Gap's quarterly profit grows 12 percent as sales improve

Gap's quarterly profit grows 12 percent as sales improve

Gap's quarterly profit grows 12 percent as sales improve

The FINANCIAL -- Gap Inc. on November 16 reported results for the third quarter of fiscal year 2017. Gap Inc.’s third quarter fiscal year 2017 diluted earnings per share were $0.58. Total company comparable sales for the third quarter of fiscal year 2017 were up 3 percent.

“Today, we are happy to report our fourth consecutive quarter of positive comps, reflecting the continued momentum in key parts of our business,” said Art Peck, president and chief executive officer, Gap Inc.

“We continue to make progress against the balanced growth strategy we outlined in September, driving efficiency at our more mature brands, while growing our footprint in the value and active space, and investing in our online and mobile experience.”

Third Quarter 2017 Comparable Sales Results

Gap Inc.’s comparable sales for the third quarter of fiscal year 2017 were up 3 percent versus a 1 percent decrease last year, which excluded an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points. Comparable sales by global brand for the third quarter were as follows:

•Old Navy Global: positive 4 percent versus positive 4 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 1 percentage point.

•Gap Global: positive 1 percent versus negative 4 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 4 percentage points.

•Banana Republic Global: negative 1 percent versus negative 6 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points.

Net Sales Results

Net sales for the third quarter of fiscal year 2017 were $3.84 billion compared with $3.80 billion for the third quarter of fiscal year 2016. Third quarter net sales details appear in the tables at the end of this press release.

Additional Third Quarter of Fiscal Year 2017 Results and 2017 Outlook

Earnings per Share

The company raised its reported diluted earnings per share guidance for fiscal year 2017 to be in the range of $2.18 to $2.22. Adjusted to exclude the second quarter benefit from insurance proceeds related to the Fishkill fire of about $0.10, the company now expects adjusted diluted earnings per share to be in the range of $2.08 to $2.12. 

The company noted that foreign currency fluctuations negatively impacted earnings per share for the third quarter of fiscal year 2017 by an estimated $0.02, or about 3 percentage points of earnings per share growth compared with the adjusted earnings per share for the third quarter of fiscal year 2016, according to Gap Inc..

Comparable Sales

The company now expects comparable sales for fiscal year 2017 to be up low-single-digits.

Operating Expenses

Third quarter fiscal year 2017 operating expenses were $1.15 billion compared with $1.10 billion last year. Excluding restructuring costs of $36 million recorded in the third quarter of fiscal year 2016, third quarter fiscal year 2017 operating expenses were up about $80 million when compared with last year on an adjusted basis. The company noted the increase in adjusted operating expenses was primarily driven by an increase in marketing and payroll, largely due to bonus, as well as investments in digital and customer initiatives that support the company’s balanced growth strategy. 

Operating Margin

The company’s operating margin for the third quarter of fiscal year 2017 was 9.8 percent compared with 10.2 percent last year or 11.0 percent last year on an adjusted basis. 

Effective Tax Rate

The effective tax rate was 37.1 percent for the third quarter of fiscal year 2017.

1 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 company now expects its fiscal year 2017 effective tax rate to be about 38 percent, primarily due to a more favorable tax impact of foreign operations compared with fiscal year 2016.

Inventory

At the end of the third quarter of fiscal year 2017, total inventory was up 3 percent year over year.

The company noted the increase is primarily due to the timing of in-transit inventory and the negative impact of foreign exchange.

Cash and Cash Equivalents

The company ended the third quarter of fiscal year 2017 with $1.35 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, net of insurance proceeds related to loss of property and equipment, was $197 million, reflecting the timing of lease payments and a larger increase in inventory from the beginning of the fiscal year to the end of the quarter when compared to the same period in fiscal year 2016. 

Cash Distribution

During the quarter, Gap Inc. repurchased 3.8 million shares for about $100 million and ended the third quarter of fiscal year 2017 with 389 million shares outstanding.

The company expects to spend about $100 million on share repurchases in the fourth quarter of fiscal year 2017.

The company paid a dividend of $0.23 per share during the third quarter of fiscal year 2017. In addition, on November 9, 2017, the company announced that its board of directors authorized a fourth quarter dividend of $0.23 per share.

Capital Expenditures

Fiscal year-to-date 2017 capital expenditures were $463 million. The company continues to expect capital spending to be approximately $625 million for fiscal year 2017, excluding costs associated with the rebuilding of the company’s Fishkill, New York distribution center campus and related supply chain spend, which is now estimated to be about $175 million. The company noted the majority of these costs are expected to be covered by insurance proceeds. 

Real Estate

The company ended the third quarter of fiscal year 2017 with 3,639 store locations in 46 countries, of which 3,193 were company-operated.

The company now expects to close about 30 company-operated stores, net of openings and repositions.