Market Overview

Gap Inc. Reports Second Quarter Results

Share:
  • Reaffirmed Full-Year Earnings Per Share Guidance Range of $2.55 to
    $2.70
  • Delivered Seventh Consecutive Quarter of Positive Comparable Sales
    Growth
  • Distributed $388 Million to Shareholders Through Share Repurchases and
    Dividends Year-to-Date

Gap
Inc.
(NYSE:GPS) today reported second quarter fiscal year 2018
diluted earnings per share of $0.76 compared with second quarter fiscal
year 2017 reported diluted earnings per share of $0.68 or $0.58 on an
adjusted basis. Please see the reconciliation of adjusted diluted
earnings per share, a non-GAAP financial measure, from the GAAP
financial measure in the table at the end of this press release.

The company also reaffirmed its full-year diluted earnings per share
guidance to be in the range of $2.55 to $2.70.

"We delivered our seventh consecutive quarter of positive comparable
sales growth, led by the strength of Old Navy," said Art Peck, president
and chief executive officer, Gap Inc. "Our balanced growth strategy
supports continued growth and improved profitability, and our
investments are focused on leveraging the advantages of our scaled
operating platform and accelerating the impact of our significant data
assets."

"The second quarter played out largely as expected, and we are
reaffirming our guidance on the year," said Teri List-Stoll, executive
vice president and chief financial officer, Gap Inc. "We are pleased
with the meaningful improvement at Banana Republic, and our work to
increase productivity is funding investments in the business to drive
differentiation and continued growth."

Second Quarter 2018 Comparable Sales Results

Due to the 53rd week in fiscal 2017, comparable sales for the
second quarter of fiscal year 2018 are compared with the 13-week period
ended August 5, 2017. On this basis, the company's second quarter
comparable sales increased 2% compared with a 1% increase last year.
Comparable sales by global brand for the second quarter were as follows:

  • Old Navy Global: positive 5% versus positive 5% last year
  • Gap Global: negative 5% versus negative 1% last year
  • Banana Republic Global: positive 2% versus negative 5% last year

Recent Accounting Pronouncement – Revenue Recognition

During the first quarter of fiscal 2018, the company adopted the new
revenue recognition standard, ASC 606. The adoption of this standard has
a significant impact on the presentation of certain line items within
the Consolidated Statements of Income, but does not have a material
impact to operating income, net income or earnings per share. The most
significant presentation changes are the reclassifications from
operating expenses to net sales for revenue sharing associated with the
company's credit card programs and breakage income for our gift cards,
as well as reclassifications from cost of goods sold and occupancy
expenses to net sales for reimbursements of loyalty program discounts
associated with the company's credit card programs.

The company adopted this standard in the first quarter of fiscal 2018,
on a modified retrospective basis. The presentation changes resulted in
an increase of $139 million to net sales, an increase of $44 million to
cost of goods sold and occupancy expenses, and an increase of $94
million to operating expenses for the second quarter of fiscal 2018.
Other changes resulting from the adoption did not have a material impact
on the company's operating income, net income or earnings per share.

In accordance with the company's adoption of the standard on a modified
retrospective basis, financial information prior to fiscal 2018 will not
be recast. The summary below provides financial measures with and
without the presentation changes for revenue sharing and reimbursements
of loyalty program discounts associated with the company's credit card
programs, and breakage income for our gift cards.

For the second quarter ended August 4, 2018:

  • Net sales were $4.1 billion, an increase of 8% compared with last
    year. Excluding the presentation changes from the adoption of the new
    revenue recognition standard, net sales increased 4% compared with
    last year.
    • The translation of foreign currencies into U.S. dollars positively
      impacted the company's net sales for the second quarter of fiscal
      year 2018 by about $23 million1. Second quarter net
      sales details appear in the tables at the end of this press
      release.
  • Gross profit was $1.63 billion, an increase of 10% compared with last
    year. Excluding the impact of presentation changes from the adoption
    of the new revenue recognition standard, gross profit increased about
    4% compared with last year.
  • Gross margin was 39.8%, an increase of 90 basis points compared with
    last year. Excluding the impact of presentation changes from the
    adoption of the new revenue recognition standard, gross margin was
    38.8%, a decrease of 10 basis points compared with last year, largely
    due to Gap Brand.
  • Operating margin was 9.7%, a decrease of 220 basis points compared
    with operating margin of 11.9% last year. Excluding the impact of
    presentation changes from the adoption of the new revenue recognition
    standard, operating margin was 10.1%, a decrease of 10 basis points
    compared with adjusted operating margin of 10.2% last year. Please see
    the reconciliation of adjusted operating margin, a non-GAAP financial
    measure, from the GAAP financial measure in the tables at the end of
    this press release.
  • The effective tax rate was 23.5% for the second quarter of fiscal year
    2018. The lower second quarter tax rate primarily reflects the
    benefits of the enactment of U.S. Tax Cuts and Jobs Act of 2017
    ("TCJA"), as well as certain immaterial adjustments to the provisional
    estimate related to the enactment of TCJA in fiscal year 2017. The
    company continues to analyze TCJA and provisional amounts will be
    finalized in fiscal year 2018.
  • Diluted earnings per share were $0.76 compared with adjusted diluted
    earnings per share of $0.58 last year. Please see the reconciliation
    of adjusted diluted earnings per share, a non-GAAP financial measure,
    from the GAAP financial measure in the table at the end of this press
    release.
    • The company noted that foreign currency fluctuations positively
      impacted earnings per share for the second quarter of fiscal year
      2018 by an estimated $0.02, in line with expectations. 2
  • During the quarter, the company repurchased 3.2 million shares for
    $100 million and ended the second quarter of fiscal 2018 with 385
    million shares outstanding.
  • The company paid a dividend of $0.2425 per share during the second
    quarter of fiscal year 2018, an increase of over 5% compared with last
    year. In addition, on August 17, 2018, the company announced that its
    Board of Directors authorized a third quarter dividend of $0.2425 per
    share.

The company ended the second quarter of fiscal year 2018 with $1.6
billion in cash, cash equivalents, and short-term investments.
Year-to-date free cash flow, defined as net cash from operating
activities less purchases of property and equipment, was $220 million,
compared to second quarter 2017 year-to-date free cash flow of $270
million, which included approximately $59 million in insurance proceeds
related to loss on property and equipment due to the Fishkill fire.
Please see the reconciliation of free cash flow, a non-GAAP financial
measure, from the GAAP financial measure in the tables at the end of
this press release.

Fiscal year-to-date 2018 capital expenditures were $326 million.

The company ended the second quarter of fiscal year 2018 with 3,626
store locations in 43 countries, of which 3,187 were company-operated.

2018 Outlook

Earnings per Share

The company reaffirmed its full-year diluted earnings per share guidance
to be in the range of $2.55 to $2.70.

Comparable Sales

The company continues to expect comparable sales for fiscal year 2018 to
be flat to up slightly.

Effective Tax Rate

The company continues to expect its fiscal year 2018 effective tax rate
to be about 26%. The company continues to analyze TCJA and provisional
amounts will be finalized in fiscal year 2018.

Share Repurchases

The company continues to expect to repurchase approximately $100 million
per quarter through the end of fiscal year 2018.

Capital Expenditures

The company continues to expect capital spending to be approximately
$800 million for fiscal year 2018, with a continued focus on
transformative infrastructure investments to support its omni-channel
and digital strategies, such as information technology and supply chain.

Real Estate

The company continues to expect to open about 25 company-operated
stores, net of closures and repositions in fiscal year 2018. In line
with its strategy, the company expects store openings to be focused on
Athleta and Old Navy locations, with closures weighted toward Gap brand
and Banana Republic.

Webcast and Conference Call Information

Tina Romani, Senior Director of Investor Relations at Gap Inc., will
host a summary of the company's second quarter fiscal year 2018 results
during a conference call and webcast from approximately 2:00 p.m. to
3:00 p.m. Pacific Time today. Ms. Romani will be joined by Art Peck, Gap
Inc. president and chief executive officer, and Teri List-Stoll, Gap
Inc. executive vice president and chief financial officer.

The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 6111933). International callers
may dial 1-323-794-2078. The webcast can be accessed at www.gapinc.com.

Forward-Looking Statements

This press release and related conference call and webcast contain
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 statements regarding the
following: earnings per share; the impact of the U.S. Tax Cuts and Jobs
Act of 2017; comparable sales for fiscal year 2018; effective tax rate
for fiscal year 2018; share repurchases in fiscal year 2018; capital
expenditures for fiscal year 2018, including transformative
infrastructure investments; store openings, net of closures and
repositions, in fiscal year 2018; impact of improving profitability of
our specialty fleet, as well as our productivity initiative; online
sales for fiscal year 2018; margin pressure at Gap brand; SG&A savings
sufficient to fund investments to support continued growth, including
digital and customer; the spread between comparable sales and sales
growth in fiscal year 2018; SG&A as a percent of net sales; the impact
on fiscal year 2018 of the 53rd week in fiscal 2017; margin expansion;
SG&A deleverage in the third quarter, and SG&A leverage in the fourth
quarter, of fiscal year 2018; the impact of Old Navy store openings in
fiscal year 2018; roll-out of In-Stock, On-Shelf app; and continued
improvement at Gap brand through fiscal year 2018.

Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause the
company's actual results to differ materially from those in the
forward-looking statements. These factors include, without limitation,
the following risks, any of which could have an adverse effect on the
company's financial condition, results of operations, and reputation:
the risk that additional information may arise during the company's
close process or as a result of subsequent events that would require the
company to make adjustments to its financial information; the risk that
the company or its franchisees will be unsuccessful in gauging apparel
trends and changing consumer preferences; the highly competitive nature
of the company's business in the United States and internationally; the
risk of failure to maintain, enhance and protect the company's brand
image; the risk of failure to attract and retain key personnel, or
effectively manage succession; the risk that the company's investments
in customer, digital, and omni-channel shopping initiatives may not
deliver the results the company anticipates; the risk if the company is
unable to manage its inventory effectively; the risk that the company is
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 the company's security measures; the risk that a
failure of, or updates or changes to, the company's information
technology systems may disrupt its operations; the risk that trade
matters could increase the cost or reduce the supply of apparel
available to the company; the risk of changes in the regulatory or
administrative landscape; the risks to the company's business, including
its costs and supply chain, associated with global sourcing and
manufacturing; the risk of changes in global economic conditions or
consumer spending patterns; the risks to the company's efforts to expand
internationally, including its ability to operate in regions where it
has less experience; the risks to the company's reputation or operations
associated with importing merchandise from foreign countries, including
failure of the company's vendors to adhere to its Code of Vendor
Conduct; the risk that the company's franchisees' operation of franchise
stores is not directly within the company's control and could impair the
value of its brands; the risk that the company or its 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 of foreign currency exchange rate
fluctuations; the risk that comparable sales and margins will experience
fluctuations; the risk that changes in the company's credit profile or
deterioration in market conditions may limit the company's access to the
capital markets; the risk of natural disasters, public health crises,
political crises, negative global climate patterns, or other
catastrophic events; the risk of reductions in income and cash flow from
the company's credit card agreement related to its private label and
co-branded credit cards; the risk that the adoption of new accounting
pronouncements will impact future results; the risk that the company
does not repurchase some or all of the shares it anticipates purchasing
pursuant to its repurchase program; and the risk that the company will
not be successful in defending various proceedings, lawsuits, disputes,
and claims.

Additional information regarding factors that could cause results to
differ can be found in the company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2018, as well as the company's subsequent
filings with the Securities and Exchange Commission.

These forward-looking statements are based on information as of August
23, 2018. The company assumes no obligation to publicly update or revise
its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will
not be realized.

About Gap Inc.

Gap Inc. is a leading global retailer offering clothing, accessories,
and personal care products for men, women, and children under the Old
Navy, Gap, Banana Republic and Athleta brands. Fiscal year 2017 net
sales were $15.9 billion. Gap Inc. products are available for purchase
in more than 90 countries worldwide through company-operated stores,
franchise stores, and e-commerce sites. For more information, please
visit www.gapinc.com.

1 The translation impact on net sales is calculated by
applying foreign exchange rates applicable for the second quarter of
fiscal year 2018 to net sales for the second quarter of fiscal year
2017. This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate fluctuations.

2 In estimating the earnings per share impact from foreign
currency exchange rate fluctuations, the company estimates current gross
margins using the appropriate prior year rates (including the impact of
merchandise-related hedges), translates current period foreign earnings
at prior year rates, and excludes the year-over-year earnings impact of
balance sheet remeasurement and gains or losses from
non-merchandise-related foreign currency hedges. This is done in order
to enhance the visibility of business results excluding the direct
impact of foreign currency exchange rate fluctuations.

 
The Gap, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

    August 4,     July 29,

($ in millions)

2018   2017
ASSETS
Current assets:
Cash and cash equivalents $ 1,322 $ 1,609
Short-term investments 286 -
Merchandise inventory 2,202 2,051
Other current assets   780       598
Total current assets 4,590 4,258
Property and equipment, net 2,832 2,643
Other long-term assets   588       716
Total assets $ 8,010     $ 7,617
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,297 $ 1,230
Accrued expenses and other current liabilities 1,026 1,062
Income taxes payable   18       107
Total current liabilities   2,341       2,399
Long-term liabilities:
Long-term debt 1,249 1,248
Lease incentives and other long-term liabilities   1,080       1,025
Total long-term liabilities   2,329       2,273
Total stockholders' equity   3,340       2,945
Total liabilities and stockholders' equity $ 8,010     $ 7,617
 
 
The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
 
    13 Weeks Ended     26 Weeks Ended
($ and shares in millions except per share amounts) August 4, 2018     July 29, 2017 August 4, 2018     July 29, 2017
Net sales $ 4,085 $ 3,799 $ 7,868 $ 7,239
Cost of goods sold and occupancy expenses   2,458   2,320   4,814   4,457
Gross profit 1,627 1,479 3,054 2,782
Operating expenses   1,229   1,028   2,427   2,077
Operating income 398 451 627 705
Interest, net   10   12   20   28
Income before income taxes 388 439 607 677
Income taxes   91   168   146   263
Net income $ 297     $ 271     $ 461     $ 414
 
Weighted-average number of shares - basic 387 395 388 397
Weighted-average number of shares - diluted 390 396 391 398
 
Earnings per share - basic $ 0.77 $ 0.69 $ 1.19 $ 1.04
Earnings per share - diluted $ 0.76 $ 0.68 $ 1.18 $ 1.04
 
Cash dividends declared and paid per share $ 0.2425 $ 0.23 $ 0.485 $ 0.46
 
 
The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
    26 Weeks Ended
August 4,     July 29,
($ in millions) 2018 2017 (b)
Cash flows from operating activities:
Net income $ 461 $ 414
Depreciation and amortization (a) 251 249
Change in merchandise inventory (224 ) (203 )
Other, net   58     26  
Net cash provided by operating activities   546     486  
 
Cash flows from investing activities:
Purchases of property and equipment (326 ) (275 )
Insurance proceeds related to loss on property and equipment - 59
Purchases of short-term investments (322 ) -
Sales and maturities of short-term investments 36 -
Other   (6 )   -  
Net cash used for investing activities   (618 )   (216 )
 
Cash flows from financing activities:
Payments of short-term debt - (67 )
Proceeds from issuances under share-based compensation plans 33 14
Withholding tax payments related to vesting of stock units (20 ) (14 )
Repurchases of common stock (200 ) (200 )
Cash dividends paid (188 ) (182 )
Other   (1 )   -  
Net cash used for financing activities   (376 )   (449 )
 
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
  (11 )   8  
Net decrease in cash, cash equivalents, and restricted cash (459 ) (171 )
Cash, cash equivalents, and restricted cash at beginning of period   1,799     1,797  
Cash, cash equivalents, and restricted cash at end of period $ 1,340   $ 1,626  
____________________
(a) Depreciation and amortization is net of amortization of lease
incentives.
(b)

The prior period amounts reflect the retrospective adoption of ASU
2016-18, Statement of Cash Flows: Restricted Cash, on February 4,
2018. As a result of the adoption of ASU 2016-18, restricted cash
of $18 million and $17 million recorded in other current assets
and other long-term assets on the Condensed Consolidated Balance
Sheets have been included with cash and cash equivalents above for
the twenty-six weeks ended August 4, 2018 and July 29, 2017,
respectively.

 
The Gap, Inc.
NON-GAAP FINANCIAL MEASURES
UNAUDITED
 
FREE CASH FLOW
 
Free cash flow is a non-GAAP financial measure. We believe free cash
flow is an important metric because it represents a measure of how
much cash a company has available for discretionary and
non-discretionary items after the deduction of capital expenditures,
net of insurance proceeds related to loss on property and equipment,
as we require regular capital expenditures to build and maintain
stores and purchase new equipment to improve our business. We use
this metric internally, as we believe our sustained ability to
generate free cash flow is an important driver of value creation.
However, this non-GAAP financial measure is not intended to
supersede or replace our GAAP results.
 
   

26 Weeks Ended

August 4,     July 29,
($ in millions) 2018 2017
Net cash provided by operating activities $ 546 $ 486
Less: Purchases of property and equipment (326 ) (275 )
Add: Insurance proceeds related to loss on property and equipment (a)   -     59  
Free cash flow $ 220       $ 270  
 
____________________
(a) Represents insurance proceeds related to loss on property and
equipment from the fire that occurred at a company-owned
distribution center campus in Fishkill, New York on August 29, 2016.
 
 

The Gap, Inc.

NON-GAAP FINANCIAL MEASURES

UNAUDITED

 

ADJUSTED INCOME STATEMENT METRICS FOR THE SECOND QUARTER OF
FISCAL YEAR 2017

 
The following adjusted income statement metrics are non-GAAP
financial measures. These measures are provided to enhance
visibility into the Company's underlying results for the period
excluding the impact of the gain from insurance proceeds in the
second quarter of fiscal year 2017. Management believes the adjusted
metrics are useful for the assessment of ongoing operations as we
believe the adjusted items are not indicative of our ongoing
operations due to the nature of the adjustments, and management
believes that the presentation of adjusted financial information
provides additional information to investors to facilitate the
comparison of results against prior years. However, these non-GAAP
financial measures are not intended to supersede or replace the GAAP
measures.
 
($ in millions)              
13 Weeks Ended July 29, 2017

Operating
Expenses

Operating
Expenses as a %
of Net Sales
(b)

Operating
Income

Operating
Income as a %
of Net Sales

Income
Taxes

Net Income

Earnings per
Share - Diluted

GAAP metrics, as reported $ 1,028 27.1 % $ 451 11.9 % $ 168 $ 271 $ 0.68
Adjustment for gain from insurance proceeds (a)   64 1.7 %   (64 ) (1.7 )%   (24 )   (40 )   (0.10 )
Non-GAAP metrics $ 1,092 28.7 % $ 387   10.2 % $ 144   $ 231   $ 0.58  
 

____________________

 
(a) Represents the gain from insurance proceeds related to the fire
that occurred in one of the buildings at a company-owned
distribution center campus in Fishkill, New York. The tax impact of
the gain from insurance proceeds is calculated at the reported
effective tax rate for the thirteen weeks ended July 29, 2017.
(b) Operating expenses as a percentage of net sales was computed
individually for each line item; therefore, the sum of the
percentages may not equal the total.
 
The Gap, Inc.
NET SALES RESULTS
UNAUDITED
 
The following table details the Company's second quarter net sales
(unaudited):
 
($ in millions)             Banana            
Old Navy

Republic

Percentage of

13 Weeks Ended August 4, 2018 (1)

Global Gap Global

Global

Other (3) Total Net Sales
U.S. (2) $ 1,816 $ 728 $ 514 $ 264 $ 3,322 82 %
Canada 151 94 58 - 303 7 %
Europe - 145 3 - 148 4 %
Asia 11 229 22 - 262 6 %
Other regions   14   29   7   -   50 1 %
Total $ 1,992 $ 1,225 $ 604 $ 264 $ 4,085 100 %
 
($ in millions) Banana
Old Navy Republic Percentage of
13 Weeks Ended July 29, 2017 (1) Global Gap Global Global Other (3) Total Net Sales
U.S. (2) $ 1,596 $ 719 $ 492 $ 231 $ 3,038 80 %
Canada 133 91 54 - 278 7 %
Europe - 148 3 - 151 4 %
Asia 12 252 24 - 288 8 %
Other regions   16   22   6   -   44 1 %
Total $ 1,757 $ 1,232 $ 579 $ 231 $ 3,799 100 %
 
____________________
(1) Net sales for the thirteen weeks ended August 4, 2018, reflect the
adoption of the new revenue recognition standard. Prior period
amounts have not been restated and continue to be reported under
accounting standards in effect for those periods.
(2) U.S. includes the United States, Puerto Rico, and Guam.
(3) Primarily consists of net sales for the Athleta and Intermix brands.
 
 
The Gap, Inc.
REAL ESTATE
 
Store count, openings, closings, and square footage for our stores
are as follows:
 
    13 Weeks Ended August 4, 2018
Store Locations     Store Locations     Store Locations     Store Locations     Square Feet
Beginning of Q2 Opened Closed End of Q2 (millions)
Old Navy North America 1,074 21 1 1,094 18.1
Old Navy Asia 14 - - 14 0.2
Gap North America 806 1 7 800 8.2
Gap Asia 320 1 2 319 3.1
Gap Europe 155 2 2 155 1.3
Banana Republic North America 572 2 4 570 4.8
Banana Republic Asia 45 - 1 44 0.2
Athleta North America 147 7 - 154 0.6
Intermix North America 38 - 1 37 0.1
Company-operated stores total 3,171 34 18 3,187 36.6
Franchise 446 11 18 439 N/A
Total 3,617 45 36 3,626 36.6
 

View Comments and Join the Discussion!