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Readying Old Navy Split, Gap Inc. Comps Fall in Second Quarter

Acknowledging it was operating in a “challenging environment,” Gap Inc. saw sales and income decline in its fiscal second quarter.

In a Nutshell: Gap Inc., still expected to break out its Old Navy chain into a separate public company next year, reported diluted earnings per share of 44 cents on a reported basis and 63 cents on an adjusted basis, excluding $38 million in costs associated with the company’s planned separation, tax impacts related to new guidance regarding the 2017 Tax Act, and costs related to the ongoing specialty fleet restructuring.

The company updated its reported diluted earnings per share guidance for fiscal year 2019 to be in the range of $1.88 to $2.08. It affirmed its fiscal year 2019 adjusted diluted earnings per share guidance range of $2.05 to $2.15.

Gap Inc. said it ended the second quarter of fiscal year 2019 with $2.33 billion in merchandise inventory, up about 6 percent year over year. The company noted that the increase in merchandise inventory was impacted by increases in in-transit times, the acquisition of Janie and Jack, which occurred in the first quarter, and net store growth year over year.

The company continues to expect comparable sales for fiscal year 2019 to be down low single digits. Gap Inc. ended the second quarter with 3,877 store locations in 44 countries, of which 3,356 were company-operated.

Where store closures are concerned, the company expects to close roughly 30 company-operated stores, net of openings and repositions in fiscal year 2019. This 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 continues to expect store openings to be focused on Old Navy, Athleta and Gap China locations.

Sales: Net sales for the second quarter ended Aug. 3 declined 2 percent to $4.01 billion, compared with sales of $4.09 billion in the year-ago quarter. The company noted that translation of foreign currencies into dollars negatively impacted net sales in the period by about $22 million.

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Gap Inc.’s second quarter comparable sales were down 4 percent compared with a 2 percent increase a year earlier. By brand, Old Navy Global comp sales fell 5 percent versus a 5 percent gain last year, Gap Global comp sales were down 7 percent compared to a 5 percent drop the previous year, and Banana Republic Global comps fell 3 percent versus a 2 percent gain last year.

Earnings: Net income in the quarter fell 43.4 percent to $168 million from $297 million in the year-ago period. Gross profit dipped 4 percent to $1.56 billion, while gross margin was 38.9 percent, a decrease of 90 basis points compared with last year.

CEO’s Take: Art Peck, president and CEO of Gap Inc., said: “We are operating in a challenging environment, but I remain confident in the strength of our brands and our plans for the future as we work to launch two independent, public companies. Heading into the second half of the year, we remain highly focused on inventory and expense discipline to improve results, as well as delivering exceptional product supported by powerful marketing to drive customer engagement.”