Banana Republic 2005 Annual Report Download - page 23

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gap inc. 2005 annual report 21
Store count and square footage were as follows:
Cost of Goods Sold and Occupancy Expenses
Cost of goods sold and occupancy expenses include the cost of merchandise, inventory shortage and valuation adjustments, freight charges, costs
associated with our sourcing operations, production costs, insurance costs related to merchandise and occupancy, rent, common area maintenance,
real estate taxes, utilities, and depreciation for our stores and distribution centers.
Occupancy expenses are comprised of rent, depreciation and other occupancy-related expenses as noted above.
Cost of goods sold and occupancy expenses as a percentage of net sales increased 2.6 percentage points in fiscal 2005 compared with fiscal 2004.
Our merchandise margin, calculated as net sales less cost of goods sold, decreased 2.2 percentage points, or $475 million, as product acceptance
challenges drove additional promotions and markdowns. In addition, cost of goods sold decreased due to a reclassification of certain sourcing costs
from operating expenses to cost of goods sold. While we had been classifying the majority of sourcing expenses in cost of goods sold, certain sourc-
ing expenses had been classified in operating expenses and, as a result, approximately $42 million of year to date sourcing expenses, primarily
comprised of payroll and benefit expenses for our wholly owned agent offices, were reclassified during fiscal 2005. As a percentage of sales, oc-
cupancy expenses increased compared to fiscal 2004 primarily due to the decrease in sales for stores that have been open for more than one year.
In addition, occupancy expenses increased due to $50 million recognized in fiscal 2005 related to the amortization of key money paid to acquire the
rights of tenancy in France. The increase was offset by a $19 million decrease in occupancy expenses from a lease accounting adjustment in the
second quarter of fiscal 2005 to true-up amounts which were estimated in our fiscal 2004 financial statements. Prior to fiscal 2005, we considered
key money an indefinite life intangible asset that was not amortized and in fiscal 2005, we determined that key money should more appropriately be
amortized over the corresponding lease term and recorded $50 million of amortization expense representing the cumulative impact of amortizing our
key money balance from fiscal 1995 through the end of fiscal 2005.
Cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.6 percentage points in fiscal 2004 compared with fiscal 2003.
Our merchandise margins increased 1.1 percentage points, or $390 million, due to enhanced product assortments supported by inventory manage-
ment and use of sophisticated markdown optimization tools to assist us in forecasting the optimal timing and level of markdowns. We had a higher
contribution of regular priced sales compared with fiscal 2003. We improved our leverage of our rent, occupancy and depreciation expenses by 0.5
percentage points in fiscal 2004 due to lower depreciation from a maturing fleet, reduced capital spending compared to historical levels and contin-
ual store fleet optimization combined with improved sales performance over the prior year. An increase in our direct (online) revenues also contrib-
uted to the improved leverage, as these sales do not incur store related rent, occupancy and depreciation expenses.
As a general business practice, we review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no
longer in stock in a sufficient range of sizes) and use markdowns to clear the majority of this merchandise.
January 28, 2006 January 29, 2005
Number of Sq. Ft. Number of Sq. Ft.
Store Locations (in millions) Store Locations (in millions)
Gap North America 1,335 12.6 1,396 13.0
Gap Europe 165 1.5 169 1.6
Gap Asia 91 1.0 78 0.8
Old Navy North America 959 18.4 889 17.3
Banana Republic North America 494 4.2 462 3.9
Banana Republic Japan 4 - - -
Forth & Towne 5 0.1 - -
Total 3,053 37.8 2,994 36.6
Increase/(Decrease) 2% 3% (1%) 0%
Percentage of Net Sales
52 Weeks Ended 52 Weeks Ended
($ in millions) Jan. 28, 2006 Jan. 29, 2005 Jan. 31, 2004 Jan. 28, 2006 Jan. 29, 2005 Jan. 31, 2004
Cost of Goods Sold
and Occupancy Expenses $ 10,154 $ 9,886 $ 9,885 63.4% 60.8% 62.4%