Gap Inc.’s first-quarter earnings and sales missed Wall Street’s expectations in what Art Peck, president and chief executive officer, described as an “extremely challenging” period.

Reported diluted earnings per share of 60 cents on a reported basis, and 24 cents on an adjusted basis, excluding the gain on sale of a building, costs associated with the company’s planned separation, and costs related to the previously announced specialty fleet restructuring. Analysts expected 32 cents.  In the year-ago period, earnings were 42 cents a share.

“This quarter was extremely challenging, and we are not at all satisfied with our results. We are committed to improving our execution and performance this year,” said Peck. “We remain confident in our plan to separate into two independently traded public companies in 2020, and we are focused on setting up both companies for long term value creation and profitable growth.”

First Quarter 2019 Comparable Sales Results

The company’s first quarter fiscal year 2019 comparable sales were down 4 percent compared with a 1 percent increase last year. Comparable sales by global brand for the first quarter were as follows:

  • Old Navy Global: negative 1 percent versus positive 3 percent last year
  • Gap Global: negative 10 percent versus negative 4 percent last year
  • Banana Republic Global: negative 3 percent versus positive 3 percent last year

For the first quarter ended May 4, 2019:

  • Net sales were $3.7 billion, a decrease of 2 percent compared with last year.
  • The translation of foreign currencies into U.S. dollars negatively impacted the company’s net sales for the first quarter of fiscal year 2019 by about $34 million.1 First quarter net sales details appear in the tables at the end of this press release.
  • Gross profit was $1.34 billion, a decrease of 6 percent compared with last year.
  • Gross margin was 36.3 percent, a decrease of 140 basis points compared with last year.
  • Operating margin was 8.5 percent, an increase of 240 basis points compared with last year. Adjusted operating margin was 3.5 percent, a decrease of 260 basis points compared with last year. Please see the reconciliation of adjusted operating margin, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.
  • The effective tax rate was 24.8 percent for the first quarter of fiscal year 2019.
  • Diluted earnings per share were $0.60 compared to $0.42 last year. Adjusted diluted earnings per share were $0.24 for the first quarter of fiscal year 2019.
  • The company noted that foreign currency fluctuations positively impacted earnings per share for the first quarter of fiscal year 2019 by an estimated $0.01.2
  • The company ended the first quarter of fiscal year 2019 with $2.24 billion in merchandise inventory, up about 10 percent year over year. The company noted that the increase in merchandise inventory was impacted by the acquisition of Janie and Jack, increases in in-transit times, and net store growth year over year.
  • The company repurchased 1.9 million shares for $50 million and ended the first quarter of fiscal year 2019 with 378 million shares outstanding.
  • The company paid a dividend of $0.2425 per share during the first quarter of fiscal year 2019. In addition, on May 22, 2019, the company announced that its Board of Directors authorized a second quarter dividend of $0.2425 per share.
  • The company ended the first quarter of fiscal year 2019 with $1.2 billion in cash, cash equivalents, and short-term investments. Year-to-date free cash flow, defined as net cash from operating activities less purchases of property and equipment, was negative $136 million compared with negative $204 million last year.
  • First quarter fiscal year 2019 capital expenditures were $165 million.
  • The company ended the first quarter of fiscal year 2019 with 3,849 store locations in 44 countries, of which 3,335 were company-operated.

2019 Outlook

Earnings per Share

The company updated its reported diluted earnings per share guidance for fiscal year 2019 to be in the range of $2.04 to $2.14. The company expects its as adjusted diluted earnings per share to be in the range of $2.05 to $2.15. Previously, Gap expected EPS to be in the range of $2.11 to $2.26. Excluding the estimated costs related to the Gap brand fleet restructuring, diluted earnings per share were expected to be in the range of $2.40 to $2.55.

Comparable Sales

The company now expects comparable sales for fiscal year 2019 to be down low single digits. Previously, comparable sales for fiscal year 2019 were expected to be flat to up slightly.

Effective Tax Rate

The company expects its reported fiscal year 2019 effective tax rate to be about 27 percent. Excluding certain non-cash tax impacts related to expected restructuring charges, the company expects its adjusted fiscal year 2019 effective tax rate to be about 26 percent. The effective tax rate may be materially impacted as additional guidance related to the Tax Cuts and Jobs Act of 2017 is issued by the U.S. Treasury Department and Internal Revenue Service.
For fiscal 2019, the company expects the effective tax rate to be about 26%.

Share Repurchases

The company continues to expect to repurchase approximately $50 million per quarter through the end of fiscal year 2019.

Capital Expenditures

The company now expects capital spending to be approximately $675 million for fiscal year 2019, which includes about $100 million of expansion costs related to a headquarters building and a buildout of its Ohio distribution center. Prviously The company expects fiscal 2019 capital spending to be approximately $750 million,,

Real Estate

The company now expects to close about 30 company-operated stores, net of openings and repositions in fiscal year 2019. The updated guidance reflects about 10 additional store openings for both Old Navy and Athleta. 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 expects store openings to be focused on Old Navy, Athleta and Gap China locations. Previously, The company expects to close about 50 company-operated stores, net of openings and repositions in fiscal year 2019.