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Gap Earnings Beat, Falls Y/Y, Hikes Div

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The Gap Inc. (GPS) posted fourth-quarter and fiscal 2013 results, wherein its quarterly earnings of 68 cents a share tanked 6.9% year over year. However, it came ahead of the Zacks Consensus Estimate of 66 cents per share. Results were negatively impacted by the loss of a week owing to calendar shift.

This calendar shift also affected nets sales, which slipped 3.2% to $4.58 billion during the fourth quarter, almost meeting the Zacks Consensus Estimate of $4.59 billion. However, with continued focus on developing its omnichannel network, Gap’s quarterly online sales came in at $698.0 million, up 15.9% from the prior-year quarter.

The company reported a 10.3% fall in its quarterly gross profit to $1,593 million with the gross margin contracting 280 basis points (bps) to 34.8%. Operating income during the quarter dipped 13.3% to $522 million, leading the operating margin to shrivel 130 bps to 11.4%. Gap’s operating expenses dropped by 8.8% to $1.07 billion, backed by the company’s tough cost management.

Fiscal 2013 Highlights

For fiscal 2013, Gap’s earnings soared 17.6% to $2.74 per share, marginally beating the Zacks Consensus Estimate of $2.73. Net sales for the year after adjusting for foreign currency translation, climbed 5%. Reported sales came in at $16.15 billion, compared to $15.65 billion in fiscal 2012, roughly coming in line with the Zacks Consensus Estimate of $16.16 billion.

Sales were driven by comparable store sales, which inched up 2% during the year. Brand wise, Gap and Old Navy delivered positive comps of 3% and 2% respectively, partially offset by a negative 1% delivered by Banana Republic. Further, the company’s online sales for the year grew 21% to $2.26 billion, supported by Gap’s omnichannel capacities.


This apparel and shoe retailer ended the year with cash and cash equivalents of $1,510 million, long-term debt at $1,369 million and total shareholders equity of $3,062 million. Moreover, the company generated a free cash flow of $1.04 billion and incurred $670 million as capital expenditure in 2013. Gap expects to spend $750 million as capital expenditures in 2014, highlighting the company’s focus on investing in its strategic plans.

Dividend & Share Repurchase

During the fourth quarter, Gap paid its shareholders a cash dividend of 20 cents a share and bought back shares worth $134 million. Also, from the company’s $1 billion share repurchase program authorized in Nov 2013, shares worth $966 were still remaining at the end of fiscal 2013.

Additionally, with the earnings release, the company announced a 10% hike in its annual dividend for fiscal 2014, to 88 cents a share from 80 cents currently. Also, for first-quarter fiscal 2014, it declared a dividend of 22 cents per share to be paid to shareholders of record as on Apr 9, 2014, payable on or post Apr 30, 2014.

This fifth consecutive year of the annual dividend hike and Gap’s share buy back program reflect its loyalty towards boosting shareholder value and returning them excess cash.

Store Update

In 2013, the company opened 34 new Gap outlets in Mainland China, bringing the store count in the region to 81 and 17 new Old Navy stores in Japan. Its Athleta brand’s store count was 65 at the end of fiscal 2013, reflecting the company’s emphasis on promoting fashion cum fitness. Also, Gap was consistently enhancing its franchise business all through 2013, as it introduced 70 new stores, covering 40 international markets.

This brings the company’s total store count to 3,539 across 48 countries with 3,164 company-operated and 375 franchise outlets, increasing its company operated floor space by 1% year over year.

Going forward in fiscal 2014, Gap intends to open 185 company-operated outlets, barring relocations, with primary focus on China, Athleta, Old Navy Japan and global outlet stores. It also plans to shut down 70 company-operated outlets, net of relocations. Following this, the company expects net square footage to increase by 2.5% next year.

In 2014, the company plans to open 30 Gap outlets in China and 25 Old Navy stores in Japan. Gap also intends to introduce Old Navy in the Chinese market by opening 5 new outlets there, apart from opening the brand’s franchises globally, beginning with Philippines next month. Also, the company anticipates its franchise partners to add 75 new outlets, covering all brands including Banana Republic, Old Navy and Gap.


Looking ahead, Gap envisions earnings per share to lie in a band of $2.90–$2.95 for fiscal 2014. The current Zacks Consensus Estimate for 2014 stands at $3.05 per share, which is likely to undergo a downward revision.

Also, on excluding the expected negative effect of foreign currency, Gap anticipates operating margin to expand in fiscal 2014. Further, it forecasts inventories to advance by 7% at the end of the first quarter of fiscal 2014.

Other Stocks to Consider

Gap currently holds a Zacks Rank #3 (Hold). Other better-ranked stocks in the retail sector include Christopher & Banks Corporation (CBK) with a Zacks Rank #1 (Strong Buy), along with Finish Line Inc. (FINL) and H & M Hennes & Mauritz AB (publ) (HNNMY) carrying a Zacks Rank #2 (Buy).

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Read the Full Research Report on HNNMY
Read the Full Research Report on FINL
Read the Full Research Report on CBK

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