Gap Meets Estimate, Affirms Outlook - Analyst Blog

Gap Inc.'s (GPS) third-quarter 2010 earnings of 48 cents per share rose 9.0% from last year's 44 cents and met the Zacks Consensus Estimate.

During the quarter, net sales grew 1.8% to $3.65 billion from $3.59 billion in the year-ago quarter. Same-store sales remained flat for the quarter, reflecting growth in Banana Republic North America (+1%), Gap North America (+1%) and the International division (+3%), offset by a 2% decline in comparable store sales in Old Navy North America. The company's franchise sales for both Gap and Banana Republic jumped 45% for the quarter. Total revenue also beat the Zacks Consensus Estimate of $3.62 billion.

Quarterly gross profit fell 1.2% year over year to $1.51 billion, and gross margin contracted 130 basis points (bps) to 41.2%.  Operating expenses as a percentage of sales declined 110 bps year over year to 27.4% on the back of strict cost containment measures. Accordingly, Gap's operating income rose marginally by 1.0% year over year to $504 million, while operating margin fell 10 bps to 13.8%.

Gap ended the quarter with cash and cash equivalents of $1.40 billion, compared with $2.17 billion in the year-ago period. Year to date, the company deployed $1.35 billion  of cash toward share buybacks and $413 million for capital expenditure.

During the reported quarter, Gap opened 25 stores and shuttered 19 locations, ending the quarter with a total of 3,082 stores. In fiscal 2010, the company plans to open approximately 65 new stores, mostly in international locations such as China, Italy and Australia. The company also expects to close approximately 100 stores.

Moving forward, Gap continues to expect earnings of $1.77 to $1.82 per share for fiscal 2010, compared with $1.58 per share earned in the prior year. The guidance is in line with the Zacks Consensus Estimate of $1.82, which moved up by two pennies over the past 30 days as 18 of 25 analysts increased their expectations.

GAP's shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold' rating. Our long-term recommendation for the stock remains ‘Neutral'.