Banana Republic 2014 Annual Report Download - page 30

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18
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, and children
under the Gap, Banana Republic, Old Navy, Piperlime, Athleta, and Intermix brands. We have Company-operated
stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, and
beginning in March 2014, Taiwan. We also have franchise agreements with unaffiliated franchisees to operate
Gap, Banana Republic, and Old Navy 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 through Company-owned websites and through the use
of third parties that provide logistics and fulfillment services. 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 according to how our business activities are managed and evaluated. As of
January 31, 2015, the Company operated under a global brand structure for our major brands, Gap, Old Navy,
and Banana Republic. The Growth, Innovation, and Digital ("GID") division managed our newer brands, Piperlime,
Athleta, and Intermix. As each of our operating segments (Gap Global, Old Navy Global, Banana Republic Global,
and GID) share similar economic and other qualitative characteristics, the results of our operating segments are
aggregated into one reportable segment.
In January 2015, we announced our decision to close the Piperlime brand. We expect to close the online platform
and the store in New York by the end of the first half of fiscal 2015.
In fiscal 2014, we successfully grew both revenue and earnings per share, while delivering progress against our
strategic objectives. We continued to execute on our key initiatives, including global growth and omni-channel
innovation. While we are pleased with the performance by Old Navy and encouraged by the improvement at
Banana Republic, we remain focused on improving the assortment at Gap brand.
In the face of challenging results at Gap brand, we demonstrated strong expense and inventory discipline across
the Company. Additionally, we generated healthy free cash flow of $1.4 billion and cash flow from operating
activities of $2.1 billion and continued our commitment to returning excess cash to shareholders, distributing $1.6
billion through dividends and share repurchases. Despite depreciating foreign currencies, which negatively
impacted our operating results, our balanced approach of revenue growth combined with disciplined expense
management and cash distribution drove earnings per share growth of 5 percent.
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.
Financial results for fiscal 2014 are as follows:
• Net sales for fiscal 2014 increased 2 percent to $16.4 billion compared with $16.1 billion for fiscal 2013.
Excluding the impact of foreign exchange, our net sales increased 3 percent for fiscal 2014 compared with fiscal
2013. See Net Sales discussion for impact of foreign exchange.
• Comparable sales for fiscal 2014 were flat compared with a 2 percent increase last year.
• Gross profit was $6.3 billion for fiscal 2014 and fiscal 2013. Gross margin for fiscal 2014 was 38.3 percent
compared with 39.0 percent for fiscal 2013.
• Operating margin for fiscal 2014 was 12.7 percent compared with 13.3 percent for fiscal 2013. Operating
margin is defined as operating income as a percentage of net sales.
• Net income was $1.3 billion for both fiscal 2014 and fiscal 2013; however, diluted earnings per share increased
5 percent to $2.87 for fiscal 2014 compared with $2.74 for fiscal 2013 due to share repurchase activities.