax payments related to vesting of stock units
(10)
(14)
Repurchases of common stock
—
(54)
Cash dividends paid
(55)
(56)
Net cash provided by (used for) financing activities
(58)
233
Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash
(2)
(7)
Net decrease in cash, cash equivalents, and restricted cash
(75)
(31)
Cash, cash equivalents, and restricted cash at beginning of period
1,273
902
Cash, cash equivalents, and restricted cash at end of period
$
1,198
$
871
Supplemental disclosure of cash flow information:
Cash paid for interest during the period
$
35
$
32
Cash paid for income taxes during the period, net of refunds
$
46
$
(420)
See Accompanying Notes to Condensed Consolidated Financial Statements
5
THE GAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
In the opinion of The Gap, Inc. (the “Company,” “we,” and “our”) management, the accompanying unaudited Condensed Consolidated Financial Statements contain all normal and recurring adjustments (except as otherwise disclosed) considered necessary to present fairly our financial position, results of operations, comprehensive loss, stockholders' equity, and cash flows as of April 29, 2023 and April 30, 2022 and for all periods presented. The Condensed Consolidated Balance Sheet as of January 28, 2023 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 January 28, 2023.
The results of operations for the 13 weeks ended April 29, 2023 are not necessarily indicative of the operating results that may be expected for the 53-week period ending February 3, 2024.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Additionally, these estimates and assumptions may change as a result of the impact of global economic conditions such as the uncertainty regarding global inflationary pressures, the Russia-Ukraine crisis, and distress in global credit and banking markets. We will continue to consider the impact of the global economic conditions on the assumptions and estimates used when preparing these Condensed Consolidated Financial Statements including inventory valuation, income taxes and valuation allowances, sales return and bad debt allowances, and the impairment of long-lived assets. If the global economic conditions worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations and financial position.
Restricted Cash
As of April 29, 2023, restricted cash primarily included consideration that serves as collateral for certain obligations occurring in the normal course of business and 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)
April 29, 2023
January 28, 2023
April 30, 2022
Cash and cash equivalents, per Condensed Consolidated Balance Sheets
$
1,170
$
1,215
$
845
Restricted cash included in other current assets
—
32
—
Restricted cash included in other long-term assets
28
26
26
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows
$
1,198
$
1,273
$
871
Accounting Pronouncements
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 Condensed Consolidated Financial Statements and disclosures, based on current information.
ASU No. 2022-04, Disclosure of Supplier Finance Program Obligations
In September 2022, the Financial Accounting Standards Board issued accounting standards update ("ASU") No. 2022-04, Disclosure of Supplier Finance Program Obligations. The ASU is intended to enhance the transparency of the use of supplier finance programs by requiring that the buyers in those programs provide additional disclosures about the program’s nature and potential magnitude, including a rollforward of the obligations and activity during the period. The ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2022, except for the rollforward information, which is effective prospectively for fiscal years beginning after December 15, 2023. We have adopted the provisions of this ASU during the 13 weeks ended April 29, 2023. The ASU does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. See Note 13 of Notes to Condensed Consolidated Financial Statements for information regarding our supply chain finance program.
Note 2. Revenue
Disaggregation of Net Sales
We disaggregate our net sales by channel and also by brand and region. 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.
Net sales disaggregated by channel are as follows:
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Store and franchise sales
$
2,053
$
2,137
Online sales (1)
1,223
1,340
Total net sales
$
3,276
$
3,477
__________
(1)Online sales primarily include sales originating from our online channel including those that are picked up or shipped from stores and net sales from revenue-generating strategic initiatives.
6
Net sales disaggregated by brand and region are as follows:
($ in millions)
Old Navy Global
Gap Global
Banana Republic Global
Athleta Global
Other (2)
Total
13 Weeks Ended April 29, 2023
U.S. (1)
$
1,659
$
496
$
374
$
309
$
3
$
2,841
Canada
145
61
36
10
—
252
Europe
—
29
1
1
—
31
Asia
1
77
14
—
—
92
Other regions
23
29
7
1
—
60
Total
$
1,828
$
692
$
432
$
321
$
3
$
3,276
($ in millions)
Old Navy Global
Gap Global
Banana Republic Global
Athleta Global
Other (2)
Total
13 Weeks Ended April 30, 2022
U.S. (1)
$
1,673
$
497
$
416
$
344
$
3
$
2,933
Canada
147
64
43
9
—
263
Europe
1
54
1
2
—
58
Asia
—
141
16
—
—
157
Other regions
20
35
6
5
—
66
Total
$
1,841
$
791
$
482
$
360
$
3
$
3,477
__________
(1)U.S. includes the United States and Puerto Rico.
(2)Primarily consists of net sales from revenue-generating strategic initiatives.
Deferred Revenue
We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards, licensing agreements, outstanding loyalty points, and reimbursements of loyalty program discounts associated with our credit card agreement. For the 13 weeks ended April 29, 2023, the opening balance of deferred revenue for these obligations was $354 million, of which $131 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $334 million as of April 29, 2023.
For the 13 weeks ended April 30, 2022, the opening balance of deferred revenue for these obligations was $345 million, of which $127 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $323 million as of April 30, 2022.
In April 2021, the Company entered into agreements with Barclays and Mastercard relating to a new long-term credit card program. In May 2022, the Company launched the new credit card program with Barclays and Mastercard and accordingly, our prior credit card program with Synchrony Financial was discontinued. The Company received an upfront payment of $60 million related to the new agreements prior to the program launch, which is being recognized as revenue over the term of the agreements.
Note 3.Restructuring
On April 25, 2023, the Company's management committed to a restructuring plan (the "Plan") as part of the Company's previously announced efforts to simplify and optimize its operating model and structure. The Plan includes a reduction in workforce of approximately 1,800 employees, primarily in headquarters locations.
In connection with the Plan, the Company incurred $75 million in restructuring costs during the 13 weeks ended April 29, 2023 on a pre-tax basis. The costs incurred in connection with the Plan are as follows:
13 Weeks Ended April 29, 2023
($ in millions)
Cost of Goods Sold and Occupancy Expenses
Operating Expenses
Total Costs
Employee-related costs
$
4
$
58
$
62
Consulting and other associated costs
—
13
13
Total restructuring costs
$
4
$
71
$
75
7
Including the costs incurred during the 13 weeks ended April 29, 2023, the Company estimates that it will incur approximately $100 million to $120 million in aggregate pre-tax cash expenditures in connection with the Plan, which consists of approximately $75 million to $85 million in employee-related costs and $25 million to $35 million in consulting and other associated costs. The actions associated with the reduction of the Company's workforce under the Plan are expected to be substantially completed by the end of the first half of fiscal 2023.
The following table summarizes restructuring costs that will be settled with cash payments and the related liability balances as of April 29, 2023, which are primarily included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet:
($ in millions)
Employee-Related Costs
Consulting and Other Associated Costs
Total
Balance at January 28, 2023
$
—
$
—
$
—
Provision
62
13
75
Cash payments
—
(10)
(10)
Balance at April 29, 2023
$
62
$
3
$
65
Note 4. Income Taxes
The effective income tax rate was 10.0 percent for the 13 weeks ended April 29, 2023, compared with 25.0 percent for the 13 weeks ended April 30, 2022. The decrease in the effective tax rate for the 13 weeks ended April 29, 2023 compared with the 13 weeks ended April 30, 2022 is primarily due to changes in the amount and jurisdictional mix of pre-tax operations.
Note 5. Debt and Credit Facilities
Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:
($ in millions)
April 29, 2023
January 28, 2023
April 30, 2022
2029 Notes
750
750
750
2031 Notes
750
750
750
Less: Unamortized debt issuance costs
(13)
(14)
(15)
Total long-term debt
$
1,487
$
1,486
$
1,485
The scheduled maturity of the Senior Notes is as follows:
Scheduled Maturity ($ in millions)
Principal
Interest Rate
Interest Payments
October 1, 2029 (1)
$
750
3.625
%
Semi-Annual
October 1, 2031 (2)
750
3.875
%
Semi-Annual
Total issuance
$
1,500
__________
(1)Includes an option to redeem the 2029 Notes, in whole or in part at any time, subject to a make-whole premium, prior to October 1, 2024. On or after October 1, 2024, includes an option to redeem the 2029 Notes, in whole or in part at any time, at stated redemption prices.
(2)Includes an option to redeem the 2031 Notes, in whole or in part at any time, subject to a make-whole premium, prior to October 1, 2026. On or after October 1, 2026, includes an option to redeem the 2031 Notes, in whole or in part at any time, at stated redemption prices.
On September 27, 2021, we completed the issuance of $1.5 billion aggregate principal amount of 3.625 percent senior notes due 2029 (“2029 Notes”) and 3.875 percent senior notes due 2031 (“2031 Notes”) (the 2029 Notes and the 2031 Notes, collectively, the “Senior Notes”). As of April 29, 2023, the aggregate estimated fair value of the Senior Notes was $1.05 billion and was based on the quoted market prices for each of the Senior Notes (level 1 inputs) as of the last business day of the fiscal quarter. The aggregate principal amount of the Senior Notes is recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized debt issuance costs.
8
On May 7, 2020, we entered into a senior secured asset-based revolving credit agreement (the "ABL Facility"), which was previously scheduled to expire in May 2023. On July 13, 2022, we entered into an amendment and restatement of the ABL Facility. Among other changes, the amendment and restatement extended the maturity of the ABL Facility to July 2027, increased the borrowing capacity from $1.8675 billion to $2.2 billion, modified the reference rate from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"), and reduced the applicable interest rate margin. Following the amendment and restatement, the ABL Facility generally bears interest at a per annum rate based on SOFR (subject to a zero floor) plus a margin, depending on borrowing base availability. The ABL Facility is available for working capital, capital expenditures, and other general corporate purposes.
As of April 29, 2023, the Company's outstanding borrowing under the ABL Facility was $350 million. The variable interest rate on the drawn amount is adjusted SOFR (calculated to include a 0.10% credit adjustment spread) plus a margin of 1.25%. The borrowing was recorded in long-term liabilities on the Condensed Consolidated Balance Sheet as of April 29, 2023.
On May 15, 2023, the Company repaid $100 million of the outstanding borrowing under the ABL Facility, which reduced the outstanding borrowing to $250 million.
We also have the ability to issue letters of credit on our ABL Facility. As of April 29, 2023, we had $49 million in standby letters of credit issued under the ABL Facility.
Following the closing of the Gap China transaction with Baozun Inc. ("Baozun") on January 31, 2023, the respective Gap China credit facilities were terminated. See Note 12 of Notes to Condensed Consolidated Financial Statements for related disclosures.
Note 6. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no material purchases, sales, issuances, or settlements related to recurring level 3 measurements for the 13 weeks ended April 29, 2023 or April 30, 2022.
9
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents held at amortized cost are as follows:
Fair Value Measurements at Reporting Date Using
($ in millions)
April 29, 2023
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents
$
2
$
—
$
2
$
—
Derivative financial instruments
19
—
19
—
Deferred compensation plan assets
33
33
—
—
Other assets
4
—
—
4
Total
$
58
$
33
$
21
$
4
Liabilities:
Derivative financial instruments
$
4
$
—
$
4
$
—
Fair Value Measurements at Reporting Date Using
($ in millions)
January 28, 2023
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents
$
15
$
—
$
15
$
—
Derivative financial instruments
11
—
11
—
Deferred compensation plan assets
34
34
—
—
Other assets
4
—
—
4
Total
$
64
$
34
$
26
$
4
Liabilities:
Derivative financial instruments
$
20
$
—
$
20
$
—
Fair Value Measurements at Reporting Date Using
($ in millions)
April 30, 2022
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents
$
16
$
—
$
16
$
—
Derivative financial instruments
44
—
44
—
Deferred compensation plan assets
40
40
—
—
Other assets
4
—
—
4
Total
$
104
$
40
$
60
$
4
Liabilities:
Derivative financial instruments
$
1
$
—
$
1
$
—
We have highly liquid fixed and variable income investments classified as cash equivalents. We value these investments at their original purchase prices plus interest that has accrued at the stated rate. Our cash equivalents are placed primarily in time deposits.
Derivative financial instruments primarily include foreign exchange forward contracts. See Note 7 of Notes to 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 to defer base compensation and bonus up to a maximum percentage, and non-employee directors to defer receipt of a portion of their Board fees. 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.
10
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 at the store level.
There were no material impairment charges recorded for long-lived assets during the 13 weeks ended April 29, 2023 or April 30, 2022.
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 impairment charges recorded for goodwill or other indefinite-lived intangible assets for the 13 weeks ended April 29, 2023 or April 30, 2022.
Note 7. 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 the Canadian dollar, Japanese yen, British pound, New Taiwan dollar, Mexican peso, and Euro. Cash flows from derivative financial instruments are classified as cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.
Derivative financial instruments are recorded at fair value on the Condensed Consolidated Balance Sheets as other current assets, other long-term assets, accrued expenses and other current liabilities, or other long-term liabilities.
Cash Flow Hedges
We designate foreign exchange 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 as cash flow hedges. The foreign exchange forward contracts entered into to hedge forecasted merchandise purchases and related costs 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 (loss) and is recognized into net income (loss) during the period in which the underlying transaction impacts the Condensed Consolidated Statements of Operations.
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 Operations in the same period and generally offset each other.
11
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
($ in millions)
April 29, 2023
January 28, 2023
April 30, 2022
Derivatives designated as cash flow hedges
$
330
$
441
$
373
Derivatives not designated as hedging instruments
599
645
758
Total
$
929
$
1,086
$
1,131
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
($ in millions)
April 29, 2023
January 28, 2023
April 30, 2022
Derivatives designated as cash flow hedges:
Other current assets
$
13
$
9
$
16
Accrued expenses and other current liabilities
1
5
—
Derivatives not designated as hedging instruments:
Other current assets
6
2
28
Accrued expenses and other current liabilities
3
15
1
Total derivatives in an asset position
$
19
$
11
$
44
Total derivatives in a liability position
$
4
$
20
$
1
Substantially all of the unrealized gains and losses from designated cash flow hedges as of April 29, 2023 will be recognized in income (loss) within the next 12 months at the then-current values, which may differ from the fair values as of April 29, 2023 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 not material for all periods presented.
See Note 6 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.
The pre-tax amounts recognized in net loss related to derivative instruments are as follows:
Location and Amount of Gain Recognized in Net Loss
13 Weeks Ended April 29, 2023
13 Weeks Ended April 30, 2022
($ in millions)
Cost of goods sold and occupancy expenses
Operating expenses
Cost of goods sold and occupancy expenses
Operating expenses
Total amount of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of derivatives are recorded
$
2,062
$
1,224
$
2,381
$
1,293
Gain recognized in net loss
Derivatives designated as cash flow hedges
(2)
—
(3)
—
Derivatives not designated as hedging instruments
—
(8)
—
(22)
Total gain recognized in net loss
$
(2)
$
(8)
$
(3)
$
(22)
12
Note 8. Share Repurchases
Share repurchase activity is as follows:
13 Weeks Ended
($ and shares in millions except average per share cost)
April 29, 2023
April 30, 2022
Number of shares repurchased (1)
—
3.7
Total cost
$
—
$
54
Average per share cost including commissions
$
—
$
14.47
_________
(1)Excludes shares withheld to settle employee statutory tax withholding related to the vesting of stock units.
In February 2019, the Company's Board of Directors (the "Board") approved a $1.0 billion share repurchase authorization (the "February 2019 repurchase program"). The February 2019 repurchase program had $476 million remaining as of April 29, 2023. All common stock repurchased is immediately retired.
Note 9. Net Loss Per Share
Weighted-average number of shares used for net loss per share is as follows:
13 Weeks Ended
(shares in millions)
April 29, 2023
April 30, 2022
Weighted-average number of shares - basic
367
370
Common stock equivalents (1)
—
—
Weighted-average number of shares - diluted
367
370
_________
(1)For the 13 weeks ended April 29, 2023 and April 30, 2022, the dilutive impact of outstanding options and awards was excluded from dilutive shares as a result of the Company's net loss for the periods.
The anti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 7 million and 12 million for the 13 weeks ended April 29, 2023 and April 30, 2022, respectively, as their inclusion would have an anti-dilutive effect on net loss per share.
Note 10. 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 April 29, 2023, Actions filed against us included commercial, intellectual property, customer, employment, securities, and data privacy 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 April 29, 2023, January 28, 2023, and April 30, 2022, 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 was not material for any individual Action or in total for all periods presented. Subsequent to April 29, 2023, 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. 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.
13
Note 11. Segment Information
We identify our operating segments according to how our business activities are managed and evaluated. As of April 29, 2023, our operating segments included: Old Navy Global, Gap Global, Banana Republic Global, and Athleta Global. Each operating segment has a brand president who is responsible for various geographies and channels. Each of our brands serves customer demand through stores and online channels, leveraging our omni-channel capabilities that allow customers to shop seamlessly across all of our brands. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one reportable segment as of April 29, 2023. 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.
See Note 2 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue by channel and by brand and region.
Note 12. Divestitures
On November 7, 2022, we signed agreements to transition our Gap China and Gap Taiwan ("Gap Greater China") operations to a third party, Baozun, to operate Gap Greater China stores and the in-market website as a franchise partner, subject to regulatory approvals and closing conditions. On January 31, 2023, the Gap China transaction closed with Baozun. The impact to the Condensed Consolidated Financial Statements upon divestiture was not material for the 13 weeks ended April 29, 2023. The Gap Taiwan operations will continue to operate as usual until regulatory approvals and closing conditions are met.
On February 1, 2022, we completed the transition of our Gap Italy operations to a third party, OVS S.p.A. ("OVS"), to operate Gap Italy stores as a franchise partner. The impact to the Condensed Consolidated Financial Statements upon divestiture was not material for the 13 weeks ended April 30, 2022. As of April 30, 2022, the Company also reclassified certain assets as held for sale assets that were expected to be sold in the next 12 months related to our distribution center in Rugby, England. The aggregate carrying amount of the assets held for sale, primarily consisting of fixed assets, was $45 million and was recorded within other current assets on the Condensed Consolidated Balance Sheet as of April 30, 2022.
Note 13. Supply Chain Finance Program
Our voluntary supply chain finance ("SCF") program provides certain suppliers with the opportunity to sell their receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the agreements between our suppliers and the financial institutions and our payment terms are not impacted by whether a supplier participates in the SCF program.
We may agree to side letters with participating financial institutions related to the SCF program that require us to transfer a certain amount of cash to be used as collateral for our payment obligations in a specified period. These collateral amounts, if applicable, are classified as restricted cash on our Condensed Consolidated Balance Sheets. There were no collateral amounts under the SCF program as of April 29, 2023 and April 30, 2022. The collateral amount under the SCF program was $30 million as of January 28, 2023. Additionally, our lenders under the ABL Facility who also participate in the SCF program have their related financings secured pursuant to the terms of the ABL Facility.
The Company's outstanding obligations under the SCF program were $322 million, $316 million, and $238 million as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively, and were included in accounts payable on the Condensed Consolidated Balance Sheets.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OUR BUSINESS
We are a collection of purpose-led, lifestyle brands offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. We have Company-operated stores in the United States, Canada, Japan, and Taiwan. Our products are available to customers online through Company-owned websites and through third party arrangements. We also have franchise agreements to operate Old Navy, Gap, Banana Republic, and Athleta throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we use our omni-channel capabilities to bridge the digital world and physical stores to further enhance our shopping experience for our customers. Our omni-channel services, including curbside pick-up, buy online pick-up in store, order-in-store, find-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, are tailored uniquely across our collection of brands. Most of the products sold under our brand names are designed by us and manufactured by independent sources.
OVERVIEW
Financial results for the first quarter of fiscal 2023 are as follows:
•Net sales for the first quarter of fiscal 2023 decreased 6 percent compared with the first quarter of fiscal 2022.
•Online sales for the first quarter of fiscal 2023 decreased 9 percent compared with the first quarter of fiscal 2022 and store and franchise sales for the first quarter of fiscal 2023 decreased 4 percent compared with the first quarter of fiscal 2022.
•Gross profit for the first quarter of fiscal 2023 was $1.21 billion compared with $1.10 billion for the first quarter of fiscal 2022. Gross margin for the first quarter of fiscal 2023 was 37.1 percent compared with 31.5 percent for the first quarter of fiscal 2022.
•Operating loss for the first quarter of fiscal 2023 was $(10) million compared with $(197) million for the first quarter of fiscal 2022.
•The effective income tax rate for the first quarter of fiscal 2023 was 10.0 percent compared with 25.0 percent for the first quarter of fiscal 2022.
•Net loss for the first quarter of fiscal 2023 was $(18) million compared with $(162) million for the first quarter of fiscal 2022.
•Diluted loss per share was $(0.05) for the first quarter of fiscal 2023 compared with $(0.44) for the first quarter of fiscal 2022.
•Merchandise inventory as of the first quarter of fiscal 2023 decreased 27 percent compared with the first quarter of fiscal 2022.
On April 25, 2023, the Company's management committed to the Plan as part of the Company's previously announced efforts to simplify and optimize its operating model and structure. The Plan includes a reduction in workforce of approximately 1,800 employees, primarily in headquarters locations.
In connection with the Plan, the Company incurred $75 million in restructuring costs during the 13 weeks ended April 29, 2023 on a pre-tax basis, which includes employee-related costs of $62 million and consulting and other associated costs of $13 million. Including the costs incurred during the 13 weeks ended April 29, 2023, the Company estimates that it will incur approximately $100 million to $120 million in aggregate pre-tax cash expenditures in connection with the Plan, which consists of approximately $75 million to $85 million in employee-related costs and $25 million to $35 million in consulting and other associated costs. The actions associated with the reduction of the Company's workforce under the Plan are expected to be substantially completed by the end of the first half of fiscal 2023.
The Company is also continuing to reduce the number of Gap and Banana Republic stores in North America by approximately 350 stores from the beginning of fiscal 2020 to the end of fiscal 2023. As of April 29, 2023, we have closed, net of openings, 315 Gap and Banana Republic stores in North America since the beginning of fiscal 2020.
On November 7, 2022, we signed agreements to transition our Gap Greater China operations to a third party, Baozun, to operate Gap Greater China stores and the in-market website as a franchise partner, subject to regulatory approvals and closing conditions. On January 31, 2023, the Gap China transaction closed with Baozun. The impact to the Condensed Consolidated Financial Statements upon divestiture was not material for the 13 weeks ended April 29, 2023. The Gap Taiwan operations will continue to operate as usual until regulatory approvals and closing conditions are met.
During the 13 weeks ended April 29, 2023, the Company sold a building for $76 million and recorded a pre-tax gain on sale of $47 million within operating expenses on the Condensed Consolidated Statement of Operations.
15
We remain focused on the following strategic priorities in the near term:
•managing inventory to support a healthy merchandise margin;
•reducing and optimizing our fixed cost structure to improve profitability and manage through current macroeconomic challenges;
•driving sales through assortment improvements and a balanced and relevant category mix;
•driving creative excellence and delivering product that offers value to our customers through a combination of fit, quality, brand, and price;
•rationalizing the Gap and Banana Republic store fleet;
•prioritizing asset-light growth through licensing, online, and franchise partnerships globally;
•optimizing investments in our four purpose-led lifestyle brands to drive relevance and market share;
•attracting and retaining strong talent in our businesses and functions; and
•continuing to integrate social and environmental sustainability into business practices to support long-term growth.
16
RESULTS OF OPERATIONS
Net Sales
See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for net sales disaggregation.
Comparable Sales ("Comp Sales")
Comp Sales include the results of Company-operated stores and sales through our online channel. The calculation of Comp Sales excludes the results of our franchise business. Comp Sales also included the results of certain foreign operations until their respective transitions to third party franchise partners. See Note 12 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for related disclosures.
A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.
A store is considered non-comparable ("Non-comp") when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.
A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.
Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.
The percentage change in Comp Sales by global brand and for The Gap, Inc., as compared with the preceding year, is as follows:
13 Weeks Ended
April 29, 2023
April 30, 2022
Old Navy Global
(1)
%
(22)
%
Gap Global
1
%
(11)
%
Banana Republic Global
(8)
%
27
%
Athleta Global
(13)
%
(7)
%
The Gap, Inc.
(3)
%
(14)
%
17
Store count, openings, closings, and square footage for our stores are as follows:
January 28, 2023
13 Weeks Ended April 29, 2023
April 29, 2023
Number of Store Locations
Number of Stores Opened
Number of Stores Closed
Number of Store Locations
Square Footage (in millions)
Old Navy North America
1,238
15
1
1,252
20.0
Gap North America
493
—
5
488
5.1
Gap Asia (1)
232
1
1
143
1.2
Banana Republic North America
419
—
6
413
3.5
Banana Republic Asia
46
2
2
46
0.2
Athleta North America
257
3
1
259
1.1
Company-operated stores total
2,685
21
16
2,601
31.1
Franchise (1)
667
57
6
852
N/A
Total
3,352
78
22
3,453
31.1
Increase (decrease) over prior year
1.1
%
(6.3)
%
January 29, 2022
13 Weeks Ended April 30, 2022
April 30, 2022
Number of Store Locations
Number of Stores Opened
Number of Stores Closed
Number of Store Locations
Square Footage (in millions)
Old Navy North America
1,252
9
3
1,258
20.2
Gap North America
520
1
9
512
5.4
Gap Asia
329
3
4
328
2.7
Gap Europe (2)
11
—
—
—
—
Banana Republic North America
446
1
2
445
3.7
Banana Republic Asia
50
1
—
51
0.2
Athleta North America
227
6
2
231
1.0
Company-operated stores total
2,835
21
20
2,825
33.2
Franchise (2)
564
23
9
589
N/A
Total
3,399
44
29
3,414
33.2
Decrease over prior year
(4.4)
%
(4.3)
%
__________
(1)The 89 Gap China stores that were transitioned to Baozun during the period are not included as store closures or openings for Company-operated and Franchise store activity. The ending balance for Gap Asia excludes Gap China stores and the ending balance for Franchise includes Gap China locations transitioned during the period.
(2)The 11 Gap Italy stores that were transitioned to OVS during the period are not included as store closures or openings for Company-operated and Franchise store activity. The ending balance for Gap Europe excludes Gap Italy stores and the ending balance for Franchise includes Gap Italy stores.
Outlet and factory stores are reflected in each of the respective brands.
18
Net Sales
Our net sales for the first quarter of fiscal 2023 decreased $201 million, or 6 percent, compared with the first quarter of fiscal 2022, driven primarily by a decrease in online sales, the transition of our Gap China business to a partnership model, and strategic store closures. Additionally, there was an unfavorable impact of foreign exchange of $35 million. The foreign exchange impact is the translation impact if net sales for the first quarter of fiscal 2022 were translated at exchange rates applicable during the first quarter of fiscal 2023.
Cost of Goods Sold and Occupancy Expenses
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Cost of goods sold and occupancy expenses
$
2,062
$
2,381
Gross profit
$
1,214
$
1,096
Cost of goods sold and occupancy expenses as a percentage of net sales
62.9
%
68.5
%
Gross margin
37.1
%
31.5
%
Cost of goods sold and occupancy expenses decreased 5.6 percentage points as a percentage of net sales in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022.
•Cost of goods sold decreased 6.0 percentage points as a percentage of net sales in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022, primarily driven by a decrease in air freight expenses as well as improved promotional activity. This was partially offset by commodity price increases.
•Occupancy expenses increased 0.4 percentage points as a percentage of net sales in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022, primarily driven by a decrease in online sales without a corresponding decrease in fixed occupancy expenses.
19
Operating Expenses
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Operating expenses
$
1,224
$
1,293
Operating expenses as a percentage of net sales
37.4
%
37.2
%
Operating margin
(0.3)
%
(5.7)
%
Operating expenses decreased $69 million, but increased 0.2 percentage points as a percentage of net sales in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022, primarily due to a decrease in net sales as well as the following:
•a decrease in advertising expenses;
•a gain on sale of building of $47 million; and
•a decrease in technology-related investments; partially offset by
•restructuring expenses of $71 million incurred during the first quarter of fiscal 2023 as a result of actions taken to further simplify and optimize our operating model and structure.
Interest Expense
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Interest expense
$
23
$
20
Interest expense primarily includes interest on outstanding borrowings and obligations mainly related to our Senior Notes.
Income Taxes
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Income taxes
$
(2)
$
(54)
Effective tax rate
10.0
%
25.0
%
The decrease in the effective tax rate for the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022 is primarily due to changes in the amount and jurisdictional mix of pre-tax operations.
20
LIQUIDITY AND CAPITAL RESOURCES
In addition to our cash flows from operating activities, our primary sources of liquidity include cash and cash equivalents, our Senior Notes, and borrowings under our ABL Facility. As of April 29, 2023, we had cash and cash equivalents of approximately $1.2 billion. We hold our cash and cash equivalents across a diversified set of reputable financial institutions and monitor the credit standing of those financial institutions. In addition, we have issued $1.5 billion aggregate principal amount of our Senior Notes, and are also able to supplement near-term liquidity, if necessary, with our ABL Facility or other available market instruments. As of April 29, 2023, the Company's outstanding borrowing under the ABL Facility was $350 million. On May 15, 2023, the Company repaid $100 million of the outstanding borrowing under the ABL Facility, which reduced the outstanding borrowing to $250 million. See Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on the Senior Notes and ABL Facility.
Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, lease and occupancy costs, personnel-related expenses, purchases of property and equipment, shipping costs, and payment of taxes. As our business typically follows a seasonal pattern, with sales peaking during the end-of-year holiday period, we fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. The seasonality of our operations, in addition to the impact of global economic conditions such as the uncertainty surrounding global inflationary pressures, the Russia-Ukraine crisis, and distress in global credit and banking markets, may lead to significant fluctuations in certain asset and liability accounts as well as cash inflows and outflows between fiscal year-end and subsequent interim periods.
Our voluntary SCF program provides certain suppliers with the opportunity to sell their receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the agreements between our suppliers and the financial institutions and our payment terms are not impacted by whether a supplier participates in the SCF program. See Note 13 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on the Company's SCF program.
We believe our existing balances of cash and cash equivalents, along with our cash flows from operations, and instruments mentioned above, provide sufficient funds for our business operations as well as capital expenditures, dividends, and other liquidity requirements associated with our business operations over the next 12 months and beyond.
Cash Flows from Operating Activities
Net cash provided by operating activities was $15 million during the first quarter of fiscal 2023 compared with $362 million of net cash used for operating activities during the first quarter of fiscal 2022, primarily due to the following:
Net Loss
•a net loss of $18 million during the first quarter of fiscal 2023 compared with a net loss of $162 million during the first quarter of fiscal 2022;
Changes in operating assets and liabilities
•an increase of $249 million related to merchandise inventory primarily due to lower inventory levels in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022;
•an increase of $234 million related to accounts payable primarily due to the timing of payments for inventory during the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022; and
•an increase of $214 million related to accrued expenses and other current liabilities primarily due to lower bonus payment during the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022; partially offset by
•a decrease of $418 million related to income taxes payable, net of receivables and other tax-related items, primarily due to receipt of tax refunds during the first quarter of fiscal 2022 related to fiscal 2020 net operating loss carryback claims.
Cash Flows from Investing Activities
Net cash used for investing activities was $30 million during the first quarter of fiscal 2023 compared with $105 million of net cash provided by investing activities during the first quarter of fiscal 2022, primarily due to the following:
•$76 million in net proceeds from the sale of a building during the first quarter of fiscal 2023 compared with $333 million in net proceeds from the sale of a building during the first quarter of fiscal 2022; partially offset by
•$111 million less purchases of property and equipment during the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022.
21
Cash Flows from Financing Activities
Net cash used for financing activities was $58 million during the first quarter of fiscal 2023 compared with $233 million of net cash provided by financing activities during the first quarter of fiscal 2022, primarily due to the following:
•$350 million in proceeds received from borrowing under the ABL Facility during the first quarter of fiscal 2022; partially offset by
•$54 million in repurchases of common stock during the first quarter of fiscal 2022 compared with no repurchases in the first quarter of fiscal 2023.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures. We require regular capital expenditures including technology improvements as well as building and maintaining our stores and distribution centers. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
13 Weeks Ended
($ in millions)
April 29, 2023
April 30, 2022
Net cash provided by (used for) operating activities
$
15
$
(362)
Less: Purchases of property and equipment
(117)
(228)
Free cash flow
$
(102)
$
(590)
Dividend Policy
In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.
We paid a dividend of $0.15 per share during the first quarter of fiscal 2023. In May 2023, the Board authorized a dividend of $0.15 per share for the second quarter of fiscal 2023.
Share Repurchases
Certain financial information about the Company’s share repurchases is set forth in Note 8 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Summary Disclosures about Contractual Cash Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of January 28, 2023, other than those which occur in the normal course of business. See Note 10 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023. See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our market risk profile as of January 28, 2023, is disclosed in our Annual Report on Form 10-K and has not significantly changed other than as noted below. See Notes 5, 6, and 7 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on our debt and credit facilities, investments, and derivative financial instruments.
On March 27, 2023, Moody's downgraded our corporate credit rating from Ba2 to Ba3 with a negative outlook and downgraded the rating of our Senior Notes from Ba3 to B1 with a negative outlook. These reductions and any future reduction in our credit ratings could result in an increase to our interest expense on future borrowings.
22
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s first quarter of fiscal 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its internal control over financial reporting following major organizational restructuring. The impact of the Plan on the Company's internal control over financial reporting will be assessed and monitored throughout the fiscal year. See Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on the Plan.
23
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
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. Actions filed against us from time to time include commercial, intellectual property, customer, employment, securities, and data privacy 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.
We cannot predict with assurance the outcome of Actions brought against us. Accordingly, developments, settlements, or resolutions may occur and impact operations 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 financial results.
Item 1A. Risk Factors.
The following risk factors appearing in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 have been updated.
Risks Related to Strategic Transactions and Investments
We may engage in or seek to engage in strategic transactions, such as acquisitions, divestitures and other dispositions, or adjust or restructure our business, all of which are subject to various risks and uncertainties, which could disrupt or adversely affect our business.
We may engage in or seek to engage in strategic transactions, such as acquisitions, divestitures or other dispositions, which we may not be able to complete on anticipated terms or time frames or at all, or which may not generate some or all of the strategic, financial, operational or other benefits we expect to realize from such transactions on such anticipated time frames or at all. In addition, these transactions may be complex in nature, and unanticipated developments or changes, including changes in law, the macroeconomic environment, market conditions, the retail industry or political conditions may affect our ability to complete such transactions. In addition, the process of completing these transactions may be time-consuming and involve considerable costs and expenses, which may be significantly higher than what we anticipate and may not yield a benefit if the transactions are not completed successfully. Executing these transactions may require significant time and attention from our senior management and employees, which could disrupt our ongoing business and adversely affect our results of operations. We may also experience increased difficulties in attracting, retaining and motivating employees and/or attracting and retaining customers during the pendency or following the completion of any of these transactions, which could harm our business.
In 2021, we reached agreements to transfer our European business to a franchise model, and in 2022 we reached agreements to transition our Mexico and Greater China businesses to a franchise model. In 2021, we also divested our Janie and Jack and Intermix brands and acquired two technology companies. We incurred costs and expenses in connection with these transactions and may incur such costs and expenses in connection with future strategic reviews, which may require significant attention from our senior management and employees. Executing any transactions resulting from future strategic reviews will be time-consuming, will involve additional costs and expenses, which may be significant, and may result in difficulties attracting, retaining and motivating employees, which could harm our business and adversely affect our results of operations.
We have also adjusted and may further adjust our business strategies to meet changes in our business environment. For example, in 2022, we began taking steps to drive long-term improvements across our business, which include reducing open and existing corporate roles, renegotiating our advertising agency contracts, reducing technology operating costs, and rationalizing digital investments. In March 2023, we shared plans to further simplify and optimize our operating model and structure, including actions such as increasing spans of control and decreasing management layers to improve quality and speed of decision making, as well as creating a consistent organizational structure across all four brands. In connection with those actions, in April 2023, we announced a restructuring plan that includes a reduction of the Company's workforce primarily in headquarters locations. Our ability to achieve the intended benefits and projected cost savings from these actions are subject to many estimates and assumptions. For example, costs associated with these actions could be higher than anticipated, and savings associated with these actions could be lower than anticipated. In addition, these actions may impact our ability to attract and retain qualified personnel, may be distracting to our senior management and employees, and may negatively impact our business operations and reputation. These actions are also subject to execution risk and may not generate the intended benefits and projected cost savings to the extent or on the timeline as expected, and our new organizational structure and strategies could be less successful than our previous organizational structure and strategies.
24
Risks Relating to Our Indebtedness and Credit Profile
Changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our business and financial condition.
We currently have a corporate credit rating of BB with a negative outlook from Standard & Poor's. In March 2023, Moody's downgraded our corporate credit rating from Ba2 to Ba3 with a negative outlook and downgraded the rating of our Senior Notes from Ba3 to B1 with a negative outlook. These reductions and any future reduction in our credit ratings could result in reduced access to the credit and capital markets, more restrictive covenants in future financing documents and higher interest costs, and potentially increased lease or hedging costs. In addition, market conditions such as increased volatility or disruption in the credit markets could adversely affect our ability to obtain financing or refinance existing debt on terms that would be acceptable to us.
There have been no other material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In February 2019, we announced that the Board approved a $1.0 billion share repurchase authorization (the "February 2019 repurchase program"), which has no expiration date. There were no shares repurchased, other than shares withheld to settle employee statutory tax withholding related to the vesting of stock units, during the 13 weeks ended April 29, 2023. The February 2019 repurchase program had $476 million remaining as of April 29, 2023.
25
Item 6. Exhibits.
Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed/ Furnished Herewith
3.1
Amended and Restated Certificate of Incorporation (P)
Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101
The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended April 29, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Stockholders' Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements
X
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
X
_____________________________
(P) This Exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.
†Indicates management contract or compensatory plan or arrangement.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE GAP, INC.
Date:
May 26, 2023
By
/s/ Bob L. Martin
Bob L. Martin
Interim Chief Executive Officer
(Principal Executive Officer)
Date:
May 26, 2023
By
/s/ Katrina O'Connell
Katrina O'Connell
Executive Vice President and Chief Financial Officer
