The Gap, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended July 29, 2017, not 2016 Q2 as stated in the request metadata. Comparisons are with the periods ended July 30, 2016. Amounts are in U.S. dollars unless noted.
Business context and results
Gap is a global apparel retailer operating Gap, Old Navy, Banana Republic, Athleta, Intermix, and Weddington Way through stores, online channels, and franchisees. The company reports one aggregated segment.
| Metric | 13 weeks ended July 29, 2017 | Prior-year period | 26 weeks ended July 29, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $3.799 billion | $3.851 billion | $7.239 billion | $7.289 billion |
| Gross profit / margin | $1.479 billion / 38.9% | $1.437 billion / 37.3% | $2.782 billion / 38.4% | $2.646 billion / 36.3% |
| Operating income / margin | $451 million / 11.9% | $279 million / 7.2% | $705 million / 9.7% | $501 million / 6.9% |
| Net income | $271 million | $125 million | $414 million | $252 million |
| Diluted EPS | $0.68 | $0.31 | $1.04 | $0.63 |
| Comparable sales | +1% | -2% | +2% | -4% |
Financial position and cash flow
- At July 29, 2017, cash and cash equivalents were $1.609 billion; total current assets were $4.258 billion and current liabilities were $2.399 billion.
- Total debt was $1.248 billion, consisting of notes due April 2021; the Japan term loan had been repaid in June 2017. No borrowings were outstanding under the $500 million revolving credit facility.
- First-half operating cash flow was $486 million, down from $734 million. Capital expenditures were $275 million. Company-defined free cash flow, including $59 million of insurance proceeds allocated to property and equipment, was $270 million versus $464 million.
- First-half cash used in financing was $449 million, including $200 million of share repurchases, $182 million of dividends, and $67 million of debt repayment. Cash ended the period at $1.609 billion, down $174 million from fiscal year-end.
Material changes and unusual items
- Second-quarter sales declined 1%, but comparable sales improved to +1%. Old Navy comps rose 5%; Gap comps fell 1% and Banana Republic comps fell 5%. For the first half, comps were +6% at Old Navy, -2% at Gap, and -5% at Banana Republic.
- Margins improved: management attributed gross-margin gains mainly to higher average selling prices, while lower occupancy costs also contributed. Foreign exchange reduced sales and remained a headwind to foreign-subsidiary gross margins.
- Second-quarter operating income included a $64 million gain from a partial insurance settlement for the Fishkill distribution-center fire, contributing about $0.10 to diluted EPS. The prior-year quarter included $150 million of restructuring costs, of which $135 million was recorded in operating expenses; those costs reduced prior-year diluted EPS by about $0.29. These items make the year-over-year profit improvement less representative of underlying change.
- First-half inventory increased $203 million in the operating cash-flow reconciliation, versus a $52 million use in the prior-year period; management cited volume and timing of receipts. Cash flow also reflected weaker movements in accounts payable and accrued liabilities.
- The company repurchased 8.7 million shares for $200 million in the first half. Of its $1 billion authorization, $800 million remained at July 29, 2017.
Outlook, commentary, and risks
- No specific full-year revenue or earnings guidance is provided in the filing. Management said existing cash and operating cash flows should fund operations, growth initiatives, and planned capital expenditures for the next 12 months and beyond; the revolver is available for additional near-term liquidity if needed.
- Management intended to pay a fiscal 2017 annual dividend of $0.92 per share, subject to its stated considerations. The first-half dividend was $0.46 per share.
- Priorities include improving on-trend product, investing in digital and customer capabilities, differentiating the store and online experience, and strengthening talent. Management expects continued foreign-currency pressure on foreign gross margins.
- The Fishkill fire continues to create logistics costs and reconstruction needs. Further business-interruption insurance recoveries depend on claim settlements; the company recorded a $9 million insurance receivable at quarter-end.
- Disclosed risks include fashion and consumer-demand shifts, competition, inventory and margin management, foreign exchange, global sourcing and supply chains, cybersecurity and IT disruption, and litigation. The company reported no material change to its previously disclosed risk factors and no material change in internal controls.
Important facts for investors to verify
- Separate operating performance from the $64 million Fishkill insurance gain and the prior-year restructuring charge when assessing earnings and margins.
- Monitor whether sales and comparable-sales trends improve at Gap and Banana Republic, and whether Old Navy’s growth is sustained.
- Track inventory levels, working-capital movements, and operating cash flow, which fell despite higher net income.
- Verify the pace of Fishkill insurance settlements, remaining logistics costs, and reconstruction-related capital spending.
- Assess capital returns and liquidity alongside the planned dividend, share repurchases, and remaining $800 million authorization.