The Gap 2006 Annual Report Download - page 28

Our growth is dependent on strategy development.
Our ability to grow our existing brands and develop or identify new growth opportunities depends in part on
our ability to appropriately identify, develop and effectively execute strategies and initiatives. Failure to
effectively identify, develop and execute strategies and initiatives may lead to increased operating costs without
offsetting benefits and could have a material adverse effect on our results of operations.
Our efforts to expand internationally through franchising and similar arrangements may not be
successful and could impair the value of our brands.
We entered into franchise agreements with unaffiliated franchisees to operate stores in Singapore, Malaysia,
United Arab Emirates, Kuwait, Qatar, Bahrain, Oman, Indonesia, and Korea. Under these agreements, third
parties operate, or will operate, stores that sell apparel, purchased from us, under our brand names. Prior to 2006,
we had no experience operating through these types of third party arrangements, and we can provide no
assurance that these arrangements will be successful. While we expect that this will be a small part of our
business in the near future, we plan to continue to increase the number of countries in which we enter into these
types of arrangements over time as part of our efforts to expand internationally. 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 in our control, such as the ability of these third parties to meet their projections regarding store openings
and sales. Moreover, while the agreements we have entered into and plan to enter into in the future provide us
with certain termination rights, 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, the value of
our brands could be impaired. Failure to successfully expand internationally through franchising or similar
arrangements, or a failure to protect the value of our brands, could have an adverse effect on our results of
operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. The stores
operated as of February 3, 2007 aggregated approximately 38.9 million square feet. Almost all our stores are
leased either on a short-term basis with one or more options after our initial term, or slightly longer terms with
negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location.
We own approximately 1.2 million square feet of headquarters office space located in San Francisco, San
Bruno and Rocklin, California. We lease approximately 1.4 million square feet of headquarters office space
located in San Francisco, San Bruno and Rocklin, California; New York, New York; Albuquerque, New Mexico;
and Toronto, Ontario. Of the 1.4 million square feet of office space leased, approximately 150,000 square feet is
under sublease to others and approximately 204,000 square feet is being marketed for sublease to others. We also
lease approximately 29 domestic regional offices and approximately 37 international offices. We own
approximately 8.6 million square feet of distribution space located in Fresno, California; Fishkill, New York;
Groveport, Ohio; Gallatin, Tennessee; Brampton, Ontario, Canada; and Rugby, England. In 2006, we closed one
of our Brampton, Ontario, Canada facilities and consolidated its operations into the other Brampton facility. We
lease approximately 1.8 million square feet of distribution space located in Grove City, Ohio and in the Northern
Kentucky suburbs outside Cincinnati, Ohio. A third-party logistics company provides logistics services to us
through a 390,000 square foot and a 46,000 square foot distribution warehouse in Chiba, Japan.
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