Banana Republic 2005 Annual Report Download

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Two Folsom Street
San Francisco,
CA 94105
gapinc.com
2005 annual report
GAP Inc. 2005 Annual Report

Table of contents

  • Page 1
    2005 annual report

  • Page 2
    table of contents Letter From the Chairman Letter to Shareholders Gap Banana Republic Old Navy Forth & Towne Gap Inc. Direct Social Responsibility Financial Highlights Key Financial Statistics Gap Inc. Financials 1 2 6 7 8 9 10 11 12 13 14

  • Page 3
    ... the product and experience they expect from our brands. This will be the key to re-establishing top line growth and driving long-term shareholder value. Robert J. Fisher Chairman Gap Inc.'s connecting great style and experiences-and by making cultural connections gap inc. 2005 annual report 1

  • Page 4
    ... a new customer experience survey for all brands; closing more than 100 underperforming Gap stores; and allocating Gap and Old Navy's product sizes based on each store's unique selling history. Paul S. Pressler President and Chief Executive Officer Building a strong platform for growth Just...

  • Page 5
    ... footage increased 3 percent in 2005, driven by store growth at Old Navy. We will continue to open new Old Navy stores in 2006. Second, we expanded our brands internationally, opening an additional 13 Gap stores and introducing Banana Republic in Japan. To help us become more relevant to customers...

  • Page 6
    ... product assortments. We are also evolving our marketing to better reï¬,ect this focus. The launch of Banana Republic's high-quality handbag collection has been very successful, and is an example of how we'll continue to extend the brand. In 2006, we look forward to introducing a personal care line...

  • Page 7
    ... nearly 155,000 hours last year to benefit charitable causes. Following the devastating hurricanes along the U.S. Gulf Coast, the company and our employees committed more than $5 million to relief efforts. This included Old Navy's shopping spree events, which helped nearly 15,000 kids who were...

  • Page 8
    ...the brand. We brought in seasoned executives, designers and merchants to lead the adult, kids, baby, accessories and body businesses. And we made product our top priority. Our customers have always looked to Gap as their source for updated, casual classics-T-shirts, hoodies, great-fitting pants and...

  • Page 9
    ...an entire line of personal care products later this year, co-developed with our industry-leading partner, Inter Parfums. Banana Republic continued reaching new customers in 2005. Based on demand from our petite customers, we began testing stand-alone petite stores in Boston, Los Angeles, Seattle, St...

  • Page 10
    ... customers by rolling out Old Navy Maternity to more than 100 stores, improving our plus-size offerings, and opening more than 70 new stores in the United States and Canada. Although it will take some time to see results, we're working hard to get these elements right. For us, there's nothing better...

  • Page 11
    ... whose time had come: We conducted a two-year study of the U.S. apparel market, and discovered enormous potential for a brand dedicated to serving boomer women. More importantly, we talked extensively to customers we knew well: women who grew up shopping Gap, Banana Republic and Old Navy. Allegory...

  • Page 12
    ...is one of the largest online apparel retailers in the U.S. In 2005, Gap Inc. Direct generated close to $600 million in net sales. Our websites extend the reach of our brands by offering an easy way for customers to shop. And in 2005 we developed an entirely new e-commerce platform and redesigned our...

  • Page 13
    ... year, while employees donated approximately 155,000 hours of their time to causes they care about. Creating Better Working Conditions in Garment Factories As a major apparel retailer, improving working conditions in garment factories approved to do business with us continues to be one of our top...

  • Page 14
    ...V I D E N D S PA I D D I V I D E N D S P AD ID TY PER SHARE (in dollars) PER SHARE (in dollars) T VS EG SE P E R A V E R A G E N E T S A L E S P EN RE A EA RL A GE RO SO S TS GROSS SQUAR FO *Q U A R E F O O T * (in dollars) *52-week basis (in dollars) *52-week basis 12 gap inc. 2005 annual report

  • Page 15
    ..., as most companies require capital expenditures to build and maintain stores and purchase new equipment to keep the business growing. We use this metric internally, as we believe our sustained ability to grow this measure is an important driver of value creation. gap inc. 2005 annual report 13

  • Page 16
    ... of Shareholders' Equity Notes to Consolidated Financial Statements Quarterly Information (Unaudited) Executive Leadership Team Board of Directors Corporate and Shareholder Information Shareholder Communications 15 16 32 34 35 36 37 38 39 40 42 60 61 62 64 65 14 gap inc. 2005 annual report

  • Page 17
    ... quarter of fiscal 2004 but paid in the first quarter of fiscal 2005. Based on year-end store square footage and inventory balances; excludes inventory related to online sales. Long-term debt includes current maturities. Based on monthly average store square footage. gap inc. 2005 annual report 15

  • Page 18
    ... selling casual apparel, accessories, and personal care products for men, women and children under the Gap, Banana Republic, Old Navy, and Forth & Towne brand names. We operate stores in the United States, Canada, the United Kingdom, France and Japan. In addition, our U.S. customers may shop online...

  • Page 19
    ... supported by effective marketing and compelling store experiences. We will continue to pursue growth strategies including real estate expansion and brand extensions, expanding our brands internationally, building our world-class online business and creating new brands. gap inc. 2005 annual report...

  • Page 20
    ...sufficient to support our shareholder distributions and strategic growth initiatives; (iv) the number of new store openings and store closings in fiscal 2006, and weightings by brand; (v) the number of Gap store upgrades in fiscal 2006; (vi) the timing for Banana Republic's new personal care line in...

  • Page 21
    ...percent in fiscal 2005, reflecting product acceptance challenges that resulted in increased promotions and markdowns. Net Sales by Brand, Region and Channel Net sales consist of retail sales, online sales and shipping fees received from customers for delivery of merchandise. Outlet retail sales are...

  • Page 22
    ... year. 52 Weeks Ended January 28, 2006 Increase (decrease) ($ in millions) 2004 Net Sales Comparable store sales Noncomparable store sales Direct (Online) Foreign exchange (2) 2005 Net Sales Gap (1) $ 7,240 (302) (87) (3) (11) 6,837 $ Old Navy 6,747 (361) 409 32 29 6,856 $ Banana Republic...

  • Page 23
    ... 29, 2005 Number of Store Locations 1,396 169 78 889 462 2,994 (1%) Sq. Ft. (in millions) 13.0 1.6 0.8 17.3 3.9 36.6 0% Gap North America Gap Europe Gap Asia Old Navy North America Banana Republic North America Banana Republic Japan Forth & Towne Total Increase/(Decrease) Cost of Goods Sold and...

  • Page 24
    ... with fiscal 2003. The increase was primarily due to higher store payroll and benefits to support increased sales, planned increases for new growth initiatives and increased advertising expenses. Gap North America ran incremental television campaigns compared to the prior year and Old Navy increased...

  • Page 25
    ...and scheduled debt maturity as well as savings from lower facility fees on our new credit facility. We anticipate that fiscal 2006 interest expense will be about $40 million. Interest Income Percentage of Net Sales ($ in millions) Interest Income Jan. 28, 2006 $ 93 52 Weeks Ended Jan. 29, 2005 $ 59...

  • Page 26
    ... cash a company has available after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to keep the business growing. We use this metric internally, as we believe our sustained ability to increase free cash flow...

  • Page 27
    ... from sale of property and equipment Purchase of short-term investments Maturities of short-term investments Change in restricted cash Change in other assets Net cash provided by (used for) investing activities January 28, 2006 $ (600) 27 (1,768) 1,645 959 23 $ 286 52 Weeks Ended January 29, 2005...

  • Page 28
    ...) New stores Existing stores Information technology Headquarters and distribution centers Total capital investments Cash Flows from Financing Activities 52 Weeks Ended January 29, 2005 $ (871) 130 (976) (79) $ (1,796) ($ in millions) Payments of long-term debt Issuance of common stock Purchase of...

  • Page 29
    ... the Old Facility with a new $750 million five-year unsecured revolving credit facility scheduled to expire in August 2009 (the "New Facility"). The New Facility is available for general corporate purposes, including commercial paper backstop, working capital, trade letters of credit and standby...

  • Page 30
    ...upgrades to our long-term credit ratings in fiscal 2004, the interest rate on the 2008 Notes decreased from 10.55 percent as of year-end fiscal 2003 to 10.05 percent as of year-end fiscal 2004. The 2005 Notes were fully repaid in fiscal 2004. Our access to the capital markets and interest expense on...

  • Page 31
    ... Balance Sheets, including deferred income taxes. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts estimated to be paid in fiscal...

  • Page 32
    ... and self-insurance for a number of risk management activities including workers' compensation, general liability, automobile liability and employee related health care benefits, a portion of which is paid by our employees. Liabilities associated with these risks are estimated based on actuarially...

  • Page 33
    ... after sixty months is remote. The liability for gift cards and gift certificates is recorded in accounts payable on the Consolidated Balance Sheets. Income Taxes We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any point in time, many tax years are...

  • Page 34
    GAP INC. FINANCIALS 2005 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge substantially all forecasted merchandise purchases...

  • Page 35
    ... is subject to increase (decrease) by 0.25 percent for each rating downgrade (upgrade) by the rating agencies. The rate in parentheses reflects the rate at January 28, 2006. In no event will the interest rate be reduced below the original interest rate on the note. gap inc. 2005 annual report 33

  • Page 36
    ... Finance Committee composed of four independent Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters. 34 gap inc. 2005 annual report

  • Page 37
    ... 28, 2006. Management's assessment of the effectiveness of internal control over financial reporting as of January 28, 2006 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein. gap inc. 2005 annual report 35

  • Page 38
    ...for each of the three years in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of January 28...

  • Page 39
    GAP INC. FINANCIALS 2005 CONSOLIDATED STATEMENTS OF OPERATIONS ($ in millions except per share amounts, shares in thousands) Net sales Cost of goods sold and occupancy expenses Gross profit Operating expenses Loss on early retirement of debt Interest expense Interest income Earnings before income ...

  • Page 40
    GAP INC. FINANCIALS 2005 CONSOLIDATED BALANCE SHEETS ($ in millions except par value, shares in thousands) Assets Current assets Cash and equivalents Short-term investments Restricted cash Merchandise inventory Other current assets Total current assets Property and equipment, net of accumulated ...

  • Page 41
    ...Net cash provided by (used for) investing activities Cash Flows from Financing Activities Payments of long-term debt (b) Issuance of common stock (b) Purchase of treasury stock, net of reissuances Cash dividends paid Net cash used for financing activities Effect of exchange rate fluctuations on cash...

  • Page 42
    ...per share) Balance at January 29, 2005 Issuance of common stock pursuant to stock option plans Conversion of convertible debt Tax benefit from exercise of stock options by employees and from vesting of restricted stock Adjustments for foreign currency translation Adjustments for fluctuations in fair...

  • Page 43
    GAP INC. FINANCIALS 2005 Treasury Stock Retained Earnings $ 5,158 Accumulated Other Comprehensive Earnings (Loss) $ (17) Deferred Compensation $ (13) (2) Comprehensive Earnings (Loss) $ 521 Shares (80,687... $ 1,089 1,113 (25) 1 1,146 1,150 29 (33) 1,060 1,031 59 (30) gap inc. 2005 annual report 41

  • Page 44
    ... Corporation, is a global specialty retailer selling casual apparel, accessories and personal care products for men, women and children under a variety of brand names including Gap, Banana Republic, Old Navy, and Forth & Towne. Our principal markets consist of the United States, Canada, Europe...

  • Page 45
    ... of sizes) and use markdowns to clear merchandise. We estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends. gap inc. 2005 annual report 43

  • Page 46
    ... key money balance from fiscal 1995 through the end of fiscal 2005. The gross carrying value and accumulated amortization of key money was $62 million and $50 million, respectively, as of January 28, 2006 and are included in other assets on the Consolidated Balance Sheets. This accounting change did...

  • Page 47
    ... and self-insurance for a number of risk management activities including workers' compensation, general liability, automobile liability and employee-related health care benefits, a portion of which is paid by our employees. Liabilities associated with these risks are estimated based on actuarially...

  • Page 48
    ... for store sales at the point at which the customer receives and pays for the merchandise at the register with either cash or credit card. For online sales, revenue is recognized at the time we estimate the customer receives the product. We estimate and defer revenue and the related product costs...

  • Page 49
    ...% 50% 4 Dividend yield Risk-free interest rate Volatility Expected life (in years) Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2005, 2004 and 2003 was $7.20, $8.33 and $5.36, respectively. gap inc. 2005 annual report 47

  • Page 50
    ... anticipated levels of new awards to be granted, changes in stock price, forfeitures of awards and employee exercise behaviors, the actual impact of earnings may differ from this estimate. In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") 107, "Share-Based Payment." SAB 107 provides...

  • Page 51
    ... the Old Facility with a new $750 million five-year unsecured revolving credit facility scheduled to expire in August 2009 (the "New Facility"). The New Facility is available for general corporate purposes, including commercial paper backstop, working capital, trade letters of credit and standby...

  • Page 52
    .... We have reviewed the provisions of the new law and concluded we will not benefit from these changes; therefore, there is no effect on income tax expense (or benefit) for the periods presented as a result of the American Jobs Creation Act's repatriation provisions. 50 gap inc. 2005 annual report

  • Page 53
    ... 2.3 (2.9) 37.9% 52 Weeks Ended January 29, 2005 35.0% 2.7 2.0 (1.1) 38.6% 52 Weeks Ended January 31, 2004 35.0% 2.1 2.2 (0.5) 38.8% Federal tax rate State income taxes, less federal benefit Tax impact of foreign operations Other (a) Effective tax rate (a) The increase from fiscal 2004 in other is...

  • Page 54
    ... estimated sublease income to be generated from sublease contracts, which have not yet been identified. Distribution facility changes in fiscal 2003 include costs associated with the cost of lease terminations, facilities restoration, severance and equipment removal. 52 gap inc. 2005 annual report

  • Page 55
    ... an agreement to sell our Gap stores and exit the market in Germany, effective August 1, 2004. Gap brand operations in Germany represented our smallest international retail business, and with only 10 store locations, accounted for less than 1 percent of total Company sales. This decision represented...

  • Page 56
    ... the Board of Directors deems appropriate, without further action on the part of the shareholders. No preferred shares have been issued. Stock Repurchase Program During fiscal 2005, we announced share repurchase authorizations totaling $2.0 billion, which we completed by the end of the fiscal year...

  • Page 57
    ...000,000 shares granted to our Chief Executive Officer. Options to purchase approximately 15 million shares of common stock that were scheduled to vest from fiscal 2006 to 2009 were impacted by this action. Although these options became immediately exercisable, the exercise price did not change. The...

  • Page 58
    ... price on the New York Stock Exchange on the first or last day of the six-month purchase period. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. There were 1,700,466, 1,422,059, and 1,626,393 shares issued...

  • Page 59
    ...of weighted-average shares for diluted earnings per share were options to purchase 44,499,102, 32,943,414, and 30,788,277 shares of common stock for fiscal 2005, 2004 and 2003, respectively, because the exercise price was greater than the average market price of the Company's common stock during the...

  • Page 60
    ... factual and legal issues and are subject to uncertainties. Actions filed against us include commercial, intellectual property, customer, labor and employment related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws...

  • Page 61
    GAP INC. FINANCIALS 2005 NOTE L: SEGMENT INFORMATION We are primarily engaged in selling retail apparel through stores in North America, Europe and Asia. We identify our operating segments based on management responsibility that include Gap North America, Banana Republic North America, Old Navy ...

  • Page 62
    ... the fourth quarter of fiscal 2005, we recorded $50 million in cost of goods sold and occupancy expenses representing the cumulative impact of amortizing our key money balance from fiscal 1995 through the end of fiscal 2005. See Note A. Per Share Data Market Prices Fiscal 1st Quarter 2nd Quarter...

  • Page 63
    ... President Banana Republic CYNTHIA HARRISS President Gap North America TOBY LENK President Gap Inc. Direct JENNY MING President Old Navy LAURI SHANAHAN GARY MUTO President Forth & Towne DIANE NEAL President Outlet ART PECK Executive Vice President Corporate Strategy and Business Development Gap Inc...

  • Page 64
    ...57 †‡ Lead Independent Director. Director since 2002. Chief Executive Officer (part-time) of Mcon Management Services, Ltd., a consulting company; former Wal-Mart executive. Director of Conn's, Inc., FurnitureBrands International, Inc., Guitar Center, Inc., and Sabre Holdings Corporation. ADRIAN...

  • Page 65
    ...manner. In an effort to provide open communication, we invite shareholders to contact our Board of Directors directly via email to [email protected]. These emails are received by our Chairman and our Lead Independent Director as well as our Corporate Governance department. gap inc. 2005 annual report 63

  • Page 66
    ... and Shareholder Information Gap Inc. Corporate Offices Two Folsom Street San Francisco, CA 94105 650-952-4400 Report Credits © Gap Inc. 2006 Printed in the U.S.A. on recycled paper The GAP employed an environmentally "sustainable" printer for the production of this Annual Report that has a zero...

  • Page 67
    .... Web Sites www.gapinc.com offers information about Gap Inc., including online versions of our Annual Report, Securities and Exchange Commission reports, quarterly earnings results and monthly sales reports. You can also read about employment opportunities, our ethical sourcing efforts, corporate...

  • Page 68
    Two Folsom Street San Francisco, CA 94105 gapinc.com