The Gap 2012 Annual Report Download - page 39

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• Occupancy expenses decreased 1.2 percentage points in fiscal 2012 compared with fiscal 2011. The decrease in
occupancy expenses as a percentage of net sales was primarily driven by higher net sales without a corresponding
increase in occupancy expenses.
Cost of goods sold and occupancy expenses increased 4.0 percentage points in fiscal 2011 compared with fiscal 2010.
• Cost of goods sold increased 3.7 percentage points in fiscal 2011 compared with fiscal 2010. The increase in cost of
goods sold as a percentage of net sales was primarily driven by increased cost of merchandise primarily due to higher
cotton prices.
• Occupancy expenses increased 0.3 percentage points in fiscal 2011 compared with fiscal 2010. The increase in
occupancy expenses as a percentage of net sales was primarily driven by lower net sales for the Stores reportable
segment without a corresponding decrease in occupancy expenses, partially offset by higher net sales for the Direct
reportable segment without a corresponding increase in occupancy expenses.
Operating Expenses and Operating Margin
($ in millions)
Fiscal Year
2012 2011 2010
Operating expenses $ 4,229 $ 3,836 $ 3,921
Operating expenses as a percentage of net sales 27.0% 26.4% 26.7%
Operating margin 12.4% 9.9% 13.4%
Operating expenses increased $393 million, or 0.6 percentage points, in fiscal 2012 compared with fiscal 2011. The
increase in operating expenses was primarily due to higher marketing expenses driven largely by investments in Gap
brand marketing and customer relationship marketing, store payroll and other store-related expenses, and higher bonus
expense.
Operating expenses decreased $85 million, or 0.3 percentage points, in fiscal 2011 compared with fiscal 2010. The
decrease in operating expenses was primarily due to higher income from fees earned under the private label and co-
branded credit card agreements, partially offset by an increase in marketing expenses.
In fiscal 2013, we expect operating margin to be about 13%.
Interest Expense (Reversal)
($ in millions)
Fiscal Year
2012 2011 2010
Interest expense (reversal) $ 87 $ 74 $ (8)
Interest expense for fiscal 2012 and 2011 primarily consists of interest expense related to our $1.25 billion long-term debt,
which was issued in April 2011, and $400 million term loan, which was funded in May 2011 and repaid in full in August
2012.
Interest expense for fiscal 2010 includes an interest expense reversal of $15 million from the reduction of interest expense
accruals resulting primarily from the filing of a U.S. federal income tax accounting method change application and the
resolution of the Internal Revenue Service's review of the Company's federal income tax returns and refund claims for
fiscal 2001 through 2006.
Income Taxes
($ in millions)
Fiscal Year
2012 2011 2010
Income taxes $ 726 $ 536 $ 778
Effective tax rate 39.0% 39.2% 39.3%
The decrease in the effective tax rate for fiscal 2012 compared with fiscal 2011 was the result of slight changes in the
individual components of the effective tax rate. The changes were primarily due to the impact of higher federal tax credits,
which were partially offset by an increase in our state taxes as a result of changes in the mix of state earnings in fiscal
2012.
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