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Gap (GPS) Tops Q2 Earnings & Sales; Stock Down on View Cut
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After posting in-line earnings and lagging sales estimates for five straight quarters, The Gap Inc. (GPS - Free Report) delivered better-than-expected top- and bottom-line results in second-quarter fiscal 2016. However, currency woes, sluggish traffic amid a tough retail landscape and softness across most brands continued to weigh upon results that declined year over year. Moreover, management curtailed its earnings outlook for fiscal 2016, leading shares of the company to slip 1.9% following the earnings announcement.
Adjusted earnings of 60 cents a share came a penny ahead of the Zacks Consensus Estimate but dropped 6.3% from the year-ago quarter figure of 64 cents. Management highlighted that the company’s earnings per share were hurt by foreign currency fluctuations, which lowered earnings by 5 cents per share and earnings growth by nearly 8 percentage points.
On a GAAP basis, earnings came in at 31 cents per share, down significantly from 52 cents recorded in the year-ago period.
Net sales of $3,851 million dipped 1.2% from the year-ago figure, while it surpassed the Zacks Consensus Estimate of $3,807.7 million. Sales continued to be hurt by soft Banana Republic and Gap’s namesake brand performances, somewhat compensated by decent trends witnessed at its Old Navy brand.
Comparable-store sales (comps) for the fiscal second quarter fell 2%, compared with a 2% decline recorded in the year-ago period. Comps at Gap Global dropped 3%, following a 6% decline in the prior-year quarter, while Banana Republic Global reported comps decline of 9% compared with a 4% fall last year. Old Navy posted flat comps for the quarter, compared with a 3% increase witnessed last year. Notably, Old Navy displayed a sequential comps improvement of nearly 6 points from the last quarter.
Gross profit fell 1.4% to $1,437 million, with the gross margin remaining nearly flat at 37.3%. Strong merchandise margins were offset by currency headwinds.
Operating income plunged 24.4% to $279 million, while the operating margin declined 230 basis points (bps) to 7.2%, mainly owing to elevated operating expenses. However, marketing expenses remained almost flat at $131 million in the reported quarter.
Financials
Gap ended the reported quarter with cash and cash equivalents of $1,681 million, long-term debt of $1,321 million, and total shareholders’ equity of $2,559 million.
During the first half of fiscal 2016, the company generated cash flow from operations of $734 million and incurred capital expenditure of $270 million. Additionally, the company’s year-to-date free cash inflow totaled $464 million. For fiscal 2016, management still projects capital expenditure of approximately $525 million. The capex will primarily be allocated toward enhancing mobile and supply chain capabilities.
Coming to Gap’s shareholder-friendly moves, the company paid 23 cents per share as quarterly cash dividend during the second quarter, and announced the same dividend for third-quarter fiscal 2016.
Store Update
In the second quarter, Gap introduced 19 stores, while it shuttered 22 company-operated stores. Gap ended the quarter with 3,730 outlets in 52 countries, of which 3,273 were company-operated and 457 were franchise. Square footage of company-operated stores declined about 1% year over year.
In fiscal 2016, the company still expects about 50 net closures of company-operated stores. Consequently, it anticipates square footage growth to drop nearly 2% year over year.
Outlook
While management remains focused on implementing its recently drawn strategic plan and is on track to create a more efficient brand model, it was not pleased with the pace of business growth witnessed in the second quarter. These factors, along with the tough environment in the apparel industry, caused management to trim its fiscal 2016 earnings outlook.
The company now envisions adjusted earnings for the fiscal year to range from $1.87−$1.92 per share, compared with $1.92 predicted earlier. The guidance also compares unfavorably with the current Zacks Consensus Estimate, which is pegged at $1.94. Further, Gap anticipates adjusted operating margin to be roughly 8.5% in the fiscal.
Despite management’s disappointing outlook, it was encouraged by the improved merchandise margins recorded in the reported quarter. The company also expects Old Navy to deliver solid growth in the second half of the year. All said, Gap is on track to make basic amendments to its business in order to boost long-term growth.
Zacks Rank
Gap carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy), American Eagle Outfitters Inc. (AEO - Free Report) and Citi Trends, Inc. (CTRN - Free Report) , each carrying a Zacks Rank #2 (Buy).
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Gap (GPS) Tops Q2 Earnings & Sales; Stock Down on View Cut
After posting in-line earnings and lagging sales estimates for five straight quarters, The Gap Inc. (GPS - Free Report) delivered better-than-expected top- and bottom-line results in second-quarter fiscal 2016. However, currency woes, sluggish traffic amid a tough retail landscape and softness across most brands continued to weigh upon results that declined year over year. Moreover, management curtailed its earnings outlook for fiscal 2016, leading shares of the company to slip 1.9% following the earnings announcement.
Adjusted earnings of 60 cents a share came a penny ahead of the Zacks Consensus Estimate but dropped 6.3% from the year-ago quarter figure of 64 cents. Management highlighted that the company’s earnings per share were hurt by foreign currency fluctuations, which lowered earnings by 5 cents per share and earnings growth by nearly 8 percentage points.
GAP INC Price, Consensus and EPS Surprise
GAP INC Price, Consensus and EPS Surprise | GAP INC Quote
On a GAAP basis, earnings came in at 31 cents per share, down significantly from 52 cents recorded in the year-ago period.
Net sales of $3,851 million dipped 1.2% from the year-ago figure, while it surpassed the Zacks Consensus Estimate of $3,807.7 million. Sales continued to be hurt by soft Banana Republic and Gap’s namesake brand performances, somewhat compensated by decent trends witnessed at its Old Navy brand.
Comparable-store sales (comps) for the fiscal second quarter fell 2%, compared with a 2% decline recorded in the year-ago period. Comps at Gap Global dropped 3%, following a 6% decline in the prior-year quarter, while Banana Republic Global reported comps decline of 9% compared with a 4% fall last year. Old Navy posted flat comps for the quarter, compared with a 3% increase witnessed last year. Notably, Old Navy displayed a sequential comps improvement of nearly 6 points from the last quarter.
Gross profit fell 1.4% to $1,437 million, with the gross margin remaining nearly flat at 37.3%. Strong merchandise margins were offset by currency headwinds.
Operating income plunged 24.4% to $279 million, while the operating margin declined 230 basis points (bps) to 7.2%, mainly owing to elevated operating expenses. However, marketing expenses remained almost flat at $131 million in the reported quarter.
Financials
Gap ended the reported quarter with cash and cash equivalents of $1,681 million, long-term debt of $1,321 million, and total shareholders’ equity of $2,559 million.
During the first half of fiscal 2016, the company generated cash flow from operations of $734 million and incurred capital expenditure of $270 million. Additionally, the company’s year-to-date free cash inflow totaled $464 million. For fiscal 2016, management still projects capital expenditure of approximately $525 million. The capex will primarily be allocated toward enhancing mobile and supply chain capabilities.
Coming to Gap’s shareholder-friendly moves, the company paid 23 cents per share as quarterly cash dividend during the second quarter, and announced the same dividend for third-quarter fiscal 2016.
Store Update
In the second quarter, Gap introduced 19 stores, while it shuttered 22 company-operated stores. Gap ended the quarter with 3,730 outlets in 52 countries, of which 3,273 were company-operated and 457 were franchise. Square footage of company-operated stores declined about 1% year over year.
In fiscal 2016, the company still expects about 50 net closures of company-operated stores. Consequently, it anticipates square footage growth to drop nearly 2% year over year.
Outlook
While management remains focused on implementing its recently drawn strategic plan and is on track to create a more efficient brand model, it was not pleased with the pace of business growth witnessed in the second quarter. These factors, along with the tough environment in the apparel industry, caused management to trim its fiscal 2016 earnings outlook.
The company now envisions adjusted earnings for the fiscal year to range from $1.87−$1.92 per share, compared with $1.92 predicted earlier. The guidance also compares unfavorably with the current Zacks Consensus Estimate, which is pegged at $1.94. Further, Gap anticipates adjusted operating margin to be roughly 8.5% in the fiscal.
Despite management’s disappointing outlook, it was encouraged by the improved merchandise margins recorded in the reported quarter. The company also expects Old Navy to deliver solid growth in the second half of the year. All said, Gap is on track to make basic amendments to its business in order to boost long-term growth.
Zacks Rank
Gap carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , with a Zacks Rank #1 (Strong Buy), American Eagle Outfitters Inc. (AEO - Free Report) and Citi Trends, Inc. (CTRN - Free Report) , each carrying a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>