1 Front Page 2 Memo TO.docx
- 2. Table of contents Appendix 1: Pro Forma FCF Page 4 Appendix 2 : Weighted Average Cost of Capital Page 5 Appendix 3 : Balance Sheets Page 6 Appendix 4 : Income Statements Page 8 Appendix 5 : Statements of Cash Flows Page 10 Appendix 6 : 10K Data Collection Page 11 Appendix 7: Market Return and Beta Page 12 4 Pro Format FCF Value Drivers Sales Growth 4.07% Directly related to sales Operating Expenses (excluding depreciation) 89.86%
- 3. Operating Current Assets 17.16% Operating Current Liabilities 14.31% Capital Expenditures 4.22% Not directly related to sales Depreciation Rate 6.09% Interest Rate on Debt 5.53% Interest Rate on ST Investments 1.73% <-- 1-year treasury yield (https://www.federalreserve.gov/releases/h15/) Tax Rate 36.34% Long term growth rate 0.00% Unlevered Free Cash Flows Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25 Jan-26 Jan-27 Jan-28 Jan-29 Sales $17,255,546 $17,958,617 $18,690,334 $19,451,865 $20,244,425 $21,069,276 $21,927,736 $22,821,174 $23,751,014 $24,718,741 Operating Expenses $15,506,519 $16,138,326 $16,795,877 $17,480,219 $18,192,444 $18,933,688 $19,705,135 $20,508,013 $21,343,605 $22,213,242 Depreciation $620,940 $665,274 $711,414 $759,435 $809,412 $861,425 $915,557 $971,895 $1,030,529 $1,091,552 Earnings Before Interest And Taxes $1,128,087 $1,155,017 $1,183,043 $1,212,212 $1,242,569 $1,274,163 $1,307,044 $1,341,265 $1,376,881 $1,413,947 Taxes $409,958 $419,745 $429,930 $440,530 $451,562 $463,044 $474,993 $487,429 $500,372 $513,842
- 4. Net Income $718,129 $735,272 $753,114 $771,682 $791,007 $811,120 $832,051 $853,836 $876,509 $900,105 Depreciation $620,940 $665,274 $711,414 $759,435 $809,412 $861,425 $915,557 $971,895 $1,030,529 $1,091,552 Capital Expenditures $727,890 $757,548 $788,414 $820,538 $853,970 $888,765 $924,977 $962,665 $1,001,888 $1,042,710 ONWC $491,595 $511,625 $532,471 $554,166 $576,745 $600,245 $624,701 $650,155 $676,645 $704,215 Change in ONWC -$216,405 $20,030 $20,846 $21,695 $22,579 $23,499 $24,457 $25,453 $26,490 $27,570 Free Cash Flows $827,584 $622,968 $655,268 $688,884 $723,869 $760,280 $798,175 $837,613 $878,659 $921,377 Terminal Value $16,207,764 PV of FCFs $15,011,177 Equity Value $15,131,177 Fair price per share $39.00 5 Weighted Average Cost of Capital Gap WACC calculation Debt Average value $1,292,833
- 5. Cost of debt 5.53% Proportion of debt in capital structure 16.44% Equity # Shares outstanding 388,000 <----- Diluted weighted-average number of shares from 10-K Current price per share $16.94 <----- As of 11/3/2019 Market capitalization $6,572,720 Cost of equity 6.11% Beta 0.68 <----- Beta calculated using 3 years data (se Returns tab) Rf 1.73% Rm 8.21% <----- Annualized market return from Returns tab Proportion of debt in capital structure 83.56% WACC 5.68% 6 Balance Sheets Gap Balance Sheets (in $1,000) (in $1,000) PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Assets
- 6. Current Assets Cash And Cash Equivalents 1,081,000 1,783,000 1,783,000 1,370,000 1,515,000 1,510,000 Short Term Investments 288,000 - - - - - Net Receivables 359,000 282,000 335,000 - - - Inventory 2,131,000 1,997,000 1,830,000 1,873,000 1,889,000 1,928,000 Other Current Assets 392,000 506,000 367,000 742,000 913,000 992,000 Total Current Assets 4,251,000 4,568,000 4,315,000 3,985,000 4,317,000 4,430,000 Long Term Investments - - - Property Plant and Equipment 2,912,000 2,805,000 2,616,000 2,850,000 2,773,000 2,758,000 Goodwill 109,000 109,000 109,000 - - - Intangible Assets 92,000 95,000 95,000 - - - Other Assets 685,000 412,000 475,000 638,000 600,000 661,000 Total Assets 8,049,000 7,989,000 7,610,000 7,473,000 7,690,000 7,849,000 Liabilities Current Liab ilities Accounts Payable 1,126,000 1,181,000 1,243,000 2,114,000 2,213,000 2,420,000 Short/Current Long Term Debt - - 65,000
- 7. 421,000 21,000 25,000 Other Current Liabilities 1,048,000 1,280,000 1,145,000 - - - Total Current Liabilities 2,174,000 2,461,000 2,453,000 2,535,000 2,234,000 2,445,000 Long Term Debt 1,249,000 1,249,000 1,248,000 1,310,000 1,332,000 1,369,000 Other Liabilities 1,073,000 1,135,000 1,005,000 1,083,000 1,141,000 973,000 Total Liabilities 4,496,000 4,845,000 4,706,000 4,928,000 4,707,000 4,787,000 Stockholders' Equity Common Stock 19,000 19,000 20,000 20,000 21,000 55,000 Retained Earnings 3,481,000 3,089,000 2,830,000 2,440,000 2,797,000 14,218,000 Treasury Stock - - - (14,245,000) Capital Surplus - - - 2,899,000 Other Stockholder Equity 53,000 36,000 54,000 85,000 165,000 135,000 Total Stockholder Equity 3,553,000 3,144,000 2,904,000 2,545,000 2,983,000 3,062,000 Total L&E 8,049,000 7,989,000 7,610,000 7,473,000 7,690,000 7,849,000 Total LT Debt 1,249,000 1,249,000 1,248,000 1,310,000 1,332,000 1,369,000
- 8. Average 1,292,833 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Operating Current Assets 2,882,000 2,785,000 2,532,000 2,615,000 2,802,000 2,920,000 Average % of Revenues 17.38% 17.57% 16.32% 16.55% 17.05% 18.08% 17.16% Trend 17.89% Operating Current Liabilities 2,174,000 2,461,000 2,388,000 2,114,000 2,213,000 2,420,000 Average % of Revenues 13.11% 15.52% 15.39% 13.38% 13.47% 14.99% 14.31% 7 Balance Sheet Analysis 8
- 9. Income Statements Gap Income statements (in $1,000) PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Total Revenue $16,580,000 $15,855,000 $15,516,000 $15,797,000 $16,435,000 $16,148,000 Cost of Revenue $10,258,000 $9,789,000 $9,876,000 $10,077,000 $10,146,000 $9,855,000 Gross Profit $6,322,000 $6,066,000 $5,640,000 $5,720,000 $6,289,000 $6,293,000 Selling General and Administrative $4,960,000 $4,587,000 $4,449,000 $4,196,000 $4,206,000 $4,144,000 Operating Income or Loss $1,362,000 $1,479,000 $1,191,000 $1,524,000 $2,083,000 $2,149,000 Other Income/Expenses $33,000 $19,000 $8,000 $6,000 $5,000 $5,000 Earnings Before Interest And Taxes $1,395,000 $1,498,000 $1,199,000 $1,530,000 $2,088,000 $2,154,000 Interest Expense $73,000 $74,000 $75,000 $59,000 $75,000 $61,000 Income Before Tax $1,322,000 $1,424,000 $1,124,000 $1,471,000 $2,013,000 $2,093,000 Income Tax Expense $319,000 $576,000 $448,000 $551,000 $751,000 $813,000 Net Income $1,003,000 $848,000 $676,000 $920,000 $1,262,000 $1,280,000 Interest on Debt 5.84% 5.93% 5.86% 4.47% 5.55%
- 10. Average 5.53% Tax Rate 24.13% 40.45% 39.86% 37.46% 37.31% 38.84% Average 36.34% Revenue Change YoY 4.57% 2.18% -1.78% -3.88% 1.78% Trend (on % change) 4.07% Operating Expenses (excluding depreciation) Regression Ys $14,607,000 $13,858,000 $13,786,000 $13,740,000 $13,847,000 $13,524,000 Regression Xs $16,580,000 $15,855,000 $15,516,000 $15,797,000 $16,435,000 $16,148,000 Slope 51.73% Intercept $5,587,662 R2 0.32 Too low value to accept Slope/Intercept as valid value drivers Operating Expenses (excluding depreciation) $14,607,000 $13,858,000 $13,786,000 $13,740,000 $13,847,000 $13,524,000 % of revenue 88.10% 87.40% 88.85% 86.98% 84.25% 83.75% Average 86.56% Trend 89.86% 9 Income Statement Analysis
- 11. 10 Statements of Cash Flows Gap statements of Cash flows (in $1,000) PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Net Income 1,003,000 848,000 676,000 920,000 1,262,000 1,280,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 578,000 499,000 531,000 527,000 500,000 470,000 Adjustments To Net Income 103,000 195,000 191,000 103,000 118,000 119,000 Changes In Accounts Receivables - - - - - - Changes In Liabilities (78,000) (53,000) 221,000 (83,000) 18,000 73,000 Changes In Inventories (154,000) (142,000) 46,000 (6,000) (9,000) (193,000) Changes In Other Operating Activities (184,000) 33,000 54,000 133,000 240,000 (44,000) Total Cash Flow From Operating Activities 1268000 1,380,000
- 12. 1,719,000 1,594,000 2,129,000 1,705,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (705,000) (731,000) (521,000) (726,000) (714,000) (670,000) Investments (287,000) - - - - 50,000 Other Cash flows from Investing Activities (9,000) 63,000 (5,000) (4,000) 118,000 (4,000) Total Cash Flows From Investing Activities -1001000 (668,000) (526,000) (730,000) (596,000) (624,000) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (373,000) (361,000) (367,000) (377,000) (383,000) (321,000) Sale Purchase of Stock - (285,000) 29,000 (950,000) (1,089,000) (882,000) Net Borrowings - (67,000) (421,000) 379,000 (21,000) 144,000 Other Cash Flows from Financing Activities (1,000) (18,000) (18,000) (70,000) (52,000) 55,000 Total Cash Flows From Financing Activities (374,000) (731,000) (777,000) (1,018,000) (1,545,000) (1,004,000) Effect Of Exchange Rate Changes (10,000) 19,000 16,000 (19,000) (21,000) (36,000) Change In Cash and Cash Equivalents (107,000) (19,000) 416,000 (154,000) (12,000) 41,000 Capital Expenditures 4.25% 4.61% 3.36% 4.60% 4.34% 4.15%
- 13. Average 4.22% Dividends Paid 37.19% 42.57% 54.29% 40.98% 30.35% 25.08% Average 38.41% 11 10K Data Collection Gap 2014 10K - Note 2. Additional Financial Statement Information (p. 48) Gap 2015 10K - Note 2. Additional Financial Statement Information (p. 47) Gap 2019 10K - Note 2. Additional Financial Statement Information (p.51) Gap 2018 10K - Note 2. Additional Financial Statement Information (p.51) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and consist of the following: ($ in millions) January 30, January 30, January 30, January 30, January 31, January 31, 2018 2018 2017 2016 2015 2014
- 14. Leasehold improvements 3,104 3,140 3,099 3,252 3,220 3,211 Furniture and equipment 2,732 2,623 2,508 2,603 2,560 2,793 Software 1,525 1,703 1,600 1,433 1,349 1,173 Land, buildings, and building improvements 1,123 1,037 1,000 1,019 1,009 1,106 Construction-in-progress 183 264 222 187 167 176 Property and equipment, at cost 8,667 8,767 8,429 8,494 8,305 8,305 Depreciation rate 6.67% 5.69% 6.30% 6.20% 6.02% 5.66% Average useful life (years) 16.4 Page 40Page 40 12 Time Series of T-Bills, S&P500, and Gap Inc. T-Bills S&P500 Gap Inc. Mean 0.22% 0.68% 1.25% Median 0.20% 1.07% 0.58% St. Dev. 0.0019 0.0411 0.1114