Gap profit beats Street, gives upbeat forecast

SAN FRANCISCO (Reuters) - Gap Inc (GPS.N) posted a 45 percent rise in profit during its holiday quarter, helped by fewer discounts and improved sales in all divisions, and gave a 2010 profit forecast that beat Wall Street's estimates.

The operator of Gap, Banana Republic and Old Navy apparel stores also raised its fiscal 2010 dividend 18 percent to 40 cents and authorized an extra $1 billion in share repurchases. Shares in the company rose 2 percent after-hours.

After a years-long slump, Gap has turned around its sales through better merchandising, more targeted fashion and marketing, beefing up its profit margins. It logged a 5 percent rise in January same-store sales with gains in all store chains.

Gap Chief Executive Officer Glenn Murphy said the company has completed the turnaround plan it put in place in 2007. It is now focused on gaining market share in North America, and pursuing online and international growth, he said.

"We can now evolve the business and start talking about how the business is going to grow," he said on a conference call.

Net income in Gap's fourth quarter ended January 30 rose to $352 million or 51 cents per share from $243 million, or 34 cents per share, a year earlier.

Analysts on average had been expecting earnings of 50 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 4 percent to $4.24 billion -- just above the $4.23 billion expected by Wall Street -- on a same-store sales gain of 2 percent. Last year, same-store sales fell 14 percent.

Gap's operating margin in the quarter was 13.9 percent compared with 9.8 percent in the year-ago period. Gap called that its highest fourth-quarter margin in more than a decade.

The company said it expects fiscal 2010 earnings per share to range between $1.70 and $1.75, above the $1.69 expected by Wall Street. It sees operating margins growing about 13 percent for the year.

The results "will temper expectations in the market that earnings are destined for a sharp slowdown," wrote Brian Sozzi of Wall Street Strategies in a research note.

Some analysts have noted that the strong margin gains that company has achieved over the past year won't be sustainable.

FOCUSING ON THE GAP

North American same-store sales at its namesake Gap stores fell 1 percent in the quarter, and declined 2 percent at Banana Republic. They rose 7 percent at Old Navy.

Recent improvements at Old Navy have had a noticeable and immediate effect on the chain's sales, but analysts have grumbled that changes at the Gap chain have been slower to resonate with shoppers.

Murphy said to be "completely honest and transparent" he expected more from the Gap chain but added he had confidence in Patrick Robinson, head designer for the Gap brand.

"I know he wants to see the brand have a better year in 2010. He knows I feel the same," Murphy said.

The seller of American-style and casual apparel such as khaki trousers, jeans and T-shirts said it would open a Gap store in Milan in late 2010 and a Banana Republic store, its more upscale brand, next door. Additional stores in Rome and other Italian cities are set to open in 2011.

It is also on track to open stores in China in the fall.

The company already operates in London, Paris, Tokyo and in Ireland and Canada, and has franchise agreements for Asia, the Middle East, Latin America and other parts of Europe.

As previously disclosed, it will launch an online shopping site for Gap and Banana Republic in the United Kingdom, which it said also will serve online shoppers in nine other European countries.

Gap sees capital expenditures of about $575 million in the fiscal year, up from $334 million in 2009, driven by Old Navy remodels, store openings abroad and an international launch of its website.

The company's shares rose 2 percent to $20.80 after closing at $20.39, up less than 1 percent.

(Editing by Edwin Chan; editing by Andre Grenon, Matthew Lewis and Carol Bishopric)