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G A P I N C . F I N A N C I A L S 2 0 0 5
gap inc. 2005 annual report 23
Loss on Early Retirement of Debt
In line with our fiscal 2004 objective of reducing long-term debt, we reduced our outstanding debt by repurchasing $596 million of domestic debt in
advance of its scheduled maturity date during fiscal 2004. We performed a net present value analysis on our outstanding debt and determined that
it would be beneficial to repurchase the debt early even though we incurred $105 million in loss on early retirement of debt due to premiums paid
and write-off of issuance costs. During fiscal 2003, we incurred $21 million in loss on early retirement of debt for the repurchase of €23 million of our
euro bond ($27 million) and the repurchase of $141 million of domestic debt.
Interest Expense
The decrease of $122 million in interest expense for fiscal 2005, compared with fiscal 2004, was primarily due to the lower debt level as a result of
our March 2005 redemption of the convertible notes, debt repurchases, and scheduled debt maturity.
The decrease of $67 million in interest expense for fiscal 2004, compared with fiscal 2003, was primarily due to the lower debt balances resulting
from our debt repurchases 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 $40 million.
Interest Income
The continued increase in interest income is primarily due to a rising interest environment, which resulted in higher yields on our investments.
Income Taxes
The decrease in the effective tax rate in fiscal 2005 from fiscal 2004 is primarily driven by the impact of a favorable tax settlement related to the
U.S.– Japan Income Tax Treaty.
The decrease in the effective tax rate in fiscal 2004 from fiscal 2003 was primarily driven by an improvement in the mix of earnings from domestic
and international operations and improved earnings performance.
We currently expect the fiscal 2006 effective tax rate to be about 39 percent due to the absence of the favorable tax settlement realized in 2005 and
the more pronounced impact of our Japan business, which is subjected to a higher tax rate than that of the U.S. The actual rate will ultimately depend
on several variables, including the mix of earnings between domestic and international operations, and the overall level of earnings.
Percentage of Net Sales
52 Weeks Ended 52 Weeks Ended
($ in millions) Jan. 28, 2006 Jan. 29, 2005 Jan. 31, 2004 Jan. 28, 2006 Jan. 29, 2005 Jan. 31, 2004
Loss on Early Retirement of Debt $ - $ 105 $ 21 - 0.6% 0.1%
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
Interest Expense $ 45 $ 167 $ 234 0.3% 1.0% 1.5%
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
Interest Income $ 93 $ 59 $ 38 0.6% 0.4% 0.2%
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
Income Taxes $ 680 $ 722 $ 653 4.2% 4.4% 4.1%
Effective tax rate 37.9% 38.6% 38.8%