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Gap (GPS) Surpasses Q2 Earnings Estimates, Lowers FY23 View
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The Gap Inc. (GPS - Free Report) reported second-quarter fiscal 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate and improved year over year. However, the top line lagged the consensus mark and declined year over year.
Results were hurt by uncertain macro and consumer environments, as well as the sale of the Gap China business. On the flip side, share gains at Old Navy and Gap brands, adjusted operating margin expansion, a reduction in the inventory, and a strong balance sheet acted as tailwinds.
Shares of Gap rose 1.5% in the after-market session on Aug 24, following the second-quarter fiscal 2023 results. In the past three months, shares of the Zacks Rank #3 (Hold) company have gained 14.3% compared with the industry’s 9.7% growth.
Image Source: Zacks Investment Research
The company posted adjusted earnings of 34 cents per share in the fiscal second quarter, surpassing the Zacks Consensus Estimate of 9 cents. Adjusted earnings also significantly improved from the 8 cents reported in the second quarter of fiscal 2022.
Net sales declined 8% year over year to $3,548 million and slightly missed the Zacks Consensus Estimate of $3,597 million. This includes a currency headwind of 1 percentage point and the adverse impacts of 2 percentage points from the sale of Gap China. The company completed the sale of Gap China at the beginning of first-quarter fiscal 2023. Comparable sales (comps) fell 6% in the fiscal second quarter.
Digital sales decreased 11% year over year, accounting for 33% of the total sales for the reported quarter. Store sales declined 7% year over year.
Old Navy: Net sales at Old Navy Global declined 6% year over year to $1,961 million due to continued softness in demand from lower-income consumers and weak active category trends. However, the company witnessed strength in women’s tops and woven bottoms, along with renewed trends in men’s and kids. Comps also declined 6% in the fiscal second quarter. Sales for Old Navy Global beat our model’s estimate of $1,918.9 million.
Gap Global: For second-quarter fiscal 2023, net sales declined 14% year over year to $755 million due to unfavorable impacts of the sale of Gap China, the shutdown of Yeezy Gap and currency headwinds. Excluding these headwinds, sales for the brand were down 4% in the quarter. The company’s sales were aided by a strong women’s category, offset by strategic store closures in North America. Comps dipped 1% in the reported quarter. Sales for Gap Global lagged our model’s estimate of $849.8 million.
Banana Republic: Net sales decreased 11% year over year to $480 million, whereas comps fell 8%. Despite market share gains, sales comparison for the quarter were impacted by last year’s outsized sales growth for the brand, owing to the shift in consumer preferences. Sales lagged our estimate of $480.6 million.
Athleta: Net sales edged down 1% year over year to $341 million for the Athleta brand, whereas comps declined 7%. Segmental results were hurt by continued product acceptance challenges. However, the decline was partly negated by efforts undertaken to improve product presentation and creatives, and to uplift the brand’s performance. Net sales surpassed our estimate of $335.6 million.
Margins & Costs
The gross margin of 37.6% expanded 310 basis points (bps) and 160 bps, respectively, from the prior-year period’s reported and adjusted gross margins. The improvement resulted from a 260-bps expansion in merchandise margins. The merchandise margin benefited from lower airfreight than last year and improved promotional activity, offset by inflationary cost headwinds.
Adjusted SG&A expenses declined 8% year over year. Adjusted SG&A, as a percentage of sales, leveraged 10 basis points to 36.6%, owing to lower advertising expenses, payroll and technology investments resulting from cost-saving actions.
The adjusted operating income was $119 million in the fiscal second quarter, excluding $13 million of restructuring costs, compared with the adjusted operating income of $65 million in the prior-year quarter. Meanwhile, the adjusted operating margin expanded 170 bps to 3.4%, driven by an improved gross margin and adjusted SG&A leverage.
Other Financials
Gap ended the fiscal second quarter with cash and cash equivalents of $1,350 million, up from $780 million in the year-ago period. As of Jul 29, 2023, it had a total stockholders’ equity of $2,263 million and a long-term debt of $1,487 million.
As of Jul 29, the company generated $528 million in cash from operating activities. Gap paid out a dividend of $56 million in the fiscal second quarter. GPS approved a dividend of 15 cents per share for the fiscal third quarter.
As of Jul 29, the company’s capital expenditure was $199 million. For fiscal 2023, capital expenditure is expected to be $500-$525 million.
Store Update
As of Jul 29, 2023, Gap had 3,456 stores in more than 40 countries, of which 2,592 were company-operated and 864 were franchise outlets.
Guidance
Despite the tough macro and consumer environments, management expects continued margin expansion and improved cash flow. The company anticipates fiscal 2023 sales to decline in the mid-single digits compared with the low to mid-single-digit decline mentioned earlier. The company reported net sales of $15.6 billion in the year-ago quarter. The company expects sales for fiscal 2023 to include an impact of $300 million from the sale of Gap China and a positive effect of $150 million from the 53rd week.
The gross margin for fiscal 2023 is likely to expand in fiscal 2023. The gross margin expansion is likely to result from a 200-bps leverage due to the lapping of elevated airfreight costs in the prior year and a 100-bps margin gain from improved inventory position and promotional activity, offset by a 10-bps deleverage from inflationary costs. Additionally, the company expects the inflationary deleverage to turn into leverage in the second half of fiscal 2023, owing to gains from improved commodity costs and ocean freight rates. ROD, as a percentage of sales, is expected to deleverage 70 bps year over year.
The company estimates adjusted operating expenses (SG&A expenses) of $5.15 billion in fiscal 2023, owing to lower variable expenses relative to a lowered sales view.
For third-quarter fiscal 2023, Gap expects a sales decline in the low-double digits, whereas it reported $4.04 billion last year. The decline can be attributed to the sale of Gap China, which is expected to impact net sales by $70 million in the fiscal third quarter.
The company anticipates the fiscal third-quarter gross margin to be in line with the 38.7% reported last year. It envisions lower inflation and airfreight costs to be offset by 150 bps of ROD deleverage. It anticipates promotional activity to be mostly in line with that reported last year. Adjusted SG&A expenses are likely to be $1.3 billion in the fiscal third quarter. The company expects year-over-year inventory to be down at the end of the fiscal third quarter, in line with year-to-date trends.
Stocks to Consider
Here are some better-ranked stocks that investors can consider, namely Urban Outfitters (URBN - Free Report) , Boot Barn (BOOT - Free Report) and American Eagle Outfitters (AEO - Free Report) .
Urban Outfitters, a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products, presently flaunts a Zacks Rank #1 (Strong Buy). The expected EPS growth rate for three to five years is 20.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Urban Outfitters’ current financial-year sales and earnings suggests growth of 5% and 95% from the year-ago period’s actuals, respectively. URBN has a trailing four-quarter earnings surprise of 19.2%, on average.
Boot Barn operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. BOOT currently sports a Zacks Rank #1 and has a long-term EPS rate of 6.4% for three to five years.
The Zacks Consensus Estimate for Boot Barn’s current financial-year sales suggests growth of 7.6% from the year-ago reported figure. BOOT has a trailing four-quarter earnings surprise of 13.5%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank of 2 (Buy). AEO has a trailing four-quarter earnings surprise of 9.2%, on average.
The Zacks Consensus Estimate for American Eagle’s current financial year’s earnings per share suggests a significant increase of 275% from the year-ago reported figure. AEO has an expected earnings per share growth rate of 9.6% for three to five years.
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Gap (GPS) Surpasses Q2 Earnings Estimates, Lowers FY23 View
The Gap Inc. (GPS - Free Report) reported second-quarter fiscal 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate and improved year over year. However, the top line lagged the consensus mark and declined year over year.
Results were hurt by uncertain macro and consumer environments, as well as the sale of the Gap China business. On the flip side, share gains at Old Navy and Gap brands, adjusted operating margin expansion, a reduction in the inventory, and a strong balance sheet acted as tailwinds.
Shares of Gap rose 1.5% in the after-market session on Aug 24, following the second-quarter fiscal 2023 results. In the past three months, shares of the Zacks Rank #3 (Hold) company have gained 14.3% compared with the industry’s 9.7% growth.
Image Source: Zacks Investment Research
The company posted adjusted earnings of 34 cents per share in the fiscal second quarter, surpassing the Zacks Consensus Estimate of 9 cents. Adjusted earnings also significantly improved from the 8 cents reported in the second quarter of fiscal 2022.
Net sales declined 8% year over year to $3,548 million and slightly missed the Zacks Consensus Estimate of $3,597 million. This includes a currency headwind of 1 percentage point and the adverse impacts of 2 percentage points from the sale of Gap China. The company completed the sale of Gap China at the beginning of first-quarter fiscal 2023. Comparable sales (comps) fell 6% in the fiscal second quarter.
Digital sales decreased 11% year over year, accounting for 33% of the total sales for the reported quarter. Store sales declined 7% year over year.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global declined 6% year over year to $1,961 million due to continued softness in demand from lower-income consumers and weak active category trends. However, the company witnessed strength in women’s tops and woven bottoms, along with renewed trends in men’s and kids. Comps also declined 6% in the fiscal second quarter. Sales for Old Navy Global beat our model’s estimate of $1,918.9 million.
Gap Global: For second-quarter fiscal 2023, net sales declined 14% year over year to $755 million due to unfavorable impacts of the sale of Gap China, the shutdown of Yeezy Gap and currency headwinds. Excluding these headwinds, sales for the brand were down 4% in the quarter. The company’s sales were aided by a strong women’s category, offset by strategic store closures in North America. Comps dipped 1% in the reported quarter. Sales for Gap Global lagged our model’s estimate of $849.8 million.
Banana Republic: Net sales decreased 11% year over year to $480 million, whereas comps fell 8%. Despite market share gains, sales comparison for the quarter were impacted by last year’s outsized sales growth for the brand, owing to the shift in consumer preferences. Sales lagged our estimate of $480.6 million.
Athleta: Net sales edged down 1% year over year to $341 million for the Athleta brand, whereas comps declined 7%. Segmental results were hurt by continued product acceptance challenges. However, the decline was partly negated by efforts undertaken to improve product presentation and creatives, and to uplift the brand’s performance. Net sales surpassed our estimate of $335.6 million.
Margins & Costs
The gross margin of 37.6% expanded 310 basis points (bps) and 160 bps, respectively, from the prior-year period’s reported and adjusted gross margins. The improvement resulted from a 260-bps expansion in merchandise margins. The merchandise margin benefited from lower airfreight than last year and improved promotional activity, offset by inflationary cost headwinds.
Adjusted SG&A expenses declined 8% year over year. Adjusted SG&A, as a percentage of sales, leveraged 10 basis points to 36.6%, owing to lower advertising expenses, payroll and technology investments resulting from cost-saving actions.
The adjusted operating income was $119 million in the fiscal second quarter, excluding $13 million of restructuring costs, compared with the adjusted operating income of $65 million in the prior-year quarter. Meanwhile, the adjusted operating margin expanded 170 bps to 3.4%, driven by an improved gross margin and adjusted SG&A leverage.
Other Financials
Gap ended the fiscal second quarter with cash and cash equivalents of $1,350 million, up from $780 million in the year-ago period. As of Jul 29, 2023, it had a total stockholders’ equity of $2,263 million and a long-term debt of $1,487 million.
As of Jul 29, the company generated $528 million in cash from operating activities. Gap paid out a dividend of $56 million in the fiscal second quarter. GPS approved a dividend of 15 cents per share for the fiscal third quarter.
As of Jul 29, the company’s capital expenditure was $199 million. For fiscal 2023, capital expenditure is expected to be $500-$525 million.
Store Update
As of Jul 29, 2023, Gap had 3,456 stores in more than 40 countries, of which 2,592 were company-operated and 864 were franchise outlets.
Guidance
Despite the tough macro and consumer environments, management expects continued margin expansion and improved cash flow. The company anticipates fiscal 2023 sales to decline in the mid-single digits compared with the low to mid-single-digit decline mentioned earlier. The company reported net sales of $15.6 billion in the year-ago quarter. The company expects sales for fiscal 2023 to include an impact of $300 million from the sale of Gap China and a positive effect of $150 million from the 53rd week.
The gross margin for fiscal 2023 is likely to expand in fiscal 2023. The gross margin expansion is likely to result from a 200-bps leverage due to the lapping of elevated airfreight costs in the prior year and a 100-bps margin gain from improved inventory position and promotional activity, offset by a 10-bps deleverage from inflationary costs. Additionally, the company expects the inflationary deleverage to turn into leverage in the second half of fiscal 2023, owing to gains from improved commodity costs and ocean freight rates. ROD, as a percentage of sales, is expected to deleverage 70 bps year over year.
The company estimates adjusted operating expenses (SG&A expenses) of $5.15 billion in fiscal 2023, owing to lower variable expenses relative to a lowered sales view.
For third-quarter fiscal 2023, Gap expects a sales decline in the low-double digits, whereas it reported $4.04 billion last year. The decline can be attributed to the sale of Gap China, which is expected to impact net sales by $70 million in the fiscal third quarter.
The company anticipates the fiscal third-quarter gross margin to be in line with the 38.7% reported last year. It envisions lower inflation and airfreight costs to be offset by 150 bps of ROD deleverage. It anticipates promotional activity to be mostly in line with that reported last year. Adjusted SG&A expenses are likely to be $1.3 billion in the fiscal third quarter. The company expects year-over-year inventory to be down at the end of the fiscal third quarter, in line with year-to-date trends.
Stocks to Consider
Here are some better-ranked stocks that investors can consider, namely Urban Outfitters (URBN - Free Report) , Boot Barn (BOOT - Free Report) and American Eagle Outfitters (AEO - Free Report) .
Urban Outfitters, a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products, presently flaunts a Zacks Rank #1 (Strong Buy). The expected EPS growth rate for three to five years is 20.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Urban Outfitters’ current financial-year sales and earnings suggests growth of 5% and 95% from the year-ago period’s actuals, respectively. URBN has a trailing four-quarter earnings surprise of 19.2%, on average.
Boot Barn operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. BOOT currently sports a Zacks Rank #1 and has a long-term EPS rate of 6.4% for three to five years.
The Zacks Consensus Estimate for Boot Barn’s current financial-year sales suggests growth of 7.6% from the year-ago reported figure. BOOT has a trailing four-quarter earnings surprise of 13.5%, on average.
American Eagle, a specialty retailer of casual apparel, accessories and footwear for men and women, currently carries a Zacks Rank of 2 (Buy). AEO has a trailing four-quarter earnings surprise of 9.2%, on average.
The Zacks Consensus Estimate for American Eagle’s current financial year’s earnings per share suggests a significant increase of 275% from the year-ago reported figure. AEO has an expected earnings per share growth rate of 9.6% for three to five years.