Gap Inc. Reports Fourth Quarter and Fiscal Year 2016 Results

Gap Inc
Published: February 24th, 2017

SAN FRANCISCO - February 23, 2017 - (BUSINESS WIRE) - Gap Inc. (NYSE:GPS) today reported fourth quarter and fiscal year 2016 results and provided guidance for fiscal year 2017.

“We’re pleased to finish the year strong, with positive comp and sales growth during the critical holiday quarter,” said Art Peck, chief executive officer, Gap Inc. “Going forward, we will maintain our focus on improving the quality and relevance of our products, increasing our responsiveness to trends and demand, and creating more synergy across channels to deliver the experiences our customers want and expect, however they choose to shop.”

“We have many opportunities ahead to position the company for long-term growth, while keeping our attention focused on operating discipline,” said Teri List-Stoll, executive vice president and chief financial officer, Gap Inc.

On a reported basis, the company’s diluted earnings per share were $0.55 for the fourth quarter of fiscal year 2016 and $1.69 for fiscal year 2016. The company’s adjusted diluted earnings per share were $0.51 for the fourth quarter of fiscal year 2016 and $2.02 for fiscal year 2016, excluding the following:

Costs associated with the company’s previously announced store closure and streamlining initiatives, including the impact from a higher tax rate, of about $0.04 and $0.41 for the fourth quarter and fiscal year 2016, respectively;
A non-cash goodwill impairment charge of $0.18 related to Intermix;
An $0.11 benefit from insurance proceeds related to the fire that occurred on the company’s Fishkill distribution center campus; and
A non-recurring tax benefit of about $0.15.

Please see the reconciliations of adjusted diluted earnings per share, a non-GAAP financial measure, in the tables at the end of this press release.

The company noted that foreign currency fluctuations negatively impacted adjusted earnings per share for fiscal year 2016 by an estimated $0.15, or about 6 percentage points of earnings per share growth on an adjusted basis.¹

¹In calculating earnings per share excluding the impact of foreign exchange, 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 adjusted business results excluding the direct impact of foreign currency exchange rate fluctuations.

Business Highlights

Old Navy delivered its fifth consecutive year of net sales growth in fiscal year 2016 and grew market share in key categories during the quarter, including dresses, denim and knits.
During the quarter, Gap brand’s operating model helped drive improved product acceptance across core categories and divisions. As part of its strategy to develop engaging digital experiences, Gap piloted a new application during the quarter, DressingRoom by Gap, to help customers virtually “try on” clothing through a smartphone augmented reality experience.
Athleta grew its footprint to 132 U.S. store locations by the end of 2016, and is scheduled to open about 15 additional U.S. stores in fiscal year 2017. The women’s performance lifestyle brand continues to be on the leading edge of fabric innovation, as demonstrated by the introduction of Sculptek, which features 360-degree stretch, and Powervita, its newest soft and supportive yoga fabric, in fiscal year 2016.
Mobile point of sale functionality expanded to about 20 percent of the Gap Inc. U.S. fleet in fiscal year 2016, enabling store associates to better serve their customers throughout their shopping experience.

Comparable Sales Results

The company’s fourth quarter fiscal year 2016 comparable sales were up 2 percent compared with a decline of 7 percent last year.

For fiscal year 2016, the company’s comparable sales were down 2 percent compared with a decline of 4 percent last year. Comparable sales by global brand for fiscal year 2016 were as follows:

Old Navy Global: positive 1 percent versus flat last year
Gap Global: negative 3 percent versus negative 6 percent last year
Banana Republic Global: negative 7 percent versus negative 10 percent last year

Net Sales Results

Fourth quarter fiscal year 2016 net sales increased 1 percent to $4.43 billion and fiscal year 2016 net sales were $15.5 billion. The translation of foreign currencies into U.S. dollars negatively impacted the company’s reported net sales for fiscal year 2016 by about $20 million. Fourth quarter and fiscal year 2016 net sales details appear in the tables at the end of this press release.

Additional Fiscal Year 2016 Results

Operating Margin: The company’s operating margin for fiscal year 2016 was 7.7 percent.
Operating Expenses: Fourth quarter fiscal year 2016 operating expenses were $1.20 billion compared with $1.09 billion last year. Fourth quarter fiscal year 2016 operating expenses include $26 million in restructuring charges, a $71 million goodwill impairment charge related to Intermix, and a $73 million gain from insurance proceeds related to the fire that occurred on the company’s Fishkill, New York distribution center campus.

Total operating expenses for fiscal year 2016 were $4.4 billion. Excluding full year restructuring charges of $197 million and other fourth quarter 2016 items mentioned above, total adjusted operating expenses for fiscal year 2016 were $4.3 billion, up $156 million compared with last year. Please see the reconciliation of adjusted operating expenses, a non-GAAP financial measure, in the tables at the end of this press release.

In line with the company’s previous quarter’s guidance, marketing expenses for the fourth quarter of fiscal year 2016 were $195 million, up $26 million compared with last year. Fiscal year 2016 marketing expenses were $601 million compared with $578 million last year.
Effective Tax Rate: The effective tax rate was 22.8 percent for the fourth quarter of fiscal year 2016. The fourth quarter tax rate reflects a non-recurring income tax benefit related to a legal structure realignment and benefits associated with changes in the company’s geographical mix of earnings. Excluding the non-recurring income tax benefit related to the legal structure realignment, as well as the tax impact related to restructuring costs and a goodwill impairment charge during the quarter, the adjusted effective tax rate for the fourth quarter of fiscal year 2016 was about 10 points higher than the reported effective tax rate.

The effective tax rate for fiscal year 2016 was 39.9 percent. Excluding the benefit from the legal structure realignment, and tax impacts of the restructuring costs and the goodwill impairment charge, the adjusted fiscal year 2016 effective tax rate was about 1 percentage point lower.
Inventory: At the end of the fourth quarter of fiscal year 2016, total inventory was down 2 percent year-over-year, in line with the company’s previous guidance.
Cash and Cash Equivalents: The company ended fiscal year 2016 with $1.8 billion in cash and cash equivalents. For fiscal year 2016, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of about $1.2 billion. 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 fourth quarter of fiscal year 2016, the company paid a dividend of $0.23 per share and repaid its $400 million term loan. No share repurchases were made in fiscal year 2016.
Capital Expenditures: Fiscal year 2016 capital expenditures were $524 million, in line with the company’s prior guidance.
Depreciation and Amortization: Fiscal year 2016 depreciation and amortization expense, net of amortization of lease incentives, was $531 million.
Real Estate: The company ended fiscal year 2016 with 3,659 store locations in 50 countries, of which 3,200 were company-operated. Square footage of company-operated stores was down about 3 percent compared with the end of fiscal year 2015, in line with the company’s prior guidance. The company noted that it completed the closure of its Old Navy Japan business and a number of dilutive Banana Republic stores, primarily internationally, during fiscal year 2016. Store count, openings, closings, and square footage of our stores for the fourth quarter of fiscal year 2016 appear in the tables at the end of this press release.

2017 Outlook

The company noted that fiscal year 2017 is a 53-week year versus the 52-week fiscal year 2016.

Earnings per Share: For fiscal year 2017, the company expects diluted earnings per share to be in the range of $1.95 to $2.05, which includes the estimated negative impact of approximately $0.09 due to foreign currency fluctuations at current exchange rates. This impact equates to approximately 5 percentage points of earnings per share growth when compared with the company’s adjusted diluted earnings per share of $2.02 for fiscal year 2016.

The company also noted that comparable sales for fiscal year 2017 are expected to be flat to up slightly. Net sales are expected to be slightly below this range driven by an expected negative impact from foreign currency fluctuations year-over-year.

The company noted that it expects its reported diluted earnings per share for the first half of fiscal year 2017 to be down in the high single digits when compared with the adjusted diluted earnings per share for the first half of fiscal year 2016.
Effective Tax Rate: For fiscal year 2017, the company expects the effective tax rate to be about 39 percent.
Inventory: The company expects total inventory to be down in the low single digits at the end of the first half of fiscal year 2017 when compared with the end of the first half of fiscal year 2016.
Cash Distribution: The company announced today that its board of directors authorized a first quarter fiscal year 2017 dividend of $0.23 per share.
Capital Expenditures: The company expects capital spending to be approximately $625 million for fiscal year 2017, excluding an estimated $200 million related to rebuilding of the company’s Fishkill, New York distribution center campus, which the company expects will be covered by insurance proceeds. The company noted that it intends to dedicate about half of its fiscal year 2017 capital spending on store investments, with the remainder focused on transformative infrastructure investments to support its omni-channel and digital strategies, such as information technology and supply chain.
Real Estate: In fiscal year 2017, the company expects to open about 40 company-operated stores, net of closures and repositions. In line with its strategy, the company expects store openings to be focused on Athleta and Old Navy locations, with closures weighted toward Gap brand.

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 fourth quarter and fiscal year 2016 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. 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: 3648818). International callers may dial 913-643-0954. The webcast can be accessed at www.gapinc.com and fourth quarter earnings call highlights can be followed on Twitter at http://twitter.com/gapinc; cashtag $GPS.

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 for the first half and full fiscal year 2017;
comparable sales for fiscal year 2017;
net sales for fiscal year 2017;
effective tax rate for fiscal year 2017;
total inventory at the end of the first half of fiscal year 2017;
future dividends;
capital expenditures for fiscal year 2017;
store openings in fiscal year 2017, focused on Athleta and Old Navy, net of closures, weighted towards Gap brand;
returning excess cash to shareholders;
foreign exchange impact in fiscal year 2017;
the impact of the additional week in fiscal year 2017;
insurance recovery for costs related to the fire at our Fishkill distribution center; and
share repurchases 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:

the risk that adjustments to the company’s unaudited financial statements may be identified through the course of the company’s independent registered public accounting firm completing its integrated audit of the company’s financial statements and financial controls;
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 adoption of new accounting pronouncements will impact future results;
the risk that the company or its franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences;
the risk that changes in global economic conditions or consumer spending patterns could adversely impact the company’s results of operations;
the highly competitive nature of the company’s business in the United States and internationally;
the risk that if the company is unable to manage its inventory effectively, its gross margins will be adversely affected;
the risk that the failure to attract and retain key personnel, or effectively manage succession, could have an adverse impact on the company’s results of operations;
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, which could have an adverse effect on the company’s results of operations and reputation;
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 risk that foreign currency exchange rate fluctuations could adversely impact the company’s financial results;
the risks to the company’s business, including its costs and supply chain, associated with global sourcing and manufacturing;
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 trade matters could increase the cost or reduce the supply of apparel available to the company and adversely affect its business, financial condition, and results of operations;
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 the company’s investments in omni-channel shopping initiatives may not deliver the results the company anticipates;
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 and adversely impact its financial results or business initiatives;
the risk that updates or changes to the company’s information technology systems may disrupt its operations;
the risk that failure to maintain, enhance and protect the company’s brand image could have an adverse effect on its results of operations;
the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect the company’s operations and financial results, or those of its franchisees or vendors;
the risk that changes in the regulatory or administrative landscape could adversely affect the company’s financial condition, strategies, and results of operations;
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 30, 2016, as well as the company’s subsequent filings with the Securities and Exchange Commission.

These forward-looking statements are based on information as of February 23, 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, and Intermix 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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Contacts:

Tina Romani
Gap Inc.
Investor Relations
415-427-5264
Investor_relations@gap.com

Jennifer Poppers
Gap Inc.
Media Relations
415-427-1729
Press@gap.com

SOURCE Gap Inc.

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, and Intermix brands.

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