The Gap 2011 Annual Report Download - page 33

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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
We are a global specialty retailer offering apparel, accessories, and personal care products for men, women,
children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We have Company-
operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, and beginning in
November 2010, China and Italy. We also have franchise agreements with unaffiliated franchisees to operate Gap
and Banana Republic 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 in over 90 countries. 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.
We identify our operating segments based on the way we manage and evaluate our business activities. We have
two reportable segments: Stores and Direct.
Fiscal 2011 was a challenging year. Unemployment remained high in our core North America markets and the
apparel retail environment was quite promotional. The debt crisis in Europe increased stock market volatility
globally, and the earthquake and tsunami in Japan had a negative impact on our business in Asia. Our largest
expense, cost of goods sold, escalated sharply in fiscal 2011 primarily as a result of global cotton price inflation,
putting significant pressure on our margins, especially in the second half of fiscal 2011. Finally, we had product
challenges throughout fiscal 2011 in our domestic and international businesses. As a result, earnings for fiscal 2011
were below last year. Despite these challenges, we are pleased with the progress we made against our long-term
strategic plan, including growing our online business and expanding internationally. We also continued to reduce
our square footage in North America through closures and consolidations at Gap and downsizes at Old Navy. We
managed our operating expenses carefully. We delivered higher average selling price per unit throughout the year,
enabled by our disciplined inventory management. We generated $815 million of free cash flow and distributed
$2.3 billion to shareholders through dividends and share repurchases. 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 2011 are as follows:
• Net sales for fiscal 2011 decreased 1 percent to $14.5 billion compared with $14.7 billion for fiscal 2010. Comparable
sales, which include the associated comparable online sales, for fiscal 2011 decreased 4 percent compared with a
2 percent increase last year.
• Direct net sales for fiscal 2011 increased 20 percent to $1.6 billion compared with $1.3 billion for fiscal 2010. Our
Direct reportable segment includes sales for each of our online brands.
• Net sales generated outside of the U.S. and Canada, including online, for fiscal 2011 were $3.7 billion, and as a
percentage of total net sales, increased 4 percent to 26 percent compared with 22 percent for fiscal 2010.
• Gross profit for fiscal 2011 was $5.3 billion compared with $5.9 billion for fiscal 2010. Gross margin for fiscal 2011
was 36.2 percent compared with 40.2 percent for fiscal 2010.
• Operating expenses for fiscal 2011 decreased 2 percent to $3.8 billion compared with fiscal 2010 and decreased
0.3 percent as a percentage of net sales.
• Operating margin for fiscal 2011 was 9.9 percent compared with 13.4 percent for fiscal 2010. Operating margin is
defined as operating income as a percentage of net sales.
• Net income for fiscal 2011 was $833 million compared with $1.2 billion for fiscal 2010. Diluted earnings per share
decreased 17 percent to $1.56 for fiscal 2011 compared with $1.88 for fiscal 2010.
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