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Gap Inc. Reports Third Quarter Results

The following excerpt is from the company's SEC filing.

Gap Inc. (NYSE: GPS) today reported results for the third quarter of fiscal year 2015 and updated its full-year fiscal 2015 outlook.

“With a challenging third quarter behind us, we are sharply focused on holiday execution across all channels,” said Art Peck, chief executive officer, Gap Inc. “We are driving forward on our key strategies designed to fuel future growth.”

“Old Navy delivered another consecutive quarter of growth,” Peck continued. “Gap has made clear progress on its transformation agenda and we look forward to introducing customers to the brand’s spring collection, which embodies elevated American style.”

On a reported basis, Gap Inc.’s third quarter fiscal year 2015 diluted earnings per share were $0.61. On an adjusted basis, the company’s diluted earnings per share were $0.63, excluding a $0.02 impact from strategic actions previously announced on June 15, 2015. Please see the reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, from the GAAP financial measure in the table at the end of this press release.

Business Highlights

Year-to-date, Gap Inc. distributed about $1.1 billion to shareholders through share repurchases and dividends, reinforcing the company’s commitment to returning cash to shareholders.

Old Navy delivered another quarter of growth as the brand continued to leverage the power of its more responsive product operating model. As part of Old Navy’s global growth strategy, the brand debuted seven company-operated stores in Mexico during the quarter, with plans to open a total of about nine stores in the country by the end of the fiscal year.

Gap’s leadership team continues to make progress on its transformation agenda, which includes a clear product aesthetic framework, new product operating model and actions to build a smaller, more vibrant fleet of stores. These strategies position the brand to drive more consistent, on-brand product collections and enhanced customer experiences across all channels.

Athleta continued to grow its footprint during the quarter and is on track to end the fiscal year with about 120 U.S. locations. Additionally, during the quarter, the brand launched its first-ever designer collaboration with Derek Lam 10 Crosby and AthletaCard joined the Gap Inc. credit card program.

Gap Inc. continues to expand and enhance its digital capabilities, making it easy for customers to shop seamlessly between the digital and physical expressions of the company’s brands. Mobile remains a top priority, as the company continues to introduce new, responsive features to create a rich, engaging and easy mobile shopping experience.

Third Quarter 2015 Comparable Sales Results

Gap Inc.’s comparable sales for the third quarter of fiscal year 2015 were down 2 percent versus a 2 percent decrease last year. Comparable sales by global brand for the third quarter were as follows:

Gap Global:

negative 4 percent versus negative 5 percent last year

Banana Republic Global:

negative 12 percent versus flat last year

Old Navy Global:

positive 4 percent versus positive 1 percent last year

Third Quarter 2015 Net Sales Results

For the third quarter of fiscal year 2015, Gap Inc.’s net sales decreased 3 percent to $3.86 billion compared with $3.97 billion for the third quarter last year.

On a constant currency basis, net sales for the third quarter of fiscal year 2015 were flat compared with last year.

In calculating the net sales change on a constant currency basis, current year foreign exchange rates are applied to both current year and prior year net sales. This is done to enhance the visibility of underlying sales trends, excluding the impact of foreign currency exchange rate fluctuations.

The company noted that the translation of foreign currencies into U.S. dollars negatively impacted the company’s reported net sales for the third quarter of fiscal year 2015 by about $100 million, primarily due to the weakening Japanese yen and Canadian dollar.

The following table details the company’s third quarter 2015 net sales:

($ in millions)

Other (2)

Percentage of Net Sales

Quarter Ended October 31, 2015

U.S. (1)

Canada

Europe

Other regions

Other (3)

Quarter Ended November 1, 2014

U.S. includes the United States, Puerto Rico, and Guam.

Includes Athleta and Intermix.

Includes Piperlime, Athleta, and Intermix.

Total online sales increased to $635 million for the third quarter of fiscal year 2015 compared with $621 million in the third quarter last year.

Additional Third Quarter Results and 2015 Outlook

Earnings per Share and Operating Margin

On a reported basis, third quarter of fiscal year 2015 diluted earnings per share were $0.61. The company’s adjusted diluted earnings per share, excluding the negative impact of about $0.02 from the strategic actions, were $0.63 for the third quarter of fiscal year 2015. Please see the reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, from the GAAP financial measure in the table at the end of this press release.

The company noted that the estimated impact from foreign currency fluctuations reduced the company’s diluted earnings per share growth rate in the third quarter of fiscal year 2015 by about $0.05 or about 6 percentage points

. The company also noted that diluted earnings per share for the third quarter of fiscal year 2014 benefitted from a discrete tax item that resulted in a lower effective tax rate of 34.5 percent compared with 37.4 percent for the third quarter this year.

The company updated its adjusted diluted earnings per share guidance for the full fiscal year 2015 to be in the range of $2.38 to $2.42 and now expects its adjusted operating margin to be about 10.5 percent in fiscal year 2015.

The company also noted that its adjusted earnings per share guidance range and adjusted operating margin for fiscal year 2015 exclude charges associated with the strategic actions, which continue to be estimated at approximately $130 million to $140 million. Additionally, its full-year guidance and operating margin for fiscal year 2015 are negatively impacted by West Coast port delays in the first half of fiscal year 2015 and foreign currency fluctuations.

Operating Expenses

Third quarter operating expenses were $1.03 billion compared with $1.04 billion in the third quarter of last year. Marketing expenses for the third quarter were $142 million, down $34 million from last year driven primarily by...


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