The Gap, Inc. (GPS) posted fourth-quarter fiscal 2014 earnings of 75 cents a share that came a penny ahead of the Zacks Consensus Estimate, and jumped 10.3% year over year on the back of strong performance across its Old Navy stores. An earnings beat, coupled with the announcement of stockholder-friendly moves, led the shares of this apparel retailer to jump roughly 3% during after-market trading hours yesterday.
Management highlighted that excluding the impact of foreign currency fluctuations, the company’s earnings per share surged approximately 20% during the quarter under review.
We observed that despite a positive earnings surprise of 1.4%, the company provided a subdued guidance for fiscal 2015. The soft guidance was issued due to currency headwinds and delay in merchandise receipts at West Coast ports on account of labor dispute, which are expected to hurt earnings per share by 16 cents and 13 cents, respectively.
Net sales increased 2.9% year over year to $4,708 million, marginally above the Zacks Consensus Estimate of $4,707 million. On a constant currency basis, net sales grew 5%. Also, with continued focus on developing its omni-channel network, Gap’s quarterly online sales came in at $792 million, up 13.5% from the prior-year quarter.
Comparable-store sales (comps) advanced 2%, against a 1% improvement in the year-ago period, as the company continued to gain from strong performance at Old Navy, which reported double-digit comps. Brand-wise, comps at Old Navy Global rose 11% versus flat comps last year. Banana Republic Global’s comps increased 1% in contrast to a 3% decline reported in the prior-year quarter. However, comps at Gap Global were down 6% as against a 1% increase recorded in the year-ago quarter.
Gross profit for the quarter increased 4.1% to $1,658 million, driven by higher sales, whereas gross margin expanded 40 basis points (bps) to 35.2%. On the other hand, operating income declined marginally by 0.6% to $519 million because of a rise in operating expenses, whereas operating margin contracted 40 bps to 11%.
Financials
Gap ended the quarter with cash and cash equivalents of $1,515 million, long-term debt of $1,332 million and total shareholders’ equity of $2,983 million. During fiscal 2014, the company generated cash flow from operations of $2,129 million and incurred capital expenditures of $714 million, resulting in free cash flow of $1,415 million.
Management now projects capital expenditures of approximately $800 million during fiscal 2015, with primary focus on enhancing omni-channel and supply chain capabilities.
Concurrent with the quarterly results, the company separately announced that its Board of Directors has authorized a new buyback plan of $1 billion and a hike in annual dividend. Last year in October, the Board had approved a $500 million share repurchase authorization.
During the reported quarter, the company bought back 3.7 million shares for $148 million. Since the commencement of 2010, the company has bought back 297 million shares at a price of $24.42 per share, aggregating more than $7.25 billion.
The company’s new annual dividend of 92 cents per share reflects an increase of about 4.5%, and represents the sixth straight year of annual dividend increment. The company stated that the new quarterly dividend of 23 cents a share will be paid on or after Apr 29, 2015 to shareholders of record as of Apr 8.
Store Update
Gap ended the fourth quarter with 3,709 outlets in 50 countries, of which 3,280 were company-operated and 429 were franchise. In fiscal 2015, management plans to open approximately 115 company-operated stores, with primary focus on greater China, Athleta and global outlet stores. The company’s franchise partners are expected to open about 35 more stores in fiscal 2015, net of closures. Gap projects square footage growth of about 2.5% in fiscal 2015.
During fiscal 2014, the company introduced 39 outlets in greater China, comprising 7 Old Navy stores and 32 Gap stores. The company expects to open about 40 stores in greater China during fiscal 2015. The company, at the end of the fourth quarter, operated 101 Athleta branded stores in the U.S., and now plans to expand this performance and lifestyle brand further by opening 20 more stores in fiscal 2015.
Outlook
Gap disappointed with its fiscal 2015 earnings forecast of $2.75–$2.80 per share that fell short of the current Zacks Consensus Estimate of $3.03. Further, management anticipates operating margin for fiscal 2015 to come around 11.7% versus 12.7% reported in fiscal 2014.
Zacks Rank
Currently, Gap carries a Zacks Rank #3 (Hold). Other well-ranked stocks in the retail sector include Pacific Sunwear of California Inc. (PSUN), sporting a Zacks Rank #1 (Strong Buy), American Eagle Outfitters, Inc. (AEO) and Aéropostale, Inc. (ARO), both carrying a Zacks Rank #2 (Buy).
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