- Reaffirmed Full-Year Earnings Per Share
Guidance Range of $2.55 to $2.70
- Delivered Seventh Consecutive Quarter
of Positive Comparable Sales Growth
- Distributed $388 Million to
Shareholders Through Share Repurchases and Dividends
Year-to-Date
Gap Inc. (NYSE: GPS) today reported second quarter fiscal year
2018 diluted earnings per share of $0.76 compared with second
quarter fiscal year 2017 reported diluted earnings per share of
$0.68 or $0.58 on an adjusted basis. 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.
The company also reaffirmed its full-year diluted earnings per
share guidance to be in the range of $2.55 to $2.70.
“We delivered our seventh consecutive quarter of positive
comparable sales growth, led by the strength of Old Navy,” said Art
Peck, president and chief executive officer, Gap Inc. “Our balanced
growth strategy supports continued growth and improved
profitability, and our investments are focused on leveraging the
advantages of our scaled operating platform and accelerating the
impact of our significant data assets.”
“The second quarter played out largely as expected, and we are
reaffirming our guidance on the year,” said Teri List-Stoll,
executive vice president and chief financial officer, Gap Inc. “We
are pleased with the meaningful improvement at Banana Republic, and
our work to increase productivity is funding investments in the
business to drive differentiation and continued growth.”
Second Quarter 2018 Comparable Sales Results
Due to the 53rd week in fiscal 2017, comparable sales for the
second quarter of fiscal year 2018 are compared with the 13-week
period ended August 5, 2017. On this basis, the company’s second
quarter comparable sales increased 2% compared with a 1% increase
last year. Comparable sales by global brand for the second quarter
were as follows:
- Old Navy Global: positive 5%
versus positive 5% last year
- Gap Global: negative 5% versus
negative 1% last year
- Banana Republic Global: positive
2% versus negative 5% last year
Recent Accounting Pronouncement – Revenue Recognition
During the first quarter of fiscal 2018, the company adopted the
new revenue recognition standard, ASC 606. The adoption of this
standard has a significant impact on the presentation of certain
line items within the Consolidated Statements of Income, but does
not have a material impact to operating income, net income or
earnings per share. The most significant presentation changes are
the reclassifications from operating expenses to net sales for
revenue sharing associated with the company’s credit card programs
and breakage income for our gift cards, as well as
reclassifications from cost of goods sold and occupancy expenses to
net sales for reimbursements of loyalty program discounts
associated with the company’s credit card programs.
The company adopted this standard in the first quarter of fiscal
2018, on a modified retrospective basis. The presentation changes
resulted in an increase of $139 million to net sales, an increase
of $44 million to cost of goods sold and occupancy expenses, and an
increase of $94 million to operating expenses for the second
quarter of fiscal 2018. Other changes resulting from the adoption
did not have a material impact on the company’s operating income,
net income or earnings per share.
In accordance with the company’s adoption of the standard on a
modified retrospective basis, financial information prior to fiscal
2018 will not be recast. The summary below provides financial
measures with and without the presentation changes for revenue
sharing and reimbursements of loyalty program discounts associated
with the company’s credit card programs, and breakage income for
our gift cards.
For the second quarter ended August 4, 2018:
- Net sales were $4.1 billion, an
increase of 8% compared with last year. Excluding the presentation
changes from the adoption of the new revenue recognition standard,
net sales increased 4% compared with last year.
- The translation of foreign currencies
into U.S. dollars positively impacted the company’s net sales for
the second quarter of fiscal year 2018 by about $23 million1.
Second quarter net sales details appear in the tables at the end of
this press release.
- Gross profit was $1.63 billion, an
increase of 10% compared with last year. Excluding the impact of
presentation changes from the adoption of the new revenue
recognition standard, gross profit increased about 4% compared with
last year.
- Gross margin was 39.8%, an increase of
90 basis points compared with last year. Excluding the impact of
presentation changes from the adoption of the new revenue
recognition standard, gross margin was 38.8%, a decrease of 10
basis points compared with last year, largely due to Gap
Brand.
- Operating margin was 9.7%, a decrease
of 220 basis points compared with operating margin of 11.9% last
year. Excluding the impact of presentation changes from the
adoption of the new revenue recognition standard, operating margin
was 10.1%, a decrease of 10 basis points compared with adjusted
operating margin of 10.2% 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 23.5% for
the second quarter of fiscal year 2018. The lower second quarter
tax rate primarily reflects the benefits of the enactment of U.S.
Tax Cuts and Jobs Act of 2017 (“TCJA”), as well as certain
immaterial adjustments to the provisional estimate related to the
enactment of TCJA in fiscal year 2017. The company continues to
analyze TCJA and provisional amounts will be finalized in fiscal
year 2018.
- Diluted earnings per share were $0.76
compared with adjusted diluted earnings per share of $0.58 last
year. 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.
- The company noted that foreign currency
fluctuations positively impacted earnings per share for the second
quarter of fiscal year 2018 by an estimated $0.02, in line with
expectations. 2
- During the quarter, the company
repurchased 3.2 million shares for $100 million and ended the
second quarter of fiscal 2018 with 385 million shares
outstanding.
- The company paid a dividend of $0.2425
per share during the second quarter of fiscal year 2018, an
increase of over 5% compared with last year. In addition, on August
17, 2018, the company announced that its Board of Directors
authorized a third quarter dividend of $0.2425 per share.
The company ended the second quarter of fiscal year 2018 with
$1.6 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 $220
million, compared to second quarter 2017 year-to-date free cash
flow of $270 million, which included approximately $59 million in
insurance proceeds related to loss on property and equipment due to
the Fishkill fire. 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 2018 capital expenditures were $326
million.
The company ended the second quarter of fiscal year 2018 with
3,626 store locations in 43 countries, of which 3,187 were
company-operated.
2018 Outlook
Earnings per Share
The company reaffirmed its full-year diluted earnings per share
guidance to be in the range of $2.55 to $2.70.
Comparable Sales
The company continues to expect comparable sales for fiscal year
2018 to be flat to up slightly.
Effective Tax Rate
The company continues to expect its fiscal year 2018 effective
tax rate to be about 26%. The company continues to analyze TCJA and
provisional amounts will be finalized in fiscal year 2018.
Share Repurchases
The company continues to expect to repurchase approximately $100
million per quarter through the end of fiscal year 2018.
Capital Expenditures
The company continues to expect capital spending to be
approximately $800 million for fiscal year 2018, with a continued
focus on transformative infrastructure investments to support its
omni-channel and digital strategies, such as information technology
and supply chain.
Real Estate
The company continues to expect to open about 25
company-operated stores, net of closures and repositions in fiscal
year 2018. In line with its strategy, the company expects store
openings to be focused on Athleta and Old Navy locations, with
closures weighted toward Gap brand and Banana Republic.
Webcast and Conference Call Information
Tina Romani, Senior Director of Investor Relations at Gap Inc.,
will host a summary of the company’s second quarter fiscal year
2018 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 Art Peck, Gap Inc. 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: 6111933). 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; the impact of the U.S. Tax Cuts and
Jobs Act of 2017; comparable sales for fiscal year 2018; effective
tax rate for fiscal year 2018; share repurchases in fiscal year
2018; capital expenditures for fiscal year 2018, including
transformative infrastructure investments; store openings, net of
closures and repositions, in fiscal year 2018; impact of improving
profitability of our specialty fleet, as well as our productivity
initiative; online sales for fiscal year 2018; margin pressure at
Gap brand; SG&A savings sufficient to fund investments to
support continued growth, including digital and customer; the
spread between comparable sales and sales growth in fiscal year
2018; SG&A as a percent of net sales; the impact on fiscal year
2018 of the 53rd week in fiscal 2017; margin expansion; SG&A
deleverage in the third quarter, and SG&A leverage in the
fourth quarter, of fiscal year 2018; the impact of Old Navy store
openings in fiscal year 2018; roll-out of In-Stock, On-Shelf app;
and continued improvement at Gap brand through fiscal year
2018.
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 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 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 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 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
agreement 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 3, 2018, 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 23, 2018. 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 and Athleta
brands. Fiscal year 2017 net sales were $15.9 billion. Gap Inc.
products are available for purchase in more than 90 countries
worldwide through company-operated stores, franchise stores, and
e-commerce sites. For more information, please visit
www.gapinc.com.
1 The translation impact on net sales is calculated by applying
foreign exchange rates applicable for the second quarter of fiscal
year 2018 to net sales for the second quarter of fiscal year 2017.
This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate
fluctuations.
2 In estimating the earnings per share impact from foreign
currency exchange rate fluctuations, the company estimates current
gross margins using the appropriate prior year rates (including the
impact of merchandise-related hedges), translates current period
foreign earnings at prior year rates, and excludes the
year-over-year earnings impact of balance sheet remeasurement and
gains or losses from non-merchandise-related foreign currency
hedges. This is done in order to enhance the visibility of business
results excluding the direct impact of foreign currency exchange
rate fluctuations.
The Gap, Inc.
CONDENSED CONSOLIDATED BALANCE
SHEETS
UNAUDITED
August 4, July 29,
($ in millions)
2018 2017 ASSETS Current assets: Cash and cash
equivalents $ 1,322 $ 1,609 Short-term investments 286 -
Merchandise inventory 2,202 2,051 Other current assets 780
598 Total current assets 4,590 4,258 Property
and equipment, net 2,832 2,643 Other long-term assets 588
716 Total assets $ 8,010 $ 7,617
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 1,297 $ 1,230 Accrued expenses and other current
liabilities 1,026 1,062 Income taxes payable 18
107 Total current liabilities 2,341
2,399 Long-term liabilities: Long-term debt 1,249
1,248 Lease incentives and other long-term liabilities 1,080
1,025 Total long-term liabilities 2,329
2,273 Total stockholders' equity 3,340
2,945 Total liabilities and stockholders'
equity $ 8,010 $ 7,617
The Gap,
Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED 13 Weeks Ended
26 Weeks Ended ($ and shares in millions except
per share amounts) August 4, 2018 July
29, 2017 August 4, 2018 July 29,
2017 Net sales $ 4,085 $ 3,799 $ 7,868 $ 7,239 Cost of goods
sold and occupancy expenses 2,458 2,320 4,814
4,457 Gross profit 1,627 1,479 3,054 2,782 Operating
expenses 1,229 1,028 2,427 2,077
Operating income 398 451 627 705 Interest, net 10 12
20 28 Income before income taxes 388 439 607 677
Income taxes 91 168 146 263 Net income
$ 297 $ 271 $ 461 $ 414
Weighted-average number of shares - basic 387 395 388 397
Weighted-average number of shares - diluted 390 396 391 398
Earnings per share - basic $ 0.77 $ 0.69 $ 1.19 $ 1.04 Earnings per
share - diluted $ 0.76 $ 0.68 $ 1.18 $ 1.04 Cash dividends
declared and paid per share $ 0.2425 $ 0.23 $ 0.485 $ 0.46
The Gap, Inc. CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS UNAUDITED 26 Weeks
Ended August 4, July 29, ($ in
millions) 2018 2017 (b) Cash flows from operating
activities: Net income $ 461 $ 414 Depreciation and amortization
(a) 251 249 Change in merchandise inventory (224 ) (203 ) Other,
net 58 26 Net cash provided by
operating activities 546 486
Cash flows from investing activities: Purchases of property and
equipment (326 ) (275 ) Insurance proceeds related to loss on
property and equipment - 59 Purchases of short-term investments
(322 ) - Sales and maturities of short-term investments 36 - Other
(6 ) - Net cash used for investing activities
(618 ) (216 ) Cash flows from financing
activities: Payments of short-term debt - (67 ) Proceeds from
issuances under share-based compensation plans 33 14 Withholding
tax payments related to vesting of stock units (20 ) (14 )
Repurchases of common stock (200 ) (200 ) Cash dividends paid (188
) (182 ) Other (1 ) - Net cash used for
financing activities (376 ) (449 ) Effect of
foreign exchange rate fluctuations on cash, cash equivalents, and
restricted cash (11 ) 8 Net decrease in cash,
cash equivalents, and restricted cash (459 ) (171 ) Cash, cash
equivalents, and restricted cash at beginning of period
1,799 1,797 Cash, cash equivalents, and
restricted cash at end of period $ 1,340 $ 1,626
____________________ (a) Depreciation and amortization is net of
amortization of lease incentives. (b)
The prior period amounts reflect the
retrospective adoption of ASU 2016-18, Statement of Cash Flows:
Restricted Cash, on February 4, 2018. As a result of the adoption
of ASU 2016-18, restricted cash of $18 million and $17 million
recorded in other current assets and other long-term assets on the
Condensed Consolidated Balance Sheets have been included with cash
and cash equivalents above for the twenty-six weeks ended August 4,
2018 and July 29, 2017, respectively.
The Gap, Inc. NON-GAAP FINANCIAL MEASURES
UNAUDITED FREE CASH FLOW Free cash flow
is a non-GAAP financial measure. We believe free cash flow is an
important metric because it represents a measure of how much cash a
company has available for discretionary and non-discretionary items
after the deduction of capital expenditures, net of insurance
proceeds related to loss on property and equipment, as we require
regular capital expenditures to build and maintain stores and
purchase new equipment to improve our business. We use this metric
internally, as we believe our sustained ability to generate free
cash flow is an important driver of value creation. However, this
non-GAAP financial measure is not intended to supersede or replace
our GAAP results.
26 Weeks Ended
August 4, July 29, ($ in
millions) 2018 2017 Net cash provided by
operating activities $ 546 $ 486 Less: Purchases of property and
equipment (326 ) (275 ) Add: Insurance proceeds related to loss on
property and equipment (a) - 59 Free
cash flow $ 220 $ 270
____________________ (a) Represents insurance proceeds related to
loss on property and equipment from the fire that occurred at a
company-owned distribution center campus in Fishkill, New York on
August 29, 2016.
The Gap, Inc.
NON-GAAP FINANCIAL MEASURES
UNAUDITED
ADJUSTED INCOME STATEMENT METRICS FOR
THE SECOND QUARTER OF FISCAL YEAR 2017
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 the gain from insurance proceeds in the
second quarter of fiscal year 2017. Management believes the
adjusted metrics are useful for the assessment of ongoing
operations as we believe the adjusted items are not indicative 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 July
29, 2017
OperatingExpenses
OperatingExpenses as a
%of Net Sales (b)
OperatingIncome
OperatingIncome as a %of
Net Sales
IncomeTaxes
Net Income
Earnings perShare -
Diluted
GAAP metrics, as reported $ 1,028 27.1 % $ 451 11.9 % $ 168 $ 271 $
0.68 Adjustment for gain from insurance proceeds (a) 64 1.7
% (64 ) (1.7 )% (24 ) (40 ) (0.10 )
Non-GAAP metrics $ 1,092 28.7 % $ 387 10.2 % $ 144 $
231 $ 0.58
____________________
(a) Represents the gain from insurance proceeds related to
the fire that occurred in one of the buildings at a company-owned
distribution center campus in Fishkill, New York. The tax impact of
the gain from insurance proceeds is calculated at the reported
effective tax rate for the thirteen weeks ended July 29, 2017. (b)
Operating expenses as a percentage of net sales was computed
individually for each line item; therefore, the sum of the
percentages may not equal the total.
The Gap, Inc.
NET SALES RESULTS UNAUDITED The following
table details the Company’s second quarter net sales (unaudited):
($ in millions)
Banana
Old Navy
Republic
Percentage of
13 Weeks Ended August 4, 2018
(1)
Global Gap Global
Global
Other (3) Total Net Sales U.S. (2) $ 1,816 $
728 $ 514 $ 264 $ 3,322 82 % Canada 151 94 58 - 303 7 % Europe -
145 3 - 148 4 % Asia 11 229 22 - 262 6 % Other regions 14
29 7 - 50 1 % Total $ 1,992 $ 1,225 $
604 $ 264 $ 4,085 100 %
($ in millions) Banana
Old Navy Republic Percentage of 13 Weeks
Ended July 29, 2017 (1) Global Gap Global
Global Other (3) Total Net Sales U.S.
(2) $ 1,596 $ 719 $ 492 $ 231 $ 3,038 80 % Canada 133 91 54 - 278 7
% Europe - 148 3 - 151 4 % Asia 12 252 24 - 288 8 % Other regions
16 22 6 - 44 1 % Total $ 1,757 $
1,232 $ 579 $ 231 $ 3,799 100 % ____________________ (1) Net
sales for the thirteen weeks ended August 4, 2018, reflect the
adoption of the new revenue recognition standard. Prior period
amounts have not been restated and continue to be reported under
accounting standards in effect for those periods. (2) U.S. includes
the United States, Puerto Rico, and Guam. (3) Primarily consists of
net sales for the Athleta and Intermix brands.
The
Gap, Inc. REAL ESTATE Store count, openings,
closings, and square footage for our stores are as follows:
13 Weeks Ended August 4, 2018 Store
Locations Store Locations
Store Locations Store Locations
Square Feet Beginning of Q2 Opened
Closed End of Q2 (millions) Old Navy North
America 1,074 21 1 1,094 18.1 Old Navy Asia 14 - - 14 0.2 Gap North
America 806 1 7 800 8.2 Gap Asia 320 1 2 319 3.1 Gap Europe 155 2 2
155 1.3 Banana Republic North America 572 2 4 570 4.8 Banana
Republic Asia 45 - 1 44 0.2 Athleta North America 147 7 - 154 0.6
Intermix North America 38 - 1 37 0.1 Company-operated stores total
3,171 34 18 3,187 36.6 Franchise 446 11 18 439 N/A Total 3,617 45
36 3,626 36.6
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180823005671/en/
Gap, Inc.Investor Relations Contact:Tina Romani,
415-427-5264Investor_relations@gap.comorMedia Relations
Contact:Trina Somera, 415-427-3145Press@gap.com
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