NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Balance Sheets as of October 31, 2020 and November 2, 2019, and the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements contain all normal and recurring adjustments (except as otherwise disclosed) considered necessary to present fairly our financial position, results of operations, comprehensive income (loss), stockholders' equity, and cash flows as of October 31, 2020 and November 2, 2019 and for all periods presented. The Condensed Consolidated Balance Sheet as of February 1, 2020 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 1, 2020.
The results of operations for the thirteen and thirty-nine weeks ended October 31, 2020 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January 30, 2021.
COVID-19
In March 2020, the World Health Organization declared the coronavirus disease ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed our North America retail stores and a large number of our stores globally. In May 2020, we began to safely reopen our temporarily closed stores in accordance with local government guidelines and most stores were open during the thirteen weeks ended October 31, 2020. Beginning in late October 2020, several European countries instituted new lockdown mandates to contain surging COVID-19 cases and as a result we have temporarily closed certain stores in Europe. We will continue to monitor regional mandates for additional temporary store closures as they arise.
During the thirty-nine weeks ended October 31, 2020, the Company implemented several actions including completing the issuance of our Senior Secured Notes for $2.25 billion due 2023 (“2023 Notes”), 2025 (“2025 Notes”), and 2027 (“2027 Notes”) (collectively, the “Notes”) and entering into a third amended and restated senior secured asset-based revolving credit agreement (the "ABL Facility") in May 2020. See Note 3 of Notes to Condensed Consolidated Financial Statements for further details related to our debt and credit facilities. Additionally, we suspended share repurchases and dividends and deferred the first quarter of fiscal 2020 dividend in March 2020.
As a result of COVID-19, we suspended rent payments beginning in April 2020 due to our temporarily closed stores and are continuing to work through negotiations with our landlords relating to those leases. We considered the Financial Accounting Standards Board's ("FASB") guidance regarding lease modifications as a result of the effects of COVID-19 and elected to apply the temporary practical expedient to account for lease changes as variable rent unless an amendment results in a substantial change in the Company's lease obligations. As of October 31, 2020, the impact of applying the temporary practical expedient was not material to our Condensed Consolidated Financial Statements.
In response to COVID-19, various governments worldwide have enacted, or are in the process of enacting, measures to provide relief to businesses negatively affected by the pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the United States. The CARES Act provides relief to U.S. corporations through financial assistance programs and modifications to certain payroll and income tax provisions. In connection with CARES Act and other financial relief measures worldwide, the Company has recognized $67 million of payroll related credits for the thirty-nine weeks ended October 31, 2020. The payroll related credits are recorded as a reduction within operating expenses in the Condensed Consolidated Statements of Operations. The Company is also considering certain other beneficial provisions of the CARES Act, including the net operating loss carryback provision. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the estimated income tax impact of the CARES Act.
We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements including inventory valuation, lease accounting impacts, income taxes, and the impairment of long-lived store assets and operating lease assets. These assumptions and estimates may change as the current situation evolves or new events occur and additional information is obtained. If the economic conditions caused by COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.
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 October 31, 2020, 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
October 31,
2020
|
|
February 1,
2020
|
|
November 2,
2019
|
|
Cash and cash equivalents, per Condensed Consolidated Balance Sheets
|
$
|
2,471
|
|
|
$
|
1,364
|
|
|
$
|
788
|
|
|
Restricted cash included in other current assets
|
4
|
|
|
—
|
|
|
—
|
|
|
Restricted cash included in other long-term assets
|
24
|
|
|
17
|
|
|
18
|
|
|
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows
|
$
|
2,499
|
|
|
$
|
1,381
|
|
|
$
|
806
|
|
Accounting Pronouncements Recently Adopted
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 accounting standards update ("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. We adopted this ASU on a prospective basis on February 2, 2020. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements or related disclosures.
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 Condensed Consolidated Financial Statements, based on current information.
ASU No. 2019-12, Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company will adopt this ASU on January 31, 2021 and does not expect there to be a material impact on our Condensed Consolidated Financial Statements.
Note 2. Revenue
The Company’s revenues include merchandise sales at stores, online, and through franchise agreements, as well as the newly introduced business-to-business ("B2B") program. 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, the Company has elected to treat shipping and handling as fulfillment activities and not as a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online 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 Operations.
We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, Old Navy, and Athleta 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. There were no material contract liabilities related to our franchise agreements for all periods presented.
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 October 31, 2020, the opening balance of deferred revenue for these obligations was $189 million, of which $68 million was recognized as revenue during the period. For the thirty-nine weeks ended October 31, 2020, the opening balance of deferred revenue for these obligations was $226 million, of which $140 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $191 million as of October 31, 2020.
We expect that the majority of our revenue deferrals as of the quarter ended October 31, 2020, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.
For the thirteen weeks ended November 2, 2019, the opening balance of deferred revenue for these obligations was $195 million, of which $78 million was recognized as revenue during the period. For the thirty-nine weeks ended November 2, 2019, the opening balance of deferred revenue for these obligations was $227 million, of which $161 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $189 million as of November 2, 2019.
Net sales disaggregated for stores and online sales for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 was as follows:
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|
|
|
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|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
($ in millions)
|
October 31, 2020
|
|
November 2, 2019
|
|
October 31, 2020
|
|
November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
Store sales (1)
|
$
|
2,379
|
|
|
$
|
2,992
|
|
|
$
|
5,129
|
|
|
$
|
8,981
|
|
|
Online sales (2)
|
1,615
|
|
|
1,006
|
|
|
4,247
|
|
|
2,728
|
|
|
Total net sales
|
$
|
3,994
|
|
|
$
|
3,998
|
|
|
$
|
9,376
|
|
|
$
|
11,709
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
__________
(1)Store sales primarily include sales made at our Company-operated stores and franchise sales. Fiscal 2020 store sales were negatively impacted by COVID-19. See Note 1 of Notes to Condensed Consolidated Financial Statements for further details.
(2)Online sales primarily include sales made through our online channels including curbside pick-up, ship-from-store sales, buy online pick-up in store sales, and order-in-store sales. Additionally, beginning in the second quarter of fiscal 2020, sales from the B2B program are also included.
See Note 10 of Notes to Condensed Consolidated Financial Statements for further disaggregation of revenue by brand and by region.
Note 3. Debt and Credit Facilities
Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:
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|
|
|
|
|
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($ in millions)
|
October 31,
2020
|
|
February 1,
2020
|
|
November 2,
2019
|
|
2021 Notes
|
$
|
—
|
|
|
$
|
1,249
|
|
|
$
|
1,249
|
|
|
2023 Notes
|
500
|
|
|
—
|
|
|
—
|
|
|
2025 Notes
|
750
|
|
|
—
|
|
|
—
|
|
|
2027 Notes
|
1,000
|
|
|
—
|
|
|
—
|
|
|
Less: Unamortized debt issuance costs
|
(36)
|
|
|
—
|
|
|
—
|
|
|
Total long-term debt
|
$
|
2,214
|
|
|
$
|
1,249
|
|
|
$
|
1,249
|
|
In June 2020, we redeemed our $1.25 billion aggregate principal amount of 5.95 percent notes due April 2021 (the "2021 Notes"). We incurred a loss on extinguishment of debt of $58 million, primarily related to the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations. Prior to redeeming our 2021 Notes, the aggregate principal amount of the 2021 Notes was recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized discount. Following the redemption, our obligations under the 2021 Notes were discharged.
In May 2020, we completed the issuance of the Notes in a private placement to qualified buyers and received gross proceeds of $2.25 billion. Concurrently with the issuance of the Notes, the Company amended the existing unsecured revolving credit facility with the ABL Facility which is scheduled to expire in May 2023. During the second quarter of fiscal 2020, we paid and recorded debt issuance costs related to the Notes and ABL Facility within long-term debt and other long-term assets on the Condensed Consolidated Balance Sheet, which will continue to be amortized through interest expense over the life of the related instrument.
The scheduled maturity of the Notes is as follows:
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Scheduled Maturity ($ in millions)
|
Principal
|
|
Interest Rate
|
|
Interest Payments
|
|
Senior Secured Notes (1)
|
|
|
|
|
|
|
May 15, 2023
|
$
|
500
|
|
|
8.375
|
%
|
|
Semi-Annual
|
|
May 15, 2025
|
750
|
|
|
8.625
|
%
|
|
Semi-Annual
|
|
May 15, 2027
|
1,000
|
|
|
8.875
|
%
|
|
Semi-Annual
|
|
Total issuance
|
$
|
2,250
|
|
|
|
|
|
__________
(1)Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium.
As of October 31, 2020, the estimated fair value of the Notes was $2.54 billion and was based on the quoted market price for each of the Notes (level 1 inputs) as of the last business day of the fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt on the Condensed Consolidated Balance Sheet, net of the unamortized debt issuance cost.
The ABL Facility has a $1.8675 billion borrowing capacity and bears interest at a base rate (typically LIBOR) plus a margin depending on borrowing base availability. We also have the ability to issue letters of credit on our ABL Facility. As of October 31, 2020, we had $48 million in standby letters of credit issued under the ABL Facility. There were no borrowings under the ABL Facility as of October 31, 2020.
The Notes are secured by the Company's real and intellectual property and equipment and intangibles. The Notes contain covenants that limit the Company’s ability to, among other things: (i) grant or incur liens on the collateral; (ii) incur, assume or guarantee additional indebtedness; (iii) enter into sale and lease-back transactions; (iv) sell or otherwise dispose of assets that are collateral; and (v) make certain restricted payments or other investments. The Notes are also subject to certain provisions related to default that, if triggered, could result in acceleration of the maturity of the Notes.
The ABL Facility agreement is secured by specified assets, including a first lien on inventory, accounts receivable and bank accounts. The Notes are also secured by a second priority lien on certain assets securing the ABL Facility, which includes security interests in inventory, accounts receivable and bank accounts, subject to certain exceptions and permitted liens. In addition, the ABL Facility agreement is secured by a second lien on certain assets securing the Notes. The ABL Facility contains customary covenants restricting the Company's activities, as well as those of its subsidiaries, including limitations on the ability to sell assets, engage in mergers, or other fundamental changes, enter into capital leases or certain leases not in the ordinary course of business, enter into transactions involving related parties or derivatives, incur or prepay indebtedness, grant liens or negative pledges on its assets, make loans or other investments, pay dividends or repurchase stock or other securities, guarantee third-party obligations, engage in sale and lease-back transactions and make changes in its corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the ABL Facility includes, as a financial covenant, a springing fixed charge coverage ratio which arises when availability falls below a specified threshold.
As of October 31, 2020, we were in compliance with the applicable financial covenants and expect to maintain compliance for the next twelve months.
We also maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). The Foreign Facilities are uncommitted and had a total capacity of $58 million as of October 31, 2020. As of October 31, 2020, there were no borrowings under the Foreign Facilities. There were $19 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of October 31, 2020.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. There were no material standby letters of credit issued under these agreements as of October 31, 2020.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019.
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
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|
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|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
($ in millions)
|
October 31, 2020
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
678
|
|
|
$
|
178
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
Short-term investments
|
178
|
|
|
119
|
|
|
59
|
|
|
—
|
|
|
Derivative financial instruments
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Deferred compensation plan assets
|
44
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Total
|
$
|
908
|
|
|
$
|
341
|
|
|
$
|
565
|
|
|
$
|
2
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
($ in millions)
|
February 1, 2020
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
311
|
|
|
$
|
19
|
|
|
$
|
292
|
|
|
$
|
—
|
|
|
Short-term investments
|
290
|
|
|
117
|
|
|
173
|
|
|
—
|
|
|
Derivative financial instruments
|
10
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
Deferred compensation plan assets
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Total
|
$
|
664
|
|
|
$
|
187
|
|
|
$
|
475
|
|
|
$
|
2
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
($ in millions)
|
November 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
|
$
|
238
|
|
|
$
|
3
|
|
|
$
|
235
|
|
|
$
|
—
|
|
|
Short-term investments
|
294
|
|
|
131
|
|
|
163
|
|
|
—
|
|
|
Derivative financial instruments
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
Deferred compensation plan assets
|
53
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Total
|
$
|
599
|
|
|
$
|
187
|
|
|
$
|
410
|
|
|
$
|
2
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
We have highly liquid investments classified as cash equivalents. 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 investments in cash equivalents are placed primarily in time deposits, money market funds, and debt securities.
Our available-for-sale securities are comprised of investments in debt securities and are recorded in both short-term investments and cash and cash equivalents on the Condensed Consolidated Balance Sheets. These securities are recorded at fair value using market prices. As of October 31, 2020 and November 2, 2019, the Company held $178 million and $294 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 October 31, 2020 and November 2, 2019, the Company held $222 million and $17 million 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 Sheet. Unrealized gains and losses on available-for-sale debt securities included within accumulated other comprehensive income were not material as of October 31, 2020 and November 2, 2019.
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019, 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 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.
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, including recently shared strategic plans. 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.
The impact of COVID-19 resulted in a qualitative indication of impairment related to our store long-lived assets. For store locations, we analyzed our store asset recoverability. There were no material impairment charges recorded for long-lived assets during the thirteen weeks ended October 31, 2020. During the thirty-nine weeks ended October 31, 2020, the Company recorded impairment of store assets of $127 million and impairment of operating lease assets of $361 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $131 million to their fair value of $4 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $1,369 million to their fair value of $1,008 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations.
There were no material impairment charges recorded for long-lived assets during the thirteen weeks ended November 2, 2019. During the thirty-nine weeks ended November 2, 2019, the Company recorded impairment of store assets of $9 million and impairment of operating lease assets of $1 million. The impairment of the store assets reduced the carrying amount of the applicable long-lived assets of $10 million to their fair value of $1 million. The impairment of the operating lease assets reduced the carrying amount of the applicable long-lived assets of $61 million to their fair value of $60 million. The impairment charges were recorded in operating expenses on the Condensed Consolidated Statement of Operations.
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 thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019.
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 dollar, Japanese yen, British pound, Euro, Mexican peso, Taiwan dollar, and Chinese yuan. 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 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; (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in foreign currencies received by entities whose functional currencies are U.S. dollars; and (3) 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, intercompany royalty payments, 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 net income (loss) during the period in which the underlying transaction impacts the Condensed Consolidated Statements of Operations.
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 Operations in the same period and generally offset each other.
Outstanding Notional Amounts
We had foreign exchange forward contracts outstanding in the following notional amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
October 31,
2020
|
|
February 1,
2020
|
|
November 2,
2019
|
|
Derivatives designated as cash flow hedges
|
$
|
474
|
|
|
$
|
501
|
|
|
$
|
640
|
|
|
Derivatives not designated as hedging instruments
|
539
|
|
|
689
|
|
|
706
|
|
|
Total
|
$
|
1,013
|
|
|
$
|
1,190
|
|
|
$
|
1,346
|
|
Quantitative Disclosures about Derivative Financial Instruments
The fair values of foreign exchange forward contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
October 31,
2020
|
|
February 1,
2020
|
|
November 2,
2019
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Other current assets
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
Other long-term assets
|
—
|
|
|
—
|
|
|
1
|
|
|
Accrued expenses and other current liabilities
|
1
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Other current assets
|
4
|
|
|
4
|
|
|
4
|
|
|
Accrued expenses and other current liabilities
|
6
|
|
|
8
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Total derivatives in an asset position
|
$
|
6
|
|
|
$
|
10
|
|
|
$
|
12
|
|
|
Total derivatives in a liability position
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Substantially all of the unrealized gains and losses from designated cash flow hedges as of October 31, 2020 will be recognized into net income (loss) within the next twelve months at the then-current values, which may differ from the fair values as of October 31, 2020 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 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
|
|
39 Weeks Ended
|
|
($ in millions)
|
October 31,
2020
|
|
November 2,
2019
|
|
October 31,
2020
|
|
November 2,
2019
|
|
Gain (loss) recognized in other comprehensive income
|
$
|
(2)
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
15
|
|
The pre-tax amounts recognized in net income (loss) related to derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of (Gain) Loss Recognized in Net Income
|
|
|
13 Weeks Ended
October 31, 2020
|
|
13 Weeks Ended
November 2, 2019
|
|
($ 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 Statements of Operations in which the effects of derivatives are recorded
|
$
|
2,374
|
|
|
$
|
1,445
|
|
|
$
|
2,439
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss recognized in net income
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
(2)
|
|
|
—
|
|
|
(9)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
—
|
|
|
4
|
|
|
—
|
|
|
8
|
|
|
Total (gain) loss recognized in net income
|
$
|
(2)
|
|
|
$
|
4
|
|
|
$
|
(9)
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain Recognized in Net Income (Loss)
|
|
|
39 Weeks Ended
October 31, 2020
|
|
39 Weeks Ended
November 2, 2019
|
|
($ 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 Statements of Operations in which the effects of derivatives are recorded
|
$
|
6,339
|
|
|
$
|
4,033
|
|
|
$
|
7,250
|
|
|
$
|
3,640
|
|
|
|
|
|
|
|
|
|
|
|
Gain recognized in net income (loss)
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
(13)
|
|
|
—
|
|
|
(21)
|
|
|
—
|
|
|
Derivative not designated as hedging instruments
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(4)
|
|
|
Total gain recognized in net income (loss)
|
$
|
(13)
|
|
|
$
|
(7)
|
|
|
$
|
(21)
|
|
|
$
|
(4)
|
|
Note 6. Share Repurchases
Share repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
($ and shares in millions except average per share cost)
|
October 31,
2020
|
|
November 2,
2019
|
|
October 31,
2020
|
|
November 2,
2019
|
|
Number of shares repurchased (1)
|
—
|
|
|
2.9
|
|
|
—
|
|
|
7.5
|
|
|
Total cost
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
Average per share cost including commissions
|
$
|
—
|
|
|
$
|
17.17
|
|
|
$
|
—
|
|
|
$
|
19.85
|
|
__________
(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"). The February 2019 repurchase program had $800 million remaining as of October 31, 2020. On March 12, 2020, the Company announced its decision to suspend share repurchases through fiscal 2020.
All of the share repurchases were paid for as of February 1, 2020 and November 2, 2019. All common stock repurchased is immediately retired.
Note 7. Income Taxes
On March 27, 2020, the CARES Act was signed into law in the United States. The CARES Act includes certain provisions that affect our income taxes, including temporary five-year net operating loss carryback provisions, modifications to the interest deduction limitations, and the technical correction for depreciation of qualified leasehold improvements.
The effective income tax rate was 21.5 percent for the thirteen weeks ended October 31, 2020, compared with 33.0 percent for the thirteen weeks ended November 2, 2019. The decrease in the effective tax rate is primarily due to changes in the mix of pretax income between domestic and international operations, partially offset by the impacts of the net operating loss carryback provisions of the CARES Act.
The effective income tax rate was 23.7 percent for the thirty-nine weeks ended October 31, 2020, compared with 31.6 percent for the thirty-nine weeks ended November 2, 2019. The decrease in the effective tax rate is primarily due to changes in the mix of pretax income between domestic and international operations and the fiscal 2019 impact of an adjustment for additional guidance issued regarding the Tax Cuts and Jobs Act of 2017 ("TCJA"), partially offset by the impacts of the net operating loss carryback provisions of the CARES Act.
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 2010.
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 October 31, 2020, it is reasonably possible that we will recognize a decrease in gross unrecognized tax benefits within the next twelve months of up to $3 million, primarily due to the closing of audits. If we do recognize such a decrease, the net impact on the Condensed Consolidated Statements of Operations would not be material.
Note 8. Earnings (Loss) Per Share
Weighted-average number of shares used for earnings (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
(shares in millions)
|
October 31,
2020
|
|
November 2,
2019
|
|
October 31,
2020
|
|
November 2,
2019
|
|
Weighted-average number of shares - basic
|
374
|
|
|
375
|
|
|
373
|
|
|
377
|
|
|
Common stock equivalents (1)
|
6
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
Weighted-average number of shares - diluted
|
380
|
|
|
376
|
|
|
373
|
|
|
379
|
|
__________
(1)For the thirty-nine weeks ended October 31, 2020, the dilutive impact of outstanding options and awards was excluded from dilutive shares as a result of the Company’s net loss for the respective period.
The anti-dilutive shares related to stock options and other stock awards excluded from the computation of weighted-average number of shares – diluted were 12 million and 17 million for the thirteen weeks ended October 31, 2020 and November 2, 2019, respectively, and 16 million and 14 million for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, respectively, as their inclusion would have an anti-dilutive effect on earnings (loss) per share.
Note 9. 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 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 October 31, 2020, Actions filed against us included commercial, intellectual property, customer, employment, 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 October 31, 2020, February 1, 2020, and November 2, 2019, 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 October 31, 2020, 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.
Note 10. Segment Information
We identify our operating segments according to how our business activities are managed and evaluated. As of October 31, 2020, 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 are aggregated into one reportable segment as of October 31, 2020. 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
|
|
Other (3)
|
|
Total
|
|
|
|
13 Weeks Ended October 31, 2020
|
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
2,034
|
|
|
$
|
611
|
|
|
$
|
323
|
|
|
$
|
370
|
|
|
$
|
3,338
|
|
|
|
|
Canada
|
|
193
|
|
|
86
|
|
|
39
|
|
|
3
|
|
|
321
|
|
|
|
|
Europe
|
|
—
|
|
|
115
|
|
|
3
|
|
|
—
|
|
|
118
|
|
|
|
|
Asia
|
|
1
|
|
|
169
|
|
|
18
|
|
|
—
|
|
|
188
|
|
|
|
|
Other regions
|
|
14
|
|
|
12
|
|
|
3
|
|
|
—
|
|
|
29
|
|
|
|
|
Total
|
|
$
|
2,242
|
|
|
$
|
993
|
|
|
$
|
386
|
|
|
$
|
373
|
|
|
$
|
3,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana Republic Global (2)
|
|
Other (4)
|
|
Total
|
|
|
|
13 Weeks Ended November 2, 2019
|
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
1,769
|
|
|
$
|
689
|
|
|
$
|
532
|
|
|
$
|
274
|
|
|
$
|
3,264
|
|
|
|
|
Canada
|
|
151
|
|
|
97
|
|
|
55
|
|
|
1
|
|
|
304
|
|
|
|
|
Europe
|
|
—
|
|
|
128
|
|
|
3
|
|
|
—
|
|
|
131
|
|
|
|
|
Asia
|
|
9
|
|
|
220
|
|
|
21
|
|
|
—
|
|
|
250
|
|
|
|
|
Other regions
|
|
18
|
|
|
24
|
|
|
7
|
|
|
—
|
|
|
49
|
|
|
|
|
Total
|
|
$
|
1,947
|
|
|
$
|
1,158
|
|
|
$
|
618
|
|
|
$
|
275
|
|
|
$
|
3,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana Republic Global
|
|
Other (3)
|
|
Total
|
|
|
|
39 Weeks Ended October 31, 2020
|
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
4,709
|
|
|
$
|
1,395
|
|
|
$
|
804
|
|
|
$
|
954
|
|
|
$
|
7,862
|
|
|
|
|
Canada
|
|
415
|
|
|
183
|
|
|
90
|
|
|
3
|
|
|
691
|
|
|
|
|
Europe
|
|
—
|
|
|
239
|
|
|
8
|
|
|
—
|
|
|
247
|
|
|
|
|
Asia
|
|
4
|
|
|
435
|
|
|
44
|
|
|
—
|
|
|
483
|
|
|
|
|
Other regions
|
|
33
|
|
|
48
|
|
|
12
|
|
|
—
|
|
|
93
|
|
|
|
|
Total
|
|
$
|
5,161
|
|
|
$
|
2,300
|
|
|
$
|
958
|
|
|
$
|
957
|
|
|
$
|
9,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Old Navy Global
|
|
Gap Global
|
|
Banana Republic Global (2)
|
|
Other (4)
|
|
Total
|
|
|
|
39 Weeks Ended November 2, 2019
|
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
5,204
|
|
|
$
|
1,942
|
|
|
$
|
1,549
|
|
|
$
|
891
|
|
|
$
|
9,586
|
|
|
|
|
Canada
|
|
427
|
|
|
251
|
|
|
155
|
|
|
2
|
|
|
835
|
|
|
|
|
Europe
|
|
—
|
|
|
380
|
|
|
10
|
|
|
—
|
|
|
390
|
|
|
|
|
Asia
|
|
30
|
|
|
654
|
|
|
70
|
|
|
—
|
|
|
754
|
|
|
|
|
Other regions
|
|
57
|
|
|
69
|
|
|
18
|
|
|
—
|
|
|
144
|
|
|
|
|
Total
|
|
$
|
5,718
|
|
|
$
|
3,296
|
|
|
$
|
1,802
|
|
|
$
|
893
|
|
|
$
|
11,709
|
|
|
|
__________
(1)U.S. includes the United States, Puerto Rico, and Guam.
(2)Banana Republic Global fiscal year 2019 net sales include the Janie and Jack brand beginning March 4, 2019.
(3)Primarily consists of net sales for the Athleta, Intermix, and Hill City brands. Beginning in fiscal year 2020, Janie and Jack net sales are also included. Net sales for Athleta for the thirteen and thirty-nine weeks ended October 31, 2020 were $292 million and $764 million, respectively.
(4)Primarily consists of net sales for the Athleta, Intermix, and Hill City brands as well as a portion of income related to our credit card agreement. Net sales for Athleta for the thirteen and thirty-nine weeks ended November 2, 2019 were $216 million and $691 million, respectively.
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 11. Store Closing and Other Operating Cost
In fiscal 2019, the Company announced plans to restructure the specialty fleet and revitalize the Gap brand during fiscal 2019 and fiscal 2020. In fiscal 2020, the Company shifted its focus towards adapting to the COVID-19 challenges and a broader scope of strategic initiatives. As a result, restructuring costs were not material in fiscal 2020. See Overview of Management's Discussion and Analysis included in Part I, Item 2 of this Form 10-Q, for more detail on some of the strategic initiatives being undertaken by the Company.
