Gap, Inc. (GPS) reported Q3 EPS of $0.71, $0.71 better than the analyst estimate of $0.00. Revenue for the quarter came in at $4.04 billion versus the consensus estimate of $3.81 billion.
Fiscal Year 2022 Outlook
- “While our third quarter results underscore the initial progress we are making toward rebalancing our assortments and reducing inventories, we continue to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as we look to the remainder of fiscal 2022,” said Katrina O’Connell, Executive Vice President and Chief Financial Officer, Gap Inc. “In the near-term, we remain focused on the actions necessary to reduce inventory, rebalance our assortments to better meet changing consumer needs, aggressively manage and reevaluate our investments, and fortify our balance sheet. While we have work to do, we believe we are taking the right steps in order to position Gap Inc. for sustainable, profitable growth and to deliver value for our shareholders over the long term.”
- The company is providing the following commentary related to its outlook.
- Sales:
- While the company is making progress balancing its assortments, it continues to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as it relates to its sales outlook for the remainder of fiscal 2022. The company anticipates that total company net sales could be down mid-single digits year-over-year in the fourth quarter of fiscal 2022.
- Gross Margin and Inventory:
- As previously communicated, the company anticipates that air freight expense will continue to normalize and as it anniversaries approximately $245 million of incremental air freight investment in the fourth quarter of last year, the company expects roughly 540 basis points of margin leverage in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021. The air freight leverage is expected to be offset by approximately 200 basis points of continued inflationary cost deleverage. ROD as a percentage of sales is expected to be flat compared to last year.
- While the company is taking actions to balance its assortment and right size inventory, the company has seen the most significant variability in its discount rate. Further limiting near-term discount rate visibility is the uncertain consumer environment and increasingly promotional environment. Gross margin in both the second and third quarters of fiscal 2022 was impacted by approximately 370 basis points of deleverage stemming primarily from higher discounting.
- The company continues to target total inventories below prior year levels by the end of fiscal 2022 as a result of its inventory actions, reduction of receipts, and anniversary of higher in-transit levels last year. By Spring, the company expects to begin to capitalize on its responsive levers, providing the flexibility to better align inventory levels with demand trends.
- SG&A:
- During the third quarter, the company took initial action to reduce operating expenses, resulting in approximately $250 million in annualized savings, of which an immaterial amount will be a benefit in the fourth quarter due to timing and severance offsets in addition to anticipated headwinds in the fourth quarter related to higher seasonal labor costs relative to last year.
- While the company’s operating expense reduction actions are expected to benefit fiscal 2023, the savings are expected to be offset by more normalized incentive compensation and continued higher wage pressure next year.
- Tax:
- The cumulative tax benefit recorded year-to-date in fiscal 2022 is not expected to have an impact on the full year, as it is expected to be fully offset with tax expense in the fourth quarter of fiscal 2022.
- Capital Expenditures:
- The company continues to expect capital expenditures of approximately $650 million in fiscal 2022.
- Other:
- As part of its 350-store closure plan, the company has closed a net total of 29 Gap and Banana Republic stores in North America year-to-date and expects to close approximately 30 more in the fourth quarter of fiscal 2022. The company is on track to open about 30 net new Athleta stores in fiscal year 2022. The company now expects to open approximately 10 net new Old Navy stores in fiscal year 2022; this excludes the 24 Old Navy Mexico stores which were transferred to a franchisee in the third quarter of this year.
- As previously communicated, the company has completed its goal of offsetting dilution in fiscal 2022 and does not anticipate further share repurchases for the remainder of the year.