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Gap Inc. Announces Third Quarter 2002 Results; Reports Earnings Per Share of $0.15.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Nov. 14, 2002

Gap Inc. (NYSE:GPS) today reported sales and earnings for the third quarter, which ended November 2, 2002.

Net sales for the third quarter increased 9 percent to $3.6 billion, compared with $3.3 billion for the third quarter last year. Comparable store sales increased 2 percent, compared with a 17 percent decrease during the same period last year.

The company reported third quarter diluted earnings per share of $0.15, compared with a net loss per share of $0.21 the prior year. Net earnings for the third quarter increased to $135 million, compared with a $179 million net loss last year.

"We're certainly pleased with our earnings for the quarter and the overall progress we're making in each of our divisions," said Gap Inc. President and CEO Paul Pressler. "Gap, Banana Republic and Old Navy are each moving in the right direction."

Store Sales Results By Division

The company's third quarter comparable store sales by division were as follows:
-- Gap Domestic: negative 2 percent, compared with a negative 17 percent last year.

-- Gap International: positive 2 percent, compared with a negative 13 percent last year.

-- Banana Republic: positive 1 percent, compared with a negative 13 percent last year.

-- Old Navy: positive 6 percent, compared with a negative 18 percent last year.


Net sales for the third quarter in each division were:

-- Gap Domestic: $1.3 billion, compared with $1.3 billion last

year.

-- Gap International: $420 million, compared with $387 million

last year.

-- Banana Republic: $456 million, compared with $429 million last

year.

-- Old Navy: $1.5 billion, compared with $1.3 billion last year.

Quarterly net sales by division dating back to fiscal 2000 are now available on gapinc.com and will be updated as reported each quarter.

Company Announces Merchandise Inventory and Accounts Payable

Adjustment -- No Impact on Reported or Prospective Net Sales or

Net Earnings

The company also announced that it has made changes in an accounting report used to record in-transit merchandise inventory. These changes correct an understatement of the company's in-transit inventory balances and the corresponding accounts payable balances.

While the company's in-transit inventory tracking system was accurately capturing data, a software upgrade in April 2002 inadvertently caused the system to begin generating accounting reports that understated in-transit inventory levels, the company said. While addressing this issue, the company also determined that its methodology for recording in-transit inventory required modifications to accurately report in-transit balances. These issues were identified in October and have been fully resolved. The company said its in-transit reporting system has been thoroughly tested and reviewed following the changes.

The table below shows the balance sheet adjustments resulting from these changes. The company said it has elected to amend its quarterly filings for the first and second quarters of 2002 to reflect the adjustments.

These adjustments will not impact previously reported or prospective net sales, net earnings, net cash flow, net working capital or financial covenant compliance. The company added that there was no impact on the amount of inventory actually ordered from vendors or sold to customers in any affected reporting period.


Table: Balance Sheet Adjustments ($000)

 Q2 '02 Q1 '02 Q4 '01
----------------------------------------------------------------------
Merchandise Inventory
Originally Reported $1,853,726 $1,686,424 $1,677,116
Adjusted $2,087,485 $1,792,713 $1,768,613

Accounts Payable
Originally Reported $882,086 $935,218 $1,105,117
Adjusted $1,115,845 $1,041,507 $1,196,614



 Q3 '01 Q2 '01 Q1 '01
----------------------------------------------------------------------
Merchandise Inventory
Originally Reported $2,589,230 $2,149,223 $2,048,822
Adjusted $2,837,534 $2,305,149 $2,119,967

Accounts Payable
Originally Reported $1,156,302 $1,081,819 $ 912,215
Adjusted $1,404,606 $1,237,745 $ 983,360


Fourth Quarter Outlook

Commenting on the fourth quarter, CFO Heidi Kunz said: "October performance significantly exceeded our expectations. However, our outlook remains cautious until we see more consistent performance in our business over time."

Real Estate Growth

Gap brand store count is based on a concepts definition. Any Gap Adult, GapKids, babyGap or GapBody concept that meets a certain square footage threshold is counted as a store, even when residing within a single physical location that may have other concepts. Store count by concept, location and square footage at third quarter end for 2002 and 2001 are as follows:


----------------------------------------------------------------------
 November 2, 2002 November 3, 2001
----------------------------------------------------------------------
 Number of Number of Sq. Ft. Number of Number of Sq. Ft.
 Stores by Stores by Stores by Stores by
 Concept Location (millions) Concept Location (millions)
----------------------------------------------------------------------
Gap
 Domestic 2,339 1,487 13.3 2,279 1,499 13.0
----------------------------------------------------------------------
Gap
 International 659 375 3.6 630 364 3.5
----------------------------------------------------------------------
Banana
 Republic 446 446 3.7 442 442 3.5
----------------------------------------------------------------------
Old Navy 850 850 17.0 796 796 16.0
----------------------------------------------------------------------
Total 4,294 3,158 37.6 4,147 3,101 36.0
----------------------------------------------------------------------


2002 and 2003 Real Estate Outlook

The company said it still expects to end fiscal 2002 with net square footage growth of around 3 percent. Concept closures will be similar to last year, but location closures will likely be higher.

Commenting on future growth, Ms. Kunz said: "For fiscal 2003, we expect to open stores at 30-40 new locations, which translates to 40-60 concepts. Approximately 60 percent of the resulting square footage growth is from Old Navy, with the balance spread equally among the other brands. At this point, we anticipate that store closures will likely be higher than 2002 levels, with net square footage expected to decline about 2 percent for the full 2003 fiscal year."

Webcast and Conference Call Information

Heidi Kunz, Executive Vice President and Chief Financial Officer, will host a summary of Gap Inc.'s third quarter results in a live conference call and real-time webcast at approximately 5 p.m. Eastern Time today. Ms. Kunz will be joined by Paul Pressler, President & CEO; John Lillie, Vice Chairman; Maureen Chiquet, President of Banana Republic; Jenny Ming, President of Old Navy; and Gary Muto, President of Gap; to discuss details on the business.

To access the conference call, please dial (800) 374-0168. International callers may dial (706) 634-0994. The webcast is located on the Conference Calls & Webcast page in the Financials & Media section of gapinc.com

Forward-Looking Statements

The information made available on this press release, conference call and webcast contain certain forward-looking statements which reflect Gap Inc.'s current view of future events and financial performance. Wherever used, the words "estimate", "expect," "plan," "anticipate," "believe," "may" and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the company's future results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging domestic and international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where the company's goods are manufactured, impact of legal proceedings and/or other factors that may be described in the company's annual report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict. The company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Gap Inc. Copyright Information

All recordings made on 800-GAP-NEWS have been recorded on behalf of Gap Inc. and consist of copyrighted material. They may not be re-recorded, reproduced, retransmitted or rebroadcast without Gap Inc.'s express written permission. Your participation represents your consent to these terms and conditions, which are governed under California law.


Gap Inc.

UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS

----------------------------------------------------------------------
($ In thousands) November 2, November 3,
 2002 2001
----------------------------------------------------------------------
ASSETS

Current Assets
 Cash and equivalents $ 2,501,118 $ 799,510
 Merchandise inventory 2,821,441 2,837,534
 Prepaid expenses and other 330,914 355,478
----------------------------------------------------------------------

Total Current Assets 5,653,473 3,992,522

Property and equipment, net 3,870,053 4,241,924
Lease rights and other assets 385,393 355,975
----------------------------------------------------------------------

Total Assets $ 9,908,919 $ 8,590,421
======================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
 Notes payable $ -- $ 1,029,250
 Current maturities of long-term debt 499,959 250,000
 Accounts payable 1,443,870 1,404,606
 Accrued expenses and other current
 liabilities 960,447 894,879
 Income taxes payable 200,271 113,196
----------------------------------------------------------------------

Total Current Liabilities 3,104,547 3,691,931

Long-Term Liabilities
 Long-term debt 2,875,683 1,273,025
 Deferred lease credits and
 other liabilities 540,147 571,838
----------------------------------------------------------------------

Total Long-Term Liabilities 3,415,830 1,844,863

Shareholders' Equity 3,388,542 3,053,627
----------------------------------------------------------------------

Total Liabilities and
 Shareholders' Equity $ 9,908,919 $ 8,590,421
======================================================================



Gap Inc.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------
 Thirteen Weeks Ended
 ------------------------------------------

($000 except share
 and per share amounts) November 2, % to November 3, % to
 2002 Sales 2001 Sales
----------------------------------------------------------------------
Net sales $3,644,956 100.0 % $3,333,373 100.0 %

----------------------------------------------------------------------
Costs and expenses
 Cost of goods
 sold and
 occupancy
 expenses 2,329,347 63.9 % 2,382,734 71.5 %
 Operating
 expenses 1,009,393 27.7 % 946,882 28.4 %
 Interest
 expense 67,475 1.9 % 23,748 0.7 %
 Interest income (9,570) (0.3)% (5,408) (0.2)%
----------------------------------------------------------------------

Earnings before
 income taxes 248,311 6.8 % (14,583) (0.4)%
Income taxes 113,041 3.1 % 164,254 5.0 %
----------------------------------------------------------------------

Net earnings/(loss) $135,270 3.7 % $(178,837) (5.4)%
----------------------------------------------------------------------

Weighted average
 number of
 shares - basic 879,275,933 862,420,054
Weighted average
 number of
 shares -
 diluted 968,163,722 862,420,054
----------------------------------------------------------------------

Earnings/(loss)
 per share -
 basic $0.15 $(0.21)
Earnings/(loss)
 per share -
 diluted $0.15 $(0.21)
======================================================================

Number of stores open
 at end of period

Total square footage
 at end of period
======================================================================

----------------------------------------------------------------------
 Thirty-nine Weeks Ended
 ------------------------------------------

($000 except share
 and per share amounts) November 2, % to November 3, % to
 2002 Sales 2001 Sales
----------------------------------------------------------------------
Net sales $9,804,105 100.0 % $9,758,248 100.0 %

----------------------------------------------------------------------
Costs and
 expenses
 Cost of goods
 sold and
 occupancy
 expenses 6,518,883 66.5 % 6,641,353 68.1 %
 Operating
 expenses 2,697,890 27.5 % 2,740,066 28.1 %
 Interest
 expense 182,556 1.9 % 76,649 0.8 %
 Interest income (26,786) (0.3)% (8,436) (0.2)%
----------------------------------------------------------------------

Earnings before
 income taxes 431,562 4.4 % 308,616 3.2 %
Income taxes 202,834 2.1 % 282,222 2.9 %
----------------------------------------------------------------------

Net earnings/(loss) $228,728 2.3 % $26,394 0.3 %
----------------------------------------------------------------------

Weighted average
 number of
 shares - basic 871,826,795 858,808,170
Weighted average
 number of
 shares -
 diluted 877,828,469 876,068,384
----------------------------------------------------------------------

Earnings/(loss)
 per share -
 basic $0.26 $0.03
Earnings/(loss)
 per share -
 diluted $0.26 $0.03
======================================================================

Number of stores open
 at end of period 4,294 4,147


Total square footage
 at end of period 37,644,744 36,033,394
======================================================================



Gap Inc.

UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------
 39 Weeks 39 Weeks
 Ended Ended
($ In thousands) Nov. 2, 2002 Nov. 3, 2001
----------------------------------------------------------------------

Cash Flows from Operating Activities:
 Net earnings $ 228,728 $ 26,394
 Adjustments to reconcile net
 earnings to net cash provided by
 operating activities:
 Depreciation and amortization 581,591 589,626
 Tax benefit from exercise of
 stock options and vesting of
 restricted stock 42,146 54,481
 Loss on disposal 13,195 --
 Changes in operating assets
 and liabilities:

 Merchandise inventory (1,040,125) (941,474)
 Prepaid expenses and other 10,223 (32,842)
 Accounts payable 241,497 343,813
 Accrued expenses and other 105,966 211,357
 Income taxes payable 115,694 95,789
 Deferred lease credits and other
 long-term liabilities (15,198) 45,726
 ---------- ----------
Net cash provided by
 operating activities 283,717 392,870
 ---------- ----------

Cash Flows from Investing Activities:
 Purchase of property and equipment (216,762) (796,258)
 Proceeds from sale of
 property & equipment 8,513 --
 Acquisition of lease rights
 and other assets (6,660) (6,505)
 ---------- ----------

Net cash used for investing
 activities (214,909) (802,763)
 ---------- ----------

Cash Flows from Financing Activities:
 Net (decrease)/increase in
 notes payable (41,942) 252,136
 Proceeds from issuance of
 long-term debt 1,345,500 495,886
 Issuance of common stock 135,346 114,245
 Cash dividends paid (58,620) (57,176)
 ---------- ----------

Net cash provided by
 financing activities 1,380,284 805,091
 ---------- ----------

Effect of exchange rate
 fluctuations on cash 16,277 (4,482)
 ---------- ----------

Net increase in cash and equivalents 1,465,369 390,716

Cash and equivalents at
 beginning of year 1,035,749 408,794
 ========== ==========

Cash and equivalents at end
 of quarter $ 2,501,118 $ 799,510
 ========== ==========
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