Gap Inc. (NYSE: GPS) today reported diluted earnings per share
of $0.60 on a reported basis, and $0.24 on an adjusted basis,
excluding the gain on sale of a building, 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 table at
the end of this press release.
“This quarter was extremely challenging, and we are not at all
satisfied with our results. We are committed to improving our
execution and performance this year,” said Art Peck, president and
chief executive officer, Gap Inc. “We remain confident in our plan
to separate into two independently traded public companies in 2020,
and we are focused on setting up both companies for long term value
creation and profitable growth.”
First Quarter 2019 Comparable Sales Results
The company’s first quarter fiscal year 2019 comparable sales
were down 4% compared with a 1% increase last year. Comparable
sales by global brand for the first quarter were as follows:
- Old Navy Global: negative 1%
versus positive 3% last year
- Gap Global: negative 10% versus
negative 4% last year
- Banana Republic Global: negative
3% versus positive 3% last year
For the first quarter ended May 4, 2019:
- Net sales were $3.7 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 first quarter of fiscal year 2019 by about $34 million.1 First
quarter net sales details appear in the tables at the end of this
press release.
- Gross profit was $1.34 billion, a
decrease of 6% compared with last year.
- Gross margin was 36.3%, a decrease of
140 basis points compared with last year.
- Operating margin was 8.5%, an increase
of 240 basis points compared with last year. Adjusted operating
margin was 3.5%, a decrease of 260 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 24.8% for
the first quarter of fiscal year 2019.
- Diluted earnings per share were $0.60
compared to $0.42 last year. Adjusted diluted earnings per share
were $0.24 for the first 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
table at the end of this press release.
- The company noted that foreign currency
fluctuations positively impacted earnings per share for the first
quarter of fiscal year 2019 by an estimated $0.01.2
- The company ended the first quarter of
fiscal year 2019 with $2.24 billion in merchandise inventory, up
about 10% year over year. The company noted that the increase in
merchandise inventory was impacted by the acquisition of Janie and
Jack, increases in in-transit times, and net store growth year over
year.
- The company repurchased 1.9 million
shares for $50 million and ended the first quarter of fiscal year
2019 with 378 million shares outstanding.
- The company paid a dividend of $0.2425
per share during the first quarter of fiscal year 2019. In
addition, on May 22, 2019, the company announced that its Board of
Directors authorized a second quarter dividend of $0.2425 per
share.
The company ended the first quarter of fiscal year 2019 with
$1.2 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 negative
$136 million compared with negative $204 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.
First quarter fiscal year 2019 capital expenditures were $165
million.
The company ended the first quarter of fiscal year 2019 with
3,849 store locations in 44 countries, of which 3,335 were
company-operated.
Recent Accounting Pronouncement - Leases
During the first quarter of fiscal 2019, we adopted the new
lease accounting standard, ASC 842, using the optional transition
method and recorded a decrease to opening retained earnings of $86
million, net of tax, as of the effective date. The adoption of ASC
842 resulted in the recording of operating lease assets and
operating lease liabilities of $5.7 billion and $6.6 billion,
respectively, as of February 3, 2019. The adoption of ASC 842 did
not have a material impact to our Condensed Consolidated Statement
of Income or Condensed Consolidated Statement of Cash Flows.
2019 Outlook
Earnings per Share
The company updated its reported diluted earnings per share
guidance for fiscal year 2019 to be in the range of $2.04 to $2.14.
The company expects its as adjusted diluted earnings per share to
be in the range of $2.05 to $2.15.
Comparable Sales
The company now expects comparable sales for fiscal year 2019 to
be down low single digits.
Effective Tax Rate
The company expects its reported fiscal year 2019 effective tax
rate to be about 27%. Excluding certain non-cash tax impacts
related to expected restructuring charges, the company expects its
adjusted fiscal year 2019 effective tax rate to be about 26%. The
effective tax rate may be materially impacted as additional
guidance related to the Tax Cuts and Jobs Act of 2017 is issued by
the U.S. Treasury Department and Internal Revenue Service.
Share Repurchases
The company continues to expect to repurchase approximately $50
million per quarter through the end of fiscal year 2019.
Capital Expenditures
The company now expects capital spending to be approximately
$675 million for fiscal year 2019, which includes 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 30 company-operated
stores, net of openings and repositions in fiscal year 2019. The
updated guidance reflects about 10 additional store openings for
both Old Navy and Athleta. 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 expects 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 first 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 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: 2858773). 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 first half and the full year of
fiscal year 2019; comparable sales for fiscal year 2019; effective
tax rate for fiscal year 2019; impact of additional guidance
related to the Tax Cut and Jobs Act of 2017; 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;
improvement in Gap brand’s margin trend in fiscal year 2019;
dividends and share repurchases in fiscal year 2019; unit inventory
comparables in the second quarter and back half of fiscal 2019;
sequential improvement in profitability throughout fiscal year
2019; impact from foreign exchange; investing prudently in
technology and supply chain initiatives; net sales in fiscal 2019;
spread between comparable sales and net sales growth in fiscal
2019; comparable sales and margin trends in the second half of
fiscal year 2019; and the benefits, impact and timing of completion
of the separation transaction.
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
May 30, 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 $16.6 billion. Gap Inc. products are available for
purchase in more than 90 countries worldwide through
company-operated stores, franchise stores, and e-commerce sites.
For more information, please visit www.gapinc.com.
1 The translation impact on net sales is calculated by applying
foreign exchange rates applicable for the first quarter of fiscal
year 2019 to net sales for the first quarter of fiscal year 2018.
This is done to enhance the visibility of underlying sales trends,
excluding the impact of foreign currency exchange rate
fluctuations.
2 In estimating the earnings per share impact from foreign
currency exchange rate fluctuations, the company estimates current
gross margins using the appropriate prior year rates (including the
impact of merchandise-related hedges), translates current period
foreign earnings at prior year rates, and excludes the
year-over-year earnings impact of balance sheet remeasurement and
gains or losses from non-merchandise-related foreign currency
hedges. This is done in order to enhance the visibility of business
results excluding the direct impact of foreign currency exchange
rate fluctuations.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE
SHEETS UNAUDITED ($ in millions) May
4,
2019
May 5,
2018
ASSETS Current assets: Cash and cash equivalents $ 941 $ 1,210
Short-term investments 272 164 Merchandise inventory 2,242 2,035
Other current assets 757 778 Total current assets
4,212 4,187 Property and equipment, net 3,129 2,791 Operating lease
assets 5,732 - Other long-term assets 547 607 Total
assets $ 13,620 $ 7,585 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Accounts payable $ 994 $ 1,072 Accrued
expenses and other current liabilities 882 975 Current portion of
operating lease liabilities 929 - Income taxes payable 26
11 Total current liabilities 2,831 2,058
Long-term liabilities: Long-term debt 1,249 1,249 Long-term
operating lease liabilities 5,597 - Lease incentives and other
long-term liabilities (a) 372 1,081 Total long-term
liabilities 7,218 2,330 Total stockholders' equity
3,571 3,197 Total liabilities and stockholders'
equity $ 13,620 $ 7,585 ____________________ (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 ($ and shares in millions except per share
amounts) May 4,
2019
May 5,
2018
Net sales $ 3,706 $ 3,783 Cost of goods sold and occupancy expenses
2,362 2,356 Gross profit 1,344 1,427 Operating expenses 1,028 1,198
Operating income 316 229 Interest, net 14 10 Income before income
taxes 302 219 Income taxes 75 55 Net income $ 227 $ 164
Weighted-average number of shares - basic 379 389 Weighted-average
number of shares - diluted 381 393 Earnings per share -
basic $ 0.60 $ 0.42 Earnings per share - diluted $ 0.60 $ 0.42
Cash dividends declared and paid per share $ 0.2425 $ 0.2425
The Gap, Inc. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS UNAUDITED 13
Weeks Ended ($ in millions) May 4,
2019 (b)
May 5,
2018 (b)
Cash flows from operating activities: Net income $ 227 $ 164
Depreciation and amortization (a) 138 126 Gain on sale of building
(191 ) - Change in merchandise inventory (83 ) (46 ) Other, net
(62 ) (310 ) Net cash provided by (used for)
operating activities 29 (66 ) Cash
flows from investing activities: Purchases of property and
equipment (165 ) (138 ) Purchase of building (343 ) - Purchases of
short-term investments (69 ) (167 ) Proceeds from sales and
maturities of short-term investments 86 3 Proceeds from sale of
building 220 - Purchase of Janie and Jack (69 ) - Other -
(7 ) Net cash used for investing activities
(340 ) (309 ) Cash flows from financing activities:
Proceeds from issuances under share-based compensation plans 10 20
Withholding tax payments related to vesting of stock units (19 )
(19 ) Repurchases of common stock (50 ) (100 ) Cash dividends paid
(92 ) (94 ) Net cash used for financing activities
(151 ) (193 ) Effect of foreign exchange rate
fluctuations on cash, cash equivalents, and restricted cash
- (2 ) Net decrease in cash, cash equivalents, and
restricted cash (462 ) (570 ) Cash, cash equivalents, and
restricted cash at beginning of period 1,420
1,799 Cash, cash equivalents, and restricted cash at end of
period $ 958 $ 1,229 ____________________
(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
thirteen weeks ended May 4, 2019 and May 5, 2018, respectively,
total cash, cash equivalents, and restricted cash includes $17
million and $19 million of restricted cash primarily recorded in
other current assets and long-term assets on the Condensed
Consolidated Balance Sheets.
The Gap, Inc. NON-GAAP FINANCIAL
MEASURES UNAUDITED ADJUSTED INCOME STATEMENT
METRICS FOR THE FIRST QUARTER OF FISCAL YEAR 2019 The
following adjusted income statement metrics are non-GAAP financial
measures. These measures are provided to enhance visibility into
the Company's underlying results for the period excluding the
impacts of a gain on the sale of a building, separation-related
costs, and specialty fleet restructuring costs. Management believes
the adjusted metrics are useful for the assessment of ongoing
operations as we believe the adjusted items are not part of our
ongoing operations due to the nature of the adjustments, and
management believes that the presentation of adjusted financial
information provides additional information to investors to
facilitate the comparison of results against prior years. However,
these non-GAAP financial measures are not intended to supersede or
replace the GAAP measures.
($ in millions)
13 Weeks Ended May 4, 2019
OperatingExpenses
OperatingExpenses as a%
of Net Sales
OperatingIncome
OperatingIncome as a %of
Net Sales (c)
IncomeTaxes
NetIncome
Earnings perShare -
Diluted
GAAP metrics, as reported $ 1,028 27.7 % $ 316 8.5 % $ 75 $ 227 $
0.60 Adjustments for: Gain on sale of building 191 5.2 % (191 )
(5.2 )% (50 ) (141 ) (0.37 ) Separation-related costs (a) (4 ) (0.1
)% 4 0.1 % 1 3 0.01 Specialty fleet restructuring costs (b)
(1 ) (0.0 )% 1 0.0 % - 1
0.00 Non-GAAP metrics $ 1,214 32.8 % $ 130
3.5 % $ 26 $ 90 $ 0.24
____________________ (a) Represents the impact of
separation-related costs. The costs primarily consist of external
adviser fees related to the separation. These costs are expected to
become more significant throughout the fiscal year. (b)
Represents the impact of specialty fleet restructuring costs. These
costs are expected to become more significant throughout the fiscal
year and primarily include lease and employee-related costs.
(c) Operating income 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. 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.
13 Weeks Ended ($ in millions) May
4,
2019
May 5,
2018
Net cash provided by (used for) operating activities $ 29 $ (66 )
Less: Purchases of property and equipment (a) (165 )
(138 ) Free cash flow $ (136 ) $ (204 ) ____________________
(a) Excludes purchase of building.
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, and
a gain on the sale of a building. However, this non-GAAP financial
measure is not intended to supersede or replace the GAAP measure.
52 Weeks Ending
February 1, 2020
Low End High End Expected earnings per share -
diluted $ 2.04 $ 2.14
Add: Estimated impact of specialty fleet
restructuring costs (a)
0.29 0.29 Add: Estimated incremental tax on restructuring costs (b)
0.04 0.04 Add: Estimated impact of separation-related costs (c)
0.05 0.05 Less: Gain on sale of building (d) (0.37 )
(0.37 ) Expected adjusted earnings per share - diluted $ 2.05
$ 2.15 ____________________ (a)
Represents the estimated earnings per share impact of estimated
costs related to the previously announced specialty fleet
restructuring, calculated net of tax at the expected adjusted
effective tax rate. (b) Represents certain non-cash tax
impacts related to expected restructuring charges. (c)
Represents the estimated earnings per share impact of estimated
costs associated with the Company's planned separation, 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 is calculated net of tax at the expected adjusted
effective tax rate.
The Gap, Inc. NET SALES RESULTS
UNAUDITED The following table details the Company’s
first quarter net sales (unaudited):
($ in millions)
13 Weeks Ended May 4, 2019
Old Navy Global
Gap Global
BananaRepublicGlobal (2)
Other (3)
Total
Percentageof Net Sales
U.S. (1) $ 1,641 $ 608 $ 487 $ 286 $ 3,022 82 % Canada 128 69 47 1
245 7 % Europe - 121 3 - 124 3 % Asia 10 233 26 - 269 7 % Other
regions 20 21 5 - 46 1 % Total $
1,799 $ 1,052 $ 568 $ 287 $ 3,706 100 %
($ in
millions)
13 Weeks Ended May 5, 2018
Old NavyGlobal
Gap Global
BananaRepublicGlobal
Other (3)
Total
Percentageof Net Sales
U.S. (1) $ 1,590 $ 680 $ 479 $ 269 $ 3,018 80 % Canada 127 77 50 1
255 7 % Europe - 135 4 - 139 4 % Asia 12 284 25 - 321 8 % Other
regions 16 28 6 - 50 1 % Total $
1,745 $ 1,204 $ 564 $ 270 $ 3,783 100 % ____________________
(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 and Intermix
brands. Beginning in the third quarter of fiscal year 2018, the
Hill City brand is also included.
The Gap, Inc.
REAL ESTATE Store count,
openings, closings, and square footage for our stores are as
follows:
13 Weeks Ended May 4, 2019
Store LocationsBeginning of Q1
Store LocationsOpened
Store LocationsClosed
Store LocationsEnd of Q1
Square Feet(millions)
Old Navy North America 1,139 6 1 1,144 18.7 Old Navy Asia 15 1 - 16
0.2 Gap North America 758 1 15 744 7.7 Gap Asia 332 20 14 338 3.1
Gap Europe 152 1 1 152 1.2 Banana Republic North America 556 2 4
554 4.7 Banana Republic Asia 45 2 1 46 0.2 Athleta North America
161 4 - 165 0.7 Intermix North America 36 - - 36 0.1 Janie and Jack
North America (1) - - - 140 0.2 Company-operated stores total 3,194
37 36 3,335 36.8 Franchise 472 46 4 514 N/A Total 3,666 83 40 3,849
36.8 ____________________ (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 May 4, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190530005761/en/
Investor Relations Contact:Tina Romani(415)
427-5264Investor_relations@gap.com
Media Relations Contact:Sarah Meron(415)
427-3145Press@gap.com
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