Company Updates its Fiscal Year 2016
Outlook
Gap Inc. (NYSE: GPS) today announced second quarter fiscal year
2016 diluted earnings per share were $0.31 on a reported basis.
Excluding the impact associated with its previously announced
restructuring plans, which was approximately $0.29, the company’s
adjusted diluted earnings per share, a non-GAAP financial measure,
were $0.60 for the second quarter of fiscal year 2016.
The company noted that foreign currency fluctuations negatively
impacted earnings per share for the second quarter of fiscal year
2016 by an estimated $0.05, or about 8 percentage points of
earnings per share growth on an adjusted basis. The company also
noted that adjusted diluted earnings per share for the second
quarter of fiscal year 2016 were up slightly when compared to the
same period last year when excluding the impact of restructuring
costs for both periods, as well as the impact of foreign currency
fluctuations for the second quarter of fiscal year 2016. Please see
the reconciliation of adjusted diluted earnings per share, a
non-GAAP financial measure, from the GAAP financial measure in the
table at the end of this press release.
“During the quarter, we took critical steps to execute our
restructuring plans and to build a more efficient global brand
model with greater potential for growth,” said Art Peck, chief
executive officer, Gap Inc. “While I remain unsatisfied with the
pace of improvement across the business, I am encouraged by the
underlying signs of progress in Q2, as demonstrated by healthier
merchandise margins. Our management teams share my urgency to
create fundamental change that will drive long-term
performance.”
Second Quarter 2016 Comparable Sales Results
Gap Inc.’s comparable sales for the second quarter of fiscal
year 2016 were down 2 percent versus a 2 percent decrease last
year. Comparable sales by global brand for the second quarter were
as follows:
- Gap Global: negative 3 percent
versus negative 6 percent last year
- Banana Republic Global: negative
9 percent versus negative 4 percent last year
- Old Navy Global: flat versus
positive 3 percent last year
Net Sales Results
Net sales for the second quarter of fiscal year 2016 were $3.85
billion compared with $3.90 billion for the second quarter of
fiscal year 2015.
The following table details the company’s second quarter fiscal
year 2016 net sales:
($ in millions) Gap Global
Old NavyGlobal
BananaRepublicGlobal
Other (2)
Total
Percentageof Net Sales
Quarter Ended July 30, 2016 U.S. (1) $ 749 $ 1,500 $ 523 $
200 $ 2,972 77 % Canada 92 129 57 — 278 7 % Europe 159 — 17 — 176 5
% Asia 280 66 29 — 375 10 % Other regions 33 10
7 — 50 1 % Total $ 1,313 $ 1,705 $ 633 $ 200 $
3,851 100 %
($ in millions) Gap Global
Old NavyGlobal
BananaRepublicGlobal
Other (2)
Total
Percentageof Net Sales
Quarter Ended August 1, 2015 U.S. (1) $ 795 $ 1,500 $ 563 $
177 $ 3,035 78 % Canada 88 124 59 1 272 7 % Europe 176 — 20 — 196 5
% Asia 270 49 27 — 346 9 % Other regions 39 2
8 — 49 1 % Total $ 1,368 $ 1,675 $ 677 $ 178 $ 3,898
100 %
(1) U.S. includes the United States, Puerto Rico, and Guam.(2)
Includes Athleta and Intermix.
Additional Second Quarter Results and 2016 Outlook
Full Year Earnings per Share Guidance and Operating Margin
The company updated its reported diluted earnings per share
guidance for fiscal year 2016 to be in the range of $1.37 to $1.47.
Excluding the negative impact of restructuring costs, which is
expected to be approximately $0.45 to $0.50, the company expects
its adjusted diluted earnings per share to be in the range of $1.87
to $1.92. Please see the reconciliation of adjusted diluted
earnings per share, a non-GAAP financial measure, from the GAAP
financial measure in the table at the end of this press
release.
Excluding restructuring costs, the company now expects its
adjusted operating margin to be about 8.5 percent in fiscal year
2016.
Operating Expenses
Second quarter fiscal year 2016 reported operating expenses were
$1.16 billion compared with $1.09 billion for the second quarter
last year. Excluding restructuring costs for the second quarters of
fiscal years 2016 and 2015, second quarter fiscal year 2016
operating expenses were about flat versus last year.
Marketing expenses for the second quarter of fiscal year 2016
were $131 million, or about flat versus the second quarter of last
year.
Effective Tax Rate
The effective tax rate was 52.5 percent for the second quarter
of fiscal year 2016. The second quarter effective tax rate reflects
the impact of certain non-cash tax expenses related to foreign
restructuring costs, which resulted in an increase to the effective
tax rate of approximately 10 percentage points.
The company now expects its reported fiscal year 2016 effective
tax rate to be about 44 percent. Excluding the tax impacts of the
restructuring costs, the company expects its adjusted fiscal year
2016 effective tax rate to be about 40 percent.
Inventory
Total inventory dollars were down about 3 percent at the end of
the second quarter of fiscal year 2016, in-line with the company’s
previous guidance. At the end of the third quarter of fiscal year
2016, the company expects total inventory dollars to be down in the
low single digits year-over-year.
Cash and Cash Equivalents
The company ended the second quarter of fiscal year 2016 with
$1.7 billion in cash and cash equivalents. Year-to-date free cash
flow, defined as net cash provided by operating activities less
purchases of property and equipment, was an inflow of $464 million.
Please see the reconciliation of free cash flow, a non-GAAP
financial measure, from the GAAP financial measure in the tables at
the end of this press release.
Cash Distribution
The company paid a dividend of $0.23 per share during the second
quarter of fiscal year 2016. In addition, on August 11, 2016, the
company announced that its board of directors authorized a third
quarter dividend of $0.23 per share. The company ended the quarter
with 398 million shares outstanding.
Capital Expenditures
Fiscal year-to-date 2016 capital expenditures were $270 million.
For fiscal year 2016, the company continues to expect capital
spending to be approximately $525 million.
Depreciation and Amortization
The company continues to expect depreciation and amortization
expense, net of amortization of lease incentives, to be about $550
million for fiscal year 2016.
Real Estate
The company ended the second quarter of fiscal year 2016 with
3,730 store locations in 52 countries, of which 3,273 were
company-operated.
During the second quarter of fiscal year 2016, the company
opened 19 and closed 22 company-operated stores. Square footage of
company-operated stores was down about 1 percent compared with the
second quarter of fiscal year 2015.
Gap Inc. continues to expect net closures of about 50
company-operated stores in fiscal year 2016. Additionally, the
company continues to expect square footage to be down about 2
percent for fiscal year 2016 when compared with fiscal year
2015.
Store count, openings, closings, and square footage for our
stores are as follows:
13 Weeks Ended July 30, 2016
Store LocationsBeginning of
Q2
Store LocationsOpened
Store LocationsClosed
Store LocationsEnd of Q2
Square Feet(millions)
Gap North America 862 3 9 856 8.9 Gap Asia 312 4 2 314 3.1 Gap
Europe 173 - 6 167 1.4 Old Navy North America 1,029 6 3 1,032 17.4
Old Navy Asia 69 - - 69 1.0 Banana Republic North America 607 2 -
609 5.1 Banana Republic Asia 51 - 1 50 0.2 Banana Republic Europe
10 - - 10 0.1 Athleta North America 122 4 - 126 0.5 Intermix North
America 41 - 1 40 0.1 Company-operated stores total 3,276 19 22
3,273 37.8 Franchise 451 14 8 457 N/A Total 3,727 33 30 3,730 37.8
Webcast and Conference Call Information
Jack Calandra, senior vice president of Corporate Finance and
Investor Relations at Gap Inc., will host a summary of the
company’s second quarter fiscal year 2016 results during a
conference call and webcast from approximately 1:30 p.m. to 2:15
p.m. Pacific Time today. Mr. Calandra will be joined by Art Peck,
Gap Inc. chief executive officer, and Sabrina Simmons, Gap Inc.
chief financial officer.
The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 7405599). International
callers may dial 913-643-0954. The webcast can be accessed at
www.gapinc.com.
August Sales
The company will report August sales at 1:15pm Pacific Time on
September 1, 2016.
Forward-Looking Statements
This press release and related conference call and webcast
contain forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
All statements other than those that are purely historical are
forward-looking statements. Words such as “expect,” “anticipate,”
“believe,” “estimate,” “intend,” “plan,” “project,” and similar
expressions also identify forward-looking statements.
Forward-looking statements include statements regarding the
following:
- earnings per share for fiscal
2016;
- operating margin for fiscal 2016;
- tax rate for fiscal 2016;
- total inventory dollars at the end of
the third quarter of fiscal 2016;
- repayment of the term loan in fiscal
2016;
- capital expenditures for fiscal
2016;
- depreciation and amortization expense
for fiscal year 2016;
- store closings in fiscal year 2016;
and
- square footage for fiscal 2016.
Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause the
company’s actual results to differ materially from those in the
forward-looking statements. These factors include, without
limitation, the following:
- the risk that additional information
may arise during the company’s close process or as a result of
subsequent events that would require the company to make
adjustments to the financial information;
- the risk that the adoption of new
accounting pronouncements will impact future results;
- the risk that we or our franchisees
will be unsuccessful in gauging apparel trends and changing
consumer preferences;
- the risk that changes in global
economic conditions or consumer spending patterns could adversely
impact our results of operations;
- the highly competitive nature of our
business in the United States and internationally;
- the risk that if we are unable to
manage our inventory effectively, our gross margins will be
adversely affected;
- the risk that the failure to attract
and retain key personnel, or effectively manage succession, could
have an adverse impact on our results of operations;
- the risk that we are subject to data or
other security breaches that may result in increased costs,
violations of law, significant legal and financial exposure, and a
loss of confidence in our security measures, which could have an
adverse effect on our results of operations and our
reputation;
- the risks to our efforts to expand
internationally, including our ability to operate under a global
brand structure and operating in regions where we have less
experience;
- the risk that foreign currency exchange
rate fluctuations could adversely impact our financial
results;
- the risks to our business, including
our costs and supply chain, associated with global sourcing and
manufacturing;
- the risks to our reputation or
operations associated with importing merchandise from foreign
countries, including failure of our vendors to adhere to our Code
of Vendor Conduct;
- the risk that trade matters could
increase the cost or reduce the supply of apparel available to us
and adversely affect our business, financial condition, and results
of operations;
- the risk that our franchisees’
operation of franchise stores is not directly within our control
and could impair the value of our brands;
- the risk that we or our franchisees
will be unsuccessful in identifying, negotiating, and securing new
store locations and renewing, modifying, or terminating leases for
existing store locations effectively;
- the risk that our investments in
omni-channel shopping initiatives may not deliver the results we
anticipate;
- the risk that comparable sales and
margins will experience fluctuations;
- the risk that changes in our credit
profile or deterioration in market conditions may limit our access
to the capital markets and adversely impact our financial results
or our business initiatives;
- the risk that updates or changes to our
information technology systems may disrupt our operations;
- the risk that failure to maintain,
enhance and protect our brand image could have an adverse effect on
our results of operations;
- the risk that natural disasters, public
health crises, political crises, or other catastrophic events could
adversely affect our operations and financial results, or those of
our franchisees or vendors;
- the risk that changes in the regulatory
or administrative landscape could adversely affect our financial
condition, strategies, and results of operations;
- the risk that we do not repurchase some
or all of the shares we anticipate purchasing pursuant to our
repurchase program; and
- the risk that we will not be successful
in defending various proceedings, lawsuits, disputes, claims, and
audits.
Additional information regarding factors that could cause
results to differ can be found in the company’s Annual Report on
Form 10-K for the fiscal year ended January 30, 2016, as well as
the company’s subsequent filings with the Securities and Exchange
Commission.
These forward-looking statements are based on information as of
August 18, 2016. The company assumes no obligation to publicly
update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results
expressed or implied therein will not be realized.
About Gap Inc.
Gap Inc. is a leading global retailer offering clothing,
accessories, and personal care products for men, women, and
children under the Gap, Banana Republic, Old Navy, Athleta, and
Intermix brands. Fiscal year 2015 net sales were $15.8 billion. Gap
Inc. products are available for purchase in more than 90 countries
worldwide through about 3,300 company-operated stores, about 450
franchise stores, and e-commerce sites. For more information,
please visit www.gapinc.com.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE
SHEETS UNAUDITED ($ in
millions)
July 30,2016
August 1,2015
ASSETS Current assets: Cash and cash equivalents $ 1,681 $ 1,043
Merchandise inventory 1,951 2,005 Other current assets 669
899 Total current assets 4,301 3,947 Property and equipment,
net 2,755 2,740 Other long-term assets 681 600 Total
assets $ 7,737 $ 7,287 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current maturities of debt $ 424 $ 20 Accounts
payable 1,224 1,206 Accrued expenses and other current liabilities
1,063 954 Income taxes payable 70 4 Total current
liabilities 2,781 2,184 Long-term liabilities:
Long-term debt 1,321 1,328 Lease incentives and other long-term
liabilities 1,076 1,104 Total long-term liabilities
2,397 2,432 Total stockholders' equity 2,559
2,671
Total liabilities and stockholders'
equity
$ 7,737 $ 7,287
The Gap, Inc. CONDENSED
CONSOLIDATED STATEMENTS OF INCOME UNAUDITED
13 Weeks Ended
26 Weeks Ended ($ and shares in millions except per share
amounts)
July 30,2016
August 1,2015
July 30,2016
August 1,2015
Net sales $ 3,851 $ 3,898 $ 7,289 $ 7,555 Cost of goods sold and
occupancy expenses 2,414 2,440 4,643
4,715 Gross profit 1,437 1,458 2,646 2,840 Operating expenses
1,158 1,089 2,145 2,085 Operating
income 279 369 501 755 Interest, net 16 16 34
20 Income before income taxes 263 353 467 735 Income taxes
138 134 215 277 Net income $ 125 $ 219
$ 252 $ 458 Weighted-average number of shares - basic 398
417 398 419 Weighted-average number of shares - diluted 399 418 399
421 Earnings per share - basic $ 0.31 $ 0.53 $ 0.63 $ 1.09
Earnings per share - diluted $ 0.31 $ 0.52 $ 0.63 $ 1.09
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS UNAUDITED
26 Weeks Ended ($ in millions)
July 30,2016
August 1,2015
Cash flows from operating activities: Net income $ 252 $ 458
Depreciation and amortization (a) 272 263 Change in merchandise
inventory (52 ) (124 ) Other, net 262 45
Net cash provided by operating activities 734
642 Cash flows from investing activities:
Purchases of property and equipment (270 ) (301 ) Other (1 )
(1 ) Net cash used for investing activities (271 )
(302 ) Cash flows from financing activities: Proceeds
from issuances under share-based compensation plans 16 53
Withholding tax payments related to vesting of stock units (17 )
(68 ) Repurchases of common stock - (622 ) Excess tax benefit from
exercise of stock options and vesting of stock units 1 24 Cash
dividends paid (183 ) (192 ) Other 23 (1 ) Net
cash used for financing activities (160 ) (806 )
Effect of foreign exchange rate fluctuations on cash and
cash equivalents 8 (6 ) Net increase
(decrease) in cash and cash equivalents 311 (472 ) Cash and cash
equivalents at beginning of period 1,370 1,515
Cash and cash equivalents at end of period $ 1,681 $
1,043 (a) Depreciation and amortization
is net of amortization of lease incentives.
The
Gap, Inc. NON-GAAP FINANCIAL MEASURES UNAUDITED
FREE CASH FLOW Free cash flow is
a non-GAAP financial measure. We believe free cash flow is an
important metric because it represents a measure of how much cash a
company has available for discretionary and non-discretionary items
after the deduction of capital expenditures, as we require regular
capital expenditures to build and maintain stores and purchase new
equipment to improve our business. We use this metric internally,
as we believe our sustained ability to generate free cash flow is
an important driver of value creation. However, this non-GAAP
financial measure is not intended to supersede or replace our GAAP
results.
26 Weeks Ended ($ in millions)
July 30, 2016
August 1,2015
Net cash provided by operating activities $ 734 $ 642 Less:
Purchases of property and equipment (270 ) (301 )
Free cash flow
$ 464 $ 341
The Gap, Inc. NON-GAAP
FINANCIAL MEASURES UNAUDITED
ADJUSTED INCOME STATEMENT METRICS The
following adjusted income statement metrics are non-GAAP financial
measures. These measures are provided to enhance visibility into
the company's underlying results for the period excluding the
impact of costs related to fiscal year 2016 restructuring
activities and fiscal year 2015 strategic actions. However, these
non-GAAP financial measures are not intended to supersede or
replace the GAAP measures.
($ in millions)
13 Weeks Ended July 30, 2016
Gross Profit
Gross Margin
OperatingExpenses
OperatingExpenses as a%
of Net Sales
OperatingIncome
OperatingIncome as a %of
Net Sales
GAAP metrics, as reported $ 1,437 37.3 % $ 1,158 30.1 % $ 279 7.2 %
Adjustments for impact of fiscal year 2016 restructuring costs (a)
15 0.4 % (135 ) (3.5 )% 150 3.9 % Non-GAAP
metrics $ 1,452 37.7 % $ 1,023 26.6 % $ 429 11.1 %
($ in millions) 13 Weeks
Ended August 1, 2015 Gross Profit Gross Margin
OperatingExpenses
OperatingExpenses as a%
of Net Sales
OperatingIncome
OperatingIncome as a %of
Net Sales
GAAP metrics, as reported $ 1,458 37.4 % $ 1,089 27.9 % $ 369 9.5 %
Adjustments for impact of fiscal year 2015 strategic actions (b)
12 0.3 % (71 ) (1.8 )% 83 2.1 % Non-GAAP
metrics $ 1,470 37.7 % $ 1,018 26.1 % $ 452 11.6 %
______________________________ (a) Represents the
restructuring costs related to fiscal year 2016 store closures and
streamlining the company's operations incurred in the second
quarter of fiscal year 2016 and impact on percentage of net sales.
The costs primarily include lease termination fees, store asset
impairments, and employee related costs. (b) Represents the
costs associated with the fiscal year 2015 strategic actions
primarily related to Gap brand incurred in the second quarter of
fiscal year 2015 and impact on percentage of net sales. The costs
primarily include inventory impairment, lease termination fees,
store asset impairments, and employee related costs.
The Gap, Inc. NON-GAAP FINANCIAL MEASURES
UNAUDITED ADJUSTED NET INCOME FOR THE
SECOND QUARTER OF FISCAL YEARS 2016 AND 2015 Adjusted
net income is a non-GAAP financial measure. Adjusted net income for
the second quarter of fiscal years 2016 and 2015 is provided to
enhance visibility into the company's underlying results for the
period excluding the impact of costs related to fiscal year 2016
restructuring activities and fiscal year 2015 strategic actions.
However, this non-GAAP financial measure is not intended to
supersede or replace the GAAP measure.
13 Weeks Ended
($ in millions) July 30, 2016 August 1, 2015
Net income, as reported $ 125 $ 219 Add: Fiscal year 2016
restructuring costs (a) 150 - Add: Fiscal year 2015 strategic
actions (b) - 83 Less: Tax benefit (c) (63 ) (32 )
Add: Incremental tax expenses related to
fiscal year 2016 restructuring costs (d)
26 - Adjusted net income $ 238 $
270 ____________________ (a) Represents
the restructuring costs incurred related to fiscal year 2016 store
closures and streamlining the company's operations, and primarily
include lease termination fees, store asset impairments, and
employee related costs. (b) Represents the costs associated
with the fiscal year 2015 strategic actions primarily related to
Gap brand, and primarily include inventory impairment, lease
termination fees, store asset impairments, and employee related
costs. (c) The amount of tax benefit associated with the
fiscal year 2016 restructuring costs is calculated using the
adjusted effective tax rate. The amount of tax benefit associated
with the fiscal year 2015 strategic actions is calculated using the
reported effective tax rate. (d) Represents the incremental
tax expenses related to fiscal year 2016 restructuring costs.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED ADJUSTED EARNINGS
PER SHARE FOR THE SECOND QUARTER OF FISCAL YEARS 2016 AND 2015
Adjusted diluted earnings per share is a non-GAAP financial
measure. Adjusted diluted earnings per share for the second quarter
of fiscal years 2016 and 2015 are provided to enhance visibility
into the company's underlying results for the period excluding the
impact of costs related to fiscal year 2016 restructuring
activities and fiscal year 2015 strategic actions, as well as the
impact from foreign currency exchange rate fluctuations. We believe
this measure provides a more comparable measure of year-over-year
earnings per share growth. However, this non-GAAP financial measure
is not intended to supersede or replace the GAAP measure.
13 Weeks Ended July 30, 2016 August 1, 2015
Earnings per share - diluted $ 0.31 $ 0.52
Add: Impact of fiscal year 2016
restructuring costs (a)
0.22 -
Add: Impact of incremental tax expenses
related to fiscal year 2016 restructuring costs (b)
0.07 - Add: Impact of fiscal year 2015 strategic actions (c)
0.12 Diluted earnings per share adjusted for certain costs
0.60 $ 0.64 Add: Estimated impact from foreign exchange (d)
0.05 Diluted earnings per share adjusted for certain
costs and foreign exchange $ 0.65 Earnings per
share decline adjusted for certain costs (6 )%
Earnings per share growth adjusted for certain costs and foreign
exchange 2 % Foreign exchange impact on adjusted
earnings per share growth 8 %
____________________ (a) Represents the earnings per share impact
of restructuring costs incurred related to fiscal year 2016 store
closures and streamlining the company's operations, calculated net
of tax at adjusted effective tax rate. The costs primarily include
lease termination fees, store asset impairments, and employee
related costs. (b) Represents the earnings per share impact
of incremental tax expenses related to fiscal year 2016
restructuring costs. (c) Represents the earnings per share
impact of costs associated with the fiscal year 2015 strategic
actions primarily related to Gap brand, calculated net of tax at
reported effective tax rate. The costs primarily include inventory
impairment, lease termination fees, store asset impairments, and
employee related costs. (d) In estimating the earnings per
share impact from foreign currency exchange rate fluctuations, the
company estimates current gross margins using the appropriate prior
year rates (including the impact of merchandise-related hedges),
translates current period adjusted foreign earnings at prior year
rates, and excludes the year-over-year earnings impact of balance
sheet remeasurement and gains or losses from
non-merchandise-related foreign currency hedges.
The Gap, Inc. NON-GAAP FINANCIAL MEASURES
UNAUDITED EXPECTED ADJUSTED EARNINGS PER
SHARE FOR FISCAL YEAR 2016 Expected adjusted diluted
earnings per share is a non-GAAP financial measure. Expected
adjusted diluted earnings per share for fiscal year 2016 is
provided to enhance visibility into the company's expected
underlying results for the period excluding the impact of
restructuring costs. However, this non-GAAP financial measure is
not intended to supersede or replace the GAAP measure.
52 Weeks EndingJanuary 28,
2017
Low End High End Expected earnings per share -
diluted $ 1.37 $ 1.47 Add: Estimated impact of restructuring costs
(a) 0.50 0.45 Expected adjusted earnings per share -
diluted $ 1.87 $ 1.92 ____________________ (a)
Represents the estimated earnings per share impact of restructuring
costs related to fiscal year 2016 store closures, streamlining the
company's operations, and certain incremental tax expenses.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160818006116/en/
Gap Inc.Investor Relations Contact:Jack Calandra,
415-427-1726Investor_relations@gap.comorMedia Relations
Contact:Jennifer Poppers, 415-427-1729Press@gap.com
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