The FINANCIAL -- Gap Inc. on November 17 reported results for the third quarter of fiscal year 2016.
On a reported basis, Gap Inc.’s third quarter fiscal year 2016 diluted earnings per share were $0.51. On an adjusted basis, the company’s diluted earnings per share were $0.60, excluding a $0.09 impact from restructuring costs related to store closure and streamlining measures previously announced on May 19, 2016, according to Gap.
“I’m pleased to see improved product across our brands, as well as areas of healthier merchandise margins, even against the backdrop of challenging traffic trends during the quarter,” said Art Peck, chief executive officer, Gap Inc.
“As we move into the holiday season, our teams are sharply focused on execution and delivering great experiences across the portfolio,” Peck continued. “Looking forward, we remain dedicated to utilizing our scale advantage in supply chain, as well as through knowledge sharing, in order to drive product innovation across brands and categories.”
The merchandise margin rate for the third quarter of fiscal year 2016 was up 220 basis points compared with the same quarter last year, primarily driven by Old Navy.
As previously reported, Gap Inc. experienced a fire in a building located on its Fishkill, New York distribution center campus on August 29, 2016. The company activated contingency plans designed to help mitigate the overall impact to the business, including leveraging its North American network of distribution centers and ship-from-store capabilities, as well as a temporary fulfillment site established on the Fishkill campus.
The company’s largest global brand, Old Navy, delivered positive 3 percent comparable sales results during the third quarter, building on its quarter-over-quarter improvement in fiscal year 2016. Additionally, the brand recently announced its holiday strategy, inclusive of its Instant Happy sweepstakes, as well as several in-store experiences that will engage customers throughout the season.
The company’s namesake brand continued on its path to transform its product-to-market processes, designed to consistently deliver on-brand product collections. For the 2016 holiday season, Gap’s Share Your Gift campaign is engaging customers across various platforms, including TV, digital and social.
The company’s Athleta brand continued to build upon its success as a performance and lifestyle brand, growing its footprint to 130 stores at the end of the third quarter of fiscal year 2016. Athleta also continued to drive innovation across its product collections with the launch of Sculptek, which leverages new stretch fiber technology that sculpts and supports.
Third Quarter 2016 Comparable Sales Results
Gap Inc.’s comparable sales for the third quarter of fiscal year 2016 were down 3 percent, including an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points, versus a 2 percent decrease last year. Comparable sales by global brand for the third quarter were as follows:
xGap Global: negative 8 percent, including an estimated negative impact from the Fishkill distribution center fire of approximately 4 percentage points, versus negative 4 percent last year
xBanana Republic Global: negative 8 percent, including an estimated negative impact from the Fishkill distribution center fire of approximately 2 percentage points, versus negative 12 percent last year
xOld Navy Global: positive 3 percent, including an estimated negative impact from the Fishkill distribution center fire of approximately 1 percentage point, versus positive 4 percent last year
Third Quarter 2016 Net Sales Results
For the third quarter of fiscal year 2016, Gap Inc.’s net sales decreased 2 percent to $3.80 billion compared with $3.86 billion for the third quarter last year.
The company noted that the translation of foreign currencies into U.S. dollars positively impacted the company’s reported net sales for the third quarter of fiscal year 2016 by about $17 million.
Additional Third Quarter Results and 2016 Outlook
Earnings per Share and Operating Margin
On a reported basis, the company expects its diluted earnings per share to be in the range of $1.41 to $1.50. The company reaffirmed its adjusted diluted earnings per share to be in the range of $1.87 to $1.92, excluding the negative impact of restructuring costs, which is now expected to be approximately $0.42 to
$0.46. Please see the reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, from the GAAP financial measure in the table at the end of this press release.
Excluding restructuring costs, the company continues to expect its adjusted operating margin to be about 8.5 percent in fiscal year 2016.
Third quarter operating expenses were $1.10 billion, including about $35 million of restructuring costs, compared with $1.03 billion in the third quarter of last year.
Marketing expenses for the third quarter were $148 million, an increase of $6 million when compared with the third quarter of last year.
Effective Tax Rate
The effective tax rate was 45.2 percent for the third quarter of fiscal year 2016. The third quarter effective tax rate reflects the impact of certain non-cash tax expenses related to foreign restructuring costs, which resulted in an increase to the effective tax rate of approximately 5 percentage points.
The company continues to expect its full-year fiscal 2016 effective tax rate to be about 44 percent. Excluding the tax impacts of the restructuring costs, the company expects its adjusted fiscal year 2016 effective tax rate to be about 40 percent.
Total inventory dollars were down 4 percent at the end of the third quarter of fiscal year 2016. At the end of the fourth quarter of fiscal year 2016, the company expects total inventory dollars to be down in the low single digits year-over-year.
Cash and Cash Equivalents
The company ended the third quarter of fiscal year 2016 with $1.52 billion in cash and cash equivalents. Year-to-date free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $417 million.
The company paid a dividend of $0.23 per share during the third quarter of fiscal year 2016. In addition, on November 10, 2016, the company announced that its Board of Directors authorized a fourth quarter dividend of $0.23 per share.
Fiscal year-to-date capital expenditures were $383 million. For fiscal year 2016, the company continues to expect capital spending to be approximately $525 million.
Depreciation and Amortization
The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, to be about $550 million for fiscal year 2016.
The company ended the third quarter of fiscal year 2016 with 3,742 store locations in 50 countries, of which 3,281 were company-operated.
During the third quarter of fiscal year 2016, the company opened 36 and closed 28 company-operated stores. Square footage of company-operated stores was down about 2 percent compared with the third quarter of fiscal year 2016.
Gap Inc. now expects net closures of about 65 company-operated stores in fiscal year 2016 and a 3 percent reduction of square footage as compared to last year.