The Gap 2014 Annual Report Download - page 35

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23
Operating Expenses and Operating Margin
($ in millions)
Fiscal Year
2014 2013 2012
Operating expenses $ 4,206 $ 4,144 $ 4,229
Operating expenses as a percentage of net sales 25.6% 25.7% 27.0%
Operating margin 12.7% 13.3% 12.4%
Operating expenses increased $62 million, or decreased 0.1 percent as a percentage of net sales, in fiscal 2014
compared with fiscal 2013. The increase in operating expenses was primarily due to the reclassification of a
portion of income related to our credit card program from operating expenses to cost of goods sold and an
increase in store payroll; partially offset by the gain on sale of a building owned but no longer occupied by the
Company and lower bonus expense.
Operating expenses decreased $85 million, or 1.3 percent as a percentage of net sales, in fiscal 2013 compared
with fiscal 2012. The decrease in operating expenses was primarily due to lower corporate overhead expenses
and store payroll, as well as a decrease in marketing expenses.
Interest Expense
($ in millions)
Fiscal Year
2014 2013 2012
Interest expense $ 75 $ 61 $ 87
Interest expense for fiscal 2014 includes interest on overall borrowings and obligations mainly related to our $1.25
billion long-term debt.
Interest expense for fiscal 2013 includes $75 million of interest on overall borrowings and obligations mainly
related to our $1.25 billion long-term debt, offset by a net reversal of $14 million of interest expense resulting from
the favorable resolution of tax matters in fiscal 2013.
Interest expense for fiscal 2012 primarily consists of interest expense related to our $1.25 billion long-term debt
and $400 million term loan, which was repaid in full in August 2012.
Income Taxes
($ in millions)
Fiscal Year
2014 2013 2012
Income taxes $ 751 $ 813 $ 726
Effective tax rate 37.3% 38.8% 39.0%
The decrease in the effective tax rate for fiscal 2014 compared with fiscal 2013 was primarily due to the
recognition of foreign tax credits upon a $473 million distribution of certain foreign earnings that occurred during
the third quarter of fiscal 2014.
The decrease in the effective tax rate for fiscal 2013 compared with fiscal 2012 was primarily due to the favorable
impact of changes in the mix of pre-tax income between our domestic and international operations, partially offset
by higher federal and state tax credits recognized in fiscal 2012.
Liquidity and Capital Resources
Our largest source of cash flows is cash collections from the sale of our merchandise. Our primary uses of cash
include merchandise inventory purchases, occupancy costs, personnel-related expenses, purchases of property
and equipment, share repurchases, and payment of taxes.