Gap Inc. Reports First Quarter Results

SAN FRANCISCO–(BUSINESS WIRE)–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

Operating
Expenses

Operating
Expenses as a
% of Net Sales

Operating
Income

Operating
Income as a %
of Net Sales (c)

Income
Taxes

Net
Income

Earnings per
Share – 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

Banana
Republic
Global (2)

Other (3)

Total

Percentage
of 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 Navy
Global

Gap Global

Banana
Republic
Global

Other (3)

Total

Percentage
of 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.

Contacts

Investor Relations Contact:
Tina Romani
(415) 427-5264
[email protected]

Media Relations Contact:
Sarah Meron
(415) 427-3145
[email protected]

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