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Gap's (GPS) Q4 Earnings Surpass Estimates, Revenues Miss

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Shares of The Gap Inc. (GPS - Free Report) rose more than 3% after the close of the trading session on Mar 4, following its fourth-quarter fiscal 2020 results, wherein earnings surpassed the Zacks Consensus Estimate while sales lagged the same. Further, both metrics declined year over year.

Despite a tough retail environment, results gained from strength in Active and Fleece along with solid online business, driven by enhanced digital capabilities. Also, it remains on track with its Power Plan 2023 plan.

In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 19.4% compared with the industry’s 28.1% growth.

Q4 Details

In the fiscal fourth quarter, the company’s earnings of 28 cents per share beat the Zacks Consensus Estimate of 17 cents but declined 51.7% from 58 cents in the year-ago quarter. Nonetheless, its bottom-line results reflect gains from improved margins.

Net sales fell 5% year over year to $4,424 million but reflected significant improvement on a sequential basis. Moreover, the top line missed the Zacks Consensus Estimate of $4,666 million. Comps remained flat year over while online sales surged 49% on the back of BOPIS and Ship from Store facilities.

Meanwhile, in-store sales declined 28%. The company’s ongoing strategy to close underperforming stores and weak store traffic in a few regions across the United States stemming from the increasing stay-at-home trend hurt sales.

Notably, its e-commerce business acquired 183 million new customers in fiscal 2020, with the online business contributing about 46% of net sales in the fiscal fourth quarter.

Brand-wise Sales & Comps

In fourth-quarter fiscal 2020, net sales declined 19% and 27% at Gap Global and Banana Republic Global brands, respectively. Further, comps for Gap Global and Banana Republic Global were down 6% and 22%, respectively. Meanwhile, sales improved 5% and 29% for the Old Navy and Athleta brands, respectively. Comps at Old Navy Global and Athleta increased 7% and 26%, respectively.

During the reported quarter, the Banana Republic brand’s product mix was unfavorable due to the sudden shift of consumers’ demand to more casual fashion to meet stay-at-home requirements, which served as a disadvantage to the brand’s work wear assortments. However, the company is focused on adjusting to consumer preferences and improving inventory mix. Moving on, Gap Brand’s global footprint was meaningfully affected by COVID-mandated store closures and restrictions in Canada, China, Europe and Japan.

At the Old Navy brand, sales gained from continued momentum in casual and cozy categories with sturdy performance in Active, Fleece and Sleep. Also, the significant acceleration of the online business, and a higher markdown rate and units per transaction somewhat offset dismal store traffic.

Apart from these, the Athleta brand’s new products, particularly sleepwear, rising customer engagement and long-term growth strategy aided sales growth. Notably, Athleta reached more than $1 billion in sales during fiscal 2021.

Margins & Costs

Gross profit of $1,620 million reflected a 3.9% increase from $1,559 million in the prior-year quarter. Gross margin of 37.7% expanded 190 basis points (bps) from the prior-year quarter, backed by gains from lower rent and occupancy costs as well as the closure of underperforming stores.

Adjusted operating expenses rose 8.2% to $1,534 million with adjusted operating expense rate contracting 310 bps to 33.4%. Moreover, adjusted operating income declined 31.7% year over year to $190 million in the reported quarter. Also, the company’s adjusted operating margin contracted 160 bps to 4.3%.

Other Financials

Gap ended the fiscal fourth quarter with cash, cash equivalents, and short-term investments of $2,398 million, representing 45% growth from $1,654 million in the year-ago period. As of Jan 30, it had total stockholders’ equity of $2,614 million and long-term debt of $2,216 million. Hence, the company has sufficient liquidity to steer clear of the coronavirus environment.

In fiscal 2020, it generated a negative free cash flow of $155 million compared with a positive cash flow of $709 million in the year-ago period, due to COVID-19 impacts. The company now expects capital spending of $392 million for fiscal 2020, down from last year’s figure of $702 million due to controlled spending in response to the COVID-19 situation.

Going ahead, management projected fiscal 2021 capital expenditure to be $800 million, which is likely to be utilized for digital, loyalty and supply-chain-related projects and investments in stores such as Old Navy and Athleta.

Apart from these, the company’s board has initiated a quarterly dividend of 24.25 cents, which was earlier approved in first-quarter fiscal 2020. Also, it revealed plans for another quarterly dividend in the second quarter of fiscal 2021.

Store Update

As of Jan 30, Gap had 3,715 stores in 45 countries, out of which 3,345 were company-operated and 574 were franchise outlets.

In sync with its ongoing fleet optimization efforts, the company plans to close about 100 Gap and Banana Republic stores globally, net of openings, in fiscal 2021, in line with its Power Plan 2023 strategy. It also expects to open 30-40 Old Navy stores along with 20-30 Athleta stores.

The Gap, Inc. Price, Consensus and EPS Surprise

Fiscal Guidance

Despite continued uncertainty associated with the COVID-19 crisis, Gap envisions adjusted earnings to be $1.2-$1.35 with sales growth of mid- to high-teens in fiscal 2021. Also, management noted that adverse impacts of COVID-19 are likely to persist in the first half of 2021 and return to pre-pandemic levels in the second half. Moreover, operating margin is expected to be roughly 5%, in sync with its Power Plan 2023 objective, which aims at least a 10% operating margin by 2023.

3 Retail Stocks to Watch

Hibbett Sports, Inc. (HIBB - Free Report) has a long-term earnings growth rate of 17.2% and currently, a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tapestry (TPR - Free Report) , with a Zacks Rank #2 , has an expected long-term earnings growth rate of 10%.

DICK’S Sporting Goods, Inc. (DKS - Free Report) has a long-term earnings growth rate of 5.6% and presently, a Zacks Rank #2.

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