This summary is based on the first quarter fiscal 2008 earnings call conducted by Gap Inc. (GPS) on May 22, 2008.
Management:
VP of IR: Evan Price
Chairman and CEO: Glenn Murphy
EVP and CFO: Sabrina Simmons
Key Investors Issues
- EPS were 34 cents a share compared to 22 cents a share last year.
- Net income was $249 million compared to $178 million in the year-earlier quarter.
- Sales fell 5% to $3.38 billion.
First Quarter Highlights
Net earnings were 34 cents per share or $249 million.
- This represents net earnings growth of 21% over the prior year, excluding last year’s loss from the discontinued operation of Forth & Towne.
- For webcast participants, earnings were $249 million, which includes about $50 million of pre-tax earnings benefit from a reduction of interest expense accruals. This reduction was primarily the result of foreign tax events. The effective tax rate was 39% and weighted average shares were 736 million.
- Total sales were $3.4 billion, down 5% versus last year. Total company''s comparable store sales were down 11% versus down 4% last year. The 6 percentage points spread between sales growth and comparable store sales was driven by net new stores and continued online growth.
- Online sales grew 21% versus last year to $236 million.
Gross margin was 39.7%, up 150 basis points compared to last year.
- Merchandise margin improved 310 basis points, which was partially offset by 160 basis points of occupancy deleveraging.
- Gross margin dollars decreased by 1% to $1.3 billion.
Operating expenses were $959 million, down $92 million versus the prior year driven by the following factors.
- Lower store payroll, primarily related to the decline in sales.
- Remodel related expenses. As reflected in capital guidance for 2008, the company is executing fewer remodels this year compared to last year. As a reminder, the decrease in remodel is driven by Old Navy where the company has chosen to put on hold additional remodels until it has solidified store prototype trend. As a result of lower remodel count, the company is incurring related costs like demolition, which are expensed.
- The company has lower marketing expenses. Marketing expenses were $93 million, down $21 million versus last year, driven by the absence of television at Gap brand.
The company ended the first quarter with $1.6 billion in inventory, down 14% versus the prior year.
- Inventory per square foot was $37, down 17% versus down 8% in 2007. Entering May, the company remained comfortable with overall inventory level.
- Capital expenditures were $114 million.
- The company opened 33 stores and closed 23.
- Company-wide, the company ended the quarter with 3,177 stores and net square footage increased less than half a percentage point.
- Free cash flow defined as cash from operations plus capital expenditures was an inflow of $62 million compared with an inflow of $159 million last year. The difference was driven by higher bonus payout in 2008 related to 2007 earnings performance.
- With regard to share repurchases, the company repurchased a total of 11 million shares for $216 million at an average price of $18.88. The company continues to utilize only excess cash to fund share repurchases. The company ended the first quarter with about $1.8 billion in cash and short-term investments.
Fiscal 2008 Outlook
- Earnings per share are expected to be $1.20 to $1.27.
- Operating margins are expected to be 8.5% to 9.5%.
- Effective tax rate is expected to be about 39%.
- Capital expenditures are expected to be about $500 million, and this includes about $130 million for new stores, $220 million for existing stores, about $100 million for IT and about $50 million for headquarters and distribution centers.
- Depreciation and amortization are expected to be about $550 million.
- Free cash flow is expected to be about $900 million.
