The Gap 2010 Annual Report Download - page 27

Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
We are a global specialty retailer offering apparel, accessories, and personal care products for men, women,
children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We have Company-
operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, and beginning in
November 2010, China and Italy. We also have franchise agreements with unaffiliated franchisees to operate Gap
and Banana Republic stores in many other countries around the world. Under these agreements, third parties
operate or will operate stores that sell apparel and related products under our brand names. In addition, our
products are available to customers online in over 90 countries. Most of the products sold under our brand names
are designed by us and manufactured by independent sources. We also sell products that are designed and
manufactured by branded third parties.
We identify our operating segments based on the way we manage and evaluate our business activities. We have
two reportable segments: Stores and Direct.
Financial highlights for fiscal 2010 include the following:
• Net sales for fiscal 2010 increased 3 percent to $14.7 billion compared with $14.2 billion for fiscal 2009, and
comparable store sales increased 1 percent compared with a decrease of 3 percent last year.
• Direct net sales for fiscal 2010 increased 16 percent to $1.3 billion compared with $1.1 billion for fiscal 2009. Our
Direct reportable segment includes sales for each of our online brands.
• Net sales for Direct and international as a percentage of total net sales for fiscal 2010 increased 2 percent to
22 percent compared with 20 percent for fiscal 2009.
• Operating margin for fiscal 2010 was 13.4 percent compared with 12.8 percent for fiscal 2009. Operating margin
is defined as operating income as a percentage of net sales.
• Net income for fiscal 2010 increased 9.3 percent to $1.2 billion compared with $1.1 billion for fiscal 2009. Diluted
earnings per share increased to $1.88 for fiscal 2010 compared with $1.58 for fiscal 2009.
• In fiscal 2010, we generated free cash flow of $1.2 billion compared with free cash flow of $1.6 billion for fiscal
2009. Free cash flow is defined as net cash provided by operating activities less purchases of property and
equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure,
see the Liquidity and Capital Resources section.
Our business and financial priorities for fiscal 2011 are as follows:
• grow revenues by consistently delivering product that resonates with our target customers around the world;
• maintain a focus on cost management and return on invested capital;
• generate strong free cash flow and return cash to shareholders; and
• invest in the future while delivering earnings per share growth.
As we focus on growing revenues in our more mature North America market in fiscal 2011, we plan to continue
growing revenues internationally through the following:
• opening additional stores, many of which will be outlets, in Canada, Europe, and Asia;
• continuing to open franchise stores worldwide; and
• continuing to offer our online shopping experience to customers in international locations.
20 Gap Inc. Form 10-K