SAN FRANCISCO - November 16, 2012 - (BUSINESS WIRE) - Gap Inc. (NYSE:GPS) today reported strong third quarter earnings, underscoring its continued progress on key business strategies.
“We're very pleased with our strong third quarter financial performance, highlighted by how well customers have responded to our product”
Net sales for the third quarter, which ended October 27, 2012, increased 8 percent to $3.86 billion compared with $3.59 billion for the third quarter last year. The company’s third quarter comparable sales increased 6 percent. Net income for the third quarter was $308 million, up 60 percent compared with the third quarter last year. Third quarter diluted earnings per share rose 66 percent to $0.63 compared with $0.38 last year.
“We're very pleased with our strong third quarter financial performance, highlighted by how well customers have responded to our product,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “We are ready to compete and win this holiday season as we drive to build upon our top line growth.”
Given its progress year-to-date, the company raised its estimate for fiscal year 2012 diluted earnings per share to be in the range of $2.20 to $2.25. It also increased its fiscal year 2012 operating margin guidance from about 11 percent to about 12 percent.
|($ in millions)
Quarter Ended October 27, 2012
|Total Stores reportable segment||1,341||1,304||620||90||-||3,355||87|
|Direct reportable segment (2)||146||210||64||-||89||509||13|
|($ in millions)
Quarter Ended October 29, 2011
|Total Stores reportable segment||1,298||1,205||587||81||-||3,171||88|
|Direct reportable segment (2)||121||178||47||-||68||414||12|
(1) U.S. includes the United States and Puerto Rico.
(2) Online sales shipped from distribution centers located outside the U.S. were $44 million ($33 million for Canada and $11 million for Europe) and $34 million ($24 million for Canada and $10 million for Europe) for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.
(3) Franchise sales were $90 million ($78 million for Gap and $12 million for Banana Republic) and $81 million ($71 million for Gap and $10 million for Banana Republic) for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.
(4) Net sales outside of the U.S. and Canada (including Direct and franchise) were $564 million and $525 million for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.
Third quarter diluted earnings per share of $0.63 increased 66 percent compared with $0.38 for the third quarter last year. This includes a benefit of about $0.02 related to tax credits.
The company increased its fiscal year 2012 diluted earnings per share guidance to be in the range of $2.20 to $2.25. This compares with diluted earnings per share of $1.56 in fiscal year 2011.
The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, for fiscal year 2012 to be about $475 million.
Third quarter operating expenses were $1.1 billion, up $105 million compared with the third quarter last year, with continued investments in marketing and store payroll. Marketing expenses for the quarter were $178 million, up $29 million compared with the third quarter last year, driven primarily by investments in Gap brand marketing and customer relationship marketing.
The company is continuing to invest in its businesses, and on a year-over-year basis, expects operating expenses in the fourth quarter of fiscal year 2012 to increase by at least as much as the 11 percent increase in the third quarter. As a result, the company continues to expect operating expenses to deleverage in the fourth quarter.
The company now expects operating margin for fiscal year 2012 to be about 12 percent, up from its previous guidance of about 11 percent.
The effective tax rate was 38.3 percent for the third quarter of fiscal year 2012. The company now expects the full year effective tax rate to be about 39.0 percent for fiscal year 2012, down from previous guidance of about 39.5 percent.
On a year-over-year basis, inventory dollars per store were down 4 percent at the end of the third quarter of fiscal year 2012. The company expects inventory dollars per store to be up in the low single digits at the end of fiscal year 2012 compared with the end of the 2011 fiscal year.
As previously communicated, the company repaid the $360 million balance on its term loan during the third quarter of fiscal year 2012. The company ended the third quarter of fiscal year 2012 with $1.8 billion in cash, cash equivalents, and short-term investments. Year-to-date, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $776 million compared with an inflow of $222 million last year. 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.
The company has repurchased $463 million in shares year-to-date. Third quarter share repurchases were 2.7 million shares for $96 million, and the company ended the third quarter of fiscal year 2012 with 480 million shares outstanding.
The company paid a dividend of $0.125 per share during the third quarter of fiscal year 2012, which was an increase of 11 percent compared with the third quarter last year. The company announced on Monday of this week that its Board of Directors authorized a quarterly dividend of $0.125 per share payable on or after January 30, 2013 to shareholders of record at the close of business on January 2, 2013. With this announcement, the company will pay a total of $0.50 per share in dividends for fiscal year 2012.
Year-to-date capital expenditures were $449 million. The company expects fiscal year 2012 capital spending of about $675 million.
The company ended the third quarter of fiscal year 2012 with a total of 3,339 store locations in 45 countries, 3,068 of which were company-operated.
On a year-to-date basis, the company opened 107 and closed 75 company-operated store locations. Square footage of company-operated stores was 36.9 million at the end of the third quarter, a decrease of about 2 percent from 37.6 million at the end of the third quarter of fiscal year 2011. This decrease reflects Gap Inc.’s strategy to optimize square footage in North America.
The company continues to expect net openings of about 15 company-operated stores and about 50 to 75 franchise stores during fiscal year 2012. Square footage for company-operated stores is expected to decrease by about 1 percent by the end of fiscal year 2012 compared with the end of fiscal year 2011.
Store count, openings, closings, and square footage for our stores are as follows:
|Quarter Ended October 27, 2012|
|Gap North America||1,014||6||4||1,016||10.5|
|Old Navy North America||1,010||9||6||1,013||17.7|
|Old Navy Asia||1||-||-||1||-|
|Banana Republic North America||586||5||2||589||4.9|
|Banana Republic Asia||33||4||-||37||0.2|
|Banana Republic Europe||10||-||-||10||0.1|
|Athleta North America||22||8||-||30||0.1|
|Piperlime North America||-||1||-||1||-|
|Company-operated stores total||3,035||46||13||3,068||36.9|
Katrina O'Connell, vice president of Corporate Finance and Investor Relations at Gap Inc., will host a summary of the company’s third quarter fiscal year 2012 results during a live conference call and real-time webcast at approximately 5 p.m. Eastern Time today. Ms. O’Connell will be joined by Glenn Murphy, Gap Inc. chairman and chief executive officer, and Sabrina Simmons, Gap Inc. chief financial officer.
To access the conference call, please dial (800) 374-1731, or (706) 679-5876 for international callers. The webcast can be accessed from the Financial News and Events page of the Investors section at www.gapinc.com. A replay of the call will be available on www.gapinc.com.
The company will report November sales on November 29, 2012.
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:
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:
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, 2012, 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 15, 2012. 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.
Gap Inc. is a leading global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Banana Republic, Old Navy, Piperlime, and Athleta brands. Fiscal 2011 net sales were $14.5 billion. Gap Inc. products are available for purchase in about 90 countries worldwide through about 3,000 company-operated stores, about 250 franchise stores, and e-commerce sites. For more information, please visit www.gapinc.com.
|The Gap, Inc.|
|CONDENSED CONSOLIDATED BALANCE SHEETS|
|($ in millions)||
|Cash, cash equivalents, and short-term investments||$||1,770||$||1,417|
|Other current assets||794||815|
|Total current assets||4,833||4,554|
|Property and equipment, net||2,559||2,550|
|Other long-term assets||615||553|
|LIABILITIES AND STOCKHOLDERS' EQUITY|
|Current maturities of debt||$||2||$||52|
|Accrued expenses and other current liabilities||1,041||957|
|Income taxes payable||1||1|
|Total current liabilities||2,628||2,482|
|Lease incentives and other long-term liabilities||972||910|
|Total long-term liabilities||2,218||2,516|
|Total stockholders' equity||3,161||2,659|
|Total liabilities and stockholders' equity||$||8,007||$||7,657|
The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|13 Weeks Ended||39 Weeks Ended|
|($ and shares in millions except per share amounts)||October 27,
|Cost of goods sold and occupancy expenses||2,271||2,271||6,531||6,397|
|Income before income taxes||499||325||1,277||1,019|
|Weighted-average number of shares - basic||481||503||485||542|
|Weighted-average number of shares - diluted||488||505||491||547|
|Earnings per share - basic||$||0.64||$||0.38||$||1.62||$||1.13|
|Earnings per share - diluted||$||0.63||$||0.38||$||1.60||$||1.12|
|The Gap, Inc.|
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS|
|39 Weeks Ended|
|($ in millions)||October 27,
|Cash flows from operating activities:|
|Depreciation and amortization (a)||363||382|
|Change in merchandise inventory||(655||)||(694||)|
|Net cash provided by operating activities||1,225||638|
|Cash flows from investing activities:|
|Purchases of property and equipment||(449||)||(416||)|
|Purchases of short-term investments||(175||)||(50||)|
|Maturities of short-term investments||125||125|
|Change in other assets||(12||)||(4||)|
|Net cash used for investing activities||(511||)||(345||)|
|Cash flows from financing activities:|
|Proceeds from issuance of short-term debt||-||9|
|Payments of short-term debt||(17||)||-|
|Proceeds from issuance of long-term debt||-||1,646|
|Payments of long-term debt issuance costs||-||(11||)|
|Payments of long-term debt||(400||)||-|
|Proceeds from issuances under share-based compensation plans, net of withholding tax payments||159||55|
|Repurchases of common stock||(467||)||(2,013||)|
|Excess tax benefit from exercise of stock options and vesting of stock units||32||11|
|Cash dividends paid||(182||)||(181||)|
|Net cash used for financing activities||(875||)||(484||)|
|Effect of foreign exchange rate fluctuations on cash||(4||)||22|
|Net decrease in cash and cash equivalents||(165||)||(169||)|
|Cash and cash equivalents at beginning of period||1,885||1,561|
|Cash and cash equivalents at end of period||$||1,720||$||1,392|
|(a) Depreciation and amortization is net of amortization of lease incentives.|
|The Gap, Inc.|
|SEC REGULATION G|
|RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW|
|39 Weeks Ended|
|($ in millions)||October 27,
|Net cash provided by operating activities||$||1,225||$||638|
|Less: purchases of property and equipment||(449||)||(416||)|
|Free cash flow (a)||$||776||$||222|
|(a) Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.|