In a tough retail environment sales gains are always a welcome sign, and so is profit growth of 25%. The Gap, Inc (GPS) reported quarterly net income of $307 million or 44 cents per share which was in-line with analysts’ estimates. Revenue was actually better than expected coming in at $3.59 billion thanks to improved sales at the value oriented brand Old Navy. The sales gains at Old Navy showed that the reorganization in those stores is finally paying off with same store sales up 10%, and it reversed a trend of sales declines for five straight years. Sales in the company’s higher end Banana Republic stores remain sluggish, but not worse than expected.
Some analysts had feared that discounting would harm margins, but according to Gap’s CEO Glenn Murphy it was the opposite. The apparel retailer actually claimed the best margins
in a decade thanks to strict cost cutting as they improved profit margin to 13.9% from 11.1% a year ago. In light of the difficult environment, Gap has closed stores and reduced the size of those in operation striving for a more efficient store, and inventory control has been essential. In fact, inventory per square foot was down 9% in the quarter. However, the company is deploying some of these savings in advancing their marketing goals. Gap has begun to advertise more heavily on television recently as they hope to attract shoppers to their stores during this crucial holiday season.
The Gap’s board authorized a $500 million stock repurchase plan, and the family of co-founder Donald Fisher has agreed to repurchase $20 million as part of the plan. Fisher passed away during the quarter after battling cancer. The stock buyback shows that the board believes the stock is attractively priced and is a sign of confidence in the direction of the company.
As for our valuation, we have The Gap as Fairly Valued coming into this report, and even though the quarter was a good one, we are unlikely to upgrade it in our next rating. The stock is in negative territory after hours following the report, which is a bit of a surprise. With earnings in-line, costs down, revenue and margins better than expected, it would seem an overall successful quarter.
