The Gap 2006 Annual Report Download - page 38

increased impairment of long-lived assets offset by $31 million in income relating to the change in our estimate
of the elapsed time for recording income associated with unredeemed gift cards in the second quarter of fiscal
2006.
Operating expenses as a percentage of net sales decreased 0.7 percentage points, or $172 million, in fiscal
2005 compared with fiscal 2004. The decrease was primarily driven by a $61 million net reversal of sublease loss
reserve in the second quarter of fiscal 2005 and the reclassification of certain sourcing expenses. While we have
been classifying the majority of sourcing expenses in cost of goods sold and occupancy expenses, some operating
costs related to certain wholly owned agent offices that source our product had been classified in operating
expenses. As a result, approximately $42 million of year to date sourcing expenses were reclassified in fiscal
2005. This reclassification had no effect on net earnings. Lower advertising expenses primarily driven by our
decision not to run a holiday television campaign at Gap brand and lower bonus expense related to fiscal 2005
performance also contributed to the decrease in operating expenses.
Operating margin excluding loss on early retirement of debt, was 7.4 percent, 10.9 percent, and 12.8 percent
in fiscal 2006, 2005 and 2004, respectively. For fiscal 2007, we expect operating margin to be in the high single-
digits.
Included in operating expenses are costs related to store closures and sublease loss reserves. The following
discussion should be read in conjunction with Note 5 of Notes to the Consolidated Financial Statements.
During the second fiscal quarter of 2005, we completed our assessment of available space and future office
facility needs and decided that we would occupy one of our vacant leased properties in San Francisco. As a result
the sublease loss reserve of $58 million associated with this space was reversed in the second fiscal quarter of
2005 and we occupied the space in fiscal 2006. We further reduced the reserve by $3 million based on our
decision to occupy certain additional office space.
Loss on Early Retirement of Debt
Percentage of Net Sales
($ in millions)
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
January 29,
2005
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
January 29,
2005
Loss on Early Retirement of Debt . . . $— $— $105 — — 0.6%
In fiscal 2004, we performed a net present value analysis on our outstanding debt and because it was
beneficial we repurchased our convertible notes early. Accordingly, we recognized $105 million in loss on early
retirement of debt in fiscal 2004 due to premiums paid and write-off of issuance costs.
Interest Expense
Percentage of Net Sales
($ in millions)
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
January 29,
2005
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
January 29,
2005
Interest Expense ................. $41 $45 $167 0.3% 0.3% 1.0%
The decreases of $4 million and $122 million in interest expense for fiscal 2006 and fiscal 2005,
respectively, were primarily due to lower debt levels as a result of our March 2005 redemption of the convertible
notes.
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