Yahoo Finance Gap Inc (GAP) Q2 2024 Earnings Call Transcript Highlights: Strong Sales Growth and Margin Expansion
Net Sales: $3.7 billion, up 5% year-over-year.
Comparable Sales: Up 3% overall.
Old Navy Net Sales: $2.1 billion, up 8% year-over-year.
Gap Brand Net Sales: $766 million, up 1% year-over-year.
Banana Republic Net Sales: $479 million, flat year-over-year.
Athleta Net Sales: $338 million, down 1% year-over-year.
Gross Margin: 42.6%, expanded 500 basis points year-over-year.
Operating Margin: 7.9%, improved 490 basis points year-over-year.
EPS: $0.54, up from $0.32 year-over-year.
Inventory Levels: Down 5% year-over-year.
Cash Balance: $2.1 billion, up 59% year-over-year.
Free Cash Flow: Nearly $400 million year-to-date.
SG&A: $1.3 billion, roughly in line with expectations.
Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Gap Inc (NYSE:GAP) delivered another successful quarter, exceeding financial expectations with net sales up 5% and comps up 3%.
Old Navy posted comps up 5%, marking four consecutive quarters of positive growth.
Gap Inc (NYSE:GAP) expanded gross margin by 500 basis points and delivered an operating income of $293 million, with an operating margin of 7.9%.
EPS increased to $0.54 from $0.32 in the second quarter of 2023.
The company ended the quarter with a strong cash balance of $2.1 billion and generated nearly $400 million in free cash flow.
Negative Points
Athletas comps were down 4% as the brand lapped heavy discounting.
Banana Republic's net sales and comparable sales were flat, indicating ongoing challenges in stabilizing the brand.
The company is facing a fluid global economic environment and uncertain consumer dynamics.
The loss of the 53rd week in fiscal 2024 is expected to negatively impact net sales by approximately $160 million.
SG&A as a percentage of net sales was 34.7%, deleveraging 10 basis points versus last years reported rate.
Q & A Highlights
Q: Can you talk about whether the momentum at Gap brand and Old Navy can continue? And can you address back-to-school trends so far? A: Richard Dickson, CEO: We had another successful quarter, exceeding expectations with net sales up 5%. Old Navy and Gap posted positive comps, demonstrating consistency. Old Navy saw strength in women's categories, denim, dresses, kids, and baby. Gap is building on the success of its linen campaign and new Get Loose campaign. For back-to-school, both Old Navy and Gap launched strong marketing campaigns, with early results showing denim and classic styles performing well.
Q: Can you explain the third-quarter guidance on sales, which seems to be a bit of a slowdown from the second quarter levels? A: Katrina O'Connell, CFO: We remain balanced in our view of the consumer and macroeconomic environment. The second quarter benefited from incremental sales growth due to our credit card agreement. We are also lapping better performance from early reinvigoration efforts at Old Navy. While we expect Athleta to return to positive comps, the magnitude of recovery has a range of outcomes.
Q: Can you elaborate on the structural changes made across merchandising and marketing at Old Navy and Gap that drive sustainable profitable growth? A: Richard Dickson, CEO: We are maintaining financial and operational rigor, reinvigorating our brands, strengthening our platform, and energizing our culture. Old Navy and Gap have shown multiple quarters of positive comps and market share gains. We are also leveraging our new media partner, Omnicom, to drive efficiencies and amplify brand narratives.
Q: What are the largest opportunities to improve margins at Old Navy? A: Katrina O'Connell, CFO: We are focused on inventory management, expanding gross margins, and being prudent about SG&A. Old Navy, as the largest brand, is crucial in this journey. We are running a fundamentally stronger business with better product sell-through at full price and less discounting, which positively impacts margins.
Q: Can you describe the core target demographic and core markets for Gap? A: Richard Dickson, CEO: Gap is a multi-generational brand, focusing on trend-right products and culturally relevant messaging. We are seeing consistent results with net sales up 1% and comps up 3%. Collaborations like Doen and Madhappy are broadening our reach and strengthening cultural relevance.
Q: How should we think about the potential EBIT margin profile of the business? A: Richard Dickson, CEO: We are proving consistent deliverables with 500 basis points of gross margin expansion and 490 basis points of operating margin expansion. We expect to expand gross margins by roughly 200 basis points year-over-year for '24, resulting in EBIT growth in the mid to high 50% range.
Q: What is a comfortable level of cash for Gap Inc. going forward? A: Katrina O'Connell, CFO: We have $2.1 billion in cash, which is a significant increase year-over-year. A minimum cash balance of around $1.2 billion ensures we can service working capital fluctuations and general business volatility. We are focused on balanced capital allocation, including investing in the business and paying attractive dividends.
Q: What is the status of the retail fleet for each division, including remodels and smaller sizes? A: Richard Dickson, CEO: We are optimizing our retail footprint and studying productivity, store experiences, and traffic. We believe in the balance of omnichannel experiences, both bricks-and-mortar and digital. Each brand leader is focused on enhancing store experiences, aesthetics, and service levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
