The Gap, Inc. — Form 10-Q Summary
Period clarification: The supplied filing covers the thirteen weeks ended April 29, 2017 (fiscal Q1 2017), not 2016 Q1. Comparisons below are with the thirteen weeks ended April 30, 2016 unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context and reporting period
Gap is a global apparel retailer operating Gap, Old Navy, Banana Republic, Athleta, Intermix, and other businesses through stores, online channels, and franchises. The company reported one aggregated reportable segment. The interim financial statements are unaudited; management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $3,440 | $3,438 |
| Gross profit / gross margin | $1,303 / 37.9% | $1,209 / 35.2% |
| Operating income / operating margin | $254 / 7.4% | $222 / 6.5% |
| Net income | $143 | $127 |
| Diluted EPS | $0.36 | $0.32 |
| Operating cash flow | $91 | $168 |
| Capital expenditures | $110 | $139 |
| Free cash flow (non-GAAP) | $(5) | $29 |
Cash and cash equivalents were $1,583 at April 29, 2017. Total debt was $1,315, including $67 current and $1,248 long-term; the company also had a $500 revolving facility with no borrowings. Current assets were $4,119 and current liabilities $2,302. The company said cash and operating cash flows should support operations, growth initiatives, and planned capital expenditures for the next 12 months and beyond.
Comparable sales rose 2% overall, versus a 5% decline a year earlier: Old Navy +8%, Gap −4%, and Banana Republic −4%. The company paid $0.23 per share in dividends and repurchased 4.2 million shares for approximately $100 million; it reported $188 million distributed to shareholders through repurchases and dividends.
Changes versus the prior comparable period
- Sales were nearly flat, while gross profit and gross margin improved. Management attributed stronger product margins primarily to higher average selling prices across global brands; lower occupancy costs also contributed.
- Operating expenses increased $62 million, and rose from 28.7% to 30.5% of sales, primarily due to higher bonus-related payroll and marketing costs, partly offset by favorable lease-termination settlements.
- Operating cash flow fell $77 million. Management cited working-capital timing, including accounts payable and inventory movements.
- The effective tax rate increased to 39.9% from 37.7%, primarily reflecting adoption of share-based compensation accounting guidance.
- Store count at quarter-end was 3,652, compared with 3,727 a year earlier; company-operated square footage declined 3.4% year over year.
Outlook, commentary, risks, and unusual items
- No earnings or sales guidance was provided. Management’s priorities include product and supply-chain improvements, investment in store and online customer experience, brand awareness, and expense discipline.
- The company intended to pay an annual dividend of $0.92 per share for fiscal 2017, consistent with fiscal 2016, subject to its stated considerations including operating performance and liquidity.
- Management expected continued currency-related pressure on foreign-subsidiary gross margins, even after merchandise hedging, because merchandise purchases are primarily in U.S. dollars.
- The Fishkill distribution-center fire continued to entail reconstruction and logistics costs. The company received $73 million in insurance proceeds during the quarter and recorded $36 million of proceeds received in excess of expected recoveries as a current liability. Insurance claim settlements and future recoveries remain uncertain.
- Key stated risks include changing apparel trends and consumer demand, competition, inventory and margin management, foreign exchange, global sourcing and trade matters, cybersecurity, IT disruptions, and legal proceedings. The company said there were no material changes to previously disclosed risk factors; recorded liabilities for legal actions were not material.
- New revenue-recognition guidance was expected to change timing for certain transactions but was not expected to materially affect the financial statements. The company expected the new lease standard to substantially increase reported long-term assets and liabilities.
- Post-termination benefit agreements entered into with nine executive officers in June 2017 provide specified benefits in certain involuntary terminations before July 1, 2020, subject to conditions and a release of claims.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is fiscal Q1 2017, although the request identifies 2016 Q1.
- Assess whether comparable-sales gains—particularly Old Navy’s—can continue and whether Gap and Banana Republic performance improves.
- Monitor the sustainability of gross-margin improvement against foreign-exchange exposure and higher operating expenses.
- Review working-capital trends, capital spending, and cash generation; quarterly free cash flow was negative.
- Track the Fishkill insurance settlement, reconstruction and logistics costs, and any further cash-flow or earnings effects.
- Consider capital returns alongside liquidity, debt maturities, and the company’s planned fiscal 2017 dividend.