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Gap Q2 Earnings Beat Estimates, FY24 Margins View Raised
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The Gap, Inc. (GAP - Free Report) reported second-quarter fiscal 2024 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate and grew year over year. GAP posted earnings of 54 cents per share, which surpassed the consensus estimate of 39 cents and surged 68.8% from the prior-year quarter's level.
Quarterly results benefited from immense strength in brands and higher market share. The company gained market share for the sixth straight quarter. It has been smoothly progressing on the reinvigoration of its brands and actively managing costs. Management is focused on its four strategic priorities, such as driving financial and operational rigor, reinvigorating the brands, reinforcing its operating platform and energizing culture.
Net sales inched up 5% year over year to $3.72 billion and beat the consensus estimate of $3.61 billion. Comparable sales (comps) rose 3% year over year. Online sales grew 7% year over year, accounting for 33% of the total sales. Store sales rose 4% year over year.
Shares of this Zacks Rank #3 (Hold) company have risen 21.2%, outperforming the industry’s 3.6% growth over the past six months.
GAP’s Brand-Wise Sales & Comps Performance
Old Navy: Net sales at Old Navy Global increased 8% year over year to $2.1 billion. Comps also rose 5%, gaining from its focus on operational rigor and consistency. This marked the fourth consecutive quarter of comps growth. Sales for Old Navy Global beat our model estimate of $2 billion.
Gap Global: Net sales grew 1% year over year to $766 million while comps increased 3%, highlighting the third straight quarter of positive comps. The company’s reinvigoration endeavors have been boosting market share gains for a while now. Sales for Gap Global lagged our model estimate of $785.3 million.
Banana Republic: Net sales remained flat year over year at $479 million with flat comps. Sales missed our estimate of $485.1 million. The brand is focused on improving its pricing and assortment architecture.
Athleta: Net sales fell 1% year over year to $338 million and comps also dropped 4%. Net sales lagged our estimate of $344.6 million. Management anticipates the brand to revert to positive comps for the rest of the fiscal year.
GAP’s Margins & Costs
The gross margin of 42.6% expanded 500 basis points (bps) from the prior-year period’s figure. Meanwhile, we estimated the adjusted gross margin to be 40.6%.
The merchandise margin grew 410 bps, benefiting from lower commodity costs, higher sales with respect to the company's revenue-sharing agreement with its credit card partner and better promotional activity. Rent, occupancy and depreciation (ROD), as a percentage of sales, leveraged 90 bps year over year. Further, the operating margin of 7.9% grew 490 bps. Our model anticipated an adjusted operating margin of 5.4%.
Operating expenses were $1.3 billion, up 4.9% from the prior-year quarter.
GAP’s Financial Health Snapshot
Gap ended the fiscal second quarter with cash and cash equivalents of $1.9 billion, up 40.7% from the year-ago period. As of Aug. 3, 2024, it had a total stockholders’ equity of $2.9 billion and a long-term debt of $1.5 billion. As of the same date, the company generated $579 million in cash from operating activities and had a free cash flow of $397 million. It paid cash dividends of $112 million in the 26 weeks ended Aug. 3, 2024.
The company’s board has approved a dividend of 15 cents per share for the fiscal third quarter. Capital expenditure totaled $182 million in the first half of fiscal 2024. For fiscal 2024, capital expenditure is expected to be $500 million.
As of the aforementioned date, Gap had 3,568 stores in nearly 40 countries, of which 2,541 were company-operated.
What to Expect From GAP in Fiscal 2024?
Owing to the robust second-quarter results, GAP raised its outlook for gross margin and operating income growth, while maintaining net sales and operating expense guidance for fiscal 2024. This outlook includes volatile consumer and macro landscape.
It still projects sales to grow slightly on a 52-week basis compared with $14.9 billion in fiscal 2023. The company expects gross margin expansion of at least 200 bps compared with a minimum of 150 bps expected earlier. Operating income is expected to grow in the mid-to-high 50% range. Management had anticipated operating income in the mid-40% range. Operating expenses are still forecast to be around $5.1 billion and the effective tax rate is estimated to be 28%.
Nearly 100 bps of benefit from commodity costs for fiscal 2024, along with disciplined inventory management, is likely to aid the gross margin. It predicts ROD, as a percentage of sales, to be relatively neutral year over year. GAP anticipates selling, general and administrative (SG&A) expenses of nearly $5.1 billion for the current fiscal year with roughly $1.3 billion for Q3 and Q4, respectively. This reflects substantial saving efforts.
For the fiscal third quarter, management projects net sales to rise slightly year over year from $3.77 billion based on the year-to-date trends. The company expects gross margin expansion in the range of 50-75 bps from 41.3% in the year-earlier quarter on lower promotional activity and operating expenses of nearly $1.3 billion.
Management forecasts the third quarter to benefit by nearly 1 percentage point owing to the shifts in timing. However, net sales in the fourth quarter are likely to be hurt by approximately 7 percentage points, or $300 million, year over year because of the timing shift and the absence of the 53rd week. Also, 1 percentage point of ROD deleverage is expected in the fourth quarter on lower sales.
Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has a trailing four-quarter earnings surprise of 7.1%, on average.
The Zacks Consensus Estimate for Boot Barn’s current financial-year sales and earnings per share indicates growth of 10.7% and 8.9%, respectively, from the year-ago figures.
Abercrombie, a leading casual apparel retailer, currently sports a Zacks Rank of 1. ANF delivered an earnings surprise of 28.9% in the last reported quarter.
The Zacks Consensus Estimate for Abercrombie’s current financial-year sales indicates growth of 11.5% from the year-ago figure.
Deckers, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 47.2% in each of the trailing four quarters.
The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 11.5% from the year-ago figure.
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Gap Q2 Earnings Beat Estimates, FY24 Margins View Raised
The Gap, Inc. (GAP - Free Report) reported second-quarter fiscal 2024 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate and grew year over year. GAP posted earnings of 54 cents per share, which surpassed the consensus estimate of 39 cents and surged 68.8% from the prior-year quarter's level.
Quarterly results benefited from immense strength in brands and higher market share. The company gained market share for the sixth straight quarter. It has been smoothly progressing on the reinvigoration of its brands and actively managing costs. Management is focused on its four strategic priorities, such as driving financial and operational rigor, reinvigorating the brands, reinforcing its operating platform and energizing culture.
Net sales inched up 5% year over year to $3.72 billion and beat the consensus estimate of $3.61 billion. Comparable sales (comps) rose 3% year over year. Online sales grew 7% year over year, accounting for 33% of the total sales. Store sales rose 4% year over year.
Shares of this Zacks Rank #3 (Hold) company have risen 21.2%, outperforming the industry’s 3.6% growth over the past six months.
GAP’s Brand-Wise Sales & Comps Performance
Old Navy: Net sales at Old Navy Global increased 8% year over year to $2.1 billion. Comps also rose 5%, gaining from its focus on operational rigor and consistency. This marked the fourth consecutive quarter of comps growth. Sales for Old Navy Global beat our model estimate of $2 billion.
Gap Global: Net sales grew 1% year over year to $766 million while comps increased 3%, highlighting the third straight quarter of positive comps. The company’s reinvigoration endeavors have been boosting market share gains for a while now. Sales for Gap Global lagged our model estimate of $785.3 million.
Banana Republic: Net sales remained flat year over year at $479 million with flat comps. Sales missed our estimate of $485.1 million. The brand is focused on improving its pricing and assortment architecture.
Athleta: Net sales fell 1% year over year to $338 million and comps also dropped 4%. Net sales lagged our estimate of $344.6 million. Management anticipates the brand to revert to positive comps for the rest of the fiscal year.
GAP’s Margins & Costs
The gross margin of 42.6% expanded 500 basis points (bps) from the prior-year period’s figure. Meanwhile, we estimated the adjusted gross margin to be 40.6%.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
The merchandise margin grew 410 bps, benefiting from lower commodity costs, higher sales with respect to the company's revenue-sharing agreement with its credit card partner and better promotional activity. Rent, occupancy and depreciation (ROD), as a percentage of sales, leveraged 90 bps year over year. Further, the operating margin of 7.9% grew 490 bps. Our model anticipated an adjusted operating margin of 5.4%.
Operating expenses were $1.3 billion, up 4.9% from the prior-year quarter.
GAP’s Financial Health Snapshot
Gap ended the fiscal second quarter with cash and cash equivalents of $1.9 billion, up 40.7% from the year-ago period. As of Aug. 3, 2024, it had a total stockholders’ equity of $2.9 billion and a long-term debt of $1.5 billion. As of the same date, the company generated $579 million in cash from operating activities and had a free cash flow of $397 million. It paid cash dividends of $112 million in the 26 weeks ended Aug. 3, 2024.
The company’s board has approved a dividend of 15 cents per share for the fiscal third quarter. Capital expenditure totaled $182 million in the first half of fiscal 2024. For fiscal 2024, capital expenditure is expected to be $500 million.
As of the aforementioned date, Gap had 3,568 stores in nearly 40 countries, of which 2,541 were company-operated.
What to Expect From GAP in Fiscal 2024?
Owing to the robust second-quarter results, GAP raised its outlook for gross margin and operating income growth, while maintaining net sales and operating expense guidance for fiscal 2024. This outlook includes volatile consumer and macro landscape.
It still projects sales to grow slightly on a 52-week basis compared with $14.9 billion in fiscal 2023. The company expects gross margin expansion of at least 200 bps compared with a minimum of 150 bps expected earlier. Operating income is expected to grow in the mid-to-high 50% range. Management had anticipated operating income in the mid-40% range. Operating expenses are still forecast to be around $5.1 billion and the effective tax rate is estimated to be 28%.
Nearly 100 bps of benefit from commodity costs for fiscal 2024, along with disciplined inventory management, is likely to aid the gross margin. It predicts ROD, as a percentage of sales, to be relatively neutral year over year. GAP anticipates selling, general and administrative (SG&A) expenses of nearly $5.1 billion for the current fiscal year with roughly $1.3 billion for Q3 and Q4, respectively. This reflects substantial saving efforts.
For the fiscal third quarter, management projects net sales to rise slightly year over year from $3.77 billion based on the year-to-date trends. The company expects gross margin expansion in the range of 50-75 bps from 41.3% in the year-earlier quarter on lower promotional activity and operating expenses of nearly $1.3 billion.
Management forecasts the third quarter to benefit by nearly 1 percentage point owing to the shifts in timing. However, net sales in the fourth quarter are likely to be hurt by approximately 7 percentage points, or $300 million, year over year because of the timing shift and the absence of the 53rd week. Also, 1 percentage point of ROD deleverage is expected in the fourth quarter on lower sales.
Key Picks
We have highlighted three better-ranked stocks, namely Boot Barn (BOOT - Free Report) , Abercombie (ANF - Free Report) and Deckers (DECK - Free Report) .
Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has a trailing four-quarter earnings surprise of 7.1%, on average.
The Zacks Consensus Estimate for Boot Barn’s current financial-year sales and earnings per share indicates growth of 10.7% and 8.9%, respectively, from the year-ago figures.
Abercrombie, a leading casual apparel retailer, currently sports a Zacks Rank of 1. ANF delivered an earnings surprise of 28.9% in the last reported quarter.
The Zacks Consensus Estimate for Abercrombie’s current financial-year sales indicates growth of 11.5% from the year-ago figure.
Deckers, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 47.2% in each of the trailing four quarters.
The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 11.5% from the year-ago figure.