Gap Q3 Earnings in Line; Lowers View on Soft Sales Trends

The Gap Inc. GPS posted third-quarter fiscal 2015 results, wherein its adjusted earnings of 63 cents a share met the Zacks Consensus Estimate. This marked the company’s third straight quarter of in-line earnings.
 

The Gap Inc. (GPS) - Earnings Surprise | FindTheCompany

Including the impact of strategic actions, the company’s GAAP earnings slumped 23.8% year over year to 61 cents a share. Management highlighted that foreign currency fluctuations reduced the company’s earnings per share growth by approximately 6% during the reported quarter.

Net sales of $3,857 million dropped 2.9% from the year-ago figure and missed the Zacks Consensus Estimate of $3,875.2 million. Shares of the company slipped 1.6% in the after-market session, following the earnings release.

The company’s third-quarter sales included an impact of nearly $100 million from foreign currency translations, primarily due to a weaker Japanese yen and Canadian dollar against the U.S. dollar. On a currency neutral basis, sales for the quarter remained flat year over year.

Results reflected growth for another consecutive quarter at Old Navy. Additionally, the company remains on track to transform its Gap brand.

Comparable-store sales (comps) for the third quarter declined 2%, compared with flat comps in the prior-year quarter. Brand-wise, comps at Gap Global fell 4% compared with a 5% decline in the year-ago period, while comps for Banana Republic Global decreased 12% as against flat comps last year. On the other hand, comps for Old Navy Global rose 4% compared with a 1% increase in the prior-year quarter.

Gross profit declined 9.8% to $1,440 million, with gross margin contracting 290 basis points (bps) to 37.3%. This was attributable to rent and occupancy expenses deleverage, lower merchandise margins and currency headwinds.

Operating income plunged 25.3% to $414 million, while the operating margin shriveled 320 bps to 10.7%, mainly owing to lower gross margin. However, marketing expenses reduced by $34 million to $142 million in the reported quarter.

Financials

Gap ended the quarter with cash and cash equivalents of $1,042 million, long-term debt of $1,331 million, and total shareholders’ equity of $2,609 million. During the first three quarters of fiscal 2015, the company generated cash flow from operations of $734 million and incurred capital expenditures of $505 million.

Management continues to project capital expenditures of approximately $800 million during fiscal 2015, allocated primarily toward enhancing omni-channel and supply chain capabilities.

Gap’s total return to its shareholders year to date amounted to $1.1 billion, via share buybacks and dividend payments. During the reported quarter, the company bought back 6.2 million shares for roughly $200 million, taking its total year-to-date buybacks to $800 million. Further, the company paid a quarterly dividend of 23 cents per share in the quarter.

Also, on Nov 13, the company declared a dividend of 23 cents per share for the fourth quarter of fiscal 2015.

Store Update

In the third quarter, Gap introduced 63 company-operated stores, while it shuttered 26 company-operated stores. Also, it opened 21 franchise stores, while closing 15. Gap ended the quarter with 3,794 outlets in 51 countries, of which 3,346 were company-operated and 448 were franchise.

In fiscal 2015, management intends to remain committed toward store growth, with primary focus on Asia, Athleta and global outlet stores. However, owing to the closure of Gap brand outlets, the company continues to expect its total store count and square footage growth to remain flat in fiscal 2015, compared to last year.

Outlook

The company has been portraying dismal sales trends for a while now, mainly hurt by the intensifying currency headwinds. Further, disappointing performance of its core Gap and Banana Republic Global brands are pressing concerns for the company.  Persistence of these headwinds is likely to dent the top line and weigh on Gap’s overall performance.

Given these factors and port labor delays at the West Coast faced by the company in the first half of the fiscal, management lowered its earnings outlook for fiscal 2015.
 
Gap lowered its fiscal 2015 earnings per share guidance to $2.38–$2.42 from $2.75–$2.80 predicted earlier. This excludes the impact from strategic actions, which include estimated charges of roughly $130–$140 million.

Further, management anticipates operating margin (excluding costs related to strategic actions) for fiscal 2015 to come in at around 10.5%.

Zacks Rank

Currently, Gap carries a Zacks Rank #3 (Hold). Better-ranked stocks in the apparel-shoe industry include American Eagle Outfitters Inc. AEO, with a Zacks Rank #1 (Strong Buy), L Brands, Inc. LB and Genesco Inc. GCO, both carrying a Zacks Rank #2 (Buy).

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