Banana Republic 2007 Annual Report Download - page 35

Excluding Forth & Towne, the reserve balances and activities for our sublease loss reserve are as follows:
($ in millions)
Balance at January 29, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94
Expense (reversals), net .................................................... (61)
Cash payments ............................................................ (19)
Balance at January 28, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Expense (reversals), net .................................................... 5
Cashpayments ............................................................ (6)
Balance at February 3, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Expense (reversals), net .................................................... 5
Cash payments ............................................................ (10)
Balance at February 2, 2008 ................................................. $ 8
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate
fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases
for foreign operations, forecasted intercompany royalty payments and intercompany obligations that bear foreign
exchange risk using foreign exchange forward contracts. The principal currencies hedged are the Euro, British
pound, Japanese yen, and Canadian dollar. We do not enter into derivative financial contracts for trading
purposes. Our derivative financial instruments are recorded on the Consolidated Balance Sheets at fair value
determined using quoted market rates.
Forward contracts used to hedge forecasted merchandise purchases are designated as cash flow hedges. These
forward contracts are used to hedge forecasted merchandise purchases over approximately 12 to 18 months.
Changes in the fair value of the forward contracts are recorded as a component of accumulated other
comprehensive earnings within stockholders’ equity and are recognized in cost of goods sold and occupancy
expenses in the period which approximates the time the hedged merchandise inventory is sold. At February 2,
2008 and February 3, 2007, we had an unrealized loss, net of tax, of $24 million and a gain, net of tax, of $14
million, respectively. Substantially all of the unrealized loss of $24 million at February 2, 2008 will be recognized in
cost of goods sold and occupancy expenses over the next 12 months at the then current values, which can be
different from year-end values. There were no material amounts recorded in fiscal 2007, 2006, or 2005 resulting
from hedge ineffectiveness. At February 2, 2008 and February 3, 2007, the fair value of these forward contracts
was $1 million and $34 million, respectively, in other current assets and $33 million and $11 million, respectively,
in accrued expenses and other liabilities on the Consolidated Balance Sheets.
We use forward contracts to hedge forecasted intercompany royalty payments and these forward contracts are
designated as cash flow hedges. These forward contracts are used to hedge intercompany royalty payments over
approximately 12 months. Changes in the fair value of the forward contracts are recorded as a component of
accumulated other comprehensive earnings within stockholders’ equity and are recognized in operating expenses
in the period which approximates the time the royalty payment is made. At February 2, 2008 we had an
unrealized loss, net of tax, of $2 million. The unrealized loss, net of tax, recorded in accumulated other
comprehensive earnings at February 3, 2007, was not material. There were no material amounts recorded in
fiscal 2007 or 2006 earnings resulting from hedge ineffectiveness. At February 2, 2008, the fair value of these
forward contracts was $0.3 million in other current assets and $3 million in accrued expenses and other liabilities
on the Consolidated Balance Sheet. At February 3, 2007, the fair value of these forward contracts was not
material.
We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate
fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the
entity with the intercompany balance. At February 2, 2008 and February 3, 2007, the fair value of these forward
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contracts was $0.5 million and $0.1 million, respectively, in other current assets and $0.3 million and $8 million,
respectively, in accrued expenses and other liabilities on the Consolidated Balance Sheets. These forward
contracts are not designated as hedging instruments therefore changes in the fair value of these foreign currency
contracts, as well as the remeasurement of the underlying intercompany balances, are recognized in operating
expenses in the same period and generally offset.
Beginning in fiscal 2007, we use forward contracts to hedge the net assets of an international subsidiary to offset
the foreign currency translation and economic exposures related to our investment in this subsidiary. We have
designated the hedge as a net investment hedge and changes in fair value are recorded as a component of
accumulated other comprehensive earnings within stockholders’ equity to offset the foreign currency translation
adjustments on the investment. The unrealized loss recorded in accumulated other comprehensive earnings at
February 2, 2008 was $10 million. At February 2, 2008, the fair value of these forward contracts was $4 million in
other current assets and $14 million in accrued expenses and other current liabilities on the Consolidated Balance
Sheet.
In addition, we use cross-currency interest rate swaps to swap the interest and principal payable of $50 million
debt securities of our Japanese subsidiary, Gap (Japan) KK, due March 2009, from a fixed interest rate of 6.25
percent, payable in U.S. dollars, to 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. We have
designated such swaps as cash flow hedges to hedge the total variability in functional currency. At February 2,
2008 and February 3, 2007, the fair value of the swaps was $6 million and $0.2 million, respectively, and is
included in lease incentives and other long-term liabilities on the Consolidated Balance Sheets.
NOTE 8. COMMON STOCK
Common and Preferred Stock
The Board of Directors is authorized to issue 60 million shares of Class B common stock, which is convertible into
shares of common stock on a share-for-share basis. Transfer of the shares is restricted. In addition, the holders of
the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend.
No Class B shares have been issued as of February 2, 2008.
The Board of Directors is authorized to issue 30 million shares of one or more series of preferred stock, par value
of $0.05 per share, and to establish at the time of issuance the issue price, dividend rate, redemption price,
liquidation value, conversion features and such other terms and conditions of each series (including voting rights)
as the Board of Directors deems appropriate, without further action on the part of the stockholders. No preferred
shares have been issued as of February 2, 2008.
Share Repurchase Program
Share repurchases for fiscal 2007, 2006, and 2005 were as follows:
($ and shares in millions, except average per share cost)
52 Weeks Ended
February 2, 2008
53 Weeks Ended
February 3, 2007
52 Weeks Ended
January 28, 2006
Number of shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 58 99
Total cost ............................................. $1,700 $1,050 $2,000
Average per share cost (a) ............................... $19.05 $17.97 $20.29
(a) Average per share cost includes commissions
In August 2007, the Board of Directors authorized $1.5 billion of our share repurchase program which was fully
utilized in fiscal 2007. In February 2008, we announced that the Board of Directors had authorized $1 billion for
additional share repurchases. In connection with these authorizations, we also entered into purchase agreements
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