Company outlines measures to drive long-term
success
Gap Inc. (NYSE: GPS) today reported first quarter fiscal year
2016 results and provided an update on the strategies outlined on
May 9, 2016 to better position the company for improved business
performance and to build for the future.
Gap Inc.’s first quarter fiscal year 2016 diluted earnings per
share were $0.32. Total company net sales were $3.44 billion for
the first quarter of fiscal year 2016 and comparable sales were
down 5 percent.
“As the pace of change across the apparel industry increases,
now is the time to accelerate our transformation by scaling our
product and operating capabilities across our global portfolio,”
said Art Peck, chief executive officer, Gap Inc. “By taking every
opportunity to exploit our strategic advantages, our brands will be
able to more fully harness the power of the enterprise to better
serve their customers across channels and geographies.”
As part of Gap Inc.’s continued commitment to better position
the company for long-term growth, the company has announced the
following measures to better align talent and financial resources
against its most important priorities:
- Focus on geographies with the
greatest potential. The company remains committed to growing
its brands in regions where it has a structural advantage and the
greatest opportunity to gain market share. As part of this effort,
Old Navy will strategically shift its focus to markets most
favorable to the brand’s growth, resulting in the closure of its
fleet of 53 stores in Japan in fiscal 2016. Old Navy’s near-term
growth ambitions will be anchored in North America, including its
most recent debut of company-operated stores in Mexico, as well as
China and its global franchise operations. Japan remains an
important market for Gap Inc.’s portfolio, with a continued strong
presence of more than 200 Gap and Banana Republic stores.
Additionally, the company expects to close select dilutive Banana
Republic stores, primarily internationally, in fiscal year 2016. In
total, the company expects to close about 75 stores related to
these measures.
- Streamline its operating model.
The company will take steps to create a more efficient global brand
structure, enabling its portfolio of brands to more fully leverage
its scale advantage and move even faster in anticipating and
responding to the ever-changing environment and needs of
customers.
The company estimates that together these measures will result
in annualized pre-tax savings of about $275 million and operating
margin improvement of nearly 2 percentage points. The company
estimates an annualized sales loss of about $250 million associated
with the store closures and expects to recognize restructuring
costs in fiscal 2016 of about $300 million pre-tax, about $100
million of which is non-cash, from the store closures and
streamlining measures.
First Quarter 2016 Comparable Sales Results
Gap Inc.’s comparable sales for the first quarter of fiscal year
2016 were down 5 percent versus a 4 percent decrease last year.
Comparable sales by global brand for the first quarter were as
follows:
- Gap Global: negative 3 percent
versus negative 10 percent last year
- Banana Republic Global: negative
11 percent versus negative 8 percent last year
- Old Navy Global: negative 6
percent versus positive 3 percent last year
Net Sales Results
On a reported basis, net sales for the first quarter of fiscal
year 2016 were $3.44 billion compared with $3.66 billion for the
first quarter of fiscal year 2015. The translation of foreign
currencies into U.S. dollars negatively impacted the company’s
reported net sales for the first quarter of fiscal year 2016 by
about $20 million. In calculating the net sales change on a
constant currency basis, current year foreign exchange rates are
applied to both current year and prior year net sales. This is done
to enhance the visibility of underlying sales trends, excluding the
impact of foreign currency exchange rate fluctuations.
The following table details the company’s first quarter fiscal
year 2016 net sales:
($ in millions)
Gap Global
Old NavyGlobal
BananaRepublicGlobal
Other (2) Total
Percentageof Net Sales
Quarter Ended April 30, 2016 U.S. (1) $ 698 $ 1,328 $ 454 $
178 $ 2,658 77 % Canada 70 98 47 1 216 6 % Europe 144 — 14 — 158 5
% Asia 280 50 26 — 356 11 % Other regions 31 10
9 — 50 1 % Total $ 1,223 $ 1,486 $ 550 $ 179 $
3,438 100 %
($ in millions) Gap Global
Old NavyGlobal
BananaRepublicGlobal
Other (3) Total
Percentageof Net Sales
Quarter Ended May 2, 2015 U.S. (1) $ 735 $ 1,403 $ 515 $ 175
$ 2,828 77 % Canada 69 102 52 1 224 6 % Europe 164 — 17 — 181 5 %
Asia 285 43 27 — 355 10 % Other regions 55 4
10 — 69 2 % Total $ 1,308 $ 1,552 $ 621 $ 176 $ 3,657
100 %
(1) U.S. includes the United States, Puerto Rico, and Guam.(2)
Includes Athleta and Intermix.(3) Includes Athleta, Intermix, and
Piperlime.
Additional First Quarter Results and 2016 Outlook
Earnings per Share
The company is not reaffirming its earnings per share guidance
for fiscal year 2016. The company noted that the current First Call
consensus earnings per share estimate of $1.92 falls within a
reasonable range of potential outcomes, excluding restructuring
impacts from its store closure and streamlining measures. However,
the company also noted that trends in the apparel retail
environment would need to improve from the first quarter of fiscal
year 2016 in order to achieve this estimate.
The company’s diluted earnings per share for the first quarter
of fiscal year 2016 were $0.32. The company noted that foreign
currency fluctuations negatively impacted earnings per share for
the first quarter of fiscal year 2016 by an estimated $0.02, or
about 4 percentage points of earnings per share growth.
In calculating earnings per share excluding the impact of
foreign exchange, 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.
Operating Margin
The company’s operating margin for the first quarter of fiscal
year 2016 was 6.5 percent.
Operating Expenses
First quarter fiscal year 2016 operating expenses were $987
million compared with $996 million last year. Marketing expenses
for the first quarter of fiscal year 2016 were $127 million, down
$9 million compared with last year.
Effective Tax Rate
The effective tax rate was 37.7 percent for the first quarter of
fiscal year 2016. Due to certain non-cash tax impacts related to
the restructuring charges, the company now expects its fiscal year
2016 effective tax rate to be about 40 percent.
Inventory
Total inventory dollars were down 3 percent at the end of the
first quarter of fiscal year 2016, in-line with the company’s
previous guidance. At the end of the second quarter of fiscal year
2016, the company expects total inventory dollars to be down in the
low single digits year over year.
Cash and Cash Equivalents
The company ended the first quarter of fiscal year 2016 with
$1.3 billion in cash and cash equivalents. Year-to-date free cash
flow, defined as net cash provided by operating activities less
purchases of property and equipment, was an inflow of about $30
million. 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.
Cash Distribution
The company paid a dividend of $0.23 per share during the first
quarter of fiscal year 2016. In addition, on May 18, 2016, the
company announced that its Board of Directors authorized a second
quarter dividend of $0.23 per share. The company ended the quarter
with 398 million shares outstanding.
Capital Expenditures
First quarter fiscal year 2016 capital expenditures were $139
million. For fiscal year 2016, the company now expects capital
spending to be approximately $525 million, $125 million less than
its previous guidance, with a continued focus on mobile and supply
chain capabilities.
Depreciation and Amortization
The company now expects depreciation and amortization expense,
net of amortization of lease incentives, to be about $550 million
for fiscal year 2016.
Real Estate
The company ended the first quarter of fiscal year 2016 with
3,727 store locations in 52 countries, of which 3,276 were
company-operated.
During the first quarter of fiscal year 2016, the company opened
18 and closed 17 company-operated stores. Square footage of
company-operated stores was down 1.3 percent compared with the
first quarter of fiscal year 2015.
The company now expects net closures of about 50
company-operated stores in fiscal year 2016. As a result, the
company now expects square footage to be down about 2 percent for
fiscal year 2016 when compared with fiscal year 2015.
Store count, openings, closings, and square footage for our
stores are as follows:
13 Weeks Ended April 30, 2016
Store LocationsBeginning of
Q1
Store LocationsOpened
Store LocationsClosed
Store LocationsEnd of Q1
Square Feet(millions)
Gap North America 866 2 6 862 9.0 Gap Asia 305 7 - 312 3.1 Gap
Europe 175 1 3 173 1.4 Old Navy North America 1,030 2 3 1,029 17.3
Old Navy Asia 65 4 - 69 1.0 Banana Republic North America 612 - 5
607 5.1 Banana Republic Asia 51 - - 51 0.2 Banana Republic Europe
10 - - 10 0.1 Athleta North America 120 2 - 122 0.5 Intermix North
America 41 - - 41 0.1 Company-operated stores total 3,275 18 17
3,276 37.8 Franchise 446 21 16 451 N/A Total 3,721 39 33 3,727 37.8
Webcast and Conference Call Information
Jack Calandra, senior vice president of Corporate Finance and
Investor Relations at Gap Inc., will host a summary of the
company’s first quarter fiscal year 2016 results during a
conference call and webcast from approximately 1:30 p.m. to 2:15
p.m. Pacific Time today. Mr. Calandra will be joined by Art Peck,
Gap Inc. chief executive officer, and Sabrina Simmons, Gap Inc.
chief financial officer.
The conference call can be accessed by calling 1-855-5000-GPS or
1-855-500-0477 (participant passcode: 214046). International
callers may dial 913-643-0954. The webcast can be accessed at
www.gapinc.com.
May Sales
The company will report May sales on June 2, 2016.
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:
- total store closures in fiscal 2016,
including Old Navy store closures in Japan and Banana Republic
store closures, primarily internationally;
- impact of store closures and
streamlining measures, including annualized savings and operating
margin improvement, lost sales and restructuring costs;
- earnings per share for fiscal
2016;
- tax rate for fiscal 2016;
- total inventory dollars at the end of
the second quarter of fiscal 2016;
- capital expenditures for fiscal
2016;
- depreciation and amortization expense
for fiscal year 2016;
- store closings in fiscal year 2016;
and
- square footage for fiscal 2016.
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:
- 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 the financial information;
- the risk that the adoption of new
accounting pronouncements will impact future results;
- the risk that we or our franchisees
will be unsuccessful in gauging apparel trends and changing
consumer preferences;
- the risk that changes in global
economic conditions or consumer spending patterns could adversely
impact our results of operations;
- the highly competitive nature of our
business in the United States and internationally;
- the risk that if we are unable to
manage our inventory effectively, our gross margins will be
adversely affected;
- the risk that the failure to attract
and retain key personnel, or effectively manage succession, could
have an adverse impact on our results of operations;
- the risk that we are 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 our security measures, which could have an
adverse effect on our results of operations and our
reputation;
- the risks to our efforts to expand
internationally, including our ability to operate under a global
brand structure and operating in regions where we have less
experience;
- the risk that foreign currency exchange
rate fluctuations could adversely impact our financial
results;
- the risks to our business, including
our costs and supply chain, associated with global sourcing and
manufacturing;
- the risks to our reputation or
operations associated with importing merchandise from foreign
countries, including failure of our vendors to adhere to our Code
of Vendor Conduct;
- the risk that trade matters could
increase the cost or reduce the supply of apparel available to us
and adversely affect our business, financial condition, and results
of operations;
- the risk that our franchisees’
operation of franchise stores is not directly within our control
and could impair the value of our brands;
- the risk that we or our 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 that our investments in
omni-channel shopping initiatives may not deliver the results we
anticipate;
- the risk that comparable sales and
margins will experience fluctuations;
- the risk that changes in our credit
profile or deterioration in market conditions may limit our access
to the capital markets and adversely impact our financial results
or our business initiatives;
- the risk that updates or changes to our
information technology (“IT”) systems may disrupt our
operations;
- the risk that failure to maintain,
enhance and protect our brand image could have an adverse effect on
our results of operations;
- the risk that natural disasters, public
health crises, political crises, or other catastrophic events could
adversely affect our operations and financial results, or those of
our franchisees or vendors;
- the risk that changes in the regulatory
or administrative landscape could adversely affect our financial
condition, strategies, and results of operations;
- the risk that we do not repurchase some
or all of the shares we anticipate purchasing pursuant to our
repurchase program; and
- the risk that we will not be successful
in defending various proceedings, lawsuits, disputes, claims, and
audits.
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 January 30, 2016, 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 19, 2016. 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 Gap, Banana Republic, Old Navy, Athleta, and
Intermix brands. Fiscal year 2015 net sales were $15.8 billion. Gap
Inc. products are available for purchase in more than 90 countries
worldwide through about 3,300 company-operated stores, about 450
franchise stores, and e-commerce sites. For more information,
please visit www.gapinc.com.
The Gap, Inc. CONDENSED CONSOLIDATED BALANCE
SHEETS UNAUDITED ($ in
millions) April 30,
2016
May 2,
2015
ASSETS Current assets: Cash and cash equivalents $ 1,313 $ 1,234
Merchandise inventory 1,958 2,010 Other current assets 674
874 Total current assets 3,945 4,118 Property and equipment,
net 2,864 2,790 Other long-term assets 698 587 Total
assets $ 7,507 $ 7,495 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current maturities of debt $ 424 $ 21 Accounts
payable 1,108 1,156 Accrued expenses and other current liabilities
974 960 Income taxes payable 49 37 Total current
liabilities 2,555 2,174 Long-term liabilities:
Long-term debt 1,318 1,331 Lease incentives and other long-term
liabilities 1,112 1,111 Total long-term liabilities
2,430 2,442 Total stockholders' equity 2,522
2,879 Total liabilities and stockholders' equity $ 7,507 $
7,495
The Gap, Inc. CONDENSED CONSOLIDATED
STATEMENTS OF INCOME UNAUDITED
13 Weeks Ended ($ and shares in millions except
per share amounts) April 30,
2016
May 2,
2015
Net sales $ 3,438 $ 3,657 Cost of goods sold and occupancy expenses
2,229 2,275 Gross profit 1,209 1,382 Operating
expenses 987 996 Operating income 222 386 Interest,
net 18 4 Income before income taxes 204 382 Income
taxes 77 143 Net income $ 127 $ 239
Weighted-average number of shares - basic 398 421 Weighted-average
number of shares - diluted 399 424 Earnings per share -
basic $ 0.32 $ 0.57 Earnings per share - diluted $ 0.32 $ 0.56
The Gap, Inc. CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS UNAUDITED
13 Weeks Ended ($ in millions) April
30,
2016
May 2,
2015
Cash flows from operating activities: Net income $ 127 $ 239
Depreciation and amortization (a) 132 133 Change in merchandise
inventory (53 ) (117 ) Other, net (38 ) (44 ) Net
cash provided by operating activities 168 211
Cash flows from investing activities: Purchases of
property and equipment (139 ) (150 ) Other (1 ) -
Net cash used for investing activities (140 )
(150 ) Cash flows from financing activities: Proceeds from
issuances under share-based compensation plans 10 35 Withholding
tax payments related to vesting of stock units (17 ) (66 )
Repurchases of common stock - (232 ) Excess tax benefit from
exercise of stock options and vesting of stock units 1 17 Cash
dividends paid (91 ) (97 ) Net cash used for
financing activities (97 ) (343 ) Effect of
foreign exchange rate fluctuations on cash and cash equivalents
12 1 Net decrease in cash and cash
equivalents (57 ) (281 ) Cash and cash equivalents at beginning of
period 1,370 1,515 Cash and cash
equivalents at end of period $ 1,313 $ 1,234
(a) Depreciation and amortization is net of
amortization of lease incentives.
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)
April 30,
2016
May 2,
2015
Net cash provided by operating activities $ 168 $ 211 Less:
Purchases of property and equipment (139 ) (150 )
Free cash flow $ 29 $ 61
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version on businesswire.com: http://www.businesswire.com/news/home/20160519006538/en/
Gap Inc.Investor Relations Contact:Jack Calandra,
415-427-1726Investor_relations@gap.comMedia Relations
Contact:Jennifer Poppers, 415-427-1729Press@gap.com
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