The Gap 2006 Annual Report Download - page 40

Cash Flows from Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash
include personnel related expenses, merchandise inventory purchases, payment of taxes, and occupancy
expenses. Net cash provided by operating activities decreased $301 million compared with fiscal 2005, primarily
due to the decrease in net earnings, higher prepaid taxes and higher inventory levels, offset by an increase in
accrued expenses.
For fiscal 2005, the $46 million decrease in cash provided by operating activities compared with fiscal 2004
was primarily due to the decrease in accounts payable mainly as a result of lower merchandise inventory levels,
and the decrease in accrued expenses, driven primarily by the decreased bonus payout as a result of fiscal 2005
performance. These decreases were offset by an increase in cash provided by the decreased inventory balance as
a result of disciplined inventory management.
Inventory management remains an area of focus. We continue to execute against our strategies to optimize
inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining
appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square
foot at February 3, 2007 was $44, a 2 percent increase over fiscal 2005 primarily due to the change in shortage
trends resulting in a lower shortage estimate. Inventory per square foot at January 28, 2006 was $43, an 11
percent decrease over fiscal 2004 primarily due to earlier Spring and later Summer product flow in fiscal 2004.
We fund inventory expenditures during normal and peak periods through cash flows from operating
activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks
during the Back-to-School and Holiday periods. During fiscal 2006, fiscal 2005, and fiscal 2004, these periods
accounted for 31 percent, 32 percent, and 32 percent, respectively, of our annual net sales. The seasonality of our
operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and
subsequent interim periods.
We expect the percent increase in inventory per square foot at the end of both the first and second quarters
of fiscal 2007 to be flat compared with last year.
Cash Flows from Investing Activities
Our cash outflows are primarily for purchases of short-term investments and capital expenditures, while
cash inflows are primarily the result of proceeds from maturities of short-term investments. Net cash used for
investing activities for fiscal 2006 was $150 million compared with net cash provided by investing activities of
$286 million in fiscal 2005. This $436 million decrease was driven by the release of $959 million of restricted
cash in fiscal 2005 as a result of the amendment to our letter of credit agreement, partially offset by $504 million
more cash provided by net maturities of investments in fiscal 2006. For fiscal 2005, net cash provided by
investing activities increased $103 million compared with fiscal 2004, as our release of restricted cash increased
$622 million, offset by $382 million less cash provided by net maturities of investments and $181 million more
in capital expenditures.
In fiscal 2006 and 2005, capital expenditures totaled approximately $572 million and $600 million,
respectively. The majority of these expenditures in both fiscal years were used for new store locations, store
remodels and information technology. For fiscal 2007, we expect capital expenditures to be about $700 million.
We expect to open about 230 new store locations and to close about 200 store locations. Included in both the
expected store openings and closings are 45 Old Navy Outlet stores that will be converted to Old Navy stores. As
a result, we expect net square footage to increase about 1 percent for fiscal 2007.
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