Gap Inc. Reports Strong Second Quarter Results and Revises Fiscal Year 2013 Outlook Upward
Gap Inc. Reports Strong Second Quarter Results and Revises Fiscal Year 2013 Outlook Upward
- Second Quarter Earnings Per Share of $0.64, a 31 Percent Increase Over Last Year
- Increase in Full Year Earnings per Share Guidance to $2.57 to $2.65, from $2.52 to $2.60
- Net Sales Up 8 Percent in the Second Quarter; Up 10 Percent on a Constant Currency Basis
- Comparable Sales Up 5 Percent for the Second Quarter
SAN FRANCISCO--(BUSINESS WIRE)-- Gap Inc. (NYS: GPS) today reported that second quarter diluted earnings per share increased to $0.64, compared with $0.49 last year. Given its progress year-to-date, the company raised its estimate for fiscal year 2013 diluted earnings per share to be in the range of $2.57 to $2.65.
"We delivered strength in both our top and bottom lines this quarter," said Glenn Murphy, chairman and chief executive officer of Gap Inc. "As we move into the second half of the year, we remain focused on growing revenue and driving continued momentum across our portfolio of brands."
Positive customer response to our assortments drove net sales for the second quarter, which ended August 3, 2013, to increase 8 percent to $3.87 billion compared with $3.58 billion for the second quarter last year. Net sales increased 10 percent on a constant currency basis. In calculating net sales growth 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 business trends, excluding the impact of foreign currency exchange rate fluctuations.
Due to the 53rd week in fiscal year 2012, comparable sales for the second quarter of fiscal year 2013 are compared with the 13-week period ended August 4, 2012. On this basis, the company's second quarter comparable sales increased 5 percent compared with a 4 percent increase in the second quarter last year.
Second Quarter 2013 Financial and Business Highlights
- Positive 5 percent comparable sales versus positive 4 percent last year, driven by strength in its largest global brands: Gap and Old Navy.
- Second quarter gross margin increased 60 basis points to 40.5 percent; operating margin expanded by 160 basis points to 13.5 percent.
- Net earnings were up $60 million, or 25 percent compared with the second quarter last year.
- The company announced its intention to increase its annual dividend per share from $0.60 to $0.80 beginning in the third quarter of 2013. This represents a 60 percent increase over the fiscal 2012 dividend per share of $0.50.
- In line with its strategy to expand Old Navy internationally, today the company is announcing plans to open the brand's first store in Shanghai and launch an Old Navy e-commerce site in China in the first half of 2014. In addition, the company ended the quarter with 10 Old Navy stores in Japan, on pace to open 15 to 20 stores for the year.
- The company continued to expand its Gap store base in mainland China, opening 6 additional stores, for a total of 55 stores. In addition, today the company is announcing its intention to bring its Gap brand to Taiwan with its first store opening in the first half of 2014, along with a Gap e-commerce site.
- Gap Inc. opened 6 Athleta stores in the second quarter, for a total of 46 stores open to date, and the brand is on pace to end fiscal 2013 with about 65 stores.
- The company continued to build upon its online success with 27 percent online sales growth in the quarter, in part driven by its industry-leading omni-channel platform for consumers, inclusive of ship-from-store, find-in-store and reserve-in-store capabilities.
Second Quarter Comparable Sales Results
Comparable sales by global brand for the second quarter of fiscal year 2013 were as follows:
- Gap Global: positive 6 percent versus positive 3 percent last year
- Banana Republic Global: negative 1 percent versus positive 6 percent last year
- Old Navy Global: positive 6 percent versus positive 3 percent last year
Net Sales Results
The following table details the company's second quarter net sales:
|($ in millions)||Gap Global||
|Quarter Ended August 3, 2013|
|($ in millions)||Gap Global||
|Quarter Ended July 28, 2012|
(1) U.S. includes the United States, Puerto Rico, and Guam.
(2) Includes Piperlime, Athleta, and fiscal year 2013 includes Intermix.
Total online sales were $466 million and $367 million for the thirteen weeks ended August 3, 2013 and July 28, 2012, respectively.
Additional Second Quarter Results and 2013 Outlook
Earnings per Share
Second quarter diluted earnings per share of $0.64 increased 31 percent compared with $0.49 for the second quarter last year. Given its progress to date, the company raised its estimate for full year 2013 diluted earnings per share to be in the range of $2.57 to $2.65.
Depreciation and Amortization
The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, for fiscal year 2013 to be about $475 million.
Second quarter operating expenses were $1 billion, up $44 million compared with the second quarter of last year.
Marketing expenses for the quarter were $148 million, up $1 million compared with the second quarter of last year.
The company's operating margin was 13.5 percent in the second quarter versus 11.9 percent last year.
The company continues to expect that operating margin for fiscal year 2013 will be about 13 percent.
Effective Tax Rate
The effective tax rate was 39.8 percent for the second quarter of fiscal year 2013. The company continues to expect its full year tax rate to be about 39 percent in fiscal year 2013.
On a year-over-year basis, inventory dollars per store were up 6 percent at the end of the second quarter of fiscal year 2013.
The company expects inventory dollars per store to be up in the mid-single digits at the end of the third quarter of fiscal year 2013 compared with the third quarter last year.
Cash and Cash Equivalents
The company ended the second quarter of fiscal year 2013 with $1.9 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 $542 million compared with an inflow of $673 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.
Second quarter share repurchases were $27 million and the company ended the second quarter of fiscal year 2013 with 468 million shares outstanding.
The company paid a dividend of $0.15 per share during the second quarter of fiscal year 2013. Reinforcing its commitment to returning cash to shareholders, the company announced today its intention to increase its annual dividend, beginning in the third quarter of 2013, from $0.60 per share to $0.80 per share. This represents a 60 percent increase over the fiscal 2012 dividend per share of $0.50.
Fiscal year-to-date, capital expenditures were $315 million.
For fiscal year 2013, the company continues to expect capital spending to be approximately $675 million in support of its outlined strategies.
The company ended the second quarter of fiscal year 2013 with a total of 3,444 store locations, 3,106 of which were company-operated.
During the second quarter of fiscal year 2013, the company opened 34 and closed 33 company-operated stores. Square footage of company-operated stores was flat compared with the second quarter of fiscal year 2012.
In fiscal year 2013, the company expects to open about 160 company-operated stores, focused on Athleta, Gap China, Old Navy Japan, and global outlet stores. The company expects that it will close about 80 company-operated stores. The closures are weighted towards Gap North America, consistent with the company's previously stated strategy. Given its focus on growing through new channels and geographies, the company continues to expect square footage to increase about 1 percent in fiscal year 2013.
Store count, openings, closings, and square footage for our stores are as follows:
|13 Weeks Ended August 3, 2013|
|Gap North America||983||8||22||969||10.1|
|Old Navy North America||1,005||5||7||1,003||17.3|
|Old Navy Asia||10||-||-||10||0.2|
|Banana Republic North America||589||5||1||593||4.9|
|Banana Republic Asia||41||1||-||42||0.2|
|Banana Republic Europe||10||-||-||10||0.1|
|Athleta North America||40||6||-||46||0.2|
|Piperlime North America||1||-||-||1||-|
|Intermix North America||32||3||1||34||0.1|
|Company-operated stores total||3,105||34||33||3,106||36.8|
Webcast and Conference Call Information
Katrina O'Connell, vice president of Corporate Finance and Investor Relations at Gap Inc., will host a summary of the company's second quarter fiscal year 2013 results during a conference call and webcast at approximately 2:00 p.m. Pacific Time today. Ms. O'Connell will be joined by Glenn Murphy, Gap Inc. chairman and 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: 7045156). International callers may dial 913-643-0954. The webcast can be accessed at www.gapinc.com.
The company will report August sales on September 5, 2013.
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 fiscal year 2013;
- driving growth and performance;
- future dividends per share;
- international expansion, including Old Navy in China and Japan, and Gap stores in Taiwan;
- additional Athleta stores;
- online expansion;
- depreciation and amortization for fiscal year 2013;
- operating margin for fiscal year 2013;
- effective tax rate for fiscal year 2013;
- inventory dollars per store at the end of the third quarter of fiscal year 2013
- capital expenditures for fiscal year 2013;
- store openings and closings for fiscal year 2013, and weightings by channel;
- real estate square footage for fiscal year 2013;
- impact of foreign exchange rates;
- impact of calendar shifts;
- spread between total sales and comparable sales;
- gaining market share.
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 adoption of new accounting pronouncements will impact future results;
- the risk that changes in general economic conditions or consumer spending patterns could adversely impact the company's results of operations;
- the highly competitive nature of the company's business in the United States and internationally;
- the risk that the company or its franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;
- the risk to the company's business associated with global sourcing and manufacturing, including sourcing costs, events causing disruptions in product shipment, or an inability to secure sufficient manufacturing capacity;
- the risk that the company's franchisees will be unable to successfully open, operate, and grow their franchised stores in a manner consistent with the company's requirements regarding its brand identities and customer experience standards;
- 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 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 its access to the capital markets and adversely impact its financial results or business initiatives;
- the risk that trade matters could increase the cost or reduce the supply of apparel available to the company and adversely affect its business, financial condition, and results of operations;
- the risk that updates or changes to the company's information technology ("IT") systems may disrupt its operations;
- the risk that actual or anticipated cyber attacks, and other cybersecurity risks, may cause the company to incur increasing costs;
- the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect the company's operations and financial results;
- the risk that acts or omissions by the company's third-party vendors, including a failure to comply with the company's code of vendor conduct, could have a negative impact on its reputation or operations;
- the risk that the company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program;
- the risk that the company will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; and
- the risk that changes in the regulatory or administrative landscape could adversely affect the company's financial condition, strategies, and results of operations.
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, 2013, as well as the company's subsequent filings with the Securities and Exchange Commission.
These forward-looking statements are based on information as of August 22, 2013. 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, children, and babies under the Gap, Banana Republic, Old Navy, Piperlime, Athleta, and Intermix brands. Fiscal year 2012 net sales were $15.7 billion. Gap Inc. products are available for purchase in more than 90 countries worldwide through about 3,100 company-operated stores, over 300 franchise stores, and e-commerce sites. For more information, please visit www.gapinc.com.
|The Gap, Inc.|
|CONDENSED CONSOLIDATED BALANCE SHEETS|
|($ in millions)||
|Cash, cash equivalents, and short-term investments||$||1,925||$||2,114|
|Other current assets||824||758|
|Total current assets||4,586||4,540|
|Property and equipment, net||2,646||2,521|
|Other long-term assets||688||600|
|LIABILITIES AND STOCKHOLDERS' EQUITY|
|Current maturities of debt||$||-||$||48|
|Accrued expenses and other current liabilities||994||977|
|Income taxes payable||57||12|
|Total current liabilities||2,278||2,238|
|Lease incentives and other long-term liabilities||937||959|
|Total long-term liabilities||2,184||2,525|
|Total stockholders' equity||3,458||2,898|
|Total liabilities and stockholders' equity||$||7,920||$||7,661|
|The Gap, Inc.|
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME|
|13 Weeks Ended||26 Weeks Ended|
|($ and shares in millions except per share amounts)||
|Cost of goods sold and occupancy expenses||2,301||2,148||4,486||4,260|
|Income before income taxes||503||405||1,033||778|
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