shares of The Gap Inc. GPS was up more than 7% in the after-market session on Nov. 17, following fiscal 2022 third-quarter results that showed top and bottom lines beating the Zacks Consensus estimate. However, both metrics improved year-on-year.
Despite inflation concerns, the results achieved solid demand for formal wear and dresses as people prefer more formal wear, dresses, woven tops and trousers, shedding casual wear as they return to travel, work and social occasions after two years of the pandemic.
However, rising prices for essential goods are hurting low-income consumers’ spending on non-essential goods such as clothing. In October, Gap closed its YeezyGap.com and Yeezy Gap lines after ending its partnership with Kanye West. The company raised concerns about a dreary holiday season this year.
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Over the past three months, the company’s shares are up 27.8% while the industry is down 5.7%.
For the fiscal third quarter, adjusted earnings of 71 cents per share beat the Zacks Consensus estimate of a loss of 2 cents. However, the metric compared unfavorably to the 27 cents reported in Q3 fiscal 2021 earnings.
Net sales rose 2% year over year to $4,039 million, beating Zacks’ consensus estimate of $3,807 million. The metric was also up 1% from pre-pandemic levels. Comparable revenues (comps) increased 1% year over year.
Digital revenue increased 5% year over year and accounted for 39% of total revenue for the quarter. The metric rose 55% from pre-pandemic levels. Store sales increased 1% year over year.
Brand-Wise Sales & Comps
Old Navy: Old Navy Global net sales increased 2% year-on-year to $2,137 million due to improved size and range balance and product acceptance, which was more than offset by softness in the infant and infant category and subdued demand due to the decline became – income consumers. The metric missed our estimate of $2,305.7 million. Comps were also down 1% year over year.
gap global: In the third quarter of fiscal 2022, net sales were flat year-over-year at $1,041 million, driven by an improvement in category mix and assortment balance offset by softness in the kids and babies category. The metric fell short of our estimate of $1,441.5 million. Comps were up 4% year over year, while North America comps were flat.
Banana Republic: Net sales increased 8% to $517 million and comparable prices increased 10%, driven by the current shift in consumer preferences and gains from the reintroduction of work-based categories last year. Sales missed our estimate of $639.7 million.
athlete: Athleta brand net sales increased 6% to $340 million while comparable prices were flat year-over-year. Segment results driven by strength in women’s active and wellness. This was somewhat offset by the shift in consumer preference from leisure to casual and work categories. Net sales missed our estimate of $448.4 million.
Margins & Costs
Adjusted gross profit of $1,562 million reflected a 5.4% decrease from $1,652 million in the year-ago quarter. Adjusted gross margin of 38.7% shrank 320 basis points (bps) year-over-year on a 370 bps decline in adjusted merchandise margin due to huge rebates and higher commodity prices, somewhat offset by higher air freight costs last year.
Adjusted operating income was $156 million compared to $170 million in the year-ago quarter. Adjusted operating margin declined 40 basis points year-over-year to 3.9%.
Adjusted operating expenses decreased 5.1% year over year to $1,406 million.
This No. 3 Zacks company (Hold) ended the fiscal third quarter with cash and cash equivalents of $679 million, compared to $801 million for the same period last year. As of July 30, 2022, it had total equity of $2,571 million and long-term debt of $1,486 million.
In the nine months ended October 30, the Company used $112 million in cash from operations. Gap repurchased 1.2 million shares worth $12 million and paid a $55 million dividend. GPS also approved a quarterly dividend of 15 cents per share during the quarter. It declared a dividend of 15 cents per share for the fourth quarter.
For the nine months ended October 30, the company’s capital expenditures were $577 million. Capital expenditures of $650 million are forecast for fiscal 2022 to improve digital facilities, loyalty, supply chain improvement and investment in store growth for Old Navy and Athleta.
As of October 29, 2022, Gap had 3,380 stores in more than 40 countries, of which 2,743 were company-operated and 637 were franchised. For fiscal 2022, GPS plans to open 30 Gap and Banana Republic stores in North America as part of its plan to close 350 stores. Expected to open 10 Athleta stores excluding 24 Old Navy Mexico stores.
As part of its plan to close 350 stores, the Company has closed 29 Gap and Banana Republic stores in North America in the nine months ended October 29, 2022. It expects to close another 30 in the fourth quarter of fiscal 2022.
The Gap, Inc. Price, Consensus, and EPS Surprise
The Gap, Inc. Price Consensus EPS Surprise Chart | Quote from The Gap, Inc
Management has struggled to reduce inventories and rebalance its ranges to meet changing consumer needs, as well as reassess investments. Given the uncertain consumer environment and higher promotions, Gap expects revenue for the fourth quarter of fiscal 2022 to decline by a mid-single digit year over year. Gross margin is expected to reach 540 basis points year-over-year in the fiscal fourth quarter of 2022, driven by the normalization of air freight likely offset by 200 basis points of continued inflationary costs.
The company’s cost-cutting efforts during the quarter resulted in annual savings of $250 million. Some of that is expected to benefit the fourth quarter, offset by headwinds related to higher seasonal labor costs.
Stocks to consider
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The Zacks Consensus estimate for Kroger’s current earnings and earnings per share points to growth of 7.8% and 9.8%, respectively, from numbers reported last year. KR has a trailing four-quarter earnings surprise averaging 15.7%.
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