Gap Inc. scored a gain in net income, but net and comp sales were down in the first quarter and CEO Art Peck expressed displeasure with the results.
In a Nutshell: As Gap Inc. prepares to separate into two independent public companies next year, the company reported diluted earnings per share of 60 cents on a reported basis, and 24 cents on an adjusted basis, excluding the gain on sale of a building, costs associated with the company’s planned separation and costs related to the previously announced specialty fleet restructuring.
Gap Inc. announced in late February that it plans to create two independent publicly traded companies: Old Navy, a category-leader in family apparel, and a yet-to-be-named company that will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City.
The company now expects to close about 30 company-operated stores, net of openings and repositions in fiscal year 2019. The updated guidance reflects about 10 additional store openings for both Old Navy and Athleta.
The guidance also includes about 130 closures related to the Gap brand fleet restructuring, the majority of which are expected to close in the fourth quarter of fiscal 2019. The company expects store openings to be focused on Old Navy, Athleta and Gap China locations.
The company ended the first quarter of fiscal year 2019 with 3,849 store locations in 44 countries, of which 3,335 were company-operated. Gap Inc. said it now expects comparable sales for fiscal year 2019 to be down in the low single digits.
It also expects capital spending to be approximately $675 million for fiscal year 2019, which includes about $100 million of expansion costs related to a headquarters building and a build-out of its Ohio distribution center.
Gap Inc. ended the first quarter with $2.24 billion in merchandise inventory, up about 10 percent year over year. The company noted that the increase in merchandise inventory was impacted by the acquisition of Janie and Jack, increases in in-transit times and net store growth.
Sales: Net sales for the first quarter ended May 4 fell 2 percent to $3.7 billion compared with $3.78 billion in the year-ago period. The company said the translation of foreign currencies into dollars negatively impacted net sales in the quarter by about $34 million.
Overall first quarter comparable store sales were down 4 percent compared with a 1 percent increase last year. Old Navy comparable sales were down 1 percent, Gap Global comps were off 10 percent and Banana Republic’s fell 3 percent.
Earnings: Net income for the quarter increased 38.4 percent to $227 million from $164 million in the year-ago period. Gross profit was down 6 percent to $1.34 billion, while gross margin was 36.3 percent, a decrease of 140 basis points compared with last year.
CEO’s Take: Art Peck, president and CEO, said: “This quarter was extremely challenging and we are not at all satisfied with our results. We are committed to improving our execution and performance this year. We remain confident in our plan to separate into two independently traded public companies in 2020, and we are focused on setting up both companies for long term value creation and profitable growth.”