Banana Republic 2012 Annual Report Download - page 35

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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
We are a global retailer offering apparel, accessories, and personal care products for men, women, children, and babies
under the Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix 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
80 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, especially at our Piperlime
and Intermix brands.
We identify our operating segments based on the way we manage and evaluate our business activities. As of February 2,
2013, we have two reportable segments: Stores and Direct.
We are pleased with our fiscal 2012 results. We delivered against our stated priorities to drive increased sales with
healthy merchandise margins, prudently invest in our business, grow earnings per share, and return excess cash to
shareholders. We delivered positive comparable sales in North America for Gap, Banana Republic, and Old Navy in each
of the four quarters of fiscal 2012. We executed on key expansion initiatives with 25 new Athleta stores, more than 30 new
Gap stores in China, and our first Old Navy store in Japan. We generated $1.3 billion of free cash flow and distributed
$1.3 billion to shareholders through dividends and share repurchases. 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
(generally accepted accounting principles) financial measure, from a GAAP financial measure, see the Liquidity and
Capital Resources section.
Fiscal 2012 consisted of 53 weeks versus 52 weeks in fiscal 2011 and 2010. Net sales and operating results, as well as
other metrics derived from the Consolidated Statement of Income, include the impact of the additional week; however, the
comparable sales calculation excludes the 53rd week.
Financial results for fiscal 2012 are as follows:
• Net sales for fiscal 2012 increased $1.1 billion to $15.7 billion compared with $14.5 billion for fiscal 2011. Comparable
sales, which include the associated comparable online sales, for fiscal 2012 increased 5 percent compared with a 4
percent decrease last year.
• Direct net sales for fiscal 2012 increased by 24 percent to $1.9 billion compared with $1.6 billion for fiscal 2011.
• Gross profit for fiscal 2012 was $6.2 billion compared with $5.3 billion for fiscal 2011. Gross margin for fiscal 2012 was
39.4 percent compared with 36.2 percent for fiscal 2011.
• Operating expenses for fiscal 2012 increased $393 million to $4.2 billion compared with $3.8 billion for fiscal 2011 and
increased 0.6 percent as a percentage of net sales.
• Operating margin for fiscal 2012 was 12.4 percent compared with 9.9 percent for fiscal 2011. Operating margin is
defined as operating income as a percentage of net sales.
• Net income for fiscal 2012 was $1.1 billion compared with $833 million for fiscal 2011. Diluted earnings per share
increased 49 percent to $2.33 for fiscal 2012 compared with $1.56 for fiscal 2011.
• In fiscal 2012, we generated free cash flow of $1.3 billion compared with free cash flow of $815 million for fiscal 2011.
• During fiscal 2012, we repurchased about 34 million shares for $1.0 billion and paid cash dividends of $240 million.
In October 2012, we announced a new global brand structure that will guide our long-term growth strategies and shape
our future management structure. Beginning in fiscal 2013, we will combine all channels and geographies under one
global leader each for Gap, Banana Republic, and Old Navy. Each global brand president will oversee their brand's
specialty, outlet, online, and franchise operations. Our newer brands (Piperlime, Athleta, and Intermix) will be managed
within our new Growth, Innovation, and Digital division as part of the new structure.
Our business and financial priorities for fiscal 2013 are as follows:
• grow sales with healthy merchandise margins;
• manage our expenses in a disciplined manner;
• deliver operating margin expansion and earnings per share growth; and
• return excess cash to shareholders.
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