The Gap, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended May 2, 2015 (first quarter of fiscal 2015), compared with the 13 weeks ended May 3, 2014. The metadata identifies “2014 Q1,” but the filing itself reports first-quarter fiscal 2015. Gap operates Gap, Old Navy, Banana Republic, Athleta, and Intermix, through company-operated stores, franchises, and online channels. Piperlime was discontinued effective April 30, 2015.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $3.657 billion | $3.774 billion |
| Gross profit / gross margin | $1.382 billion / 37.8% | $1.466 billion / 38.8% |
| Operating income / operating margin | $386 million / 10.6% | $443 million / 11.7% |
| Net income | $239 million | $260 million |
| Diluted EPS | $0.56 | $0.58 |
| Operating cash flow | $211 million | $513 million |
| Capital expenditures | $150 million | $162 million |
| Free cash flow (company-defined, non-GAAP) | $61 million | $351 million |
Sales declined 3% reported and 1% excluding foreign exchange. Comparable sales fell 4%, versus a 1% decline a year earlier. By brand, comparable sales were down 10% at Gap Global and 8% at Banana Republic Global, while Old Navy Global increased 3%. Online sales were $563 million, compared with $575 million.
Cash and cash equivalents were $1.234 billion at May 2, 2015. Debt comprised $1.352 billion in total, including $21 million current and $1.331 billion long term. The company had no borrowings under its $500 million revolving credit facility; it amended that facility on May 20, 2015, extending maturity to May 2020. Management said cash and operating cash flows should support operations and planned investment for the next 12 months and beyond.
Changes, outlook, and material items
- Gross margin fell 1.0 percentage point, principally because lower sales increased occupancy costs as a share of revenue. Operating margin declined 1.1 points.
- Operating cash flow decreased $302 million year over year. The company cited timing of credit-card-program receipts, inventory receipts, and a prior-year upfront credit-card-program payment, among other factors.
- Foreign exchange reduced reported sales by $88 million. Management expected currency movements to continue to weigh meaningfully on sales and foreign-subsidiary gross margins, particularly in Canada and Japan.
- Delayed merchandise receipts at U.S. West Coast ports during the first half of fiscal 2015 were expected to have a meaningful negative impact on full-year operating results. No numerical earnings or sales guidance is provided in the filing text.
- Management’s priorities included improving product acceptance and the Gap brand, investing in digital and omni-channel capabilities, and expanding in Asia and Athleta stores. The company intended to pay $0.92 per share in dividends for fiscal 2015, versus $0.88 in fiscal 2014.
- Net interest expense was $5 million, including a reversal of approximately $14 million in tax-related interest expense, primarily following a favorable foreign tax ruling and tax-authority actions concerning transfer pricing. The filing says this reversal did not materially affect the income-tax provision.
- The company repurchased 5.6 million shares for approximately $230 million and paid $97 million in dividends during the quarter. Shareholder distributions totaled $329 million, as reported by management. The company also disclosed ordinary-course legal claims and tax examinations; recorded litigation liabilities were not material.
Important facts for investors to verify
- Whether comparable sales and margins at Gap and Banana Republic recover, and whether Old Navy’s growth continues.
- The realized effect of port delays and foreign-exchange movements on sales, gross margin, and full-year operating results.
- Whether operating cash flow rebounds after the quarter’s working-capital and payment-timing effects.
- Planned capital spending, store expansion, dividends, and buybacks relative to cash generation and liquidity.
- Developments in tax audits, legal proceedings, and the impact of the new revenue-recognition standard, which the company was still assessing.