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Gap (GPS) Rises on Narrower-Than-Expected Q4 Loss & Sales Beat
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Shares of The Gap Inc. (GPS - Free Report) jumped more than 7% in the after-market session on Mar 3, following better-than-expected fourth-quarter fiscal 2021 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. Results gained from strength in the core business stemming from restructuring efforts, including selling smaller non-strategic brands, transition to an asset-light partnership model, and shutting down of underperforming North American stores. The company remains poised for long-term growth on the back of investments in demand generation, customer loyalty and artificial intelligence.
For the fiscal fourth quarter, the company’s loss of 2 cents per share was narrower than the Zacks Consensus Estimate of a loss of 14 cents. However, the metric compared unfavorably with earnings of 28 cents and 58 cents reported in fourth-quarter fiscal 2020 and fourth-quarter fiscal 2019, respectively.
Net sales rose 2.3% year over year to $4,525 million, while the metric declined 3% on a two-year basis. The figure beat the Zacks Consensus Estimate of $4,509 million. Strategic permanent store closures and divestitures hurt sales.
Despite store openings, the company continued to witness strength in the online business, with digital sales increasing 44% from fourth-quarter fiscal 2019, accounting for 43% of total sales for the reported quarter.
Comparable sales (comps) grew 3% each on a year-over-year and two-year basis. Comps included online sales and comparable sales days for stores open on the same days in both 2020 and 2019.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global improved 2% from fourth-quarter fiscal 2019, while comps remained flat from the pre-pandemic levels. Strength in Active, Denim and Kids and Baby categories aided the results. However, supply-chain issues acted as deterrents.
Gap Global: For fourth-quarter fiscal 2021, net sales declined 13% on a two-year basis at Gap Global due to store closures. Comps for Gap Global rose 3% from fourth-quarter fiscal 2019. The brand’s partnerships such as Gap Home with Walmart and Yeezy Gap, as well as a joint venture with NEXT in Europe, enabled the brand to expand the customer base and contribute to quarterly growth.
Banana Republic: Net sales declined 11% and comps were down 2% on a two-year basis due to permanent store closures. Higher AUR stemming from the relaunch of the Banana Republic brand, along with efforts to expand into new categories with the launch of BR Baby, remained upsides.
Athleta: Net sales jumped 52% for the Athleta brand, while comps advanced 42% from the 2019 comparable period. Segmental results gained from a solid online show and growth in the wellness space, backed by the launch of AthletaWell. Driven by these factors, Athleta is on track to reach $2 billion in net sales by fiscal 2023.
Gross profit of $1,523 million reflected an 8.7% decrease from $1,668 million in the prior-year quarter and declined 9% on a two-year basis. Adjusted gross margin of 33.7% contracted 260 basis points (bps) from fourth-quarter fiscal 2019 due to a 500-bps decline in merchandise margins, stemming from higher air freight. On the flip side, lower rent and occupancy costs, stemming from online growth, store closures and negotiated rent, remained upsides.
Operating expenses declined 1.2% year over year. Adjusted operating expenses increased 6.3% to $1,507 million, while adjusted operating expense rate of 33.3% expanded 300 bps from fourth-quarter fiscal 2019. The increase in operating expenses can be attributed to higher investments in marketing and technology, and a rise in compensation and fulfillment costs, which somewhat offset lower store expenses.
Operating income declined from $134 million to $8 million in the quarter under review. Adjusted operating income of $16 million compares unfavorably with the prior-year quarter’s reported figure of $278 million. Adjusted operating margin of 0.4% contracted 550 bps from fourth-quarter fiscal 2019. This includes the adverse impacts of roughly 600 bps related to transitory air freight expenses.
Other Financials
Gap ended the fiscal fourth quarter with cash and cash equivalents of $877 million, representing a significant decline from $1,988 million in the year-ago period. As of Jan 29, 2022, it had total stockholders’ equity of $2,722 million and long-term debt of $1,484 million.
In fiscal 2021, the company generated a free cash flow of $115 million. Gap bought back 9 million shares worth $201 million and paid out a dividend of $226 million in fiscal 2021. GPS also approved a quarterly dividend of 12 cents per share in the quarter under review. On Feb 24, the company’s board approved the first-quarter fiscal 2022 dividend of 15 cents, which reflects a hike of 25% on a sequential basis. For discal 2022, management envisions repurchasing 200 million shares.
In fiscal 2021, the company’s capital expenditure was $694 million. For fiscal 2022, capital expenditure is forecast to be $700 million for enhancing digital facilities, loyalty, supply-chain improvement, and investment in store growth for Old Navy and Athleta.
Store Update
As of Jan 29, 2022, Gap had 3,399 stores in more than 40 countries, out of which 2,835 were company-operated and 564 were franchise outlets.
For fiscal 2022, GPS plans to close 50-60 Gap and Banana Republic stores in North America as part of its 350 store closure plan. It also expects to open 30-40 Old Navy and Athleta stores, each.
Fiscal 2022 Guidance
Management issued the fiscal 2022 view, wherein it expects adjusted earnings of $1.85-$2.05. Sales are anticipated to grow year over year in the low-single digits, while fiscal first-quarter sales are likely to decline in the mid to high-single digits. The adjusted operating margin is likely to be 6-6.5%.
Image Source: Zacks Investment Research
In the past three months, shares of this Zacks Rank #4 (Sell) company have declined 17.3% compared with the industry’s 21.7% fall.
Stocks to Consider
Here are three better-ranked stocks to consider — DICK'S Sporting Goods (DKS - Free Report) , Boot Barn Holdings (BOOT - Free Report) and Tractor Supply Company (TSCO - Free Report) .
Boot Barn Holdings, the leading lifestyle retailer of western and work-related footwear, apparel and accessories, currently flaunts a Zacks Rank #1(Strong Buy). In the last reported quarter, the company posted adjusted earnings of $2.23 per share. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Boot Barn Holdings’ current financial-year sales and EPS suggests growth of 62.6% and 220.8%, respectively, from the year-ago period. BOOT has an expected EPS growth rate of 20% for three-five years.
DICK'S Sporting Goods, a sporting goods retailer, presently flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 104.2%, on average.
The Zacks Consensus Estimate for DICK'S Sporting Goods’ current financial-year sales and EPS suggests growth of 27.8% and 151.6%, respectively, from the year-ago period. DKS has an expected EPS growth rate of 11.7% for three-five years.
Tractor Supply currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 22%, on average.
The Zacks Consensus Estimate for Tractor Supply’s current financial-year sales and EPS suggests growth of 8.2% and 8%, respectively, from the year-ago period. TSCO has an expected EPS growth rate of 9.8% for three-five years.
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Gap (GPS) Rises on Narrower-Than-Expected Q4 Loss & Sales Beat
Shares of The Gap Inc. (GPS - Free Report) jumped more than 7% in the after-market session on Mar 3, following better-than-expected fourth-quarter fiscal 2021 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. Results gained from strength in the core business stemming from restructuring efforts, including selling smaller non-strategic brands, transition to an asset-light partnership model, and shutting down of underperforming North American stores. The company remains poised for long-term growth on the back of investments in demand generation, customer loyalty and artificial intelligence.
For the fiscal fourth quarter, the company’s loss of 2 cents per share was narrower than the Zacks Consensus Estimate of a loss of 14 cents. However, the metric compared unfavorably with earnings of 28 cents and 58 cents reported in fourth-quarter fiscal 2020 and fourth-quarter fiscal 2019, respectively.
Net sales rose 2.3% year over year to $4,525 million, while the metric declined 3% on a two-year basis. The figure beat the Zacks Consensus Estimate of $4,509 million. Strategic permanent store closures and divestitures hurt sales.
Despite store openings, the company continued to witness strength in the online business, with digital sales increasing 44% from fourth-quarter fiscal 2019, accounting for 43% of total sales for the reported quarter.
Comparable sales (comps) grew 3% each on a year-over-year and two-year basis. Comps included online sales and comparable sales days for stores open on the same days in both 2020 and 2019.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global improved 2% from fourth-quarter fiscal 2019, while comps remained flat from the pre-pandemic levels. Strength in Active, Denim and Kids and Baby categories aided the results. However, supply-chain issues acted as deterrents.
Gap Global: For fourth-quarter fiscal 2021, net sales declined 13% on a two-year basis at Gap Global due to store closures. Comps for Gap Global rose 3% from fourth-quarter fiscal 2019. The brand’s partnerships such as Gap Home with Walmart and Yeezy Gap, as well as a joint venture with NEXT in Europe, enabled the brand to expand the customer base and contribute to quarterly growth.
Banana Republic: Net sales declined 11% and comps were down 2% on a two-year basis due to permanent store closures. Higher AUR stemming from the relaunch of the Banana Republic brand, along with efforts to expand into new categories with the launch of BR Baby, remained upsides.
Athleta: Net sales jumped 52% for the Athleta brand, while comps advanced 42% from the 2019 comparable period. Segmental results gained from a solid online show and growth in the wellness space, backed by the launch of AthletaWell. Driven by these factors, Athleta is on track to reach $2 billion in net sales by fiscal 2023.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Margins & Costs
Gross profit of $1,523 million reflected an 8.7% decrease from $1,668 million in the prior-year quarter and declined 9% on a two-year basis. Adjusted gross margin of 33.7% contracted 260 basis points (bps) from fourth-quarter fiscal 2019 due to a 500-bps decline in merchandise margins, stemming from higher air freight. On the flip side, lower rent and occupancy costs, stemming from online growth, store closures and negotiated rent, remained upsides.
Operating expenses declined 1.2% year over year. Adjusted operating expenses increased 6.3% to $1,507 million, while adjusted operating expense rate of 33.3% expanded 300 bps from fourth-quarter fiscal 2019. The increase in operating expenses can be attributed to higher investments in marketing and technology, and a rise in compensation and fulfillment costs, which somewhat offset lower store expenses.
Operating income declined from $134 million to $8 million in the quarter under review. Adjusted operating income of $16 million compares unfavorably with the prior-year quarter’s reported figure of $278 million. Adjusted operating margin of 0.4% contracted 550 bps from fourth-quarter fiscal 2019. This includes the adverse impacts of roughly 600 bps related to transitory air freight expenses.
Other Financials
Gap ended the fiscal fourth quarter with cash and cash equivalents of $877 million, representing a significant decline from $1,988 million in the year-ago period. As of Jan 29, 2022, it had total stockholders’ equity of $2,722 million and long-term debt of $1,484 million.
In fiscal 2021, the company generated a free cash flow of $115 million. Gap bought back 9 million shares worth $201 million and paid out a dividend of $226 million in fiscal 2021. GPS also approved a quarterly dividend of 12 cents per share in the quarter under review. On Feb 24, the company’s board approved the first-quarter fiscal 2022 dividend of 15 cents, which reflects a hike of 25% on a sequential basis. For discal 2022, management envisions repurchasing 200 million shares.
In fiscal 2021, the company’s capital expenditure was $694 million. For fiscal 2022, capital expenditure is forecast to be $700 million for enhancing digital facilities, loyalty, supply-chain improvement, and investment in store growth for Old Navy and Athleta.
Store Update
As of Jan 29, 2022, Gap had 3,399 stores in more than 40 countries, out of which 2,835 were company-operated and 564 were franchise outlets.
For fiscal 2022, GPS plans to close 50-60 Gap and Banana Republic stores in North America as part of its 350 store closure plan. It also expects to open 30-40 Old Navy and Athleta stores, each.
Fiscal 2022 Guidance
Management issued the fiscal 2022 view, wherein it expects adjusted earnings of $1.85-$2.05. Sales are anticipated to grow year over year in the low-single digits, while fiscal first-quarter sales are likely to decline in the mid to high-single digits. The adjusted operating margin is likely to be 6-6.5%.
Image Source: Zacks Investment Research
In the past three months, shares of this Zacks Rank #4 (Sell) company have declined 17.3% compared with the industry’s 21.7% fall.
Stocks to Consider
Here are three better-ranked stocks to consider — DICK'S Sporting Goods (DKS - Free Report) , Boot Barn Holdings (BOOT - Free Report) and Tractor Supply Company (TSCO - Free Report) .
Boot Barn Holdings, the leading lifestyle retailer of western and work-related footwear, apparel and accessories, currently flaunts a Zacks Rank #1(Strong Buy). In the last reported quarter, the company posted adjusted earnings of $2.23 per share. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Boot Barn Holdings’ current financial-year sales and EPS suggests growth of 62.6% and 220.8%, respectively, from the year-ago period. BOOT has an expected EPS growth rate of 20% for three-five years.
DICK'S Sporting Goods, a sporting goods retailer, presently flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 104.2%, on average.
The Zacks Consensus Estimate for DICK'S Sporting Goods’ current financial-year sales and EPS suggests growth of 27.8% and 151.6%, respectively, from the year-ago period. DKS has an expected EPS growth rate of 11.7% for three-five years.
Tractor Supply currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 22%, on average.
The Zacks Consensus Estimate for Tractor Supply’s current financial-year sales and EPS suggests growth of 8.2% and 8%, respectively, from the year-ago period. TSCO has an expected EPS growth rate of 9.8% for three-five years.