Gap Earnings 2020-10-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

gps-20201031

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)


Delaware						94-1697231
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

Two Folsom Street

San Francisco, California 94105

(Address of principal executive offices)

Registrant’s telephone number, including area code: (415) 427-0100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.05 par value

GPS

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of the registrant’s common stock outstanding as of November 18, 2020 was 374,029,098.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following:

•the potential impact of COVID-19 on the assumptions and estimates used when preparing the quarterly financial statements, and on our results of operations, financial position, and liquidity;

•the potential impact if economic conditions caused by COVID-19 were to worsen beyond what is currently estimated by management;

•the impact of recent accounting pronouncements;

•recognition of revenue deferrals as revenue;

•compliance with applicable financial covenants under the 2023 Notes, 2025 Notes, 2027 Notes, and the ABL Facility;

•the expected tax impact of our participation in the Coronavirus Aid, Relief and Economic Security Act;

•unrealized gains and losses from designated cash flow hedges;

•total gross unrecognized tax benefits;

•the impact of losses due to indemnification obligations;

•the outcome of proceedings, lawsuits, disputes, and claims, including the impact of such actions on our financial results;

•the ability of our new capital structure to provide sufficient liquidity to continue to navigate the COVID-19 pandemic;

•the ability to supplement near-term liquidity, if necessary, with our $1.8675 billion asset-based revolving credit facility or other available market instruments;

•current cash balances and cash flows from our operations and from issuance of the 2023 Notes, 2025 Notes, 2027 Notes being sufficient to support our business operations;

•the impact of the seasonality of our operations;

•offering product that is consistently brand-appropriate and on-trend with high customer acceptance;

•the impact of adopting the accounting standards update No. 2019-12 on January 31 2021;

•growing and operating our global online business and our newly introduced business-to-business program;

•realigning inventory with customer demand;

•increasing focus on improving operational discipline and efficiency by streamlining operations and processes and leveraging scale;

•managing inventory to support a healthy merchandise margin;

•the expected timing, cost and scope of the strategic review of our operating model in Europe;

•the expectation that we will reach additional agreements with our landlords regarding suspended rent payments for our temporarily closed stores;

•rationalizing the Gap and Banana Republic brands, with emphasis on the specialty fleet globally, to create a healthier business while prioritizing asset-light growth through licensing and franchise partnerships in international markets;

•the impact of our expected lease buyouts related to a small population of stores in the future;

•continuing to integrate social and environmental sustainability into business practices;

•increased interest expense on future borrowings caused by any future reductions in our credit ratings; and

•the impact of changes in internal control over financial reporting.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:

•the overall global economic environment and risks associated with the COVID-19 pandemic;

•the risk that we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;

•the highly competitive nature of our business in the United States and internationally;

•the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;

•engaging in or seeking to engage in strategic transactions that are subject to various risks and uncertainties;

•the risk that failure to maintain, enhance and protect our brand image could have an adverse effect on our results of operations;

•the risk that the failure to manage key executive succession and retention and to continue to attract qualified personnel could have an adverse impact on our results of operations;

•the risk that our investments in customer, digital, and omni-channel shopping initiatives may not deliver the results we anticipate;

•the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected;

•the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing;

•the risk that we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation;

•the risk that a failure of, or updates or changes to, our information technology ("IT") systems may disrupt our operations;

•the risks to our efforts to expand internationally, including our ability to operate in regions where we have less experience;

•the risk that we or our franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively;

•the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct;

•the risk that our franchisees’ operation of franchise stores is not directly within our control and could impair the value of our brands;

•the risk that trade matters could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations;

•the risk that foreign currency exchange rate fluctuations could adversely impact our financial results;

•the risk that comparable sales and margins will experience fluctuations;

•the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives;

•the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations;

•the risk that natural disasters, public health crises (similar to and including the ongoing COVID-19 pandemic), political crises, negative global climate patterns, or other catastrophic events could adversely affect our operations and financial results, or those of our franchisees or vendors;

•the risk that reductions in income and cash flow from our credit card arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows;

•the risk that the adoption of new accounting pronouncements will impact future results;

•the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; and

•the risk that we will not be successful in defending various proceedings, lawsuits, disputes, and claims.

Additional information regarding factors that could cause results to differ can be found in this Quarterly Report on Form 10-Q and our other filings with the U.S. Securities and Exchange Commission.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of November 25, 2020, and we assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

We suggest that this document be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

THE GAP, INC.

TABLE OF CONTENTS


		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of October 31, 2020, February 1, 2020, and November 2, 2019	1

	Condensed Consolidated Statements of Operations for the Thirteen Weeks and Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Thirteen Weeks and Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019	3

	Condensed Consolidated Statements of Stockholders' Equity for the Thirteen Weeks and Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019	4

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 31, 2020 and November 2, 2019	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 5.	Other Information.	29

Item 6.	Exhibits	30

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	October 31, 2020		February 1, 2020		November 2, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	2,471	$	1,364	$	788
Short-term investments	178		290		294
Merchandise inventory	2,747		2,156		2,720
Other current assets	966		706		770
Total current assets	6,362		4,516		4,572
Property and equipment, net of accumulated depreciation of $5,891, $5,839 and $5,999	2,846		3,122		3,225
Operating lease assets	4,460		5,402		5,796
Other long-term assets	705		639		525
Total assets	$	14,373	$	13,679	$	14,118
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable	$	2,284	$	1,174	$	1,241
Accrued expenses and other current liabilities	1,283		1,067		974
Current portion of operating lease liabilities	823		920		934
Income taxes payable	41		48		43
Total current liabilities	4,431		3,209		3,192
Long-term liabilities:
Long-term debt	2,214		1,249		1,249
Long-term operating lease liabilities	4,899		5,508		5,650
Lease incentives and other long-term liabilities	458		397		393
Total long-term liabilities	7,571		7,154		7,292
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued and Outstanding 374, 371, and 373 shares	19		19		19
Additional paid-in capital	60		—		—
Retained earnings	2,268		3,257		3,573
Accumulated other comprehensive income	24		40		42
Total stockholders’ equity	2,371		3,316		3,634
Total liabilities and stockholders’ equity	$	14,373	$	13,679	$	14,118

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	13 Weeks Ended				39 Weeks Ended
($ and shares in millions except per share amounts)	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Net sales	$	3,994	$	3,998	$	9,376	$	11,709
Cost of goods sold and occupancy expenses	2,374		2,439		6,339		7,250
Gross profit	1,620		1,559		3,037		4,459
Operating expenses	1,445		1,338		4,033		3,640
Operating income (loss)	175		221		(996)		819
Loss on extinguishment of debt	—		—		58		—
Interest expense	55		19		132		58
Interest income	(1)		(7)		(7)		(21)
Income (loss) before income taxes	121		209		(1,179)		782
Income taxes	26		69		(280)		247
Net income (loss)	$	95	$	140	$	(899)	$	535
Weighted-average number of shares - basic	374		375		373		377
Weighted-average number of shares - diluted	380		376		373		379
Earnings (loss) per share - basic	$	0.25	$	0.37	$	(2.41)	$	1.42
Earnings (loss) per share - diluted	$	0.25	$	0.37	$	(2.41)	$	1.41

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	13 Weeks Ended				39 Weeks Ended
($ in millions)	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Net income (loss)	$	95	$	140	$	(899)	$	535
Other comprehensive income (loss), net of tax
Foreign currency translation	5		(4)		(14)		(5)
Change in fair value of derivative financial instruments, net of tax of $—, $—, $1, and $5	(2)		—		9		10
Reclassification adjustment for gains on derivative financial instruments, net of tax of $(1), $—, $(2), and $(5)	(1)		(9)		(11)		(16)
Other comprehensive income (loss), net of tax	2		(13)		(16)		(11)
Comprehensive income (loss)	$	97	$	127	$	(915)	$	524

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares	Amount								Total
Balance as of August 1, 2020	374	$	19	$	39	$	2,173	$	22	$	2,253
Net income for the thirteen weeks ended October 31, 2020						95				95
Other comprehensive income (loss), net of tax
Foreign currency translation								5		5
Change in fair value of derivative financial instruments								(2)		(2)
Amounts reclassified from accumulated other comprehensive income								(1)		(1)

Issuance of common stock related to stock options and employee stock purchase plans	—	—		4						4
Issuance of common stock and withholding tax payments related to vesting of stock units	—	—		—						—
Share-based compensation, net of forfeitures				17						17
Common stock dividends (1)						—				—
Balance as of October 31, 2020	374	$	19	$	60	$	2,268	$	24	$	2,371

Balance as of August 3, 2019	376	$	19	$	—	$	3,551	$	55	$	3,625
Net income for the thirteen weeks ended November 2, 2019						140				140
Other comprehensive loss, net of tax
Foreign currency translation								(4)		(4)
Change in fair value of derivative financial instruments								—		—
Amounts reclassified from accumulated other comprehensive income								(9)		(9)
Repurchases and retirement of common stock	(3)	—		(23)		(27)				(50)
Issuance of common stock related to stock options and employee stock purchase plans	—	—		5						5
Issuance of common stock and withholding tax payments related to vesting of stock units	—	—		(1)						(1)
Share-based compensation, net of forfeitures				19						19
Common stock dividends declared and paid ($0.2425 per share)						(91)				(91)
Balance as of November 2, 2019	373	$	19	$	—	$	3,573	$	42	$	3,634

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income
($ and shares in millions except per share amounts)	Shares	Amount								Total
Balance as of February 1, 2020	371	$	19	$	—	$	3,257	$	40	$	3,316
Net loss for the thirty-nine weeks ended October 31, 2020						(899)				(899)
Other comprehensive income (loss), net of tax
Foreign currency translation								(14)		(14)
Change in fair value of derivative financial instruments								9		9
Amounts reclassified from accumulated other comprehensive income								(11)		(11)

Issuance of common stock related to stock options and employee stock purchase plans	1	—		16						16
Issuance of common stock and withholding tax payments related to vesting of stock units	2	—		(8)						(8)
Share-based compensation, net of forfeitures				52						52
Common stock dividends ($0.2425 per share) (1)						(90)				(90)
Balance as of October 31, 2020	374	$	19	$	60	$	2,268	$	24	$	2,371

Balance as of February 2, 2019	378	$	19	$	—	$	3,481	$	53	$	3,553
Cumulative effect of a change in accounting principle related to leases						(86)				(86)
Net income for the thirty-nine weeks ended November 2, 2019						535				535
Other comprehensive income (loss), net of tax
Foreign currency translation								(5)		(5)
Change in fair value of derivative financial instruments								10		10
Amounts reclassified from accumulated other comprehensive income								(16)		(16)
Repurchases and retirement of common stock	(8)	—		(67)		(83)				(150)
Issuance of common stock related to stock options and employee stock purchase plans	1	—		22						22
Issuance of common stock and withholding tax payments related to vesting of stock units	2	—		(21)						(21)
Share-based compensation, net of forfeitures				66						66
Common stock dividends declared and paid ($0.7275 per share)						(274)				(274)
Balance as of November 2, 2019	373	$	19	$	—	$	3,573	$	42	$	3,634

__________

(1) On March 4, 2020, the Company declared a first quarter fiscal year 2020 dividend of $0.2425 per share. On March 26, 2020, the Company announced that the dividend will be payable on or after April 28, 2021 to shareholders of record at the close of business on April 7, 2021. The dividend payable amount was estimated based upon the shareholders of record as of October 31, 2020.

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	39 Weeks Ended
($ in millions)	October 31, 2020		November 2, 2019
Cash flows from operating activities:
Net income (loss)	$	(899)	$	535
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	381		417

Share-based compensation	55		64
Impairment of operating lease assets	361		1
Impairment of store assets	127		9

Loss on extinguishment of debt	58		—
Amortization of debt issuance costs	8		1
Non-cash and other items	—		(4)
Gain on sale of building	—		(191)
Deferred income taxes	(74)		42
Changes in operating assets and liabilities:
Merchandise inventory	(590)		(559)
Other current assets and other long-term assets	37		8

Accounts payable	1,120		129
Accrued expenses and other current liabilities	98		28
Income taxes payable, net of receivables and other tax-related items	(206)		89
Lease incentives and other long-term liabilities	54		19
Operating lease assets and liabilities, net	(131)		(60)
Net cash provided by operating activities	399		528
Cash flows from investing activities:
Purchases of property and equipment	(288)		(523)
Purchase of building	—		(343)
Proceeds from sale of building	—		220



Purchases of short-term investments	(237)		(235)
Proceeds from sales and maturities of short-term investments	348		231
Purchase of Janie and Jack	—		(69)
Other	2		—
Net cash used for investing activities	(175)		(719)
Cash flows from financing activities:


Proceeds from revolving credit facility	500		—
Payments for revolving credit facility	(500)		—
Proceeds from issuance of long-term debt	2,250		—
Payments to extinguish debt	(1,307)		—
Payments for debt issuance costs	(61)		—
Proceeds from issuances under share-based compensation plans	16		22
Withholding tax payments related to vesting of stock units	(8)		(21)
Repurchases of common stock	—		(150)

Cash dividends paid	—		(274)

Net cash provided by (used for) financing activities	890		(423)
Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash	4		—
Net increase (decrease) in cash, cash equivalents, and restricted cash	1,118		(614)
Cash, cash equivalents, and restricted cash at beginning of period	1,381		1,420
Cash, cash equivalents, and restricted cash at end of period	$	2,499	$	806



Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	41	$	75
Cash paid for income taxes during the period, net of refunds	$	8	$	117

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Accounting Policies

Basis of Presentation

The Condensed Consolidated Balance Sheets as of October 31, 2020 and November 2, 2019, and the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements contain all normal and recurring adjustments (except as otherwise disclosed) considered necessary to present fairly our financial position, results of operations, comprehensive income (loss), stockholders' equity, and cash flows as of October 31, 2020 and November 2, 2019 and for all periods presented. The Condensed Consolidated Balance Sheet as of February 1, 2020 has been derived from our audited financial statements.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted from these interim financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

The results of operations for the thirteen and thirty-nine weeks ended October 31, 2020 are not necessarily indicative of the operating results that may be expected for the 52-week period ending January 30, 2021.

COVID-19

In March 2020, the World Health Organization declared the coronavirus disease ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed our North America retail stores and a large number of our stores globally. In May 2020, we began to safely reopen our temporarily closed stores in accordance with local government guidelines and most stores were open during the thirteen weeks ended October 31, 2020. Beginning in late October 2020, several European countries instituted new lockdown mandates to contain surging COVID-19 cases and as a result we have temporarily closed certain stores in Europe. We will continue to monitor regional mandates for additional temporary store closures as they arise.

During the thirty-nine weeks ended October 31, 2020, the Company implemented several actions including completing the issuance of our Senior Secured Notes for $2.25 billion due 2023 (“2023 Notes”), 2025 (“2025 Notes”), and 2027 (“2027 Notes”) (collectively, the “Notes”) and entering into a third amended and restated senior secured asset-based revolving credit agreement (the "ABL Facility") in May 2020. See Note 3 of Notes to Condensed Consolidated Financial Statements for further details related to our debt and credit facilities. Additionally, we suspended share repurchases and dividends and deferred the first quarter of fiscal 2020 dividend in March 2020.

As a result of COVID-19, we suspended rent payments beginning in April 2020 due to our temporarily closed stores and are continuing to work through negotiations with our landlords relating to those leases. We considered the Financial Accounting Standards Board's ("FASB") guidance regarding lease modifications as a result of the effects of COVID-19 and elected to apply the temporary practical expedient to account for lease changes as variable rent unless an amendment results in a substantial change in the Company's lease obligations. As of October 31, 2020, the impact of applying the temporary practical expedient was not material to our Condensed Consolidated Financial Statements.

In response to COVID-19, various governments worldwide have enacted, or are in the process of enacting, measures to provide relief to businesses negatively affected by the pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the United States. The CARES Act provides relief to U.S. corporations through financial assistance programs and modifications to certain payroll and income tax provisions. In connection with CARES Act and other financial relief measures worldwide, the Company has recognized $67 million of payroll related credits for the thirty-nine weeks ended October 31, 2020. The payroll related credits are recorded as a reduction within operating expenses in the Condensed Consolidated Statements of Operations. The Company is also considering certain other beneficial provisions of the CARES Act, including the net operating loss carryback provision. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the estimated income tax impact of the CARES Act.

We continue to consider the impact of COVID-19 on the assumptions and estimates used when preparing these quarterly financial statements including inventory valuation, lease accounting impacts, income taxes, and the impairment of long-lived store assets and operating lease assets. These assumptions and estimates may change as the current situation evolves or new events occur and additional information is obtained. If the economic conditions caused by COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.

Restricted Cash

Any cash that is legally restricted from use is classified as restricted cash. If the purpose of restricted cash is related to acquiring a long-term asset, liquidating a long-term liability, or is otherwise unavailable for a period longer than one year from the balance sheet date, the restricted cash is included within other long-term assets on our Condensed Consolidated Balance Sheets. Otherwise, restricted cash is included within other current assets on our Condensed Consolidated Balance Sheets.

As of October 31, 2020, restricted cash primarily included consideration that serves as collateral for certain obligations occurring in the normal course of business and our insurance obligations. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our Condensed Consolidated Balance Sheets to the total shown on our Condensed Consolidated Statements of Cash Flows:


($ in millions)	October 31, 2020		February 1, 2020		November 2, 2019
Cash and cash equivalents, per Condensed Consolidated Balance Sheets	$	2,471	$	1,364	$	788
Restricted cash included in other current assets	4		—		—
Restricted cash included in other long-term assets	24		17		18
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows	$	2,499	$	1,381	$	806

Accounting Pronouncements Recently Adopted

ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued accounting standards update ("ASU") No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU is intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. We adopted this ASU on a prospective basis on February 2, 2020. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements or related disclosures.

Accounting Pronouncements Not Yet Adopted

Except as noted below, the Company has considered all recent accounting pronouncements and concluded that there are no recent accounting pronouncements that may have a material impact on our Condensed Consolidated Financial Statements, based on current information.

ASU No. 2019-12, Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB's simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company will adopt this ASU on January 31, 2021 and does not expect there to be a material impact on our Condensed Consolidated Financial Statements.

Note 2. Revenue

The Company’s revenues include merchandise sales at stores, online, and through franchise agreements, as well as the newly introduced business-to-business ("B2B") program. We also receive revenue sharing from our credit card agreement for private label and co-branded credit cards, and breakage revenue related to our gift cards, credit vouchers, and outstanding loyalty points. Breakage revenue is recognized based upon historical redemption patterns. For online sales, the Company has elected to treat shipping and handling as fulfillment activities and not as a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. We also record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Our credit card agreement provides for certain payments to be made to us, including a share of revenue from the performance of the credit card portfolios and reimbursements of loyalty program discounts. We have identified separate performance obligations related to our credit card agreement that include both providing a license and an obligation to redeem loyalty points issued under the loyalty rewards program. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to redeem loyalty points is deferred until those loyalty points are redeemed. Income related to our credit card agreement is classified within net sales on our Condensed Consolidated Statements of Operations.

We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, Old Navy, and Athleta stores in a number of countries throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. We have identified separate performance obligations related to our franchise agreements that include both providing our franchise partners with a license and an obligation to supply franchise partners with our merchandise. Our obligation to provide a license is satisfied when the subsequent sale or usage occurs and our obligation to supply franchise partners with our merchandise is satisfied when control of the merchandise transfers. There were no material contract liabilities related to our franchise agreements for all periods presented.

We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts associated with our credit card agreement. For the thirteen weeks ended October 31, 2020, the opening balance of deferred revenue for these obligations was $189 million, of which $68 million was recognized as revenue during the period. For the thirty-nine weeks ended October 31, 2020, the opening balance of deferred revenue for these obligations was $226 million, of which $140 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $191 million as of October 31, 2020.

We expect that the majority of our revenue deferrals as of the quarter ended October 31, 2020, will be recognized as revenue in the next twelve months as our performance obligations are satisfied.

For the thirteen weeks ended November 2, 2019, the opening balance of deferred revenue for these obligations was $195 million, of which $78 million was recognized as revenue during the period. For the thirty-nine weeks ended November 2, 2019, the opening balance of deferred revenue for these obligations was $227 million, of which $161 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $189 million as of November 2, 2019.

Net sales disaggregated for stores and online sales for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 was as follows:


	13 Weeks Ended				39 Weeks Ended
($ in millions)	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019

Store sales (1)	$	2,379	$	2,992	$	5,129	$	8,981
Online sales (2)	1,615		1,006		4,247		2,728
Total net sales	$	3,994	$	3,998	$	9,376	$	11,709

__________

(1)Store sales primarily include sales made at our Company-operated stores and franchise sales. Fiscal 2020 store sales were negatively impacted by COVID-19. See Note 1 of Notes to Condensed Consolidated Financial Statements for further details.

(2)Online sales primarily include sales made through our online channels including curbside pick-up, ship-from-store sales, buy online pick-up in store sales, and order-in-store sales. Additionally, beginning in the second quarter of fiscal 2020, sales from the B2B program are also included.

See Note 10 of Notes to Condensed Consolidated Financial Statements for further disaggregation of revenue by brand and by region.

Note 3. Debt and Credit Facilities

Long-term debt recorded on the Condensed Consolidated Balance Sheets consists of the following:


($ in millions)	October 31, 2020		February 1, 2020		November 2, 2019
2021 Notes	$	—	$	1,249	$	1,249
2023 Notes	500		—		—
2025 Notes	750		—		—
2027 Notes	1,000		—		—
Less: Unamortized debt issuance costs	(36)		—		—
Total long-term debt	$	2,214	$	1,249	$	1,249

In June 2020, we redeemed our $1.25 billion aggregate principal amount of 5.95 percent notes due April 2021 (the "2021 Notes"). We incurred a loss on extinguishment of debt of $58 million, primarily related to the make-whole premium, which was recorded on the Condensed Consolidated Statement of Operations. Prior to redeeming our 2021 Notes, the aggregate principal amount of the 2021 Notes was recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized discount. Following the redemption, our obligations under the 2021 Notes were discharged.

In May 2020, we completed the issuance of the Notes in a private placement to qualified buyers and received gross proceeds of $2.25 billion. Concurrently with the issuance of the Notes, the Company amended the existing unsecured revolving credit facility with the ABL Facility which is scheduled to expire in May 2023. During the second quarter of fiscal 2020, we paid and recorded debt issuance costs related to the Notes and ABL Facility within long-term debt and other long-term assets on the Condensed Consolidated Balance Sheet, which will continue to be amortized through interest expense over the life of the related instrument.

The scheduled maturity of the Notes is as follows:


Scheduled Maturity ($ in millions)	Principal		Interest Rate		Interest Payments
Senior Secured Notes (1)
May 15, 2023	$	500	8.375	%	Semi-Annual
May 15, 2025	750		8.625	%	Semi-Annual
May 15, 2027	1,000		8.875	%	Semi-Annual
Total issuance	$	2,250

__________

(1)Includes an option to call the Notes in whole or in part at any time, subject to a make-whole premium.

As of October 31, 2020, the estimated fair value of the Notes was $2.54 billion and was based on the quoted market price for each of the Notes (level 1 inputs) as of the last business day of the fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt on the Condensed Consolidated Balance Sheet, net of the unamortized debt issuance cost.

The ABL Facility has a $1.8675 billion borrowing capacity and bears interest at a base rate (typically LIBOR) plus a margin depending on borrowing base availability. We also have the ability to issue letters of credit on our ABL Facility. As of October 31, 2020, we had $48 million in standby letters of credit issued under the ABL Facility. There were no borrowings under the ABL Facility as of October 31, 2020.

The Notes are secured by the Company's real and intellectual property and equipment and intangibles. The Notes contain covenants that limit the Company’s ability to, among other things: (i) grant or incur liens on the collateral; (ii) incur, assume or guarantee additional indebtedness; (iii) enter into sale and lease-back transactions; (iv) sell or otherwise dispose of assets that are collateral; and (v) make certain restricted payments or other investments. The Notes are also subject to certain provisions related to default that, if triggered, could result in acceleration of the maturity of the Notes.

The ABL Facility agreement is secured by specified assets, including a first lien on inventory, accounts receivable and bank accounts. The Notes are also secured by a second priority lien on certain assets securing the ABL Facility, which includes security interests in inventory, accounts receivable and bank accounts, subject to certain exceptions and permitted liens. In addition, the ABL Facility agreement is secured by a second lien on certain assets securing the Notes. The ABL Facility contains customary covenants restricting the Company's activities, as well as those of its subsidiaries, including limitations on the ability to sell assets, engage in mergers, or other fundamental changes, enter into capital leases or certain leases not in the ordinary course of business, enter into transactions involving related parties or derivatives, incur or prepay indebtedness, grant liens or negative pledges on its assets, make loans or other investments, pay dividends or repurchase stock or other securities, guarantee third-party obligations, engage in sale and lease-back transactions and make changes in its corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the ABL Facility includes, as a financial covenant, a springing fixed charge coverage ratio which arises when availability falls below a specified threshold.

As of October 31, 2020, we were in compliance with the applicable financial covenants and expect to maintain compliance for the next twelve months.

We also maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). The Foreign Facilities are uncommitted and had a total capacity of $58 million as of October 31, 2020. As of October 31, 2020, there were no borrowings under the Foreign Facilities. There were $19 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of October 31, 2020.

We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. There were no material standby letters of credit issued under these agreements as of October 31, 2020.

Note 4. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen and thirty-nine weeks ended October 31, 2020 or November 2, 2019.

Financial Assets and Liabilities

Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:


			Fair Value Measurements at Reporting Date Using
($ in millions)	October 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	678	$	178	$	500	$	—
Short-term investments	178		119		59		—
Derivative financial instruments	6		—		6		—
Deferred compensation plan assets	44		44		—		—
Other assets	2		—		—		2
Total	$

Price	17.18	EPS	2
Shares	379	P/E	8
MCap	6,511	P/FCF	12
Net Debt	443	EBIT	1,134
TEV	6,954	TEV/EBIT	6
TTM 2019-11-02, in MM, except price, ratios

10-Q	2020-10-31	Filed 2020-11-25
10-Q	2020-08-01	Filed 2020-08-31
10-Q	2020-05-02	Filed 2020-06-09
10-K	2020-02-01	Filed 2020-03-17
10-Q	2019-11-02	Filed 2019-11-27
10-Q	2019-08-03	Filed 2019-08-30
10-Q	2019-05-04	Filed 2019-05-31
10-K	2019-02-02	Filed 2019-03-19
10-Q	2018-11-03	Filed 2018-11-30
10-Q	2018-08-04	Filed 2018-08-31
10-Q	2018-05-05	Filed 2018-06-01
10-K	2018-02-03	Filed 2018-03-20
10-Q	2017-10-28	Filed 2017-11-22
10-Q	2017-07-29	Filed 2017-08-25
10-Q	2017-04-29	Filed 2017-06-05
10-K	2017-01-28	Filed 2017-03-20
10-Q	2016-10-29	Filed 2016-12-05
10-Q	2016-07-30	Filed 2016-09-02
10-Q	2016-04-30	Filed 2016-06-03
10-K	2016-01-30	Filed 2016-03-21
10-Q	2015-10-31	Filed 2015-12-08
10-Q	2015-08-01	Filed 2015-09-08
10-Q	2015-05-02	Filed 2015-06-08
10-K	2015-01-31	Filed 2015-03-23
10-Q	2014-11-01	Filed 2014-12-08
10-Q	2014-08-02	Filed 2014-09-05
10-Q	2014-05-03	Filed 2014-06-10
10-K	2014-02-01	Filed 2014-03-24
10-Q	2013-08-03	Filed 2013-09-06
10-Q	2013-05-04	Filed 2013-06-11
10-K	2013-02-02	Filed 2013-03-26
10-Q	2012-10-27	Filed 2012-12-03
10-Q	2012-07-28	Filed 2012-08-31
10-Q	2012-04-28	Filed 2012-06-06
10-K	2012-01-28	Filed 2012-03-26
10-Q	2011-10-29	Filed 2011-12-07
10-Q	2011-07-30	Filed 2011-09-07
10-Q	2011-04-30	Filed 2011-06-08
10-K	2011-01-29	Filed 2011-03-28
10-Q	2010-10-30	Filed 2010-12-08
10-Q	2010-07-31	Filed 2010-09-09
10-Q	2010-05-01	Filed 2010-06-08
10-K	2010-01-30	Filed 2010-03-26

8-K	2020-11-24
8-K	2020-10-05
8-K	2020-08-31
8-K	2020-08-27
8-K	2020-08-10
8-K	2020-06-25
8-K	2020-06-04
8-K	2020-05-19
8-K	2020-05-07
8-K	2020-04-23
8-K	2020-04-23
8-K	2020-03-30
8-K	2020-03-25
8-K	2020-03-13
8-K	2020-03-04
8-K	2020-03-04
8-K	2020-01-13
8-K	2019-11-21
8-K	2019-11-13
8-K	2019-11-04
8-K	2019-09-12
8-K	2019-08-22
8-K	2019-08-20
8-K	2019-05-30
8-K	2019-05-21
8-K	2019-03-15
8-K	2019-02-25
8-K	2018-11-20
8-K	2018-10-02
8-K	2018-08-23
8-K	2018-08-16
8-K	2018-06-13
8-K	2018-06-01
8-K	2018-05-31
8-K	2018-05-24
8-K	2018-05-22
8-K	2018-03-20
8-K	2018-03-16
8-K	2018-03-01
8-K	2018-02-19

EX-10.1	exhibit101q32020.htm
EX-10.2	exhibit102q32020.htm
EX-10.3	exhibit103q32020.htm
EX-10.4	exhibit104q32020.htm
EX-10.5	exhibit105q32020.htm
EX-10.6	exhibit106q32020.htm
EX-10.7	exhibit107q32020.htm
EX-10.8	exhibit108q32020.htm
EX-10.9	exhibit109q32020.htm
EX-10.10	exhibit1010q32020.htm
EX-31.1	exhibit311q32020.htm
EX-31.2	exhibit312q32020.htm
EX-32.1	exhibit321q32020.htm
EX-32.2	exhibit322q32020.htm

GPS 10Q Quarterly Report

Gap Earnings 2020-10-31