The Gap, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended May 3, 2014. The request labels the period “2013 Q1,” but the filing covers 2014 Q1.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $3.774 billion | $3.729 billion |
| Gross profit / margin | $1.466 billion / 38.8% | $1.544 billion / 41.4% |
| Operating income / margin | $443 million / 11.7% | $530 million / 14.2% |
| Net income | $260 million | $333 million |
| Diluted EPS | $0.58 | $0.71 |
| Operating cash flow | $513 million | $356 million |
| Capital expenditures | $162 million | $151 million |
| Free cash flow | $351 million | $205 million |
- Comparable sales declined 1%, versus 2% growth a year earlier. Online sales rose 13% to $575 million, or 15% of sales. FX-adjusted sales growth was 2%.
- Gross margin fell 2.6 percentage points, primarily due to increased promotional activity; occupancy costs also weighed on margin. Operating expenses were $1.023 billion, approximately flat as a share of sales.
- Cash and equivalents were $1.544 billion at quarter-end. Total debt was $1.393 billion, including $24 million current maturities. The $500 million revolving facility had no borrowings. Management said cash and operating cash flows should support operations and planned investment for at least 12 months.
Changes, outlook, and risks
- Sales increased 1%, but earnings fell: net income declined about 22% and diluted EPS about 18%. Gap Global comparable sales were down 5%; Old Navy Global was up 1%; Banana Republic Global was down 1%.
- Operating cash flow improved, but management attributed part of the increase to an upfront payment associated with amending the credit-card program agreement and timing of credit-card receivables. These factors merit distinction from recurring operating performance.
- Fiscal 2014 guidance: operating margin about 13%, flat with fiscal 2013; diluted EPS of $2.90–$2.95; effective tax rate about 38.5%; capital spending about $750 million; depreciation and amortization, net of lease-incentive amortization, about $520 million. The company planned an annual dividend of $0.88 per share, a 10% increase.
- Management cited expected negative foreign-exchange effects, particularly from the Canadian dollar and Japanese yen, on translated sales and foreign subsidiary gross margins. Priorities include online and omni-channel growth, expansion in Asia and outlets, additional Athleta stores, and franchise growth.
- Q1 shareholder distributions totaled $328 million: $219 million of share repurchases and $98 million of dividends in cash flows. The company repurchased 5.6 million shares at an average $39.25; $747 million remained under its $1 billion authorization.
- Q1 2013 included an $18 million reversal of interest expense following favorable resolution of tax matters, affecting year-over-year comparisons. Current legal proceedings and recorded related liabilities were not material, according to the filing. Foreign-exchange exposure, consumer demand, competition, inventory and promotional activity, sourcing, and execution of international and digital initiatives remain risks.
Important facts to verify
- Whether the sharp gross-margin decline and negative comparable sales persist, and whether promotional intensity eases.
- How much operating cash-flow improvement is recurring versus attributable to credit-card agreement proceeds and receivables timing.
- Progress toward fiscal 2014 EPS, operating-margin, tax-rate, and capital-spending guidance, including currency impacts.
- Returns on buybacks, dividends, store expansion, and online/omni-channel investment, and the remaining repurchase authorization.
- The filing reports an assessment of the forthcoming revenue-recognition standard but does not quantify its potential financial impact.