Gap Barely Beats, Affirms Outlook - Analyst Blog

Gap Inc. (GPS) reported fiscal 2010 second-quarter earnings of 36 cents per share, growing 9.1% from last year's 33 cents and edging past the Zacks Consensus Estimate of 35 cents. The better-than-expected result was mainly driven by higher sales at Old Navy and Banana Republic, coupled with a jump in online sales.

During the quarter, net sales grew 2.2% to $3.32 billion from $3.25 billion in the year-ago quarter. Same-store sales edged up 1%, reflecting growth in Banana Republic North America (+3%), Old Navy North America (+2%) and the International division (+3%), partially offset by a 4% decline in comparable store sales in Gap North America. Overall sales in the quarter also benefited from a strong performance by the company's e-commerce channel, which was expanded to 55 countries.

Quarterly gross profit grew 2.0% year-over-year to $1.31 billion, while gross margin remained essentially flat, dipping 10 basis points (bps) to 39.6%. The slight reduction in margin was the result of a 50 bps decline in merchandise margins, partially offset by the leveraging impact of higher same-store sales on rent and occupancy costs.

Operating expenses, as a percentage of sales, declined 50 bps year-over-year to 27.6% on the back of strict cost containment measures. Accordingly, Gap's operating income rose 5.9% year-over-year to $397 million, while operating margin rose 40 bps to 12.0%.

Gap ended the quarter with cash and cash equivalents of $1.35 billion, compared to $2.03 billion in the year-ago period. During the first half of fiscal 2010, the company deployed $1.1 billion of cash towards share buybacks and $248 million towards capital expenditure. The company also stated that its Board authorized a new $750 million share buyback program, bringing total repurchase authorizations to $1.75 billion in fiscal 2010.

During the reported quarter, Gap opened 10 stores and shuttered 19 locations, ending the quarter with a total of 3,076 stores. In fiscal 2010, the company plans to open approximately 65 new stores mostly in international locations, such as China, Italy and Australia, and close approximately 110 stores.

Moving forward, Gap continues to expect earnings of $1.77 to $1.82 per share for fiscal 2010, compared to $1.58 last year. The guidance is in line with the Zacks Consensus Estimate of $1.80 per share, which dipped a penny over the past month as 11 of 24 covering analysts lowered expectations, while 3 moved in the opposite direction.

We currently have a long-term "Neutral" recommendation on Gap.

 
GAP INC (GPS): Free Stock Analysis Report
 
Zacks Investment Research