The Gap Inc. (GPS Quick QuoteGPS – Free Report) reported third-quarter fiscal 2023 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate. However, both metrics declined year over year.
Results were hurt by a challenging apparel market and the sale of the Gap China business. On the flip side, share gains at Old Navy and Gap brands, margin expansion, reduced inventory and a strong balance sheet acted as tailwinds.
Shares of Gap jumped more than 17% in the after-market session on Nov 16, following third-quarter fiscal 2023 results. In the past three months, shares of this Zacks Rank #3 (Hold) company have risen 36.8% compared with the industry’s 5.2% growth.
GPS posted adjusted earnings of 59 cents per share in the fiscal third quarter, surpassing the Zacks Consensus Estimate of 20 cents. However, adjusted earnings fell 17% from the 71 cents reported in the third quarter of fiscal 2022.
Net sales declined 7% year over year to $3,767 million but beat the Zacks Consensus Estimate of $3,614 million. This includes the adverse impacts of 2 percentage points from the sale of Gap China. The company completed the sale of Gap China at the beginning of the first quarter of fiscal 2023. Comparable sales (comps) fell 2% in the fiscal third quarter.
Digital sales decreased 8% year over year, accounting for 38% of the total sales for the reported quarter. Store sales
declined 6% year over year.
Brand-Wise Sales & Comps
Old Navy: Net sales at Old Navy Global decreased 1% year over year to $2,126 million due to continued softness in apparel. However, the company witnessed strength in women and kids as well as an acceleration in the active category. Comps also increased 1% in the fiscal third quarter. Sales for Old Navy Global beat our model’s estimate of $1,942.6 million.
Gap Global: For the third quarter of fiscal 2023, net sales declined 15% year over year to $887 million due to the unfavorable impacts of the sale of Gap China and the shutdown of Yeezy Gap. Excluding these headwinds, sales for the brand were down 6% in the quarter. The company’s sales were aided by strength in women and kids. Comps declined 1% in the reported quarter. Sales for Gap Global lagged our model’s estimate of $841.8 million.
Banana Republic: Net sales decreased 11% year over year to $460 million, whereas comps fell 8%. Sales lagged our estimate of $480.1 million.
Athleta: Net sales edged down 18% year over year to $279 million for the Athleta brand, whereas comps declined 19%. Segmental results were hurt by elevated discount levels. However, the decline was partly negated by better product and brand marketing. Net sales surpassed our estimate of $344.2 million.
Margins & Costs
The gross margin of 41.3% expanded 390 basis points (bps) and 260 bps, respectively, from the prior-year period’s reported and adjusted gross margins. Meanwhile, we estimated the adjusted gross margin to be 38.7%. This excludes $53 million in impairment charges related to the decision to discontinue the Yeezy Gap business. The improvement resulted from an expansion of 460 bps and 340 bps, respectively, from the prior-year period’s reported and adjusted gross margins. The merchandise margin benefited from lower airfreight than last year and improved promotional activity.
Adjusted SG&A expenses declined 17% year over year. Adjusted SG&A, as a percentage of sales, leveraged 420 basis points to 34.5% compared with our estimate of 36%.
The adjusted operating income rose 22% to $255 million in the fiscal third quarter, excluding $5 million of restructuring costs. Meanwhile, the adjusted operating margin expanded 290 bps to 6.8% compared to our estimate of 2.7%.
Gap ended the fiscal third quarter with cash and cash equivalents of $1,351 million, up from $679 million in the year-ago period. As of Oct 28, 2023, it had total stockholders’ equity of $2,460 million and a long-term debt of $1,488 million.
As of Oct 28, the company generated $832 million in cash from operating activities. GPS approved a dividend of 15 cents per share for the fiscal fourth quarter.
As of Oct 28, the company’s capital expenditure was $288 million. For fiscal 2023, capital expenditure is expected to be $475 million, down from the earlier guided view of $500-$525 million.
The Gap, Inc. Price, Consensus and EPS Surprise
The company expects to open 15 to 20 Old Navy and Athleta stores and close 50 Gap and Banana Republic stores in fiscal 2023. This will complete its plan to close 350 Gap and Banana Republic stores in North America by the end of fiscal 2023.
As of Oct 28, 2023, Gap had 3,533 stores in more than 40 countries, of which 2,592 were company-operated, and 864 were franchise outlets.
Management retained its full-year revenue outlook. The fourth quarter and fiscal 2023 are estimated to positively impact net sales by $150 million each. The company’s fourth-quarter sales are likely to be flat to slightly negative compared with last year’s sales of $4.2 billion, driven by strength in Old Navy and Gap brands. GPS continues to anticipate that fiscal 2023 sales are predicted to decline in the mid-single-digit range compared to last year’s sales of $15.6 billion.
The company continues to forecast gross margin expansion for fiscal 2023 and the fourth quarter, respectively, driven by merchandise margin expansion of 280 basis points stemming from improved commodity costs and lower air utilization.
Adjusted operating expenses are likely to be $1.4 billion in the fourth quarter and $5.15 billion for fiscal 2023.