Gap Inc.'s (GPS) first-quarter 2011 earnings of 40 cents per share declined 11.1% from last year's 45 cents, while the earnings came a penny ahead of the Zacks Consensus Estimate.
The drop in quarterly performance of the company was primarily attributable to sluggish top-line performance coupled with the rise in input cost.
Quarter in Details
During the quarter, net sales inched down 1.0% to $3,295.0 million from $3,329.0 million in the year-ago quarter. Same-store sales plummeted 3.0% for the quarter versus an increase of 5.0% in the prior-year quarter. Gap reported a decline in same store sales across all brands.
The same-store sales of Gap North America, Old Navy North America, Banana Republic North America and International brands inched down 3.0%, 2.0%, 1.0% and 6.0%, respectively. However, totalrevenue beats the Zacks Consensus Estimate of $3,284.0 million.
Quarterly gross profit fell 6.9% year over year to $1,304.0 million, and gross margin contracted 250 basis points (bps) to 39.6%. Operating expenses, as a percentage of sales, increased marginally by 10 bps from the prior-year quarter to 27.9%. Accordingly, Gap's operating income plunged 22.8% year over year to $233.0 million, while operating margin fell 200 bps to 7.1%.
Balance Sheet and Dividend
Gap ended the quarter with cash and cash equivalents of $2,417.0 million compared with $2,056.0 million in the year-ago period. In first-quarter 2011, the company deployed $548.0 million of cash toward share buybacks and $127.0 million for capital expenditure. Moreover, the company has paid a quarterly dividend of 11.25 cents, up 13.0% from the prior-year quarter.
Store Count
During the reported quarter, Gap opened 25 stores and shuttered 26 locations. In fiscal 2011, the company now expects to open net 75 new stores, up from its earlier guidance of 65 stores. The company ended the quarter with a total of 3,245 stores.
Guidance
The company is apprehensive regarding the operating margin in 2011 owing to cost inflation. As a result, the company has lowered its fiscal 2011 earnings guidance in the range of $1.40 to $1.50 from the earlier expectation of $1.88 to $1.93 per share.
Peer Comparables
Gap competes with The TJX Companies Inc. (TJX) among others. The latter reported first-quarter 2011 earnings decline of 2.5% to 78 cents a share from 80 cents in the year-ago period.
Based in San Francisco, California, The Gap Inc. is a premier international specialty retailer offering a diverse range of clothing, accessories, and personal care products for men, women, children and babies. Its flagship brands include Gap, Banana Republic, Old Navy, Piperlime and Athleta.
In a drive to boost its international operations, Gap seeks to consolidate its foreign business under one division from London. Lackluster sales in North America compelled the company to explore overseas market. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from its overseas operations and online business by 2013.
To achieve this end, Gap has opened its stores in China, Italy and Australia and has launched e-commerce business in more than 90 markets, which are expected to further strengthen its top and bottom line performance, moving forward.
Gap's shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.
GAP INC (GPS): Free Stock Analysis Report
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