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FINAL PAPER: FINANCIAL SYSTEMS MANAGEMENT
Gap Inc. (GPS)
ABOUT GAP INC.
Gap Inc. is an international specialty retailing company that offers not only clothing for most sizes, but also
accessories and personal care products for males, females and children (Yahoo Finance, “"GPS: Summary for
Gap, Inc. (The) Common Stock”).
ITS BEGINNINGS
The first Gap store was opened by Don Fisher, Gap Inc.’s founder. He initially opened the store because he
could not find jeans that fit him (Gap Inc., “Our Story”). Such first store was founded in 1969 in San Francisco,
where it now maintains its headquarters. After that, rapid growth followed (Gap Inc., “Key Facts”).
NOWADAYS
Its first international store opened in 1987 in the United Kingdom. Since then, it has continued to grow. As of
January 30, 2010, according to the New York Times it operated 3,095 stores worldwide (New York Times,
“Gap Inc.”). Current locations range from United States, United Kingdom, Canada, China, France, Ireland and
Japan (Gap Inc., “Key Factors”).
Gap Inc. now owns several brands including Gap, GapKids, BabyGap, GapBody, Banana Republic, Old Navy,
Piperlime and Athleta. In addition, it has several outlet stores. Further, it has more than 170 franchise stores
throughout the United States, Australia, Latin America and the Middle East (Gap Inc., “Key Factors”)..
THE BRANDS
Gap is marketed as modern, sexy, American style and cool. It carries apparel and accessories for females,
males, kids and toddlers. The prices range but are about blue collar level. They also have outlets where prices
can be more comfortable. Gap Inc., “Gap”).
Banana Republic’s marketing reads: “Accessible luxury, modern style”. It carries apparel and accessories for
males and females (Gap Inc., “Banana Republic”).
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Old Navy targets kids, toddlers, males and females. They carry lower quality but more accessible products, and
have chosen to be marketed as “Fun, fashion and value for the whole family” (Gap Inc., “Old Navy”).
Piperlime and Athleta, from what I was able to observe are both brands of higher quality and price. Piperlime
carries shoes, apparel and accessories and it targets mainly females. Athleta has a sport/casual style.
PRICE COMPARISON OVER TIME
When Gap initially opened in 1969, a pair of jeans cost an average of $7 (Gap Inc., “Key Facts”).
Today’s cost of the same produce is closer to $25 to $85 (Gap Inc., “Sale: Male Jeans”).
HOW IT OPERATES
“Our people are what make us a great company”. Gap Inc. employs over 134,000 individuals who are as diverse
as the millions of customers it welcomes on
a weekly basis (Gap Inc., Our People”).
Gap Inc. believes that “doing what is right is
good business” and that social responsibility
should not be corporate speak but how
business is done, and they have for the past
42
years
(Gap
Responsibility”).
Inc.,
“Social
(Gap Inc., “Community Investment”).
For the past 3 years Gap Inc. has been learning from its new community investment strategy, and is encouraged
to continue with it as positive results are shown. This new model consists in using and positively influencing
their assets while creating a “virtuous cycle”, which produces a collective benefit for their employees,
customers, shareholders, vendors and communities (Gap Inc., “Community Investment).
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Financial Ratios
Current Ratio
Quick/Acid
=
=
Test Ratio
Days Sales
=
Outstanding
Total Asset
Turnover
Ratio
=
Debt Ratio
=
TIE Ratio
Profit Margin
ROA
=
=
=
Current Assets
4,664.00
Current Liabilities
2,131.00
Current Assets-Inventories
3,217.00
Current Liabilities
2,131.00
Receivables
243.00
Average Sales per Day
38.90
Sales
14,197.00
Total Assets
7,985.00
Total Debt
3,094.00
Total Assets
7,985.00
EBIT (Operating Income)
1,815.00
Interest Charges
6.00
Net Income
1,102.00
Sales
14,197.00
Net Income
1,102.00
Total Assets
ROE
Book Value
Per Share
=
=
2009
2008
=
2.1886
1,102.00
Common Equity (Stockholder's Equity)
4,891.00
Common Equity
4,891.00
Shares Outstanding
55.00
=
1.8559
2,158.00
=
1.5096
2,499.00
=
6.2474
41.00
=
1.1580
1.7780
14,526.00
=
1.0302
0.3875
3,177.00
=
1.9204
302.5000
1,548.00
=
0.4200
0.0776
=
1548.0000
0.1380
967.00
=
0.0666
0.2253
967.00
=
0.1278
88.9273
0.7X
614.00
=
14.0746
15,923.00
=
1.8636
1.8X
2,272.00
=
0.2899
43.8%
1,315.00
50.5769
967.00
4,387.00
833.00
=
0.0528
8.33X
833.00
=
0.7587
15.29%
=
0.1707
25.54%
=
94.0727
8,544
=
0.2204
4,387.00
=
1.4230
15,763.00
7,564.00
=
=
26.00
14,526.00
=
3,233.00
7,838.00
1.00
=
1.9X
8,544.00
7,564.00
=
2.2135
43.62
7,564.00
=
=
2,272.00
39.80
=
5,029.00
Comparison
2,272.00
2,158.00
7,985.00
Net Income
4,005.00
2007
883.00
5,174.00
=
79.7636
55.00
5,174.00
55.00
(Gap Inc.,"2009 Annual Report"). (Gap Inc.,"2008 Annual Report"). (Gap Inc.,"2007 Annual Report").
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Analysis of Financial Ratios
Liquidity Ratios
Current Ratio helps determine the ability of a company to take care of its short-term debt. (Brigham, Eugene F.,
and Joel F. Houston, "Liquidity Ratios”). In 2008, Gap Inc.’s current ratio fell slightly below 1.9x, the
industry’s average (Bloomberg, "GAP INC/THE (GPS:US): Financial Ratios – BusinessWeek”). However, it
improved by 2009 and reached a 2.2x ratio, surpassing that of industry average.
Quick Ratio, because it doesn’t take into account inventories, provides a more immediate position of a firm’s
liquidity. In the past 3 years, Gap Inc.’s quick ratio was higher, and almost double, from that of the industry’s
average of 0.7x (Bloomberg, "GAP INC/THE (GPS:US): Financial Ratios - BusinessWeek").
The above two results of liquidity positively influence the ability of the firm to raise capital through loans and
stock, and therefore maintain a sustainable business.
Asset Management Ratios
Days Sales Outstanding provides an average number of days the firm must wait to receive cash after the sale is
made (Brigham, Eugene F., and Joel F. Houston. "Days Sales Outstanding"). Gap Inc.’s DSO fell far below 30
days for all three years studies, meaning they are more likely to have a lower rate of bad debt.
Total Asset Turnover Ratio determines how many times all company’s assets are sold and restocked (Brigham,
Eugene F., and Joel F. Houston. "Total Assets Turnover Ratio"). Gap Inc.’s TATO ratios were close, if not at
industry average in 2007 and 2008. However, in 2009 it fell slightly. Therefore, if unforeseen, management
will need to further investigate and find the factors that influenced this decrease, and work on improving them.
Some of those factors could include sales, marketing, assets, innovation or lack of thereof, and more.
Asset management ratios measure a company’s effectiveness for managing its assets. In Gap Inc.’s case for
years 2007 through 2009, it can be said that they did well, although there is room for improvement.
Debt Management Ratios
Gap’s debt ratios have fluctuated in the past three years. It increased from 29% in 2007 to 42% in 2008. Then, it
decreased to 39% in 2009. Compared to the industry average of 43.8% (Bloomberg, "GAP INC/THE
(GPS:US): Financial Ratios - BusinessWeek."), Gap Inc. chose to –and was able- finance their operations with
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slightly lower rates of debt. Therefore, we could argue that they took less risky decisions, which may be
accompanied by less expected returns.
Profitability Ratios
Profit Margin measures the net income per dollar of sales. Net Income for Gap Inc. increasingly improved
between 2007 and 2009, which played a key role in the increase of profit margin during those years, especially
since sales have slightly decreased over the years. In 2007, Gap Inc. had a profit margin of 5.28%. In 2008 it
went up to 6.667%, and it continued to increase in 2009, reaching 7.76%. However, even at its highest, Gap
Inc.’s profit margin fell below industry average of 8.33% (Bloomberg, "GAP INC/THE (GPS:US): Financial
Ratios - BusinessWeek.").
ROA has constantly been below industry average for Gap Incorporated, between 2007 with 75.87%, 2008 with
12.78% and 2009 with 13.80%. Conversely, we can see improvement throughout the years, reaching its highest
ROA in 2009.
ROE measures the return on common stockholder’s investment (Brigham, Eugene F., and Joel F. Houston,
"Return on Common Equity”). It is an important ratio as it is also used as an indicator of future earnings.
However, in order to better understand the results we must first look at the previous ratios to pin point a
company’s weaknesses and therefore plan on how to improve.
Gap Inc. indicated an ROE of 17.07%, 22.05% and 22.53% during the years of 2007, 2008 and 2009
respectively, showing an improvement over the past 3 years. However, even at its highest, it fell slightly below
average of 22.54% (Bloomberg, "GAP INC/THE (GPS:US): Financial Ratios - BusinessWeek.").
We must remember that being at or above industry average doesn’t necessarily mean that the company is doing
well. Instead, it means that the firm is doing well in comparison to those in the same business of industry.
Market Value Ratios
Book Value per Share shows how investors value the firm through the ratio of the stock’s market price and its
book value or what it is actually worth (Brigham, Eugene F., and Joel F. Houston, "Market/Book Ratio."). Gap
Inc.’s Market value ratio, as the rest of the above ratios decreased in 2008 compared to 2007, then improved by
2009.
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Gap Inc. Horizontal Analysis 2007 - 2009
Sales Revenue
COGS
Gross Profit
Total Operating Expenses
Operating Income before taxes (EBIT)
Taxes related to Operations (Income Taxes)
Net Income
2009
14197
8473
5724
2008
14526
9079
5447
2007
15763
10071
5692
2009
0.900653
0.841327
1.005622
2008
0.921525
0.901499
0.956957
2007
100%
100%
100%
1815
1816
714
1102
3899
1584
617
967
4377
1406
573
833
0.414668
1.291607
1.246073
1.322929
0.890793
1.1266
1.076789
1.160864
100%
100%
100%
100%
*On 2007 Taxes related to Operations included Loss from discounted operations, net of income tax benefit of 34
Although sales revenue decreased from 2007 to 2008 and from 2008 to 2009, cost of goods sold also decreased during those years. Further, gross
profit increased from 2008 to 2009, surpassing the numbers from 2007. In addition, total operating expenses have decreased over the years while
operating income before taxes have increased, creating an increase in net income over the above years.
From the above results along with those of the financial ratios we can concur that Gap Inc. is financially sound and will be able to pay its debt and
continue operations while variables are held constant and/or management continues to make good decisions.
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WORKS CITED
"GAP INC/THE (GPS:US): Financial Ratios - BusinessWeek." Investing & Stock Research by Company and
Industry - BusinessWeek. Bloomberg.com. Web. 18 Feb. 2011.
<http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=GPS:US>.
"2009 Annual Report." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/dam/gapincsite/documents/GPS_AR_09.pdf>.
"2008 Annual Report." Gapinc.com. Gap Inc. Web. 18 Feb. 2011. <http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9ODk2fENoaWxkSUQ9LTF8VHlwZT0z&t=1>.
"2007 Annual Report." Gapinc.com. Gap Inc. Web. 18 Feb. 2011. <http://media.corporateir.net/media_files/IROL/11/111302/AR07.pdf>.
"Banana Republic." Gapinc.com. Gap Inc. Web. 7 Mar. 2011. <http://bananarepublic.gap.com/>.
"Community Investment." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/gapinc/html/csr/community_investment.html>.
"Gap." Gapinc.com. Gap Inc. Web. 7 Mar. 2011. <http://www.gap.com//>.
"Key Facts." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/gapinc/html/aboutus/keyfacts.html>.
"Old Navy." Gapinc.com. Gap Inc. Web. 7 Mar. 2011. <http://oldnavy.gap.com/>.
"Our People." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/gapinc/html/aboutus/ourpeople.html>.
"Our Story." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/gapinc/html/aboutus/ourstory.html>.
"Sale: Male Jeans." Gapinc.com. Gap Inc. Web. 7 Mar. 2011.
<http://www.gap.com/browse/category.do?cid=26273>.
"Social Responsibility." Gapinc.com. Gap Inc. Web. 18 Feb. 2011.
<http://www.gapinc.com/content/gapinc/html/csr.html>.
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Brigham, Eugene F., and Joel F. Houston. "Days Sales Outstanding." Fundamentals of Financial Management.
6th Edition ed. Mason, OH: South-Western Cengage Learning, 2009. 90-91. Print.
Brigham, Eugene F., and Joel F. Houston. "Liquidity Ratios." Fundamentals of Financial Management. 6th
Edition ed. Mason, OH: South-Western Cengage Learning, 2009. 88-89. Print.
Brigham, Eugene F., and Joel F. Houston. "Market/Book Ratio." Fundamentals of Financial Management. 6th
Edition ed. Mason, OH: South-Western Cengage Learning, 2009. 99-100. Print.
Brigham, Eugene F., and Joel F. Houston. "Return on Common Equity.” ." Fundamentals of Financial
Management. 6th Edition ed. Mason, OH: South-Western Cengage Learning, 2009. 98. Print.
Brigham, Eugene F., and Joel F. Houston. "Total Assets Turnover Ratio." Fundamentals of Financial
Management. 6th Edition ed. Mason, OH: South-Western Cengage Learning, 2009. 92. Print.
"Gap Inc." Nytimes.com. New York times. Web. 18 Feb. 2011.
<http://topics.nytimes.com/topics/news/business/companies/gap_the_inc/index.html>.
"GPS: Summary for Gap, Inc. (The) Common Stock- Yahoo! Finance." Yahoo! Finance - Business Finance,
Stock Market, Quotes, News. Web. 18 Feb. 2011. <http://finance.yahoo.com/q?s=GPS&ql=0>.
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