QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2019
☐
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, California94105
(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 20, 2019 was 373,299,389.
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 impact of recent accounting pronouncements;
•
recognition of revenue deferrals as revenue;
•
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;
•
structure and timing of completion of the planned separation transaction;
•
process of completing the separation transaction, including estimated costs;
•
anticipated strategic, financial, operational or other benefits of the separation transaction, including future financial performance of the independent companies following the proposed separation transaction;
•
plans to restructure the Gap brand specialty fleet, including anticipated benefits, store closures and timing, impact to annualized sales, associated costs, and effect on annualized savings;
•
offering product that is consistently brand-appropriate and on-trend with high customer acceptance;
•
improving inventory productivity by leveraging responsive capabilities;
•
investing in digital and customer capabilities, as well as store experience;
•
increasing productivity by leveraging our scale and streamlining operations and processes;
•
attracting and retaining strong talent in our businesses and functions;
•
continuing to integrate social and environmental sustainability into business practices;
•
investing strategically in the business while maintaining operating discipline and driving efficiency;
•
continuing to transform our product to market processes;
•
continuing our investment in customer experience to drive higher customer engagement and loyalty;
•
continuing to invest in strengthening brand awareness, customer acquisition, and digital capabilities;
•
utilizing data, analytics, and technology to respond faster while making decisions;
•
current cash balances and cash flows being sufficient to support our business operations, including separation related costs and planned capital expenditures, as well as Gap brand specialty fleet restructuring costs and growth initiatives;
•
ability to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility or other available market instruments;
•
the impact of the seasonality of our operations;
•
dividend payments in fiscal 2019;
•
closure of Old Navy stores in China; 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 risks associated with our plan to separate into two independent publicly-traded companies, including that the separation may not be completed in accordance with the expected plans or anticipated timeframe, or at all;
•
the risk that our plan to separate into two publicly-traded companies may not achieve some or all of the anticipated benefits;
•
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 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 attract and retain key personnel, or effectively manage succession, 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 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 business, including our costs and supply chain, associated with global sourcing and manufacturing;
•
the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations;
•
the risks to our efforts to expand internationally, including our ability to operate in regions where we have less experience;
•
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 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 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 results or our business initiatives;
•
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 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, 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 our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 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 27, 2019, 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 2, 2019.
Property and equipment, net of accumulated depreciation of $5,999, $5,755, and $6,112
3,225
2,912
2,887
Operating lease assets
5,796
—
—
Other long-term assets
525
886
572
Total assets
$
14,118
$
8,049
$
8,173
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
1,241
$
1,126
$
1,299
Accrued expenses and other current liabilities
974
1,024
1,070
Current portion of operating lease liabilities
934
—
—
Income taxes payable
43
24
24
Total current liabilities
3,192
2,174
2,393
Long-term liabilities:
Long-term debt
1,249
1,249
1,249
Long-term operating lease liabilities
5,650
—
—
Lease incentives and other long-term liabilities
393
1,073
1,091
Total long-term liabilities
7,292
2,322
2,340
Commitments and contingencies (see Note 12)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares for all periods presented; Issued and Outstanding 373, 378, and 382 shares
19
19
19
Additional paid-in capital
—
—
—
Retained earnings
3,573
3,481
3,368
Accumulated other comprehensive income
42
53
53
Total stockholders’ equity
3,634
3,553
3,440
Total liabilities and stockholders’ equity
$
14,118
$
8,049
$
8,173
See Accompanying Notes to Condensed Consolidated Financial Statements
1
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 Weeks Ended
39 Weeks Ended
($ and shares in millions except per share amounts)
November 2, 2019
November 3, 2018
November 2, 2019
November 3, 2018
Net sales
$
3,998
$
4,089
$
11,709
$
11,957
Cost of goods sold and occupancy expenses
2,439
2,466
7,250
7,280
Gross profit
1,559
1,623
4,459
4,677
Operating expenses
1,338
1,260
3,640
3,687
Operating income
221
363
819
990
Interest expense
19
21
58
54
Interest income
(7
)
(8
)
(21
)
(21
)
Income before income taxes
209
350
782
957
Income taxes
69
84
247
230
Net income
$
140
$
266
$
535
$
727
Weighted-average number of shares - basic
375
384
377
387
Weighted-average number of shares - diluted
376
387
379
390
Earnings per share - basic
$
0.37
$
0.69
$
1.42
$
1.88
Earnings per share - diluted
$
0.37
$
0.69
$
1.41
$
1.86
Cash dividends declared and paid per share
$
0.2425
$
0.2425
$
0.7275
$
0.7275
See Accompanying Notes to Condensed Consolidated Financial Statements
2
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
13 Weeks Ended
39 Weeks Ended
($ in millions)
November 2, 2019
November 3, 2018
November 2, 2019
November 3, 2018
Net income
$
140
$
266
$
535
$
727
Other comprehensive income (loss), net of tax
Foreign currency translation
(4
)
(4
)
(5
)
(27
)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $-, $1, $5, and $(2)
—
11
10
57
Reclassification adjustment for gains on derivative financial instruments, net of (tax) tax benefit of $-, $(1), $(5), and $8
(9
)
(7
)
(16
)
(13
)
Other comprehensive income (loss), net of tax
(13
)
—
(11
)
17
Comprehensive income
$
127
$
266
$
524
$
744
See Accompanying Notes to Condensed Consolidated Financial Statements
3
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 4, 2018
385
$
19
$
—
$
3,268
$
53
$
3,340
Net income for the thirteen weeks ended November 3, 2018
266
266
Other comprehensive income, net of tax
—
—
Repurchases and retirement of common stock
(4
)
—
(27
)
(73
)
(100
)
Issuance of common stock related to stock options and employee stock purchase plans
1
—
7
7
Issuance of common stock and withholding tax payments related to vesting of stock units
—
—
(2
)
(2
)
Share-based compensation, net of forfeitures
22
22
Common stock dividends ($0.2425 per share)
(93
)
(93
)
Balance as of November 3, 2018
382
$
19
$
—
$
3,368
$
53
$
3,440
Balance as of February 3, 2018
389
$
19
$
8
$
3,081
$
36
$
3,144
Cumulative effect of a change in accounting principle related to revenue recognition
36
36
Net income for the thirty-nine weeks ended November 3, 2018
727
727
Other comprehensive income, net of tax
17
17
Repurchases and retirement of common stock
(10
)
—
(105
)
(195
)
(300
)
Issuance of common stock related to stock options and employee stock purchase plans
2
—
40
40
Issuance of common stock and withholding tax payments related to vesting of stock units
1
—
(22
)
(22
)
Share-based compensation, net of forfeitures
79
79
Common stock dividends ($0.7275 per share)
(281
)
(281
)
Balance as of November 3, 2018
382
$
19
$
—
$
3,368
$
53
$
3,440
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
(13
)
(13
)
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 ($0.2425 per share)
(91
)
(91
)
Balance as of November 2, 2019
373
$
19
$
—
$
3,573
$
42
$
3,634
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 loss, net of tax
(11
)
(11
)
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 ($0.7275 per share)
(274
)
(274
)
Balance as of November 2, 2019
373
$
19
$
—
$
3,573
$
42
$
3,634
See Accompanying Notes to Condensed Consolidated Financial Statements
4
THE GAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 Weeks Ended
($ in millions)
November 2, 2019
November 3, 2018
Cash flows from operating activities:
Net income
$
535
$
727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
417
425
Amortization of lease incentives
—
(45
)
Share-based compensation
64
72
Non-cash and other items
7
10
Gain on sale of building
(191
)
—
Deferred income taxes
42
33
Changes in operating assets and liabilities:
Merchandise inventory
(559
)
(696
)
Other current assets and other long-term assets
8
(64
)
Accounts payable
129
90
Accrued expenses and other current liabilities
28
(148
)
Income taxes payable, net of prepaid and other tax-related items
89
127
Lease incentives and other long-term liabilities
19
36
Operating lease assets and liabilities, net
(60
)
—
Net cash provided by operating activities
528
567
Cash flows from investing activities:
Purchases of property and equipment
(523
)
(510
)
Purchase of building
(343
)
—
Proceeds from sale of building
220
—
Purchases of short-term investments
(235
)
(408
)
Proceeds from sales and maturities of short-term investments
231
112
Purchase of Janie and Jack
(69
)
—
Other
—
(7
)
Net cash used for investing activities
(719
)
(813
)
Cash flows from financing activities:
Proceeds from issuances under share-based compensation plans
22
40
Withholding tax payments related to vesting of stock units
(21
)
(22
)
Repurchases of common stock
(150
)
(300
)
Cash dividends paid
(274
)
(281
)
Other
—
(1
)
Net cash used for financing activities
(423
)
(564
)
Effect of foreign exchange rate fluctuations on cash, cash equivalents, and restricted cash
—
(13
)
Net decrease in cash, cash equivalents, and restricted cash
(614
)
(823
)
Cash, cash equivalents, and restricted cash at beginning of period
1,420
1,799
Cash, cash equivalents, and restricted cash at end of period
$
806
$
976
Supplemental disclosure of cash flow information:
Cash paid for interest during the period
$
75
$
77
Cash paid for income taxes during the period, net of refunds
$
117
$
73
Cash paid for operating lease liabilities
$
916
$
—
See Accompanying Notes to Condensed Consolidated Financial Statements
5
THE GAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies
Basis of Presentation
The Condensed Consolidated Balance Sheets as of November 2, 2019 and November 3, 2018, and the Condensed Consolidated Statements of Income, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders' Equity for the thirteen and thirty-nine weeks endedNovember 2, 2019 and November 3, 2018, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks endedNovember 2, 2019 and November 3, 2018 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”). In the opinion of management, such statements include all adjustments (which include normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, stockholders' equity, and cash flows as of November 2, 2019 and November 3, 2018 and for all periods presented. The Condensed Consolidated Balance Sheet as of February 2, 2019 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 2, 2019.
The results of operations for the thirteen and thirty-nine weeks endedNovember 2, 2019 are not necessarily indicative of the operating results that may be expected for the 52-week period ending February 1, 2020.
Accounting Pronouncements Recently Adopted
ASU No. 2016-02, Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2016-02, Leases. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for leases at the commencement date. We adopted ASU No. 2016-02 and related amendments (collectively "ASC 842") on February 3, 2019 using the optional transition method, which allows for the prospective application of the standard. As of the effective date, we recorded a decrease to opening retained earnings of $86 million, net of tax, which consisted primarily of impairments for certain store and operating lease assets. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which allowed us to carry forward our historical lease classification, to not reassess prior conclusions related to initial direct costs, and to not reassess whether any expired or existing contracts are or contain leases. We also elected the lessee practical expedient to combine lease and nonlease components for new leases and modified leases. The adoption of ASC 842 resulted in the recording of operating lease assets and operating lease liabilities of $5.7 billion and $6.6 billion, respectively, on our Consolidated Balance Sheet as of February 3, 2019.
See Note 9 of Notes to Condensed Consolidated Financial Statements for information regarding required disclosures related to our leases.
ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, this guidance amends and expands disclosure requirements. We adopted this ASU on a prospective basis on February 3, 2019. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
See Note 5 of Notes to Condensed Consolidated Financial Statements for information regarding derivative financial instruments.
6
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 Consolidated Financial Statements, based on current information.
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 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. This guidance is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact this guidance may have on our Consolidated Financial Statements and related disclosures.
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 November 2, 2019, restricted cash primarily included consideration that serves as collateral for 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)
November 2, 2019
February 2, 2019
November 3, 2018
Cash and cash equivalents, per Condensed Consolidated Balance Sheets
$
788
$
1,081
$
958
Restricted cash included in other current assets
—
1
1
Restricted cash included in other long-term assets (a)
18
338
17
Total cash, cash equivalents, and restricted cash, per Condensed Consolidated Statements of Cash Flows
$
806
$
1,420
$
976
__________
(a)
As of February 2, 2019, restricted cash included in other long-term assets included $320 million of consideration held by a third party in connection with the purchase of a building that was completed in fiscal 2019.
Note 2. Revenue
The Company’s revenues include merchandise sales at stores, online, and through franchise agreements. 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 and catalog 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 and catalog 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 Income.
We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy 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. As of the quarter ended November 2, 2019 and November 3, 2018, there were no material contract liabilities related to our franchise agreements.
7
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 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 endedNovember 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 related to gift cards, credit vouchers, outstanding loyalty points, and reimbursements of loyalty program discounts was $189 million as of November 2, 2019.
We expect that the majority of our revenue deferrals as of the quarter ended November 2, 2019, will be recognized as revenue in the next 12 months as our performance obligations are satisfied.
For the thirteen weeks ended November 3, 2018, the opening balance of deferred revenue for these obligations was $194 million, of which $84 million was recognized as revenue during the period. For the thirty-nine weeks endedNovember 3, 2018, the opening balance of deferred revenue for these obligations was $232 million, of which $170 million was recognized as revenue during the period. The closing balance of deferred revenue for these obligations was $193 million as of November 3, 2018.
See Note 13 of Notes to Condensed Consolidated Financial Statements for disaggregation of revenue by brand and by region.
Note 3. Debt and Credit Facilities
As of November 2, 2019, February 2, 2019, and November 3, 2018, the estimated fair value of our $1.25 billion aggregate principal amount of 5.95 percent notes (the “Notes”) due April 2021 was $1.30 billion, $1.30 billion, and $1.29 billion, respectively, and was based on the quoted market price of the Notes (level 1 inputs) as of the last business day of the respective fiscal quarter. The aggregate principal amount of the Notes is recorded in long-term debt on the Condensed Consolidated Balance Sheets, net of the unamortized discount.
We have a $500 million, five-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in May 2023. There were no borrowings and no material outstanding standby letters of credit under the Facility as of November 2, 2019.
We maintain multiple agreements with third parties that make unsecured revolving credit facilities available for our operations in foreign locations (the “Foreign Facilities”). These Foreign Facilities are uncommitted and are generally available for borrowings, overdraft borrowings, and the issuance of bank guarantees. The total capacity of the Foreign Facilities was $55 million as of November 2, 2019. As of November 2, 2019, there were no borrowings under the Foreign Facilities. There were $17 million in bank guarantees issued and outstanding primarily related to store leases under the Foreign Facilities as of November 2, 2019.
We have bilateral unsecured standby letter of credit agreements that are uncommitted and do not have expiration dates. As of November 2, 2019, we had $22 million in standby letters of credit issued under these agreements.
Note 4. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives and available-for-sale debt securities. The Company categorizes financial assets and liabilities recorded at fair value based upon a three-level hierarchy that considers the related valuation techniques.
There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks endedNovember 2, 2019 or November 3, 2018. There were no transfers of financial assets or liabilities into or out of level 1, level 2, and level 3 during the thirteen and thirty-nine weeks endedNovember 2, 2019 or November 3, 2018.
8
Financial Assets and Liabilities
Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents are as follows:
Fair Value Measurements at Reporting Date Using
($ in millions)
November 2, 2019
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash equivalents
$
238
$
3
$
235
$
—
Short-term investments
294
131
163
—
Derivative financial instruments
12
—
12
—
Deferred compensation plan assets
53
53
—
—
Other assets
2
—
—
2
Total
$
599
$
187
$
410
$
2
Liabilities:
Derivative financial instruments
$
10
$
—
$
10
$
—
Fair Value Measurements at Reporting Date Using
($ in millions)
February 2, 2019
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash equivalents
$
373
$
26
$
347
$
—
Short-term investments
288
125
163
—
Derivative financial instruments
20
—
20
—
Deferred compensation plan assets
48
48
—
—
Other assets
2
—
—
2
Total
$
731
$
199
$
530
$
2
Liabilities:
Derivative financial instruments
$
11
$
—
$
11
$
—
Fair Value Measurements at Reporting Date Using
($ in millions)
November 3, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash equivalents
$
438
$
30
$
408
$
—
Short-term investments
296
124
172
—
Derivative financial instruments
46
—
46
—
Deferred compensation plan assets
49
49
—
—
Total
$
829
$
203
$
626
$
—
Liabilities:
Derivative financial instruments
$
1
$
—
$
1
$
—
We have highly liquid investments classified as cash equivalents, which are placed primarily in time deposits, money market funds, and commercial paper. With the exception of our available-for-sale investments noted below, we value these investments at their original purchase prices plus interest that has accrued at the stated rate.
Our available-for-sale securities are comprised of investments in debt securities. These securities are recorded at fair value using market prices. As of November 2, 2019 and November 3, 2018, the Company held $294 million and $296 million, respectively, of available-for-sale debt securities with maturity dates greater than three months and less than two years within short-term investments on the Condensed Consolidated Balance Sheets. In addition, as of November 2, 2019 and November 3, 2018, the Company held $17 million and $6 million of available-for-sale debt securities with maturities of less than three months at the time of purchase within cash and cash equivalents on the Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale debt securities included within accumulated other comprehensive income were immaterial as of November 2, 2019 and November 3, 2018.
9
The Company regularly reviews its available-for-sale debt securities for other-than-temporary impairment. For the thirteen and thirty-nine weeks endedNovember 2, 2019 and November 3, 2018, the Company did not consider any of its securities to be other-than-temporarily impaired and, accordingly, did not recognize any impairment loss.
Derivative financial instruments primarily include foreign exchange forward contracts. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. See Note 5 of Notes to Condensed Consolidated Financial Statements for information regarding currencies hedged against the U.S. dollar.
We maintain the Gap Inc. Deferred Compensation Plan (“DCP”), which allows eligible employees and non-employee directors to defer base compensation up to a maximum percentage. Plan investments are directed by participants and are recorded at market value and designated for the DCP. The fair value of the Company’s DCP assets is determined based on quoted market prices, and the assets are recorded in other long-term assets on the Condensed Consolidated Balance Sheets.
Nonfinancial Assets
We review the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value of the long-lived assets is determined using level 3 inputs and based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail stores is primarily at the store level.
There were no material impairment charges recorded for long-lived assets for the thirteen and thirty-nine weeks endedNovember 2, 2019 or November 3, 2018.
As discussed in Note 1, we recorded a decrease to fiscal 2019 opening retained earnings due to the adoption of ASC 842 related to impairments as of the effective date.
We review the carrying amount of goodwill and other indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.
There were no material impairment charges recorded for goodwill or other indefinite-lived intangible assets for the thirteen and thirty-nine weeks endedNovember 2, 2019 or November 3, 2018.