- Narrows Full-Year Earnings Per Share
Guidance Range to $2.55 to $2.60, Compared with Previous Guidance
of $2.55 to $2.70
- Distributed $581 Million to
Shareholders Through Share Repurchases and Dividends
Year-to-Date
Gap Inc. (NYSE: GPS) today reported third quarter fiscal year
2018 diluted earnings per share of $0.69 compared with third
quarter fiscal year 2017 diluted earnings per share of $0.58.
“We are pleased to report continued solid performance from Old
Navy, Banana Republic and Athleta leading into the important
holiday season,” said Art Peck, president and chief executive
officer, Gap Inc. “We are clearly not satisfied with the
performance of Gap brand. We know this iconic brand is important to
customers, and we are committed to taking the bold and necessary
steps to ensure that it delivers value to shareholders.”
Third Quarter 2018 Comparable Sales Results
Due to the 53rd week in fiscal 2017, comparable sales for the
third quarter of fiscal year 2018 are compared with the 13-week
period ended November 4, 2017. On this basis, the company’s third
quarter comparable sales were flat compared with a 3% increase last
year. Comparable sales by global brand for the third quarter were
as follows:
- Old Navy Global: positive 4%
versus positive 4% last year
- Gap Global: negative 7% versus
positive 1% last year
- Banana Republic Global: positive
2% versus negative 1% 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 $170 million to net sales, an increase
of $42 million to cost of goods sold and occupancy expenses, and an
increase of $128 million to operating expenses for the third
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 third quarter ended November 3, 2018:
- Net sales were $4.1 billion, an
increase of 7% compared with last year. Excluding the presentation
changes from the adoption of the new revenue recognition standard,
net sales increased 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 2018 by about $20 million1. Third
quarter net sales details appear in the tables at the end of this
press release.
- Gross profit was $1.62 billion, an
increase of 6% compared with last year. Excluding the impact of
presentation changes from the adoption of the new revenue
recognition standard, gross profit decreased about 2% compared with
last year.
- Gross margin was 39.7%, flat compared
with last year. Excluding the impact of presentation changes from
the adoption of the new revenue recognition standard, gross margin
was 38.1%, a decrease of 160 basis points compared with last year,
largely driven by an increase in shipping expenses and elevated
promotional activity at Gap brand.
- Operating margin was 8.9%, a decrease
of 90 basis points compared with operating margin of 9.8% last
year. Excluding the impact of presentation changes from the
adoption of the new revenue recognition standard, operating margin
was 9.3%, a decrease of 50 basis points compared with last
year.
- The effective tax rate was 24.0% for
the third quarter of fiscal year 2018. The lower third quarter tax
rate primarily reflects the tax benefits of the enactment of U.S.
Tax Cuts and Jobs Act of 2017 (“TCJA”), as well as certain
adjustments to the liability for the one-time transition tax
enacted as part of the U.S. TCJA in fiscal year 2017, partially
offset by increases to liabilities recorded in connection with
examinations by taxing authorities. The company continues to
analyze TCJA and provisional amounts will be finalized in the
fourth quarter of fiscal year 2018.
- Diluted earnings per share were $0.69
compared with diluted earnings per share of $0.58 last year.
- The company noted that foreign currency
fluctuations positively impacted earnings per share for the third
quarter of fiscal year 2018 by an estimated $0.012.
- During the quarter, the company
repurchased 3.6 million shares for $100 million and ended the third
quarter of fiscal 2018 with 382 million shares outstanding.
- The company paid a dividend of $0.2425
per share during the third quarter of fiscal year 2018, an increase
of over 5% compared with last year. In addition, on November 15,
2018, 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 2018 with
$1.3 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 $57
million, compared to third quarter 2017 year-to-date free cash flow
of $197 million, which included $60 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 $510
million.
The company ended the third quarter of fiscal year 2018 with
3,688 store locations in 43 countries, of which 3,218 were
company-operated.
2018 Outlook
Earnings per Share
The company updated its diluted earnings per share guidance for
fiscal year 2018 to be in the range of $2.55 to $2.60, which
incorporates the benefit of an expected fiscal year 2018 effective
tax rate of 25% compared with previous guidance of an effective tax
rate of 26%.
Comparable Sales
The company continues to expect comparable sales for fiscal year
2018 to be flat to up slightly.
Effective Tax Rate
The company now expects its fiscal year 2018 effective tax rate
to be about 25% compared with previous guidance of 26%, primarily
due to current year adjustments to our fiscal year 2017 net
provisional tax under TCJA. The effective tax rate may be
materially impacted as additional guidance is issued by the U.S.
Treasury Department and Internal Revenue Service. The company
continues to analyze TCJA and provisional amounts will be finalized
in the fourth quarter of fiscal year 2018.
Share Repurchases
The company expects to spend about $100 million on share
repurchases in the fourth quarter of fiscal year 2018.
Capital Expenditures
The company now expects capital spending to be approximately
$750 million for fiscal year 2018 compared with previous guidance
of about $800 million, 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 third 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: 7829279). 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 2018; effective tax
rate for the fourth quarter and full year of fiscal year 2018;
impact of the U.S. Tax Cuts and Jobs Act of 2017; comparable sales
and spread between comparable sales and total sales in the fourth
quarter and full year of fiscal year 2018; share repurchases in the
fourth quarter of fiscal year 2018; capital expenditures for fiscal
year 2018, including transformative infrastructure investments;
store openings, net of closures and repositions, and weighting by
brand in fiscal year 2018; improvement on comparable sales and
margin in the fourth quarter of fiscal year 2018; evaluation of,
and taking action on, the underperforming portion of Gap brand’s
specialty fleet globally; online sales for fiscal year 2018;
improvement in Gap brand’s margin trend in the fourth quarter of
fiscal year 2018; elimination of Fishkill impacts; productivity
savings in fiscal year 2018; benefit from foreign exchange in
fiscal year 2018; impact on the fourth quarter and full year of
fiscal year 2018 of the calendar shift and the 53rd week in fiscal
year 2017; deleverage in rent and occupancy in the fourth quarter
of fiscal year 2018; operating expense leverage in the fourth
quarter of fiscal year 2018; and composition of revenues for the
fourth quarter of 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
November 20, 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 $15.9 billion. Gap Inc.
products are available for purchase in more than 90 countries
worldwide through company-operated stores, franchise stores, and
e-commerce sites. For more information, please visit
www.gapinc.com.
1 The translation impact on net sales is calculated by applying
foreign exchange rates applicable for the third quarter of fiscal
year 2018 to net sales for the third quarter of fiscal year 2017.
This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate
fluctuations.
2 In estimating the earnings per share impact from foreign
currency exchange rate fluctuations, the company estimates current
gross margins using the appropriate prior year rates (including the
impact of merchandise-related hedges), translates current period
foreign earnings at prior year rates, and excludes the
year-over-year earnings impact of balance sheet remeasurement and
gains or losses from non-merchandise-related foreign currency
hedges. This is done in order to enhance the visibility of business
results excluding the direct impact of foreign currency exchange
rate fluctuations.
The Gap, Inc. CONDENSED
CONSOLIDATED BALANCE SHEETS UNAUDITED ($ in
millions)
November 3, 2018
October 28,2017
ASSETS Current assets: Cash and cash equivalents $ 958 $ 1,353
Short-term investments 296 - Merchandise inventory 2,668 2,476
Other current assets 792 654 Total current assets
4,714 4,483 Property and equipment, net 2,887 2,686 Other long-term
assets 572 726 Total assets $ 8,173 $ 7,895
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts
payable $ 1,299 1,330 Accrued expenses and other current
liabilities 1,070 1,132 Income taxes payable 24 134
Total current liabilities 2,393 2,596 Long-term
liabilities: Long-term debt 1,249 1,248 Lease incentives and other
long-term liabilities 1,091 1,027 Total long-term
liabilities 2,340 2,275 Total stockholders' equity
3,440 3,024 Total liabilities and stockholders'
equity $ 8,173 $ 7,895
The Gap, Inc. CONDENSED
CONSOLIDATED STATEMENTS OF INCOME UNAUDITED 13
Weeks Ended 39 Weeks Ended ($ and shares in millions
except per share amounts)
November 3, 2018
October 28, 2017 November 3, 2018 October 28,
2017 Net sales $ 4,089 $ 3,838 $ 11,957 $ 11,077 Cost of goods
sold and occupancy expenses 2,466 2,313 7,280
6,770 Gross profit 1,623 1,525 4,677 4,307 Operating
expenses 1,260 1,147 3,687 3,224
Operating income 363 378 990 1,083 Interest, net 13
14 33 42 Income before income taxes 350 364 957 1,041
Income taxes 84 135 230 398 Net income
$ 266 $ 229 $ 727 $ 643 Weighted-average number of shares -
basic 384 391 387 395 Weighted-average number of shares - diluted
387 393 390 397 Earnings per share - basic $ 0.69 $ 0.59 $
1.88 $ 1.63 Earnings per share - diluted $ 0.69 $ 0.58 $ 1.86 $
1.62 Cash dividends declared and paid per share $ 0.2425 $
0.23 $ 0.7275 $ 0.69
The Gap,
Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED 39 Weeks Ended ($ in
millions)
November 3, 2018
October 28, 2017 (b)
Cash flows from operating activities: Net income $ 727 $ 643
Depreciation and amortization (a) 380 372 Change in merchandise
inventory (696 ) (636 ) Other, net 156 221
Net cash provided by operating activities 567
600 Cash flows from investing activities:
Purchases of property and equipment (510 ) (463 ) Insurance
proceeds related to loss on property and equipment - 60 Purchases
of short-term investments (408 ) - Sales and maturities of
short-term investments 112 - Other (7 ) - Net
cash used for investing activities (813 ) (403 )
Cash flows from financing activities: Payments of short-term
debt - (67 ) Proceeds from issuances under share-based compensation
plans 40 23 Withholding tax payments related to vesting of stock
units (22 ) (15 ) Repurchases of common stock (300 ) (300 ) Cash
dividends paid (281 ) (272 ) Other (1 ) - Net
cash used for financing activities (564 ) (631 )
Effect of foreign exchange rate fluctuations on cash, cash
equivalents, and restricted cash (13 ) 7 Net
decrease in cash, cash equivalents, and restricted cash (823 ) (427
) Cash, cash equivalents, and restricted cash at beginning of
period 1,799 1,797 Cash, cash
equivalents, and restricted cash at end of period $ 976 $
1,370
____________________
(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 $17
million recorded in other current assets and other long-term assets
on the Condensed Consolidated Balance Sheets have been included
with cash and cash equivalents above for the thirty-nine weeks
ended November 3, 2018 and October 28, 2017, respectively.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED FREE CASH FLOW
Free cash flow is a non-GAAP financial measure. We believe free
cash flow is an important metric because it represents a measure of
how much cash a company has available for discretionary and
non-discretionary items after the deduction of capital
expenditures, net of insurance proceeds related to loss on property
and equipment, as we require regular capital expenditures to build
and maintain stores and purchase new equipment to improve our
business. We use this metric internally, as we believe our
sustained ability to generate free cash flow is an important driver
of value creation. However, this non-GAAP financial measure is not
intended to supersede or replace our GAAP results.
39
Weeks Ended ($ in millions) November 3,
2018
October 28,
2017
Net cash provided by operating activities $ 567 $ 600 Less:
Purchases of property and equipment (510 ) (463 ) Add: Insurance
proceeds related to loss on property and equipment (a) -
60 Free cash flow $ 57 $ 197
____________________
(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.
NET SALES RESULTS UNAUDITED The following
table details the Company’s third quarter net sales (unaudited):
($ in millions)
Old Navy
BananaRepublic
Percentage of
13 Weeks Ended November 3, 2018
(1)
Global
Gap Global
Global
Other (3)
Total
Net Sales
U.S. (2) $ 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 %
($ in
millions)
Old Navy
BananaRepublic
Percentage of
13 Weeks Ended October 28, 2017
(1)
Global
Gap Global
Global
Other (4)
Total
Net Sales
U.S. (2) $ 1,587 $ 750 $ 467 $ 200 $ 3,004 79 % Canada 143 109 57 1
310 8 % Europe - 154 4 - 158 4 % Asia 13 278 21 - 312 8 % Other
regions 15 31 8 - 54 1 % Total $
1,758 $ 1,322 $ 557 $ 201 $ 3,838 100 %
____________________ (1) Net sales for the
thirteen weeks ended November 3, 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, Intermix, and Hill City brands. (4) 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 November 3, 2018
Store LocationsBeginning of
Q3
Store LocationsOpened
Store LocationsClosed
Store Locations Endof Q3
Square Feet(millions)
Old Navy North America 1,094 24 1 1,117 18.4 Old Navy Asia 14 - -
14 0.2 Gap North America 800 5 7 798 8.2 Gap Asia 319 8 4 323 3.1
Gap Europe 155 3 4 154 1.3 Banana Republic North America 570 5 1
574 4.8 Banana Republic Asia 44 1 - 45 0.2 Athleta North America
154 3 - 157 0.6 Intermix North America 37 - 1 36 0.1
Company-operated stores total 3,187 49 18 3,218 36.9 Franchise 439
37 6 470 N/A Total 3,626 86 24 3,688 36.9
View source
version on businesswire.com: https://www.businesswire.com/news/home/20181120005679/en/
Investor Relations Contact:Tina Romani(415)
427-5264Investor_relations@gap.com
Media Relations Contact:Trina Somera(415)
427-3145Press@gap.com
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