The FINANCIAL — Gap Inc. on August 20 reported second quarter fiscal year 2015 results and reaffirmed its full-year earnings per share guidance to be in the range of $2.75 to $2.80, excluding the impact from strategic actions previously announced on June 15, 2015.
“I remain confident in our strategies to improve business performance and drive loyalty going forward,” said Art Peck, chief executive officer, Gap Inc. “Our evolving product operating model is laying the foundation to more consistently deliver on-trend product collections across our portfolio.”
On a reported basis, Gap Inc.’s second quarter of fiscal year 2015 diluted earnings per share were $0.52, including the negative impacts associated with foreign currency fluctuations, West Coast port delays, and the strategic actions, according to Gap Inc..
Excluding the negative impact of about $0.12 from the strategic actions, the company’s adjusted diluted earnings per share were $0.64 for the second quarter of fiscal year 2015. 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.
In addition, Gap Inc. distributed about $800 million to shareholders through share repurchases and dividends fiscal year-to-date, reinforcing the company’s commitment to returning excess cash to shareholders.
First Half Fiscal Year 2015 Results
For the first half of fiscal year 2015, the company’s diluted earnings per share were $1.09. The company’s adjusted diluted earnings per share were $1.42, or an increase of approximately 12 percent compared with adjusted diluted earnings per share for the first half of fiscal year 2014, which excludes a $0.05 gain on asset sale. The company noted that its adjusted diluted earnings per share for the first half of fiscal year 2015 excludes the following negative impacts:
$0.06 per share due to the estimated impact from foreign currency fluctuations;
$0.13 per share due to the estimated impact from West Coast port delays; and
$0.14 per share due to charges associated with strategic actions primarily at Gap brand, including lease buyouts, asset impairments, and employee-related costs.
“We’re pleased to deliver earnings per share growth of about 12 percent on an adjusted basis for the first half of the year, while continuing to work through product challenges at two of our global brands,” said Sabrina Simmons, chief financial officer, Gap Inc.
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.
Business Highlights
On top of three consecutive years of growth, Old Navy delivered another quarter of positive comparable sales, demonstrating the continued success of its demand-driven and trend-predictive product pipeline in delivering aspirational collections that customers love.
Gap brand continues to make progress against its strategic actions, including right-sizing its North America store count to create a smaller, more vibrant fleet of stores. The brand’s leadership team remains focused on an aggressive agenda designed to improve business performance, including the implementation of a clear, on-brand product aesthetic framework and a new product operating model to increase speed, predictability and responsiveness.
The company continues to pursue its strategy to integrate physical and digital shopping experiences, redefining how customers shop and engage with Gap Inc.’s portfolio of brands. During the quarter, the company expanded its Reserve in Store service to all U.S. Athleta stores, while its Order in Store capabilities continued to offer more customers across its portfolio access to expanded inventories including broader size, color and style selections.
Second Quarter 2015 Comparable Sales Results
Gap Inc.’s comparable sales for the second quarter of fiscal year 2015 were down 2 percent versus flat last year. Comparable sales by global brand for the second quarter were as follows:
Gap Global: negative 6 percent versus negative 5 percent last year
Banana Republic Global: negative 4 percent versus flat last year
Old Navy Global: positive 3 percent versus positive 4 percent last year
Second Quarter 2015 Net Sales Results
For the second quarter of fiscal year 2015, Gap Inc.’s net sales decreased 2 percent to $3.90 billion compared with $3.98 billion for the second quarter last year.
On a constant currency basis, net sales for the second quarter of fiscal year 2015 were about flat compared with last year. In calculating the net sales change 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 sales trends, excluding the impact of foreign currency exchange rate fluctuations.
The translation of net sales in foreign currencies into U.S. dollars negatively impacted the company’s reported sales for the second quarter of fiscal year 2015 by about $100 million, primarily due to the weakening Japanese yen and Canadian dollar.
Additional Second Quarter Results and 2015 Outlook
Earnings per Share and Operating Margin
On a reported basis, second quarter of fiscal year 2015 diluted earnings per share were $0.52, including the negative impacts associated with foreign currency fluctuations, West Coast port delays, and the strategic actions.
Excluding the negative impact of about $0.12 from the strategic actions, the company’s adjusted diluted earnings per share were $0.64 for the second quarter of fiscal year 2015. 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 also noted that the estimated impact from foreign currency fluctuations reduced the company’s diluted earnings per share growth rate in the second quarter of fiscal year 2015 by about $0.04 or about 5 percentage points.
The company reaffirmed its full-year earnings per share guidance to be in the range of $2.75 to $2.80 for fiscal year 2015, excluding the negative impact associated with the strategic actions. The company updated its estimate of the charges associated with the strategic actions to approximately $130 million to $140 million, from the previously announced range of $140 million to $160 million. This guidance is provided to enhance visibility into the company’s expectations regarding its ongoing business, excluding the strategic actions.
The company continues to expect operating margin, excluding the impact associated with the strategic actions, to be down about 1 percentage point in fiscal year 2015 compared with fiscal year 2014.
Operating Expenses
Second quarter operating expenses were $1.09 billion, compared with $1.00 billion in the second quarter of last year. Marketing expenses for the second quarter were $131 million, down $11 million from last year.
Effective Tax Rate
The effective tax rate was 38 percent for the second quarter of fiscal year 2015. The company continues to expect its full-year fiscal 2015 effective tax rate to be about 38 percent.
Inventory
At the end of the second quarter of fiscal year 2015, inventory dollars per store were up about 1 percent on a year-over-year basis, in line with the company’s previously communicated guidance.
At the end of the third quarter of fiscal year 2015, the company expects year-over-year inventory dollars per store to be down slightly compared with last year.
Cash and Cash Equivalents
The company ended the second quarter of fiscal year 2015 with $1.04 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 $341 million. 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.
Cash Distribution
During the quarter, Gap Inc. repurchased 10 million shares for about $375 million and ended the second quarter of fiscal year 2015 with 410 million shares outstanding.
Including the company’s dividend, shareholder distributions totaled about $800 million for the first half of fiscal year 2015, underscoring the company’s commitment to returning excess cash to shareholders.
The company paid a dividend of $0.23 per share during the second quarter of fiscal year 2015. In addition, on August 13, 2015, the company announced that its Board of Directors authorized a third quarter dividend of $0.23 per share.
Capital Expenditures
Fiscal year-to-date capital expenditures were $301 million. For fiscal year 2015, the company continues to expect capital spending to be approximately $800 million.
Depreciation and Amortization
The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, to be about $525 million for fiscal year 2015.
Real Estate
The company ended the second quarter of fiscal year 2015 with 3,751 store locations in 51 countries, of which 3,309 were company-operated.
While the company continues to pursue its previously stated growth initiatives with a focus on Asia, global outlets and Athleta in the U.S., it now expects its overall store count and square footage to remain flat in fiscal year 2015, as compared to last year due to Gap brand store closures.
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