The FINANCIAL — Gap Inc. on August 17 reported results for the second quarter of fiscal year 2017.
On a reported basis, Gap Inc.’s second quarter fiscal year 2017 diluted earnings per share were $0.68. On an adjusted basis, the company’s second quarter fiscal year 2017 diluted earnings per share were $0.58, excluding a $0.10 benefit from insurance proceeds related to the fire that occurred on the company’s Fishkill distribution center campus in fiscal year 2016, according to Gap.
“With a third consecutive quarter of comp sales growth, we are seeing our investments in product, customer experience, and brand equity begin to pay off,” said Art Peck, president and chief executive officer, Gap Inc. “Based on the strength of the first half, we are pleased to increase our full year earnings guidance.”
Peck continued, “As we continue to focus on long-term growth, we are accelerating our strategies that put the customer at the center of everything we do – including a focus on product categories where we have clear differentiation, continued investment in our online and mobile offerings, and taking advantage of our operating scale to drive speed to market, responsiveness to customer demands and efficiency.”
Second Quarter 2017 Comparable Sales Results
Gap Inc.’s comparable sales for the second quarter of fiscal year 2017 were up 1 percent versus a 2 percent decrease last year. Comparable sales by global brand for the second quarter were as follows:
•Old Navy Global: positive 5 percent versus flat last year
•Gap Global: negative 1 percent versus negative 3 percent last year
•Banana Republic Global: negative 5 percent versus negative 9 percent last year
Net Sales Results
Net sales for the second quarter of fiscal year 2017 were $3.80 billion compared with $3.85 billion for the second quarter of fiscal year 2016. The translation of foreign currencies into U.S. dollars negatively impacted the company’s net sales for the second quarter of fiscal year 2017 by about $37 million.
Additional Second Quarter of Fiscal Year 2017 Results and 2017 Outlook
Earnings per Share
The company updated its reported diluted earnings per share guidance for fiscal year 2017 to be in the range of $2.12 to $2.20. Excluding the benefit from insurance proceeds related to the Fishkill fire of about $0.10, the company expects its adjusted diluted earnings per share to be in the range of $2.02 to $2.10. 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 noted that foreign currency fluctuations negatively impacted earnings per share for the second quarter of fiscal year 2017 by an estimated $0.02, or about 3 percentage points of earnings per share growth.2
Comparable and Net Sales
The company continues to expect comparable sales for fiscal year 2017 to be flat to up slightly.
Net sales for fiscal year 2017 are expected to be slightly below this range driven by an expected negative impact from foreign currency fluctuations year-over-year as well as the impact from international closures in fiscal year 2016.
Operating Expenses
Second quarter fiscal year 2017 operating expenses were $1.03 billion compared with $1.16 billion last year. Excluding the $64 million gain from insurance proceeds related to the Fishkill fire recorded in the second quarter of fiscal year 2017 and restructuring costs of $135 million recorded in the second quarter of fiscal year 2016, second quarter fiscal year 2017 operating expenses were up about $70 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 payroll, largely due to bonus, as well as investments in digital and customer initiatives that support the company’s long term growth. Please see the reconciliation of adjusted operating expenses, a non-GAAP financial measure, in the tables at the end of this press release.
1The translation impact on net sales is calculated by applying foreign exchange rates applicable for the second quarter of fiscal year 2017 to net sales for the second quarter of fiscal year 2016. This is done to enhance the visibility of underlying sales trends, excluding the impact of foreign currency exchange rate fluctuations.
2In 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.
Operating Margin
The company’s operating margin for the second quarter of fiscal year 2017 was 11.9 percent compared with 7.2 percent last year.
The company’s adjusted operating margin for the second quarter of fiscal year 2017 was 10.2 percent compared with adjusted operating margin of 11.1 percent last year. Please see the reconciliation of adjusted operating margin, a non-GAAP financial measure, in the tables at the end of this press release.
Effective Tax Rate
The effective tax rate was 38.3 percent for the second quarter of fiscal year 2017.
The company continues to expect its fiscal year 2017 effective tax rate to be about 39 percent.
Inventory
At the end of the second quarter of fiscal year 2017, total inventory was up 5 percent.
The company noted about half of the increase is due to the timing of in-transit inventory and the remaining increase is due to mixing into key loyalty categories that have higher costs but also typically deliver higher merchandise margins.
Cash and Cash Equivalents
The company ended the second quarter of fiscal year 2017 with $1.6 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 $270 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 4.5 million shares for about $100 million and ended the second quarter of fiscal year 2017 with 392 million shares outstanding.
The company expects to spend about $100 million on share repurchases in the third quarter of fiscal year 2017.
The company paid a dividend of $0.23 per share during the second quarter of fiscal year 2017. In addition, on August 10, 2017, the company announced that its board of directors authorized a third quarter dividend of $0.23 per share.
Capital Expenditures
Fiscal year-to-date 2017 capital expenditures were $275 million. The company continues to expect capital spending to be approximately $625 million for fiscal year 2017, excluding an estimated $200 million associated with the rebuilding of the company’s Fishkill, New York distribution center campus and related supply chain spend. The company noted the majority of these costs are expected to be covered by insurance proceeds.
Real Estate
The company ended the second quarter of fiscal year 2017 with 3,642 store locations in 47 countries, of which 3,179 were company-operated.
The company continues to expect store count to be about flat at the end of fiscal year 2017 compared with fiscal year 2016.
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