Gap Inc.

March 12, 2020

Gap Inc. (NYSE: GPS) today reported fourth quarter and fiscal year 2019 results, provided guidance for fiscal year 2020, and announced certain leadership changes.

Interim Chief Executive Officer, Bob Fisher, commented, “While fiscal 2019 was a challenging year, I am proud of our teams and their commitment to Gap Inc. Thanks to their efforts, we began to see stabilization in our business in the fourth quarter, driven primarily by improvement in Old Navy’s performance. The current environment presents new challenges, but I am confident in Sonia’s leadership and her ability to deliver the transformational change required.”

Quarterly and Annual Earnings
On a reported basis, the company’s diluted loss per share was $0.49 for the fourth quarter of fiscal year 2019 and diluted earnings per share for fiscal year 2019 were $0.93. The company’s adjusted diluted earnings per share were $0.58 for the fourth quarter of fiscal year 2019 and $1.97 for fiscal year 2019. Please see the reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

Included in the fourth quarter reported results was an impairment charge of $296 million related to the store assets and operating lease assets of the company’s flagship stores. As a result of the company’s specialty fleet rationalization efforts, the company reassessed its operating strategy for flagships, given their declining importance as marketing and brand awareness tools. Specifically, in the fourth quarter, the company began to explore options to exit or sublease certain flagship locations, including the Gap and Old Navy Times Square locations. The majority of the impairment charge related to the operating lease assets of the Times Square locations, due to the negative contribution of the individual stores, length of the leases, and the significant decline in the market rents. There were also significant costs incurred in the quarter related to the recently cancelled Old Navy separation, including the disposal of capital assets with no alternative future use and certain obligations under noncancelable contracts. Fourth quarter separation-related charges were $189 million.

Leadership Updates
Following the earlier announcement of the appointment of Sonia Syngal to CEO effective March 23, 2020, today the company announced a series of additional leadership changes. Katrina O’Connell, Chief Financial Officer of Old Navy, will become the company’s Chief Financial Officer, succeeding Teri List-Stoll who has served in the role since January 2017. List-Stoll will remain with Gap Inc. for several months to ensure a smooth transition.

“Katrina brings more than two decades of Gap, Inc. experience, across both brands and functions. Her command of finance, portfolio management and strategy, coupled with her strong operating capabilities from her time leading inventory management, make her uniquely qualified to take on this role,” said incoming Gap Inc. CEO Sonia Syngal. “I’m fortunate to have had her as a partner in leading Old Navy over the past three years, as we defined the growth roadmap for the brand, and I look forward to working alongside her in this new capacity.”

Additional leadership appointments include:

  • Mark Breitbard will lead the company’s Specialty brands, as well as our Asia business and Franchise;
     
  • Nancy Green will step up to lead the Old Navy brand while the board and management undergo an internal and external search for the next President and Chief Executive Officer.

These positions are effective March 23.​​

Comparable Sales Results
The company’s fourth quarter fiscal year 2019 comparable sales were down 1% compared with negative 1% last year. Comparable sales by brand for the fourth quarter were as follows:

  • Old Navy Global: flat versus flat last year
  • Gap Global: negative 5% versus negative 5% last year
  • Banana Republic Global: flat versus negative 1% last year
  • Athleta: positive 2% versus positive 7% last year

For fiscal year 2019, the company’s comparable sales were down 3% compared with flat last year. Comparable sales by brand for fiscal year 2019 were as follows:

  • Old Navy Global: negative 2% versus positive 3% last year
  • Gap Global: negative 7% versus negative 5% last year
  • Banana Republic Global: negative 2% versus positive 1% last year
  • Athleta: positive 5% versus positive 9% last year

Fourth Quarter and Fiscal Year 2019 Results

  • Fourth quarter fiscal year 2019 net sales were $4.7 billion, an increase of 1% compared with last year. Fiscal year 2019 net sales were $16.4 billion, a decrease of 1% compared with last year.
    • The translation of foreign currencies into U.S. dollars positively impacted the company’s net sales for the fourth quarter of fiscal year 2019 by about $7 million and negatively impacted the company’s net sales for fiscal year 2019 by about $61 million.1
    • Fourth quarter and fiscal year 2019 net sales details appear in the tables at the end of this press release.

This press release includes the non-GAAP measures adjusted earnings per share, adjusted gross profit, adjusted gross margin and adjusted operating margin. Please see the reconciliation of these measures from the most directly comparable GAAP financial measures in the tables at the end of this press release.

  • Fourth quarter fiscal year 2019 gross profit was $1.67 billion, an increase of 2% compared with last year. Fiscal year 2019 gross profit was $6.13 billion, a decrease of 3% compared with last year.
     
  • Fourth quarter fiscal year 2019 adjusted gross profit was $1.70 billion, an increase of 3% compared with last year. Fiscal year 2019 adjusted gross profit was $6.16 billion, a decrease of 3% compared with last year.
     
  • Fourth quarter fiscal year 2019 gross margin was 35.8%, an increase of 20 basis points compared with last year. Fiscal year 2019 gross margin was 37.4%, a decrease of 70 basis points compared with last year.
     
  • Fourth quarter fiscal year 2019 adjusted gross margin was 36.3%, an increase of 70 basis points compared with last year. Fiscal year 2019 adjusted gross margin was 37.6%, a decrease of 50 basis points compared with last year.
     
  • Fourth quarter fiscal year 2019 operating margin was negative 5.2%, compared to 8.0% last year. Fiscal year 2019 operating margin was 3.5%, compared to 8.2% last year.
     
  • Fourth quarter fiscal year 2019 adjusted operating margin was 5.9%, a decrease of 210 basis points compared with last year. Fiscal year 2019 adjusted operating margin was 6.4%, a decrease of 180 basis points compared with last year.
     
  • The effective tax rate was 27.6% for the fourth quarter of fiscal year 2019. The fourth quarter effective tax rate reflects non-cash tax impacts related to restructuring and impairment charges incurred in the quarter, which resulted in an increase to the effective tax rate of approximately 8 percentage points.
     
  • The effective tax rate for fiscal year 2019 was 33.5%. The fiscal year 2019 effective tax rate reflects current year adjustments to our fiscal year 2017 tax liability under TCJA for additional guidance issued by the U.S. Treasury Department and certain non-cash tax impacts related to restructuring and impairment charges. These impacts resulted in an increase to the effective tax rate of approximately 8 percentage points.
     
  • The company ended the fourth quarter of fiscal year 2019 with $2.16 billion in merchandise inventory, up about 1% year over year, primarily due to the acquisition of Janie & Jack, as well as the inventory required for new store openings.
     
  • During the fourth quarter of fiscal year 2019, the company repurchased 2.9 million shares for $50 million. For fiscal year 2019, the company repurchased 10.4 million shares for $200 million and ended fiscal year 2019 with 371 million shares outstanding.
     
  • The company paid a dividend of $0.2425 per share during the fourth quarter of fiscal year 2019. In addition, on March 4, 2020, the company announced that its Board of Directors authorized a first quarter fiscal year 2020 dividend of $0.2425 per share.

The company ended the fourth quarter of fiscal year 2019 with $1.7 billion in cash, cash equivalents, and short-term investments. Fiscal year 2019 free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $709 million compared with $676 million last year. Please see the reconciliation of free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

Fiscal year 2019 capital expenditures were $702 million.

The company ended fiscal year 2019 with 3,919 store locations in 42 countries, of which 3,345 were company-operated.

2020 Outlook

“Due to the evolving coronavirus situation, we are facing a period of uncertainty regarding the potential impact on both our supply chain and customer demand,” said Sonia Syngal. “During our 50-year history, Gap, Inc. has weathered many storms. We will benefit from our strong balance sheet and cash generation as well as our important vendor relationships during this current challenging period. We are focusing on decisive actions that will ensure we emerge well positioned to compete in the years ahead, and I am impressed by how diligently the teams have navigated the events of the past weeks.”

Earnings per Share

For fiscal 2020, the company expects its reported diluted earnings per share for fiscal year 2020 to be in the range of $1.23 to $1.35. Excluding costs related to previously announced plans to restructure the Gap brand specialty fleet, the company expects its adjusted diluted earnings per share to be in the range of $1.80 to $1.92.

The fiscal year 2020 guidance largely does not incorporate any estimated impact from the coronavirus outbreak, with the exception of approximately $100 million in sales or $0.10 in diluted earnings per share for the first quarter impact in Asia and Europe. It is not currently possible to provide a reasonable estimate of further impact from the evolving outbreak, including potential disruption from any supply chain impacts or reduction in demand in these or other geographies, including the United States. These estimates could materially change if there is meaningful deterioration from current trends.

Sales

The company expects both comparable sales and net sales for fiscal year 2020 to be down low-single digits, as we continue the Gap specialty fleet restructuring efforts.

Effective Tax Rate

For fiscal year 2020, the company expects its reported effective tax rate to be about 30%. Excluding certain non-cash tax impacts related to expected restructuring charges, the company expects its adjusted fiscal year 2020 effective tax rate to be about 26%.

Share Repurchases

The company noted that in light of the current economic uncertainty stemming from a number of factors, including the coronavirus outbreak, it currently intends to suspend share repurchases in fiscal year 2020.

Capital Expenditures
The company expects capital spending to be approximately $600 million for fiscal year 2020, which includes about $50 million of expansion costs related to the continued buildout of its Ohio distribution center.

Real Estate

The company expects to close about 90 company-operated stores, net of openings and repositions in fiscal year 2020. This guidance includes about 170 Gap brand store closures globally, the majority of which are expected to close in the fourth quarter of fiscal 2020. The company continues to expect store openings to be focused on Old Navy and Athleta.

Webcast and Conference Call Information
The company will host a summary of the company’s fourth quarter and fiscal year 2019 results during a conference call and webcast from approximately 2:00 p.m. to 3:00 p.m. Pacific Time today.

The conference call can be accessed by calling 1-855-5000-GPS or 1-855-500-0477 (participant passcode: 7436665). International callers may dial 1-323-794-2078. The webcast can be accessed at www.gapinc.com.

Forward-Looking Statements
This press release and related conference call and webcast contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding the following: earnings per share for fiscal year 2020; the impact of the coronavirus outbreak, including demand suppression and supply chain disruption, in the first quarter and in fiscal year 2020; comparable sales for fiscal year 2020; net sales and net sales growth for fiscal year 2020; effective tax rate for fiscal year 2020; debt repayment in fiscal year 2020; suspension of share repurchases in fiscal year 2020; capital expenditures for fiscal year 2020; store closings, net of openings and repositions, including timing, cost and weighting by brand, in fiscal year 2020; production schedules for mills operated in China; impact of investments in data and analytics; Athleta’s plan to reach $2 billion in sales; impact of exiting leases for less profitable stores, including flagship locations, through buyout or sublease; rent and occupancy leverage in fiscal year 2020; impact of tariffs in fiscal year 2020; disciplined expense management; maintaining our dividend; prioritizing debt reduction over share repurchases in fiscal year 2020; refinancing our 2021 notes; restructuring related costs, including costs and other challenges related to specialty store closures, in fiscal year 2020; and prudent investments, including focus on profitable and growth brands; driving profitability at Banana Republic and developing an action plan for Gap brand. 

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause the company’s actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following risks, any of which could have an adverse effect on the company’s financial condition, results of operations, and reputation: the risk that additional information may arise during the company’s close process or as a result of subsequent events that would require the company to make adjustments to its financial information; the risk that the company or its franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences; the highly competitive nature of the company’s business in the United States and internationally; the risks associated with engaging in or seeking to engage in strategic transactions; the risk of failure to maintain, enhance and protect the company’s brand image; the risk of failure to manage key executive succession and retention and to continue to attract qualified personnel; the risk that the company’s investments in customer, digital, and omni-channel shopping initiatives may not deliver the results the company anticipates; the risk if the company is unable to manage its inventory effectively; the risks to the company’s business, including its costs and supply chain, associated with global sourcing and manufacturing; the risk that the company is subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in the company’s security measures; the risk that a failure of, or updates or changes to, the company’s information technology systems may disrupt its operations; the risk of changes in global economic conditions or consumer spending patterns; the risks to the company’s efforts to expand internationally, including its ability to operate in regions where it has less experience; the risk that the company or its franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively; the risks to the company’s reputation or operations associated with importing merchandise from foreign countries, including failure of the company’s vendors to adhere to its Code of Vendor Conduct; the risk that the company’s franchisees’ operation of franchise stores is not directly within the company’s control and could impair the value of its brands; the risk that trade matters could increase the cost or reduce the supply of apparel available to the company; the risk of foreign currency exchange rate fluctuations; the risk that comparable sales and margins will experience fluctuations; the risk that changes in the company’s credit profile or deterioration in market conditions may limit the company’s access to the capital markets; the risk of changes in the regulatory or administrative landscape; the risk of natural disasters, public health crises, political crises, negative global climate patterns, or other catastrophic events; the risk of reductions in income and cash flow from the company’s credit card arrangement related to its private label and co-branded credit cards; the risk that the adoption of new accounting pronouncements will impact future results; the risk that the company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program; and the risk that the company will not be successful in defending various proceedings, lawsuits, disputes, and claims.

Additional information regarding factors that could cause results to differ can be found in the company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019, as well as the company’s subsequent filings with the Securities and Exchange Commission.

These forward-looking statements are based on information as of March 12, 2020. The company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

About Gap Inc.
Gap Inc. is a leading global retailer offering clothing, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City brands. Fiscal year 2019 net sales were $16.4 billion. Gap Inc. products are available for purchase in more than 90 countries worldwide through company-operated stores, franchise stores, and e-commerce sites. For more information, please visit www.gapinc.com.

Investor Relations Contact:
Tina Romani
(415) 427-5264
Investor_relations@gap.com

Media Relations Contact:
Sandy Goldberg
(415) 427-3022
press@gap.com

1The translation impact on net sales is calculated by applying foreign exchange rates applicable for the fourth quarter and fiscal year 2019 to net sales for the fourth quarter and fiscal year 2018. This is done to enhance the visibility of underlying sales trends, excluding the impact of foreign currency exchange rate fluctuations.

Please find our financial tables here.

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