Gap Inc. (NYSE: GPS) today reported diluted earnings per share
of $0.44 on a reported basis, and $0.63 on an adjusted basis,
excluding costs associated with the company’s planned separation,
tax impacts related to new guidance regarding the Tax Cuts and Jobs
Act of 2017, and costs related to the previously announced
specialty fleet restructuring. 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.
“We are operating in a challenging environment, but I remain
confident in the strength of our brands and our plans for the
future as we work to launch two independent, public companies,”
said Art Peck, president and chief executive officer, Gap Inc.
“Heading into the second half of the year, we remain highly focused
on inventory and expense discipline to improve results, as well as
delivering exceptional product supported by powerful marketing to
drive customer engagement.”
Second Quarter 2019 Comparable Sales Results
The company’s second quarter fiscal year 2019 comparable sales
were down 4% compared with a 2% increase last year. Comparable
sales by global brand for the second quarter were as follows:
- Old Navy Global: negative 5% versus positive 5% last
year
- Gap Global: negative 7% versus negative 5% last
year
- Banana Republic Global: negative 3% versus positive 2%
last year
For the second quarter ended August 3, 2019:
- Net sales were $4.0 billion, a decrease of 2% compared with
last year.
- The translation of foreign currencies into U.S. dollars
negatively impacted the company’s net sales for the second quarter
of fiscal year 2019 by about $22 million.1
- Second quarter net sales details appear in the tables at the
end of this press release.
- Gross profit was $1.56 billion, a decrease of 4% compared with
last year.
- Gross margin was 38.9%, a decrease of 90 basis points compared
with last year.
- Operating margin was 7.0%, a decrease of 270 basis points
compared with last year. Adjusted operating margin was 8.3%, a
decrease of 140 basis points compared with 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 38.0% for the second quarter of
fiscal year 2019. The second quarter effective tax rate reflects
adjustments to our fiscal year 2017 tax liability for additional
guidance issued by the U.S. Treasury Department regarding the U.S.
Tax Cuts and Jobs Act of 2017 (“TCJA”) and non-cash tax impacts
related to restructuring charges incurred in the quarter. These
items resulted in an increase to the effective tax rate of
approximately 12 percentage points.
- Diluted earnings per share were $0.44 compared to $0.76 last
year. Adjusted diluted earnings per share were $0.63 for the second
quarter of fiscal year 2019. 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 negatively
impacted earnings per share for the second quarter of fiscal year
2019 by an estimated $0.01.2
- The company ended the second quarter of fiscal year 2019 with
$2.33 billion in merchandise inventory, up about 6% year over year.
The company noted that the increase in merchandise inventory was
impacted by increases in in-transit times, the acquisition of Janie
and Jack, which occurred in the first quarter of fiscal year 2019,
and net store growth year over year.
- During the quarter, the company repurchased 2.7 million shares
for $50 million and ended the second quarter of fiscal year 2019
with 376 million shares outstanding.
- The company paid a dividend of $0.2425 per share during the
second quarter of fiscal year 2019. In addition, on August 14,
2019, 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 2019 with
$1.5 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 $259
million compared with $220 million last year. 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 2019 capital expenditures were $324
million.
The company ended the second quarter of fiscal year 2019 with
3,877 store locations in 44 countries, of which 3,356 were
company-operated.
2019 Outlook
Earnings per Share The company updated its reported diluted
earnings per share guidance for fiscal year 2019 to be in the range
of $1.88 to $2.08. The company affirmed its fiscal year 2019
adjusted diluted earnings per share guidance range of $2.05 to
$2.15.
Comparable Sales The company continues to expect comparable
sales for fiscal year 2019 to be down low single digits.
Effective Tax Rate The company now expects its reported fiscal
year 2019 effective tax rate to be about 30%. Excluding the current
quarter adjustments to our fiscal year 2017 tax liability for
additional tax reform guidance and certain non-cash tax impacts
related to expected restructuring charges, the company continues to
expect its adjusted fiscal year 2019 effective tax rate to be about
26%.
Share Repurchases The company continues to expect to repurchase
approximately $50 million per quarter through the end of fiscal
year 2019.
Capital Expenditures The company continues to expect capital
spending to be approximately $675 million for fiscal year 2019,
which includes about $100 million of expansion costs related to a
headquarters building and a buildout of its Ohio distribution
center. The company noted that it is assessing the amount of
capital spending that will be needed to execute its planned
separation and noted its capital expenditures guidance does not
include separation-related capital spend.
Real Estate The company continues to expect to close about 30
company-operated stores, net of openings and repositions in fiscal
year 2019. This guidance also includes about 130 closures related
to the Gap brand fleet restructuring, the majority of which are
expected to close in the fourth quarter of fiscal 2019. The company
continues to expect store openings to be focused on Old Navy,
Athleta and Gap China locations.
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
2019 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: 210830). 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 for fiscal year 2019; comparable
sales for fiscal year 2019; effective tax rate for fiscal year
2019; share repurchases per quarter through fiscal year 2019;
capital expenditures for fiscal year 2019; store openings and
closings, net of closures and repositions, and weighting by brand
in fiscal year 2019; inventory levels in the back half of fiscal
year 2019; impact of foreign exchange; inventory growth versus net
sales growth; impact of improved inventory allocations based on
channel demand and localization; capital investments needed to
facilitate the separation transaction; restructuring related costs,
including costs related to specialty store closures, in fiscal year
2019; costs associated with preparing for and executing the
separation transaction; and gross margin trends in the back half of
fiscal year 2019.
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 risks associated with our plan to
separate into two independent publicly-traded companies, including
that the separation may not be completed in accordance with the
expected plans or anticipated timeframe, or at all; the risk that
our plan to separate into two publicly-traded companies may not
achieve some or all of the anticipated benefits; 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
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 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 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 arrangement 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 2, 2019, 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 22, 2019. 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, Athleta,
Intermix, Janie and Jack, and Hill City brands. Fiscal year 2018
net sales were $16.6 billion. Gap Inc. products are available for
purchase in more than 90 countries worldwide through
company-operated stores, franchise stores, and e-commerce sites.
For more information, please visit www.gapinc.com.
1 The translation impact on net sales is calculated by applying
foreign exchange rates applicable for the second quarter of fiscal
year 2019 to net sales for the second quarter of fiscal year 2018.
This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate
fluctuations.
2 In estimating the earnings per share impact from foreign
currency exchange rate fluctuations, the company estimates current
gross margins using the appropriate prior year rates (including the
impact of merchandise-related hedges), translates current period
foreign earnings at prior year rates, and excludes the
year-over-year earnings impact of balance sheet remeasurement and
gains or losses from non-merchandise-related foreign currency
hedges. This is done in order to enhance the visibility of business
results excluding the direct impact of foreign currency exchange
rate fluctuations.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED ($ in millions) August 3,2019
August 4,2018 ASSETS Current assets: Cash and cash
equivalents
$
1,177
$
1,322
Short-term investments
294
286
Merchandise inventory
2,326
2,202
Other current assets
770
780
Total current assets
4,567
4,590
Property and equipment, net
3,141
2,832
Operating lease assets
5,807
-
Other long-term assets
528
588
Total assets
$
14,043
$
8,010
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable
$
1,246
$
1,297
Accrued expenses and other current liabilities
908
1,026
Current portion of operating lease liabilities
946
-
Income taxes payable
34
18
Total current liabilities
3,134
2,341
Long-term liabilities: Long-term debt
1,249
1,249
Long-term operating lease liabilities
5,644
-
Lease incentives and other long-term liabilities (a)
391
1,080
Total long-term liabilities
7,284
2,329
Total stockholders' equity
3,625
3,340
Total liabilities and stockholders' equity
$
14,043
$
8,010
____________________ (a) Beginning in fiscal 2019, lease incentives
and other long-term liabilities no longer reflects lease incentives
due to the adoption of the new lease accounting standard.
The
Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED 13 Weeks Ended 26 Weeks Ended
($ and shares in millions except per share amounts)
August 3,2019 August 4,2018 August 3,2019
August 4,2018 Net sales
$
4,005
$
4,085
$
7,711
$
7,868
Cost of goods sold and occupancy expenses
2,449
2,458
4,811
4,814
Gross profit
1,556
1,627
2,900
3,054
Operating expenses
1,274
1,229
2,302
2,427
Operating income
282
398
598
627
Interest, net
11
10
25
20
Income before income taxes
271
388
573
607
Income taxes
103
91
178
146
Net income
$
168
$
297
$
395
$
461
Weighted-average number of shares - basic
378
387
378
388
Weighted-average number of shares - diluted
379
390
380
391
Earnings per share - basic
$
0.44
$
0.77
$
1.04
$
1.19
Earnings per share - diluted
$
0.44
$
0.76
$
1.04
$
1.18
Cash dividends declared and paid per share
$
0.2425
$
0.2425
$
0.485
$
0.485
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS UNAUDITED 26 Weeks Ended ($
in millions) August 3,2019 (b) August 4,2018 (b)
Cash flows from operating activities: Net income
$
395
$
461
Depreciation and amortization (a)
277
251
Gain on sale of building
(191
)
-
Change in merchandise inventory
(166
)
(224
)
Other, net
268
58
Net cash provided by operating activities
583
546
Cash flows from investing activities: Purchases of property
and equipment
(324
)
(326
)
Purchase of building
(343
)
-
Purchases of short-term investments
(150
)
(322
)
Proceeds from sales and maturities of short-term investments
146
36
Proceeds from sale of building
220
-
Purchase of Janie and Jack
(69
)
-
Other
-
(6
)
Net cash used for investing activities
(520
)
(618
)
Cash flows from financing activities: Proceeds from
issuances under share-based compensation plans
17
33
Withholding tax payments related to vesting of stock units
(20
)
(20
)
Repurchases of common stock
(100
)
(200
)
Cash dividends paid
(183
)
(188
)
Other
-
(1
)
Net cash used for financing activities
(286
)
(376
)
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
(2
)
(11
)
Net decrease in cash, cash equivalents, and restricted cash
(225
)
(459
)
Cash, cash equivalents, and restricted cash at beginning of period
1,420
1,799
Cash, cash equivalents, and restricted cash at end of period
$
1,195
$
1,340
____________________ (a) Fiscal 2018 depreciation and amortization
is net of amortization of lease incentives. Beginning in fiscal
2019, amortization of lease incentives is no longer reflected due
to the adoption of the new lease accounting standard. (b) For the
twenty-six weeks ended August 3, 2019 and August 4, 2018,
respectively, total cash, cash equivalents, and restricted cash
includes $18 million of restricted cash primarily recorded in other
current assets and long-term assets on the Condensed Consolidated
Balance Sheets.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED FREE CASH FLOW
Free cash flow is a non-GAAP financial measure. We believe free
cash flow is an important metric because it represents a measure of
how much cash a company has available for discretionary and
non-discretionary items after the deduction of capital expenditures
as we require regular capital expenditures to build and maintain
stores and purchase new equipment to improve our business. We use
this metric internally, as we believe our sustained ability to
generate free cash flow is an important driver of value creation.
However, this non-GAAP financial measure is not intended to
supersede or replace our GAAP results.
26 Weeks Ended
($ in millions) August 3,2019 August 4,2018
Net cash provided by operating activities
$
583
$
546
Less: Purchases of property and equipment (a)
(324
)
(326
)
Free cash flow
$
259
$
220
____________________ (a) Excludes purchase of building in the first
quarter of fiscal 2019.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED ADJUSTED INCOME STATEMENT
METRICS FOR THE SECOND QUARTER OF FISCAL YEAR 2019 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
impacts of separation-related costs, specialty fleet restructuring
costs, and the impact of an adjustment to our fiscal 2017 tax
liability for additional guidance issued by the U.S. Treasury
Department regarding the TCJA. Management believes the adjusted
metrics are useful for the assessment of ongoing operations as we
believe the adjusted items are not part 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 August 3, 2019
OperatingExpenses OperatingExpenses as a %of Net Sales
(d) OperatingIncome OperatingIncome as a %of Net
Sales (d) IncomeTaxes NetIncome Earnings
perShare -Diluted GAAP metrics, as reported
$ 1,274
31.8%
$ 282
7.0%
$ 103
$ 168
$ 0.44
Adjustments for: Separation-related costs (a)
(38)
(0.9)%
38
0.9%
9
29
0.08
Specialty fleet restructuring costs (b)
(14)
(0.3)%
14
0.3%
3
11
0.03
U.S. federal tax reform adjustment (c)
-
0.0%
-
0.0%
(30)
30
0.08
Non-GAAP metrics
$ 1,222
30.5%
$ 334
8.3%
$ 85
$ 238
$ 0.63
____________________ (a) Represents the impact of costs related to
the planned Old Navy spin-off transaction. These costs primarily
consist of external adviser and consulting fees related to the
separation. (b) Represents the impact of costs related to
previously announced plans to restructure the specialty fleet and
revitalize the Gap brand. These costs are expected to become more
significant throughout the fiscal year and primarily include lease
and employee-related costs. (c) Represents the impact of an
adjustment to our fiscal 2017 tax liability for additional guidance
issued by the U.S. Treasury Department regarding the TCJA. (d)
Operating expense and operating income as a percentage of net sales
were computed individually for each line item; therefore, the sum
of the percentages may not equal the total.
The Gap, Inc.
NON-GAAP FINANCIAL MEASURES UNAUDITED
EXPECTED ADJUSTED EARNINGS PER SHARE FOR FISCAL YEAR 2019
Expected adjusted diluted earnings per share is a non-GAAP
financial measure. Expected adjusted diluted earnings per share for
fiscal year 2019 is provided to enhance visibility into the
Company's expected underlying results for the period excluding the
estimated impact of specialty fleet restructuring costs and related
tax, separation-related costs, a gain on the sale of a building,
and the impact of an adjustment to our fiscal 2017 tax liability
for additional guidance issued by the U.S. Treasury Department
regarding the TCJA. However, this non-GAAP financial measure is not
intended to supersede or replace the GAAP measure.
52
Weeks EndingFebruary 1, 2020 Low End High End
Expected earnings per share - diluted
$
1.88
$
2.08
Add: Estimated impact of specialty fleet restructuring costs (a)
0.14
0.14
Add: Estimated incremental tax on restructuring costs (b)
0.02
0.02
Add: Estimated impact of separation-related costs (c)
0.30
0.20
Less: Gain on sale of building (d)
(0.37
)
(0.37
)
Add: U.S. Federal tax reform adjustment (e)
0.08
0.08
Expected adjusted earnings per share - diluted
$
2.05
$
2.15
____________________ (a) Represents the estimated earnings per
share impact of estimated costs related to previously announced
plans to restructure the specialty fleet and revitalize Gap brand,
calculated net of tax at the expected adjusted effective tax rate.
(b) Represents certain non-cash tax impacts related to expected
restructuring charges discussed above. (c) Represents the estimated
earnings per share impact of estimated costs associated with the
planned Old Navy spin-off transaction, calculated net of tax at the
expected adjusted effective tax rate. (d) The estimated earnings
per share impact of the gain on the sale of a building in the first
quarter of fiscal 2019, calculated net of tax at the expected
adjusted effective tax rate. (e) Represents the impact of an
adjustment to our fiscal 2017 tax liability for additional guidance
issued by the U.S. Treasury Department regarding the TCJA.
The
Gap, Inc. NET SALES RESULTS UNAUDITED The
following table details the Company’s second quarter net sales
(unaudited):
($ in millions) Old NavyGlobal
Gap Global BananaRepublicGlobal (2) Other (3)
Total Percentageof Net Sales 13 Weeks Ended August
3, 2019 U.S. (1)
$
1,794
$
645
$
530
$
331
$
3,300
83%
Canada
148
85
53
-
286
7%
Europe
-
131
4
-
135
3%
Asia
11
201
23
-
235
6%
Other regions
19
24
6
-
49
1%
Total
$
1,972
$
1,086
$
616
$
331
$
4,005
100%
($ in millions) Old NavyGlobal Gap
Global BananaRepublicGlobal Other (3)
Total Percentageof Net Sales 13 Weeks Ended August
4, 2018 U.S. (1)
$
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%
____________________ (1) U.S. includes the United States, Puerto
Rico, and Guam. (2) Beginning on March 4, 2019, Banana Republic
Global includes net sales for the Janie and Jack brand. (3)
Primarily consists of net sales for the Athleta and Intermix
brands, as well as a portion of income related to our credit card
agreement. Beginning in the third quarter of fiscal year 2018, the
Hill City brand is also included.
The Gap, Inc. REAL
ESTATE Store count, openings, closings, and square
footage for our stores are as follows:
February 2,
2019 26 Weeks Ended August 3, 2019 August 3, 2019
Store Locations Store LocationsOpened Store
LocationsClosed Store Locations Square
Feet(millions) Old Navy North America
1,139
28
1
1,166
19.0
Old Navy Asia
15
2
-
17
0.2
Gap North America
758
3
28
733
7.6
Gap Asia
332
29
19
342
3.1
Gap Europe
152
1
2
151
1.3
Banana Republic North America
556
5
7
554
4.7
Banana Republic Asia
45
3
1
47
0.2
Athleta North America
161
10
-
171
0.7
Intermix North America
36
-
1
35
0.1
Janie and Jack North America (1)
-
-
-
140
0.2
Company-operated stores total
3,194
81
59
3,356
37.1
Franchise
472
66
17
521
N/A
Total
3,666
147
76
3,877
37.1
____________________ (1) On March 4, 2019, we acquired select
assets of Gymboree, Inc. related to Janie and Jack. The 140 stores
acquired were not included as store openings for fiscal 2019;
however, they are included in the ending number of store locations
as of August 3, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190822005614/en/
Investor Relations Contact: Tina Romani (415) 427-5264
Investor_relations@gap.com
Media Relations Contact: Trina Somera (415) 427-3145
Press@gap.com
Gap (NYSE:GPS)
Historical Stock Chart
From Jun 2024 to Jul 2024
Gap (NYSE:GPS)
Historical Stock Chart
From Jul 2023 to Jul 2024