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Gap (GPS) Q1 Earnings & Sales Top Estimates, Stock Gains
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The Gap Inc. (GPS - Free Report) reported solid first-quarter fiscal 2017 results, wherein both earnings and sales topped estimates. Further, the company witnessed an improvement in comparable store sales (comps), driven by continued growth at Old Navy. The company’s progress towards improving product quality and fit, as well as better responsiveness to trends and demand, are also helping results.
However, results continued to be affected by foreign currency headwinds, a challenging retail environment, and persistent weakness across the company’s Banana Republic brand.
Following the strong results, the stock jumped 4.1% in the after-market trading session. Overall, shares of Gap have outperformed the Zacks categorized Retail – Apparel/Shoe industry year to date. The company’s shares rose 6.4%, while the industry witnessed a decline of 18.3%.
Q1 Highlights
Gap’s adjusted earnings of 36 cents a share surpassed the Zacks Consensus Estimate of 29 cents and grew 12.5% from 32 cents earned in the year-ago period. Earnings for the quarter continued to be hurt by currency headwinds to the tune of 9 percentage points.
Fueled by favorable comps, net sales remained nearly flat with the year-ago quarter at $3,440 million. Further, the top line surpassed the Zacks Consensus Estimate of $3,408 million. Foreign currency translations bore $11 million impact on sales. While sales continued to be hurt by soft performance of its namesake and Banana Republic brands, Old Navy’s continued strength helped results.
Comps for the fiscal first quarter jumped 2%, against 5% decline recorded in the year-ago period. Comps gained from strong Old Navy performance, which reported 8% rise in comps versus 6% decline in the year-ago quarter. However, results were offset by 4% comps decline for both Gap and Banana Republic brands.
As was the case with most retailers, sales were weak at the start of the quarter due to delayed tax refunds that slowed traffic and spending at stores. However, the company’s sales picked up during the Easter selling season, particularly at Old Navy, leading to an upside in comps.
Margins
Gross profit jumped 7.8% to $1,303 million, with the gross margin expanding 270 basis points (bps) to 37.9%. We believe that this is largely attributable to a 220 bps increase in merchandise margins and 50 bps rent and occupancy expenses leverage.
Operating income grew 14.4% to $254 million, while operating margin expanded about 90 bps to 7.4%, as strong gross margin more than offset 6.3% increase in operating expenses.
Financials
Gap ended fiscal first quarter with cash and cash equivalents of $1,583 million, long-term debt of $1,248 million, and total shareholders’ equity of $2,862 million.
During the quarter, the company generated cash flow from operations of $91 million and incurred capital expenditure of $110 million. Further, the company had a negative free cash of $5 million at quarter-end.
For fiscal 2017, management projects capital expenditure of approximately $625 million, excluding the planned $200 million spending associated with reconstructing the Fishkill distribution center.
Coming to Gap’s shareholder-friendly moves, the company paid first-quarter dividend of 23 cents per share and bought back 4.2 million shares for $100 million in the fiscal first quarter. Additionally, concurrent to the earnings release, the company declared second-quarter dividend of 23 cents per share, payable on or after Jul 26 to shareholders of record as on Jul 5.
Looking ahead, the company plans to make buybacks worth roughly $100 million in second-quarter fiscal 2017.
Store Update
In the fiscal first quarter, Gap introduced 24 stores, while shuttering 31 stores. Of the 24 stores opened, nine were company-operated and 15 were franchise. Similarly, the 31 stores closed in the quarter included 23 company-operated and eight franchise stores. Thus, the company ended the fiscal first quarter with 3,652 outlets in 50 countries, of which 3,186 were company-operated and 466 were franchise.
Gap now anticipates store count for fiscal 2017 to be flat with fiscal 2016 levels, down from previous guidance of 40 net new stores.
Outlook
Following the first quarter results, the company reiterated outlook for fiscal 2017. The company continues to envision earnings for the fiscal year in the range of $1.95−$2.05 per share. However, the company updated earnings per share guidance for first-half fiscal 2017 to be down mid-single digits, marking an improvement from the previous forecast of high-single digit decline.
Further, the company anticipates comps growth to range from flat to improve marginally. Net sales, are expected to be little lower than this range, owing to the currency challenges.
Children’s Place, with a long-term earnings growth rate of 8%, has gained nearly 10.1% year to date.
Big 5 Sporting has gained nearly 53.9% in the last one year. Moreover, it has a long-term earnings growth rate of 12%.
Build-A-Bear has to its credit a solid earnings surprise history with an average trailing four-quarter beat of 67.5%. Moreover, the stock has a long-term earnings growth rate of 22.5%.
Zacks' Hidden Trades
While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?
Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum...from stocks under $10 to ETF to option movers...from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors.
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Gap (GPS) Q1 Earnings & Sales Top Estimates, Stock Gains
The Gap Inc. (GPS - Free Report) reported solid first-quarter fiscal 2017 results, wherein both earnings and sales topped estimates. Further, the company witnessed an improvement in comparable store sales (comps), driven by continued growth at Old Navy. The company’s progress towards improving product quality and fit, as well as better responsiveness to trends and demand, are also helping results.
However, results continued to be affected by foreign currency headwinds, a challenging retail environment, and persistent weakness across the company’s Banana Republic brand.
Following the strong results, the stock jumped 4.1% in the after-market trading session. Overall, shares of Gap have outperformed the Zacks categorized Retail – Apparel/Shoe industry year to date. The company’s shares rose 6.4%, while the industry witnessed a decline of 18.3%.
Q1 Highlights
Gap’s adjusted earnings of 36 cents a share surpassed the Zacks Consensus Estimate of 29 cents and grew 12.5% from 32 cents earned in the year-ago period. Earnings for the quarter continued to be hurt by currency headwinds to the tune of 9 percentage points.
Gap, Inc. (The) Price, Consensus and EPS Surprise
Gap, Inc. (The) Price, Consensus and EPS Surprise | Gap, Inc. (The) Quote
Fueled by favorable comps, net sales remained nearly flat with the year-ago quarter at $3,440 million. Further, the top line surpassed the Zacks Consensus Estimate of $3,408 million. Foreign currency translations bore $11 million impact on sales. While sales continued to be hurt by soft performance of its namesake and Banana Republic brands, Old Navy’s continued strength helped results.
Comps for the fiscal first quarter jumped 2%, against 5% decline recorded in the year-ago period. Comps gained from strong Old Navy performance, which reported 8% rise in comps versus 6% decline in the year-ago quarter. However, results were offset by 4% comps decline for both Gap and Banana Republic brands.
As was the case with most retailers, sales were weak at the start of the quarter due to delayed tax refunds that slowed traffic and spending at stores. However, the company’s sales picked up during the Easter selling season, particularly at Old Navy, leading to an upside in comps.
Margins
Gross profit jumped 7.8% to $1,303 million, with the gross margin expanding 270 basis points (bps) to 37.9%. We believe that this is largely attributable to a 220 bps increase in merchandise margins and 50 bps rent and occupancy expenses leverage.
Operating income grew 14.4% to $254 million, while operating margin expanded about 90 bps to 7.4%, as strong gross margin more than offset 6.3% increase in operating expenses.
Financials
Gap ended fiscal first quarter with cash and cash equivalents of $1,583 million, long-term debt of $1,248 million, and total shareholders’ equity of $2,862 million.
During the quarter, the company generated cash flow from operations of $91 million and incurred capital expenditure of $110 million. Further, the company had a negative free cash of $5 million at quarter-end.
For fiscal 2017, management projects capital expenditure of approximately $625 million, excluding the planned $200 million spending associated with reconstructing the Fishkill distribution center.
Coming to Gap’s shareholder-friendly moves, the company paid first-quarter dividend of 23 cents per share and bought back 4.2 million shares for $100 million in the fiscal first quarter. Additionally, concurrent to the earnings release, the company declared second-quarter dividend of 23 cents per share, payable on or after Jul 26 to shareholders of record as on Jul 5.
Looking ahead, the company plans to make buybacks worth roughly $100 million in second-quarter fiscal 2017.
Store Update
In the fiscal first quarter, Gap introduced 24 stores, while shuttering 31 stores. Of the 24 stores opened, nine were company-operated and 15 were franchise. Similarly, the 31 stores closed in the quarter included 23 company-operated and eight franchise stores. Thus, the company ended the fiscal first quarter with 3,652 outlets in 50 countries, of which 3,186 were company-operated and 466 were franchise.
Gap now anticipates store count for fiscal 2017 to be flat with fiscal 2016 levels, down from previous guidance of 40 net new stores.
Outlook
Following the first quarter results, the company reiterated outlook for fiscal 2017. The company continues to envision earnings for the fiscal year in the range of $1.95−$2.05 per share. However, the company updated earnings per share guidance for first-half fiscal 2017 to be down mid-single digits, marking an improvement from the previous forecast of high-single digit decline.
Further, the company anticipates comps growth to range from flat to improve marginally. Net sales, are expected to be little lower than this range, owing to the currency challenges.
Zacks Rank & Key Picks
Gap currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include The Children's Place Inc. (PLCE - Free Report) , Big 5 Sporting Goods Inc. (BGFV - Free Report) and Build-A-Bear Workshop Inc. (BBW - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Children’s Place, with a long-term earnings growth rate of 8%, has gained nearly 10.1% year to date.
Big 5 Sporting has gained nearly 53.9% in the last one year. Moreover, it has a long-term earnings growth rate of 12%.
Build-A-Bear has to its credit a solid earnings surprise history with an average trailing four-quarter beat of 67.5%. Moreover, the stock has a long-term earnings growth rate of 22.5%.
Zacks' Hidden Trades
While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?
Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum...from stocks under $10 to ETF to option movers...from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors.
Click here for Zacks' secret trade>>