The Gap 2013 Annual Report Download - page 32

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Our franchise business is subject to certain risks not directly within our control that could impair the
value of our brands.
We enter into franchise agreements with unaffiliated franchisees to operate stores in many countries around the
world. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products
under our brand names. The effect of these arrangements on our business and results of operations is uncertain
and will depend upon various factors, including the demand for our products in new markets internationally and
our ability to successfully identify appropriate third parties to act as franchisees, distributors, or in a similar
capacity. In addition, certain aspects of these arrangements are not directly within our control, such as franchisee
financial stability and the ability of these third parties to meet their projections regarding store locations, store
openings, and sales. Other risks that may affect these third parties include general economic conditions in specific
countries or markets, foreign exchange rates, changes in diplomatic and trade relationships, restrictions on the
transfer of funds, and political instability. Moreover, while the agreements we have entered into and plan to enter
into in the future provide us with certain termination rights, the value of our brands could be impaired to the extent
that these third parties do not operate their stores in a manner consistent with our requirements regarding our
brand identities and customer experience standards. Failure to protect the value of our brands, or any other
harmful acts or omissions by a franchisee, could have an adverse effect on our results of operations and our
reputation.
The market for prime real estate is competitive.
Our ability to effectively obtain real estate - to open new stores, distribution centers, and corporate offices
nationally and internationally - depends on the availability of real estate that meets our criteria for traffic, square
footage, co-tenancies, lease economics, demographics, and other factors. We also must be able to effectively
renew our existing store leases. In addition, from time to time, we may seek to downsize, consolidate, reposition,
or close some of our real estate locations, which in most cases requires a modification of an existing store lease.
Failure to secure adequate new locations or successfully modify existing locations, or failure to effectively manage
the profitability of our existing fleet of stores, could have a material adverse effect on our results of operations.
Additionally, the economic environment may at times make it difficult to determine the fair market rent of real
estate properties within the United States and internationally. This could impact the quality of our decisions to
exercise lease options at previously negotiated rents and the quality of our decisions to renew expiring leases at
negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate
locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores and
could have a material adverse effect on our results of operations.
We experience fluctuations in our comparable sales and margins.
Our success depends in part on our ability to improve sales, in particular at our largest brands. A variety of factors
affect comparable sales or margins, including apparel trends, competition, current economic conditions, the timing
of new merchandise releases and promotional events, changes in our merchandise mix, the success of marketing
programs, foreign currency fluctuations, and weather conditions. These factors may cause our comparable sales
results to differ materially from prior periods and from expectations. Our comparable sales, including the
associated comparable online sales, have fluctuated significantly in the past on an annual, quarterly, and monthly
basis. Over the past 24 months, our reported monthly comparable sales have ranged from an increase of 10
percent in July 2012 to a decrease of 3 percent in September 2013. Over the past five years, our reported gross
margins have ranged from a high of 40.3 percent in fiscal 2009 to a low of 36.2 percent in fiscal 2011. In addition,
over the past five years, our reported operating margins have ranged from a high of 13.4 percent in fiscal 2010 to
a low of 9.9 percent in fiscal 2011.
Our ability to deliver strong comparable sales results and margins depends in large part on accurately forecasting
demand and apparel trends, selecting effective marketing techniques, providing an appropriate mix of
merchandise for our broad and diverse customer base, managing inventory effectively, using effective pricing
strategies, and optimizing store performance. Failure to meet the expectations of investors, securities analysts, or
credit rating agencies in one or more future periods could reduce the market price of our common stock and
cause our credit ratings to decline.