Gap Inc.’s (GPS) second-quarter 2011 earnings of 35 cents per share declined 2.8% from last year’s 36 cents per share, but were a penny ahead of the Zacks Consensus Estimate.
Quarter in Details
During the quarter, net sales edged up 2.0% to $3,386.0 million from $3,317.0 million in the year-ago quarter. Same-store sales slipped 2.0% for the quarter versus an increase of 1.0% in the prior-year quarter. Gap reported a decline in same-store sales across all brands except Old Navy North America in which it reported flat comparables.
Same-store sales of Gap North America, Banana Republic North America and International brands inched down 3.0%, 2.0% and 4.0%, respectively. Total revenue missed the Zacks Consensus Estimate of $3,703.0 million.
Quarterly gross profit fell 4.8% year over year to $1,251.0 million, and gross margin contracted 270 basis points (bps) to 36.9%. Operating expenses, as a percentage of sales, decreased 50 bps from the prior-year quarter to 27.1%. Gap’s operating income plunged 15.9% year over year to $334.0 million, while operating margin fell 200 bps to 9.9%.
Balance Sheet and Dividend
Gap ended the quarter with cash and cash equivalents of $2,104.0 million compared with $1,353.0 million in the year-ago period. In second-quarter 2011, the company deployed $820.0 million of cash toward share buybacks, $60 million toward dividends and $261.0 million for capital expenditure.
The company expects to expend $575 million in capex for fiscal 2011.
Store Count
During the reported quarter, Gap opened 31 stores and shuttered 28 locations. In fiscal 2011, the company now expects to open net 75 new stores. The company ended the quarter with a total of 3,248 stores.
Guidance
The company has maintained its fiscal 2011 earnings guidance in the range of $1.40 to $1.50 per share.
San Francisco, California based 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 international operations, Gap consolidated its foreign business under one division from London. Lackluster sales in North America compelled the company to explore business in other shores. 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 bolster its top and bottom line performance, moving forward.
Above all, Gap operates in a highly fragmented market and competes with national and local department stores and discount stores, such as American Eagle Outfitters Inc. (AEO) and The TJX Companies Inc. (TJX), which offer products at fire sale prices. To retain the existing market share, the company may have to slash sales prices, which could affect margins.
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.
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