Yahoo Finance Gap's (GPS) Q1 Earnings Beat Estimates, Sales Decrease Y/Y
Shares of The Gap Inc. GPS jumped more than 13% in the after-market session on May 25, following the first-quarter fiscal 2023 results, wherein the bottom line surpassed the Zacks Consensus Estimate and also improved year over year. However, the top line lagged the consensus mark and declined year over year.
Results were hurt by uncertain macro and consumer environments. On the flip side, share gains at Old Navy and Gap brands, adjusted operating margin expansion, reduction in inventory, and a strong balance sheet acted as tailwinds.
In the past three months, shares of the company have plunged 43.4% compared with the industry’s 18.2% decline.
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Q1 Details
For the fiscal first quarter, adjusted earnings of a penny per share which came ahead of the Zacks Consensus Estimate of a loss of 17 cents. The metric compared favorably with a loss of 44 cents reported in the first quarter of fiscal 2022.
Net sales declined 6% year over year to $3,276 million and missed the Zacks Consensus Estimate of $3,288 million. This includes a currency headwind of 1 point and 2 points of adverse impact from the sale of Gap China. Comparable sales (comps) fell 3% on a year-over-year basis.
Digital sales decreased single digits year over year, accounting for 37% of the total sales for the reported quarter. Meanwhile, the metric jumped 40% from the pre-pandemic levels. Store sales moved down 4% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global fell 1% year over year to $1,828 million due to continued softness in the active and kid's categories, as well as muted demand from lower-income consumers, somewhat offset by continued strength in the women's category. Sales grew 2% compared to 2019 pre-pandemic levels. The metric surpassed our estimate of $1,740.8 million. Comps also declined 1% year over year.
Gap Global: For first-quarter fiscal 2023, net sales declined 13% year over year to $692 million due to unfavorable impact from the sale of Gap China, the shutdown of Yeezy Gap and currency headwinds. The metric missed our estimate of $794.7 million. Comps increased 1% year over year.
Banana Republic: Net sales decreased 10% to $432 million, whereas comps fell 8% year over year. Segmental results were hurt by last year’s brand-lapped outsized growth, driven by the shift in consumer preferences. Sales lagged our estimate of $447.5 million.
Athleta: Net sales edged down 11% to $321 million for the Athleta brand, whereas comps fell 13% year over year. Sales in this brand grew 45% compared to 2019 pre-pandemic levels. Segmental results were hurt by continued product acceptance challenges. Net sales beat our estimate of $313.1 million.
Margins & Costs
The adjusted gross margin of 37.2% expanded 570 basis points (bps) year over year due to a 610-bps rise in adjusted merchandise margins, stemming from lower airfreight and inflationary headwinds.
The adjusted operating loss was $18 million in the reported quarter, excluding a $47 million gain related to the sale of an office building and $75 million of restructuring costs. Meanwhile, the adjusted operating margin expanded 620 bps to 0.5%, driven by improved gross margin stemming from reduced air freight expense and improved promotional activity, as well as adjusted SG&A leverage.
Adjusted SG&A, as a percentage of sales, leveraged 60 basis points to 36.6%, owing to lower advertising expenses and lower technology investments resulting from cost-saving actions.
Other Financials
This Zacks Rank #3 (Hold) company ended the fiscal first quarter with cash and cash equivalents of $1,170 million, up from $845 million in the year-ago period. As of Apr 29, 2023, it had total stockholders’ equity of $2,185 million and long-term debt of $1,487 million.
As of Apr 29, the company generated $15 million in cash from operating activities. Gap paid out a dividend of $55 million in the said quarter. GPS also approved a fiscal second-quarter dividend of 15 cents per share in the quarter under review.
As of Apr 29, the company’s capital expenditure was $117 million. For fiscal 2023, capital expenditure is now expected to be $500-$525 million, down from the prior outlook of $500-$550 million for lower technology project investments and fewer store openings.
Store Update
As of Apr 29, 2023, Gap had 3,453 stores in more than 40 countries, of which 2,601 were company-operated and 852 were franchise outlets. For fiscal 2023, GPS plans to open 25-30 Old Navy and Athleta stores, and close 50-55 Gap and Banana Republic stores.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Guidance
Despite the tough macro and consumer environments, management expects continued margin expansion and improved cash flow. The company continues to anticipate fiscal 2023 sales to decrease in the low to mid-single-digit range compared to last year's reported figure of $15.6 billion. The view also includes a 53rd week, which is estimated to positively impact sales by $150 million.
For second-quarter fiscal 2023, it expects sales to decrease in the mid to high-single-digit range compared to last year's reported figure of $3.86 billion. This view includes approximately $60 million in sales for Gap China. Also, the fiscal second-quarter and fiscal 2023 gross margins are envisioned to expand year over year. Adjusted SG&A is likely to be $1.3 billion in the fiscal second quarter and $5.2 billion for fiscal 2023.
Stocks to Consider
Some better-ranked stocks that investors may consider are Tecnoglass TGLS, Kroger KR and TJX Companies TJX.
Tecnoglass manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 18.1% and 23.8%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 22.7%, on average.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank of 2 (Buy). KR has a trailing four-quarter earnings surprise of 9.8%, on average.
The Zacks Consensus Estimate for Kroger’s current financial year’s earnings per share suggests growth of 6.6% from the year-ago reported figure. KR has an expected earnings per share growth rate of 6% for three to five years.
TJX Companies, which operates as an off-price apparel and home fashion retailer, carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 10.5%.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 6.4% and 14.5%, respectively, from the year-ago period. TJX has a trailing four-quarter earnings surprise of 4.4%, on average.
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