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Gap (GPS) Tops Q3 Earnings Estimates, Soft Comps Hurt Sales
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The Gap Inc. (GPS - Free Report) reported third-quarter fiscal 2018 results, wherein earnings surpassed estimates while sales lagged. However, both top and bottom lines improved year over year. Results gained from persistent strength in Old Navy, Banana Republic and Athleta brands, ahead of the crucial holiday season. However, continued weakness at the company’s namesake brand and soft margins hurt results.
Notably, the company delivered positive earnings surprise in six of the last seven quarters while it missed sales estimates after seven consecutive beats. Further, management lowered its earnings guidance for the fiscal year.
Shares of the company have declined 1.4% in after-hours trading yesterday. The downside can mainly be attributed to persistently soft flagship brand performance, strained margins and a lowered earnings view for fiscal 2018. In the past three months, this Zacks Rank #3 (Hold) stock has decreased 24.2% compared with the industry’s 17.1% decline.
Q3 Highlights
In the fiscal third quarter, Gap’s earnings of 69 cents per share outpaced the Zacks Consensus Estimate of 68 cents by a penny. The bottom line also improved nearly 19% from 58 cents registered a year ago. Quarterly earnings included currency tailwinds of 1 cent per share.
Net sales grew 6.5% to $4,089 million and beat the Zacks Consensus Estimate of $3,983 million. Excluding the presentation changes, owing to the adoption of the new revenue recognition standard, the top line increased 2% year over year. These changes contributed $170 million to the top line. However, foreign currency translations negatively impacted revenues by $20 million.
Total comps were flat compared with 3% growth in the year-ago period. Notably, comps improved for the eighth straight quarter due to continued growth at Old Navy and Banana Republic. Comps for Old Navy and Banana Republic were up 4% and 2%, respectively, while the Gap brand’s comps fell 7%.
Margins
Gross profit rose 6% to $1,623 million, with flat gross margin at 39.7%. Excluding the impact of presentation changes from the revenue recognition standard, gross profit declined 2% while gross margin contracted 160 bps to 38.1% mainly due to higher shipping expenses and increased promotional activity for the flagship brand.
Operating income declined nearly 4% to $363 million, with operating margin contraction of 90 bps to 9.8%. Excluding the impact of the revenue recognition standard, operating margin declined 50 bps to 9.3%.
Financials
Gap ended the quarter with cash and cash equivalents of $958 million, long-term debt of $1,249 million, and total stockholders’ equity of $3,440 million.
In the first nine months of fiscal 2018, the company generated net cash flow from operations of $567 million and incurred capital expenditure of $510 million. Gap had free cash flow of $57 million as of Nov 3, 2018.
Coming to Gap’s shareholder-friendly moves, the company bought back 3.6 million shares for approximately $100 million and paid dividend of 24.25 cents per share in the fiscal third quarter. This dividend reflects more than 5% growth year over year.
Additionally, management announced a dividend of 24.25 cents per share for the fiscal fourth quarter, payable on or after Jan 30, 2019, to shareholders of record as of Jan 9.
For fiscal 2018, management now projects capital expenditure of roughly $750 million compared with $800 million anticipated earlier. The amount will be used for transformative infrastructure investments to enhance its omni-channel and digital strategies, including information technology as well as supply chain capabilities.
Moreover, management anticipates spending $100 million for share buybacks in the fiscal fourth quarter.
Store Updates
In the first nine months of fiscal 2018, Gap opened 109 company-operated stores, most of which were Old Navy and Athleta outlets. Additionally, the company closed about 56 stores, mainly Gap and Banana Republic. Consequently, Gap ended the fiscal third quarter with 3,688 outlets in 43 countries, of which 3,218 were company-operated and 470 were franchise stores.
In fiscal 2018, Gap still anticipates opening nearly 25 company-operated stores, net of closures and repositions. In sync with its growth strategy, it expects to open more of Athleta and Old Navy stores and close Gap and Banana Republic stores.
Outlook
Driven by current-year adjustments to fiscal 2017 net provisional tax under TCJA, Gap revised its effective tax rate guidance for fiscal 2018. It now expects effective tax rate of about 25% in fiscal 2018 compared with 26% stated earlier.
Consequently, the company lowered its earnings per share view for fiscal 2018. Management now envisions earnings per share of $2.55-$2.60, reflecting a decline from $2.55-$2.70 expected earlier. Comps are still anticipated to be flat to up slightly.
Looking for Better-Ranked Retail Stocks, Check These
Canada Goose Holdings Inc. (GOOS - Free Report) has a long-term earnings growth rate of 31.3%. The company currently carries a Zacks Rank #1.
Fossil Group, Inc. (FOSL - Free Report) , also a Zacks Rank #1 stock, delivered an average positive earnings surprise of 119.5% in the trailing four quarters.
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Gap (GPS) Tops Q3 Earnings Estimates, Soft Comps Hurt Sales
The Gap Inc. (GPS - Free Report) reported third-quarter fiscal 2018 results, wherein earnings surpassed estimates while sales lagged. However, both top and bottom lines improved year over year. Results gained from persistent strength in Old Navy, Banana Republic and Athleta brands, ahead of the crucial holiday season. However, continued weakness at the company’s namesake brand and soft margins hurt results.
Notably, the company delivered positive earnings surprise in six of the last seven quarters while it missed sales estimates after seven consecutive beats. Further, management lowered its earnings guidance for the fiscal year.
Shares of the company have declined 1.4% in after-hours trading yesterday. The downside can mainly be attributed to persistently soft flagship brand performance, strained margins and a lowered earnings view for fiscal 2018. In the past three months, this Zacks Rank #3 (Hold) stock has decreased 24.2% compared with the industry’s 17.1% decline.
Q3 Highlights
In the fiscal third quarter, Gap’s earnings of 69 cents per share outpaced the Zacks Consensus Estimate of 68 cents by a penny. The bottom line also improved nearly 19% from 58 cents registered a year ago. Quarterly earnings included currency tailwinds of 1 cent per share.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. Price, Consensus and EPS Surprise | The Gap, Inc. Quote
Net sales grew 6.5% to $4,089 million and beat the Zacks Consensus Estimate of $3,983 million. Excluding the presentation changes, owing to the adoption of the new revenue recognition standard, the top line increased 2% year over year. These changes contributed $170 million to the top line. However, foreign currency translations negatively impacted revenues by $20 million.
Total comps were flat compared with 3% growth in the year-ago period. Notably, comps improved for the eighth straight quarter due to continued growth at Old Navy and Banana Republic. Comps for Old Navy and Banana Republic were up 4% and 2%, respectively, while the Gap brand’s comps fell 7%.
Margins
Gross profit rose 6% to $1,623 million, with flat gross margin at 39.7%. Excluding the impact of presentation changes from the revenue recognition standard, gross profit declined 2% while gross margin contracted 160 bps to 38.1% mainly due to higher shipping expenses and increased promotional activity for the flagship brand.
Operating income declined nearly 4% to $363 million, with operating margin contraction of 90 bps to 9.8%. Excluding the impact of the revenue recognition standard, operating margin declined 50 bps to 9.3%.
Financials
Gap ended the quarter with cash and cash equivalents of $958 million, long-term debt of $1,249 million, and total stockholders’ equity of $3,440 million.
In the first nine months of fiscal 2018, the company generated net cash flow from operations of $567 million and incurred capital expenditure of $510 million. Gap had free cash flow of $57 million as of Nov 3, 2018.
Coming to Gap’s shareholder-friendly moves, the company bought back 3.6 million shares for approximately $100 million and paid dividend of 24.25 cents per share in the fiscal third quarter. This dividend reflects more than 5% growth year over year.
Additionally, management announced a dividend of 24.25 cents per share for the fiscal fourth quarter, payable on or after Jan 30, 2019, to shareholders of record as of Jan 9.
For fiscal 2018, management now projects capital expenditure of roughly $750 million compared with $800 million anticipated earlier. The amount will be used for transformative infrastructure investments to enhance its omni-channel and digital strategies, including information technology as well as supply chain capabilities.
Moreover, management anticipates spending $100 million for share buybacks in the fiscal fourth quarter.
Store Updates
In the first nine months of fiscal 2018, Gap opened 109 company-operated stores, most of which were Old Navy and Athleta outlets. Additionally, the company closed about 56 stores, mainly Gap and Banana Republic. Consequently, Gap ended the fiscal third quarter with 3,688 outlets in 43 countries, of which 3,218 were company-operated and 470 were franchise stores.
In fiscal 2018, Gap still anticipates opening nearly 25 company-operated stores, net of closures and repositions. In sync with its growth strategy, it expects to open more of Athleta and Old Navy stores and close Gap and Banana Republic stores.
Outlook
Driven by current-year adjustments to fiscal 2017 net provisional tax under TCJA, Gap revised its effective tax rate guidance for fiscal 2018. It now expects effective tax rate of about 25% in fiscal 2018 compared with 26% stated earlier.
Consequently, the company lowered its earnings per share view for fiscal 2018. Management now envisions earnings per share of $2.55-$2.60, reflecting a decline from $2.55-$2.70 expected earlier. Comps are still anticipated to be flat to up slightly.
Looking for Better-Ranked Retail Stocks, Check These
Boot Barn Holdings, Inc. (BOOT - Free Report) has a long-term earnings growth rate of 23%. The company presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Canada Goose Holdings Inc. (GOOS - Free Report) has a long-term earnings growth rate of 31.3%. The company currently carries a Zacks Rank #1.
Fossil Group, Inc. (FOSL - Free Report) , also a Zacks Rank #1 stock, delivered an average positive earnings surprise of 119.5% in the trailing four quarters.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>