August 19, 2010 / 8:20 PM / 9 years ago

Gap profit beats as sales edge up

NEW YORK (Reuters) - Gap Inc (GPS.N) reported higher-than-expected quarterly profit, helped by a sales rebound for its Banana Republic and Old Navy chains and a surge in online sales, but a buildup in inventory portended an uptick in price cutting.

Sales at stores open at least a year, or same-store sales, rose 3 percent at Banana Republic, compared with a 15 percent decline a year ago, and rose 2 percent at Old Navy.

Gap got a further lift from online sales, which rose 15 percent, in part by expanding its online shopping beyond the United States to a total of 55 countries during the quarter.

Gap also kept operating expenses virtually on par with year-ago levels, with its sales gains lifting operating margins by 0.4 percentage point to 12 percent.

Yet, despite improvements in many lines of business, same-store sales at Gap’s namesake stores in North America, which account for about a quarter of overall sales, continued to slip, falling 4 percent.

“My patience is not indefinite,” Chief Executive Glenn Murphy said on a call with analysts. “I was disappointed in our inability to generate the sales that we had expected to.” Murphy said the Gap stores failed to offer enough tops that would complement the jeans shoppers were buying.

Gap, based in San Francisco, said net income rose 2.6 percent to $234 million, or 36 cents per share, for the second quarter ended July 31, from $228 million, or 33 cents per share, a year earlier. Analysts were expecting 35 cents a share, according to Thomson Reuters I/B/E/S.

Total sales rose 2.2 percent to $3.32 billion, in line with Wall Street estimates.

Gap kept its 2010 profit forecast of $1.77 to $1.82 per share, compared with a Wall Street forecast of $1.79 per share.

INVENTORY BUILDS

Gap has been steadily working to improve its products, streamline its organization and improve profit margins after a long stretch of sales declines in recent years.

The company is betting its new black pants line, which arrived in stores two weeks ago, will boost its performance. Gap will start an ad campaign for the line next week.

Chief Financial Officer Sabrina Simmons declined to give any exact numbers on how the line was doing, but did say, “so far, so good.”

But some investors and analysts have expressed concern high inventory levels this fall could increase already fierce pressure for markdowns and erode margin gains.

Inventory per square foot was up 12 percent at the end of the quarter, compared with a year earlier and the company said it expects inventory to be up by a “high single digits” percentage at the end of the third quarter.

Needham & Co retail analyst Christine Chen warned that Gap could be setting itself up for another round of price slashing if it finds itself saddled with merchandise it has trouble selling, but said some of the inventory increase was likely to make sure Gap did not run out of the black pants.

“If you’re going to be promoting to gain market share, you need more units,” Chen said.

Gap’s board authorized a new $750 million share buyback. which Chen said was largely the cause of the after hours share spike.

The shares were up 54 cents from a closing price on Thursday of $17.71.

Reporting by Phil Wahba; additional reporting by Alexandria Sage in Las Vegas. Editing by Robert MacMillan

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