Gap Q1 Earnings Beat Ests, Fall Y/Y - Analyst Blog

Battered by higher cost of goods sold and occupancy expenses along with unfavorable foreign currency translations, The Gap, Inc.'s GPS earnings per share for first-quarter fiscal 2014 fell drastically from the year-ago comparable period level.

The company's quarterly earnings came in at 58 cents per share, down 18.3% from the year-ago comparable quarter earnings of 71 cents. However, it came a penny ahead of the Zacks Consensus Estimate of 57 cents per share.

However, net sales of the company inched up 1.2% to $1,774 million despite the severe winter weather conditions in the beginning of the quarter, slow start of the spring selling season and unfavorable foreign exchange rates, thanks to the company's strategic initiatives, including the enhancement of omni-channel capabilities, global growth and effective inventory management, which helped it to fight against the aforementioned challenges. However, the top-line was marginally below the Zacks Consensus Estimate of $1,779 million.

On a constant currency basis, the company's net sales would have increased 2%. With continued focus on developing its omni-channel network, Gap's quarterly online sales came in at $575 million, up 13% from the prior-year quarter.

During the quarter, Gap's comparable-store sales (comps) inched down 1% as against a 2% rise registered in the year-ago quarter. Global brand-wise, comps at Gap Global witnessed a 5% fall versus an increase of 3% in the prior-year period. Banana Republic Global's comps for the quarter declined 1% as against flat comps last year. Moreover, comps at the company's Old Navy Global stores inched up 1% compared with a 3% rise in the year-ago comparable quarter.

The company reported a 5.1% fall in its quarterly gross profit to $1,466 million with the gross margin contracting 260 basis points (bps) to 38.8% primarily due to a decline of 230 bps in merchandise margins. Operating income during the quarter dipped 16.4% to $443 million, leading the operating margin to contract 250 bps to 11.7%. The company witnessed an improvement of 10 bps in the operating expenses as a percentage of sales primarily due to its effective cost management.

Financials

This apparel and shoe retailer ended the quarter with cash and cash equivalents of $1,544 million, long-term debt at $1,369 million and total shareholders' equity of $3,036 million. Moreover, the company generated a free cash flow of $351 million and operating cash flow of $513 million, while it incurred $162 million as capital expenditure in the first quarter. Gap expects to spend $750 million as capital expenditures in 2014, highlighting the company's focus on investing in its strategic plans.

Dividend & Share Repurchase

During the first quarter, Gap paid its shareholders a cash dividend of 22 cents a share and bought back shares worth $219 million. Also, from the company's $1 billion share repurchase program authorized in Nov 2013, shares worth $443 were still remaining at the end of the quarter.

On May 20, the company's board of directors authorized a dividend of 22 cents per share for the second quarter.

Store Update

During the quarter, Gap introduced its first-ever Old Navy company operated store and e-commerce site in Mainland China. Apart from this it also opened its first-ever Old Navy franchise-operated store in Philippines and intends to open four more in the remaining period of fiscal 2014. Gap also made its first appearance in Taiwan during the quarter.

In the U.S., by opening six new Athleta stores, Gap is on track to achieve its target of 100 Athleta stores by the end of fiscal 2014.

In total, Gap opened 31 new stores, while it shut down 16 stores during the quarter. This brings the company's total store count to 3,565 across 48 countries with 3,179 company-operated and 386 franchise outlets, increasing its company operated floor space by 0.5% year over year.

Going forward in fiscal 2014, Gap intends to open 185 company-operated outlets, barring relocations, with primary focus on China, Old Navy in Japan, Athleta and global outlet stores. It also plans to shut down 70 company-operated outlets, net of relocations. Following this, the company expects net square footage to increase by 2.5% next year.

In 2014, the company plans to open 30 Gap outlets in China and 25 Old Navy stores in Japan. Also, the company anticipates its franchise partners to add 75 new outlets, covering all brands, including Banana Republic, Old Navy and Gap.

Outlook

Gap reaffirmed its earnings guidance range of $2.90–$2.95 per share for fiscal 2014. The current Zacks Consensus Estimate for 2014 stands at $2.95 per share.

Other Stocks to Consider

Gap currently holds a Zacks Rank #3 (Hold). Other better-ranked stocks in the retail sector include Citi Trends, Inc. CTRN with a Zacks Rank #1 (Strong Buy), along with Foot Locker, Inc. FL and American Apparel, Inc. APP both carrying a Zacks Rank #2 (Buy).