The Gap Message Board - Msg: 10479699

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Non-Tech : The Gap

GPS 24.38

+4.9%

Oct 28 3:59 PM EST

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To: Beltropolis Boy who wrote (74)	7/12/1999 11:18:00 PM
From: HRM	Read Replies (2) of 189

<<curious: are you bothered at all by management's use of debt to fuel share buybacks?>> Not really. I see it more as leveraging up the balance sheet as they have grown to lower the overall cost of capital. If used intelligently this can improve shareholder returns. The real key in my mind is if the borrowing is done out of necessity or to take advantage of favorable conditions in the market in order to increase their ability to take advantage of attractive opportunities. The Gap borrowing seems to fall more into the second camp. The $500 million in 10 yr paper was borrowed at 6.9% in the fall of 1997. If my memory serves me correct, corporate spreads were quite low then. The 6.9% was probably only 60 - 75 bp over the 10 yr treasury. So in one respect you could say that was a pretty smart move on their part. The $50 million increase in debt this year was from the Japanese sub. This could have been related to tax or capital planning issues. For example, at times it can be more attractive to raise debt in a foreign sub rather than infusing equity dollars since it can be easier to repatriate the debt. You may have also noted they have a shelf registration for another $500 million of debt (sort of their rainy day fund). Taken together, I read these actions as suggesting they have moved up a notch in their financial and capital planning. And the debt is only 40% of last years cash flow from operations. This suggests that they probably could have accomplished all their objectives without the borrowing, but it would have left them with less flexibility going forward. As long as the overall debt load stays less than 50% of equity I don't think it will impact them unless they are failing to execute their overall plan. Harry

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