Battered by negative comparable store sales growth, increased
input costs and deep discounting,
) fourth-quarter 2011 earnings slide 27% to 44 cents per share from
the prior-period earnings of 60 cents per share. However, quarterly
earnings managed to beat the Zacks Consensus Estimate of 42 cents
Quarter in Details
During the quarter, net sales edged down 1.9% to $4,283 million
from $4,364 million in the year-ago quarter, primarily due to
higher discounting offers to lure customers during holiday season
and negative comparable store sales growth. However, total revenue
of $4283 million nominally beat the Zacks Consensus Estimate of
Same-store sales slipped 4% for the quarter versus an increase
of 1% in the prior-year quarter. The decline is due to a drop in
same-store sales across all brands, except a flat year-over-year
comparable sales at Banana Republic North America. Same-store sales
of Gap North America, Old Navy North America and International
brands declined 3%, 6% and 8%, respectively.
Quarterly gross profit fell 15.8% year over year to $1,405
million, primarily due to higher input costs. Consequently, gross
margin contracted 540 basis points (bps) to 32.8%.
Gap's operating income plunged 37.3% year over year to $372
million and operating margin shriveled 490 bps to 8.7%, marginally
offset by a benefit of 60 basis points from leveraged operating
expenses as a percentage of sales.
Fiscal 2011 highlight
The company's earnings of $1.56 per share for fiscal 2011
declined 17% from the previous fiscal earnings of $1.88. However,
it managed to surpass the Zacks Consensus Estimate of $1.54 per
Net sales during the period inched down approximately 1% year
over year to $14,549 million, primarily due to a decline of 4% in
comparable store sales. Each of Gap's segments, including Gap North
America, Banana Republic North America, Old Navy North America and
International brands experienced a decline of 4%, 1%, 3% and
7%, respectively, in comparable store sales. However, total revenue
beat the Zacks Consensus Estimate of $14,546 million.
However, despite weak top- and bottom-line performance during
the fiscal, the company has some reasons to cheer. Gap is in the
process of achieving its target of generating 30% net sales through
International and Direct divisions by fiscal 2013. During 2011, the
two segments contributed 26% toward net sales. Moreover, with
efficient inventory management, the company delivered higher
Average Unit Retails during full fiscal. Moreover, Gap has
efficiently managed its costs and invested in pre-planned long-term
Balance Sheet, Share Repurchases and Dividend
At the end of fiscal 2011, the company has cash and cash
equivalents of $1,885 million compared with $1,561 million in the
year-ago period and free cash flow of $815 million. In 2011, the
company has made a capital expenditure of $584 million and expects
to expend $600 million for fiscal 2012.
During 2011, the company deployed $2,092 million of cash toward
share buybacks and $236 million toward dividends. Gap's board of
directors has authorized a new $1 billion share repurchase program
replacing the previously announced share repurchase program of $500
During the fiscal, Gap paid an annual dividend of 45 cents per
share to its shareholders and announced to raise annual dividend by
11.1% to 50 cents in fiscal 2012.
During the reported quarter, Gap opened 43 company-operated
stores and shuttered 72 locations, bringing the total
company-operated store counts to 3,036. Moreover, in the fourth
quarter, the company opened 16 stores in franchise business
bringing the total franchise store counts to 217.
In an effort to improve customer experience and boost
productivity per square footage, the company plans to strategically
close and consolidate square footage at Gap and Old Navy brands. In
2012, Gap intends to open 125 company-operated stores and shut down
115 company-operated stores in different locations. Moreover, it
also expects to decrease net square footage by 1% in fiscal 2012.
In 2011, the company's net square footage decreased 2.6% from the
previous fiscal level.
Contrary to this, the company is planning aggressively to expand
its international and franchise business. Of the 125 stores to be
opened in fiscal 2012, 55 stores will be opened outside U.S.
Further, the company intends to triple the Gap store count in China
from 15 to approximately 45 during the next 12 month period.
Further, Gap also intends to open 10 Athleta stores in the country
to a total of 50 Athleta stores.
The company now expects earnings in the range of $1.75 to $1.80
per share for fiscal 2012, an increase of 12% to 15% from fiscal
2011. The current Zacks Consensus Estimate stands at $1.80 per
share, which is at the higher end of its guidance range. Moreover,
Gap is also anticipating an increase of 10% in operating margin
during fiscal 2012.
In a drive to boost international operations, Gap consolidated
its foreign business under one division from London. Lackluster
sales in North America compelled the company to explore business in
other shores. In order to counter the domestic market saturation,
Gap is aiming to generate 30% of total sales from its overseas
operations and online business by 2013.
To achieve this end, Gap has opened its stores in China, Italy
and Australia and has launched e-commerce business in more than 90
markets. These initiatives are expected to bolster the company's
top- and bottom-line performance, moving forward.
We believe that the company's long-term strategic moves along
with disciplined cost management measures will not only provide
financial flexibility, but will also help to drive value
proposition. Moreover, Gap's globally recognized brands complement
each other, enabling it to leverage its position in the sector.
However, Gap operates in a highly fragmented market and competes
with national and local department stores and discount stores, such
American Eagle Outfitters Inc.
The TJX Companies Inc.
), which offer products at fire sale prices. To retain the existing
market share, the company may have to slash sales prices, which
could affect its margins.
Gap's shares maintain a Zacks #3 Rank, which translates into a
short-term 'Hold' rating. Our long-term recommendation on the stock
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