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Was Gap Inc.’s Q2 An Impressive One?

August 28, 2014 | About:
ICRAOnline

ICRAOnline

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Gap Inc. (GPS), one of the oldest and biggest apparel companies in the U.S., reported its second-quarter earnings on August 21, and the numbers were pretty interesting, exceeding analyst expectations. Over the years, the retailer has leveraged its position, building a strong brand image among loyal customers. Customers have shown a strong affinity towards Gap, Old Navy and Banana Republic products due to the company’s deep understanding of the consumer’s varied tastes. During the earnings call, CEO Glenn Murphy said, “We remain focused on our strategic initiatives as we turn our focus toward delivering a strong second half.”

Let’s dive directly into the quarter’s report card to unravel the major takeaways and assess the performance.

Revenue gets a clear boost

Net sales for the quarter increased 3% to $3.98 billion from $3.87 billion reported a year earlier. Though same-store sales remained comparatively flat this quarter, the revenue exceeded analyst estimate of $3.96 billion. Comparable sales at Gap were down by 5%; sales in Banana Republic were somewhat flat while sales at Old Navy were up by 4%. The three business wings exhibited subtle differences in same-store sales.

On the contrary, online sales saw a jump of 11% to $515 million this quarter from $466 million in the comparable quarter last year. The company continues to enhance its digital capabilities, which is supporting its top line growth.

Regionwise, the U.S. contributed to more than three-fourths of the revenue this quarter. The company has also been trying to improve its sales in the emerging markets of Japan and China. The number of company stores rose 4% year-over-year from 3,428 locations to 3,565. This, too, aided the top line.

Earnings rise, operating costs under control

The company is putting in a huge effort to keep the operating costs under tight rein, which is evident in the quarter’s marketing expenses that went down $6 million to $142 million when compared with the same quarter last year.

Gap’s net income improved 10% to $332 million or $0.75 per share, compared with $303 million or $0.64 per share reported a year earlier. The improvement in earnings was majorly attributable to the increase in revenue and asset gain from sale of building owned but no longer occupied by the company.

Earnings per share, barring the impact of the asset sale gain, were $0.70 per share this quarter. The earnings (excluding the special items) outshined Reuter’s analyst consensus of $0.69 per share.

Investor rewards continue

As year-to-date free cash flow improved to $668 million compared with the inflow of $542 million last year, the company kept its investors happy by announcing the share repurchase and dividend payout this quarter. Ultimately, the company did add value to its stockholders.

During the second quarter, the company used $364 million to repurchase 9 million shares, thereby ending the quarter with 434 million shares outstanding. Also dividend worth $0.22 per share was paid out in the period. In addition, on August 15 management authorized a third quarter dividend of $0.22 per share that added to investors smile.

Strategies going forward

As part of the global expansion plan, the company announced during the earnings call that it would enter India through franchise-operated Gap stores in 2015. The company is partnering with Arvind LifeStyle Brand Ltd., a subsidiary of Arvind Ltd. The first stores are expected to open in Mumbai and Delhi starting with Gap’s Summer 2015 collection for adults, kids and babies. The company aims to open about 40 franchise-operated outlets in this market.

In addition, the Gap brand continues to create a strong footage in greater China with 5 new stores opened during the quarter, and with the expectation of opening approximately 110 Gap stores across mainland China, Hong Kong and Taiwan by end of this fiscal year.

Besides focusing on store growth globally, the company is also emphasizing improving the omni-channel operations, maintaining strong supply chain operations and working towards seamless inventory management in the upcoming quarters.

Management outlook remains strong

Management has revised its earnings guidance upwards to $2.95-$3 per share from $2.90-$2.95 per share estimated earlier for reflecting the $0.05 per share gain related to asset sale. The optimism of the management is clearly evident from the modified earnings guidance that is higher from $2.95 per share expected by analysts’ for the entire fiscal year.

Concluding note

Gap is on expansion mode and is looking ahead to open more stores, while keeping its operating costs under close watch. Management remains upbeat as Gap ventures to expand its global footprint, and shift its focus from the U.S. that remains its chief revenue spot till date. The second quarter numbers give a good start for the company. Let’s stay tuned and keep a close eye on the forthcoming quarters.


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