Credit: Shutterstock photoIt has been about a month since the last earnings report for Gap, Inc. (The)GPS . Shares have lost about 2.9% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Gap's Q4 Earnings Meet, Currency Leads to Soft View
Gap came out with fourth-quarter fiscal 2016 results, wherein adjusted earnings of $0.51 a share came in line with the Zacks Consensus Estimate, but dropped significantly from $2.02 recorded in the year-ago period. On a GAAP basis, earnings came in at $0.55 per share, down considerably from $1.69 reported in the year-ago period.
Fuelled by favorable comps, net sales improved 1% to $4,429 million, thus breaking its seven-quarter long trend of year-over-year decline. Also, the top line surpassed the Zacks Consensus Estimate of $4,395.5 million. While sales continued to be hurt by soft Banana Republic's performance, Old Navy's continued strength more than offset the weakness.
Comps for the fiscal-fourth quarter jumped 2%, compared to a 7% decline recorded in the year-ago period. This was largely attributable to a successful holiday season that benefited from favorable customer response for the Gap and Old Navy brands. While the early November results were dampened by soft traffic at stores and malls, the pace picked up in December.
Margins
Gross profit jumped 4.2% to $1,501 million, with the gross margin expanding 110 basis points (bps) to 33.9%. We believe that this is largely attributable to strong merchandise margins, which increased 50 bps in the quarter.
Operating income, however, declined 15.2% to $301 million, with the operating margin contracting about 130 bps to 6.8%, mainly owing to elevated marketing and operating expenses, with the latter also including costs related to the restructuring initiatives announced in May 2016.
Fiscal 2016 & Other Developments
Catching a glimpse of fiscal 2016, Gap's adjusted earnings came in at $2.02, down 17% year over year. However, the figure came in line with the Zacks Consensus Estimate. Net sales of $15,516 million dipped 1.8% year over year, while beating our estimate of $15,485 million.
Adverse currency fluctuations dented fiscal 2016 adjusted earnings by nearly $0.15. Further, sales in the fiscal were negatively impacted by currency translations to the tune of nearly $20 million.
During the fourth quarter, Gap's namesake brand's operating model remained on track, which helped boost product acceptance across key categories. Also, in a drive to enhance its digital strategies, Gap introduced a new app - DressingRoom by Gap. This app will enable customers to try clothes through reality experiences generated via smart phones.
Further, Gap's Athleta brand is progressing well with its innovations and efforts toward becoming a performance and lifestyle brand, as evident from its solid footprint by the end of fiscal 2016. Finally, in fiscal 2016, Gap's mobile point of sale improved to nearly 20% of its domestic fleet. This in turn, has been helping store associates to enrich customer experiences, thus highlighting the company's focus on augmenting omnichannel and digital operations.
Financials
Gap ended fiscal 2016 with cash and cash equivalents of $1,783 million, long-term debt of $1,248 million, and total shareholders' equity of $2,904 million.
During fiscal 2016, the company generated cash flow from operations of $1,719 million and incurred capital expenditure of $524 million. Additionally, the company's total free cash inflow for the fiscal totaled $1.2 billion, including proceeds of about $73 million from the Fishkill fire calamity.
For fiscal 2017, management projects capital expenditure of approximately $625 million, excluding the spending associated with reconstructing the Fishkill distribution center.
Coming to Gap's shareholder-friendly moves, it announced a first quarter dividend of $0.23 per share, which will be payable on Apr 26 to shareholders of record as on Apr 5. Also, the company plans to make buybacks of roughly $100 million in the first half of fiscal 2017. Gap currently has buybacks worth $1 billion remaining under its standing authorization.
Store Update
In the fourth quarter, Gap introduced 30 stores, while closing 113 company-operated stores. It ended the fiscal with 3,659 outlets in 50 countries, of which 3,200 were company-operated and 459 were franchise. Square footage of company-operated stores declined about 3% year over year.
Notably, Gap closed its Old Navy Japan business in fiscal 2016, alongside shuttering down several dilutive Banana Republic stores (mainly global).
In fiscal 2017, Gap anticipates to open roughly 40 company-operated stores, net of store closures and repositions. As per plan, the new stores will be primarily focused on Athleta and Old Navy, while store closures will be mainly concentrated on the namesake brand.
Outlook
Management remains impressed with the solid end to fiscal 2016, given the sales momentum witnessed in the crucial holiday quarter. However, in fiscal 2017, the company expects to continue being hurt by the perils of foreign currency movements. That said, management issued a fresh outlook for fiscal 2017.
During the fiscal, management anticipates comps growth to range from flat to improve marginally. Net sales, are expected to be little lower than this range, owing to the currency challenges.
Consequently, the company envisions earnings for the fiscal year to range from $1.95−$2.05 per share, including a negative currency impact of about $0.09 (or 5% EPS growth).
Moreover, management expects reported earnings per share to be down in high single digits in the first half of fiscal 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 17.8% due to these changes.
Gap, Inc. (The) Price and Consensus
Gap, Inc. (The) Price and Consensus | Gap, Inc. (The) Quote
VGM Scores
At this time, Gap's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with a 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Interestingly, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
