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Gap (GPS) Q2 Earnings & Sales Beat Estimates, Stock Rises
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Shares of The Gap Inc. (GPS - Free Report) rose more than 8% in the after-market session on Aug 25, following the second-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics declined year over year. Results were affected by changing consumer preference from casual wear to dressier clothes, as well as higher inventory, a tough macroeconomic environment and elevated costs.
However, strength in Banana Republic remained an upside. Also, sales in July and August improved as fuel prices eased, which led to a slight increase in discretionary spending. The company expects to invest cautiously in marketing, pause hiring plans and slow down its spending on technology.
In the past three months, shares of the company have declined 10% compared with the industry’s 1.5% fall.
Image Source: Zacks Investment Research
Q2 Details
For the fiscal second quarter, adjusted earnings of 8 cents per share surpassed the Zacks Consensus Estimate of a loss of 4 cents. However, the metric compared unfavorably with earnings of 70 cents reported in second-quarter fiscal 2021.
Net sales declined 8% year over year to $3,857 million. However, the figure beat the Zacks Consensus Estimate of $3,821 million. Comparable sales (comps) slumped 10% on a year-over-year basis.
Digital sales decreased 6% year over year, accounting for 34% of the total sales for the reported quarter. The metric jumped 55% from the pre-pandemic levels. Store sales declined 10% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global declined 13% year over year to $2,090 million due to imbalances in size and assortment, ongoing inventory delays, headwinds related to product acceptance in some key categories, and muted demand stemming from lower-income consumers. The metric beat our estimate of $2,039.8 million. Comps also declined 15% year over year.
Gap Global: For second-quarter fiscal 2022, net sales declined 10% year over year to $881 million, owing to category mix imbalances, store closures and inflationary pressures. The metric lagged our estimate of $900.8 million. Comps decreased 10% year over year across North America and declined 7% globally.
Banana Republic: Net sales advanced 9% to $539 million and comps were up 8%, driven by the current shift in consumer preferences and gains from the prior year’s relaunch of work-based categories. Sales beat our estimate of $514.9 million.
Athleta: Net sales jumped 1% to $344 million for the Athleta brand, while comps declined 8%. Segmental results gained from increased awareness, along with strength in women’s active and wellness. This was somewhat offset by the shift in consumer preference from athleisure to occasion and work-based categories as well as weal product acceptance in this spring/summer season. The missed our estimate of $354.3 million.
Margins & Costs
The adjusted gross profit of $1,388 million reflected a 24% decrease from $1,823 million in the prior-year quarter. The adjusted gross margin of 36% contracted 730 basis points (bps) year over year due to a 700-bps decline in adjusted merchandise margins stemming from $50 million of higher air freight. Also, huge discounts at Old Navy and rising commodity price increases were somewhat offset by fewer discounts at Banana Republic.
Adjusted operating income was $65 million compared with $428 million in the year-ago quarter. The adjusted operating margin contracted 850 bps year over year to 1.7%.
Adjusted operating expenses declined 5.2% year over year to $1,323 million.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal second quarter with cash and cash equivalents of $708 million, representing a significant decline from $2,375 million in the year-ago period. As of Jul 30, 2022, it had total stockholders’ equity of $2,305 million and long-term debt of $1,485 million.
In the quarter under review, the company used $207 million in cash from operating activities. Gap bought back 5.7 million shares worth $57 million and paid out a dividend of $55 million. GPS also approved a quarterly dividend of 15 cents per share in the quarter under review. It also noted that it would not repurchase any shares during the rest of fiscal 2022.
In the six months ending Jul 30, the company’s capital expenditure was $406 million. For fiscal 2022, capital expenditure is forecast to be $650 million for enhancing digital facilities, loyalty, supply-chain improvement, and investment in store growth for Old Navy and Athleta.
Store Update
As of Jul 30, 2022, Gap had 3,390 stores in more than 40 countries, of which 2,799 were company-operated and 591 were franchise outlets. For fiscal 2022, GPS plans to close 50 Gap and Banana Republic stores in North America as part of its 350 store-closure plan. It also expects to open 30-40 Athleta stores and 20-30 Old Navy stores.
Given the current macroeconomic environment and the ongoing CEO transition, management withdrew its prior fiscal 2022 view. The company also noted that it has been making efforts to lower inventory, rebalance its assortments to meet changing consumer needs, as well as reevaluate investments.
Gap remains optimistic about sales in the second half of fiscal 2022. Air freight costs are likely to lower in the second half of fiscal 2022. Although the company entered the fiscal third quarter with higher inventory, it expects inventory to reduce significantly by the end of fiscal 2022. Gap is undertaking actions to lower operating expenses, which are likely to be a headwind in fiscal 2023. The third-quarter bottom line is expected to gain from the sale of its UK distribution center.
The Zacks Consensus Estimate for Dollar General’s current financial-year revenues and EPS suggests growth of 10% and 13.4%, respectively, from the year-ago reported figure. Dollar General has a trailing four-quarter earnings surprise of 2.8%, on average.
Costco, which is engaged in the operation of membership warehouses, carries a Zacks Rank #2. COST has an expected EPS growth rate of 9.2% for three to five years.
The Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 15.4% and 18.2%, respectively, from the year-ago period. COST has a trailing four-quarter earnings surprise of 9.7%, on average.
Dollar Tree operates discount variety retail stores. The stock currently carries a Zacks Rank #2. DLTR has an expected EPS growth rate of 15.5% for three to five years.
The Zacks Consensus Estimate for Dollar Tree’s current financial-year revenues and EPS suggests growth of 6.7% and 40.7%, respectively, from the year-ago reported figure. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.
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Gap (GPS) Q2 Earnings & Sales Beat Estimates, Stock Rises
Shares of The Gap Inc. (GPS - Free Report) rose more than 8% in the after-market session on Aug 25, following the second-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics declined year over year. Results were affected by changing consumer preference from casual wear to dressier clothes, as well as higher inventory, a tough macroeconomic environment and elevated costs.
However, strength in Banana Republic remained an upside. Also, sales in July and August improved as fuel prices eased, which led to a slight increase in discretionary spending. The company expects to invest cautiously in marketing, pause hiring plans and slow down its spending on technology.
In the past three months, shares of the company have declined 10% compared with the industry’s 1.5% fall.
Image Source: Zacks Investment Research
Q2 Details
For the fiscal second quarter, adjusted earnings of 8 cents per share surpassed the Zacks Consensus Estimate of a loss of 4 cents. However, the metric compared unfavorably with earnings of 70 cents reported in second-quarter fiscal 2021.
Net sales declined 8% year over year to $3,857 million. However, the figure beat the Zacks Consensus Estimate of $3,821 million. Comparable sales (comps) slumped 10% on a year-over-year basis.
Digital sales decreased 6% year over year, accounting for 34% of the total sales for the reported quarter. The metric jumped 55% from the pre-pandemic levels. Store sales declined 10% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global declined 13% year over year to $2,090 million due to imbalances in size and assortment, ongoing inventory delays, headwinds related to product acceptance in some key categories, and muted demand stemming from lower-income consumers. The metric beat our estimate of $2,039.8 million. Comps also declined 15% year over year.
Gap Global: For second-quarter fiscal 2022, net sales declined 10% year over year to $881 million, owing to category mix imbalances, store closures and inflationary pressures. The metric lagged our estimate of $900.8 million. Comps decreased 10% year over year across North America and declined 7% globally.
Banana Republic: Net sales advanced 9% to $539 million and comps were up 8%, driven by the current shift in consumer preferences and gains from the prior year’s relaunch of work-based categories. Sales beat our estimate of $514.9 million.
Athleta: Net sales jumped 1% to $344 million for the Athleta brand, while comps declined 8%. Segmental results gained from increased awareness, along with strength in women’s active and wellness. This was somewhat offset by the shift in consumer preference from athleisure to occasion and work-based categories as well as weal product acceptance in this spring/summer season. The missed our estimate of $354.3 million.
Margins & Costs
The adjusted gross profit of $1,388 million reflected a 24% decrease from $1,823 million in the prior-year quarter. The adjusted gross margin of 36% contracted 730 basis points (bps) year over year due to a 700-bps decline in adjusted merchandise margins stemming from $50 million of higher air freight. Also, huge discounts at Old Navy and rising commodity price increases were somewhat offset by fewer discounts at Banana Republic.
Adjusted operating income was $65 million compared with $428 million in the year-ago quarter. The adjusted operating margin contracted 850 bps year over year to 1.7%.
Adjusted operating expenses declined 5.2% year over year to $1,323 million.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal second quarter with cash and cash equivalents of $708 million, representing a significant decline from $2,375 million in the year-ago period. As of Jul 30, 2022, it had total stockholders’ equity of $2,305 million and long-term debt of $1,485 million.
In the quarter under review, the company used $207 million in cash from operating activities. Gap bought back 5.7 million shares worth $57 million and paid out a dividend of $55 million. GPS also approved a quarterly dividend of 15 cents per share in the quarter under review. It also noted that it would not repurchase any shares during the rest of fiscal 2022.
In the six months ending Jul 30, the company’s capital expenditure was $406 million. For fiscal 2022, capital expenditure is forecast to be $650 million for enhancing digital facilities, loyalty, supply-chain improvement, and investment in store growth for Old Navy and Athleta.
Store Update
As of Jul 30, 2022, Gap had 3,390 stores in more than 40 countries, of which 2,799 were company-operated and 591 were franchise outlets. For fiscal 2022, GPS plans to close 50 Gap and Banana Republic stores in North America as part of its 350 store-closure plan. It also expects to open 30-40 Athleta stores and 20-30 Old Navy stores.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Fiscal 2022 Guidance
Given the current macroeconomic environment and the ongoing CEO transition, management withdrew its prior fiscal 2022 view. The company also noted that it has been making efforts to lower inventory, rebalance its assortments to meet changing consumer needs, as well as reevaluate investments.
Gap remains optimistic about sales in the second half of fiscal 2022. Air freight costs are likely to lower in the second half of fiscal 2022. Although the company entered the fiscal third quarter with higher inventory, it expects inventory to reduce significantly by the end of fiscal 2022. Gap is undertaking actions to lower operating expenses, which are likely to be a headwind in fiscal 2023. The third-quarter bottom line is expected to gain from the sale of its UK distribution center.
Stocks to Consider
Here are three better-ranked stocks to consider — Dollar General (DG - Free Report) , Costco (COST - Free Report) and Dollar Tree (DLTR - Free Report) .
Dollar General, a discount retailer, currently carries a Zacks Rank #2 (Buy). DG has an expected EPS growth rate of 12.8% for three to five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Dollar General’s current financial-year revenues and EPS suggests growth of 10% and 13.4%, respectively, from the year-ago reported figure. Dollar General has a trailing four-quarter earnings surprise of 2.8%, on average.
Costco, which is engaged in the operation of membership warehouses, carries a Zacks Rank #2. COST has an expected EPS growth rate of 9.2% for three to five years.
The Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 15.4% and 18.2%, respectively, from the year-ago period. COST has a trailing four-quarter earnings surprise of 9.7%, on average.
Dollar Tree operates discount variety retail stores. The stock currently carries a Zacks Rank #2. DLTR has an expected EPS growth rate of 15.5% for three to five years.
The Zacks Consensus Estimate for Dollar Tree’s current financial-year revenues and EPS suggests growth of 6.7% and 40.7%, respectively, from the year-ago reported figure. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.