Gap Clocks First Comp Sales Growth in Two Years

Retailer’s Q4 FY16 sales inched up 0.9% to $4.43 billion from $4.39 billion

The Gap Inc. (NYSE: GPS), a US-based global specialty retailer that markets its products under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brand names, announced its Q4 FY16 and full-year FY16 financial results on February 23rd, 2017.

The San Francisco, California-based Company sells its products in more than 90 countries worldwide through about 3,200 company-operated stores, about 450 franchise stores, and ecommerce sites. Its FY15 net sales were $15.8 billion. The Company’s omni-channel services, including order-in-store, reserve-in-store, find-in-store and ship-from-store, are offered across all its brands. Gap has company-operated stores in the US, Canada, the UK, France, Ireland, Japan, Italy, China, Taiwan, and Hong Kong. It operates Gap, Banana Republic, and Old Navy stores in Asia, Australia, Europe, Latin America, the Middle East and Africa. Read more about Gap’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Gap’s net sales inched up 0.9% to $4.43 billion from $4.39 billion in the year-ago same period. Comparable sales grew 2% compared to a decline of 7% in the year-ago comparable period, marking the first period of sales growth since CEO Art Peck took over two years ago.

On the other hand, Gap’s operating expenses increased to $1.2 billion versus $1.08 billion in Q4 FY15. In all, lower taxation helped Gap’s net income to grow to $220 million, or $0.55 per share, versus $214 million, or $0.53 per share, in the year earlier corresponding period. On an adjusted basis, diluted EPS were $0.51, excluding the impact from restructuring costs related to store closure and streamlining measures.

According to CEO Peck, Gap undertook many measures to address the quality, the aesthetics, the value and the fit of its clothes, in order to improve its product lines. For example, the average development cycle for the industry has been 10 months. Gap has worked to bring it down to 8 to 10 weeks for many of its categories, with a third of its products having the capability to be produced within the quarter. This would enable the company to better compete with fast fashion retailers such as H&M and Zara, which are known for their quick turnaround times. This factor has also ensured that Gap can manage inventory more efficiently.

Gap has also increased testing of products, through either crowd-sourcing or physically testing the products in stores, to be better informed about buying commitments. Particularly for the Gap brand, the Company has moved to a demand-based buying model, with one platform across all inventory, pricing, assortment building, and in-season management. This same program is set to be implemented across the Company, which should not only help its product lines but also its cost structure. Gap’s revenue by geography in Q4 FY16 and full-year FY16 is given below:

FY16 financial highlights

During FY16, Gap’s net sales declined to $15.5 billion versus $15.79 billion in the prior year. The translation of foreign currencies into US dollars negatively impacted the Company’s reported net sales by about $20 million during the year.

In FY16, the Company’s comparable sales were down 2% compared to a decline of 4% last year. Old Navy Global clocked positive 1% versus flat last year, while Gap Global reported negative 3% versus negative 6% last year. Banana Republic Global clocked negative 7% versus negative 10% last year.

Old Navy delivered its fifth consecutive year of net sales growth in FY16 and grew market share in key categories including dresses, denim and knits. As part of its strategy to develop engaging digital experiences, Gap piloted a new application during the quarter, DressingRoom by Gap, to help customers virtually “try on” clothing through a smartphone augmented reality experience.

Athleta grew its footprint to 132 US stores by the end of FY16, and is scheduled to open about 15 additional US stores in FY17. The women’s performance lifestyle brand continues to be on the leading edge of fabric innovation, as demonstrated by the introduction of Sculptek, which features 360 degree stretch, and Powervita, its newest soft and supportive yoga fabric, in FY16.

Mobile point of sale functionality expanded to about 20% of Gap’s US fleet in FY16, enabling store associates to better serve their customers throughout their shopping experience.

Total operating expenses for FY16 were $4.4 billion. Excluding full year restructuring charges of $197 million, total adjusted operating expenses were $4.3 billion, up $156 million compared to last year. In all, FY16 net income plunged to $676 million, or $1.69 per diluted share, versus $920 million, or $2.23 per diluted share, in the previous year.

Other highlights

Inventory: At the end of Q4 FY16, total inventory dollars were down 2%, in-line with the Company’s previous guidance.

Stores update: Gap ended FY16 with 3,659 store locations in 50 countries, of which 3,200 were company operated. Square footage of Company-operated stores was down about 3% to 36.7 million compared to the year-ago same period, in-line with the Company’s prior guidance. The Company completed the closure of its Old Navy Japan business and a number of dilutive Banana Republic stores, primarily internationally, during FY16.

In FY17, Gap expects to open about 40 Company-operated stores, net of closures and repositions. In-line with its strategy, Gap expects store openings to be focused on Athleta and Old Navy locations, with closures weighted towards the Gap brand.

Cash position: Gap ended FY16 with $1.8 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 $1.2 billion.

Dividend: The Board of Directors authorized a first quarter FY17 dividend of $0.23 per share, payable on or after April 26th, 2017, to shareholders of record at the close of business on April 05th, 2017.

New appointments: On November 15th, 2016, Gap announced the appointment of Teri List-Stoll as Executive Vice President and Chief Financial Officer, effective January 17th, 2017. List-Stoll will report to CEO Art Peck and will serve on the Company’s senior leadership team. List-Stoll will succeed Sabrina Simmons, who is leaving the Company, and will have oversight of the firm’s global finance function, as well as loss prevention and corporate administration divisions. Once List-Stoll joins Gap in mid-January 2017, Simmons will shift into an advisory role through the end of March 2017.

Capital expenditures: Gap’s FY16 capital expenditures were $524 million, in-line with its earlier forecasts.

Trimming of workforce: On February 27th, 2017, Gap announced that it plans to shed 216 workers in San Francisco in a move effective March 31st, 2017. This is part of the Company’s plan to streamline its operational model. The cuts come amid a broader pullback by a number of retailers including store closings among Macy’s Inc. (NYSE: M) and Sears Hometown and Outlet Stores Inc. (NASDAQ: SHOS).

Guidance for FY17

For FY17, Gap expects diluted EPS to be in the range of $1.95 to $2.05, which includes the estimated negative impact of approximately $0.09 due to foreign currency fluctuations at current exchange rates. This impact equates to approximately 5% of EPS growth when compared with the company’s adjusted diluted EPS of $2.02 for FY16.

Comparable sales for FY17 are expected to be flat to up slightly. Net sales are expected to be slightly below this range driven by an expected negative impact from foreign currency fluctuations Y-o-Y.

Gap expects capital spending to be approximately $625 million for FY17, excluding an estimated $200 million related to rebuilding of the company’s Fishkill, New York distribution center campus, which the company expects will be covered by insurance proceeds. About half of the FY17 capital spending will be earmarked for store investments, with the remainder focused on transformative infrastructure investments to support its omni-channel and digital strategies, such as information technology and supply chain.

Stock Performance

Gap’s stock ended the day at $24.82, slipping 1.51%, at the close on Tuesday, February 28th, 2017, having vacillated between an intraday high of $25.14 and a low of $24.43 during the session. The stock’s trading volume was at 6,799,418 for the day. The Company’s market cap was at $9.61 billion as of Tuesday’s close.

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