Gap’s Sales Falls for Seventh Straight Quarter

Retailer’s net sales fell 2% to $3.80 billion compared to $3.86 billion in the year-ago period

g1The 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 Q3 FY16 financial results on November 17th, 2016.

The San Francisco, California-based Company sells its products in more than 90 countries worldwide through about 3,300 company-operated stores, about 450 franchise stores, and e-commerce 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 U.S., Canada, the U.K., 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.

Q3 FY16 financial highlights

During Q3 FY16, Gap’s net sales fell 2% to $3.80 billion compared to $3.86 billion in the year-ago period. Sales have fallen for seven straight quarters so far. The translation of foreign currencies into U.S. dollars positively impacted Q3 FY16 net sales by about $17 million.

g2As with specialty retailer Abercrombie & Fitch Co. (NYSE: ANF), Gap is faced with sluggish sales at its stores as shoppers increasingly buy apparel online and shop more at off-price chains, forcing the Company to offer massive discounts to attract customers. While the Company has taken major steps in its restructuring plans, it is also testing new offerings like high-tech fabrics, stain-resistant clothes, and adding more varieties of athletic-inspired clothing at Gap and Old Navy stores. The company is also exploring smaller-sized Old Navy store formats.

During Q3 FY16, Gap’s comparable sales fell 3%, including an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points, versus a 2% decrease in the year-ago period. For Gap Global, comp sales were at negative 8%, including an estimated negative impact from the Fishkill distribution center fire of approximately 4%, versus negative 4% in the year-ago period. At Banana Republic Global, comp sales were at negative 8%, including an estimated negative impact from the Fishkill distribution center fire of approximately 2%, versus negative 12% last year. On the brighter side, Old Navy Global reported positive comp sales of 3%, including an estimated negative impact from the Fishkill distribution center fire of about 1%, versus positive 4% last year.

g3During Q3 FY16, Gap’s operating expenses rose to $1.10 billion, including about $35 million of restructuring costs, compared with $1.03 billion in the year-ago period. Marketing expenses increased to $148 million versus the year-ago period. The lone bright spot in the otherwise dismal earnings results was Q3 FY16 merchandise margin rate, which grew 220 basis points versus last year, primarily driven by Old Navy.

In all, Gap’s net income fell to $204 million, or $0.51 per share, versus $248 million, or $0.61 per share, in the year-ago period. On an adjusted basis, diluted EPS were $0.60, excluding a $0.09 impact from restructuring costs related to store closure and streamlining measures.

Other highlights

Inventory: At the end of Q3 FY16, total inventory dollars were down 4%, in-line with the Company’s previous guidance. At the end of Q4 FY16, Gap expects total inventory dollars to be down in the low single digits Y-o-Y.

g4Stores update: Gap announced in May 2016 that it was closing 75 Old Navy and banana republic stores outside North America. The move affects just a fraction of the more than 3,700 stores that Gap operates globally and should result in annual savings of $275 million before taxes in FY16.

At the end of Q3 FY16, Gap had 3,742 stores in 50 countries, of which 3,281 were company-operated. During Q3 FY16, Gap opened 36 and closed 28 company-operated stores. Square footage of company-operated stores was down about 2% compared to the year-ago period. Gap also expects net closures of about 65 company-operated stores in FY16 and a 3% reduction of square footage compared to FY15.

Cash position: Gap ended Q3 FY16 with $1.52 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 $417 million.

Dividend: Gap paid a dividend of $0.23 per share during Q3 FY16. In addition, on November 10th, 2016, Gap’s Board of Directors authorized a Q4 FY16 dividend of $0.23 per share.

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 company’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 year-to-date capital expenditures were $383 million. For FY16, Gap expects capital spending to be approximately $525 million.

Guidance for full year FY16

Gap reaffirmed its outlook for full year FY16 and expects adjusted diluted EPS to be in the range of $1.87 to $1.92, excluding the negative impact of restructuring costs, which is expected to be approximately $0.45 to $0.50. Gap expects diluted EPS for FY16 to be in the range of $1.37 to $1.47 and adjusted operating margin to be about 8.5% in FY16.

Stock Performance

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Gap’s stock ended the day at $24.99, slipping 2.42%, at the close on Monday, November 21st, 2016, having vacillated between an intraday high of $26.36 and a low of $24.92 during the session. The stock’s trading volume was at 11,807,053 for the day. The Company’s market cap was at $11.94 billion as of Tuesday’s close.

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