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Gap (GPS) Q3 Earnings & Sales Beat Estimates on Solid Demand
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Shares of The Gap Inc. (GPS - Free Report) rose more than 7% in the after-market session on Nov 17, following the third-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics improved year over year.
Despite inflation concerns, results gained from sturdy demand for formal clothing and dresses, as people are preferring more formal clothing, dresses, woven tops and pants, shelving casual wear as they return to travel, work and social occasions after two years of the pandemic.
However, rising prices of essential commodities hurt lower-income consumers' spending on non-essentials like apparel. In October, Gap shut down its YeezyGap.com and Yeezy Gap line after discontinuing its partnership with Kanye West. The company raised concerns about a drab holiday season this year.
Image Source: Zacks Investment Research
In the past three months, shares of the company have gained 27.8% against the industry’s 5.7% fall.
Q3 Details
For the fiscal third quarter, adjusted earnings of 71 cents per share surpassed the Zacks Consensus Estimate of a loss of 2 cents. However, the metric compared unfavorably with earnings of 27 cents reported in third-quarter fiscal 2021.
Net sales rose 2% year over year to $4,039 million and beat the Zacks Consensus Estimate of $3,807 million. The metric also grew 1% compared to the pre-pandemic level. Comparable sales (comps) inched up 1% on a year-over-year basis.
Digital sales increased 5% year over year, accounting for 39% of the total sales for the reported quarter. The metric jumped 55% from the pre-pandemic levels. Store sales inched up 1% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global rose 2% year over year to $2,137 million due to improved size and assortment balance, as well as product acceptance, which was more than offset by softness in the kids and baby category, and muted demand stemming from lower-income consumers. The metric missed our estimate of $2,305.7 million. Comps also declined 1% year over year.
Gap Global: For third-quarter fiscal 2022, net sales remained flat year over year to $1,041 million, driven by improvement in the category mix and assortment balance, offset by softness in the kids and baby category. The metric lagged our estimate of $1,441.5 million. Comps increased 4% year over year, while North America comps remained flat.
Banana Republic: Net sales advanced 8% to $517 million and comps were up 10%, driven by the current shift in consumer preferences and gains from the prior year’s relaunch of work-based categories. Sales missed our estimate of $639.7 million.
Athleta: Net sales jumped 6% to $340 million for the Athleta brand, while comps remained flat year over year. Segmental results gained from 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. Net sales missed our estimate of $448.4 million.
Margins & Costs
The adjusted gross profit of $1,562 million reflected a 5.4% decrease from $1,652 million in the prior-year quarter. The adjusted gross margin of 38.7% contracted 320 basis points (bps) year over year due to a 370-bps decline in adjusted merchandise margins stemming from huge discounts and elevated commodity prices, somewhat offset by the lapping of last year’s higher air freight costs.
Adjusted operating income was $156 million compared with $170 million in the year-ago quarter. The adjusted operating margin contracted 40 bps year over year to 3.9%.
Adjusted operating expenses declined 5.1% year over year to $1,406 million.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal third quarter with cash and cash equivalents of $679 million, down from $801 million in the year-ago period. As of Jul 30, 2022, it had total stockholders’ equity of $2,571 million and long-term debt of $1,486 million.
In the nine months ending Oct 30, the company used $112 million in cash from operating activities. Gap bought back 1.2 million shares worth $12 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 declared a fourth-quarter dividend of 15 cents per share.
In the nine months ending Oct 30, the company’s capital expenditure was $577 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 Oct 29, 2022, Gap had 3,380 stores in more than 40 countries, of which 2,743 were company-operated and 637 were franchise outlets. For fiscal 2022, GPS plans to open 30 Gap and Banana Republic stores in North America as part of its 350 store-closure plan. It expects to open 10 Athleta stores, excluding 24 Old Navy Mexico stores.
As part of its 350-store closure plan, the company closed 29 Gap and Banana Republic stores in North America in the nine months ending Oct 29, 2022. It expects to close 30 more in the fourth quarter of fiscal 2022.
Per management, it has been making efforts to lower inventory and rebalance its assortments to meet changing consumer needs, as well as reevaluate investments. Given the uncertain consumer environment and higher promotions, Gap expects sales to decline year over year in the mid-single digits in the fourth quarter of fiscal 2022. The gross margin is likely to leverage 540 basis points year over year in the fourth quarter of fiscal 2022, driven by air freight normalization, which is likely to be offset by 200 basis points of continued inflationary cost.
The company’s cost-cutting actions in the quarter under review resulted in $250 million in annualized savings. Part of this is envisioned to benefit the fourth quarter, offset by headwinds related to higher seasonal labor costs.
Wingstop currently sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. Shares of WING have declined 9.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank #2 (Buy). KR has an expected EPS growth rate of 11.7% for three to five years.
The Zacks Consensus Estimate for Kroger’s current financial-year revenues and EPS suggests growth of 7.8% and 9.8%, respectively, from the year-ago reported figures. KR has a trailing four-quarter earnings surprise of 15.7%, on average.
Chipotle Mexican Grill, an operator of fast-casual restaurants, currently carries a Zacks Rank #2. The expected EPS growth rate of the company for three to five years is 23.4%.
The Zacks Consensus Estimate for Chipotle Mexican Grill’s current financial-year revenues and EPS suggests growth of 15.2% and 30.8%, respectively, from the year-ago reported figures. CMG has a trailing four-quarter earnings surprise of 4.1%, on average.
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Gap (GPS) Q3 Earnings & Sales Beat Estimates on Solid Demand
Shares of The Gap Inc. (GPS - Free Report) rose more than 7% in the after-market session on Nov 17, following the third-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics improved year over year.
Despite inflation concerns, results gained from sturdy demand for formal clothing and dresses, as people are preferring more formal clothing, dresses, woven tops and pants, shelving casual wear as they return to travel, work and social occasions after two years of the pandemic.
However, rising prices of essential commodities hurt lower-income consumers' spending on non-essentials like apparel. In October, Gap shut down its YeezyGap.com and Yeezy Gap line after discontinuing its partnership with Kanye West. The company raised concerns about a drab holiday season this year.
Image Source: Zacks Investment Research
In the past three months, shares of the company have gained 27.8% against the industry’s 5.7% fall.
Q3 Details
For the fiscal third quarter, adjusted earnings of 71 cents per share surpassed the Zacks Consensus Estimate of a loss of 2 cents. However, the metric compared unfavorably with earnings of 27 cents reported in third-quarter fiscal 2021.
Net sales rose 2% year over year to $4,039 million and beat the Zacks Consensus Estimate of $3,807 million. The metric also grew 1% compared to the pre-pandemic level. Comparable sales (comps) inched up 1% on a year-over-year basis.
Digital sales increased 5% year over year, accounting for 39% of the total sales for the reported quarter. The metric jumped 55% from the pre-pandemic levels. Store sales inched up 1% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global rose 2% year over year to $2,137 million due to improved size and assortment balance, as well as product acceptance, which was more than offset by softness in the kids and baby category, and muted demand stemming from lower-income consumers. The metric missed our estimate of $2,305.7 million. Comps also declined 1% year over year.
Gap Global: For third-quarter fiscal 2022, net sales remained flat year over year to $1,041 million, driven by improvement in the category mix and assortment balance, offset by softness in the kids and baby category. The metric lagged our estimate of $1,441.5 million. Comps increased 4% year over year, while North America comps remained flat.
Banana Republic: Net sales advanced 8% to $517 million and comps were up 10%, driven by the current shift in consumer preferences and gains from the prior year’s relaunch of work-based categories. Sales missed our estimate of $639.7 million.
Athleta: Net sales jumped 6% to $340 million for the Athleta brand, while comps remained flat year over year. Segmental results gained from 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. Net sales missed our estimate of $448.4 million.
Margins & Costs
The adjusted gross profit of $1,562 million reflected a 5.4% decrease from $1,652 million in the prior-year quarter. The adjusted gross margin of 38.7% contracted 320 basis points (bps) year over year due to a 370-bps decline in adjusted merchandise margins stemming from huge discounts and elevated commodity prices, somewhat offset by the lapping of last year’s higher air freight costs.
Adjusted operating income was $156 million compared with $170 million in the year-ago quarter. The adjusted operating margin contracted 40 bps year over year to 3.9%.
Adjusted operating expenses declined 5.1% year over year to $1,406 million.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal third quarter with cash and cash equivalents of $679 million, down from $801 million in the year-ago period. As of Jul 30, 2022, it had total stockholders’ equity of $2,571 million and long-term debt of $1,486 million.
In the nine months ending Oct 30, the company used $112 million in cash from operating activities. Gap bought back 1.2 million shares worth $12 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 declared a fourth-quarter dividend of 15 cents per share.
In the nine months ending Oct 30, the company’s capital expenditure was $577 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 Oct 29, 2022, Gap had 3,380 stores in more than 40 countries, of which 2,743 were company-operated and 637 were franchise outlets. For fiscal 2022, GPS plans to open 30 Gap and Banana Republic stores in North America as part of its 350 store-closure plan. It expects to open 10 Athleta stores, excluding 24 Old Navy Mexico stores.
As part of its 350-store closure plan, the company closed 29 Gap and Banana Republic stores in North America in the nine months ending Oct 29, 2022. It expects to close 30 more in the fourth quarter of fiscal 2022.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Guidance
Per management, it has been making efforts to lower inventory and rebalance its assortments to meet changing consumer needs, as well as reevaluate investments. Given the uncertain consumer environment and higher promotions, Gap expects sales to decline year over year in the mid-single digits in the fourth quarter of fiscal 2022. The gross margin is likely to leverage 540 basis points year over year in the fourth quarter of fiscal 2022, driven by air freight normalization, which is likely to be offset by 200 basis points of continued inflationary cost.
The company’s cost-cutting actions in the quarter under review resulted in $250 million in annualized savings. Part of this is envisioned to benefit the fourth quarter, offset by headwinds related to higher seasonal labor costs.
Stocks to Consider
Here are three better-ranked stocks to consider — Wingstop (WING - Free Report) , Kroger (KR - Free Report) and Chipotle Mexican Grill (CMG - Free Report) .
Wingstop currently sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. Shares of WING have declined 9.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank #2 (Buy). KR has an expected EPS growth rate of 11.7% for three to five years.
The Zacks Consensus Estimate for Kroger’s current financial-year revenues and EPS suggests growth of 7.8% and 9.8%, respectively, from the year-ago reported figures. KR has a trailing four-quarter earnings surprise of 15.7%, on average.
Chipotle Mexican Grill, an operator of fast-casual restaurants, currently carries a Zacks Rank #2. The expected EPS growth rate of the company for three to five years is 23.4%.
The Zacks Consensus Estimate for Chipotle Mexican Grill’s current financial-year revenues and EPS suggests growth of 15.2% and 30.8%, respectively, from the year-ago reported figures. CMG has a trailing four-quarter earnings surprise of 4.1%, on average.