Gap Inc. (NYSE: GPS) today reported diluted earnings per share
of $0.37 on a reported basis, and $0.53 on an adjusted basis,
excluding costs associated with the company’s planned separation,
and costs related to the previously announced specialty fleet
restructuring. Please see the reconciliation of adjusted diluted
earnings per share, a non-GAAP financial measure, from the GAAP
financial measure in the tables at the end of this press
release.
“We are not pleased with the third quarter results and are
focused on aggressively addressing the operational issues that are
hindering the performance of our brands,” said Robert J. Fisher,
Gap Inc. interim president and chief executive officer. “We
continue to make progress against our separation plans, which will
provide improved focus and a further catalyst for
transformation.”
Third Quarter 2019 Comparable Sales Results
The company’s third quarter fiscal year 2019 comparable sales
were down 4% versus flat last year. Comparable sales by global
brand for the third quarter were as follows:
- Old Navy Global: negative 4% versus positive 4% last
year
- Gap Global: negative 7% versus negative 7% last
year
- Banana Republic Global: negative 3% versus positive 2%
last year
For the third quarter ended November 2, 2019:
- Net sales were $4.0 billion, a decrease of 2% compared with
last year.
- The translation of foreign currencies into U.S. dollars
negatively impacted the company’s net sales for the third quarter
of fiscal year 2019 by about $12 million.1
- Third quarter net sales details appear in the tables at the end
of this press release.
- Gross profit was $1.56 billion, a decrease of 4% compared with
last year.
- Gross margin was 39.0%, a decrease of 70 basis points compared
with last year.
- Operating margin was 5.5%, a decrease of 340 basis points
compared with last year. Adjusted operating margin was 7.5%, a
decrease of 140 basis points compared with last year. Please see
the reconciliation of adjusted operating margin, a non-GAAP
financial measure, from the GAAP financial measure in the tables at
the end of this press release.
- The effective tax rate was 33.0% for the third quarter of
fiscal year 2019. The third quarter effective tax rate reflects
non-cash tax impacts related to restructuring charges incurred in
the quarter, which resulted in an increase to the effective tax
rate of approximately 2 percentage points.
- Diluted earnings per share were $0.37 compared with $0.69 last
year. Adjusted diluted earnings per share were $0.53 for the third
quarter of fiscal year 2019. Please see the reconciliation of
adjusted diluted earnings per share, a non-GAAP financial measure,
from the GAAP financial measure in the tables at the end of this
press release.
- The company ended the third quarter of fiscal year 2019 with
$2.72 billion in merchandise inventory, up about 2% year over year.
The company noted that about three points of the increase in
merchandise inventory was driven by the acquisition of Janie and
Jack, which occurred in the first quarter of fiscal year 2019, net
store growth year over year, and tariffs.
- During the quarter, the company repurchased 2.9 million shares
for $50 million and ended the third quarter of fiscal year 2019
with 373 million shares outstanding.
- The company paid a dividend of $0.2425 per share during the
third quarter of fiscal year 2019. In addition, on November 14,
2019, the company announced that its Board of Directors authorized
a fourth quarter dividend of $0.2425 per share.
The company ended the third quarter of fiscal year 2019 with
$1.1 billion in cash, cash equivalents, and short-term investments.
Year-to-date free cash flow, defined as net cash from operating
activities less purchases of property and equipment, was $5 million
compared with $57 million last year. 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.
Fiscal year-to-date 2019 capital expenditures were $523
million.
The company ended the third quarter of fiscal year 2019 with
3,938 store locations in 44 countries, of which 3,396 were
company-operated.
2019 Outlook
Earnings per Share The company affirmed its reported diluted
earnings per share guidance for fiscal year 2019 to be in the range
of $1.38 to $1.47 and its adjusted diluted earnings per share
guidance range of $1.70 to $1.75.
Comparable Sales The company now expects comparable sales for
fiscal year 2019 to be down mid-single digits.
Net Sales The company now expects net sales growth for fiscal
year 2019 to be down low-single digits.
Effective Tax Rate The company now expects its reported fiscal
year 2019 effective tax rate to be about 31%. Excluding current
year adjustments to our fiscal year 2017 tax liability under TCJA
for additional guidance issued by the U.S. Treasury Department and
certain non-cash tax impacts related to expected restructuring
charges, the company continues to expect its adjusted fiscal year
2019 effective tax rate to be about 26%.
Share Repurchases The company continues to expect to repurchase
approximately $50 million in the fourth quarter of fiscal year
2019.
Capital Expenditures The company now expects capital spending to
be approximately $835 million for fiscal year 2019, which includes
about $160 million of separation-related capital spend and about
$100 million of expansion costs related to a headquarters building
and a buildout of its Ohio distribution center.
Real Estate The company now expects to close about 15
company-operated stores, net of openings and repositions in fiscal
year 2019. This guidance also includes about 130 closures related
to the Gap brand fleet restructuring, the majority of which are
expected to close in the fourth quarter of fiscal 2019. The company
continues to expect store openings to be focused on Old Navy,
Athleta and Gap China locations.
Webcast and Conference Call Information
Tina Romani, senior director of investor relations at Gap Inc.,
will host a summary of the company’s third quarter fiscal year 2019
results during a conference call and webcast from approximately
2:00 p.m. to 3:00 p.m. Pacific Time today. Ms. Romani will be
joined by Robert J. Fisher, Gap Inc. interim president and chief
executive officer, and Teri List-Stoll, Gap Inc. executive vice
president and chief financial officer.
The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 1359664). International
callers may dial 1-323-794-2078. The webcast can be accessed at
www.gapinc.com.
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 year 2019; comparable
sales for fiscal year 2019; effective tax rate for fiscal year
2019; share repurchases per quarter through fiscal year 2019;
capital expenditures for fiscal year 2019; store openings and
closings, net of closures and repositions, and weighting by brand
in fiscal year 2019; the anticipated benefits of the separation;
net revenues in fiscal 2019; investments in marketing in the fourth
quarter; restructuring related costs, including costs and other
challenges related to specialty store closures, in fiscal year
2019; costs associated with preparing for and executing the
separation transaction; impact of improved inventory allocations
based on channel demand and localization; gross margin trends in
fiscal 2019; and inventory levels in the fourth quarter of fiscal
year 2019.
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 risks, any of which could have an adverse
effect on the company’s financial condition, results of operations,
and reputation: 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 its
financial information; the risks associated with our plan to
separate into two independent publicly-traded companies, including
that the separation may not be completed in accordance with the
expected plans or anticipated timeframe, or at all; the risk that
our plan to separate into two publicly-traded companies may not
achieve some or all of the anticipated benefits; the risk that the
company or its franchisees will be unsuccessful in gauging apparel
trends and changing consumer preferences; the highly competitive
nature of the company’s business in the United States and
internationally; the risk of failure to maintain, enhance and
protect the company’s brand image; the risk of failure to attract
and retain key personnel, or effectively manage succession; the
risk that the company’s investments in customer, digital, and
omni-channel shopping initiatives may not deliver the results the
company anticipates; the risk if the company is unable to manage
its inventory effectively; the risk that the company is 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 the company’s security measures; the risk
that a failure of, or updates or changes to, the company’s
information technology systems may disrupt its operations; the
risks to the company’s business, including its costs and supply
chain, associated with global sourcing and manufacturing; the risk
of changes in global economic conditions or consumer spending
patterns; the risks to the company’s efforts to expand
internationally, including its ability to operate in regions where
it has less experience; the risks to the company’s reputation or
operations associated with importing merchandise from foreign
countries, including failure of the company’s vendors to adhere to
its Code of Vendor Conduct; the risk that the company’s
franchisees’ operation of franchise stores is not directly within
the company’s control and could impair the value of its brands; the
risk that the company or its 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 of foreign currency exchange rate
fluctuations; the risk that comparable sales and margins will
experience fluctuations; the risk that changes in the company’s
credit profile or deterioration in market conditions may limit the
company’s access to the capital markets; the risk that trade
matters could increase the cost or reduce the supply of apparel
available to the company; the risk of changes in the regulatory or
administrative landscape; the risk of natural disasters, public
health crises, political crises, negative global climate patterns,
or other catastrophic events; the risk of reductions in income and
cash flow from the company’s credit card arrangement related to its
private label and co-branded credit cards; the risk that the
adoption of new accounting pronouncements will impact future
results; the risk that the company does not repurchase some or all
of the shares it anticipates purchasing pursuant to its repurchase
program; and the risk that the company will not be successful in
defending various proceedings, lawsuits, disputes, and claims.
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 February 2, 2019, as well as
the company’s subsequent filings with the Securities and Exchange
Commission.
These forward-looking statements are based on information as of
November 21, 2019. 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 Old Navy, Gap, Banana Republic, Athleta,
Intermix, Janie and Jack, and Hill City brands. Fiscal year 2018
net sales were $16.6 billion. Gap Inc. products are available for
purchase in more than 90 countries worldwide through
company-operated stores, franchise stores, and e-commerce sites.
For more information, please visit www.gapinc.com.
1 The translation impact on net sales is calculated by applying
foreign exchange rates applicable for the third quarter of fiscal
year 2019 to net sales for the third quarter of fiscal year 2018.
This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate
fluctuations.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED ($ in millions) November
2,2019 November 3,2018 ASSETS Current assets: Cash and
cash equivalents
$
788
$
958
Short-term investments
294
296
Merchandise inventory
2,720
2,668
Other current assets
770
792
Total current assets
4,572
4,714
Property and equipment, net
3,225
2,887
Operating lease assets
5,796
-
Other long-term assets
525
572
Total assets
$
14,118
$
8,173
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable
$
1,241
$
1,299
Accrued expenses and other current liabilities
974
1,070
Current portion of operating lease liabilities
934
-
Income taxes payable
43
24
Total current liabilities
3,192
2,393
Long-term liabilities: Long-term debt
1,249
1,249
Long-term operating lease liabilities
5,650
-
Lease incentives and other long-term liabilities (a)
393
1,091
Total long-term liabilities
7,292
2,340
Total stockholders' equity
3,634
3,440
Total liabilities and stockholders' equity
$
14,118
$
8,173
____________________ (a) Beginning in fiscal 2019, lease incentives
and other long-term liabilities no longer reflects lease incentives
due to the adoption of the new lease accounting standard.
The
Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED 13 Weeks Ended 39 Weeks Ended
($ and shares in millions except per share amounts)
November 2,2019 November 3,2018 November
2,2019 November 3,2018 Net sales
$
3,998
$
4,089
$
11,709
$
11,957
Cost of goods sold and occupancy expenses
2,439
2,466
7,250
7,280
Gross profit
1,559
1,623
4,459
4,677
Operating expenses
1,338
1,260
3,640
3,687
Operating income
221
363
819
990
Interest, net
12
13
37
33
Income before income taxes
209
350
782
957
Income taxes
69
84
247
230
Net income
$
140
$
266
$
535
$
727
Weighted-average number of shares - basic
375
384
377
387
Weighted-average number of shares - diluted
376
387
379
390
Earnings per share - basic
$
0.37
$
0.69
$
1.42
$
1.88
Earnings per share - diluted
$
0.37
$
0.69
$
1.41
$
1.86
Cash dividends declared and paid per share
$
0.2425
$
0.2425
$
0.7275
$
0.7275
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS UNAUDITED 39 Weeks Ended ($ in
millions) November 2,2019 (b) November 3,2018 (b)
Cash flows from operating activities: Net income
$
535
$
727
Depreciation and amortization (a)
417
380
Gain on sale of building
(191
)
-
Change in merchandise inventory
(559
)
(696
)
Other, net
326
156
Net cash provided by operating activities
528
567
Cash flows from investing activities: Purchases of property
and equipment
(523
)
(510
)
Purchase of building
(343
)
-
Purchases of short-term investments
(235
)
(408
)
Proceeds from sales and maturities of short-term investments
231
112
Proceeds from sale of building
220
-
Purchase of Janie and Jack
(69
)
-
Other
-
(7
)
Net cash used for investing activities
(719
)
(813
)
Cash flows from financing activities: Proceeds from
issuances under share-based compensation plans
22
40
Withholding tax payments related to vesting of stock units
(21
)
(22
)
Repurchases of common stock
(150
)
(300
)
Cash dividends paid
(274
)
(281
)
Other
-
(1
)
Net cash used for financing activities
(423
)
(564
)
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash
-
(13
)
Net decrease in cash, cash equivalents, and restricted cash
(614
)
(823
)
Cash, cash equivalents, and restricted cash at beginning of period
1,420
1,799
Cash, cash equivalents, and restricted cash at end of period
$
806
$
976
____________________
(a) Fiscal 2018 depreciation and
amortization is net of amortization of lease incentives. Beginning
in fiscal 2019, amortization of lease incentives is no longer
reflected due to the adoption of the new lease accounting
standard.
(b) For the thirty-nine weeks ended
November 2, 2019 and November 3, 2018, total cash, cash
equivalents, and restricted cash includes $18 million of restricted
cash recorded in other current assets and other long-term assets on
the Condensed Consolidated Balance Sheets.
The Gap, Inc. NON-GAAP FINANCIAL MEASURES
UNAUDITED FREE CASH FLOW Free cash flow
is a non-GAAP financial measure. We believe free cash flow is an
important metric because it represents a measure of how much cash a
company has available for discretionary and non-discretionary items
after the deduction of capital expenditures as we require regular
capital expenditures to build and maintain stores and purchase new
equipment to improve our business and infrastructure. We use this
metric internally, as we believe our sustained ability to generate
free cash flow is an important driver of value creation. However,
this non-GAAP financial measure is not intended to supersede or
replace our GAAP results.
39 Weeks Ended ($ in
millions) November 2,2019 November 3,2018 Net
cash provided by operating activities
$
528
$
567
Less: Purchases of property and equipment (a)
(523
)
(510
)
Free cash flow
$
5
$
57
____________________
(a) Excludes purchase of building in the
first quarter of fiscal 2019.
The Gap, Inc. NON-GAAP FINANCIAL MEASURES
UNAUDITED ADJUSTED INCOME STATEMENT METRICS FOR
THE THIRD QUARTER OF FISCAL YEAR 2019 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 impacts
of separation-related costs and specialty fleet restructuring
costs. Management believes the adjusted metrics are useful for the
assessment of ongoing operations as we believe the adjusted items
are not part of our ongoing operations due to the nature of the
adjustments, and management believes that the presentation of
adjusted financial information provides additional information to
investors to facilitate the comparison of results against prior
years. However, these non-GAAP financial measures are not intended
to supersede or replace the GAAP measures.
($ in millions)
13 Weeks Ended November 2, 2019
Gross Profit GrossMargin OperatingExpenses
OperatingExpenses as a% of Net Sales OperatingIncome
OperatingIncome as a %of Net Sales IncomeTaxes
NetIncome Earnings perShare -Diluted GAAP metrics, as
reported
$
1,559
39.0
%
$
1,338
33.5
%
$
221
5.5
%
$
69
$
140
$
0.37
Adjustments for: Separation-related costs (a)
-
0.0
%
(70
)
(1.8)
%
70
1.8
%
19
51
0.14
Specialty fleet restructuring costs (b)
1
0.0
%
(7
)
(0.2)
%
8
0.2
%
-
8
0.02
Non-GAAP metrics
$
1,560
39.0
%
$
1,261
31.5
%
$
299
7.5
%
$
88
$
199
$
0.53
____________________ (a) Represents the impact of costs related to
the planned Old Navy spin-off transaction. These costs primarily
consist of cost associated with information technology and
consulting fees. (b) Represents the impact of costs related to
previously announced plans to restructure the specialty fleet and
revitalize the Gap brand. These costs primarily include lease and
employee-related costs.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED EXPECTED ADJUSTED EARNINGS
PER SHARE FOR FISCAL YEAR 2019 Expected adjusted diluted
earnings per share is a non-GAAP financial measure. Expected
adjusted diluted earnings per share for fiscal year 2019 is
provided to enhance visibility into the Company's expected
underlying results for the period excluding the estimated impact of
specialty fleet restructuring costs and related tax,
separation-related costs, a gain on the sale of a building, and the
impact of an adjustment to our fiscal 2017 tax liability for
additional guidance issued by the U.S. Treasury Department
regarding the TCJA. However, this non-GAAP financial measure is not
intended to supersede or replace the GAAP measure.
52
Weeks EndingFebruary 1, 2020 Low End High End
Expected earnings per share - diluted
$
1.38
$
1.47
Add: Estimated impact of specialty fleet restructuring costs (a)
0.14
0.14
Add: Estimated incremental tax on restructuring costs (b)
0.03
0.03
Add: Estimated impact of separation-related costs (c)
0.44
0.40
Less: Gain on sale of building (d)
(0.37
)
(0.37
)
Add: U.S. Federal tax reform adjustment (e)
0.08
0.08
Expected adjusted earnings per share - diluted
$
1.70
$
1.75
____________________ (a) Represents the estimated earnings per
share impact of estimated costs related to previously announced
plans to restructure the specialty fleet and revitalize Gap brand,
calculated net of tax at the expected adjusted effective tax rate.
(b) Represents certain non-cash tax impacts related to expected
restructuring charges discussed above. (c) Represents the estimated
earnings per share impact of estimated costs associated with the
planned Old Navy spin-off transaction, calculated net of tax at the
expected adjusted effective tax rate. (d) The estimated earnings
per share impact of the gain on the sale of a building in the first
quarter of fiscal 2019, calculated net of tax at the expected
adjusted effective tax rate. (e) Represents the impact of an
adjustment to our fiscal 2017 tax liability for additional guidance
issued by the U.S. Treasury Department regarding the TCJA.
The
Gap, Inc. NET SALES RESULTS UNAUDITED The
following table details the Company’s third quarter net sales
(unaudited):
($ in millions) Old NavyGlobal
Gap Global BananaRepublicGlobal (2) Other (3)
Total Percentageof Net Sales 13 Weeks Ended
November 2, 2019 U.S. (1)
$
1,769
$
689
$
532
$
274
$
3,264
82%
Canada
151
97
55
1
304
8%
Europe
-
128
3
-
131
3%
Asia
9
220
21
-
250
6%
Other regions
18
24
7
-
49
1%
Total
$
1,947
$
1,158
$
618
$
275
$
3,998
100%
($ in millions) Old NavyGlobal Gap
Global BananaRepublicGlobal Other (3)
Total Percentageof Net Sales 13 Weeks Ended
November 3, 2018 U.S. (1)
$
1,769
$
738
$
510
$
257
$
3,274
80%
Canada
152
104
59
1
316
8%
Europe
-
145
4
-
149
4%
Asia
13
266
21
-
300
7%
Other regions
13
30
7
-
50
1%
Total
$
1,947
$
1,283
$
601
$
258
$
4,089
100%
____________________ (1) U.S. includes the United States, Puerto
Rico, and Guam. (2) Beginning on March 4, 2019, Banana Republic
Global includes net sales for the Janie and Jack brand. (3)
Primarily consists of net sales for the Athleta, Intermix and Hill
City brands, as well as a portion of income related to our credit
card agreement.
The Gap, Inc. REAL ESTATE
Store count, openings, closings, and square footage for our stores
are as follows:
February 2, 2019 39 Weeks Ended
November 2, 2019 November 2, 2019 Store Locations
Store LocationsOpened Store LocationsClosed Store
Locations Square Feet(millions) Old Navy North
America
1,139
60
2
1,197
19.4
Old Navy Asia
15
4
1
18
0.2
Gap North America
758
3
34
727
7.5
Gap Asia
332
46
27
351
3.2
Gap Europe
152
3
12
143
1.2
Banana Republic North America
556
8
10
554
4.7
Banana Republic Asia
45
4
2
47
0.2
Athleta North America
161
24
-
185
0.8
Intermix North America
36
-
1
35
0.1
Janie and Jack North America (1)
-
-
-
139
0.2
Company-operated stores total
3,194
152
89
3,396
37.5
Franchise
472
94
24
542
N/A
Total
3,666
246
113
3,938
37.5
____________________ (1) On March 4, 2019, we acquired select
assets of Gymboree, Inc. related to Janie and Jack. The 140 stores
acquired were not included as store openings for fiscal 2019;
however, they are included in the ending number of store locations
as of November 2, 2019, net of one closure that occurred in the
third quarter of fiscal 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191121005909/en/
Investor Relations Contact: Tina Romani (415) 427-5264
Investor_relations@gap.com Media Relations Contact: Trina
Somera (415) 427-3145 Press@gap.com
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