Gap Inc. was “not pleased” by its third quarter performance that saw net income and sales decline, and comps fall in every major division.
In a Nutshell: Gap Inc. is proceeding with the separation of Old Navy into a separate publicly traded company next year and expects to incur $160 million in separation-related capital spend for fiscal 2019.
The company reported diluted earnings per share (EPS) of 37 cents on a reported basis and 53 cents on an adjusted basis, excluding costs associated with the company’s planned separation, and costs related to the previously announced specialty fleet restructuring.
Gap said it ended the third quarter with $2.72 billion in merchandise inventory, up about 2 percent year over year. The company noted that about three points of the increase in merchandise inventory was driven by the acquisition of Janie and Jack, which occurred in the first quarter of fiscal year 2019, net year-over-year store growth, and tariffs.
The company affirmed its reported diluted EPS guidance for fiscal year 2019 to be in the range of $1.38 to $1.47 and its adjusted diluted earnings per share guidance range of $1.70 to $1.75. The company now expects comparable sales for the year to be down mid-single digits and net sales growth to decline by the low-single digits.
Gap Inc. now expects to close about 15 company-operated stores, net of openings and repositions in the year. 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.
The company ended the third quarter of fiscal year 2019 with 3,938 store locations in 44 countries, of which 3,396 were company operated.
Sales: Net sales in the third quarter ended Nov. 2 decreased 2 percent to $4 billion, compared with $4.09 billion last year. Comparable sales were down 4 percent versus flat last year. Old Navy Global comp sales declined 4 percent versus a gain of 4 percent last year, Gap Global comp sales fell 7 percent compared to a 7 decline a year earlier and Banana Republic Global comp sales were off 3 percent versus a 2 increase last year.
The company said the translation of foreign currencies into dollars negatively impacted the company’s net sales for the quarter by about $12 million.
Earnings: Net income in the period dropped 47.4 percent to $140 million from $266 million in the year-ago quarter.
Gross profit was down 4 percent compared to last year to $1.56 billion. Gross margin was 39 percent, a decrease of 70 basis points compared with last year, while operating margin was 5.5 percent, a decline of 340 basis points compared with last year.
CEO’s Take: Robert J. Fisher, interim president and CEO of Gap Inc., said: “We are not pleased with the third-quarter results and are focused on aggressively addressing the operational issues that are hindering the performance of our brands. We continue to make progress against our separation plans, which will provide improved focus and a further catalyst for transformation.”