Gap Q1 Earnings In Line With Estimates, Retains View
The Gap Inc.’s (GPS - Analyst Report) first-quarter fiscal 2015 earnings of 56 cents a share were in line with the Zacks Consensus Estimate but fell 3.4% year over year.
The Gap Inc. - Earnings Surprise | FindTheCompany
Though the company gained from strong sales at its Old Navy brand, bottom-line results were impacted by foreign currency headwinds as well as weak performance at its Banana Republic and Gap brands. Further, results were also hurt by the delay in merchandise receipts due to the West Coast port slowdown.
Management highlighted that foreign currency fluctuations reduced the company’s earnings per share by approximately 3% during the quarter.
Net sales fell nearly 3% year over year to $3,657 million and missed the Zacks Consensus Estimate of $3,696 million. On a constant currency basis, net sales inched down 1%. Also, Gap’s quarterly online sales were down 2.1% from the year-ago quarter to $563 million.
Comparable-store sales (comps) dipped 4% compared with a 1% decline in the year-ago period as the company continued to struggle with weak performance of its Gap and Banana Republic brands, which was offset by comps growth at the Old Navy brand.
Comps for Banana Republic Global and Gap Global were down 10% and 8%, respectively, compared with respective declines of 5% and 1% recorded last year. However, Old Navy Global comps rose 3% as compared to a 1% increase in first-quarter of fiscal 2014.
Gross profit declined 5.7% to $1,382 million owing to soft sales and gross margin contracted 100 basis points (bps) to 37.8%. Consequently, operating income declined 12.9% to $386 million, whereas operating margin contracted 110 bps to 10.6%.
Financials
Gap ended the quarter with cash and cash equivalents of $1,234 million, long-term debt of $1,331 million and total shareholders’ equity of $2,879 million. During the first quarter, the company generated cash flow from operations of $211 million and incurred capital expenditures of $150 million, resulting in free cash flow of $61 million.
Management projects capital expenditures of approximately $800 million during fiscal 2015, to be primarily allocated toward enhancing omni-channel and supply chain capabilities.
During the reported quarter, the company bought back 5.6 million shares for $230 million. Further, the company paid a quarterly dividend of 23 cents in the quarter.
On May 20, the company declared a dividend of 23 cents for the second quarter.
Store Update
In the first quarter, the company introduced 50 company-operated stores while shutting down 21 of those. This increased the square footage of company-operated stores by 3%. Gap ended the first quarter with 3,749 outlets in 51 countries, of which 3,309 were company-operated and 440 were franchise.
In fiscal 2015, management plans to open approximately 115 company-operated stores, with primary focus on greater China, Athleta and global outlet stores. The company’s franchise partners are expected to open about 35 more stores in fiscal 2015, net of closures. Gap projects square footage growth of about 2.5% in fiscal 2015.
Outlook
Gap retained its fiscal 2015 earnings forecast of $2.75–$2.80 per share. Further, management anticipates operating margin for fiscal 2015 to be around 11.7% versus 12.7% reported in fiscal 2014, implying a 100 bps decline.
Zacks Rank
Currently, Gap carries a Zacks Rank #3 (Hold). Better-ranked stocks in the Apparel/Shoe industry include American Eagle Outfitters Inc. (AEO - Analyst Report), with a Zacks Rank #1 (Strong Buy), and L Brands Inc. (LB - Analyst Report) and ANN Inc. (ANN - Snapshot Report), both carrying a Zacks Rank #2 (Buy).
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