THE GAP, INC. Overview
We are a collection of purpose-led, lifestyle brands offering apparel, accessories, and personal care products for men, women, and children under theOld Navy , Gap,Banana Republic , and Athleta brands. We also offer an assortment of products for women, men, and children through our Intermix and Janie and Jack brands. We have Company-operated stores inthe United States ,Canada , theUnited Kingdom ,France ,Ireland ,Japan ,Italy ,China ,Taiwan , andMexico . Our products are available to customers online through Company-owned websites and through the use of third parties that provide logistics and fulfillment services. We also have franchise agreements with unaffiliated franchisees to operate Gap,Banana Republic ,Old Navy , andAthleta stores throughoutAsia ,Europe ,Latin America , theMiddle East , andAfrica . Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we also use our omni-channel capabilities to bridge the digital world and physical stores to further enhance our shopping experience for our customers. Our omni-channel services, including curbside pick-up, buy online pick-up in store, order-in-store, find-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, are tailored uniquely across our collection of brands. Most of the products sold under our brand names are designed by us and manufactured by independent sources. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. As a result, we temporarily closed ourNorth America retail stores and a large number of our stores globally. InMay 2020 , we began to safely reopen our temporarily closed stores with industry-leading safety measures for customers and employees and continued to monitor regional mandates for additional temporary store closures as they arose. As COVID-19 cases surged again in the fourth quarter of fiscal 2020, there were additional mandated store closures in international markets and stay-at-home restrictions in certain domestic markets. Although the pandemic has caused a significant reduction in store sales, our online sales have increased significantly and we have leveraged our omni fulfillment capabilities, including curbside pick-up and ship-from-store, to safely serve customer demand. With the shift from store sales to online sales, we have experienced increased shipping costs in order to meet customer demand. Additionally, we invested in health and safety measures to protect employees and customers demonstrating our commitment to being a leader in safe retailing practices. We implemented several actions during fiscal 2020 to enhance our liquidity position in response to COVID-19. InMay 2020 , the Company issued Senior Secured Notes for$2.25 billion due 2023 ("2023 Notes"), 2025 ("2025 Notes"), and 2027 ("2027 Notes") (collectively, the "Notes") and entered into a third amended and restated senior secured asset-based revolving credit agreement (the "ABL Facility") with an initial aggregate principal amount of up to$1.8675 billion . Proceeds from the issuance of the Notes were used to redeem our$1.25 billion aggregate principal amount of 5.95 percent notes dueApril 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 Consolidated Statement of Operations. See Note 5 of Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Form 10-K for further details related to our debt and credit facilities. Refer to the "Liquidity and Capital Resources" section for further discussion related to the impacts of COVID-19 on our operations and liquidity during fiscal 2020. As a result of COVID-19, we suspended rent payments for our temporarily closed stores. We are continuing to work through negotiations with our landlords relating to those leases and there was a rent abatement benefit of approximately$80 million recognized on the Consolidated Statement of Operations. The Company also expects substantial cash lease buyout amounts relating to a small population of stores we intend to close across multiple brands; however, we expect these buyouts to have a minimal net impact to our Consolidated Statements of Operations. For the fifty-two weeks endedJanuary 30, 2021 , the Company executed several store buyout agreements. The net impact of these buyouts was not material to our Consolidated Statement of Operations for the fifty-two weeks endedJanuary 30, 2021 . 26 -------------------------------------------------------------------------------- InOctober 2020 , we shared plans to strategically review our operating model inEurope , which includes 117 Company-operated stores. As part of our review, we are considering options that are aligned with our asset-light growth strategies including the possibility of leveraging the strength of our franchise business model and transitioning elements of the business to interested partners. We are also reviewing the strategies of our warehouse and distribution model and our Company-owned e-commerce sites forGap andBanana Republic inEurope . While no decisions have been made, such plans could result in additional costs to the Company including charges related to leases, inventory, and employee-related costs. We expect to finalize our plans in fiscal 2021. Additionally, inOctober 2020 , the Company shared its strategic focus to reduce the number ofGap andBanana Republic stores inNorth America by approximately 350 stores from the beginning of fiscal 2020 to the end of fiscal 2023. The majority of the stores being considered have leases that expired in fiscal 2020 or will expire in fiscal 2021 which allows us to exit underperforming stores with a minimal net impact to our Consolidated Statement of Operations. In fiscal 2020, we have closed, net of openings, 189Gap andBanana Republic stores inNorth America . During the fourth quarter of fiscal 2020, we performed a strategic review of the Intermix business which resulted in an impairment charge of$56 million related to our store long-lived assets as well as the Intermix trade name. For the fifty-two weeks endedJanuary 30, 2021 , the Company recorded impairment of store assets of$135 million and operating lease assets of$391 million , primarily due to lower cash flows from stores and the reduced estimated fair value of real estate, particularly in mall locations, as a result of COVID-19. See Notes 4 and 6 of Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Form 10-K, for further information regarding impairments. During the first quarter of fiscal 2020, the Company recorded inventory related impairment costs of$235 million , primarily related to seasonal inventory that was stranded in stores when closures occurred or seasonal inventory in distribution centers that was planned for store sales. The costs also included impaired garment and fabric commitment costs for future seasonal product. Additionally, to strategically manage excess inventory through COVID-19, select seasonal product is being stored at our distribution centers for introduction into the market primarily in fiscal 2021. As we continue to face a period of uncertainty regarding the ongoing impact of COVID-19 on both our projected customer demand and supply chain, we remain focused on the following strategic priorities in the near-term: •offering product that is consistently brand-appropriate and on-trend with high customer acceptance and appropriate value perception; •growing our global online business; •realigning inventory with customer demand; •attracting and retaining strong talent in our businesses and functions; •increasing the focus on improving operational discipline and efficiency by streamlining operations and processes throughout the organization and leveraging our scale; •managing inventory to support a healthy merchandise margin; •rationalizing the Gap and Banana Republic brands; •performing strategic reviews of our brand portfolio to create a healthier business while prioritizing asset-light growth through licensing and franchise partnerships in international markets; and •continuing to integrate social and environmental sustainability into business practices to support long-term growth. 27 -------------------------------------------------------------------------------- We believe focusing on these priorities in the near term will propel the Company to execute against the Power Plan 2023 strategy, including leveraging: •The Power of its Brands, reflected by the Company's four purpose-led, lifestyle brands,Old Navy , Gap,Banana Republic andAthleta ; •The Power of its Portfolio, which enables growth synergies across key customer categories; and •The Power of its Platform, which leverages the Company's powerful platform to both enable growth, such as through competitive omni-channel capabilities, as well as cost synergies, fueled by its scaled operations. We continue to monitor the rapidly evolving pandemic situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. We identify our operating segments according to how our business activities are managed and evaluated. As ofJanuary 30, 2021 , our operating segments included Old Navy Global, Gap Global, Banana Republic Global, andAthleta . We have determined that each of our operating segments share similar economic and other qualitative characteristics, and, therefore, the results of our operating segments are aggregated into one reportable segment. Financial results for fiscal 2020 are as follows: •Net sales for fiscal 2020 decreased 16 percent to$13.8 billion compared with$16.4 billion for fiscal 2019. •Online sales for fiscal 2020 increased 54 percent compared with fiscal 2019 and store sales for fiscal 2020 decreased 39 percent compared with fiscal 2019. •Gross profit for fiscal 2020 was$4.7 billion compared with$6.1 billion for fiscal 2019. Gross margin for fiscal 2020 was 34.1 percent compared with 37.4 percent for fiscal 2019. •Operating loss for fiscal 2020 was$(862) million compared with operating income of$574 million for fiscal 2019. •Effective tax rate for fiscal 2020 was 39.7 percent compared with 33.5 percent for fiscal 2019. •Net loss for fiscal 2020 was$(665) million compared with net income of$351 million for fiscal 2019. •Diluted loss per share was$(1.78) for fiscal 2020 compared with diluted earnings per share of$0.93 for fiscal 2019. Results of Operations Net Sales See Note 15 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for net sales by brand and region. Comparable Sales ("Comp Sales") Comp Sales include the results of Company-operated stores and sales through online channels. The calculation ofGap Inc. Comp Sales includes the results of Intermix,Janie and Jack , and Hill City, but excludes the results of our franchise business. A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales. A store is considered non-comparable ("Non-comp") when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year. 28 -------------------------------------------------------------------------------- A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year. Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison. We have historically reported comparable sales which include the results of Company-operated stores and sales through online channels. Stores closed for more than three days and stores that have not been open and operated by the Company for at least one year are not included in our comparable sales calculation. As a result of the extensive temporary store closures during the first quarter of fiscal 2020 due to the COVID-19 pandemic, comparable sales are not a meaningful metric for the fifty-two weeks endedJanuary 30, 2021 and we have not included a discussion within our Results of Operations. We intend to include these metrics in future periods when they become more meaningful. Similarly, we have historically reported net sales per average square foot and have also omitted this metric as it is not meaningful for fiscal 2020. 29 -------------------------------------------------------------------------------- Store count, openings, closings, and square footage for our stores are as follows: February 1, 2020 Fiscal 2020 January 30, 2021 Number of Number of Number of Number of Square Footage Store Locations Stores Opened Stores Closed (1) Store Locations (in millions)Old Navy North America 1,207 32 19 1,220 19.6 Old Navy Asia 17 - 17 - -Gap North America 675 2 121 556 5.8 GapAsia 358 16 34 340 2.9 GapEurope 137 4 24 117 1.0Banana Republic North America 541 3 73 471 4.0 Banana Republic Asia 48 5 6 47 0.2Athleta North America 190 11 2 199 0.8Intermix North America 33 - 2 31 0.1Janie andJack North America 139 - 20 119 0.2 Company-operated stores total 3,345 73 318 3,100 34.6 Franchise 574 67 26 615 N/A Total 3,919 140 344 3,715 34.6 Decrease over prior year (5.2) % (6.5) % February 2, 2019 Fiscal 2019 February 1, 2020 Number of Number of Number of Number of Square Footage Store Locations Stores Opened Stores Closed Store Locations (in millions)Old Navy North America 1,139 73 5 1,207 19.5 Old Navy Asia 15 4 2 17 0.2Gap North America 758 4 87 675 7.1 GapAsia 332 61 35 358 3.2 GapEurope 152 4 19 137 1.1Banana Republic North America 556 9 24 541 4.6 Banana Republic Asia 45 5 2 48 0.2Athleta North America 161 29 - 190 0.8Intermix North America 36 - 3 33 0.1Janie andJack North America (2) - - - 139 0.2 Company-operated stores total 3,194 189 177 3,345 37.0 Franchise 472 140 38 574 N/A Total 3,666 329 215 3,919 37.0 Increase over prior year 6.9 % 0.8 % __________ (1)Represents stores that have been permanently closed, not stores temporarily closed as a result of COVID-19. (2)OnMarch 4, 2019 , we acquired select assets ofGymboree Group, Inc. related toJanie and Jack . The 140 stores acquired were not included as store openings for fiscal 2019; however, they are included in the ending number of store locations as ofFebruary 1, 2020 , net of one closure that occurred in the third quarter of fiscal 2019. Outlet and factory stores are reflected in each of the respective brands. 30 -------------------------------------------------------------------------------- Net Sales Discussion Our net sales for fiscal 2020 decreased$2.6 billion , or 16 percent, compared with fiscal 2019, reflecting a 39 percent decline in store sales, partially offset by a 54 percent increase in online sales. The decrease in net sales was primarily driven by mandatory store closures and stay-at-home restrictions related to COVID-19 as well as permanent store closures as a result of our strategic store rationalization initiatives forGap Global and Banana Republic Global. Although COVID-19 negatively affected our store sales for fiscal 2020, our online sales increased significantly compared with fiscal 2019. Our net sales for fiscal 2019 decreased$197 million , or 1 percent, compared with fiscal 2018. The decrease was primarily driven byGap Inc. Comp Sales of negative 3 percent and net store closures at Gap Global, partially offset by the addition ofJanie and Jack , new store openings at Old Navy Global, and an increase in net sales atAthleta in part due to new stores. The translation of net sales in foreign currencies toU.S. dollars had an unfavorable impact of about$61 million for fiscal 2019 and is calculated by translating net sales for fiscal 2018 at exchange rates applicable during fiscal 2019.
Cost of Goods Sold and Occupancy Expenses
Fiscal Year
($ in millions) 2020 2019 2018
Cost of goods sold and occupancy expenses $ 9,095 $ 10,250 $ 10,258
Gross profit $ 4,705 $ 6,133 $ 6,322
Cost of goods sold and occupancy expenses as a
percentage of net sales 65.9 % 62.6 % 61.9 %
Gross margin 34.1 % 37.4 % 38.1 %
Cost of goods sold and occupancy expenses increased 3.3 percentage points as a
percentage of net sales in fiscal 2020 compared with fiscal 2019.
•Cost of goods sold increased 4.1 percentage points as a percentage of net sales
in fiscal 2020 compared with fiscal 2019, primarily driven by higher shipping
costs as a result of growth in online sales as well as higher inventory
impairment due to store closures in the first half of the year and decreased
retail traffic as a result of COVID-19; partially offset by lower promotional
activity.
•Occupancy expenses decreased 0.8 percentage points as a percentage of net sales
in fiscal 2020 compared with fiscal 2019, primarily driven by growth in online
sales with minimal impact on fixed occupancy expenses; partially offset by
decrease in net sales largely due to store closures as a result of COVID-19
without a corresponding decrease in occupancy expenses.
Cost of goods sold and occupancy expenses increased 0.7 percentage points as a
percentage of net sales in fiscal 2019 compared with fiscal 2018.
•Cost of goods sold increased 0.6 percentage points as a percentage of net sales
in fiscal 2019 compared with fiscal 2018, primarily driven by higher promotional
activity at Old Navy Global.
•Occupancy expenses increased 0.1 percentage points as a percentage of net sales
in fiscal 2019 compared with fiscal 2018, primarily driven by a decrease in net
sales without a corresponding decrease in occupancy expenses.
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Fiscal Year
($ in millions) 2020 2019 2018
Operating expenses $ 5,567 $ 5,559 $ 4,960
Operating expenses as a percentage of net sales 40.3 % 33.9 % 29.9 %
Operating margin (6.2) % 3.5 % 8.2 %
Operating expenses increased $8 million or 6.4 percentage points as a percentage
of net sales in fiscal 2020 compared with fiscal 2019 primarily due to the
following:
•impairment charges of $557 million incurred during fiscal 2020 primarily due to
the impact of COVID-19 and a strategic review of the Intermix business compared
with impairment charges of $337 million incurred during fiscal 2019 primarily
related to global flagships;
•a gain on the sale of a building that occurred during fiscal 2019 of $191
million ;
•an increase in advertising expenses due to higher investment in marketing
support across all purpose-led lifestyle brands;
•an increase in lease termination fees incurred in fiscal 2020;
partially offset by
•separation-related and specialty fleet restructuring costs of $339 million
incurred in fiscal 2019;
•a decrease in store payroll and benefits and other store operating expenses as
a result of COVID-19 temporary store closures across all brands which was
partially offset by additional costs incurred to support health and safety
measures as we reopened stores.
Operating expenses increased $599 million or 4.0 percentage points as a
percentage of net sales in fiscal 2019 compared with fiscal 2018 primarily due
to the following:
•an increase due to separation-related costs of $300 million , global flagship
impairment charges of $296 million , operating expenses related to Janie and
Jack , and specialty fleet restructuring costs of $39 million , incurred in fiscal
2019 and not present in fiscal 2018;
•an increase in expenses related to information technology;
•an increase in bonus expense compared with a lower fiscal 2018 bonus expense;
•an increase in advertising expenses due to increased spending at Old Navy
Global and Athleta ;
partially offset by
•a gain on the sale of a building that occurred during fiscal 2019 of $191
million .
Loss on Extinguishment of Debt
We incurred a loss on extinguishment of debt of $58 million during fiscal 2020
which was recorded on the Consolidated Statement of Operations. In May 2020 , the
Company completed the issuance of the Notes for $2.25 billion and used the
proceeds to redeem our 2021 Notes. The loss on extinguishment of debt was
primarily related to the make-whole premium.
Interest Expense
Fiscal Year
($ in millions) 2020 2019 2018
Interest expense $ 192 $ 76 $ 73
Interest expense increased $116 million or 152.6 percent during fiscal 2020
compared with fiscal 2019 primarily due to higher total outstanding debt and
higher interest rates as a result of the May 2020 issuance of the Notes. The
total outstanding principal related to our Notes increased from $1.25 billion as
of February 1, 2020 , to $2.25 billion as of January 30, 2021 . Additionally, the
new Notes bear interest at 8.375 percent, 8.625 percent, and 8.875 percent
compared with our previous 5.95 percent 2021 Notes.
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Income Taxes
Fiscal Year
($ in millions) 2020 2019 2018
Income taxes $ (437) $ 177 $ 319
Effective tax rate 39.7 % 33.5 % 24.1 %
The increase in the effective tax rate for fiscal 2020 compared with fiscal 2019
was primarily due to the benefit associated with the enactment of the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the
recognition of certain tax benefits associated with foreign entity structure
changes, partially offset by the tax impact of foreign operations.
During fiscal 2020, we recorded a $122 million benefit related to the CARES Act
carryback provisions and a $113 million benefit related to recognition of
certain tax benefits associated with foreign entity structure changes.
The increase in the effective tax rate for fiscal 2019 compared with fiscal 2018
was primarily due to impacts related to the Tax Cuts and Jobs Act of 2017
("TCJA"). See Note 7 of Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data, of this Form 10-K for
further details.
Liquidity and Capital Resources
We continue to manage through the impacts of COVID-19 and the impact it has on
our operations and liquidity. During fiscal 2020, we took several actions to
improve our financial profile and increase our liquidity, including entering
into new debt financing, decreasing capital expenditures, and suspending
quarterly cash dividends and share repurchases for the fiscal year.
Additionally, in March 2020 , we deferred the record and payment dates for our
previously announced first quarter of fiscal 2020 dividend and drew down the
entire amount under our previous unsecured revolving credit facility of $500
million .
In May 2020 , we completed the issuance of our Notes and received gross proceeds
of $2.25 billion and repaid the $500 million that was outstanding under our
previous unsecured revolving credit facility. Concurrently with the issuance of
the Notes, the Company entered into the ABL Facility with an initial aggregate
principal amount of up to $1.8675 billion which is scheduled to expire in May
2023 . We did not borrow any funds under the ABL Facility. In June 2020 , we
redeemed our 2021 Notes.
The Notes are guaranteed on a senior secured basis, jointly and severally, by
our existing and future direct and indirect domestic subsidiaries that guarantee
the ABL Facility. The Notes and the guarantees are secured by a first priority
lien on security interests in certain of our and the guarantors' real property
in addition to a lien on substantially all of our and the guarantors'
intellectual property, equipment, investment property, and general intangibles,
subject to certain exceptions and permitted liens. The Notes and the guarantees
are secured by a second priority lien on certain of the assets securing the ABL
Facility, which includes security interests in accounts, inventory, deposit
accounts, securities accounts, intercompany loans and related assets, subject to
certain exceptions and permitted liens, which security interests will be junior
to the security interests in such assets that secure the ABL Facility. The ABL
Facility has a junior lien on certain assets securing the Notes. An
intercreditor agreement governs how the collateral securing the respective debt
obligations will be treated among the secured parties.
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We consider the following to be measures of our liquidity and capital resources:
January 30, February 1,
($ in millions) 2021 2020
Cash and cash equivalents $ 1,988 $ 1,364
Short-term investments 410 290
Debt
5.95 percent 2021 Notes - 1,249
8.375 percent 2023 Notes 500 -
8.625 percent 2025 Notes 750 -
8.875 percent 2027 Notes 1,000 -
Working capital 2,124 1,307
Current ratio 1.55:1 1.41:1
As of January 30, 2021 , the majority of our cash, cash equivalents, and
short-term investments were held in the United States and are generally
accessible without any limitations.
We are also able to supplement near-term liquidity, if necessary, with our ABL
Facility or other available market instruments.
Our largest source of operating cash flows is cash collections from the sale of
our merchandise. Our primary uses of cash include merchandise inventory
purchases, lease and occupancy costs, personnel-related expenses, purchases of
property and equipment, and payment of taxes.
We are party to many contractual obligations involving commitments to make
payments to third parties. These obligations impact our short-term and long-term
liquidity and capital resource needs. Certain contractual obligations are
reflected on the Consolidated Balance Sheet as of January 30, 2021 , while others
are considered future obligations. Our contractual obligations primarily consist
of operating leases, purchase obligations and commitments, long-term debt and
related interest payments, and income taxes. See Notes 5 and 11 of Notes to
Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data of this Form 10-K for amounts outstanding as of January 30,
2021 related to debt and operating leases, respectively.
Purchase obligations and commitments consist of open purchase orders to purchase
inventory as well as commitments for products and services used in the normal
course of business. As of January 30, 2021 , our purchase obligations and
commitments were approximately $4 billion . We expect that the majority of these
purchase obligations and commitments will be settled within one year.
Our contractual obligations related to income taxes are primarily related to
unrecognized tax benefits. See Note 7 of Notes to Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data of
this Form 10-K for information related to income taxes.
We believe our capital structure provides sufficient liquidity and our cash
flows from our operations, along with current cash balance, and the instruments
mentioned above will be sufficient to support our business operations for the
next twelve months and satisfy our cash requirements mentioned above.
Cash Flows from Operating Activities
Net cash provided by operating activities decreased $1,174 million during fiscal
2020 compared with fiscal 2019, primarily due to the following significant
changes:
Net income (Loss)
•Net loss compared with net income in prior comparable period;
Non-cash items
•an increase of $189 million due to non-cash impairment charges for operating
lease assets and store assets during fiscal 2020 compared with fiscal 2019; and
•$191 million increase due to a gain on the sale of a building during fiscal
2019;
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Changes in operating assets and liabilities
•a decrease of $390 million related to income taxes payable, net of receivables
and other tax-related items, resulting from the taxable loss carryback estimated
for fiscal 2020 as well as timing of tax-related payments;
•a decrease of $309 million related to merchandise inventory primarily due to
timing of receipts as a result of shipping delays and port congestion as well as
seasonal inventory stored at our distribution centers; and
•a decrease of $124 million related to accrued expenses and other current
liabilities primarily due to separation-related costs incurred in fiscal 2019;
partially offset by
•an increase of $498 million related to accounts payable primarily due to a
change in payment terms and the suspension of rent payments for stores closed
temporarily as a result of COVID-19.
Net cash provided by operating activities increased $30 million during fiscal
2019 compared with fiscal 2018, primarily due to the following significant
changes:
Net income
•a decrease in net income;
Non-cash items
•an increase of $239 million due to non-cash impairment charges of operating
lease assets in fiscal 2019; partially offset by
•$191 million decrease due to a gain on the sale of a building during fiscal
2019;
Changes in operating assets and liabilities
•an increase of $306 million related to accrued expenses and other current
liabilities primarily due to a significant decrease in bonus accrual in fiscal
2018 combined with an increase in accruals in fiscal 2019 due to
separation-related costs;
•an increase of $158 million related to merchandise inventory primarily due to
flat inventory during fiscal 2019 compared with an increase in inventory during
fiscal 2018; and
•an increase of $144 million related to timing of payments for accounts payable.
We fund inventory expenditures during normal and peak periods through cash flows
from operating activities and available cash. Our business follows a seasonal
pattern, with sales peaking during the end-of-year holiday period. The
seasonality of our operations, in addition to impacts related to COVID-19, may
lead to significant fluctuations in certain asset and liability accounts between
fiscal year-end and subsequent interim periods.
Cash Flows from Investing Activities
Net cash used for investing activities during fiscal 2020 decreased $384 million
compared with fiscal 2019, primarily due to the following:
•$310 million fewer purchases of property and equipment during fiscal 2020
compared with fiscal 2019; and
•an increase of $123 million due to the net activity related to the purchase and
sale of buildings during fiscal 2019;
partially offset by
•$120 million lower net proceeds from available-for-sale securities during
fiscal 2020 compared with fiscal 2019.
In fiscal 2020, cash used for purchases of property and equipment was $392
million primarily related to information technology and supply chain to support
our omni and digital strategies.
Net cash used for investing activities during fiscal 2019 decreased $107 million
compared with fiscal 2018, primarily due to the following:
•$287 million fewer net purchases of available-for-sale debt securities during
fiscal 2019 compared with fiscal 2018; partially offset by
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•a decrease of $123 million due to the net activity related to the purchase and
sale of buildings during fiscal 2019; and
•$69 million purchase of Janie and Jack during fiscal 2019.
In fiscal 2019, cash used for purchases of property and equipment was $702
million primarily related to store investments.
Cash Flows from Financing Activities
Net cash provided by financing activities during fiscal 2020 increased $1,455
million compared with fiscal 2019, primarily due to the following:
•$2,250 million proceeds received related to the issuance of long-term debt
during fiscal 2020; and
•an increase of $564 million due to the suspension of both cash dividends and
share repurchases during fiscal 2020; partially offset by
•$1,307 million payment for the extinguishment of long-term debt during fiscal
2020.
Net cash used for financing activities during fiscal 2019 decreased $189 million
compared with fiscal 2018, primarily due to fewer repurchases of common stock.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an
important metric because it represents a measure of how much cash a company has
available for discretionary and non-discretionary items after the deduction of
capital expenditures as we require regular capital expenditures to build and
maintain stores and purchase new equipment to improve our business and
infrastructure. We use this metric internally, as we believe our sustained
ability to generate free cash flow is an important driver of value creation.
However, this non-GAAP financial measure is not intended to supersede or replace
our GAAP result.
The following table reconciles free cash flow, a non-GAAP financial measure,
from net cash provided by operating activities, a GAAP financial measure.
Fiscal Year
($ in millions) 2020 2019 2018
Net cash provided by operating activities
(705) Free cash flow$ (155) $ 709 $ 676 __________
(1)Excludes purchase of building in the first quarter of fiscal 2019.
Debt and Credit Facilities Certain financial information about the Company's debt and credit facilities is set forth under the headings "Debt and Credit Facilities" in Note 5 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. Dividend Policy In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions. The Company suspended its regular quarterly cash dividend through fiscal 2020. The Company determined that taking this action was in the best interest of the Company in order to preserve liquidity in the context of the ongoing and uncertain duration and impact of COVID-19 on its operations. OnMarch 2, 2021 , the Company affirmed that the payment of the previously declared first quarter dividend will be payable on or afterApril 28, 2021 to shareholders of record at the close of business onApril 7, 2021 . We intend to initiate a quarterly dividend beginning in the second quarter of fiscal 2021, subject to compliance with the restricted payments covenants in the indenture governing the Notes and the ABL Facility. 36 -------------------------------------------------------------------------------- Share Repurchases InMarch 2020 , the Company announced its decision to suspend share repurchases through fiscal 2020 due to the economic uncertainty stemming from a number of factors, including COVID-19. Any future repurchases will be limited by the restricted payments covenants in the indenture governing the Notes and the ABL Facility. Certain financial information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 9 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. Our significant accounting policies can be found under the heading "Organization and Summary of Significant Accounting Policies" in Note 1 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. The policies and estimates discussed below include the financial statement elements that are either judgmental or involve the selection or application of alternative accounting policies and are material to our financial statements. Inventory Valuation We value inventory at the lower of cost or net realizable value ("LCNRV"), with cost determined using the weighted-average cost method. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes or colors), and we primarily use promotions and markdowns to clear merchandise. We record an adjustment to inventory when future estimated selling price is less than cost. Our LCNRV adjustment calculation requires management to make assumptions to estimate the selling price and amount of slow-moving merchandise and broken assortments subject to markdowns, which is dependent upon factors such as historical trends with similar merchandise, inventory aging, forecasted consumer demand, and the promotional environment. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our LCNRV. However, if estimates regarding consumer demand are inaccurate our operating results could be affected. Impairment of Long-Lived Assets Long-lived assets, which primarily consist of property and equipment and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Events that result in an impairment review include a significant decrease in the operating performance of the long-lived asset or the decision to close a store, corporate facility, or distribution center. The impact of the COVID-19 pandemic, primarily in the first quarter of 2020, resulted in a qualitative indication of impairment related to our store long-lived assets. Long-lived assets are considered impaired if the carrying amount exceeds the estimated undiscounted future cash flows of the asset or asset group over the estimated remaining useful life. 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. For our Company-operated stores, including flagships, the individual store generally represents the lowest level of independent identifiable cash flows and the asset group is comprised of both property and equipment and operating lease assets. 37 -------------------------------------------------------------------------------- For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. The estimated fair value of the asset or asset group is based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk. For operating lease assets, the Company determines the estimated fair value of the assets by comparing the discounted contractual rent payments to estimated market rental rates using available valuation techniques. Our estimate of future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales and gross profits and estimating useful lives of the assets. These estimates can be affected by factors such as future sales results, real estate market conditions, store closure plans, economic conditions, business interruptions, interest rates and government regulations that can be difficult to predict. If actual results and conditions are not consistent with the estimates and assumptions used in our calculations, we may be exposed to additional impairments of long-lived assets. See Note 6 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for additional information and disclosures about impairment of long-lived assets.
Leases
We determine if a long-term contractual obligation is a lease at inception. The
majority of our operating leases relate to company stores. We also lease some of
our corporate facilities and distribution centers. Most store leases have a
five-year base period and include options that allow us to extend the lease term
beyond the initial base period, subject to terms agreed upon at lease inception.
We include options that are reasonably certain of being exercised in our lease
terms. Some leases also include early termination options, which can be
exercised under specific conditions. Our lease agreements do not contain any
material residual value guarantees or material restrictive covenants.
We record our lease liabilities at the present value of the lease payments not
yet paid, discounted at the rate of interest that the Company would have to pay
to borrow on a collateralized basis over a similar term. As the Company's leases
do not provide an implicit interest rate, the Company uses an incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments. This information is dependent
upon directly observable borrowing rates and market information for credit
spreads. The incremental borrowing rate is also adjusted for each lease's
respective geography. Management judgement is applied in the determination of
the appropriate credit rating, credit spread and adjustments for the impacts of
collateralization used to determine the incremental borrowing rate. Changes in
these inputs can have a significant effect on the recorded operating lease
assets and related lease liabilities.
See Note 11 of Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data, of this Form 10-K for related
disclosures.
Income Taxes
We are a multinational company operating in multiple domestic and foreign
locations with different tax laws and regulations. The Company's management is
required to interpret and apply these tax laws and regulations in determining
the amount of its income tax liability for financial statement purposes. We
record a valuation allowance against our deferred tax assets when it is more
likely than not that some portion or all of such deferred tax assets will not be
realized. In determining the need for a valuation allowance, management is
required to make assumptions and to apply judgment, including tax planning
strategies, forecasting future income, taxable income, and the geographic mix of
income or losses in the jurisdictions in which we operate. Our effective tax
rate in a given financial statement period may also be materially impacted by
changes in the geographic mix and level of income or losses, changes in the
expected or actual outcome of audits, changes in the deferred tax valuation
allowance or new tax legislation and guidance such as the enactment of the CARES
Act in fiscal 2020.
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At any point in time, many tax years are subject to or in the process of being
audited by various U.S. and foreign tax jurisdictions. These audits include
reviews of our tax filing positions, including the timing and amount of
deductions taken and the allocation of income between tax jurisdictions. When an
uncertain tax position is identified, we recognize a benefit only if we believe
it is more likely than not that the tax position based on its technical merits
will be sustained upon examination by the relevant tax authorities. We recognize
a benefit for tax positions using the highest cumulative tax benefit that is
more likely than not to be realized. We establish a liability for tax positions
that do not meet this threshold. The evaluation of uncertain tax positions
requires management to apply specialized skill and knowledge related to tax laws
and regulations and to make assumptions that are subject to factors such as
possible assessments by tax authorities, changes in facts and circumstances,
issuance of new regulations, and resolutions of tax audits. To the extent we
prevail in matters for which a liability has been established or are required to
pay amounts in excess of our established liability, our effective income tax
rate in a given financial statement period could be materially affected.
See Note 7 of Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data, of this Form 10-K for additional
information on income taxes including the impact of the CARES act.
Recent Accounting Pronouncements
See "Organization and Summary of Significant Accounting Policies" in Note 1 of
Notes to Consolidated Financial Statements included in Item 8, Financial
Statements and Supplementary Data, of this Form 10-K for recent accounting
pronouncements, including the expected dates of adoption and estimated effects
on our Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Derivative Financial Instruments
Certain financial information about the Company's derivative financial
instruments is set forth under the heading "Derivative Financial Instruments" in
Note 8 of Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
We have performed a sensitivity analysis as of January 30, 2021 based on a model
that measures the impact of a hypothetical 10 percent adverse change in foreign
currency exchange rates to U.S. dollars (with all other variables held constant)
on our underlying estimated major foreign currency exposures, net of derivative
financial instruments. The foreign currency exchange rates used in the model
were based on the spot rates in effect as of January 30, 2021 . The sensitivity
analysis indicated that a hypothetical 10 percent adverse movement in foreign
currency exchange rates would have an unfavorable impact on the underlying cash
flow, net of our foreign exchange derivative financial instruments, of $41
million as of January 30, 2021 .
Debt
Certain financial information about the Company's debt is set forth under the
heading "Debt and Credit Facilities" in Note 5 of Notes to Consolidated
Financial Statements included in Item 8, Financial Statements and Supplementary
Data, of this Form 10-K.
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In May 2020 , we completed the issuance of the Notes and received gross proceeds
of $2.25 billion . The Notes have a fixed interest rate and are exposed to
interest rate risk that is limited to changes in fair value. Changes in interest
rates do not impact our cash flows. The scheduled maturity of the Notes is as
follows:
Scheduled Maturity ($ 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.
In conjunction with our financings, we obtained new long-term senior unsecured
credit ratings from Moody's. On March 26, 2020 , Moody's downgraded our senior
unsecured rating from Baa2 to Ba1 and changed their outlook from stable to
negative. On April 23, 2020 , Moody's downgraded our corporate credit ratings
from Ba1 to Ba2 with negative outlook, and Standard & Poor's downgraded our
credit ratings from BB to BB- with negative outlook. Any future reduction in the
Moody's and Standard & Poor's ratings would potentially result in an increase to
our interest expense on future borrowings.
Cash Equivalents and Short-Term Investments
Certain financial information about the Company's cash equivalents and
short-term investments is set forth under the heading "Fair Value Measurements"
in Note 6 of Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
We have highly liquid fixed and variable income investments classified as cash
and cash equivalents and short-term investments. All highly liquid investments
with original maturities of three months or less at the time of purchase are
classified as cash and cash equivalents. Our cash equivalents are placed
primarily in time deposits, money market funds, and commercial paper. We
generally value these investments at their original purchase prices plus
interest that has accrued at the stated rate. We also have highly liquid
investments with original maturities of greater than three months and less than
two years that are classified as short-term investments. These securities are
recorded at fair value using market prices.
Changes in interest rates impact the fair value of our investments that are
considered available-for-sale. As of January 30, 2021 and February 1, 2020 , the
Company held $410 million and $290 million , respectively, of available-for-sale
debt securities with original maturity dates greater than three months and less
than two years within short-term investments on the Consolidated Balance Sheets.
In addition, as of January 30, 2021 and February 1, 2020 , the Company held $90
million and $23 million , respectively, of available-for-sale debt securities
with original maturities of less than three months at the time of purchase
within cash and cash equivalents. Unrealized gains or losses on
available-for-sale debt securities included in accumulated other comprehensive
income were immaterial as of January 30, 2021 and February 1, 2020 .
Changes in interest rates also impact the interest income derived from our
investments. In fiscal 2020 and fiscal 2019, we earned interest income of $10
million and $30 million , respectively.
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