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Gap's (GPS) Loss Wider Than Estimates in Q4, Sales Miss
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Shares of The Gap Inc. (GPS - Free Report) declined more than 8% in the after-market session on Mar 9, following the dismal fourth-quarter fiscal 2022 results, wherein the top and bottom lines lagged the Zacks Consensus Estimate. Also, both metrics declined year over year.
Despite inflationary pressure and drab demand, the company undertook actions such as lowering excess inventory, improving assortment balance, particularly at Old Navy, and optimizing the cost structure.
In the past three months, shares of the company have plunged 17.2% against the industry’s 3% growth.
Image Source: Zacks Investment Research
Q4 Details
For the fiscal fourth quarter, the adjusted loss of 75 cents per share was wider than the Zacks Consensus Estimate of a loss of 59 cents, whereas the same met our estimate. However, the metric compared unfavorably with a loss of 2 cents reported in fourth-quarter fiscal 2021.
Net sales declined 6% year over year to $4,243 million and missed the Zacks Consensus Estimate of $4,327 million and our estimate of $4,293.6 million. This includes a currency headwind of 1 point. The metric also decreased 19% from the pre-pandemic level. Comparable sales (comps) fell 5% on a year-over-year basis.
Digital sales decreased 10% year over year, accounting for 41% of the total sales for the reported quarter. The metric jumped 29% from the pre-pandemic levels. Store sales moved down 3% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global fell 6% year over year to $2,166 million due to muted demand, stemming from lower-income consumers, and sluggishness in the kids and baby category. This was somewhat offset by the strength in the women’s category. The metric surpassed our estimate of $2,072.3 million. Comps also declined 7% year over year.
Gap Global: For fourth-quarter fiscal 2022, net sales declined 9% year over year to $1,061 million due to the softness in the kids and baby category, offset by strength across the women’s category. Also, the shutdown of Yeezy Gap negatively impacted growth in North America. The metric beat our estimate of $658.7 million. Comps decreased 4% year over year, while North America comps fell 5%.
Banana Republic: Net sales fell 6% to $578 million and comps were down 3%, owing to weakness in outerwear and sweaters, and its holiday gifting assortment. On the flip side, dresses and suiting drove comp growth. Sales surpassed our estimate of $500.7 million.
Athleta: Net sales edged down 1% to $436 million for the Athleta brand, while comps fell 5% year over year. Segmental results were hurt by products not matching consumer preferences. However, management expects the brand to continue gaining market share. Net sales beat our estimate of $381.4 million.
Margins & Costs
The adjusted gross margin of 35% contracted 480 basis points (bps) year over year due to a 430-bps decline in adjusted merchandise margins, stemming from huge discounts and inflationary headwinds.
The adjusted operating loss was $6 million in the reported quarter, excluding impairment charges related to inventory, $35 million in costs related to the transition of Old Navy Mexico, and an $83-million gain on sale related to a UK distribution center.
Adjusted SG&A, as a percentage of sales, deleveraged 80 basis points from the prior year due to lower sales volume in the quarter.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal fourth quarter with cash and cash equivalents of $1,215 million, down from $877 million in the year-ago period. As of Jan 28, 2023, it had total stockholders’ equity of $2,233 million and long-term debt of $1,486 million.
As of Jan 28, the company generated $607 million in cash from operating activities. Gap paid out a dividend of $54 million in the said quarter. GPS also approved a quarterly dividend of 15 cents per share in the quarter under review.
As of Jan 28, the company’s capital expenditure was $685 million. For fiscal 2023, capital expenditure is forecast to be $500-$550 million for lower technology project investments and fewer store openings.
Store Update
As of Jan 28, 2023, Gap had 3,352 stores in more than 40 countries, of which 2,685 were company-operated and 667 were franchise outlets. For fiscal 2023, GPS plans to open 30-35 Old Navy and Athleta, and close 50-55 Gap and Banana Republic stores.
The company is likely to fulfill its 350-store closure plan by the end of 2023. It already achieved 90% of the target in 2022.
For first-quarter fiscal 2023, management expects a sales decline in the mid-single-digit range compared with the prior-year quarter’s reported figure of $3.5 billion. The sale of Gap China to Baozun closed on Jan 31, 2023.
For fiscal 2023, net sales are anticipated to decrease in the low to mid-single-digit range compared with the prior year’s reported sales of $15.6 billion. The view will include a 53rd week, which is estimated to favorably impact sales by $150 million.
The company expects year-over-year gross margin expansions for the first quarter and fiscal 2023. SG&A expenses are predicted to be $1.2 billion in the first quarter and $5.2 billion in fiscal 2023.
The company expects first quarter and fiscal 2023 gross margin expansion year over year driven by 550 basis points of leverage relate to lapping of last year's elevated air freight and 360 basis points of deleverage stemming from inflationary cost headwinds. These inflationary headwinds are expected to moderate and become a tailwind in the back half of the year. At least half of this 360-basis-point inflationary headwind is expected to be offset by less discounting and promotional activity, particularly at Old Navy.
SG&A expense is predicted to be $1.2 billion in the first quarter and $5.2 billion in fiscal 2023. The metric is likely to reflect continued benefit of last year's savings actions, offset by higher incentive compensation. The company expects higher incentive compensation and wage inflation in fiscal 2023, which is likely to be fully offset by the cost savings initiatives implemented in fiscal 2022.
Business Development
The company has been making efforts to simplify and optimize its operating model and structure, including increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, as well as creating a consistent organizational structure across all four brands. These actions are expected to generate $300 million in annualized savings, of which half is expected to be realized in the latter half of fiscal 2023. The company is also likely to incur severance and other related costs related to the optimization plan.
Apart from these efforts, the company is expected to realize $250 million in annualized savings, as announced in the third quarter of fiscal 2022. Over the last six months, it identified $550 million in annualized savings in total. Gap revealed plans to further optimize its marketing spend and rationalize its technology investments over the next few years.
Stocks to Consider
Here are some better-ranked stocks you may want to consider — Urban Outfitters (URBN - Free Report) , Arhaus (ARHS - Free Report) and American Eagle Outfitters (AEO - Free Report) .
Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year revenues suggests growth of 5% from the year-ago reported figure.
Arhaus, which operates as a lifestyle brand and premium retailer in the home furnishing market, carries a Zacks Rank #2 at present. Its expected EPS growth rate for three to five years is 16.1%.
The Zacks Consensus Estimate for Arhaus’ revenues and EPS suggests growth of 54% and 26.1%, respectively, from the year-ago reported figures. Arhaus has a trailing four-quarter earnings surprise of 112%, on average.
American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.
The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year sales and EPS suggests growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.
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Gap's (GPS) Loss Wider Than Estimates in Q4, Sales Miss
Shares of The Gap Inc. (GPS - Free Report) declined more than 8% in the after-market session on Mar 9, following the dismal fourth-quarter fiscal 2022 results, wherein the top and bottom lines lagged the Zacks Consensus Estimate. Also, both metrics declined year over year.
Despite inflationary pressure and drab demand, the company undertook actions such as lowering excess inventory, improving assortment balance, particularly at Old Navy, and optimizing the cost structure.
In the past three months, shares of the company have plunged 17.2% against the industry’s 3% growth.
Image Source: Zacks Investment Research
Q4 Details
For the fiscal fourth quarter, the adjusted loss of 75 cents per share was wider than the Zacks Consensus Estimate of a loss of 59 cents, whereas the same met our estimate. However, the metric compared unfavorably with a loss of 2 cents reported in fourth-quarter fiscal 2021.
Net sales declined 6% year over year to $4,243 million and missed the Zacks Consensus Estimate of $4,327 million and our estimate of $4,293.6 million. This includes a currency headwind of 1 point. The metric also decreased 19% from the pre-pandemic level. Comparable sales (comps) fell 5% on a year-over-year basis.
Digital sales decreased 10% year over year, accounting for 41% of the total sales for the reported quarter. The metric jumped 29% from the pre-pandemic levels. Store sales moved down 3% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global fell 6% year over year to $2,166 million due to muted demand, stemming from lower-income consumers, and sluggishness in the kids and baby category. This was somewhat offset by the strength in the women’s category. The metric surpassed our estimate of $2,072.3 million. Comps also declined 7% year over year.
Gap Global: For fourth-quarter fiscal 2022, net sales declined 9% year over year to $1,061 million due to the softness in the kids and baby category, offset by strength across the women’s category. Also, the shutdown of Yeezy Gap negatively impacted growth in North America. The metric beat our estimate of $658.7 million. Comps decreased 4% year over year, while North America comps fell 5%.
Banana Republic: Net sales fell 6% to $578 million and comps were down 3%, owing to weakness in outerwear and sweaters, and its holiday gifting assortment. On the flip side, dresses and suiting drove comp growth. Sales surpassed our estimate of $500.7 million.
Athleta: Net sales edged down 1% to $436 million for the Athleta brand, while comps fell 5% year over year. Segmental results were hurt by products not matching consumer preferences. However, management expects the brand to continue gaining market share. Net sales beat our estimate of $381.4 million.
Margins & Costs
The adjusted gross margin of 35% contracted 480 basis points (bps) year over year due to a 430-bps decline in adjusted merchandise margins, stemming from huge discounts and inflationary headwinds.
The adjusted operating loss was $6 million in the reported quarter, excluding impairment charges related to inventory, $35 million in costs related to the transition of Old Navy Mexico, and an $83-million gain on sale related to a UK distribution center.
Adjusted SG&A, as a percentage of sales, deleveraged 80 basis points from the prior year due to lower sales volume in the quarter.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal fourth quarter with cash and cash equivalents of $1,215 million, down from $877 million in the year-ago period. As of Jan 28, 2023, it had total stockholders’ equity of $2,233 million and long-term debt of $1,486 million.
As of Jan 28, the company generated $607 million in cash from operating activities. Gap paid out a dividend of $54 million in the said quarter. GPS also approved a quarterly dividend of 15 cents per share in the quarter under review.
As of Jan 28, the company’s capital expenditure was $685 million. For fiscal 2023, capital expenditure is forecast to be $500-$550 million for lower technology project investments and fewer store openings.
Store Update
As of Jan 28, 2023, Gap had 3,352 stores in more than 40 countries, of which 2,685 were company-operated and 667 were franchise outlets. For fiscal 2023, GPS plans to open 30-35 Old Navy and Athleta, and close 50-55 Gap and Banana Republic stores.
The company is likely to fulfill its 350-store closure plan by the end of 2023. It already achieved 90% of the target in 2022.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Guidance
For first-quarter fiscal 2023, management expects a sales decline in the mid-single-digit range compared with the prior-year quarter’s reported figure of $3.5 billion. The sale of Gap China to Baozun closed on Jan 31, 2023.
For fiscal 2023, net sales are anticipated to decrease in the low to mid-single-digit range compared with the prior year’s reported sales of $15.6 billion. The view will include a 53rd week, which is estimated to favorably impact sales by $150 million.
The company expects year-over-year gross margin expansions for the first quarter and fiscal 2023. SG&A expenses are predicted to be $1.2 billion in the first quarter and $5.2 billion in fiscal 2023.
The company expects first quarter and fiscal 2023 gross margin expansion year over year driven by 550 basis points of leverage relate to lapping of last year's elevated air freight and 360 basis points of deleverage stemming from inflationary cost headwinds. These inflationary headwinds are expected to moderate and become a tailwind in the back half of the year. At least half of this 360-basis-point inflationary headwind is expected to be offset by less discounting and promotional activity, particularly at Old Navy.
SG&A expense is predicted to be $1.2 billion in the first quarter and $5.2 billion in fiscal 2023. The metric is likely to reflect continued benefit of last year's savings actions, offset by higher incentive compensation. The company expects higher incentive compensation and wage inflation in fiscal 2023, which is likely to be fully offset by the cost savings initiatives implemented in fiscal 2022.
Business Development
The company has been making efforts to simplify and optimize its operating model and structure, including increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, as well as creating a consistent organizational structure across all four brands. These actions are expected to generate $300 million in annualized savings, of which half is expected to be realized in the latter half of fiscal 2023. The company is also likely to incur severance and other related costs related to the optimization plan.
Apart from these efforts, the company is expected to realize $250 million in annualized savings, as announced in the third quarter of fiscal 2022. Over the last six months, it identified $550 million in annualized savings in total. Gap revealed plans to further optimize its marketing spend and rationalize its technology investments over the next few years.
Stocks to Consider
Here are some better-ranked stocks you may want to consider — Urban Outfitters (URBN - Free Report) , Arhaus (ARHS - Free Report) and American Eagle Outfitters (AEO - Free Report) .
Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year revenues suggests growth of 5% from the year-ago reported figure.
Arhaus, which operates as a lifestyle brand and premium retailer in the home furnishing market, carries a Zacks Rank #2 at present. Its expected EPS growth rate for three to five years is 16.1%.
The Zacks Consensus Estimate for Arhaus’ revenues and EPS suggests growth of 54% and 26.1%, respectively, from the year-ago reported figures. Arhaus has a trailing four-quarter earnings surprise of 112%, on average.
American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.
The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year sales and EPS suggests growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.