The Gap 2007 Annual Report Download - page 21

We currently expect the fiscal 2008 effective tax rate to be about 39 percent. The actual rate will ultimately
depend on several variables, including the mix of earnings between domestic and international operations, the
overall level of earnings, and the potential resolution of outstanding tax contingencies.
Discontinued Operation
Loss from discontinued operation relates to the Forth & Towne brand, whose stores were closed by the end of
June 2007. Loss from the discontinued operation of Forth & Towne, net of income tax benefit, was $34 million,
$31 million, and $18 million for fiscal 2007, 2006, and 2005, respectively. Loss from the discontinued operation on
a pre-tax basis for fiscal 2007 included $29 million related to the impairment of long-lived assets, $6 million of
lease settlement charges, $5 million of employee severance, $2 million of net sublease losses and $4 million of
administrative and other costs.
FINANCIAL CONDITION
Liquidity
We consider the following to be measures of our liquidity and capital resources for the last three fiscal years:
($ in millions)
52 Weeks
Ended/As of
February 2, 2008
53 Weeks
Ended/As of
February 3, 2007
52 Weeks
Ended/As of
January 28, 2006
Working capital (a) ..................................... $1,653 $ 2,757 $ 3,297
Current ratio (a) ........................................ 1.68:1 2.21:1 2.70:1
Net cash provided by operating activities ................... $2,081 $ 1,250 $ 1,551
(a) Our working capital and current ratio calculations include restricted cash.
Our working capital and current ratio as of February 2, 2008 decreased compared with February 3, 2007 due
primarily to decreases in cash, cash equivalents, short-term investments and merchandise inventory, and an
increase in accounts payable.
We believe that cash flows from our operations and our existing capital resources will be adequate to satisfy our
capital needs for the foreseeable future.
Cash Flows from Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash
include merchandise inventory purchases, personnel related expenses, and payment of taxes and occupancy. In
fiscal 2007, net cash provided by operating activities increased $831 million compared with fiscal 2006, primarily
due to higher net earnings, a decrease in inventory purchases as a result of our continued focus on inventory
management, an increase in accounts payable due to a change in vendor payment terms and lower income taxes
paid in fiscal 2007 compared with fiscal 2006.
For fiscal 2006, the $301 million decrease in cash provided by operating activities compared with fiscal 2005 was
primarily due to the decrease in net earnings, higher prepaid taxes and higher inventory levels, offset by an
increase in accrued expenses.
Inventory management remains an area of focus. We continue to execute against our strategies of managing
inventory levels in a manner that supports more selling at regular price and healthy merchandise margins. As a
result, inventory per square foot at February 2, 2008 was $37, compared with inventory per square foot of $44 at
February 3, 2007 and $43 at January 28, 2006.
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 thirteen weeks during the
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back-to-school and holiday periods. During fiscal 2007, fiscal 2006, and fiscal 2005, these periods accounted for
32 percent, 31 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.
As part of our normal business practices, we periodically benchmark vendor payment terms within our industry.
Based upon this review, we determined that there was an opportunity to modify our merchandise vendor payment
terms to be more in line with our competitors. This change became effective in September 2007 and, as a result,
we have an extended time to pay.
Cash Flows from Investing Activities
Our cash outflows from investing activities 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 2007 increased $124 million compared with fiscal 2006. In fiscal
2007 and 2006, capital expenditures totaled $682 million and $572 million, respectively. The majority of these
expenditures in both fiscal years were used for new store locations, store remodels and information technology. In
fiscal 2007, we had net maturities of short-term investments of $393 million compared with net maturities of short-
term investments of $381 million in fiscal 2006.
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 2008, we expect capital expenditures to be about $500 million. We expect to open about 115 new store
locations and to close about 100 store locations. These openings and closings include 15 store repositions. As a
result, we expect net square footage to increase less than half a percent for fiscal 2008.
Cash Flows from Financing Activities
Our cash outflows related to financing activities consist primarily of the repurchase of our common stock,
repayment of debt, and dividend payments, while cash inflows typically consist of proceeds from share-based
compensation. During fiscal 2007, we paid $1.7 billion for the repurchase of approximately 89 million shares
compared with repurchases of approximately 58 million shares for $1.1 billion in fiscal 2006. We also repaid our
6.90 percent notes payable of $326 million in September 2007.
For fiscal 2006, cash flows used for financing activities decreased $938 million compared with fiscal 2005 driven
by repurchases of $1.0 billion less common stock than in fiscal 2005.
Free Cash Flow
Free cash flow is a non-GAAP measure. We believe free cash flow is an important metric because it represents a
measure of how much cash a company has available after the deduction of capital expenditures, as we require
regular capital expenditures to build and maintain stores and purchase new equipment to improve our business.
We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver
of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP
results.
In fiscal 2007, we delivered $1.4 billion in free cash flow, which represented 168 percent of net earnings,
compared with $678 million in fiscal 2006. The increase was driven primarily by lower inventory levels and the
change in vendor payment terms. Free cash flow as a percent of net earnings was 87 percent and 85 percent for
fiscal 2006 and 2005, respectively.
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