Banana Republic 2007 Annual Report Download - page 17

(a) Operating margin includes the loss on early retirement of debt of $105 million for fiscal 2004.
(b) A dividend of $0.0222 per share declared in the fourth quarter of fiscal 2004 was paid in the first quarter of
fiscal 2005.
(c) Based on year-end inventory balance and store square footage; excludes inventory related to online sales
and excludes inventory and square footage related to Forth & Towne.
(d) Fiscal 2007 reduction due to classification of notes payable of $138 million into current maturities of long-term
debt. Fiscal 2006 reduction due to classification of notes payable of $325 million into current maturities of
long-term debt, which was repaid in September 2007. Fiscal 2005 reduction due primarily to the March 2005
redemption of our Senior Convertible Notes of $1.4 billion. See Note 4 of Notes to the Consolidated Financial
Statements.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are a global specialty retailer operating retail and online stores selling casual apparel, accessories, and
personal care products for men, women, and children under the Gap, Old Navy, Banana Republic, and Piperlime
brands. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. We
also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia,
Europe and the Middle East. Under these agreements, third parties operate or will operate stores that sell
apparel, purchased from us, under our brand names. In addition, our U.S. customers can shop online at
www.gap.com, www.bananarepublic.com, www.oldnavy.com, and www.piperlime.com. We design virtually all of
our products, which are manufactured by independent sources, and sell them under our brands. We also offer
products that are designed and manufactured by branded third parties in our online shoe store, Piperlime, which
was launched in October 2006.
Fiscal 2007 and 2005 had 52 weeks versus 53 weeks in fiscal 2006. Net sales numbers for the fourth quarter and
year for fiscal 2006 include this additional week; however, comparable store sales calculations exclude the 53rd
week.
Significant financial items during fiscal 2007 include:
• Net sales for fiscal 2007 were $15.8 billion compared with $15.9 billion in fiscal 2006, and comparable store
sales decreased 4 percent compared with a decrease of 7 percent last year.
• Net earnings from continuing operations for fiscal 2007 increased 7 percent to $867 million, or $1.09 per
share on a diluted basis, compared with $809 million, or $0.97 per share on a diluted basis for fiscal 2006.
• In February 2007, we announced our decision to close our Forth & Towne store locations. We eliminated
about 550 Forth & Towne positions and closed all 19 stores by the end of June 2007. Forth & Towne is
presented as a discontinued operation in the accompanying Consolidated Financial Statements. We recorded
a loss from the discontinued operation of $34 million, net of income tax benefit, in fiscal 2007 and we expect
future charges to be immaterial.
• As part of our efforts to streamline operations, we examined our organizational structure to ensure that we
were enabling our brands to make decisions and effect change more efficiently. These cost reduction
initiatives resulted in $34 million of expenses in fiscal 2007, of which $32 million were operating expenses
and $2 million were cost of goods sold and occupancy expenses. The majority of these expenses were
related to severance benefits for employees at our headquarter locations.
• Net earnings for fiscal 2007 were $833 million, or $1.05 per share on a diluted basis, compared with $778
million, or $0.93 per share on a diluted basis for fiscal 2006. Included in net earnings for fiscal 2007 was $68
million, or $0.07 per share on a diluted basis, related to the discontinued operation of Forth & Towne and
expenses associated with our cost reduction initiatives described above.
• Our online sales for fiscal 2007 increased 24 percent to $903 million, compared with $730 million for fiscal
2006.
• We generated cash flows from operating activities of $2.1 billion during 2007. During the third quarter of fiscal
2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. Our capital expenditures
in fiscal 2007 were $682 million.
• In fiscal 2007, we generated free cash flow of $1.4 billion compared with free cash flow of $678 million in
fiscal 2006. Free cash flow is defined as net cash provided by operating activities less the purchase of
property and equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, to a GAAP
financial measure, see the Financial Condition section in this Management’s Discussion and Analysis.
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