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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended January 28, 2017 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-33338 American Eagle Outfitters, Inc. (Exact name of registrant as specified in its charter) Delaware No. 13-2721761 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 77 Hot Metal Street, Pittsburgh, PA 15203-2329 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 432-3300 Securities registered pursuant to Section 12(b) of the Act: Common Shares, $0.01 par value New York Stock Exchange (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Sections 15(d) of the Act. YES YES NO NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at the past 90 days. YES NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer (Do not check if a smaller reporting company) Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES Smaller reporting company NO The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 30, 2016 was $2,983,485,568. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 182,221,528 Common Shares were outstanding at March 6, 2017. DOCUMENTS INCORPORATED BY REFERENCE Part III Proxy Statement for 2017 Annual Meeting of Stockholders, in part, as indicated. AMERICAN EAGLE OUTFITTERS, INC. TABLE OF CONTENTS Page Number PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures 3 9 13 13 14 14 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Consolidated Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information 14 17 18 31 32 59 59 62 PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services 62 62 62 62 62 PART IV Item 15. Exhibits, Financial Statement Schedules 63 2 PART I Item 1. Business. General American Eagle Outfitters, Inc., (\"AEO Inc.,\" the \"Company,\" \"we,\" \"our\") a Delaware corporation, was founded in 1977. We are a leading multibrand specialty retailer, operating over 1,000 retail stores and online at www.ae.com and www.aerie.com in the U.S. and internationally. We offer a broad assortment of apparel and accessories for men and women under the American Eagle Outfitters brand, and intimates, apparel and personal care products for women under the Aerie brand. AEO Inc. operates stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom. We also have license agreements with third-parties to operate American Eagle Outfitters and Aerie stores throughout Asia, Europe, Latin America and the Middle East. As of January 28, 2017, we operated 943 American Eagle Outfitters stores and 102 Aerie stand-alone stores. Our licensed store base has grown to 176 locations in 23 countries. We also acquired two emerging brands to complement our existing brands, Tailgate, a vintage sports-inspired apparel brand, and Todd Snyder New York, a premium menswear brand. Information concerning our segment and certain geographic information is contained in Note 2 of the Consolidated Financial Statements included in this Form 10-K and is incorporated herein by reference. Additionally, a five-year summary of certain financial and operating information can be found in Part II, Item 6, Selected Consolidated Financial Data, of this Form 10-K. See also Part II, Item 8, Financial Statements and Supplementary Data. Brands American Eagle Outfitters Brand (\"AEO Brand\") We are an American brand rooted in our denim heritage and passionate about providing the highest-quality products. American Eagle Outfitters is a style movement that's 40 years in the making. Our innovative fabrics and fits have positioned us as America's favorite jeans brandand while jeans are our heart and soul, we also design a high-quality assortment of apparel and accessories that reflects our customer's individual styleat a value that is approachable by all. AEO's brand platform, #WeAllCan TM , celebrates the power and individuality of young America. As of January 28, 2017, the AEO brand operated 943 stores and online at www.ae.com. Aerie Aerie is an intimates brand in operation for over 10 years and is committed to making all girls feel good about their REAL selves. We offer bras, undies, swim, sleep, apparel and more and have grown into a body-positive movement that has changed the industry. Empowering. Honest. Fun. Smart. Strong and Sexy. #AerieREAL is a campaign that means more than no retouching, it's about loving your real self from the inside out . As of January 28, 2017, the Aerie brand operates 102 stand-alone stores and 88 side-by-side stores connected to AEO brand stores. In addition, the Aerie brand merchandise is sold online at www.aerie.com and certain items are sold in AEO brand stores. Other brands Tailgate is a vintage, sports-inspired apparel brand with a college town store concept. As of January 28, 2017, the Tailgate brand operates 4 standalone stores and is available online at www.ae.com. Todd Snyder New York is a premium menswear brand. As of January 28, 2017, the Todd Snyder brand operates 1 stand-alone store and online at www.ToddSnyder.com. 3 Business Priorities & Strategy We are focused on driving our brands forward and delivering an exceptional customer experience across channels. Our current priorities include: Delivering innovation, quality and outstanding value to our customers Strengthening our brands, customer experience and engagement Leveraging omni-channel and enhancing capabilities to gain market share through a focus on our customers and where they choose to shop Growing Aerie to be the leading intimates brand in the marketplace Strengthening our financial discipline including inventory and expense management, delivering profitable revenue growth and focus on high return investments among other areas Real Estate We ended Fiscal 2016 with a total of 1,226 stores, consisting of 1,050 Company owned stores and 176 licensed store locations. Our AEO brand stores average approximately 6,600 gross square feet and approximately 4,600 on a selling square foot basis. Our Aerie brand stand-alone stores average approximately 3,800 gross square feet and approximately 3,000 on a selling square foot basis. The gross square footage of our Company owned stores increased by 0.3% to 6.6 million during Fiscal 2016. Company-Owned Stores Our Company owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S., Canada, Mexico, China, Hong Kong and the United Kingdom. Refer to Note 16 to the Consolidated Financial Statements for additional information regarding impairment and restructuring charges in China, Hong Kong and the United Kingdom. The following table provides the number of our Company-owned stores in operation as of January 28, 2017 and January 30, 2016. AEO Brand: United States Canada Mexico China Hong Kong United Kingdom Total AEO Brand Aerie Brand: United States Canada Total Aerie Brand Tailgate Todd Snyder Total Consolidated 4 January 28, 2017 January 30, 2016 812 84 28 10 6 3 943 822 86 23 9 6 3 949 86 16 102 4 1 1,050 82 15 97 1 1,047 The following table provides the changes in the number of our Company-owned stores for the past five fiscal years: Beginning of Year Fiscal Year 2016 2015 2014 2013 2012 1,047 1,056 1,066 1,044 1,069 Opened Closed 29 23 60 64 16 End of Year (26) (32) (70) (42) (41) 1,050 1,047 1,056 1,066 1,044 Licensed Stores In addition to our Company owned stores, our merchandise is sold at stores operated by third-party licensees. Under these agreements, our merchandise is sold at American Eagle Outfitters and Aerie stores owned and operated by third-party operators. Revenue recognized under license agreements generally consists of royalties earned and recognized upon sale of merchandise by license partners to retail customers. As of January 28, 2017, our products were sold in 176 locations operated by licensees in 23 countries as provided in the following table. We continue to increase the number of locations under these types of arrangements as part of our disciplined approach to global expansion. January 28, 2017 Israel Japan South Korea Chile Colombia Philippines UAE Saudi Arabia Thailand Egypt Greece Kuwait Lebanon Morocco Panama Qatar Singapore Bahrain Costa Rica Curacao Guatemala Jordan Oman Total Licensed Stores 41 34 19 12 12 9 9 8 6 3 3 3 3 2 2 2 2 1 1 1 1 1 1 176 AEO Direct We sell merchandise through our digital channels, ae.com, aerie.com and our AEO apps, both domestically and internationally in 81 countries. The digital channels reinforce each particular brand platform, and are designed to complement the in-store experience. Over the past several years, we have invested in building our technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the desktop and tablet experience. 5 Omni-Channel In addition to our investments in technology, we have invested in building omni-channel capabilities to better serve customers and gain operational efficiencies. These upgraded technologies have provided a single view of inventory across channels, connecting physical stores directly to our digital store, providing our customers with a more convenient and improved shopping experience. Our two distribution centers are fully omni-channel and service both stores and digital businesses. We offer the ability for customers to seamlessly return product via any channel regardless of where it was originally purchased. Our store-to-door capability enables store customers to make purchases from online inventory while shopping in our stores. Additionally, we fulfill online orders at stores through our buy online, ship from store capability, maximizing inventory exposure to digital traffic. We also offer a reserve online, pick up in store service to our customers and give them the ability to lookup in-store inventory from all digital channels. We will continue to optimize these tools and services to build ongoing improvements to the customer shopping experience. Merchandise Suppliers We design our merchandise, which is manufactured by third-party factories. During Fiscal 2016, we purchased substantially all of our merchandise from non-North American suppliers. For the year, we sourced merchandise through approximately 300 vendors located throughout the world, primarily in Asia, and did not source more than 10% of our merchandise from any single factory or supplier during the year. We maintain a quality control department at our distribution centers to inspect incoming merchandise shipments for overall quality of manufacturing. Inspections are also made by our employees and agents at manufacturing facilities to identify quality issues prior to shipment of merchandise. We uphold an extensive factory inspection program to monitor compliance with our Vendor Code of Conduct. New garment factories must pass an initial inspection in order to do business with us and we continue to review their social compliance performance both through internal audits by our compliance team and through the use of third-party monitors. We strive to partner with suppliers who respect local laws and share our dedication to utilize best practices in human rights, labor rights, environmental practices and workplace safety. We have been a certified member of the CustomsTrade Partnership Against Terrorism program (\"C-TPAT\") since 2004. C-TPAT is a voluntary program offered by the Bureau of Customs and Border Protection (\"CBP\") in which an importer agrees to work with CBP to strengthen overall supply chain security. As of September 2016, we were accepted into the Apparel, Footwear and Textiles Center, one of CBP's Centers of Excellence and Expertise (\"CEE\"). The CEE was created to ensure uniformity, create efficiencies, reduce redundancies, enhance industry expertise and facilitate trade, all with a final goal of reduced costs at the border and allowing CBP to focus on high-risk shipments. Inventory and Distribution Merchandise is shipped directly from our vendors to our U.S. distribution centers in Hazleton, Pennsylvania and Ottawa, Kansas, or to our Canadian distribution center in Mississauga, Ontario. Additionally, an increasing amount of product is shipped directly to stores which reduces transit times and lowers operating costs. We contract with third-party distribution centers in Mexico, Hong Kong, China and the Netherlands to service our Company owned stores in those regions. Regulation We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. Virtually all of our products are manufactured by foreign suppliers and imported by us, and we are subject to a variety of trade laws, customs regulations and international trade agreements. Apparel and other products sold by us are under the jurisdiction of multiple governmental agencies and regulations, including, in the U.S., the Federal Trade Commission and the Consumer Products Safety Commission. These regulations relate principally to product labeling, marketing, licensing requirements, and consumer product safety requirements and regulatory testing. We are also subject to regulations governing our employees both globally and in the U.S., and by disclosure and reporting requirements for publicly traded companies established under existing or new federal or state laws, including the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (\"SEC\") and New York Stock Exchange (\"NYSE\"). Our licensing partners, buying/sourcing agents, and the vendors and factories with which we contract for the manufacture and distribution of our products are also subject to regulation. Our agreements require our licensing partners, buying/sourcing agents, vendors, and factories to operate in compliance with all applicable laws and regulations, and we 6 are not aware of any violations which could reasonably be expected to have a material adverse effect on our business or operating results. Competition The global retail apparel industry is highly competitive both in stores and online. We compete with various local, national, and global apparel retailers, as well as the casual apparel and footwear departments of department stores and discount retailers, primarily on the basis of quality, fashion, service, selection and price. Trademarks and Service Marks We have registered AMERICAN EAGLE OUTFITTERS , AMERICAN EAGLE , AE , AEO , #WeAllCan TM , LIVE YOUR LIFE , Aerie and the Flying Eagle Design with the United States Patent and Trademark Office. We also have registered or have applied to register substantially all of these trademarks with the registries of the foreign countries in which our stores and/or manufacturers are located and/or where our product is shipped. We have registered AMERICAN EAGLE OUTFITTERS , AMERICAN EAGLE , AEO , LIVE YOUR LIFE , Aerie and the Flying Eagle Design with the Canadian Intellectual Property Office. In addition, we have acquired rights in AE TM for clothing products and registered AE in connection with certain non-clothing products. In the U.S. and in other countries around the world, we also have registered, or have applied to register, a number of other marks used in our business, including our pocket stitch designs. Our registered trademarks are renewable indefinitely, and their registrations are properly maintained in accordance with the laws of the country in which they are registered. We believe that the recognition associated with these trademarks makes them extremely valuable and, therefore, we intend to use and renew our trademarks in accordance with our business plans. Employees As of January 28, 2017, we had approximately 38,700 employees in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom of whom approximately 32,100 were part-time or seasonal hourly employees. Executive Officers of the Registrant Jennifer M. Foyle, age 50, has served as our Global Brand President - Aerie since January 2015. Prior thereto, Ms. Foyle served as Executive Vice President, Chief Merchandising Officer - Aerie from February 2014 to January 2015 and Senior Vice President, Chief Merchandising Officer - Aerie from August 2010 to February 2014. Prior to joining us, Ms. Foyle was President of Calypso St. Barth from 2009 to 2010. In addition, she held various positions at J. Crew Group, Inc., including Chief Merchandising Officer, from 2003 to 2009. Early in her career Ms. Foyle was the Women's Divisional Merchandise Manager for Gap Inc. from 1999 - 2003 and held various roles at Bloomingdales from 1988-1999. Peter Z. Horvath , age 59, has served as our Chief Global Commercial and Administrative Officer since May 2016. Prior to joining us, Mr. Horvath served as Chief Executive Officer and Chairman of Mission Essential Personnel, LLC, from January 2012 to June 2015. Prior to that time, he served as Executive Vice President and Chief Operating Officer of Victoria's Secret Stores, Limited Brands from July 2008 to December 2010. From January 2005 to June 2008, Mr. Horvath was President of DSW, Inc. From 1985 to 2004, he held a variety of positions at Limited Brands, including Chief Financial Officer, Apparel Merchandising from 1997 to 2002 and Senior Vice President, Enterprise Merchandise Planning and Allocation from 2002 to 2004. Early in his career, Mr. Horvath worked at Bristol Myers, Inc. and W.R. Grace and Co. Retail Group. Charles F. Kessler , age 44, has served as our Global Brand President - American Eagle Outfitters since January 2015. Prior thereto, he served as our Executive Vice President, Chief Merchandising and Design Officer - American Eagle Outfitters from February 2014 to January 2015. Prior to joining us, Mr. Kessler served as Chief Merchandising Officer at Urban Outfitters, Inc. from October 2011 to November 2013 and as Senior Vice President, Corporate Merchandising at Coach, Inc. from July 2010 to October 2011. Prior to that time, Mr. Kessler held various positions with Abercrombie & Fitch Co. from 1994 to 2010, including Executive Vice President, Female Merchandising from 2008 to 2010. 7 Robert L. Madore , age 52, has served as our Executive Vice President and Chief Financial Officer since October 2016. Prior to joining us, Mr. Madore served as the Chief Financial Offi cer of Ralph Lauren Corporation from April 2015 to September 2016. Prior to that role, he held a number of key financial and operational roles at the Ralph Lauren Corporation, including Senior Vice President of Corporate Finance from December 2010 to March 2015, and Senior Vice President of Operations and Chief Financial Officer of its retail division from 2004 to December 2010. Prior to that time, Mr. Madore was Chief Financial Officer for New York & Company from 2003 to 2004, and served as Chief Operating Officer and Chief Financial Officer of FutureBrand, a division of McCann Erickson, from 2001 to 2003. Prior thereto, he held various executive management positions at Nine West Group, Inc. starting in 1995. Mr. Madore began his career in 1987 at Deloitte & Touche until 1995. Michael R. Rempell, age 43, has served as our Executive Vice President and Chief Operations Officer since June 2012. Prior thereto, he served as our Executive Vice President and Chief Operating Officer, New York Design Center, from April 2009 to June 2012, as Senior Vice President and Chief Supply Chain Officer from May 2006 to April 2009, and in various other positions since joining us in February 2000. Jay L. Schottenstein, age 62, has served as our Executive Chairman, Chief Executive Officer since December 2015. Prior thereto, Mr. Schottenstein served as our Executive Chairman, Interim Chief Executive Officer from January 2014 to December 2015. He has also served as the Chairman of the Company and its predecessors since March 1992. He served as our Chief Executive Officer from March 1992 until December 2002 and prior to that time, he served as a Vice President and Director of our predecessors since 1980. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores Corporation (\"SSC\") since March 1992 and as President since 2001. Prior thereto, Mr. Schottenstein served as Vice Chairman of SSC from 1986 to 1992. He has been a Director of SSC since 1982. Mr. Schottenstein also served as Chief Executive Officer from March 2005 to April 2009 and as Chairman of the Board since March 2005 of DSW Inc., a company traded on the NYSE. He has also served as a member of the Board of Directors for AB Acquisition LLC (Albertsons/Safeway) since 2006. He has also served as an office and director of various other entities owned or controlled by members of his family since 1976. Fiscal Year Our fiscal year ends on the Saturday nearest to January 31. As used herein, \"Fiscal 2017\" refers to the 53-week period ending February 3, 2018. \"Fiscal 2016\2016 ANNUAL REPORT GAPINC.COM 170252_L01_CVRS.indd 1 3/17/17 7:45 PM BOARD OF DIRECTORS LEADERSHIP TEAM C O R P O R AT E AND SHAREHOLDER I N F O R M AT I O N Domenico De Sole, 73 (*) Director since 2004. Chairman of Tom Ford International, a luxury retailer. Former President and Chief Executive Ofcer of Gucci Group NV. Chairman of Sotheby's. Director of Newell Rubbermaid, Inc. (Not standing for reelection at the May 2017 Annual Meeting of Shareholders.) Art Peck Director, and President and CEO, Gap Inc. Gap Inc. Investor Relations Please see the Investors tab on www.gapinc.com 2 Folsom Street San Francisco, CA 94105 415-427-0100 investor_relations@gap.com Robert J. Fisher, 62 (+) Non-Executive Chairman. Director since 1990. Managing Director of Pisces, Inc., an investment group. Former Interim Chief Executive Ofcer and executive of the company. William S. Fisher, 59 Director since 2009. Founder and Chief Executive Ofcer of Manzanita Capital Limited, a private equity fund. Former executive of the company. Teri List-Stoll EVP and Chief Financial Ofcer Sonia Syngal President and CEO, Old Navy Jeff Kirwan President and CEO, Gap Nancy Green President and CEO, Athleta Jyothi Rao President and General Manager, Intermix Tracy Gardner, 53 Director since 2015. Principal of Tracy Gardner Consultancy. Former Chief Executive Ofcer of dELiA*s Inc., an omni-channel retail company primarily marketing to teenage girls. Former executive of the company. Paul Chapman EVP and Chief Information Ofcer Brian Goldner, 53 (*) Director since 2016. Chairman, President, and Chief Executive Ofcer of Hasbro, Inc. Former Executive Vice President and Chief Operating Ofcer of Bandai America. Julie Gruber EVP, Global General Counsel, Corporate Secretary and Chief Compliance Ofcer Isabella D. Goren, 56 (^) Director since 2011. Former Chief Financial Ofcer of AMR Corporation and American Airlines, Inc. Director of Lyondell Basell Industries N.V. and MassMutual Financial Group. Bob L. Martin, 68 (* +) Director since 2002. Operating Partner of Stephens Group, Inc., a private equity group. Chief Executive Ofcer (part-time) of Mcon Management Services, Ltd., a consulting company. Former President and Chief Executive Ofcer of Wal-Mart International. Director of Conn's, Inc. Sebastian DiGrande EVP, Strategy and Chief Customer Ofcer Abinta Malik EVP and General Manager, Greater China Bobbi Silten EVP, Global Talent and Sustainability Michael Yee EVP, Global Supply Chain: Sourcing and Production Shawn Curran EVP, Global Supply Chain: Logistics and Product Operations Stock Exchange Listing Trading Symbol \"GPS\" / New York Stock Exchange Annual Shareholders' Meeting May 17, 2017, 10:00 a.m. Pacic Time Gap Inc. Headquarters 2 Folsom Street San Francisco, CA 94105 Independent Registered Public Accounting Firm Deloitte & Touche LLP San Francisco, CA Registrar and Transfer Agent (For registered shareholders) Wells Fargo Bank, N.A. Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120 Benecial Shareholders (Shares held by your broker in the name of the brokerage house) Direct questions to your broker. Fiscal 2017 Earnings Release Dates Please visit www.gapinc.com for up-to-date information about earnings release dates. Live audio of each quarterly earnings conference call can be accessed through the Investors page of our website at www.gapinc.com the day of the earnings release. Replays are available for approximately 90 days following the event. Jorge P. Montoya, 70 (^) Director since 2004. Former executive of The Procter & Gamble Company. Director of The Kroger Co. Art Peck, 61 Director since 2015. President and Chief Executive Ofcer, Gap Inc. Mayo A. Shattuck III, 62 (+ ^) Director since 2002. Non-Executive Chairman of Exelon Corporation, an energy company. Former Chairman, Chief Executive Ofcer and President of Constellation Energy Group. Director of Capital One Financial Corporation and Alarm.com Holdings, Inc. Katherine Tsang, 59 (*) Director since 2010. Principal of Max Giant Limited, an investment company. Former Chairperson of Greater China, Standard Chartered Bank, Standard Chartered Bank (Taiwan) Limited, Standard Chartered Bank (Hong Kong) Limited. Former Chief Executive Ofcer of Standard Chartered Bank (China) Limited. Doris F. Fisher Honorary Lifetime Director since 2009. Former Director and merchandiser of the company. Cofounder of the company with her husband Donald G. Fisher, who passed away in September 2009. P R I N T I N G C O N S I D E R AT I O N S The Gap Inc. 2016 Annual Report was printed by an environmentally sustainable printer, which utilizes 100 percent renewable wind power and sustainable manufacturing principles including: socially responsible procurement; green chemistry principles; reduced VOC inks and coatings; recycling of residual materials; and carbon reduction strategies supporting forest carbon offset initiatives. Printed on FSC-certied Finch paper supporting responsible forestry. (*) Compensation and Management Development Committee (+) Governance and Sustainability Committee (^) Audit and Finance Committee 170252_L01_CVRS.indd 2 3/20/17 4:51 PM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 28, 2017 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware (State of Incorporation) 94-1697231 (I.R.S. Employer Identification No.) Two Folsom Street, San Francisco, California (Address of principal executive offices) 94105 (Zip code) Registrant's telephone number, including area code: (415) 427-0100 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value (Title of class) The New York Stock Exchange (Name of exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act: Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of July 29, 2016 was approximately $6 billion based upon the last price reported for such date in the NYSE-Composite transactions. The number of shares of the registrant's common stock outstanding as of March 14, 2017 was 399,843,485. Documents Incorporated by Reference Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2017 (hereinafter referred to as the \"2017 Proxy Statement\") are incorporated into Part III. Special Note on Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the \"safe harbor\" provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as \"expect,\" \"anticipate,\" \"believe,\" \"estimate,\" \"intend,\" \"plan,\" \"project,\" and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following: target cash balance and ability to provide for our working capital needs and for unexpected business downturns; the impact of foreign exchange rate fluctuations in fiscal 2017; the impact of store closures and streamlining measures, including annualized savings; the recovery of remaining costs related to the Fishkill distribution center fire; attracting, retaining, and training great talent in our businesses and functions; continuing our investment in customer experience both in stores and online; net store openings in fiscal 2017; the impact of continuing depreciation of certain foreign currencies on gross margin in fiscal 2017; current cash balances and cash flows being sufficient to support our business operations, including growth initiatives, planned capital expenditures, dividend payments, and repayment of debt; ability to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility or other available market instruments; the impact of the seasonality of our operations; cash spending for purchases of property and equipment in fiscal 2017, including costs related to rebuilding the Fishkill, New York distribution center campus; dividend payments in fiscal 2017; share repurchases in fiscal 2017; the estimates and assumptions we use in our accounting policies; the impact of accounting pronouncements; unrealized gains and losses from designated cash flow hedges; total gross unrecognized tax benefits; the impact of losses due to indemnification obligations; the outcome of proceedings, lawsuits, disputes, and claims; and the impact of changes in internal control over financial reporting. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following: the risk that we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences; the highly competitive nature of our business in the United States and internationally; the risk that failure to maintain, enhance and protect our brand image could have an adverse effect on our results of operations; the risk that the failure to attract and retain key personnel, or effectively manage succession, could have an adverse impact on our results of operations; the risk that trade matters could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations; the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition, strategies, and results of operations; the risk that our investments in omni-channel shopping initiatives may not deliver the results we anticipate; the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected; the risk that we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation; the risk that foreign currency exchange rate fluctuations could adversely impact our financial results; the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing; the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations; the risks to our efforts to expand internationally, including our ability to operate under a global brand structure and operating in regions where we have less experience; the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct; the risk that our franchisees' operation of franchise stores is not directly within our control and could impair the value of our brands; the risk that we or our franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively; the risk that comparable sales and margins will experience fluctuations; the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives; the risk that updates or changes to our information technology (\"IT\") systems may disrupt our operations; the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect our operations and financial results, or those of our franchisees or vendors; the risk that reductions in income and cash flow from our marketing and servicing arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows; the risk that the adoption of new accounting pronouncements will impact future results; the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; and the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits. Additional information regarding factors that could cause results to differ can be found in this Annual Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission (\"SEC\"). Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of March 20, 2017, and we assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. THE GAP, INC. 2016 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 1A. Risk Factors 5 Item 1B. Unresolved Staff Comments 12 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Mine Safety Disclosures 12 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 74 Item 9A. Controls and Procedures 74 Item 9B. Other Information 74 PART III Item 10. Directors, Executive Officers and Corporate Governance 74 Item 11. Executive Compensation 74 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accounting Fees and Services 75 PART IV Item 15. Exhibits, Financial Statement Schedules 76 [THIS PAGE INTENTIONALLY LEFT BLANK] Part I Item 1. Business. General The Gap, Inc. (Gap Inc., the \"Company,\" \"we,\" and \"our\") was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988. Gap Inc. is a leading global apparel retail company. We offer apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands. Our portfolio of distinct brands across multiple channels and geographies, combined with our size and scale which allows for strategic and advantageous partnerships with our third-party vendors and suppliers throughout the organization, gives us a competitive advantage in the global retail marketplace. In December 2016, the Company acquired Weddington Way, which does not have a material impact on our Consolidated Financial Statements. Gap Inc. is an omni-channel retailer, with sales to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. Gap Inc. has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico. We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. Most of the products sold under our brand names are designed by us and manufactured by independent sources. We also sell products that are designed and manufactured by branded third parties, especially at our Intermix brand. Gap Inc. is a leader among apparel retailers in using omni-channel capabilities to bridge the digital world and physical stores, creating world-class shopping experiences regardless of where or how our customers shop. The Company's suite of omni-channel services, including order-in-store, reserve-in-store, find-in-store, and ship-fromstore, as well as enhanced mobile experiences, are uniquely tailored across its portfolio of brands. Gap. Gap is one of the world's most iconic apparel and accessories brands anchored in optimistic, casual, American style. Founded in San Francisco in 1969, the brand's collections continue to build the foundation of modern wardrobes - all things denim, tees, button-downs, and khakis, along with must-have trends. Gap is designed to build the foundation of modern wardrobes through every stage of life with apparel and accessories for adult men and women under the Gap name, in addition to GapKids, babyGap, GapMaternity, GapBody, and GapFit collections. Beginning in 1987 with the opening of the first store outside North America in London, Gap continues to connect with customers around the world through specialty stores, online, and franchise stores. In addition, we bring the brand to value-conscious customers, with exclusively designed collections for Gap Outlet and Gap Factory stores and websites. Banana Republic. Acquired with two stores in 1983 as a travel and adventure outfitter, Banana Republic is now a global apparel and accessories brand focused on delivering versatile, contemporary classics, designed for today with style that endures. Banana Republic offers clothing and accessories with detailed craftsmanship and luxurious materials. Customers can purchase Banana Republic products globally in our specialty and Banana Republic Factory stores, online, and in franchise stores. Old Navy. Old Navy is a global apparel and accessories brand that believes in the democracy of style, making high quality, must-have fashion essentials for the whole family, while delivering incredible value, and fun, unique store experiences. Old Navy opened its first store in 1994 in the United States and since has expanded its international presence with Company-operated stores in Canada, China, and Mexico, as well as franchise stores in seven countries. Customers can purchase Old Navy products globally in Company-operated and franchise stores and online. 1 Athleta. Athleta is a premium fitness and lifestyle brand creating versatile performance apparel to inspire a community of active, confident women and girls. Established in 1998 and acquired by Gap Inc. in 2008, Athleta integrates technical features and innovative design across its women's collection to carry her through a life in motion, from yoga, training and sports, to everyday activities and travel. In 2016, the company launched Athleta Girl, mirroring its signature performance in styles for the next generation. Customers can purchase Athleta products in the United States through its stores and catalogs, or globally through its website. Intermix. Acquired in December 2012, Intermix curates must-have styles from the most coveted emerging and established designers. Known for styling on-trend pieces in unexpected ways, Intermix delivers a unique point of view and an individualized approach to shopping and personal style. Customers can shop in stores in the United States and Canada, and online. Weddington Way. Acquired in December 2016, Weddington Way is a social shopping platform for wedding parties, featuring an online boutique with exclusive bridesmaid dresses and a curated selection of wedding party gifts. Customers can shop Weddington Way online, and the brand ships globally. Piperlime. Launched in 2006, Piperlime offered a mix of private label and branded apparel and accessories. The Company closed the Piperlime brand during the first half of fiscal 2015. Sales to customers are tendered for cash, debit cards, credit cards, or personal checks. We also issue and redeem gift cards through our brands. Gap, Banana Republic, Old Navy, and Athleta each have a private label credit card program and a co-branded credit card program through which frequent customers receive benefits. Private label and co-branded credit cards are provided by a third-party financing company, with associated revenue sharing arrangements reflected in Gap Inc. operations. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store. Stores are generally open seven days per week (where permitted by law) and most holidays. We ended fiscal 2016 with 3,200 Company-operated stores and 459 franchise store locations. For more information on the number of stores by brand and region, see the table in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" included in Item 7 of this Form 10-K. Certain financial information about international operations is set forth under the heading "Segment Information" in Note 17 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. Merchandise Vendors We purchase private label and non-private label merchandise from about 800 vendors. Our vendors have factories in about 40 countries. Our two largest vendors each accounted for about 5 percent of the dollar amount of our total fiscal 2016 purchases. Of our merchandise purchased during fiscal 2016, substantially all purchases, by dollar value, were from factories outside the United States. Approximately 25 percent and 23 percent of our fiscal 2016 purchases, by dollar value, were from factories in Vietnam and China, respectively. Product cost increases or events causing disruption of imports from Vietnam, China, or other foreign countries, including the imposition of additional import restrictions or taxes, or vendors potentially failing due to political, financial, or regulatory issues, could have an adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. Also see the sections entitled \"Risk FactorsOur business is subject to risks associated with global sourcing and manufacturing," "Risk FactorsRisks associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct, could harm our business,\" and \"Risk FactorsTrade matters may disrupt our supply chain\" in Item 1A of this Form 10-K. Seasonal Business Our business follows a seasonal pattern, with sales peaking during the end-of-year holiday period. 2 Brand Building Our ability to develop and evolve our existing brands is a key to our success. We believe our distinct brands are among our most important assets. With the exception of Intermix, virtually all aspects of brand development, from product design and distribution to marketing, merchandising and shopping environments, are controlled by Gap Inc. employees. With respect to Intermix, we control all aspects of brand development except for product design related to third-party products. We continue to invest in our business and enhance the customer experience through significant investments in our supply chain and omni-channel capabilities, investments in marketing, enhancement of our online shopping sites, remodeling of existing stores, and international expansion. Trademarks and Service Marks Gap, GapKids, babyGap, GapMaternity, GapBody, GapFit, Banana Republic, Old Navy, Athleta, and Intermix trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications, with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. Franchising We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in a number of countries throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. For additional information on risks related to our franchise business, see the sections entitled \"Risk FactorsOur efforts to expand internationally may not be successful\" and \"Risk FactorsOur franchise business is subject to certain risks not directly within our control that could impair the value of our brands\" in Item 1A of this Form 10-K. Inventory The nature of the retail business requires us to carry a significant amount of inventory, especially prior to the peak holiday selling season when we, along with other retailers, generally build up inventory levels. We maintain a large part of our inventory in distribution centers. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes or colors) and we primarily use promotions and markdowns to clear merchandise. Also see the sections entitled \"Risk FactorsWe must successfully gauge apparel trends and changing consumer preferences to succeed\GENERAL INSTRUCTIONS Current Year is the most recent year in the nancial statements provided in the FRAP content folder. Please review that. Use the truncated numbers (that match the statement presentation) in the answer boxes. If those are correct and your answer is wrong, check your math. If that is ne, then it is a format issue, so see the directions. Note that this setup is different than most OWL setups. After you initially "check answer\Please review the general directions in Part B. of this assignment ____ ..... Part c. INCOME STATEMENT ANALYSIS (PROFITABILITY) There are also many, many ways to analyze protability. See Appendix C pg 728-730 for the "Summary of Financial Ratios" One useful approach is to do "vertical analysis" of the income statement. Basically, every line of the income statement is stated as a % of sales revenue. Many "standard" protability ratios, are just key income statement lines restated as a % in this fashion. Gross margin % (gross prot/sales) and Prot % (net income/sales) are common examples of these. I have you compute the Gross Margin % below as it is often an important indicator. Note that gross margin is a number, while gross margin ratio or gross margin percentage is the computation gross margin/sales. There are many other common protability ratios. Return on equity and Return on assets are probably the most commonly used indicators. I have you compute a simplied version of return on equity below. Compute it as net income/total equity. Just use end of year equity in the denominator(usually you compute an average equity). The numerator is often adjusted for interest expense and we will ignore that variation as well. Round all of the computations to 3 decimal p aces. Show all of these as a percentage.(i.e. if your answer is .3475 round then format it as 34.8 (OWL has the % sign so do not add that). GPS Current Year Prior Year 5720* I 15797 = 36.2 % Gross margin Percentage I = % *lf gross margin is not provided on the income statement just compute it as sales -cost of goods sold Return on equity I = % I = % AEO Current Year Prior Year Gross Margin Percentage I = % I = % Return on Equity I = % 218138 I 1051376 = 20.7 % These ratios are also readily available at nancial sites. However, please note that you really need to scan the income statement detail before making decisions based on just the ratios. There may be unusual item in the income statement that can distort the ratios and the comparisons. Some analysts use income before special items (discontinued operation or extraordinary items) to compute the ratios. If other unusual (but not special) items are in the body of the income statement, net income could be adjusted for that, as well. Do not try to do that here, however. Just be aware of the possible benet of that type of analysis. Please review the general directions in Part B. of this assignment _-___ Part D. INCOME STATEMENT ANALYSIS (TREND-HORIZONTAL) Another useful technique is called horizontal analysis (or trend analysis). Basically you compare the same line item of an income statement and compute % changes across time. Again, there are various approaches. You can choose a base year and show all other years as a % of that base. Alternatively, you can compute the change from the prior year- and that is what you will do below forjusttwo lines of the income statement. - Compute % change in net sales as (current sales - prior year sales)lprior year sales - Compute % change in net income as (current net income - prior year net income)lprior year net income Round all of the computations to 3 decimal places. Show all of these as a percentage.(i.e. if your answer is .3475 round then format it as 34.8 (OWL has the % sign so do not add that). If there is a decline in income, use a negative sign for yournal answer. I have done a comparison of the prior year to the year before that in the right hand column. GPS | Current Year Prior Year ' _ 538* I 16435 = -3.9 % % Change In net sales ' I i , % *15797-16435 % Change in net income I / i = i % 442 I 1262 = -21.1 % AEO Current Year Prior Year % Change in net sales '7 I i = i J % 238981 /3232367 = 1.3 % % Change in net income I W W , W I 7 7 7 7 i = 7m '2 % 3:}:11gP/833322 = 171.6 %