Gap Inc. Reports Third Quarter Earnings Per Share of $0.35, up 17% from $0.30 for Third Quarter Last Year
Thursday, November 20, 2008 4:30:00 PM ET Gap Inc. (GPS ) today reported that net earnings for the third
quarter, which ended November 1, 2008, increased to $246 million, or
$0.35 per share on a diluted basis, compared with $238 million, or $0.30
per share on a diluted basis, for the third quarter last year.
Third quarter net sales were $3.6 billion, compared with $3.9 billion
for the third quarter of last year. The company’s third quarter
comparable store sales decreased 12 percent, compared with a decrease of
5 percent in the third quarter of last year. The company’s online sales
for the third quarter increased 15 percent to $284 million, compared
with $247 million for the third quarter of last year.
"We’re pleased with our ability to improve our earnings results during
the third quarter," said Glenn Murphy, chairman and chief executive
officer of Gap Inc. "While we expect the challenging economic
environment to continue, we’ll focus on offering our customers an
engaging store experience and products at the right value proposition to
stand out this holiday season."
The company continued to generate strong cash flow and maintains a
healthy balance sheet, as demonstrated by the $1.6 billion in cash and
investments on hand at the end of the third quarter. Year-to-date free
cash flow, defined as net cash provided by operating activities less
purchases of property and equipment, was an inflow of $519 million.
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 release.
Gap Inc. also reaffirmed that it expects full year diluted earnings per
share on a GAAP basis to be $1.30 to $1.35, compared with fiscal year
2007 diluted earnings per share of $1.05.
Sales Results By Division
The following table represents the company’s third quarter comparable
store sales and net sales by division:
Third Quarter Third Quarter
Comparable Store Net Sales
Sales
2008 2007 2008 2007
Gap North America -7% -6% $1.07 billion $1.14 billion
Banana Republic North America -11% 1% $566 million $607 million
Old Navy North America -18% -8% $1.2 billion $1.5 billion
International -1% -4% $413 million $379 million
Gap Inc. Direct (1) n/a n/a $284 million $247 million
(1) Gap Inc. Direct includes Athleta online and catalog sales beginning
September 2008.
Additional Results and 2008 Outlook
Effective Tax Rate
The effective tax rate was 38.2 percent for the third quarter of fiscal
year 2008. The company continues to expect that the effective tax rate
will be about 39 percent for fiscal year 2008.
Cash and Investments
The company continues to expect to generate about $1 billion in free
cash flow for the full year. Please see the reconciliation of expected
free cash flow, a non-GAAP financial measure, from the GAAP financial
measure in the tables at the end of this release.
Share Repurchases
During the third quarter, the company repurchased 5.7 million shares for
a total of $100 million. Approximately 0.9 million of these 5.7 million
shares were repurchased from individual members of the Fisher family as
part of the company’s previously announced purchase agreements with them.
Year-to-date, the company has repurchased 33.4 million shares for a
total of $600 million.
Dividends
The company paid a dividend of $0.085 per share during the third quarter.
Margins
Gross margin of 38.7 percent increased 120 basis points in the third
quarter compared with the prior year.
Operating margin for the third quarter was 11.1 percent compared with
9.5 percent for the third quarter of fiscal year 2007. The company
continues to expect operating margin to be about 10 percent for fiscal
year 2008.
Inventory
On a year-over-year basis, the company reported that inventory per
square foot was down 13 percent at the end of the third quarter. At the
end of the fourth quarter of fiscal year 2008, the company expects
inventory per square foot to be down in the high-single digits compared
with the fourth quarter of fiscal year 2007. This reduction is on top of
a 15 percent decline as reported at the end of the fourth quarter of
fiscal year 2007. Please see the Financials section on www.gapinc.com
for the company’s explanation of numerical range guidance.
Interest Expense
The company continues to expect fiscal year 2008 interest expense to be
about $5 million.
Depreciation and Amortization
The company continues to expect depreciation and amortization expense
for fiscal year 2008 to be about $550 million.
Capital Expenditures
Year-to-date capital expenditures were $315 million. The company
continues to expect capital spending of about $450 million in fiscal
year 2008.
Real Estate
During the third quarter of fiscal year 2008, the company opened 37
store locations and closed 17 store locations. This compares with 115
openings and 67 closings for the third quarter of the prior year, which
included 45 Old Navy Outlet store conversions.
The company ended the third quarter of fiscal year 2008 with 3,190 store
locations, and net square footage increased 0.8 percent from the end of
fiscal year 2007.
Year-to-date, the company has opened 92 store locations and closed 69
store locations. These numbers include 16 repositions, which are
reflected as both an opening and a closing.
The company continues to expect that it will open about 100 stores and
close about 115 stores for fiscal year 2008, including repositions. The
company continues to expect that net square footage will remain roughly
flat in fiscal year 2008 over last year.
The following table contains divisional third quarter store openings and
closings, and square footage as of November 1, 2008:
Quarter Ended November 1, 2008
Beginning Q3 Store Locations Store Locations Opened Store Locations Closed Net Store Locations End of Q3 Sq. Ft.
(millions)
Gap North America 1,230 5 8 1,227 12.1
Gap Europe 169 5 1 173 1.5
Gap Asia 111 2 1 112 1.1
Old Navy North America 1,066 16 6 1,076 20.2
Banana Republic North America 568 6 1 573 4.9
Banana Republic Asia 25 1 - 26 0.1
Banana Republic Europe 1 2 - 3 -
Total 3,170 37 17 3,190 39.9
Webcast and Conference Call Information
Evan Price, vice president, Investor Relations, will host a summary of
Gap Inc.’s third quarter fiscal year 2008 results in a live conference
call and real-time webcast at approximately 5 p.m. Eastern time today.
Mr. Price will be joined by Glenn Murphy, Gap Inc. chairman and chief
executive officer, and Sabrina Simmons, Gap Inc. executive vice
president and chief financial officer.
To access the conference call, please dial (800) 374-0168, or (706)
634-0994 for international callers. The webcast is located on the
Conference Calls & Webcasts page in the Financials section of www.gapinc.com.
Replay of this event will be made available on (800) GAP-NEWS for four
weeks after this announcement and archived on www.gapinc.com.
November Sales
The company will report November sales on December 4, 2008.
Forward-Looking Statements
This press release and related conference call and webcast contain
unaudited financial information for the third quarter of 2008 and
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: (i)
having enough cash to fund working capital and to sustain the company
through a prolonged downturn; (ii) debt repayment; (iii) the holiday
season being challenging; (iv) continued discipline in expense
management efforts; (v) diluted earnings per share for fiscal year 2008;
(vi) effective tax rate for fiscal year 2008; (vii) free cash flow for
fiscal year 2008; (viii) net cash provided by operating activities for
fiscal year 2008; (ix) operating margin for fiscal year 2008; (x)
year-over-year change in inventory per square foot at the end of the
fourth quarter of fiscal year 2008; (xi) interest expense for fiscal
year 2008; (xii) depreciation and amortization for fiscal year 2008;
(xiii) capital expenditures for fiscal year 2008; (xiv) store openings
and closings for fiscal year 2008; and (xv) real estate square footage
for fiscal year 2008.
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 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 financial information;
the risk that the adoption of new accounting pronouncements will impact
future results; the risk that the company will be unsuccessful in
gauging fashion trends and changing consumer preferences; the risk that
changes in general economic conditions, consumer confidence, or consumer
spending patterns will have a negative impact on the company’s financial
performance or strategies; the highly competitive nature of the
company’s business in the United States and internationally and its
dependence on consumer spending patterns, which are influenced by
numerous other factors; the risk that the company will be unsuccessful
in identifying and negotiating new store locations and renewing leases
for existing store locations effectively; the risk that comparable store
sales and margins will experience fluctuations; the risk that the
company will be unsuccessful in implementing its strategic, operating
and people initiatives; the risk that adverse changes in the company’s
credit ratings may have a negative impact on its financing costs,
structure and access to capital in future periods; the risk that changes
to the company’s IT systems may disrupt its operations; the risk that
trade matters, events causing disruptions in product shipments from
China and other foreign countries, or an inability to secure sufficient
manufacturing capacity may disrupt the company’s supply chain or
operations; the risk that the company’s efforts to expand
internationally through franchising and similar arrangements may not be
successful and could impair the value of its brands; the risk that acts
or omissions by the company’s third party vendors, including a failure
to comply with the company’s code of vendor conduct, could have a
negative impact on the company’s reputation or 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; any of which could impact net
sales, costs and expenses, and/or planned strategies. 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 February 2, 2008. Readers should also consult the company’s
quarterly report on Form 10-Q for the fiscal quarter ended August 2,
2008.
These forward-looking statements are based on information as of November
20, 2008. 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 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
brand names. Fiscal 2007 sales were $15.8 billion. Gap Inc. operates
more than 3,100 stores in the United States, the United Kingdom, Canada,
France, Japan and Ireland. In addition, Gap Inc. is expanding its
international presence with franchise agreements in Asia, Europe, Latin
America and the Middle East. For more information, please visit gapinc.com.
The Gap, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
($ in millions) November 1, 2008 November 3, 2007
ASSETS
Current assets:
Cash and cash equivalents $ 1,480 $ 1,491
Short-term investments 75 165
Restricted cash 38 43
Merchandise inventory 2,224 2,480
Other current assets 740 682
Total current assets 4,557 4,861
Property and equipment, net 3,016 3,302
Other long-term assets 613 421
Total assets $ 8,186 $ 8,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt $ 188 $ -
Accounts payable 1,578 1,402
Accrued expenses and other current liabilities 1,052 1,287
Income taxes payable 25 25
Total current liabilities 2,843 2,714
Long-term liabilities:
Long-term debt - 188
Lease incentives and other long-term liabilities 1,018 1,072
Total long-term liabilities 1,018 1,260
Total stockholders’ equity 4,325 4,610
Total liabilities and stockholders’ equity $ 8,186 $ 8,584
The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
($ and shares in millions except per share amounts) November 1, 2008 November 3, 2007 November 1, 2008 November 3, 2007
Net sales $ 3,561 $ 3,854 $ 10,444 $ 11,088
Cost of goods sold and occupancy expenses 2,183 2,407 6,386 7,022
Gross profit 1,378 1,447 4,058 4,066
Operating expenses 984 1,079 2,908 3,169
Interest, net (4 ) (27 ) (33 ) (76 )
Earnings from continuing operations before income taxes 398 395 1,183 973
Income taxes 152 156 459 371
Earnings from continuing operations, net of income taxes 246 239 724 602
Loss from discontinued operation, net of income tax benefit - (1 ) - (34 )
Net earnings $ 246 $ 238 $ 724 $ 568
Weighted-average number of shares - basic 709 788 720 806
Weighted-average number of shares - diluted 712 791 723 809
Basic earnings per share:
Earnings from continuing operations, net of income taxes $ 0.35 $ 0.30 $ 1.01 $ 0.75
Loss from discontinued operation, net of income tax benefit - - - (0.05 )
Net earnings per share $ 0.35 $ 0.30 $ 1.01 $ 0.70
Diluted earnings per share:
Earnings from continuing operations, net of income taxes $ 0.35 $ 0.30 $ 1.00 $ 0.74
Loss from discontinued operation, net of income tax benefit - - - (0.04 )
Net earnings per share $ 0.35 $ 0.30 $ 1.00 $ 0.70
The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
39 Weeks Ended 39 Weeks Ended
($ in millions) November 1, 2008 November 3, 2007
Cash flows from operating activities:
Net earnings $ 724 $ 568
Depreciation and amortization (a) 422 407
Change in merchandise inventory (667 ) (645 )
Other cash provided by operating activities, net 355 673
Net cash provided by operating activities 834 1,003
Cash flows from investing activities:
Purchases of property and equipment (315 ) (519 )
Proceeds from sale of property and equipment - 11
Purchases of short-term investments (75 ) (719 )
Maturities of short-term investments 177 1,124
Acquisition of business, net of cash acquired (141 ) -
Change in restricted cash 1 1
Change in other long-term assets - (3 )
Net cash used for investing activities (353 ) (105 )
Cash flows from financing activities:
Payments of long-term debt - (326 )
Proceeds from share-based compensation, net 69 86
Repurchase of common stock (593 ) (1,050 )
Excess tax benefit from exercise of stock options and vesting of 6 4
stock units
Cash dividends paid (183 ) (192 )
Net cash used for financing activities (701 ) (1,478 )
Effect of exchange rate fluctuations on cash (24 ) 41
Net decrease in cash and cash equivalents (244 ) (539 )
Cash and cash equivalents at beginning of period 1,724 2,030
Cash and cash equivalents at end of period $ 1,480 $ 1,491
(a) Depreciation and amortization is net of the amortization of
lease incentives.
The Gap, Inc.
SEC REGULATION G
UNAUDITED
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO
FREE CASH FLOW
39 Weeks Ended 39 Weeks Ended
($ in millions) November 1, 2008 November 3, 2007
Net cash provided by operating activities $ 834 $ 1,003
Less: purchases of property and equipment (315 ) (519 )
Free cash flow (a) $ 519 $ 484
RECONCILIATION OF EXPECTED NET CASH PROVIDED BY OPERATING
ACTIVITIES TO EXPECTED FREE CASH FLOW
Expected
52 Weeks Ending
($ in millions) January 31, 2009
Expected net cash provided by operating activities $ 1,450
Less: expected purchases of property and equipment (450 )
Expected free cash flow (a) $ 1,000
_________
(a) Free cash flow is a non-GAAP financial measure. We believe free
cash flow is an important metric as it represents a measure of how
much cash a company has available 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.
SOURCE: Gap Inc.
Gap Inc.
Evan Price, 415-427-2161 (Investors)
Kris Marubio, 415-427-1798 (Media)
