Gap Analysis Report

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THE GAP, INC. (GPS) - Financial and Strategic SWOT Anal ysis
Review
Reference Code: GDRT29527FSA
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THE GAP, INC. (GPS) - Financial and Strategic SWOT Anal ysis Review
Reference Code: GDRT29527FSA Publication Date: OCT 2012
Two Folsom Street Phone +1 650 9524400 Revenue 14,549 (million USD)
San Francisco, CA Fax +1 302 6555049 Net Profit 833 (million USD)
94105 Website www.gapinc.com Employees 132,000
United States Exchange
GPS [New York Stock
Exchange]
Industry Retailing

Company Overview
The Gap, Inc. (Gap) is a specialty apparel company. The product line of the company consists of casual apparel such as denim,
khakis and T-shirts; footwear, personal care products, accessories and fashion apparel. The stores of the company operate under
five banners, namely, Gap, Old Navy, Piperlime, and Athleta brands and Banana Republic. The company distributes its products
through its retail stores, internet and catalog stores. The company is also operates wholesale and franchisee businesses. Gap
operates company owned stores in the US, Canada, France, Ireland, Italy, J apan and the UK.
Key Executi ves
Name Title
Glenn K. Murphy Chairman
Adrian D. P. Bellamy Director
Domenico De Sole Director
Robert J . Fisher Director
Bob L. Martin Director
Source: Annual Report, Company Website, Primary and Secondary
Research, GlobalData
Share Data
THE GAP, INC.
Share Price (USD) as on 03-Oct-
2012
36.75
EPS (USD) 1.56
Market Cap (million USD) 17,381
Enterprise Value (million USD) 16,881
Shares Outstanding (million) 481

SWOT Anal ysis
THE GAP, INC., SWOT Anal ysis
Strengths Weaknesses
Wide Geographic Presence
Strong Product Portfolio and
Brand Recognition

Decreasing Comparable Store
Sales
Dependency on Third Party
Manufacturers

Opportunities Threats
Expansion into New Markets
Increasing Online Presence

Decreasing Shopping Trips
Changing Consumer Behavior

Source: Annual Report, Company Website, Primary and Secondary Research,
GlobalData

Financial Performance


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Table of Contents
Table of Contents ............................................................................................................................................................................... 2
List of Tables .................................................................................................................................................................................. 3
List of Figures ................................................................................................................................................................................. 3
Section 1 - About the Company .......................................................................................................................................................... 4
THE GAP, INC. - Key Facts ............................................................................................................................................................... 4
THE GAP, INC. - Key Employees ...................................................................................................................................................... 5
THE GAP, INC. - Key Employee Biographies .................................................................................................................................... 6
THE GAP, INC. - Major Products and Services .................................................................................................................................. 7
THE GAP, INC. - History .................................................................................................................................................................... 8
THE GAP, INC. - Company Statement ............................................................................................................................................. 10
THE GAP, INC. - Locations And Subsidiaries .................................................................................................................................. 12
Head Office ................................................................................................................................................................................... 12
Other Locations & Subsidiaries ..................................................................................................................................................... 12
Section 2 Company Analysis ......................................................................................................................................................... 13
THE GAP, INC. - Business Description ............................................................................................................................................ 13
THE GAP, INC. - Corporate Strategy ............................................................................................................................................... 14
THE GAP, INC. - SWOT Analysis .................................................................................................................................................... 15
SWOT Analysis - Overview ........................................................................................................................................................... 15
THE GAP, INC. - Strengths .......................................................................................................................................................... 15
Strength - Wide Geographic Presence ...................................................................................................................................... 15
Strength - Strong Product Portfolio and Brand Recognition ...................................................................................................... 15
Strength - Strong Liquidity Position ........................................................................................................................................... 15
THE GAP, INC. - Weaknesses ..................................................................................................................................................... 15
Weakness - Decreasing Comparable Store Sales .................................................................................................................... 15
Weakness - Dependency on Third Party Manufacturers ........................................................................................................... 16
Weakness - Product Recall ....................................................................................................................................................... 16
THE GAP, INC. - Opportunities .................................................................................................................................................... 16
Opportunity - Expansion into New Markets ............................................................................................................................... 16
Opportunity - Increasing Online Presence ................................................................................................................................. 16
Opportunity - Growing Apparel Market ...................................................................................................................................... 16
THE GAP, INC. - Threats .............................................................................................................................................................. 17
Threat - Decreasing Shopping Trips.......................................................................................................................................... 17
Threat - Changing Consumer Behavior ..................................................................................................................................... 17
Threat - Competitive Environment ............................................................................................................................................. 17
THE GAP, INC. - Key Competitors ................................................................................................................................................... 18
Section 3 Company Financial Ratios ............................................................................................................................................. 19
Financial Ratios - Capital Market Ratios........................................................................................................................................... 19
Financial Ratios - Annual Ratios ...................................................................................................................................................... 19
Performance Chart ........................................................................................................................................................................... 21
Financial Performance...................................................................................................................................................................... 21
Financial Ratios - Interim Ratios ....................................................................................................................................................... 22
Financial Ratios - Ratio Charts ......................................................................................................................................................... 23
THE GAP, INC., Recent Deals Summary ......................................................................................................................................... 24
Section 4 Appendix ....................................................................................................................................................................... 25
Methodology ................................................................................................................................................................................. 25
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Ratio Definitions ............................................................................................................................................................................ 25
About GlobalData ......................................................................................................................................................................... 29
Contact Us .................................................................................................................................................................................... 29
Disclaimer ..................................................................................................................................................................................... 29

List of Tables
THE GAP, INC., Key Facts ................................................................................................................................................................. 4
THE GAP, INC., Key Employees ........................................................................................................................................................ 5
THE GAP, INC., Key Employee Biographies...................................................................................................................................... 6
THE GAP, INC., Major Products and Services ................................................................................................................................... 7
THE GAP, INC., History ..................................................................................................................................................................... 8
THE GAP, INC., Other Locations ..................................................................................................................................................... 12
THE GAP, INC., Subsidiaries ........................................................................................................................................................... 12
THE GAP, INC., Key Competitors .................................................................................................................................................... 18
THE GAP, INC., Ratios based on current share price ...................................................................................................................... 19
THE GAP, INC., Annual Ratios ........................................................................................................................................................ 19
THE GAP, INC., Interim Ratios ........................................................................................................................................................ 22
THE GAP, INC., Recent Deals Summary ......................................................................................................................................... 24
Currency Codes ............................................................................................................................................................................... 25
Capital Market Ratios ....................................................................................................................................................................... 25
Equity Ratios .................................................................................................................................................................................... 26
Profitability Ratios ............................................................................................................................................................................. 26
Cost Ratios ....................................................................................................................................................................................... 27
Liquidity Ratios ................................................................................................................................................................................. 27
Leverage Ratios ............................................................................................................................................................................... 28
Efficiency Ratios ............................................................................................................................................................................... 28

List of Figures
THE GAP, INC., Performance Chart (2008 - 2012) .......................................................................................................................... 21
THE GAP, INC., Ratio Charts ........................................................................................................................................................... 23
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Section 1 - About the Company
THE GAP, INC. - Key Facts
THE GAP, INC., Key Facts
Corporate Address Two Folsom Street, San
Francisco, CA, 94105,
United States
Ticker Symbol, Exchange GPS [New York Stock
Exchange]
Telephone +1 650 9524400 No. of Employees 132,000
Fax +1 302 6555049 Fiscal Year End J anuary
URL www.gapinc.com Revenue (in USD Million) 14,549
Industry Retailing
Locations Bahrain, Bulgaria, Canada, Croatia, Cyprus, Egypt, France, Greece, Indonesia, Ireland,
Israel, J apan, J ordan, Kuwait, Malaysia, Mexico, Oman, Philippines, Qatar, Republic of
Korea, Romania, Russian Federation, Saudi Arabia, Singapore, Turkey, United Arab
Emirates, United Kingdom, United States
Source: Annual Report, Company Website, Primary and Secondary Research GlobalData
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THE GAP, INC. - Key Employees
THE GAP, INC., Key Employees
Name Job Title Board Level Since Age
Glenn K. Murphy Chairman, Chief Executive
Officer
Executive Board

2007 50
Adrian D. P. Bellamy Director Non Executive Board 1995 70
Domenico De Sole Director Non Executive Board 2004 68
Robert J . Fisher Director Non Executive Board 1990 57
Bob L. Martin Director Non Executive Board 2002 63
J orge P. Montoya Director Non Executive Board 2004 65
Mayo A. Shattuck III Director Non Executive Board 2002 57
William S. Fisher Director Non Executive Board 2009 55
Katherine Tsang Director Non Executive Board 2010 54
Doris F. Fisher Director Non Executive Board 2009
Bella Goren Director Non Executive Board 2011 52
Michelle Banks Chief Compliance Officer,
Executive Vice President,
General Counsel, Secretary
Senior Management

2011 48
J ack Calhoun President, Banana Republic Senior Management

Toby Lenk President, Gap Inc. Direct Senior Management
Art Peck President, Gap Inc. North
America
Senior Management 2011 56
Eva Sage Gavin Executive Vice President,
Global Human Resources and
Corporate Affairs
Sabrina L Simmons Chief Financial Officer,
Executive Vice President
Senior Management

2008 48
Stephen Sunnucks President, International, Gap
Inc
Senior Management
Tom Keiser Chief Information Officer,
Senior Management

2010 46
David Zoba Senior Vice President, Global
Real Estate, Gap Inc.
Senior Management
Colin Funnell Executive Vice President,
Global Supply Chain
Tom Sands Executive Vice President,
Stores and Operations
Senior Management
Nancy Green Chief Compliance Officer,
Senior Management

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THE GAP, INC. - Key Employee Biographies
THE GAP, INC., Key Employee Biographies

Glenn K. Murphy
J ob Title: Chairman, Chief Executive Officer
Board Level: Executive Board
Since: 2007
Age: 50

Mr Murphy has been the chairman and the chief executive officer of the
company since 2007. Prior to this, he served as the chairman and the
chief executive officer of Shoppers Drug Mart, Canada from 2001
through 2007. Previously, he served as the president and the chief
executive officer of Chapters, Canada. He also served in various
managerial positions at Loblaw Companies Ltd, Canada for 14 years.
He started his career at A.C. Nielsen.

Sabrina L Simmons
J ob Title: Chief Financial Officer, Executive
Vice President
Board Level: Senior Management
Since: 2008
Age: 48

Mr. Simmons has been the chief financial officer and the executive vice
president of the company since 2008. Prior to this, he served as the
executive vice president of Corporate Finance from September 2007
through J anuary 2008.He also served as the senior vice president,
Corporate Finance and Treasurer; and vice president and the treasurer
of the company.

Tom Keiser
J ob Title: Chief Information Officer, Executive
Vice President
Board Level: Senior Management
Since: 2010
Age: 46

Mr. Keiser has been the chief information officer and the executive vice
president of the company since 2010. Prior to this, he served as the
chief information officer and executive vice president of The Limited
Brands, Inc., from 2006 to October 2009. Previously, he served as
senior vice president, at The Limited Brands, Inc. from 2004 through
2006.

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THE GAP, INC. - Major Products and Services
Gap is a specialty retailer, engaged in providing a wide range of products for men, women and children. The companys key
products include the following:

THE GAP, INC., Major Products and Services
Products:
Apparel
Accessories
Personal care
Brands:
Gap
Old Navy
Banana Republic
Piperlime
Athleta
babyGap
GapKids
GapBody
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THE GAP, INC. - History
THE GAP, INC., History
2011 Corporate Changes/Expansions In August, the company announced to open its flagship stores in
Guam and Vietnam through its franchise channel.

2011 Corporate Changes/Expansions In November, the company launched its first flagship store in Hong
Kong.

2011 Divestiture In October, the company announced that it will bring the first store
expression of Old Navy, outside of North America, to J apan within the
next 18 months, and also plans to around triple the number of
Company stores in greater China from 15 at the end of this year to
over 45 by the end of 2012.

2010 Corporate Changes/Expansions The company announced its plans for a franchise agreement to
introduce Gap brand in South America.

2010 Corporate Changes/Expansions The company opened its first store in Italy.

2009 Contracts/Agreements The company signed an agreement with Armin Systems Limited to
bring Gap stores to Thailand.

2009 Management Changes The company announced Mr. Mark Breitbard as the Chief
Merchandising and Creative Officer of OLD NAVY.

2009 Product Recall The company recalled its Childrens Coats due to the toggle
fasteners that could break and detach from the coat, posing a
choking hazard to young children.

2008 Acquisitions/Mergers/Takeovers The company acquired Athleta Inc., a popular womens sports and
active apparel.

2007 Corporate Changes/Expansions The company opened its franchise stores in United Arab Emirates,
Bahrain, Indonesia, Kuwait, Qatar, Korea, Oman, Turkey, Philippines,
Riyadh and Saudi Arabia.

2006 New Products/Services The company launched its first online brand, Piperlime.

2005 Corporate Awards Gap's website Gapinc.com was honored with a WebAward by the
Web Marketing Association in 2005.

2005 Corporate Changes/Expansions The company opened its first Banana Republic stores in J apan.

2001 Corporate Changes/Expansions The company established 12 Old Navy stores in Canada.

2000 Commercial Operation The company launched its maternity collection on gap.com in 2000.

2000 New Products/Services The company launched its subsidiary website Oldnavy.com

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1999 Commercial Operation The company launched its subsidiary website BananaRepublic.com
in 1999

1997 Corporate Awards The company was awarded Marketer of the Year by Advertising Age
Magazine in 1997.

1997 New Products/Services The company established its online store at gap.com.

1997 New Products/Services The company launched its formal ethics product line.

1996 Corporate Changes/Expansions Opened its store in the Shibuya shopping district in Tokyo, in 1996.

1995 Corporate Changes/Expansions The company opened its first Banana Republic store in Canada.

1994 Corporate Changes/Expansions The company opened its Old Navy store in Colma, California.

1993 Corporate Changes/Expansions The company expanded its business in France by opening its store in
the Galeries Lafayette department store in Paris

1990 New Products/Services In 1990, the company introduced its new product line for kids namely
babyGap.

1989 Corporate Changes/Expansions The company opened its first Gap store in Canada in 1989.

1988 New Products/Services The company introduced its Individuals of Style advertising
campaign.

1987 Corporate Changes/Expansions Gap expanded its presence in the U.K. in 1987 by opening a store in
London.

1986 Corporate Changes/Expansions Tthe company opened its first GapKids store in San Mateo,
California.

1983 Acquisitions/Mergers/Takeovers The company acquired Banana Republic in 1983.

1977 Commercial Operation The company established its nonprofit charitable arm.

1976 Stock Listings/IPO The company was listed on New York and Pacific Stock Exchanges
in 1976.

1969 Incorporation/Establishment The company was established in 1969 by Doris and Don Fisher in
San Francisco, California.

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THE GAP, INC. - Company Statement

A statement by Mr. Glenn Murphy, the chairman and the chief Executive Officer of The Gap, Inc is given below. The statement has
been taken from the companys Annual Report for the year ended 2011.

Im proud to present my fifth Annual Report for Gap Inc.

Looking back over the past five years, amid many changing market dynamics, what stands out to me is our firm commitment to the
strategy that we began to seed in 2007 and that has been evolving ever since.

In my first annual report, I wrote that Our long-term strategy is anchored on maximizing the earnings potential of our brands and
taking advantage of the many opportunities through our Outlet, international and online businesses.

Im pleased that we made further progress against our strategy last year. While doing so, we had to fine tune the performance of
our domestic business, as we managed through some unique macro events.

Although we were disappointed by our overall financial results, including an earnings decline for the first time since 2006, all of us
at Gap Inc. remain steadfast in our commitment to increasing shareholder value.

What you will see in this annual report is the further realization of our vision: Sharing American Style Around the World

At Gap Inc., we own brands, not just stores. We compete against other global retailers in our home market and around the world,
with the intention of standing out to consumers by offering a clear and consistent interpretation of American style across our
distinct brands. Over the last year, a considerable amount of work within our design and merchandising organizations has gone
into improving our ability to deliver on this goal, especially as we head into 2012.

Our competitive advantage lies in offering our global customers widespread access to our product, regardless of their shopping
preferences. We achieve that through our strategy of operating multiple brands, through multiple channels and across multiple
geographies. This powerful combination sets the stage for future sales and earnings opportunities.

To deliver on this potential, in 2011, we made a number of significant organizational changes. More and more, customers shop
across channels within a brand, so we brought together our Outlet and specialty divisions last year. This has produced great
synergies within Gap and Banana Republic. It is also enabling us to identify the ideal store mix in each market; for example, were
in the process of rebalancing our fleet of Gap stores by reducing the specialty and increasing the Outlet expressions of the brand
in North America.

At Gap, weve also brought our creative talent together under one roof in New York to deliver a global-local approach to the
business. The Gap Global Creative Center sets a singular vision for our product and marketing around the world, while also
providing an ability to localize for the specific needs of our customers. We share ideas directly between our design and marketing
teams, who work side-byside with our merchants for International and North America. The first product line from this new team,
along with the corresponding Be Bright marketing campaign, arrived in stores at the beginning of the 2012 fiscal year.

At Old Navy, we adjusted both the product and marketing strategies towards the end of the year. We introduced a new marketing
platform Funnovations, Inc. that premiered during Holiday 2011, and that we plan to continue in 2012. We branched out into a
new category with a successful licensing partnership with the National Football League to offer fans products of their favorite
teams at their neighborhood Old Navy store. We remodeled another 100 Old Navy stores, most of which are downsizes that create
the right shopping environment for customers.

At Banana Republic, the mens business is maintaining its winning streak and the brand applied those learnings to improve the
womens product over the course of 2011, leading to stronger results. The brands marketing now brings its versatile work focus to
life, highlighting modern, covetable options that take customers from desk to dinner. Among our most buzz-worthy marketing
campaigns was the partnership with the popular American television show, Mad Men.

2011 was a landmark year for our newest brand, Athleta. Building upon the successful catalog and online business with extremely
loyal customers, we opened eight more retail locations across the U.S., where female athletes can build community and inspire
one another. Well keep expanding, with plans to reach 50 stores in 2013, and we launched our first national marketing campaign,
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called Power to the She. At Piperlime, we continued our evolution from an exclusive shoe website to offering a wider range of
products with the intention of becoming the antidote to the department store for shoppers seeking fresh and localized offerings.
Weve grown our apparel assortment for women, and added mens clothing.

Once again, a stand-out performer for Gap Inc. was our Direct business, which grew more than 20 percent. Through our online
strategy of shipping product to 90 countries in all and enabling customers to shop from every one of our brands at once, our online
revenue exceeded $1.5 billion in 2011. Were on the path to our goal of $2 billion in revenue from our Direct division by 2014.

Innovation is key to the success of online, and this year marked yet another year of customer-focused initiatives that received
incremental investments. Some of the accomplishments include: deploying a number of new tools to allow customers to shop more
easily from any location, including their smart phones; establishing a new distribution center in the western United States to better
serve our North American customers; and stepping up targeted and personalized online marketing.

Customers can now experience our brands and touch our products in 39 countries, up from just six countries in 2007. To fuel our
growth and scale the business further in coming years, we made an organizational shift and established one International division,
led out of London. With other headquarter offices in Tokyo and Shanghai, this new structure strikes a great balance of having
experienced Gap Inc. executives from North America working alongside talented regional hires to drive the business forward.

The franchise business continues to grow at a fast rate, with a 45 percent increase in net sales year-over-year. In 2011, we
launched in eight new franchise countries, including Chile, our first South American nation. We opened the doors to more than 50
new Gap and Banana Republic franchise stores, for a total of 227 by year end, on our way to our target of 400 by 2014.

China, the worlds second largest apparel market, represents a major component of our global growth strategy, building
momentum following our first store openings in 2010. With a total of 14 stores now in China, including our Hong Kong flagship that
opened in November and new locations in HangZhou and Tianjin, we expect to have a fleet of about 45 stores by the end of fiscal
year 2012. Since launching an ecommerce site last year, online orders have been logged from over 330 cities in China.

Of our three established core brands, Old Navy is the only one without a store presence beyond North America. After a thoughtful
planning process in 2011, that is about to change. Old Navy is on track to expand outside North America with its first company-
owned store in J apan in mid-2012.

At the heart of our company, our people and our values set us apart. These values were put to the test by the devastating
earthquake and tsunami that occurred in J apan on March 11. In the midst of the emotional shock and physical destruction of this
tragedy, we went through the deliberate process of ensuring that our 6,000 employees and their families were safe. Once that was
confirmed, we selectively opened stores in communities that needed access to clothing, and donated more than $1 million worth of
clothing and five percent of sales in J apan for a period of time to the recovery efforts.Proceeds were also contributed from a limited
edition t-shirt created by our product teams in North America.

We take seriously the responsibility to assist the global communities we serve. In my role as chairman of Gap Foundations Board
of Trustees, its inspiring to see that our employees increased their number of volunteer hours to 433,000.

We were also proud that the Gap Inc. P.A.C.E. (Personal Advancement & Career Enhancement) program to help female garment
workers was recognized by the Clinton Global Initiative as an exemplary approach to womens economic empowerment. It was
especially fitting that Bob Fisher received the honor from former President Bill Clinton given his involvement in the development of
the program.

All of us at Gap Inc. continue to draw strength from the Fisher Family. A notable highlight of 2011 was the induction of our
founders, Doris and Don Fisher, into the California Hall of Fame. Doris accepted the award in recognition of their transformation of
retail, and their contributions to our communities, to education, and to the arts. In fact, the passion and character of our founders
set a high bar for our management team, our leaders and our 132,000 employees. A day seldom passes when their ability to win
while creating a company with a heart isnt top of mind.

Looking ahead to 2012, were determined to take the lessons from the past and apply them to what lies ahead. The opportunity to
grow our brands and our divisions both in North America and globally drives round-the-clock efforts to return Gap Inc. to a high
level of performance.

I will be excited to report back to you with our progress a year from now.
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THE GAP, INC. - Locations And Subsidiaries
Head Office
THE GAP, INC.
Two Folsom Street
San Francisco
CA
94105
United States
Tel: +1 650 9524400
Fax: +1 302 6555049

Other Locations & Subsidiaries
THE GAP, INC., Other Locations
Gap Commercial Co., Ltd.
4th Floor, Building 6
No. 800, Changde Road
Shanghai
200040
China
Tel: +86 21 22199668


THE GAP, INC., Subsidiaries
Banana Republic, LLC
5900 North Meadows Drive
Grove City
OH
43123 8476
United States
Tel: +1 888 2778953
Url: www.bananarepublic.gap.com

Old Navy, LLC
Two Folsom Street
San Francisco
CA 94105
United States
Tel: +1 800 6536289
Url: www.oldnavy.com

Athleta, Inc.
1450 Technology Lane
Suite 150
Petaluma
94954
United States
Tel: +1 888 3225515
Url: www.athleta.com

GPS Sourcing (South Africa) (Proprietary) Limited
South Africa

Banana Republic (J apan) Y.K.
J apan

Gap International Sourcing (Holdings) Limited
Hong Kong Special Administrative Region of China

Gap International Sourcing (Mexico) S.A. de C.V.
Mexico

GPS (Bermuda) Insurance Services Limited
Bermuda


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Section 2 Company Anal ysis
THE GAP, INC. - Business Description
The Gap, Inc. (Gap) is an US based specialty retailer, involves in offering clothes, accessories and personal care products for
men, women, children and babies under the store banners: Gap, Banana Republic, Athleta, Old Navy and Piperlime. Gap operates
self owned stores in the US, Canada, France, Ireland, Italy, J apan and the UK. The company through its franchise agreements
operates its Gap and Banana Republic stores across various countries such as Bahrain, Bulgaria, Croatila, Cyprus, Egypt, Israel,
J ordan, Kuwait, Greece, Indonesia, Malaysia, Mexico, Oman, Philippines, Qatar, Romania, Russia, Saudi Arabia, Singapore,
South Korea, Turkey, and United Arab Emirates.

Gap operates in two reportable business segments, namely, Stores and Direct.

The Stores segment of the company comprises the retail stores for the brands Gap, Old Navy, and banana republic. The company
through its Gap stores offers denim, khakis, T-shirts, hoodies, great-fitting pants, fashion apparel and others. The Gap brands of
the company comprise Gap, babyGap, GapKids, GapMaternity and Gapbody. Under the GapKids and babyGap brands, the
company offers casual apparels for children. The company also provides womens sleepwear, loungewear, yoga wear, and
personal care products under its GapBody brand. The company through Old Navy brand offers apparel, shoes, accessories and
personal care products for adults, children and infants. Old Navy offers products through stores and on line. Banana Republic is a
luxury brand offers accessories, shoes, personal care products and intimate apparels. Banana Republic offers products through
specialty stores, outlet stores, online sales and franchise stores. For the fiscal year ended J anuary 2012, the Stores segment
reported $12,989m, indicating a decrease of 3% over $13,365m of previous fiscal. The segment contributed 89% of the companys
total revenue in the year ended J anuary 2012.

The Direct segment of Gap consists of the results of the online businesses for each of the web-based brands including gap.com,
oldnavy.com, bananarepublic.com, piperlime.com and athleta.com. The Piperlime and Athleta brands are the online stores of the
company. Piperlime brand offers footwear and handbags for women, men, and kids. Moreover it provides tips and advices about
the ongoing trends from the leading style authorities. Athleta brand of the company comprises products including sports and active
apparel and footwear for women for activities consisting golf, running, tennis, swimming, skiing, snowboarding and yoga. The
Athleta brand also has catalog sales. The e-commerce platform of the company was launched in 2008. For the fiscal year ended
J anuary 2012, the Direct segment reported $1,560m, indicating an increase of 20% over $1,299m of previous fiscal. The segment
contributed 11% of the companys total revenue in the year ended J anuary 2012.

The company purchase its merchandise from over 1,000 vendors spread across 43 countries. The companys 98% merchandisees
are manufactured outside the United States including 26% from China. The company distributes its products through a number of
subsidiaries. Some of the major subsidiaries include, Athleta (ITM) Inc., Banana Republic (J apan) Y.K., Gap (Italy) Srl., Gap
International Sourcing (Holdings) Limited, Gap International Sourcing (India) Private Limited and others.

Geographically, the company operates its stores business through five segments, namely, the US, Canada, Europe, Asia and
other regions. For the year ended J anuary 2012 the US contributed 68% of companys total revenue followed by Asia with 8%,
Canada with 6%, Europe with 6% and other regions with 1% of the companys total revenue in the year ended J anuary 2012.

In J uly 2012, the company opened its first Old Navy store outside North America in J apan.
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THE GAP, INC. - Corporate Strategy
The Gap Inc's (gap) success lies on its long term strategic intents. The company's business strategy is focused on maximising the
value proposition of its offerings to its customers. The company emphasizes on continuous inovation to gain long term customer
attachment. It carries out several customer research activities and remodels its stores according to the customer's preferences.
Gap relies on its business model and focuses on setting the priorities and meeting its goals.
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THE GAP, INC. - SWOT Anal ysis
SWOT Anal ysis - Overview
The Gap, Inc. (Gap) is a specialty retailer of apparel, footwear and accessories. The company is engaged in operating 3,082 family
apparel stores in the US, Canada, the UK, France, Ireland and J apan. The company also has online and catalog stores. The
companys broad product portfolio and brand recognition and wide geographic presence provide strong foundation for its future
growth . However, intense competition and changing consumer behavior are the major areas of concern for the company.

THE GAP, INC. - Strengths
Strength - Wide Geographic Presence
The company's wide geographic presence insulates it from the risk of operating in a single economy. Gap operates 3,082 stores
across North America, Europe and Asia. In addition it has also entered into a number of franchising agreements to distribute its
products across several geographies. The companys franchised stores are located in Bahrain, Indonesia, Kuwait, Malaysia, the
Philippines, the Oman, Qatar, The Kingdom of Saudi Arabia, Singapore, South Korea, Turkey, the United Arab Emirates, Greece,
Romania, Bulgaria, Cyprus and Croatia. The company also operates its online stores through www.gap.com,
www.bananarepublic.com, www.oldnavy.com, and www.piperlime.com websites. The company's global presence enables it to
build its brand image and maintain its strong position in the market.

Strength - Strong Product Portfolio and Brand Recognition
The company's strong product portfolio and brand recognition ensures financial stability through a diversified customer base. Gap
through its retail and online stores engaged in providing a wide range of apparel and accessories for men, women and children.
The company markets its products under the well known brands, namely Gap, Old Navy, GapKids, babyGap, GapBody, Banana
Republic, and Piperlime. Under the Gap brand, the company provides denim, khakis and T-shirts, fashion apparel, accessories
and personal care products. The company also provides a wide collection of apparel and accessories under the brand names
GapKids and babyGap. Under the Old Navy brand, the company offers apparel, shoes and accessories for both children and
adults. The company also provides casual and tailored apparel, shoes and accessories for men and women under its Banana
Republic brand. In addition, the company also offers its products through its websites. The company, through its multiple store
banners, caters to a wide range of customers across the world.

Strength - Strong Liquidity Position
The company's liquidity position strengthen significantly during the fiscal year 2010.The company recorded current ratio of 2.19 at
the fiscal year ended 2010, as compared to 1.86 in 2009. Gap had significant increase in its cash and short term investments
during the fiscal year 2010. It recorded cash and short term investments of USD 2573.00 million in 2010, as compared to USD
1715.00 million during the fiscal year ended 2009. Moreover the company reported a net change in cash of USD 633.00 million in
2010, as compared to a negative net change in cash of USD 9 million at the fiscal year ended 2009. This was principally due to
increase in cash inflow from operating activities. The company' cash flow from operating activities increased 36.54% to USD
1928.00 during the fiscal year ended 2010. Increasing cash and cash equivalent represents the companys ability to fund its
business opportunities, working capital needs, meeting short term obligations and other capital requirements in the future.

THE GAP, INC. - Weaknesses
Weakness - Decreasing Comparable Store Sales
The comparable store sales have been decreasing over the past few years, which is adversely affecting the growth of the
company. The stores segment accounts for more than 90% of the companys total revenue. During the fiscal year ended 2010, the
company generated USD 13,079 million as compared to USD 13,496 million in the fiscal year ending 2009, a decrease of 3.18%.
Over the past three years, the comparable store sales figures have been declining as demonstrated by a decrease of 9.17% in the
fiscal year 2009 and a decrease of 2.19 % in the fiscal year 2008. As a result, Gap recorded a negative CAGR of 2.97% during
the period 2006-2010. The decrease has been primarily due to a decline in net sales in all the brands due to the weakening retail
environment and a shift of consumers from department stores to supermarkets and discount stores.

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Weakness - Dependency on Third Party Manufacturers
The company is highly dependent on the vendors outside the US, which may adversely affect its ability to meet any urgent
requirements. The company purchases private label merchandise from approximately 650 vendors and non-private label
merchandise from approximately 350 vendors having facilities in approximately 60 countries. During the fiscal year 2010,
approximately 98% of the merchandise was produced outside the US. These outside vendors require to comply with certain
vendor conducts and environmental, labor, health, and safety standards in domestic and international markets. Any
noncompliance with the standards might delay the delivery of the goods and significantly affect the company's reputation. Thus,
the company's high dependence on third party manufacturers may have an adverse affect on its business operations.

Weakness - Product Recall
The company's various product recalls not only generate substantial negative publicity about its products and business, but also
prevent commercialization of other future product candidates. During April 2010, the company recalled its babyGap Marrakesh and
Gap Outlet baby one-piece swimsuits . This recall was mainly due to presence of a halter straps that were manufactured too short
causing the plastic ring located at the center of the swimsuit to press against the child's throat and obstruct the airway. This poses
a strangulation hazard to the child.

THE GAP, INC. - Opportunities
Opportunity - Expansion i nto New Markets
The company has taken several initiatives to enter new geographies in recent financial years. During November 2010, the
company opened its firsh Gap store in Italy. This new store is located on Corso Vittorio Emanuele in Milans premier shopping
district. It also entered into an agreement with Armin Systems Limited to bring Gap stores in Thailand. Moreover during November
2010, the company announced to open its first store in Latin America during the fiscal year 2011. The store will be located in
Santiago, Chile. The company also had taken initiatives to launch its Gap, Banana Republic and Old Navy online brands in
Canada, and Gap and Banana Republic online in the UK and nine other European countries. The company also has renewed
interest for a possible foray into India's specialty clothing market through possible venture with Reliance Retail. The company's
several initiatives to enter new markets may provide significant exposure to more diversified customer base and strengthen its
brand image.

Opportunity - Increasing Online Presence
With the rising trend of e-commerce business, there is huge potential for the company to increase its profitability through the
direct-to-customer segment. In the fiscal year ending 2009, the direct-to-customer segment accounted for 7.87% of the total
revenue of the company and it increased by 8.54% as compared to the sales at the end of the fiscal year 2010. The company can
increase the contribution of this segment to the revenue by increasing its online presence. According to Forrester, online sales are
expected to increase 13% to about USD 176.9 billion in 2010. The growth is forecast to be 10%, 9% and 8% for 2011, 2012 and
2013, respectively. Moreover according to a report published by U.S. Census Bureau the non-store retail sales for the 10 month
period from J anuary to October 2010 increased by 12.7% from the same period in 2009. Such web-based store concept provides
consumers the convenience of shopping from home, doing away with the time consuming journey and saving on the transportation
cost. Thus, web sales are expected to register substantial growth in the coming years as e-commerce continues to capture market
share from physical stores. The company stands to benefit from the growth trend of e-retail, which is supported by rising internet
penetration and increasing familiarity to online shopping.

Opportunity - Growing Apparel Market
The performance of the industry is forecasted to accelerate, with an anticipated CAGR rate of 2.6% during 2006-2011. According
to research, the US apparel retailing industry is expected to drive to a value of USD336.7 billion by the end of 2011. Gaps stores
and direct segments provide branded apparel, footwear and accessories for men, women and children through their retail and
online stores. The company offering state of the art products and solutions through their wide distribution channel is likely to utilize
opportunity of the growing apparel industry and thereby boost their top line growth.

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THE GAP, INC. - Threats
Threat - Decreasing Shopping Trips
The business of Gap may significantly affected due to decreasing shopping trips of consumers in the US. The US operations
contributed to 82.1% of the total revenue of the company in the fiscal year ending 2010. According to a study by Nielsen, outlet
shopping trips in the US has shown an average monthly decline of 4% from J uly 2008 to February 2010. The company has already
been recording a decline in comparable store sales over the past few years, which accounts for over 90% of the total sales
revenue of the company. Significant decrease in the shopping trips in the US might adversely affect the company's growth in
future years.

Threat - Changing Consumer Behavior
Owing to recession, consumers in the US are left with lesser disposable incomes. It is showing in their purchase attitude.
Consumers tend to reduce their discretionary shopping. According to a consumer survey conducted in the US by Harris
Interactive, more than half of adults (54%) say they would reduce discretionary spending during an economic recession and the
majority (63%) of adults said they would not make a purchase if there was no deal attached. It clearly states that during an
economic recession, consumers would cut budgets, yet will continue to shop when discounts are available. The scenario is a
threat to specialty retailers like the company, which sell discretionary products. They will see a decreased footfalls and reduced
revenues. In order to attract customers, these retailers will have to spend more on coupons and discounts, which will reduce their
margins.

Threat - Competitive Environment
Gap operates in a highly competitive specialty apparel retail industry. It faces intense competition from local, national, and global
department stores, specialty and discount store chains, independent retail stores, and online businesses, which are dealing with
similar products. The company also faces significant competition from the local players in European, J apanese, and Canadian
markets. The company's franchisees also faces competition in the respective markets. Increasing global competition in the apparel
retailing market may significantly affect the company's market share in the future financial years.

NOTE:
* Sector average represents top companies within the specified sector
The above strategic analysis is based on in-house research and reflects the publishers opinion only
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THE GAP, INC. - Key Competitors
THE GAP, INC., Key Competitors
Name Headquarters Revenue (US$ m)
Abercrombie & Fitch Co. United States (Estimated) 4,158
American Eagle Outfitters, Inc. United States 3,160
Guess, Inc. United States 2,688
J . Crew Group, Inc. United States 1,578
Urban Outfitters, Inc. United States 2,474
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Section 3 Company Financial Ratios
Financial Ratios - Capital Market Ratios
THE GAP, INC., Ratios based on current share price
Key Ratios 03-Oct-2012
P/E (Price/Earnings) Ratio 23.12
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) 12.31
Enterprise Value/Sales 1.16
Enterprise Value/Operating Profit 11.74
Enterprise Value/Total Assets 2.27
Dividend Yield 0.01
Note: Above ratios are based on share price as of 03-Oct-2012, the above ratios are absolute numbers
Financial Ratios - Annual Ratios
THE GAP, INC., Annual Ratios
Key Ratios Unit/Currency 2008 2009 2010 2011 2012
Equity Ratios
EPS (Earnings per Share) USD 1.09 1.34 1.58 1.88 1.56
Dividend per Share USD 0.32 0.34 0.34 0.40 0.45
Dividend Cover Absolute 3.41 3.96 4.64 4.70 3.47
Book Value per Share USD 5.82 6.32 7.24 6.94 5.68
Cash Value per Share USD 2.35 0.75 1.58 1.60 2.08
Profitability Ratios
Gross Margin % 36.11 37.50 40.32 40.16 36.25
Operating Margin % 8.34 10.66 12.78 13.42 9.88
Net Profit Margin % 5.28 6.66 7.76 8.21 5.73
Profit Markup % 56.52 60 67.56 67.11
PBIT Margin (Profit Before Interest
& Tax)
% 9.88
PBT Margin (Profit Before Tax) % 8.92 10.90 12.79 13.52 9.41
Return on Equity % 19.49 22.04 22.53 29.51 30.24
Return on Capital Employed % 24.33 28.63 31 39.60 27.16
Return on Assets % 10.63 12.78 13.80 17.04 11.22
Return on Fixed Assets % 35.05 43.50 54.65 62.70 46.19
Return on Working Capital % 79.55 83.81 71.65 107.48 65.93
Growth Ratios
Sales Growth % -1 -7.85 -2.26 3.29 -0.78
Operating Income Growth % 7.35 17.72 17.25 8.43 -26.93
EBITDA Growth % 6.92 12.80 14.88 9 -30.97
Net Income Growth % 7.07 16.09 13.96 9.26 -30.81
EPS Growth % 13.88 22.42 17.75 18.71 -16.16
Working Capital Growth % -40.04 11.74 37.14 -27.71 19.12
Cost Ratios
Operating Costs (% of Sales) % 91.66 89.34 87.22 86.58 90.12
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Administration Costs (% of Sales) % 4.72 5.24 5.03 5.29
Interest Costs (% of Sales) % 0.47
Liquidity Ratios
Current Ratio Absolute 1.68 1.86 2.19 1.87 2.02
Quick Ratio Absolute 1.03 1.16 1.50 1.10 1.27
Cash Ratio Absolute 0.78 0.79 1.21 0.79 0.89
Leverage Ratios
Debt to Equity Ratio % 4.40 1.14 0.07 60.44
Net Debt to Equity Absolute -0.36 0.17 0.04 -0.08 0.56
Debt to Capital Ratio % 3.48 0.92 0.06 31.45
Interest Coverage Ratio Absolute 2,084.06
Efficiency Ratios
Asset Turnover Absolute 2.01 1.92 1.78 2.08 1.96
Fixed Asset Turnover Absolute 4.82 4.95 5.40 5.72 5.77
Inventory Turnover Absolute 6.39 6.03 5.74 5.42 5.74
Current Asset Turnover Absolute 3.86 3.63 3.04 3.74 3.38
Capital Employed Turnover Absolute 3.69 3.31 2.90 3.59 5.28
Working Capital Turnover Absolute 9.54 7.86 5.60 8.01 6.67
Revenue per Employee USD 110,220
Net Income per Employee USD 6,311
Capex to Sales % 4.33 2.97 2.35 3.80 3.77
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Performance Chart
THE GAP, INC., Performance Chart (2008 - 2012)

Financial Performance
The company reported revenues of (U.S. Dollars) USD 14,549.00 million during the fiscal year ended J anuary 2012, a decrease of
0.78% from 2011. The operating profit of the company was USD 1,438.00 million during the fiscal year 2012, a decrease of
26.93% from 2011. The net profit of the company was USD 833.00 million during the fiscal year 2012, a decrease of 30.81% from
2011.
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Financial Ratios - Interim Ratios
THE GAP, INC., Interim Ratios
Key Ratios Unit/Currency Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012
Interim EPS (Earnings per Share) USD 0.40 0.35 0.38 0.44 0.47
Dividend per Share USD 0.11 0.11 0.11 0.11 0.13
Book Value per Share USD 6.63 5.93 5.44 5.68 6.14
Gross Margin % 39.58 36.95 36.65 32.80 39.43
Operating Margin % 11.71 9.86 9.65 8.69 11.33
Net Profit Margin % 7.07 5.58 5.38 5.09 6.68
Profit Markup % 65.49 58.59 57.86 48.82 65.10
PBIT Margin (Profit Before Interest &
Tax)
% 11.75 9.89 9.68 8.73 11.36
PBT Margin (Profit Before Tax) % 11.56 9.24 9.07 8.17 10.70
Operating Costs (% of Sales) % 88.29 90.14 90.35 91.31 88.67
Interest Costs (% of Sales) % 0.18 0.65 0.61 0.56 0.66
Current Ratio Absolute 2.33 2.17 1.83 2.02 2.16
Quick Ratio Absolute 1.51 1.36 0.90 1.27 1.39
Debt to Equity Ratio % 33.04 52.69 62.35 60.44 53.86
Net Debt to Equity Absolute -31.05 -14.66 10 -7.99 -11.50
Debt to Capital Ratio % 20.99 29.14 32.04 31.45 29.45
Interest Coverage Ratio Absolute -6,250 -1,322.73 -1,377.27 -1,358.33 -1,521.74
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Financial Ratios - Ratio Charts
THE GAP, INC., Ratio Charts
EPS Operating Margin

Return on Equity Return on Assets

Debt to Equity Ratio Current Ratio

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THE GAP, INC., Recent Deals Summary
THE GAP, INC., Recent Deals Summary
Deal Date Deal Status Deal Type Acquirer (s) /
Investor (s)
/Surviving Entity
Target / Issuer /
Partner (s)
Vendor Deal
Value (US
$ million)
25-Mar-2010 Completed Partnership THE GAP, INC.,
Undisclosed
Company

19-Feb-2010 Completed Partnership Keds Corporation,
THE GAP, INC.

12-Feb-2010 Announced Partnership Collective Brands,
Inc., THE GAP, INC.

08-J ul-2009 Completed Partnership Armin Systems Ltd.,
THE GAP, INC.

10-J un-2009 Completed Partnership Stella McCartney
Ltd., THE GAP,
INC.

30-Apr-2009 Completed Partnership ASOS plc, THE
GAP, INC.

20-Apr-2009 Completed Divestiture -
Company
THE GAP, INC. Athleta, Inc.
148.00
16-Feb-2009 Completed Partnership Elbit Trade & Retail
Ltd., THE GAP,
INC.

12-J an-2009 Completed Partnership Pantone, Inc., THE
GAP, INC.

26-Nov-2008 Completed Partnership THE GAP, INC.,
Tiny Prints, Inc.

Note: Deals include recent 10 deals in the past 24 months.
Above data is extracted from GlobalDatas Deals and Alliances Profile.
GlobalData
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Section 4 Appendix
The data and analysis within this report is driven by GlobalData.

GlobalData gives you key information to drive sales, investment and deal making activity in your business.

Our coverage includes 200,000 +reports on 185,000+companies (including 150,000+private) across 200+countries and 29
industries. The key industries include Alternative Energy, Oil & Gas, Clean Technology, Technology and Telecommunication,
Pharmaceutical and Healthcare, Power, Financial Services, Chemical and Metal & Mining.

Methodology
GlobalData company reports are based on a core set of research techniques which ensure the best possible level of quality and
accuracy of data. The key sources used include:

Company Websites
Company Annual Reports
SEC Filings
Press Releases
Proprietary Databases

Currency Codes
Currency Code Currency
USD U.S. Dollars
GlobalData

Ratio Definitions
Capital Market Ratios
Capital Market Ratios measure investor response to owning a company's stock and also the cost of issuing stock.
Price/Earnings
Ratio (P/E)

Price/Earnings (P/E) ratio is a measure of the price paid for a share relative to the annual income
earned per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors
are paying more for each unit of income, so the stock is more expensive compared to one with
lower P/E ratio. A high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. Price per share is as of previous business close,
and EPS is from latest annual report.
Calculation: Price per Share / Earnings per Share
Enterprise
Value/Earnings
before Interest, Tax,
Depreciation &
Amortization
(EV/EBITDA)

Enterprise Value/EBITDA (EV/EBITDA) is a valuation multiple that is often used in parallel with,
or as an alternative to, the P/E ratio. The main advantage of EV/EBITDA over the PE ratio is that
it is unaffected by a company's capital structure. It compares the value of a business, free of
debt, to earnings before interest. Price per share is as of previous business close, and shares
outstanding last reported. Other items are from latest annual report.
Calculation: (Market Cap +Debt +Preferred Stock - Cash & Cash Equivalents) / (Net Income +
Interest +Tax +Depreciation +Amortization)
Enterprise
Value/Sales

Enterprise Value/Sales (EV/Sales) is a ratio that provides an idea of how much it costs to buy the
company's sales. EV/Sales is seen as more accurate than Price/Sales because market
capitalization does not take into account the amount of debt a company has, which needs to be
paid back at some point. Price per share is as of previous business close, and shares
outstanding last reported. Other items are from latest annual report.
Calculation: (Market Cap +Debt +Preferred Stock - Cash & Cash Equivalents) / Sales
Enterprise
Value/Operating
Profit

Enterprise Value/Operating Profit measures the company's enterprise value to the operating
profit. Price per share is as of previous business close, and shares outstanding last reported.
Other items are from latest annual report.
Calculation: (Market Cap +Debt +Preferred Stock - Cash & Cash Equivalents) / Operating
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Income
Enterprise
Value/Total Assets

Enterprise Value/Total Assets measures the company's enterprise value to the total assets. Price
per share is as of previous business close, and shares outstanding last reported. Other items are
from latest annual report.
Calculation: (Market Cap +Debt +Preferred Stock - Cash & Cash Equivalents) / Total Assets
Dividend Yield

Dividend Yield shows how much a company pays out in dividends each year relative to its share
price. In the absence of any capital gains, the dividend yield is the return on investment for
a stock.
Calculation: Annual Dividend per Share / Price per Share
GlobalData

Equity Ratios
These ratios are based on per share value.
Earnings per Share
(EPS)

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share
of common stock. EPS serves as an indicator of a company's profitability.
Calculation: Net Income / Weighted Average Shares
Dividend per Share

Dividend is the distribution of a portion of a company's earnings, decided by the board of
directors, to a class of its shareholders.
Dividend Cover

Dividend cover is the ratio of company's earnings (net income) over the dividend paid to
shareholders.
Calculation: Earnings per share / Dividend per share
Book Value per
Share

Book Value per Share measure used by owners of common shares in a firm to determine the
level of safety associated with each individual share after all debts are paid accordingly.
Calculation: (Shareholders Equity - Preferred Equity) / Outstanding Shares
Cash Value per
Share

Cash Value per Share is a measure of a company's cash (cash & equivalents on the balance
sheet) that is determined by dividing cash & equivalents by the total shares outstanding.
Calculation: Cash & equivalents / Outstanding Shares
GlobalData

Profitability Ratios
Profitability Ratios are used to assess a company's ability to generate earnings, based on revenues generated or
resources used. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well.
Gross Margin

Gross margin is the amount of contribution to the business enterprise, after paying for direct-fixed
and direct-variable unit costs.
Calculation: {(Revenue-Cost of revenue) / Revenue}*100
Operating Margin

Operating Margin is a ratio used to measure a company's pricing strategy and operating
efficiency.
Calculation: (Operating Income / Revenues) *100
Net Profit Margin

Net Profit Margin is the ratio of net profits to revenues for a company or business segment - that
shows how much of each dollar earned by the company is translated into profits.
Calculation: (Net Profit / Revenues) *100
Profit Markup

Profit Markup measures the company's gross profitability, as compared to the cost of revenue.
Calculation: Gross Income / Cost of Revenue
PBIT Margin (Profit
Before Interest &
Tax)

Profit Before Interest & Tax Margin shows the profitability of the company before interest
expense & taxation.
Calculation: {(Net Profit+Interest+Tax) / Revenue} *100
PBT Margin (Profit Profit Before Tax Margin measures the pre-tax income over revenues.
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Before Tax)

Calculation: {Income Before Tax / Revenues} *100
Return on Equity Return on Equity measures the rate of return on the ownership interest (shareholders' equity) of
the common stock owners.
Calculation: (Net Income / Shareholders Equity)*100
Return on Capital
Employed

Return on Capital Employed is a ratio that indicates the efficiency and profitability of a company's
capital investments. ROCE should always be higher than the rate at which the company borrows;
otherwise any increase in borrowing will reduce shareholders' earnings.
Calculation: EBIT / (Total Assets Current Liabilities)*100
Return on Assets

Return on Assets is an indicator of how profitable a company is relative to its total assets, the
ratio measures how efficient management is at using its assets to generate earnings.
Calculation: (Net Income / Total Assets)*100
Return on Fixed
Assets

Return on Fixed Assets measures the company's profitability to its fixed assets (property, plant &
equipment).
Calculation: (Net Income / Fixed Assets) *100
Return on Working
Capital

Return on Working Capital measures the company's profitability to its working capital.
Calculation: (Net Income / Working Capital) *100
GlobalData

Cost Ratios
Cost ratios help to understand the costs the company is incurring as a percentage of sales.
Operating costs (%
of Sales)

Operating costs as percentage of total revenues measures the operating costs that a company
incurs compared to the revenues.
Calculation: (Operating Expenses / Revenues) *100
Administration
costs (% of Sales)

Administration costs as percentage of total revenue measures the selling, general and
administrative expenses that a company incurs compared to the revenues.
Calculation: (Administrative Expenses / Revenues) *100
Interest costs (% of
Sales)

Interest costs as percentage of total revenues measures the interest expense that a company
incurs compared to the revenues.
Calculation: (Interest Expenses / Revenues) *100
GlobalData

Liquidity Ratios
Liquidity ratios are used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher
the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. A company's
ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment.
Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be
able to continue as a going concern.
Current Ratio

Current Ratio measures a company's ability to pay its short-term obligations. The ratio gives an
idea of the company's ability to pay back its short-term liabilities (debt and payables) with its
short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable
the company is of paying its obligations. A ratio under 1 suggests that the company would be
unable to pay off its obligations if they came due at that point.
Calculation: Current Assets / Current Liabilities
Quick Ratio

Quick ratio measures a company's ability to meet its short-term obligations with its most liquid
assets.
Calculation: (Current Assets - Inventories) / Current Liabilities
Cash Ratio Cash ratio is the most stringent and conservative of the three short-term liquidity ratio. It only
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looks at the most liquid short-term assets of the company, which are those that can be most
easily used to pay off current obligations. It also ignores inventory and receivables, as there are
no assurances that these two accounts can be converted to cash in a timely matter to meet
current liabilities.
Calculation: {(Cash & Bank Balance + Marketable Securities) / Current Liabilities)}
GlobalData

Leverage Ratios
Leverage ratios are used to calculate the financial leverage of a company to get an idea of the company's methods of
financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors
looked at include debt, equity, assets and interest expenses.
Debt to Equity Ratio

Debt to Equity Ratio is a measure of a company's financial leverage. The debt/equity ratio also
depends on the industry in which the company operates. For example, capital-intensive
industries tend to have a higher debt-equity ratio.
Calculation: Total Liabilities / Shareholders Equity
Debt to Capital
Ratio

Debt to capital ratio gives an idea of a company's financial structure, or how it is financing its
operations, along with some insight into its financial strength. The higher the debt-to-capital ratio,
the more debt the company has compared to its equity. This indicates to investors whether a
company is more prone to using debt financing or equity financing. A company with high debt-to-
capital ratios, compared to a general or industry average, may show weak financial strength
because the cost of these debts may weigh on the company and increase its default risk.
Calculation: {Total Debt / (Total assets - Current Liabilities)}
Interest Coverage
Ratio

Interest Coverage Ratio is used to determine how easily a company can pay interest on
outstanding debt, calculated as earnings before interest & tax by interest expense.
Calculation: EBIT / Interest Expense
GlobalData

Efficiency Ratios
Efficiency ratios measure a company's effectiveness in various areas of its operations, essentially looking at maximizing
its use of resources.
Fixed Asset
Turnover

Fixed Asset Turnover ratio indicates how well the business is using its fixed assets to generate
sales. A higher ratio indicates the business has less money tied up in fixed assets for each
currency unit of sales revenue. A declining ratio may indicate that the business is over-invested
in plant, equipment, or other fixed assets.
Calculation: Net Sales / Fixed Assets
Asset Turnover

Asset turnover ratio measures the efficiency of a company's use of its assets in generating sales
revenue to the company. A higher asset turnover ratio shows that the company has been more
effective in using its assets to generate revenues.
Calculation: Net Sales / Total Assets
Current Asset
Turnover

Current Asset Turnover indicates how efficiently the business uses its current assets to generate
sales.
Calculation: Net Sales / Current Assets
Inventory Turnover

Inventory Turnover ratio shows how many times a company's inventory is sold and replaced over
a period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies
either strong sales or ineffective buying.
Calculation: Cost of Goods Sold / Inventory
Working Capital
Turnover

Working Capital Turnover is a measurement to compare the depletion of working capital to the
generation of sales. This provides some useful information as to how effectively a company is
using its working capital to generate sales.
Calculation: Net Sales / Working Capital
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Capital Employed
Turnover

Capital employed turnover ratio measures the efficiency of a company's use of its equity in
generating sales revenue to the company.
Calculation: Net Sales / Shareholders Equity
Capex to sales

Capex to Sales ratio measures the company's expenditure (investments) on fixed and related
assets' effectiveness when compared to the sales generated.
Calculation: (Capital Expenditure / Sales) *100
Net income per
Employee

Net income per Employee looks at a company's net income in relation to the number of
employees they have. Ideally, a company wants a higher profit per employee possible, as it
denotes higher productivity.
Calculation: Net Income / No. of Employees
Revenue per
Employee

Revenue per Employee measures the average revenue generated per employee of a company.
This ratio is most useful when compared against other companies in the same industry.
Generally, a company seeks the highest revenue per employee.
Calculation: Revenue / No. of Employees
Efficiency Ratio

Efficiency Ratio is used to calculate a bank's efficiency. An increase means the company is
losing a larger percentage of its income to expenses. If the efficiency ratio is getting lower, it is
good for the bank and its shareholders.
Calculation: Non-interest expense / Total Interest Income
GlobalData

Notes
Financial information of the company is taken from the most recently published annual reports or SEC filings
The financial and operational data reported for the company is as per the industry defined standards
Revenue converted to USD at average annual conversion rate as of fiscal year end
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Copyright 1998 - 2012 ValuEngine Inc PO Box 399 Melbourne, FL 32902 support@ValuEngine.com (800)381-5576
The Leader in Stock Valuation and Forecasting
DETAILED STOCK VALUATION REPORT
GAP INC
Ticker: GPS
Oct. 01, 2012
CONTENTS
Valuation Snapshot
Forecast Target Prices -1, 3, 6, and 12 Month Time Horizons
Historical Price and Recommendation Chart
Business Summary
Optimal Buy-Sell Levels
Overall Rankings
Alternate Valuation Figures -PEG and Comparables' PEG
Detailed Financials - Annual and Quarterly
ValuEngine's fundamentally-based, quant-derived research is now
available to private investors. ValuEngine's research will enhance your
ability to evaluate individual stocks, manage your portfolio, and allocate
capital for maximum returns.
ValuEngine currently covers @5500 US equities as well as @500 ADRs
and foreign stocks that trade on US markets. In addition, the firm covers
most major Canadian stocks and can provide coverage of Tokyo markets
on an as needed basis.
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DETAILED RESEARCH REPORT
GAP INC(GPS) Oct. 01, 2012
VALUENGINE RECOMMENDATION & BASIC INFORMATION
Copyright 1998 - 2012 ValuEngine Inc 1
Close Price Target Price Volume Sell Hol d Buy
2008 2009 2010 2011 2012
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ValuEngine.com 2011
RECOMMENDATION
NEGATIVE NEUTRAL POSITIVE
underperform match outperform
VALUENGINE RATING
RECOMMENDATION FACTORS
Value Rank
Overall Rank top 16%
Fair Value $30.03 btm 19%
1Yr Target Price $40.09 top 3%
P/E Ratio 19.63 top 50%
Last 1-Y Return 117.64% top 4%
Market Cap(bil) $17.50 top 5%
BASIC INFORMATION
Last Trade $35.78
Trade Date 09/28/12
Market Cap(bil) $17.5042
Trailing P/E 19.63
Forward P/E 15.73
PEG Ratio 0.79
P/S Ratio 1.17
M/B Ratio 6.04
Sharpe Ratio 0.35
5-Y Avg Ann Return 13.26%
Volatility 37.40%
EPS Growth 24.77%
Annual Dividend $0.50
Dividend Yield 1.40%
LT Debt/Equity 0.54
Beta 1.27
VALUATION ANALYSIS
GPS Today's Fair value: $30.03
19.14% overvalued
Industry Retail-apparel/shoe
1.91% overvalued
Sector Retail-wholesale
12.45% overvalued
FORECAST ANALYSIS
Target Price Exp. Return
1-Month $36.32 1.51%
3-Month $37.06 3.57%
6-Month $38.37 7.25%
1-Year $40.09 12.04%
2-Year $41.63 16.35%
3-Year $41.14 14.99%
Contact ValuEngine:
ValuEngine, Inc.
PO Box 399
Melbourne, FL 32902
(800) 381-5576 (T)
support@ValuEngine.com
www.ValuEngine.com
VALUENGINE RECOMMENDATION
ValuEngine has issued a STRONG BUY recommendation for GAP INC on Oct.
01, 2012. Based on the information we have gathered and our resulting
research, we feel that GAP INC has the probability to OUTPERFORM average
market performance for the next year. The company exhibits ATTRACTIVE
momentum, company size and 5-year annualized return.
RECOMMENDATION OVERVIEW
ValuEngine's stock recommendations are based on the proprietary ValuEngine
one-year forecast return (1YFR) model output for each individual equity. A
stock is rated Strong Buy, Buy, Hold, Sell, Strong Sell based on the Forecast
One Year Return. The breakdown for each rating is as follows:
Strong Buy: More than +12% 1YFR
Buy: Between +5% and +12% 1YFR
Hold: Between -5% and +5% 1YFR
Sell: Between -12% and -5% 1YFR
Strong Sell: Less than -12% 1YFR
ValuEngine's Strong Buy-rated stocks have an averaged annual return of 19%
since 2001. For more details on the ValuEngine One Year Forecast Target
price and its components, please go HERE.
FAIR MARKET VALUATION PRICE
Based on available data as of Oct. 01, 2012, we believe that GPS should be
trading at $30.03. This makes GPS 19.14% overvalued. Fair Value indicates
what we believe the stock should be trading at today if the stock market were
perfectly efficient and everything traded at its true worth. For GPS, we base this
on actual earnings per share (EPS) for the previous four quarters of $1.82,
forecasted EPS for the next four quarters of $2.27, and correlations to the 30-
year Treasury bond yield of 3.03%. There are an additional 10 firm specific and
interest rate related parameters, each playing a role in the valuation analysis.
For more details on ValuEngine's Fair Value Model, please go HERE.
FORECASTED TARGET PRICES
The predictive variables used in Valuengine's forecast target price models
include both proprietary and well-established forecasting variables derived from
credible financial research studies and publications. Our forecasting models
capture, among other things, several important tendencies that stock prices
consistently exhibit: Short-term price reversals, Intermediate-term momentum
continuation, and Long-term price reversals. We use a distinct forecasting
model for each time horizon and for every industry. We then apply the most
advanced statistical/econometric techniques to ensure that our stock return
forecasts are as reliable as possible. For more details on ValuEngine's
Forecast Model, please click HERE.
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GAP INC(GPS)
BUSINESS SUMMARY, DATA SUMMARY & MARKET RATIO BASED VALUATION
BUSINESS SUMMARY
The Gap, Inc. is a global specialty retailer which operates
stores selling casual apparel, personal care and other
accessories for men, women and children under the Gap,
Banana Republic and Old Navy brands. The company
designs virtually all of its products, which in turn are
manufactured by independent sources, and sells them under
its brand names.
OPTIMAL BUY-SELL
Based solely on the Historical Mispricing of GPS, the best
time to buy would be below $24.03 (or valuation below -
20.00%). The best time to sell would be above $35.44 (or
valuation above 18.00%).
EVALUATION & RANKINGS
Value Rank
Valuation 19.14% 19
12-Month Return 117.64% 97
5-Y Avg Ann Rtn 13.26% 91
Volatility 37.40% 66
EPS Growth 24.77% 61
Market Cap(bill) 17.5 96
Sharpe Ratio 0.35 90
P/S Ratio 1.17 53
M/B Ratio 6.04 16
P/E Ratio 19.63 51
EVALUATION & RANKINGS SUMMARY
Just as important as the percentages shown for our ten
predictive variables for each stock is the way they are
ranked against the 7000 plus stocks in our database. This is
sometimes confusing to newcomers to ValuEngine. Each of
these quantitative measurements is ranked on a scale of 1
to 100. Generally the higher the ranking, the more positive
the influence each measurement has on the overall
attractiveness of the stock. In other words a high rank is
always better. Let's take them one by one:
Valuation rank 19: 81% of stocks are more undervalued
Momentum rank 97: 3% of stocks have higher
momentum
Sharpe Ratio rank 90: 10% of stocks have a higher

Sharpe Ratio
5-Year Average Annual Return 91: 9% of stocks have

higher average annual return
Volatility rank 66: 34% of stocks have less volatility

EPS growth rank 61: 39% of stocks have greater
projected EPS growth
Size rank 96: 4% of companies have higher market

capitalization
P/E rank 51: 49% of stocks have lower P/E ratios

Price/Sales rank 53: 47% of stocks have lower
price/sales ratios
Market/Book rank 16: 84% of stocks have lower

market/book value ratios
MARKET RATIO BASED VALUATION

Portfolio managers and professionals traditionally rely on
market ratios to gauge whether a stock is fair valued or
overvalued. On this page, we present such a valuation
based on one of three market ratios: PEG (price to trailing 4
quarter earnings ratio, divided by the consensus analyst
forecasted next year EPS growth), P/E (price to forward 4
quarter earnings ratio), and P/S ratio (price to trailing 4
quarter sal es). Among the three, PEG i s the most
informative as it reflects both the price/earnings ratio and
expected future EPS growth, while P/E is better than P/S.
For each given stock, we apply the PEG to give a fair value
assessment if both its trailing 4 quarter EPS and forecasted
EPS growth rate are positive. If its forecasted EPS growth is
negative but its forward 4 quarter EPS is positive, we apply
the P/E to give a fair value for the stock as of today.
Otherwise, we resort to the P/S to assess its fair value.
To establish a valuation standard, we use both (i) the
average historical market ratio of the stock over the past 10
years (or however long there is data available for the stock),
and (ii) the average market ratio today of five comparable
stocks in the same sector and from companies of similar
size. These two alternative perspectives should give you a
good idea about where this stock's valuation stands today.
1. Valuation Based on GPS's Past PEG
Over the past 10 years, GPS's average PEG is 4.18. GPS
earned $1.82 per share in its recent 4 quarters. The analyst
consensus estimate is $2.27 for its 4 quarter forward EPS.
GPS's current price sales ratio is 1.17. The following
assessment is based on multiplying the historical PEG with
recent 4 quarter EPS and the forecasted EPS growth rate
over the next 4 quarters for GPS.
Fair Value
Historical Average PEG 4.18
PEG-Based Fair Value $188.72
2. Valuation Based on Comparables' PEG
GPS's comparables are BELLY, GUCG, JWN, LTD and
LULU. The current PEG average of these comparables is
1.24. GPS earned $1.82 per share in its recent 4 quarters.
The analyst consensus estimate is $2.27 for its 4-quarter-
forward EPS. GPS's current price sales ratio is 1.17. The
following assessment is based on multiplying comparable
stocks' average PEG today with GPS's recent 4 quarter
EPS and the forecasted EPS growth rate over the next 4
quarters .
Comparables' PEG
Comparables Current PEG
BELLY n/a
GUCG n/a
JWN 0.8
LTD 1.15
LULU 1.78
Fair Value
Comparable Stocks' Avg PEG 1.24
Comparable PEG-Based Fair Value $56.17
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GAP INC(GPS)
VALUENGINE RANKINGS
Just as important as the percentages shown for our ten predictive variables for each stock is the way they are ranked against
the 7000 plus stocks in our database. Each of these quantitative measurements is ranked on a scale of 1 to 100. Generally the
higher the ranking, the more positive the influence each measurement has on the overall attractiveness of the stock. In other
words a high rank is always better. The below data points show how the rank for each data point for GPS relates to the overall
industry, sector, and S&P 500 averages.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Valuation
Rank
GPS 19.14% 19
Industry 1.91% 48
Sector 12.45% 48
S&P 500 n/a n/a
The ValuEngine Valuation Rank measures the relationship between a
company's stock price and its Fair Value. The higher the Valuation rank,
the more undervalued the stock. With a Valuation Rank of 19, GPS is
moderately lower than the average of its industry group, which carries a
Valuation Rank of 48.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
12-Month Return
Rank
GPS 117.64% 97
Industry 28.35% 63
Sector 24.13% 57
S&P 500 25.16% 67
The ValuEngine 12-Month Return Rank reflects the relative stock
performance of a stock over the recent 12 months. On a scale of 1 to
100, a higher 12-Month Return rank indicates a stronger performance.
With a 12-Month Return Rank of 97, GPS is significantly higher than the
industry's rank score of 63.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5-Y Avg Ann Rtn
Rank
GPS 13.26% 91
Industry -3.58% 62
Sector -7.14% 58
S&P 500 -1.16% 63
The ValuEngine 5-Years Average Return Rank reflects a stock's
average annual return over the last 5 years, in comparison with the
coverage universe. A higher rank indicates a better return performance.
With a rank of 91, GPS is moderately higher than the industry, which
has a rank of 62.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Volatility
Rank
GPS 37.40% 66
Industry 60.10% 44
Sector 60.10% 49
S&P 500 19.52% 92
The ValuEngine Volatility Rank reflects the volatility associated with the
stock. A higher Volatility Rank indicates a lower volatile percentile of
stocks. GPS has a Volatility Rank of 66, which is moderately higher than
the industry Rank of 44.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EPS Growth
Rank
GPS 24.77% 61
Industry 33.78% 57
Sector 36.56% 51
S&P 500 n/a n/a
The ValuEngine EPS Growth Rank indicates a stock's expected EPS
growth rate. A high rank indicates a high growth rate expectation. GPS
has an EPS Growth Rank of 61.This is in line with the industry rank of
57.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market Cap(bill)
Rank
GPS 17.5 96
Industry 5.16 68
Sector 5.53 60
S&P 500 7,498.86 100
The ValuEngine Size rank signifies the company's size in terms of
market capi tal i zati on. A hi gher rank denotes a l arger market
capitalization within ValuEngine's stock universe. With a Size rank of 96,
GPS is moderately higher than the industry, which has a rank of 68.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sharpe Ratio
Rank
GPS 0.35 90
Industry -0.03 60
Sector -0.03 58
S&P 500 -0.06 60
The ValuEngine Sharpe Ratio Rank measures the risk return tradeoff
offered by a stock. Sharpe ratio is the stock's average annual return
(over the last five years) divided by its annualized volatility over the
same 5 years. With a rank of 90, GPS is moderately higher than the
industry, which has a rank of 60.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
P/S Ratio
Rank
GPS 1.17 53
Industry 1.07 65
Sector 1.65 67
S&P 500 n/a n/a
The ValuEngine Price/Sales rank signifies the relative position of the
company based on its P/S ratio. Stocks with the lowest P/S ratio are
assigned a rank of 100 while stocks with the highest P/S ratio are
ranked 1. At a Price/Sales rank of 53, GPS is slightly lower than the
industry rank of 65.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
M/B Ratio
Rank
GPS 6.04 16
Industry 4.49 36
Sector 5.61 39
S&P 500 n/a n/a
The Market/Book Rank is a measure of a stock's market to book ratio
relative to the stock universe. A higher rank corresponds to a lower
market book value. GPS has a Market/Book rank of 16, which is slightly
lower than the industry rank of 36.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
P/E Ratio
Rank
GPS 19.63 51
Industry 19.53 49
Sector 21.34 54
S&P 500 n/a n/a
The ValuEngine P/E Rank signifies the relative standing of a company
on its P/E ratio, relative to the universe. Stocks in the top P/E percentile
are each assigned a rank of 1(highest P/E stocks) while those in the
bottom P/E percentile are assigned a rank of 100 (traditional value
stocks). With a P/E rank of 51, GPS is in line with the industry P/E rank
of 49.
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GAP INC(GPS)
COMPARISON OF SIMILAR STOCKS* & RISk ASSESSMENT
Valuation
Rank
GPS 19.14% 19
BELLY n/a n/a
GUCG n/a n/a
LTD 3.63% 41
JWN -10.61% 66
12-Month Return
Rank
GPS 117.64% 97
BELLY 4.75% 41
GUCG n/a n/a
LTD 25.38% 67
JWN 19.93% 60
5-Y Avg Ann Rtn
Rank
GPS 13.26% 91
BELLY n/a n/a
GUCG 7.13% 83
LTD 15.33% 93
JWN 3.26% 75
Volatility
Rank
GPS 37.40% 66
BELLY 30.24% 76
GUCG 160.34% 4
LTD 42.24% 59
JWN 48.16% 51
EPS Growth
Rank
GPS 0.25 61
BELLY n/a n/a
GUCG n/a n/a
LTD 0.16 50
JWN 0.22 57
Market Cap(bill)
Rank
GPS 17.5 96
BELLY 15.06 95
GUCG 14.37 95
LTD 14.34 95
JWN 11.48 94
Sharpe Ratio
Rank
GPS 0.35 90
BELLY -0.04 63
GUCG 0.04 71
LTD 0.36 90
JWN 0.07 73
P/S Ratio
Rank
GPS 1.17 53
BELLY n/a n/a
GUCG 4.79 17
LTD 1.4 48
JWN 1.03 57
M/B Ratio
Rank
GPS 6.04 16
BELLY 8.2 12
GUCG 9.35 10
LTD n/a n/a
JWN 6.91 14
P/E Ratio
Rank
GPS 19.63 51
BELLY n/a n/a
GUCG n/a n/a
LTD 18.63 53
JWN 17.31 57
FORECAST COMPARISONS
RETURN FORECAST: EXPECTED RETURN
GPS JWN LTD
One-Month 1.51% 1.62% 1.38%
Three-Month 3.57% 3.64% 3.47%
Six-Month 7.25% 6.49% 6.07%
One-Year 12.04% 9.69% 9.05%
Two-Year 16.35% 13.18% 12.32%
Three-Year 14.99% 9.80% 7.10%
RISK ASSESSMENT: CHANCE OF GAIN
GPS JWN LTD
One-Month 55.55% 54.65% 54.49%
Three-Month 57.56% 56.01% 56.53%
Six-Month 60.80% 57.56% 58.05%
One-Year 62.63% 57.97% 58.48%
Two-Year 62.14% 57.67% 58.17%
Three-Year 59.15% 54.68% 53.87%
RISK ASSESSMENT: CHANCE OF LOSS
GPS JWN LTD
One-Month 44.45% 45.35% 45.51%
Three-Month 42.44% 43.99% 43.47%
Six-Month 39.20% 42.44% 41.95%
One-Year 37.37% 42.03% 41.52%
Two-Year 37.86% 42.33% 41.83%
Three-Year 40.85% 45.32% 46.13%
* Comparables are companies in the same Sector and Industry and of
approximately similar market capitalization value.
35

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GAP INC(GPS)
ANNUAL FINANCIALS (All items in Millions)
BALANCE SHEET 201201 201101 201001 200901 200801 200701 200601 200501
Cash 1885 0 2366 1756 1762 2074 2090 3260
Marketable Securities 0 0 225 0 177 570 952 817
Receivables 0 0 0 0 0 0 0 0
Inventory 1615 0 1477 1506 1575 1796 1696 1814
Raw Materials -- -- -- -- -- -- -- --
Work in Progress -- -- -- -- -- -- -- --
Finished Goods -- -- -- -- -- -- -- --
Notes Receivable 0 0 0 0 0 0 0 0
Other Current Assets 809 0 596 743 572 589 501 413
Total Current Assets 4309 4309 4664 4005 4086 5029 5239 6304
Property, Plant & Equipment 7783 7783 7427 7245 -- -- -- --
Accumulated Depreciation 5260 5010 4799 4312 -- -- -- --
Net Property, Plant & Equipment 2523 2523 2628 2933 3267 3197 3246 3376
Investment & Advances 0 0 0 0 0 0 0 0
Other non-current Assets 0 0 0 0 0 0 0 0
Deferred Charges 0 0 0 0 0 0 0 0
Intangibles 0 0 0 0 0 0 0 0
Deposits & other assets 590 0 693 626 485 318 336 368
TOTAL ASSETS 7422 7422 7985 7564 7838 8544 8821 10048
Notes Payable 0 0 0 0 0 0 0 0
Accounts Payable 1066 1066 1027 975 1006 1109 1132 1240
Current Portion of Long-term Debt 59 0 0 50 138 325 0 0
Current Portion of Capital Leases 0 0 0 0 0 0 0 0
Accrued Expenses 998 0 1063 1076 1259 822 725 924
Income Taxes Payable 5 0 41 57 30 16 85 78
Other Current Liabilities 0 0 0 0 0 0 0 0
Total Current Liabilities 2128 2128 2131 2158 2433 2272 1942 2242
Mortgages 0 0 0 0 0 0 0 0
Deferred Charges (taxes/income) 0 0 0 0 0 0 0 0
Convertible Debt 0 0 0 0 0 0 0 1373
Long Term Debt 1606 0 0 0 50 188 513 513
Non-Current Capital Leases 0 0 0 0 0 0 0 0
Other Long-Term Liabilities 933 0 963 1019 1081 910 941 984
Minority Interest (liabilities) 0 0 0 0 0 0 0 0
Total Liabilities 4667 4667 3094 3177 3564 3370 3396 5112
Preferred Stock 0 0 0 0 0 0 0 0
Common Stock, Net 55 0 55 55 55 55 54 49
Capital Surplus 2867 0 2935 2895 2783 2631 2402 904
Retained Earnings 12364 0 10815 9947 9223 8646 8133 7181
Treasury Stock 12760 0 9069 8633 7912 6235 5210 3238
Other Equity 229 0 155 123 125 77 46 40
Total Shareholders' Equity 2755 2755 4891 4387 4274 5174 5425 4936
Total Liabilites & Shareholders Equity 7422 7422 7985 7564 7838 8544 8821 10048
36

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GAP INC(GPS)
ANNUAL FINANCIALS (All items in Millions)
INCOME STATEMENT 201201 201101 201001 200901 200801 200701 200601 200501
Net Sales or Revenues 14549 14549 14197 14526 15763 15943 16023 16267
Cost of Goods Sold 9275 0 8473 9079 10071 10294 10154 9886
Gross Profit 5274 14549 5724 5447 5692 5649 5869 6381
Research & Development Expense 0 0 0 0 0 0 0 0
Selling, General & Admin. Expense 3836 0 3909 3899 4377 4475 4124 4296
Income Before Depr., Depl., Amort. 1438 14549 1815 1548 1315 1174 1745 2085
Depreciation, Depletion, Amort. 0 0 0 0 0 0 0 0
Non-Operating Income 5 0 7 37 117 131 93 -46
Interest Expense 74 0 6 1 26 41 45 167
Pretax Income 1369 1369 1816 1584 1406 1264 1793 1872
Provision for Income Taxes 536 0 714 617 539 486 680 722
Minority Interest 0 0 0 0 0 0 0 0
Investment Gains (Losses) 0 0 0 0 0 0 0 0
Other Income 0 0 0 0 0 0 0 0
Income Before Extraordinaries & Disc 0 1369 1102 967 867 778 1113 1150
Extraordinary Items & Discontinued 0 0 0 0 -34 0 0 0
Net Income 833 1369 1102 967 833 778 1113 1150
Average Shares used for Diluted EPS 533 641 699 719 794 836 902.3 991.1
Average Shares used for Basic EPS 529 636 694 716 791 831.1 881.1 893.4
Income Before Non-Recurring Items 833 1204 1102 967 907.3 778 1113 1147.5
Income From Non-Recurring Items 0 0 0 0 -40.3 0 0 -6.5
EPS - Basic, net 1.6 1.9 1.6 1.4 1 0.9 1.3 1.3
EPS - Diluted, net 1.6 1.9 1.6 1.3 1 0.9 1.2 1.2
EPS - Diluted, before non-recurring 1.6 1.9 1.6 1.3 1.1 0.9 1.2 1.2
Preferred Dividends - Acc & Pd -- -- -- -- -- -- -- --
Dividends (common) 221.1 245.7 234.6 240.2 240.4 259.4 175.8 77.8
Dividend per share (common) 0.4 0.4 0.3 0.3 0.3 0.3 0.2 0.1
CASH FLOW STATEMENT
Net Income (Cash Flow) 833 833 1102 967 833 778 1113 1150
Depreciation, Depletion, Amortization-CF 506 0 573 568 547 530 625 620
Net Increase(decrease) in -94 0 229 -248 645 -84 -113 -122
Cash from(used in) Discontinued Oper. 0 0 0 0 0 0 0 0
Other Adjustments - Net 118 0 24 125 56 26 -74 -28
Net Cash from (used by) Operating Act. 1363 1363 1928 1412 2081 1250 1551 1620
Increase/Decrease in Prop, Plant, & Equ. -548 0 -333 -430 -671 -550 -573 -442
Acquisition/Disposition of Subsidiaires 0 0 0 -142 0 0 0 0
Increase (decrease) in Investments 100 0 -225 176 393 381 -123 259
Other Cash inflow from Investment Act. -6 0 21 -2 4 19 982 343
Net Cash from (used by) Invesment Act. -454 -454 -537 -398 -274 -150 286 160
Issuance (purchase) of Equity Shares -2092 0 -547 -705 -1575 -1050 -1861 -846
Issuance (repayment) of Debt Securities 1646 0 -50 -138 -326 0 0 -871
Increase (decrease) in Bank & Other 16 0 0 0 0 0 0 0
Payment of Dividends & Other Cash -236 0 -234 -243 -252 -265 -179 -79
Other Cash from (used by) Financing 64 0 60 81 7 213 0 0
Net Cash from (used by) Financing Act. -602 -602 -771 -1005 -2146 -1102 -2040 -1796
Net Change in Cash & Cash Equivalents 324 324 633 -9 -306 -5 -210 -16
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GAP INC(GPS)
QUARTERLY FINANCIALS (All items in Millions)
BALANCE SHEET 201207 201204 201201 201110 201107 201104 201101 201010
Cash 2114 1972 1885 1392 2104 2417 0 1403
Marketable Securities -- 75 0 25 75 50 0 251
Receivables -- 0 0 0 0 0 0 0
Inventory 1668 1591 1615 2322 1750 1713 0 2160
Raw Materials -- -- -- -- -- -- -- --
Work in Progress -- -- -- -- -- -- -- --
Finished Goods -- -- -- -- -- -- -- --
Notes Receivable -- 0 0 0 0 0 0 0
Other Current Assets 758 807 809 815 752 690 0 663
Total Current Assets 4540 4445 4309 4554 4681 4870 4309 4477
Property, Plant & Equipment -- 7779 7783 7752 7726 -- 7783 --
Accumulated Depreciation -- 5258 5260 5202 5166 -- -- --
Net Property, Plant & Equipment 2521 2521 2523 2550 2560 2559 2523 2587
Investment & Advances -- 0 0 0 0 0 0 0
Other non-current Assets -- 0 0 0 0 0 0 0
Deferred Charges -- 0 0 0 0 0 0 0
Intangibles -- 0 0 0 0 0 0 0
Deposits & other assets 600 606 590 553 565 598 0 664
TOTAL ASSETS 7661 7572 7422 7657 7806 8027 7422 7728
Notes Payable -- 0 0 0 0 0 0 0
Accounts Payable 1201 1016 1066 1472 1161 1053 1066 1438
Current Portion of Long-term Debt 48 59 59 52 40 0 0 0
Current Portion of Capital Leases -- 0 0 0 0 0 0 0
Accrued Expenses 977 920 998 957 955 952 0 963
Income Taxes Payable 12 59 5 1 2 85 0 11
Other Current Liabilities -- 0 0 0 0 0 0 0
Total Current Liabilities 2238 2054 2128 2482 2158 2090 2128 2412
Mortgages -- 0 0 0 0 0 0 0
Deferred Charges (taxes/income) -- 0 0 0 0 0 0 0
Convertible Debt -- 0 0 0 0 0 0 0
Long Term Debt 1566 1566 1606 1606 1606 1246 0 0
Non-Current Capital Leases -- 0 0 0 0 0 0 0
Other Long-Term Liabilities 959 935 933 910 918 920 0 972
Minority Interest (liabilities) -- 0 0 0 0 0 0 0
Total Liabilities 4763 4555 4667 4998 4682 4256 4667 3384
Preferred Stock -- 0 0 0 0 0 0 0
Common Stock, Net -- 55 55 55 55 55 0 55
Capital Surplus -- 2804 2867 2873 2874 2865 0 2939
Retained Earnings -- 12536 12364 12201 12063 11934 0 11462
Treasury Stock -- 12604 12760 12696 12082 11283 0 10295
Other Equity -- 226 229 226 214 200 0 183
Total Shareholders' Equity 2898 3017 2755 2659 3124 3771 2755 4344
Total Liabilites & Shareholders Equity 7661 7572 7422 7657 7806 8027 7422 7728
38

Vglu ngine E
TM
GAP INC(GPS)
QUARTERLY FINANCIALS (All items in Millions)
INCOME STATEMENT 201207 201204 201201 201110 201107 201104 201101 201010
Net Sales or Revenues 3575 3487 4283 3585 3386 3295 4364 3654
Cost of Goods Sold 2148 2112 2878 2271 2135 1991 -6080 2149
Gross Profit 1427 1375 1405 1314 1251 1304 10329 1505
Research & Development Expense -- 0 0 0 0 0 0 0
Selling, General & Admin. Expense 1002 980 1033 968 917 918 -2845 1001
Income Before Depr., Depl., Amort. 425 395 372 346 334 386 13174 504
Depreciation, Depletion, Amort. -- 0 0 0 0 0 0 0
Non-Operating Income 20 1 2 1 1 1 -4 1
Interest Expense -- 23 24 22 22 6 6 3
Pretax Income 405 373 350 325 313 381 -16 502
Provision for Income Taxes 162 140 132 132 124 148 -546 199
Minority Interest -- 0 0 0 0 0 0 0
Investment Gains (Losses) -- 0 0 0 0 0 0 0
Other Income -- 0 0 0 0 0 0 0
Income Before Extraordinaries & Disc 243 233 218 193 189 233 365 303
Extraordinary Items & Discontinued 0 0 0 0 0 0 0 0
Net Income 243 233 218 193 189 233 365 303
Average Shares used for Diluted EPS 491 494 492 505 545 588 612 626
Average Shares used for Basic EPS 486 489 488 503 542 583 606 622
Income Before Non-Recurring Items 243 233 218 193 189 233 365 303
Income From Non-Recurring Items 0 0 0 0 0 0 0 0
EPS - Basic, net 0.5 0.5 0.4 0.4 0.3 0.4 0.6 0.5
EPS - Diluted, net 0.5 0.5 0.4 0.4 0.3 0.4 0.6 0.5
EPS - Diluted, before non-recurring 0.5 0.5 0.4 0.4 0.3 0.4 0.6 0.5
Preferred Dividends - Acc & Pd -- -- -- -- -- -- -- --
Dividends (common) 61.2 61.3 54.9 58.8 61.9 65.6 61.4 61.9
Dividend per share (common) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
CASH FLOW STATEMENT
Net Income (Cash Flow) 476 233 833 615 422 233 833 839
Depreciation, Depletion, Amortization-CF 245 123 506 382 255 129 0 429
Net Increase(decrease) in 249 -31 -94 -541 -235 -165 0 -426
Cash from(used in) Discontinued Oper. -- 0 0 0 0 0 0 0
Other Adjustments - Net -- 39 118 182 117 34 0 94
Net Cash from (used by) Operating Act. 970 364 1363 638 559 231 1363 936
Increase/Decrease in Prop, Plant, & Equ. -297 -148 -548 -416 -261 -127 0 -413
Acquisition/Disposition of Subsidiaires -- 0 0 0 0 0 0 0
Increase (decrease) in Investments -75 -75 100 75 25 50 0 -25
Other Cash inflow from Investment Act. -6 -8 -6 -4 -3 -2 0 3
Net Cash from (used by) Invesment Act. -378 -231 -454 -345 -239 -79 -454 -435
Issuance (purchase) of Equity Shares -369 -22 -2092 -2013 -1360 -518 0 -1352
Issuance (repayment) of Debt Securities -40 -40 1646 1635 1635 1235 0 0
Increase (decrease) in Bank & Other -11 0 16 9 0 0 0 3
Payment of Dividends & Other Cash -121 -61 -236 -181 -126 -66 0 -192
Other Cash from (used by) Financing 108 81 64 66 51 38 0 71
Net Cash from (used by) Financing Act. -433 -42 -602 -484 200 689 -602 -1470
Net Change in Cash & Cash Equivalents 154 87 324 -169 543 856 324 -945
39

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Vglu ngine E
TM
GAP INC(GPS)
VALUENGINE SERVICE DESCRIPTIONS
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Vglu ngine E
TM
GAP INC(GPS)
VALUENGINE'S METHODOLOGY
Engine Rating and Average Annual Return
(Jan 2001 - Aug 2012)
1 2 3 4 5
Engine Rating
0
5
10
15
20
25
A
v
g

R
e
t
u
r
n

(
%
)
41
GICS Sector Consumer Discretionary
Sub-Industry Apparel Retail
Summary This specialty apparel retailer operates Gap, Banana Republic and Old Navy
stores, offering casual clothing to moderate, upscale and value-oriented market segments.
Key Stock Statistics (Source S&P, Vickers, company reports)
52-Wk Range $36.23 15.08 S&P Oper. EPS 2013E 2.00 Market Capitalization(B) $17.108 Beta 1.25
Trailing 12-Month EPS $1.80 S&P Oper. EPS 2014E 2.25 Yield (%) 1.43 S&P 3-Yr. Proj. EPS CAGR(%) 17
Trailing 12-Month P/E 19.4 P/E on S&P Oper. EPS 2013E 17.5 Dividend Rate/Share $0.50 S&P Credit Rating BB+
$10K Invested 5 Yrs Ago $23,070 Common Shares Outstg. (M) 489.2 Institutional Ownership (%) 53
Price Performance
M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O
2009 2010 2011 2012
2
3
2
30-Week Mov. Avg.
12-Mo. Target Price
10-Week Mov. Avg.
Relative Strength
GAAP Earnings vs. Previous Year
Up Down No Change
Volume Above Avg.
Below Avg.
STARS
10
15
20
30
0
20
40
60
Vol.
Mil.
5
1
Options: ASE, CBOE, P, Ph
Analysis prepared by Equity Analyst Jason N. Asaeda on Aug 23, 2012, when the stock traded at $34.98.
Highlights
We expect net sales to reach $15.34 billion in FY
13 (Jan.), on a projected 4% increase in consol-
idated same-store sales and a 1% reduction in
net selling square footage. GPS is focused on
driving customer traffic and conversion in
North America. Through a sharper value mes-
sage in pricing and marketing, we think the
company has repositioned Old Navy to regain
leadership in the value sector. We also see col-
orful assortments resonating with Old Navy and
Gap customers and expect exclusive co-
branded collections (such as Mad Men and Tri-
na Turk) to appeal to Banana Republic's more
fashion-conscious customers.
We see operating margins expanding to 10.8%
in FY 13, from 9.9% in FY 12. We expect mean-
ingful savings from lower average unit costs on
like-for-like product in the second half of FY 13
to offset reinvestments in core categories
across brands (e.g., suiting at Banana Republic
and denim at Gap) and investment spending on
Gap marketing, international expansion, e-
commerce, and a new global IT platform.
Assuming a slow pace of share buybacks under
the company's new $1 billion repurchase au-
thorization, we estimate EPS of $2.00 in FY 13.
Investment Rationale/Risk
We applaud GPS for its improved performance,
as consolidated same-store sales rose 4% in
the first half of FY 13, versus a 2% decline in the
FY 12 period. That said, with the shares recently
trading at over 15X our FY 14 EPS estimate, a
premium to their five-year historical average
forward P/E multiple of 13.5X, we think in-
vestors have over-aggressively priced in a turn-
around. We see an emphasis on commodity-
type basic apparel limiting Gap's pricing power
in a promotional retail environment. Years of in-
consistent execution also cause us to question
Banana Republic's ability to deliver compelling
product as FY 13 progresses. In addition, we
believe macroeconomic concerns continue to
weigh on Old Navy's moderate-income cus-
tomers.
Risks to our recommendation and target price
include better-than-expected sales growth and
margin expansion, and a faster-than-expected
pace of share buybacks.
We arrive at our 12-month target price of $27 by
applying a forward P/E multiple of 12X, a dis-
count to the stock's five-year historical average
that we view as warranted by turnaround exe-
cution risks, to our FY 14 EPS estimate.
Qualitative Risk Assessment
LOW MEDIUM HIGH
Our risk assessment reflects our view of GPS's
turnaround potential and strong cash flow and
balance sheet, offset by execution risks.
Quantitative Evaluations
S&P Quality Ranking A-
D C B- B B+ A- A A+
Relative Strength Rank STRONG
96
LOWEST = 1 HIGHEST = 99
Revenue/Earnings Data
Revenue (Million $)
1Q 2Q 3Q 4Q Year
2013 3,487 3,575 -- -- --
2012 3,295 3,386 3,585 4,283 14,549
2011 3,329 3,317 3,654 4,364 14,664
2010 3,127 3,245 3,589 4,236 14,197
2009 3,384 3,499 3,561 4,082 14,526
2008 3,549 3,685 3,854 4,675 15,763
Earnings Per Share ($)
2013 0.47 0.49 E0.50 E0.54 E2.00
2012 0.40 0.35 0.38 0.44 1.56
2011 0.45 0.36 0.48 0.60 1.88
2010 0.31 0.33 0.44 0.51 1.58
2009 0.34 0.32 0.35 0.34 1.34
2008 0.25 0.32 0.30 0.35 1.09
Fiscal year ended Jan. 31. Next earnings report expected: NA. EPS
Estimates based on S&P Operating Earnings; historical GAAP
earnings are as reported.
Dividend Data (Dates: mm/dd Payment Date: mm/dd/yy)
Amount
($)
Date
Decl.
Ex-Div.
Date
Stk. of
Record
Payment
Date
0.113 11/08 12/30 01/04 01/25/12
0.125 02/23 04/03 04/05 04/27/12
0.125 05/16 06/29 07/03 07/24/12
0.125 08/15 10/05 10/10 10/24/12
Dividends have been paid since 1976. Source: Company reports.
Stock Report | August 23, 2012 | NYS Symbol: GPS | GPS is in the S&P 500
Gap Inc. (The)
S&P Recommendation
SELL # # # # #
Price
$34.97 (as of Aug 23, 2012)
12-Mo. Target Price
$27.00
Investment Style
Large-Cap Blend
Please read the Required Disclosures and Analyst Certification on the last page of this report.
Redistribution or reproduction is prohibited without written permission. Copyright 2012 The McGraw-Hill Companies, Inc.
42
Business Summary August 23, 2012
CORPORATE OVERVIEW. Gap, Inc. is a specialty retailer that operates stores selling casual apparel, ac-
cessories, and personal care products for men, women and children. As of April 28, 2012, it operated 3,026
stores: 1,022 Gap North America; 584 Banana Republic North America; 1,014 Old Navy North America; 192
Gap Europe; 161 Gap Asia; 32 Banana Republic Asia; 10 Banana Republic Europe; and 11 Athleta North
America, with 36.9 million sq. ft. of total retail space. Another 244 stores were franchised.
MARKET PROFILE. GPS participates in the men's, women's and children's apparel market, which generat-
ed approximately $199 billion at U.S. retail in 2011 (a 3.8% increase from 2010), according to The NPD
Group consumer estimated data. The apparel market is fragmented, with national brands marketed by 20
companies accounting for about 30% of total apparel sales, and the remaining 70% comprised of smaller
and/or private label "store" brands. The market is mature, in our view, with demand largely mirroring popu-
lation growth, and fashion trends accounting for a modicum of incremental volume.
COMPETITIVE LANDSCAPE. By channel, specialty stores account for the largest share of apparel sales, at
33% in 2011 and added one market share point, according to NPD. Mass merchants (e.g., Walmart and
Target) came in second, at 16% (vs. 16% in 2010), followed by department stores (e.g., Macy's and Nord-
strom) at 14%, national chains (e.g., Sears and JCPenney) at 13%, and off-price retailers (e.g., TJX and
Ross Stores) at 8%. Factory outlets, direct and e-mail pure plays and other captured the remaining 16%.
GPS is the largest U.S. specialty retailer, with an estimated 15% of the channel's volume based on the
company's total U.S. sales of $9.94 billion in FY 12. Specialty retailers like GPS compete on customer
knowledge garnered by daily interactions, focus groups and market intelligence, and this knowledge is of-
ten combined with high customer service levels to result in an attractive price/value equation for con-
sumers.
PRIMARY BUSINESS DYNAMICS. GPS is the leading apparel specialty retailer, with four brands targeted
at a broad demographic spanning boomers to babies and lower income to luxury shoppers. In our view,
few apparel and retail brands are as strong as Gap and Old Navy. However, GPS's size has been a hin-
drance to its sales growth, in our opinion, limiting its ability to quickly incorporate prevailing fashion trends
into brand designs and delivering them to store locations. From FY 06 through FY 10, the company's casual
positioning along with its vast size resulted in five consecutive years of negative annual same-store sales.
While same-store sales turned positive in FY 11, edging up 1%, lackluster Gap merchandising and a promo-
tional retail environment drove a 4% same-store sales decline in FY 12.
GPS's business strategy incorporates brand extensions, such as personal care, petites, and collection
handbags at Banana Republic or maternity and larger sizes at Gap and Old Navy; international expansion,
including franchising; growing its $1.6 billion online business (Gap Inc. Direct); and creating new brands,
such as Piperlime, its new footwear and apparel site, which opened in November 2006. In FY 09, the com-
pany purchased Athleta, an e-commerce site dedicated to sports apparel for women, and implemented a
franchise model to expand its international presence.
In FY 13, GPS expects to open approximately 125 company-operated stores, including 55 international loca-
tions, and to close some 115 locations, mainly Gap North America. This will result in about a 1% reduction
in net selling square footage. GPS is focused on improving productivity in North America through pruning
of underperforming Gap stores and remodeling of Old Navy locations.
FINANCIAL TRENDS. Paul Presser, GPS's former CEO, restored financial and operating stability to GPS,
but by his early 2007 departure, financial metrics had eroded as top-line sales growth was elusive for three
consecutive years. By FY 07, sales productivity had declined to FY 02 levels, and return on assets (ROA),
return on capital (ROC) and return on equity (ROE) had experienced a similar trajectory. Glenn Murphy took
over as CEO in July 2007, and while top-line growth remained wanting, in our view, better internal controls
and reduced discretionary spending led to improved operating margins and financial returns through FY
11. GPS's financial performance subsequently weakened in FY 12, reflecting a highly promotional retail en-
vironment, fashion missteps, and significant product cost inflation.
Corporate Information
Investor Contact
E. Price (415-427-2360)
Office
Two Folsom Street, San Francisco, CA 94105.
Telephone
415-427-0100.
Email
investor_relations@gap.com
Website
http://www.gapinc.com
Officers
Chrmn & CEO
G.K. Murphy
EVP, CFO & Chief
Acctg Officer
S.L. Simmons
EVP & Secy
M.A. Banks
EVP & CIO
J.T. Keiser
Board Members
A. D. Bellamy
D. De Sole
R. J. Fisher
W. S. Fisher
I. D. Goren
B. L. Martin
J. P. Montoya
G. K. Murphy
M. A. Shattuck, III
K. Tsang
K. C. Youngblood
Domicile
Delaware
Founded
1969
Employees
132,000
Stockholders
8,396
Stock Report | August 23, 2012 | NYS Symbol: GPS
Gap Inc. (The)
43
S&P Fair Value
Rank
2+
1 2 3 4 5
LOWEST HIGHEST
Based on S&P's proprietary quantitative model, stocks are ranked
from most overvalued (1) to most undervalued (5).
Fair Value
Calculation
$32.20
Analysis of the stock's current worth, based on S&P's proprietary
quantitative model suggests that GPS is slightly overvalued by
$2.77 or 7.9%.
Investability
Quotient
Percentile
95
LOWEST = 1 HIGHEST = 100
GPS scored higher than 95% of all companies for which an S&P
Report is available.
Volatility
LOW AVERAGE HIGH
Technical
Evaluation
BULLISH
Since June, 2012, the technical indicators for GPS have been
BULLISH.
Insider Activity
UNFAVORABLE NEUTRAL FAVORABLE
Expanded Ratio Analysis
2012 2011 2010 2009
Price/Sales 1.28 0.81 1.09 1.04
Price/EBITDA 9.59 4.70 6.23 6.85
Price/Pretax Income 13.62 6.00 8.52 9.51
P/E Ratio 22.38 9.88 14.04 15.58
Avg. Diluted Shares Outstg (M) 533.0 641.0 699.0 719.0
Figures based on calendar year-end price
Key Growth Rates and Averages
Past Growth Rate (%) 1 Year 3 Years 5 Years 9 Years
Sales -0.78 0.37 -1.97 -0.89
Net Income -30.81 -3.53 4.25 3.44
Ratio Analysis (Annual Avg.)
Net Margin (%) 5.73 7.23 6.77 6.58
% LT Debt to Capitalization 36.33 NA NA NA
Return on Equity (%) 24.37 24.99 23.13 22.25
Company Financials Fiscal Year Ended Jan. 31
Per Share Data ($) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
Tangible Book Value 5.32 6.64 6.96 6.04 11.50 9.58 6.33 5.73 5.33 4.12
Cash Flow 2.67 2.76 2.51 2.25 1.89 1.57 1.93 1.79 1.71 1.43
Earnings 1.56 1.88 1.58 1.34 1.09 0.93 1.24 1.21 1.09 0.54
S&P Core Earnings 1.56 1.88 1.58 1.34 1.09 0.93 1.15 1.13 1.03 0.50
Dividends NA 0.40 0.34 0.34 0.32 0.20 0.09 0.09 0.09 0.09
Payout Ratio NA 26% 22% 22% 29% 22% 7% 7% 8% 17%
Calendar Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Prices:High 23.73 26.34 23.36 21.89 22.02 21.39 22.70 25.72 23.47 17.14
Prices:Low 15.08 16.62 9.56 9.41 15.20 15.91 15.90 18.12 12.01 8.35
P/E Ratio:High 15 14 15 16 20 23 18 21 22 32
P/E Ratio:Low 10 9 6 7 14 17 13 15 11 15
Income Statement Analysis (Million $)
Revenue 14,549 14,664 14,197 14,526 15,763 15,943 16,023 16,267 15,854 14,455
Operating Income 1,944 2,530 2,484 2,199 1,984 1,701 2,370 2,705 2,543 1,794
Depreciation 592 562 573 651 635 530 625 620 664 781
Interest Expense 74.0 NA 6.00 9.00 36.0 49.0 45.0 167 234 249
Pretax Income 1,369 1,982 1,816 1,584 1,406 1,264 1,793 1,872 1,683 801
Effective Tax Rate 39.2% 39.3% 39.3% 39.0% 38.3% 38.5% 37.9% 38.6% 38.8% 40.4%
Net Income 833 1,204 1,102 967 867 778 1,113 1,150 1,030 477
S&P Core Earnings 833 1,204 1,102 967 867 776 1,033 1,073 978 439
Balance Sheet & Other Financial Data (Million $)
Cash 1,885 1,661 2,573 1,715 1,939 2,644 2,987 7,139 2,261 3,389
Current Assets 4,309 3,926 4,664 4,005 4,086 5,029 5,239 6,304 6,689 5,740
Total Assets 7,422 7,065 7,985 7,564 7,838 8,544 8,821 10,048 10,343 9,902
Current Liabilities 2,128 2,095 2,131 2,158 2,433 2,272 1,942 2,242 2,492 2,727
Long Term Debt 1,606 NA NA Nil 50.0 188 513 1,886 2,487 2,896
Common Equity 2,755 4,080 4,891 4,387 4,274 5,174 5,425 4,936 4,783 3,658
Total Capital 4,420 4,080 4,891 4,437 4,324 5,362 5,938 6,822 7,270 6,554
Capital Expenditures 548 557 334 431 682 572 600 442 272 303
Cash Flow 1,425 1,766 1,757 1,618 1,502 1,308 1,738 1,770 1,694 1,258
Current Ratio 2.0 1.9 2.2 1.9 1.7 2.2 2.7 2.8 2.7 2.1
% Long Term Debt of Capitalization 36.3 Nil Nil Nil 1.2 3.5 8.6 27.6 34.2 44.2
% Net Income of Revenue 5.7 8.2 7.8 6.7 5.5 4.9 6.9 7.1 6.5 3.3
% Return on Assets 11.5 16.0 14.2 12.6 10.6 9.0 11.8 11.1 10.2 5.4
% Return on Equity 24.4 26.8 23.8 22.3 18.4 14.7 21.5 24.0 24.4 14.3
Gap Inc. (The)
Data as orig reptd.; bef. results of disc opers/spec. items. Per share data adj. for stk. divs.; EPS diluted. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked. UR-Under Review.
44
Sub-Industry Outlook Stock Performance
Our fundamental outlook for apparel retailers is
neutral. In 2012, we believe a combination of new
fashion trends and a steady flow of promotions will
support a low single digit increase in apparel sales.
Apparel sales increased 3.8% in 2011, reflecting
gains across most channels, according to The NPD
Group Inc. consumer estimated data. Sales at
manufacturer-owned stores rose 14.7%, followed by
6.5% and 5.6% increases in the specialty and
off-price channels, respectively. Sales rose only
1.4% in the mass channel, we believe reflecting
cutbacks in spending by lower-income customers,
while sales at national chains and department
stores grew 3.0% and 2.9%, respectively. In 2011,
market shares were relatively static with the
exception of the specialty channel, which added
nearly a point to 33% and held the largest share of
the apparel market.
We believe apparel cost inflation contributed to
sales growth in 2011. While consumers long
benefited from apparel being a deflationary
category, retail prices increased last year (more on
fashion styles and less on basic apparel) due to
higher commodity costs (particularly cotton),
manufacturing labor wages, and product freight
charges. Fortunately, many apparel retailers found
that their customers, while shopping with an eye
toward value, were willing to stretch their budgets
when the merchandise was right.
With commodity costs starting to ease, we see an
opportunity for apparel retailers to regain lost
margin in 2012, particularly in the back half of the
year. We also look for apparel retailers to maintain
discipline in inventory and expense management in
support of earnings growth. We believe companies
with strong brands, differentiated products, superior
customer service and attractive price-value
propositions are likely to outperform their peers.
Year to date through June 15, the S&P Apparel
Retail Index rose 20.1% versus a 6.5% gain for the
S&P 1500 Index. In 2011, the sub-industry index
outperformed the broader market, increasing 13.2%
versus a 0.3% decline for the S&P 1500. In our view,
the positive price performance of the group
reflected the expectation of a consumer spending
recovery.
--Jason Asaeda
GICS Sector: Consumer Discretionary
Sub-Industry: Apparel Retail
Based on S&P 1500 Indexes
Month-end Price Performance as of 07/31/12
2008 2009 2010 2011 2012
160
140
120
100
80
60
40
20
0
Sub-Industry Sector S&P 1500
NOTE: All Sector & Sub-Industry information is based on the
Global Industry Classification Standard (GICS)
Gap Inc. (The)
Sub-Industry : Apparel Retail Peer Group*: Women's Apparel Retailers
Peer Group
Stock
Symbol
Stk.Mkt.
Cap.
(Mil. $)
Recent
Stock
Price($)
52
Week
High/Low($) Beta
Yield
(%)
P/E
Ratio
Fair
Value
Calc.($)
Quality
Ranking
S&P
IQ
%ile
Return on
Revenue
(%)
LTD to
Cap
(%)
Gap Inc GPS 17,108 34.97 36.23/15.08 1.25 1.4 19 32.20 A- 95 5.7 36.3
Ann Inc ANN 1,700 34.84 35.42/21.05 1.79 Nil 19 28.40 B- 87 3.9 0.4
Cache, Inc CACH 40 3.08 7.88/2.80 2.07 Nil NM 3.80 C 36 0.9 NA
Cato Corp'A' CATO 800 29.16 32.32/21.61 0.78 3.4 13 NA A- 96 7.0 NA
Chico's FAS CHS 3,027 18.05 18.58/9.57 1.73 1.2 21 21.40 B 88 6.4 NA
Christopher & Banks CBK 83 2.30 5.00/1.01 1.84 10.4 NM NA B- 37 NA NA
Coldwater Creek CWTR 64 0.53 1.83/0.45 1.92 Nil NM NA C 8 NM 10.1
Limited Brands LTD 13,907 47.77 51.84/34.69 1.53 2.1 20 43.30 B+ 96 8.2 94.8
New York & Co NWY 226 3.75 4.72/2.25 2.60 Nil NM 2.50 NR 36 NM NA
Reitmans Canada RET.C 167 12.40 16.24/11.85 NA 6.5 10 NA B+ NA 8.1 3.3
bebe Stores BEBE 460 5.46 9.58/5.35 1.23 1.8 34 6.00 B- 67 0.8 NA
NA-Not Available NM-Not Meaningful NR-Not Rated. *For Peer Groups with more than 15 companies or stocks, selection of issues is based on market capitalization.
Source: S&P.
Redistribution or reproduction is prohibited without written permission. Copyright 2012 The McGraw-Hill Companies,Inc.
45
S&P Analyst Research Notes and other Company News
August 17, 2012
UP 1.83 to 36.17... GPS posts $0.49 vs. $0.35 Q2 EPS on 4% higher same-store
sales, 5.6% total sales rise. Capital IQ consensus forecast was $0.48. Raises FY 13
EPS guidance to to $1.95-$2.00. S&P Capital IQ raises estimate, target, reiterates
sell. ...
August 17, 2012
11:39 am ET ... S&P REITERATES SELL OPINION ON SHARES OF GAP INC. (GPS
35.85**): We lift our FY 13 (Jan.) EPS estimate by $0.10 to $2.00 on higher margin
expectations, and we raise our target price by $3 to $27 on a revised historical
P/E valuation. Jul-Q EPS of $0.49, vs. $0.35, beat our estimate by $0.01 as margin
benefit from lower product costs offset increased investments in brand marketing
and store payroll. While we applaud GPS for achieving two consecutive quarters
of positive comps, given years of inconsistent execution and an uncertain outlook
for consumer spending, we continue to think investors have over-aggressively
priced in a turnaround. /J. Asaeda
August 2, 2012
UP 3.34 to 32.76... GPS posts 10% higher July same-store sales (SSS), 12% higher
total sales. Posts 4% higher Q2 SSS, 6% higher total sales. Sees $0.47-$0.48 Q2
EPS. Capital IQ consensus forecast was $0.38. Jefferies raises target, reiterates
buy. ...
August 2, 2012
03:52 pm ET ... S&P REITERATES SELL RECOMMENDATION ON SHARES OF GAP
INC. (GPS 33.33**): We lift our FY 13 (Jan.) EPS estimate by $0.08 to $1.90, but
keep FY 14's at $2.50 and our target price at $24. In July, comps were up 10%, vs.
our 2% growth estimate. In North America, comps rose 13% at Gap, 8% at
Banana Republic, and 12% at Old Navy. Gap International reported a 4% comp
gain. We think promotional activity rather than "must have" product drove sales
across brands. While we view GPS"s operations as stronger today than a year
ago, given years of inconsistent execution and a weak economy, we continue to
think investors have overaggressively priced in a turnaround. /J. Asaeda
August 2, 2012
03:14 pm ET ... GAP INC. (GPS 32.62) UP 3.2, GAP INC. (GPS) REPORTS JULY
SALES. JEFFERIES RAISES TARGET, KEEPS BUY... Analyst Randal Konik says GPS
reported meaningfully better than expected July same-store sales (SSS) of +10%
vs. consensus of +4% with all brands posting beats. Views results as further proof
of positive momentum with domestic, intl businesses accelerating. In particular,
believes improved product and marketing campaign at Gap brand (SSS +13%) is
resonating with consumers, expects momentum to build into Fall/Holiday as
brand will begin to benefit from the direction of Tracy Gardner (former J.Crew
President) as creative advisor. Raises $40 price target to $45. M.Morrow
July 5, 2012
11:59 am ET ... JUNE SAME-STORE SALES RESULTS FOR SELECTED RETAILERS
(LTD 46.97****): Our index of 10 retailers misses our sales-weighted Jun same
store gain estimate of 3.3%, at 2.8%. Semi-annual sales drove comps up 7.0% at
LTD and 8.1% at Nordstrom (JWN 52, Hold), vs. our 3.0% and 5.0% growth
forecasts. By delivering value, TJX Companies (TJX 44, Hold) and Ross Stores
(ROST 67, Hold) also beat our 4.0% and 6.0% comp growth estimates, at 7.0%
each. Gap's (GPS 28, Sell) flat comp fell short of our 3.0% growth forecast on
lower international sales. Kohl's (KSS 48, Buy) reported a 4.2% comp decline but
progress in building inventory, in line with our expectations. /J. Asaeda
May 31, 2012
05:30 am ET ... S&P LOWERS OPINION ON SHARES OF GAP INC. TO SELL FROM
HOLD (GPS 26.67**): Based on our channel checks, we think GPS has
repositioned Old Navy to regain price leadership in the value segment. We also
see color resonating with Gap customers and expect success for the upcoming
Trina Turk capsule collection at Banana Republic. However, we view Gap's
current emphasis on commodity-type basics and Banana Republic's inconsistent
track record with merchandising as turnaround risks. Reflecting our more
guarded outlook, we reduce our FY 13 (Jan.) EPS estimate $0.03 to $1.82. We also
lower our target price to $24 from $27 on updated historical P/E analysis. /J.
Asaeda
May 31, 2012
DOWN 0.19 to 26.48... GPS posts 2% higher May same-store sales, 3.8% higher
net sales.
May 18, 2012
UP 0.00 to 26.31... GPS posts $0.47 vs. $0.40 Q1 EPS on 4% same-store sales rise,
5.8% total sales rise. Capital IQ consensus forecast was $0.46. Given its Q1
performance, GPS raises its FY 13 EPS estimate to $1.78-$1.83.
May 18, 2012
10:05 am ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF GAP INC. (GPS
25.60***): Apr-Q EPS of $0.47, vs. $0.40, beats our $0.32 estimate on a successful
spring selling season and rent/occupancy expense leverage off of a 4% comp
gain. While FY 13 (Jan.) is off to an encouraging start, GPS's history of
inconsistent execution tempers our near-term outlook. We also see investments
in higher quality product as well as in e-commerce, Gap brand marketing and
other growth initiatives largely offsetting expected margin benefits this fall from
lower product costs. We lift our FY 13 EPS estimate by $0.05 to $1.85 and raise our
peer-P/E based target price by $2 to $27. /J. Asaeda
May 17, 2012
Gap Inc. at its annual general meeting held on May 15, 2012, approved the
appointment of Adrian D.P. Bellamy, Bob L. Martin and Glenn K. Murphy as
directors.
May 1, 2012
Completing a global search that began in February, Gap Inc. announced that
Stefan Larsson, a veteran of nearly 15 years with the successful fashion retailer
H&M, will become the first global brand president for Old Navy. Larsson will join
the company by October. The announcement comes as Gap Inc. prepares to open
its first Old Navy store outside North America, in Japan, in July. Over nearly 15
years, Larsson was part of the team responsible for growing H&M, with revenues
increasing from about $3 billion to about $17 billion and operations expanding
from 12 to 44 countries. Larsson most recently served as head of Global Sales for
H&M with responsibility for about 2,300 stores worldwide.
April 5, 2012
DOWN 0.07 to 26.58... GPS posts 8% higher March same-store sales, 10% higher
total sales.
April 5, 2012
11:18 am ET ... MARCH SAME-STORE SALES RESULTS FOR SELECTED RETAILERS
(LTD 48.31****): Our index of 10 retailers beat our 6.0% sales-weighted March
comp growth estimate, at 7.0%, as warm weather, an earlier Easter, and colorful
assortments provided a lift to spring apparel sales. Both LTD and Gap Inc. (GPS
27, Hold) reported total company comp gains of 8%, which topped our 7% and 4%
growth estimates, respectively. While we see Gap starting to benefit from its
turnaround strategies, we also note that its total company comps declined 10%
last year, which made for a much easier comparison than the year-ago 14%
increase LTD was up against. /J. Asaeda
March 1, 2012
UP 2.18 to 25.54... GPS posts 4% higher Feb. same-store sales, 6.5% higher total
sales.
Gap Inc. (The)
Source: S&P.
46
Analysts' Recommendations
Wall Street Average
S
WH
H
BH
B
Number of Analysts Following Stock
Monthly Average Trend Buy
B
Buy/Hold
BH
Hold
H
Weak Hold
WH
Sell
S
No Opinion GPS Trend
S O N D J F M A M J J A S O N D J F M A M J J A
2010 2011 2012
Stock Price ($)
10
20
30
40
28
32
36
Of the total 45 companies following GPS, 31 analysts currently publish recommendations.
No. of Ratings % of Total 1 Mo. Prior 3 Mos. Prior
Buy 7 23 6 6
Buy/Hold 4 13 4 4
Hold 14 45 14 17
Weak Hold 1 3 2 1
Sell 4 13 3 3
No Opinion 1 3 1 0
Total 31 100 30 31
Wall Steet Consensus Opinion
HOLD
Companies Offering Coverage
Over 30 firms follow this stock; not all firms are
displayed.
Argus Research Company
Atlantic Equities LLP
BMO Capital Markets, U.S. Equity Research
Barclays
BofA Merrill Lynch
CL King & Associates, Inc
Canaccord Genuity
Caris & Company
Citigroup Inc
Collins Stewart LLC
Cowen and Company, LLC
Credit Agricole Securities (USA) Inc.
Credit Suisse
Daiwa Capital Markets America Inc.
Daiwa Securities Capital Markets Co. Ltd.
Deutsche Bank
FBR Capital Markets & Co.
Goldman Sachs
ISI Group Inc.
JP Morgan
Janney Montgomery Scott LLC
Jefferies & Company, Inc.
Jesup & Lamont Securities Corporation
KeyBanc Capital Markets Inc.
Lazard Capital Markets
Mizuho Securities Co., Ltd.
Moody?s
Morgan Stanley
Needham & Company
Nomura Securities Co. Ltd.
Wall Street Consensus Estimates
2012 Actual $1.56
2011 2012
A M J J A S O N D J F M A M J J A
1
1.5
2
2.5
Estimates 2012 2013 2014
Fiscal Years Avg Est. High Est. Low Est. # of Est. Est. P/E
2014 2.30 2.75 2.05 30 15.2
2013 2.07 2.25 1.90 28 16.9
2014 vs. 2013 11% 22% 8% 7% -10%
Q2'14 0.53 0.59 0.50 22 66.0
Q2'13 0.48 0.49 0.47 22 72.9
Q2'14 vs. Q2'13 10% 20% 6% 0% -9%
A company's earnings outlook plays a major part in any investment decision. Standard & Poor's organizes the earnings estimates of over 2,300
Wall Street analysts, and provides their consensus of earnings over the next two years. This graph shows the trend in analyst estimates over
the past 15 months.
Wall Street Consensus vs. Performance
For fiscal year 2013, analysts estimate that GPS
will earn $2.07. For the 1st quarter of fiscal year
2013, GPS announced earnings per share of $0.47,
representing 23% of the total annual estimate. For
fiscal year 2014, analysts estimate that GPS's
earnings per share will grow by 11% to $2.30.
Gap Inc. (The)
Source: S&P, Capital IQ Estimates, Inc.
47
Glossary
S&P STARS
Since January 1, 1987, Standard and Poor's Equity
Research Services has ranked a universe of common
stocks based on a given stock's potential for future
performance. Under proprietary STARS (STock
Appreciation Ranking System), S&P equity analysts rank
stocks according to their individual forecast of a stock's
future total return potential versus the expected total
return of a relevant benchmark (e.g., a regional index
(S&P Asia 50 Index, S&P Europe 350 Index or S&P 500
Index)), based on a 12-month time horizon. STARS was
designed to meet the needs of investors looking to put
their investment decisions in perspective. Data used to
assist in determining the STARS ranking may be the
result of the analyst's own models as well as internal
proprietary models resulting from dynamic data inputs.
S&P 12-Month Target Price
The S&P equity analyst's projection of the market price a
given security will command 12 months hence, based on
a combination of intrinsic, relative, and private market
valuation metrics, including S&P Fair Value.
Investment Style Classification
Characterizes the stock as Growth or Value, and
indicates its capitalization level. Growth is evaluated
along three dimensions (earnings, sales and internal
growth), while Value is evaluated along four dimensions
(book-to-price, cash flow-to-price, dividend yield and
sale-to-price). Growth stocks score higher than the
market average on growth dimensions and lower on
value dimensions. The reverse is true for Value stocks.
Certain stocks are classified as Blend, indicating a
mixture of growth and value characteristics and cannot
be classified as purely growth or value.
S&P EPS Estimates
Standard & Poor's earnings per share (EPS) estimates
reflect analyst projections of future EPS from continuing
operations, and generally exclude various items that are
viewed as special, non-recurring, or extraordinary. Also,
S&P EPS estimates reflect either forecasts of S&P equity
analysts; or, the consensus (average) EPS estimate,
which are independently compiled by Capital IQ, a data
provider to Standard & Poor's Equity Research. Among
the items typically excluded from EPS estimates are
asset sale gains; impairment, restructuring or
merger-related charges; legal and insurance
settlements; in process research and development
expenses; gains or losses on the extinguishment of debt;
the cumulative effect of accounting changes; and
earnings related to operations that have been classified
by the company as discontinued. The inclusion of some
items, such as stock option expense and recurring types
of other charges, may vary, and depend on such factors
as industry practice, analyst judgment, and the extent to
which some types of data is disclosed by companies.
S&P Core Earnings
Standard & Poor's Core Earnings is a uniform
methodology for adjusting operating earnings by
focusing on a company's after-tax earnings generated
from its principal businesses. Included in the Standard &
Poor's definition are employee stock option grant
expenses, pension costs, restructuring charges from
ongoing operations, write-downs of depreciable or
amortizable operating assets, purchased research and
development, M&A related expenses and unrealized
gains/losses from hedging activities. Excluded from the
definition are pension gains, impairment of goodwill
charges, gains or losses from asset sales, reversal of
prior-year charges and provision from litigation or
insurance settlements.
Qualitative Risk Assessment
The S&P equity analyst's view of a given company's
operational risk, or the risk of a firm's ability to continue
as an ongoing concern. The Qualitative Risk Assessment
is a relative ranking to the S&P U.S. STARS universe, and
should be reflective of risk factors related to a
company's operations, as opposed to risk and volatility
measures associated with share prices.
In contrast to our qualitative STARS recommendations,
which are assigned by S&P analysts, the quantitative
evaluations described below are derived from
proprietary arithmetic models. These computer-driven
evaluations may at times contradict an analyst's
qualitative assessment of a stock. One primary reason
for this is that different measures are used to determine
each. For instance, when designating STARS, S&P
analysts assess many factors that cannot be reflected in
a model, such as risks and opportunities, management
changes, recent competitive shifts, patent expiration,
litigation risk, etc.
S&P Quality Ranking
Growth and stability of earnings and dividends are
deemed key elements in establishing S&P's Quality
Rankings for common stocks, which are designed to
capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes
into consideration certain adjustments and modifications
deemed desirable in establishing such rankings. The
final score for each stock is measured against a scoring
matrix determined by analysis of the scores of a large
and representative sample of stocks. The range of
scores in the array of this sample has been aligned with
the following ladder of rankings:
A+
A
A-
B+
NR
Highest
High
Above Average
Average
Not Ranked
B
B-
C
D
Below Average
Lower
Lowest
In Reorganization
S&P Fair Value Rank
Using S&P's exclusive proprietary quantitative model,
stocks are ranked in one of five groups, ranging from
Group 5, listing the most undervalued stocks, to Group 1,
the most overvalued issues. Group 5 stocks are expected
to generally outperform all others. A positive (+) or
negative (-) Timing Index is placed next to the Fair Value
ranking to further aid the selection process. A stock with
a (+) added to the Fair Value Rank simply means that this
stock has a somewhat better chance to outperform other
stocks with the same Fair Value Rank. A stock with a (-)
has a somewhat lesser chance to outperform other
stocks with the same Fair Value Rank. The Fair Value
rankings imply the following: 5-Stock is significantly
undervalued; 4-Stock is moderately undervalued; 3-Stock
is fairly valued; 2-Stock is modestly overvalued; 1-Stock
is significantly overvalued.
S&P Fair Value Calculation
The price at which a stock should trade at, according to
S&P's proprietary quantitative model that incorporates
both actual and estimated variables (as opposed to only
actual variables in the case of S&P Quality Ranking).
Relying heavily on a company's actual return on equity,
the S&P Fair Value model places a value on a security
based on placing a formula-derived price-to-book
multiple on a company's consensus earnings per share
estimate.
Insider Activity
Gives an insight as to insider sentiment by showing
whether directors, officers and key employees who have
proprietary information not available to the general
public, are buying or selling the company's stock during
the most recent six months.
Funds From Operations FFO
FFO is Funds from Operations and equal to a REIT's net
income, excluding gains or losses from sales of property,
plus real estate depreciation.
Investability Quotient (IQ)
The IQ is a measure of investment desirability. It serves
as an indicator of potential medium-to-long term return
and as a caution against downside risk. The measure
takes into account variables such as technical
indicators, earnings estimates, liquidity, financial ratios
and selected S&P proprietary measures.
S&P's IQ Rationale:
Gap Inc
Proprietary S&P Measures
Technical Indicators
Liquidity/Volatility Measures
Quantitative Measures
Raw Score
34
20
17
58
Max Value
115
40
20
75
IQ Total 129 250
Volatility
Rates the volatility of the stock's price over the past year.
Technical Evaluation
In researching the past market history of prices and
trading volume for each company, S&P's computer
models apply special technical methods and formulas to
identify and project price trends for the stock.
Relative Strength Rank
Shows, on a scale of 1 to 99, how the stock has
performed versus all other companies in S&P's universe
on a rolling 13-week basis.
Global Industry Classification Standard (GICS)
An industry classification standard, developed by
Standard & Poor's in collaboration with Morgan Stanley
Capital International (MSCI). GICS is currently comprised
of 10 Sectors, 24 Industry Groups, 68 Industries, and 154
Sub-Industries.
S&P Issuer Credit Rating
A Standard & Poor's Issuer Credit Rating is a current
opinion of an obligor's overall financial capacity (its
creditworthiness) to pay its financial obligations. This
opinion focuses on the obligor's capacity and willingness
to meet its financial commitments as they come due. It
does not apply to any specific financial obligation, as it
does not take into account the nature of and provisions
of the obligation, its standing in bankruptcy or liquidation,
statutory preferences, or the legality and enforceability
of the obligation. In addition, it does not take into
account the creditworthiness of the guarantors, insurers,
or other forms of credit enhancement on the obligation.
The Issuer Credit Rating is not a recommendation to
purchase, sell, or hold a financial obligation issued by an
obligor, as it does not comment on market price or
suitability for a particular investor. Issuer Credit Ratings
are based on current information furnished by obligors or
obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform
an audit in connection with any Issuer Credit Rating and
may, on occasion, rely on unaudited financial
information. Issuer Credit Ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other
circumstances.
Exchange Type
ASE - American Stock Exchange; AU - Australia Stock
Exchange; BB - Bulletin Board; NGM - Nasdaq Global
Market; NNM - Nasdaq Global Select Market; NSC -
Nasdaq Capital Market; NYS - New York Stock
Exchange; OTN - Other OTC (Over the Counter); OTC -
Over the Counter; QB - OTCQB; QX - OTCQX; TS - Toronto
Stock Exchange; TXV - TSX Venture Exchange; NEX -
NEX Exchange.
S&P Equity Research Services
Standard & Poor's Equity Research Services U.S.
includes Standard & Poor's Investment Advisory
Services LLC; Standard & Poor's Equity Research
Services Europe includes McGraw-Hill Financial
Research Europe Limited trading as Standard & Poor's;
Standard & Poor's Equity Research Services Asia
includes McGraw-Hill Financial Singapore Pte. Limited's
Gap Inc. (The)
Redistribution or reproduction is prohibited without written permission. Copyright 2012 Standard & Poor's Financial Services LLC.
STANDARD & POOR'S, S&P, S&P 500, S&P Europe 350 and STARS are registered trademarks of Standard & Poor's Financial Services LLC.
48
offices in Singapore, Standard & Poor's Investment
Advisory Services (HK) Limited in Hong Kong, Standard &
Poor's Malaysia Sdn Bhd, and Standard & Poor's
Information Services (Australia) Pty Ltd.
Abbreviations Used in S&P Equity Research Reports
CAGR- Compound Annual Growth Rate; CAPEX- Capital
Expenditures; CY- Calendar Year; DCF- Discounted Cash
Flow; EBIT- Earnings Before Interest and Taxes; EBITDA-
Earnings Before Interest, Taxes, Depreciation and
Amortization; EPS- Earnings Per Share; EV- Enterprise
Value; FCF- Free Cash Flow; FFO- Funds From Operations;
FY- Fiscal Year; P/E- Price/Earnings ; PEG Ratio-
P/E-to-Growth Ratio; PV- Present Value; R&D- Research
& Development; ROE- Return on Equity; ROI- Return on
Investment; ROIC- Return on Invested Capital; ROA-
Return on Assets; SG&A- Selling, General &
Administrative Expenses; WACC- Weighted Average
Cost of Capital
Dividends on American Depository Receipts (ADRs) and
American Depository Shares (ADSs) are net of taxes
(paid in the country of origin).
Required Disclosures
In contrast to the qualitative STARS recommendations
covered in this report, which are determined and
assigned by S&P equity analysts, S&Ps quantitative
evaluations are derived from S&Ps proprietary Fair
Value quantitative model. In particular, the Fair Value
Ranking methodology is a relative ranking methodology,
whereas the STARS methodology is not. Because the
Fair Value model and the STARS methodology reflect
different criteria, assumptions and analytical methods,
quantitative evaluations may at times differ from (or even
contradict) an equity analysts STARS recommendations.
As a quantitative model, Fair Value relies on history and
consensus estimates and does not introduce an element
of subjectivity as can be the case with equity analysts in
assigning STARS recommendations.
S&P Global STARS Distribution
In North America: As of June 29, 2012, research analysts
at Standard & Poor's Equity Research Services North
America recommended 37.5% of issuers with buy
recommendations, 57.5% with hold recommendations
and 5.0% with sell recommendations.
In Europe: As of June 29, 2012, research analysts at
Standard & Poor's Equity Research Services Europe
recommended 32.5% of issuers with buy
In Asia: As of June 29, 2012, research analysts at
Standard & Poor's Equity Research Services Asia
Globally: As of June 29, 2012, research analysts at
Standard & Poor's Equity Research Services globally
##### 5-STARS (Strong Buy): Total return is
expected to outperform the total return of a relevant
benchmark, by a wide margin over the coming 12
months, with shares rising in price on an absolute basis.
##### 4-STARS (Buy): Total return is expected to
outperform the total return of a relevant benchmark over
the coming 12 months, with shares rising in price on an
absolute basis.
##### 3-STARS (Hold): Total return is expected to
closely approximate the total return of a relevant
benchmark over the coming 12 months, with shares
generally rising in price on an absolute basis.
##### 2-STARS (Sell): Total return is expected to
underperform the total return of a relevant benchmark
over the coming 12 months, and the share price not
anticipated to show a gain.
#####1-STARS (Strong Sell): Total return is
expected to underperform the total return of a relevant
benchmark by a wide margin over the coming 12 months,
with shares falling in price on an absolute basis.
Relevant benchmarks: In North America the relevant
benchmark is the S&P 500 Index, in Europe and in Asia,
the relevant benchmarks are generally the S&P Europe
350 Index and the S&P Asia 50 Index.
For All Regions: All of the views expressed in this
research report accurately reflect the research analyst's
personal views regarding any and all of the subject
securities or issuers. No part of analyst compensation
was, is, or will be directly or indirectly, related to the
specific recommendations or views expressed in this
research report.
S&P Global Quantitative Recommendations Distribution
In Europe: As of June 29, 2012, Standard & Poor's
Quantitative Services Europe recommended 48.0% of
issuers with buy recommendations, 22.0% with hold
recommendations and 29.0% with sell recommendations.
In Asia: As of June 29, 2012, Standard & Poor's
Quantitative Services Asia recommended 51.0% of
Globally: As of June 29, 2012, Standard & Poor's
Quantitative Services globally recommended 46.0% of
Additional information is available upon request.
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49
undertakes no duty of due diligence or independent
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construed as a recommendation is intended for general
circulation and does not take into account the specific
investment objectives, financial situation or particular
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investment, taking into account the specific investment
objectives, financial situation or particular needs of any
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product.
For residents of Malaysia - All queries in relation to this
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U.S. STARS Cumulative Model Performance
Hypothetical Growth Due to Price Appreciation of $100
For the Period 12/31/1986 through 07/31/2012
S&P 500 5 STARS 4 STARS 3 STARS 2 STARS 1 STARS
$0
$800
$1,600
$2,400
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10
The performance above represents only the results of
Standard & Poor's model portfolios. Model performance
has inherent limitations. Standard & Poor's maintains the
models and calculates the model performance shown,
but does not manage actual assets. The U.S. STARS
model performance chart is only an illustration of
Standard & Poor's (S&P) research; it shows how U.S.
common stocks, ADRs (American Depositary Receipts)
and ADSs (American Depositary Shares), collectively
equities, that received particular STARS rankings
performed. STARS categories are models only; they are
not collective investment funds. The STARS performance
does not show how any actual portfolio has performed.
STARS model performance does not represent the
results of actual trading of investor assets. Thus, the
model performance shown does not reflect the impact
that material economic and market factors might have
had on decision-making if actual investor money had
been managed. Performance is calculated using a
time-weighted rate of return. While model performance
for some or all STARS categories performed better than
the S&P 500 for the period shown, the performance
during any shorter period may not have, and there is no
assurance that they will perform better than the S&P 500
in the future. STARS does not take into account any
particular investment objective, financial situation or
need and is not intended as an investment
recommendation or strategy. Investments based on the
STARS methodology may lose money. High returns are
not necessarily the norm and there is no assurance that
they can be sustained. Past model performance of
STARS is no guarantee of future performance.
For model performance calculation purposes, the
equities within each STARS category at December 31,
1986 were equally weighted. Thereafter, additions to the
composition of the equities in each STARS category are
made at the average value of the STARS category at the
preceding month end with no rebalancing. Deletions are
made at the closing price of the day that the deletion is
made. Performance was calculated from inception
through March 31, 2003 on a monthly basis. Thereafter,
performance is calculated daily. Equities in each STARS
category will change over time, and some or all of the
equities that received STARS rankings during the time
period shown may not have maintained their STARS
ranking during the entire period.
The model performance does not consider taxes and
brokerage commissions, nor does it reflect the deduction
of any advisory or other fees charged by advisors or
other parties that investors will incur when their
accounts are managed in accordance with the models.
The imposition of these fees and charges would cause
actual performance to be lower than the performance
shown. For example, if a model returned 10 percent on a
$100,000 investment for a 12-month period (or $10,000)
and an annual asset-based fee of 1.5 percent were
imposed at the end of the period (or $1,650), the net
return would be 8.35 percent (or $8,350) for the year.
Over 3 years, an annual 1.5% fee taken at year end with
an assumed 10% return per year would result in a
cumulative gross return of 33.1%, a total fee of $5,375
and a cumulative net return of 27.2% (or $27,200). Fees
deducted on a frequency other than annual would result
in a different cumulative net return in the preceding
example.
The Standard & Poor's 500 index is the benchmark for
U.S. STARS. The S&P 500 index is calculated in U.S.
dollars and does not take into account the reinvestment
of dividends. Indexes are unmanaged, statistical
composites and their returns do not include payment of
any sales charges or fees an investor would pay to
purchase the securities they represent. Such costs
would lower performance. It is not possible to invest
directly in an index. The S&P 500 index includes a
different number of constituents and has different risk
characteristics than the STARS equities. Some of the
STARS equities may have been included in the S&P 500
index for some (but not necessarily all) of the period
covered in the chart, and some such equities may not
have been included at all. The S&P 500 excludes ADRs
and ADSs. The methodology for calculating the return of
the S&P 500 index differs from the methodology of
calculating the return for STARS. Past performance of
the S&P 500 index is no guarantee of future
performance.
An investment based upon the models should only be
made after consulting with a financial advisor and with
an understanding of the risks associated with any
investment in securities, including, but not limited to,
market risk, currency risk, political and credit risks, the
risk of economic recession and the risk that issuers of
securities or general stock market conditions may
worsen, over time. Foreign investing involves certain
risks, including currency fluctuations and controls,
restrictions on foreign investments, less governmental
supervision and regulation, less liquidity and the
potential for market volatility and political instability. As
with any investment, investment returns and principal
value will fluctuate, so that when redeemed, an
investor's shares may be worth more or less than their
original cost.
For residents of Australia This report is distributed by
Standard & Poors Information Services (Australia) Pty
Ltd ("SPIS") in Australia. The entirety of this report is
approved by Mike Fink, who has reviewed and
authorised its content as at the date of publication.
Any express or implied opinion contained in this report is
limited to "General Advice" and based solely on
consideration of the investment merits of the financial
product(s) alone. The information in this report has not
been prepared for use by retail investors and has been
Gap Inc. (The)
50
prepared without taking account of any particular
person's financial or investment objectives, financial
situation or needs. Before acting on any advice, any
person using the advice should consider its
appropriateness having regard to their own or their
clients' objectives, financial situation and needs. You
should obtain a Product Disclosure Statement relating to
the product and consider the statement before making
any decision or recommendation about whether to
acquire the product. Each opinion must be weighed
solely as one factor in any investment decision made by
or on behalf of any adviser and any such adviser must
accordingly make their own assessment taking into
account an individual's particular circumstances.
SPIS holds an Australian Financial Services Licence
Number 258896. Please refer to the SPIS Financial
Services Guide for more information at
www.fundsinsights.com.au.
Gap Inc. (The)
51

3

3

52

53

54

55

56

Q

3

3

3

3

3

3

3

3

57

58

Q

59

QQQQ

QQQQ
QQQQ
QQQQQ

QQQ
QQQ

QQ

QQQ
QQ
QQQ

QQQ

60

Q

61

62

Q

63

Forecast

64

Q

15,15515,734

5,7355,831

13,50314,153
1,6521,581

1,5681,504

950902

950902

2,1422,045
2,1422,045

Forecast

65

2,9093,070

6,2316,640

2,1052,238

9,3849,881

12,46013,128

-6,229-6,487
6,2316,640

Forecast

66

Q

1,4461,356

-661-675

6,149-663

6,93417

Forecast

67

17.716.98.58.922.826.4NMNM1.21.1
11.310.711.310.7-16.1-14.224.224.61.61.5
4.23.814.9-4.329.74.9-5.4-13.437.34.9

68

37.837.114.113.010.910.16.35.75.14.2
-150.6-152.3297.5291.225.526.64.44.8-1.0-1.0
0.971.11-19.05-22.183.083.201.641.5730.030.0

69
Morningstar Equity Research
Research Methodology for Valuing Companies
Components of Our
Methodology
3 Economic Moat Rating
3 Moat Trend Rating
3 Moat Valuation
3 Three-Stage Discounted
Cash Flow
3 Weighted Average Cost
of Capital
3 Fair Value Estimate
3 Scenario Analysis
3 Uncertainty Ratings
3 Margin of Safety
3 Consider Buying/Selling
3 Stewardship Rating
The Morningstar Rating for stocks identies companies trad-
ing at a discount or premium to our analysts assessment of
their fair value. A number of components drive this rating: (1)
our assessment of the rms economic moat, (2) our estimate
of the stocks intrinsic value based on a discounted cash-ow
model, (3) the margin of safety bands we apply to our Fair
Value Estimate, and (4) the current stock price relative to our
fair value estimate.
The concept of the Morningstar Economic Moat Rating
plays a vital role not only in our qualitative assessment of a
rms investment potential, but also in our valuation process.
We assign three moat ratingsnone, narrow, or wideas
well as the Morningstar Moat Trend Ratingpositive,
stable, or negativeto each company we cover. There are
two major requirements for rms to earn either a narrow or
wide moat rating: (1) the prospect of earning above-average
returns on capital; and (2) some competitive edge that pre-
vents these returns from quickly eroding. The assumptions
we make about a rms moat determine the length of eco-
nomic outperformance that we assume in the latter stages
of our valuation model. We also quantify the value of each
rms moat, which represents the difference between a rms
enterprise value and the value of the rm if no future net in-
vestment were to occur. Said differently, moat value identi-
es the value generated by the rm as a result of any future
net new investment. Our Moat Trend Rating reects our as-
sessment of whether each rms competitive advantage is
either getting stronger or weaker, since we think of moats as
dynamic, rather than static.
At the heart of our valuation system is a detailed projection
of a companys future cash ows. The rst stage of our three-
stage discounted cash ow model can last from 5 to 10 years
and contains numerous detailed assumptions about various
nancial and operating items. The second stage of our mod-
elwhere a rms return on new invested capital (RONIC)
and earnings growth rate implicitly fade until the perpetuity
yearcan last anywhere from 0 years (for no-moat rms) to
20 years (for wide-moat companies). In our third stage, we
assume the rms RONIC equals its weighted average cost of
capital, and we calculate a continuing value using a standard
Morningstar Research Methodology for Valuing Companies
Analyst conducts
company and
industry research:
Financial statement
analysis
Channel checks
Trade-show visits
Industry and company
reports and journals
Conference calls
Management and
site visits
3
3
3
3
3
3
Strength of competitive
advantage is rated:
None, Narrow, or Wide
Advantages that confer
an economic moat:
High Switching Costs
(Microsoft)
Cost advantage
(Wal-Mart)
Intangible assets
(Johnson & Johnson)
Network Effect
(Mastercard)
Efficient Scale
(Lockheed Martin)
Analyst considers
past financial results
and focuses on
competitive position
and future prospects
to forecast future
cash flows.
Assumptions are
entered into
Morningstars
proprietary discounted
cash-flow model.
The analyst then eval-
uates the range of
potential intrinsic
values for the company
and assigns an
Uncertainty Rating: Low,
Medium, High,
Very High, or Extreme.
The Uncertainty Rating
determines the margin
of safety required
before we would rec-
ommend the stock.
The higher the uncer-
tainty, the wider
the margin of safety.
Analyst uses a
discounted cash-flow
model to develop
a Fair Value Estimate,
which serves as the
foundation for
the Morningstar
Rating for stocks.
The current stock price
relative to Morningstars
Fair Value Estimate,
adjusted for uncertainty,
determines the
Morningstar Rating
for stocks.
The Morningstar Rating
for stocks is updated
each evening after the
market closes.
QQQQQ
QQQQ
QQQ
QQ
Q
Fundamental
Analysis
Economic
Moat
TM
Rating
Company
Valuation
Fair Value
Estimate
Uncertainty
Assessment

70
Morningstar Equity Research
Research Methodology for Valuing Companies
Detailed Methodology
Documents and Materials*
3 Comprehensive
Equity Research Methodology
3 Uncertainty Methodology
3 Cost of Equity Methodology
3 Morningstar DCF
Valuation Model
3 Stewardship Rating
Methodology
* Please contact a sales
representative for more
information.
perpetuity formula. In deciding on the rate at which to dis-
count future cash ows, we ignore stock-price volatility.
Instead, we rely on a system that measures the estimated
volatility of a rms underlying future free cash ows, tak-
ing into account fundamental factors such as the diversity of
revenue sources and the rms xed cost structure.
We also employ a number of other tools to augment our valu-
ation process, including scenario analysis, where we assess
the likelihood and performance of a business under different
economic and rm-specic conditions. Our analysts typically
model three to ve scenarios for each company we cover,
stress-testing the model and examining the distribution of
resulting fair values.
The Morningstar Uncertainty Rating captures the range of
these potential fair values, based on an assessment of a
companys future sales range, the rms operating and -
nancial leverage, and any other contingent events that may
impact the business. Our analysts use this range to assign
an appropriate margin of safetyor the discount/premium
to a fair value we apply in setting our consider buying/con-
sider selling prices. Firms trading below our consider-buying
prices receive our highest rating of ve stars, whereas rms
trading above our consider-selling prices receive our lowest
rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
Low Medium High Very High*
* Occasionally a stocks uncertainty will be too high for us to estimate, in which case we label it Extreme.
5 Star
4 Star
3 Star
2 Star
1 Star
Uncertainty Rating
125%
105%
80%
95%
135%
110%
70%
90%
155%
115%
60%
85%
175%
125%
50%
80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess-
ment of management's stewardship of shareholder capital,
with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.

71
Morningstar Corporate Credit Rating
3 Offers a proprietary
measure of the credit qual-
ity of companies on our
coverage list.
3 Encapsulates our in-depth
modeling and quantitative
work in one letter grade.
3 Allows investors to rank
companies by each of
the four underlying com-
ponents of our credit
ratings, including both
analyst-driven and
quantitative measures.
3 Provides access to all
the underlying forecasts
that go into the rating,
available through our insti-
tutional service.
Methodology
We feel its important to perform credit analysis through
different lensesqualitative and quantitative, as well as
fundamental and market-driven. We therefore evaluate
each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around
a rms business operations and the cash ow generated
by those operations. Key components of the Business Risk
rating include the Morningstar Economic Moat
Rating and
the Morningstar Uncertainty Rating.
Cash Flow Cushion
Morningstars proprietary Cash Flow Cushion
ratio is a
fundamental indicator of a rms future nancial health
The measure reveals how many times a companys internal
cash generation plus total excess liquid cash will cover
its debt-like contractual commitments over the next
ve years. The Cash Flow Cushion acts as a predictor of
nancial distress, bringing to light potential renancing,
operational, and liquidity risks inherent to the rm.
3
3
3
3
3
3
Purpose
The Morningstar Corporate Credit Rating measures the
ability of a rm to satisfy its debt and debt-like obligations.
The higher the rating, the less likely we think the company
is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the
modeling expertise of our securities research team. For
each company, we publish:
Five years of detailed pro-forma nancial statements
Annual estimates of free cash ow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases
Forecasts of leverage, coverage, and liquidity ratios
for ve years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar
Corporate Credit Rating and are available to subscribers
at select.morningstar.com.
Morningstars Approach to Rating Corporate Credit
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive
Analysis
Cash-Flow
Forecasts
Scenario
Analysis
Quantitative
Checks
Rating
Committee
AA
A
BBB
C
D
BB
B
CC
CCC
Analyst conducts
company and
industry research:
Management interviews
Conference calls
Trade show visits
Competitor, supplier,
distributor, and
customer interviews
Assign Economic
Moat Rating
Analyst considers
company nancial
statements
and competitive
dynamics to
forecast future
free cash
ows to the rm.
Analyst derives
estimate of Cash-
Flow Cushion.
Analysts run bull
and bear cases
through the model
to derive alternate
estimates of
enterprise value.
Based on compet-
itive analysis,
cash-ow fore-
casts, and
scenario analysis,
the analyst
assigns
Business Risk.
We gauge a rms
health using
quantitative tools
supported by our
own backtesting
and academic
research.
Morningstar
Solvency Score
Distance to Default
Senior personnel
review each
company to
determine the
appropriate nal
credit rating.
Review modeling
assumptions
Approve
company-specic
adjustments
AAA Extremely Low Default Risk
AA Very Low Default Risk
A Low Default Risk
BBB Moderate Default Risk
BB Above Average Default Risk
B High Default Risk
CCC Currently Very High Default Risk
CC Currently Extreme Default Risk
C Imminent Payment Default
D Payment Default
UR Under Review
UR+ Positive Credit Implication
UR- Negative Credit Implication
AAA

72
Overall Credit Rating
The four component ratings roll up into a single prelim-
inary credit rating. To determine the nal credit rating,
a credit committee of at least ve senior research per-
sonnel reviews each preliminary rating.
We review credit ratings on a regular basis and as events
warrant. Any change in rating must be approved by the
Credit Rating Committee.
Investor Access
Morningstar Corporate Credit Ratings are available on
Morningstar.com. Our credit research, including detailed
cash-ow models that contain all of the components of the
Morningstar Corporate Credit Rating, is available to
subscribers at select.morningstar.com.
The advantage of the Cash Flow Cushion ratio relative to
other fundamental indicators of credit health is that the
measure focuses on the future cash-generating
performance of the rm derived from Morningstars
proprietary discounted cash ow model. By making
standardized adjustments for certain expenses to reect
their debt-like characteristics, we can compare future
projected free cash ows with debt-like cash commitments
coming due in any particular year. The forward-looking
nature of this metric allows us to anticipate changes in a
rms nancial health and pinpoint periods where cash
shortfalls are likely to occur.
Morningstar Solvency Score
The Morningstar Solvency Score
is a quantitative score
derived from both historical and forecasted nancial ratios.
It includes ratios that focus on liquidity (a companys
ability to meet short term cash outows), protability
(a companys ability to generate prot per unit of input),
capital structure (how does the company nance its
operations), and interest coverage (how much of prot is
used up by interest payments).
Distance to Default
Morningstars quantitative Distance to Default measure
ranks companies on the likelihood that they will tumble
into nancial distress. The measure is a linear model of the
percentile of a rms leverage (ratio of Enterprise Value to
Market Value), the percentile of a rms equity volatility
relative to the rest of the universe and the interaction of
these two percentiles. This is a proxy methodology for the
common denition of Distance to Default which relies on
option-based pricing models. The proxy has the benet of
increased breadth of coverage, greater simplicity of
calculation, and more predictive power.
For each of these four categories, we assign a score, which
we then translate into a descriptive rating along the scale
of Very Good / Good / Fair / Poor / Very Poor.
Morningstar Corporate Credit Rating
Morningstars Approach to Rating Corporate Credit

73

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Table of Contents

These reports were compiled using a product of Thomson Reuters www.thomsonreuters.com

Sharpe Ratio rank 90: 10% of stocks have a higher

5-Year Average Annual Return 91: 9% of stocks have

Volatility rank 66: 34% of stocks have less volatility

Size rank 96: 4% of companies have higher market

P/E rank 51: 49% of stocks have lower P/E ratios

Market/Book rank 16: 84% of stocks have lower

MARKET RATIO BASED VALUATION

Morningstars proprietary Cash Flow Cushion

The Morningstar Solvency Score

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