Gap, Inc. Financial Analysis

The GAP, Inc. The Fiscal twelvemonth Ended January 28, 2012 A. entry AND OVERVIEW 1. Financial Statements Included in the Annual Report 2. 1. Consolidated Statements of currency Flow 2. Major Competitors of the GAP, Inc. Ameri eject double birdie Outfitters, Inc. , J. pack Group, Inc. , and the TJX Companies, Inc. mint be shown as the major competitors for the GAP, Inc. Based on the data given in maven- division reports of the companies, gross gross profit security deposit % for GAP, Inc. is 36%, plot American Eagle Outfitters has 36%, J. Grew Group, Inc. as 40%, and TJX has 32% gross perimeter. Stock terms on November 2, 2012 is $35. 11 for the GAP, Inc. , patch it is $21. 05 for American Eagle Outfitters, Inc. , $43. 55 for J. Crew Group, Inc. , and $41. 52 for the TJX Companies, Inc. Debt-to- candour ratio is the total debt divided by total regionholders paleness and this ratio is a measure of keep come with solvency and its office to visualize its short- and long term obligations. For the major competitors of the GAP, Inc. this ratio calculated as below 3. Auditing Firm of the GAP, Inc.Deloitte & Touche LLP attain audited the ac conjunctioning unify balance p altogethers of the GAP, Inc. and the new(prenominal) mo benefitary statements which are the consolidated statements of income, gillyflowerholders equity, and cash flows for 3 course of instructions in the period ended in January 28, 2012. They realize excessively consulted the partnerships internal control over financial report as of January 28, 2012. Deloitte & Touche LLP indicated that consolidated financial statements, which are given in the annual report, present fairly the financial position of The GAP, Inc. nd subsidiaries as of January 28, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in their opinion, the alliance maintained effective internal control over financial reporting as of 28 January, 2012 base d on the criteria established in Internal ControlInteg graded Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. B. pecuniary method of accounting ANALYSIS 1. The Inventory Method The conjunction physical exertiond the weighted- bonny mode turn reviewing memorial to compile the financial statements.When development the weighted fair method, the cost of goods obtainable for sale is divided by the fleck of units available for sale, which yields the weighted-average cost per unit and to estimate ending inventory cost number of units in the ending inventory is multiplied by the weighted average cost per unit. 2. The Depreciation Method and Estimated Useful Lives of the Depreciable Assets Over the estimated useful lives of the think assets, the straight line method is used while computing wear and tear to compile financial statements. The estimated useful life of depreciable assets is shown as below 3.Goodwill and intangible asset Asse ts The company reviews not only intangible assets for impairment, but to a fault the carrying standard of goodwill annually. The goodwill and other indefinite-lived intangible assets, including trade name, are preserve in other long-term assets in the consolidated balance sheet of company as shown in Note 3 4. The class of Stocks and issuing of Shares As you can charm in the consolidated balance sheet, the company has greens stock with authorized 2. 3 billion parts issued 1. 106 billion shares for all periods presented outstanding 485 one thousand gazillion and 588 zillion shares for periods presented.The company is authorized to issue 60 million shares of Class B commonality stock, which is convertible into shares of common stock on a share-for-share undercoat and no Class B shares get to been issued as of January 28, 2012. The confederation is excessively authorized to issue 30 million shares of one or more series of preferred stock, which has a equation value of $0 . 05 per share and no preferred share has been issued as of January 28, 2012. 5. treasury Stock and Number of Shares Treasury Stock held by the company has 621 and 518 shares for the periods presented in the consolidated balance sheet as January 28, 2012 and January 29, 2011. . Dividends paid by the Company The company declared and paid dividends during the period reviewed as shown in the consolidated statements of income and it is $0. 45 in pecuniary category 2011, $0. 40 in fiscal course 2010, and $0. 34 in fiscal yr 2009 per share. 7. The footing per share of the common stock The bell per share of the common stock as of the most recent fiscal year-end date, which is January 28, 2012, is $18. 69. On the other hand, the price per share on November 3, 2012, which is the day we can detect the close price sooner the report date, is $35. 11. 8. Generated CashThe company generated $1. 363 billion interlock cash by operating activities during fiscal year 2011. The add of gene rated cash generated during fiscal year 2011 decreased $381 million comparing the amount generated during fiscal year 2010. Also, net income cash provided by operating activities during fiscal year 2010 decreased $184 million compared with fiscal year 2009. The cash outflows for commiting activities of the company are originally for capital expenditures and purchases of enthronements, whereas cash inflows are primarily provided from maturities of short-run enthronizations.The amount of net cash used for decking activities is $454 million during the fiscal year 2011, $429 million during the fiscal year 2010 and $537 million during the fiscal year 2009, while maturities of short-term throneitures are $150 million, $600 million, and $125 million in fiscal year 2011, 2010 and 2009. The cash outflows from financial activities are primarily repurchases of the companys common stock and dividend payments, while cash inflows are primarily proceeds from the yield of long-term debt.P roceeds from issuance of long-term debt are $1. 646 billion for fiscal year 2011 and net cash used for financing activities is $602 million. 9. Ratio Analysis for the Company The current ratio is the one of the measures of company equity and it indicates the relationship surrounded by current assets and current liabilities. For the company, current ratio is calculated as below The reverse on gross sales ratio measures the companys favourableness and it indicates the relationship between net income and sales. For the company, reward on sales ratio is shown belowThe debt-to-equity ratio is a measure of the companys solvency and it measures the congener proportions of financing from debt and financing from shareholders. It is calculated for the company as seen below The flow on investment ratio shows the reverse generated per vaulting horse of total investment and it is calculated for the company as seen below The return on proprietors equity ratio measures the return generated per dollar of owners equity and for the company the return on owners equity ratio is The gross delimitation ratio measures the gross profit of the companys products and for the company it is calculated as shown belowThe inventory turnover rate measures the speed at which company sells its inventory. This measure is important to ensure that inventory delivered customers in a timely manner so that cash can be received by the company. Net profit margin measures alike companys profitability and it is mostly used for internal comparison. It is also an indicator of a companys pricing strategies and how well it controls be. Profit margin for the company is The asset turnover ratio calculates the totalrevenuefor every dollar of assets a company owns and it is calculated for the company as seen belowThe truehearted ratio is measure of a companys ability to meet its current obligations like the current ratio and it is more reliable criterion of liquidity because it considers only asset s that are quickly converted to cash as quick assets. The quick ratio for the company is Theprice-to- shekels (P/E) ratio of ashareis the market price of the share divided by the annualearnings per share. a high P/Eratio suggests that investors are packinghigher(prenominal) earningsgrowthin the future compared to companies with alower P/E. Based on the price per share on January 28, 2012, the price-to-earnings ratio for the GAP, Inc. s 10. 11. Horizontal and just Analysis for the Comparative Income Statement and Balance sail THE GAP, INC. CONSOLIDATED INCOME STATEMENTS (millions) Vertical and Horizontal Analysis Financial Data Vertical Analysis Horizontal Analysis 2011 2010 2011 (%) 2010 (%) $ Change % Change Net sales $ 14,549 $ 14,664 100. 00 100. 00 (115) (0. 78) Cost of goods exchange and tenancy expenses 9,275 8,775 63. 75 59. 84 500 5. 70 Gross profit 5,274 5,889 36. 5 40. 16 (615) (10. 44) Operating expenses 3,836 3,921 26. 37 26. 74 (85) (2. 17 ) Operating income 1,438 1,968 9. 88 13. 42 (530) (26. 93) Interest expense (reversal) 74 (8) 0. 51 (0. 05) 82 (1025) Interest income (5) (6) (0. 03) (0. 04) 1 (16. 67) Income before income taxes 1,369 1,982 9. 41 13. 52 (613) (30. 93) Income taxes 536 778 3. 68 5. 31 (242) (31. 11) Net income $ 833 $ 1,204 5. 73 8. 21 (371) (30. 81) 12. Segments reported by the company The GAP, Inc. dentified its operating divisions based on the way to manage and prise the note activities and based on this way the company has two reportable segments Stores and direct. The stores reportable segment has results of the retail stores for Gap, Old Navy, and Banana Republic which are brands of the GAP, Inc. while the direct reportable segment includes the results for the brands of the company, both domestic and international. C. MANAGERIAL ACCOUNTING ANALYSIS 1. Return on Investment for Stores and Direct Segments As it is mentioned before, return on investment is calculated as net income divided by average total assets company has.While calculate return on investment each segment for the company, which are stores and direct, we need net income for these disparate segments and also average total assets as given financial information by reportable segments in the annual report. The operating income, depreciation and amortization expenses, purchases of topographic point and equipment for each segment, and the effective tax rate, which is given as 39. 2% for fiscal year 2011, are used to calculate the net income for each segment. The return on investment, which is net income divided by segment assets, for the stores reportable segment is 0. 37, while it is 0. 22 for direct reportable segment. It means that the company get $3. 7 for every $100 investment for the reportable stores segment and $22 for every $100 investment for the direct reportable segment. Calculations for the return on investment ratio are shown in the table below 2. equilibrium Income Residual income (RI) is a managerial accounting measurement used to measure and compare the relative success of business units. The basic formula for calculating oddment income is to multiply operating assets by the minimum required rate of return, and then subtract this value from operating income.For the stores and direct reportable segments, the residual income is 3. Assuming that 70% of the expenses are unconquerable a. part Margin Contribution margin is the total sales less total variable costs at a given level of activity. For the GAP, Inc. total sales amount is $14. 549 billion during the fiscal year 2011 as seen in the consolidated statements of income, while total variable cost is $2. 782 billion, which is 30% of cost of goods sold and occupancy expenses. Based on this data, contribution margin in fiscal year 2011 is b. Contribution Margin RatioThe contribution margin ratio is the contribution margin per unit divided by selling price per unit or contribution margin div ided by total sales. The contribution margin ratio of the company is 0. 8088 or 80. 88% in fiscal year 2011, as you can see the calculation below c. Break-even in gross sales Dollars The break-even point in dollars can be calculated by using contribution margin ratio approach. The basic formula with this approach is fixed cost divided by contribution margin ratio for the break-even in sales dollars. The fixed cost for the company is $6. 92 billion ($9,275 * 70%) and the break-even point in dollars D. SUPPLEMENTAL MATERIAL E. INVESTMENT DECISION FOR THE partnership There are different criteria to assess the overall performance of companies. We have discussed various perspectives to make a comprehensive evaluation for the GAP, Inc. in the preceding(prenominal) parts of the report. While discussing nature of the investment decision, the data given before is used to explain the performance of the company for investors. Investors invest money in companys stock expecting a return in t heir investment in the form of dividends or appreciation in the price of stock.From this perspective, we should tax the price of stock for the company and the dividends paid. As it is mentioned before, the price per share of the common stock was $18. 69 on January 28, 2012, while it is $35. 11 on November 2, 2012. The price to equity ratio is 22, assuming that the earnings per share will be the same for November 2, 2012 within fiscal year 2011, while it was only 12 on January 28, 2012. Comparing the antecedent data, it is possible to say that investors can expect higher earnings growth in the future, but it would not be useful for investors to use only this ratio as a basis of investment.Major competitors should also be assessed from the industry analysis perspective to decide to invest company. To compare the company performance with the major competitors, we calculated gross margin ratio and debt-to-equity ratio before. These measurements are very important to assess the placem ent of the company in industry. Although J. Crew Group, Inc. is basically higher gross margin relatively to its competitors, the GAP, Inc. has also high gross margin which is the same with some other American Eagle Outfitters, Inc. and higher than TJX Companies, Inc. The GAP, Inc. s debt-to-equity ratio is 1. 69, while it is 0. 38 for AEO, 2. 4 for JCG and 1. 83 for TJX. It means that the GAP, Inc. had $1. 69 of debt for every $1. 00 of shareholders equity. From this perspective, American Eagle Outfitters has lower debt for every $1. 00 of shareholders equity, while other competitors have more debt relatively to the GAP, Inc. We can say that debt-to-equity ratio for our company is unexceptionable among the companies in industry. For the evaluation of the companies based on financial statements, the analysts usually use a combination of three methods of analysis which are horizontal analysis, vertical analysis and ratio analysis as we made in the introductory parts of the report. Horizontal analysis examines the changes in one financial statement keepsake over time, while vertical analysis shows each item on a financial statement as a percentage of one particular item on the statement. Investors use the vertical analysis to evaluate the composition of the companys financial position and earnings. As we can see in the vertical analysis, the companys percentage of net income for fiscal year 2011 is 5. 73 while it is 8. 21 for fiscal year 2010. Investors should take this into account and compare these values with the competitors values to see that the short letter of industry between these years.On the other hand, we can see that cash as a percentage of total assets for fiscal year 2011 is 25. 40 while it is 22. 09 for fiscal year 2010. This gives us some insight into the cash worry system of the company. From the horizontal analysis perspective, the GAP, Inc. had a 30. 81 change negatively in net income, while it had 20. 76 percent increase in cash and a 5. 05 increase in total assets. We can see that decreasing amount of income is the result of mostly increasing cost of goods sold and occupancy expenses. So, investors should take this into account and compare it with the companys some other competitors in the industry.Finally, ratio analysis is used to judge the companys efficiency in using its current assets and liabilities. It is really important to see whether company is profitable or liquid for investors to decide invest on the company. Based on the current and quick ratio, we can say that companys liquidity is enough to pay its liabilities. We measured companys profitability by using gross margin, return on sales, return on assets, asset turnover and returns on owners equity and profit margin and see that company is profitable to invest and since it has virtually 12% return on investment which shows us it makes sense to invest on the GAP, Inc.Investment decision is quite difficult for investors since they should asses the comp any from many different perspectives, we can say that the GAP, Inc. is one of the leading companies in the industry and it has a good return on investment. The changes between fiscal year 2011 and fiscal year 2010 should be taken into account by comparing with competitors and previous fiscal years. In general investors could see that the price per share of the common stock has increasing value for the company and it is profitable to invest. So, I would invest in this company, since I believe that it has a good return for investors.