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GAP INC. REPORTS THIRD QUARTER RESULTS

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  • Delivers Fourth Consecutive Quarter of Positive Comparable Sales Growth, with Positive 3 Percent.

  • Increases Reported EPS Guidance to a Range of $2.18 to $2.22 for Fiscal Year 2017.

  • Increases Adjusted EPS Guidance to a Range of $2.08 to $2.12, Compared to Previous Guidance

    of $2.02 to $2.10.

  • Distributed Approximately $572 Million to Shareholders Through Share Repurchases and Dividends Year-to-Date.

    SAN FRANCISCO – November 16, 2017 – Gap Inc. (NYSE: GPS) today reported results for the third quarter of fiscal year 2017. Gap Inc.’s third quarter fiscal year 2017 diluted earnings per share were $0.58. Total company comparable sales for the third quarter of fiscal year 2017 were up 3 percent.

    “Today, we are happy to report our fourth consecutive quarter of positive comps, reflecting the continued momentum in key parts of our business,” said Art Peck, president and chief executive officer, Gap Inc.

    “We continue to make progress against the balanced growth strategy we outlined in September, driving efficiency at our more mature brands, while growing our footprint in the value and active space, and investing in our online and mobile experience.”

    Third Quarter 2017 Comparable Sales Results

    Gap Inc.’s comparable sales for the third quarter of fiscal year 2017 were up 3 percent versus a 1 percent decrease last year, which excluded an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points. Comparable sales by global brand for the third quarter were as follows:

    • Old Navy Global: positive 4 percent versus positive 4 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 1 percentage point.

    • Gap Global: positive 1 percent versus negative 4 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 4 percentage points.

    • Banana Republic Global: negative 1 percent versus negative 6 percent last year, excluding an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points.

  •  

    Tina Romani
    (415) 427-5264 Investor_relations@gap.com

    Media Relations Contact:

    Trina Somera (415) 427-3145 Press@gap.com 

     

    Net Sales Results

    Net sales for the third quarter of fiscal year 2017 were $3.84 billion compared with $3.80 billion for the third quarter of fiscal year 2016. Third quarter net sales details appear in the tables at the end of this press release.

    Additional Third Quarter of Fiscal Year 2017 Results and 2017 Outlook

    Earnings per Share

    The company raised its reported diluted earnings per share guidance for fiscal year 2017 to be in the range of $2.18 to $2.22. Adjusted to exclude the second quarter benefit from insurance proceeds related to the Fishkill fire of about $0.10, the company now expects adjusted diluted earnings per share to be in the range of $2.08 to $2.12. Please see the reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, from the GAAP financial measure in the table at the end of this press release.

    The company noted that foreign currency fluctuations negatively impacted earnings per share for the third quarter of fiscal year 2017 by an estimated $0.02, or about 3 percentage points of earnings per share growth compared with the adjusted earnings per share for the third quarter of fiscal year 2016.1

    Comparable Sales

    The company now expects comparable sales for fiscal year 2017 to be up low-single-digits.

    Operating Expenses

    Third quarter fiscal year 2017 operating expenses were $1.15 billion compared with $1.10 billion last year. Excluding restructuring costs of $36 million recorded in the third quarter of fiscal year 2016, third quarter fiscal year 2017 operating expenses were up about $80 million when compared with last year on an adjusted basis. The company noted the increase in adjusted operating expenses was primarily driven by an increase in marketing and payroll, largely due to bonus, as well as investments in digital and customer initiatives that support the company’s balanced growth strategy. Please see the reconciliation of adjusted operating expenses, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

    Operating Margin

    The company’s operating margin for the third quarter of fiscal year 2017 was 9.8 percent compared with 10.2 percent last year or 11.0 percent last year on an adjusted basis. Please see the reconciliation of adjusted operating margin, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

    Effective Tax Rate

    The effective tax rate was 37.1 percent for the third quarter of fiscal year 2017.

    1 In estimating the earnings per share impact from foreign currency exchange rate fluctuations, the company estimates current gross margins using the appropriate prior year rates (including the impact of merchandise-related hedges), translates current period foreign earnings at prior year rates, and excludes the year-over-year earnings impact of balance sheet remeasurement and gains or losses from non-merchandise-related foreign currency hedges. This is done in order to enhance the visibility of business results excluding the direct impact of foreign currency exchange rate fluctuations.

     

    The company now expects its fiscal year 2017 effective tax rate to be about 38 percent, primarily due to a more favorable tax impact of foreign operations compared with fiscal year 2016.

    Inventory

    At the end of the third quarter of fiscal year 2017, total inventory was up 3 percent year over year.

    The company noted the increase is primarily due to the timing of in-transit inventory and the negative impact of foreign exchange.

    Cash and Cash Equivalents

    The company ended the third quarter of fiscal year 2017 with $1.35 billion in cash and cash equivalents. Year-to-date free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, net of insurance proceeds related to loss of property and equipment, was $197 million, reflecting the timing of lease payments and a larger increase in inventory from the beginning of the fiscal year to the end of the quarter when compared to the same period in fiscal year 2016. Please see the reconciliation of free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

    Cash Distribution

    During the quarter, Gap Inc. repurchased 3.8 million shares for about $100 million and ended the third quarter of fiscal year 2017 with 389 million shares outstanding.

    The company expects to spend about $100 million on share repurchases in the fourth quarter of fiscal year 2017.

    The company paid a dividend of $0.23 per share during the third quarter of fiscal year 2017. In addition, on November 9, 2017, the company announced that its board of directors authorized a fourth quarter dividend of $0.23 per share.

    Capital Expenditures

    Fiscal year-to-date 2017 capital expenditures were $463 million. The company continues to expect capital spending to be approximately $625 million for fiscal year 2017, excluding costs associated with the rebuilding of the company’s Fishkill, New York distribution center campus and related supply chain spend, which is now estimated to be about $175 million. The company noted the majority of these costs are expected to be covered by insurance proceeds. Please see the reconciliation of adjusted capital expenditures, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

    Real Estate

    The company ended the third quarter of fiscal year 2017 with 3,639 store locations in 46 countries, of which 3,193 were company-operated.

    The company now expects to close about 30 company-operated stores, net of openings and repositions.

    Webcast and Conference Call Information

    Jennifer Fall, senior vice president of Corporate Finance and Investor Relations at Gap Inc., will host a summary of the company’s third quarter fiscal year 2017 results during a conference call and webcast from approximately 2:00 p.m. to 3:00 p.m. Pacific Time today. Ms. Fall will be joined by Art Peck, Gap

    Inc. president and chief executive officer, and Teri List-Stoll, Gap Inc. executive vice president and chief financial officer.

    The conference call can be accessed by calling 1-855-5000-GPS or 1-855-500-0477 (participant passcode: 1998196). International callers may dial 1-323-794-2078. The webcast can be accessed at www.gapinc.com.

    Forward-Looking Statements

    This press release and related conference call and webcast contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding the following: earnings per share, comparable sales for fiscal year 2017; foreign exchange impact in fiscal year 2017; effective tax rate for fiscal year 2017; share repurchases in the fourth quarter of fiscal year 2017; capital expenditures for fiscal year 2017; costs related to rebuilding the Fishkill distribution center; insurance recovery for costs related to the fire at our Fishkill distribution center; new stores, store closures and store count at the end of fiscal year 2017; store openings and closures by the end of 2018; SG&A for the fourth quarter of fiscal year 2017; and online growth in fiscal year 2017.

    Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause the company’s actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following risks, any of which could have an adverse effect on the Company’s financial condition, results of operations, and reputation: the risk that additional information may arise during the company’s close process or as a result of subsequent events that would require the company to make adjustments to the unaudited financial information; the risk that the company or its franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences; the highly competitive nature of the company’s business in the United States and internationally; the risk of failure to maintain, enhance and protect the company’s brand image; the risk of failure to attract and retain key personnel, or effectively manage succession; the risk that trade matters could increase the cost or reduce the supply of apparel available to the company; the risk of changes in the regulatory or administrative landscape; the risk that the company’s investments in omni- channel shopping initiatives may not deliver the results the company anticipates; the risk if the company is unable to manage its inventory effectively; the risk that the company is subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in the company’s security measures; the risk of foreign currency exchange rate fluctuations; the risks to the company’s business, including its costs and supply chain, associated with global sourcing and manufacturing; the risk of changes in global economic conditions or consumer spending patterns; the risks to the company’s efforts to expand internationally, including its ability to operate under a global brand structure and operating in regions where it has less experience; the risks to the company’s reputation or operations associated with importing merchandise from foreign countries, including failure of the company’s vendors to adhere to its Code of Vendor Conduct; the risk that the company’s franchisees’ operation of franchise stores is not directly within the company’s control and could impair the value of its brands; the risk that the company or its franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively; the risk that comparable sales and margins will experience fluctuations; the risk that changes in the company’s credit profile or deterioration in market conditions may limit the company’s access to the capital markets; the risk that updates or changes to the company’s information technology systems may disrupt its operations; the risk of natural disasters, public health crises, political crises, or other catastrophic events; the risk of reductions in income and

     

    cash flow from our marketing and servicing arrangement related to our private label and co-branded credit cards; the risk that the adoption of new accounting pronouncements will impact future results; the risk that the company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program; and the risk that the company will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits.

    Additional information regarding factors that could cause results to differ can be found in the company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017, as well as the company’s subsequent filings with the Securities and Exchange Commission.

    These forward-looking statements are based on information as of November 16, 2017. The company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

    About Gap Inc.

    Gap Inc. is a leading global retailer offering clothing, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, Intermix, and Weddington Way brands. Fiscal year 2016 net sales were $15.5 billion. Gap Inc. products are available for purchase in more than 90 countries worldwide through about 3,200 company-operated stores, about 450 franchise stores, and e-commerce sites. For more information, please visit www.gapinc.com.

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