Gap Rises on Healthy Sales

Feb.25.11 | About: The Gap, (GPS)

Gap Inc.’s (NYSE:GPS) fourth-quarter 2010 earnings of 60 cents per share rose 17.6% from last year's 51 cents and beat the Zacks Consensus Estimate of 57 cents a share.

For fiscal 2010, the company reported earnings growth of 19% to $1.88 per share from $1.58 per share reported in fiscal 2009. Earnings also beat the Zacks Consensus Estimate of $1.86 per share.

Quarter in Details

During the quarter, net sales grew 3.0% to $4,364 million from $4,236 million in the year-ago quarter. Same-store sales remained flat for the quarter, the net effect of growth in Banana Republic North America (+1%) and Old Navy North America (+1%), offset by a 2% decline in Gap North America and another 1% fall in International comparable store sales. Total revenue also beat the Zacks Consensus Estimate of $4,357 million.

Quarterly gross profit fell 0.2% year over year to $1,669 million, and gross margin contracted 130 basis points (bps) to 38.0%. Operating expenses, as a percentage of sales, declined 90 bps year over year to 24.7% on the back of strict cost containment measures. Accordingly, Gap's operating income rose marginally by 1.0% year over year to $593 million, while operating margin fell 30 bps to 13.6%.


Gap ended the quarter with cash and cash equivalents of $1,561 million, compared with $2,384 million in the year-ago period. In fiscal 2010, the company deployed $2.0 billion of cash toward share buybacks and $557 million for capital expenditure. The company expects capital expenditure of $575 million in fiscal 2011 on Old Navy store remodels and investments in global expansion.

Store Count

During the reported quarter, Gap opened 40 stores and shuttered 41 locations. In fiscal 2010, the company opened 118 stores, which included more of international outlets and franchises, and closed 103 stores comprising mostly of Gap North America stores. The company ended the year with a total of 3,246 stores.


Moving forward, Gap expects earnings of $1.88 to $1.93 per share for fiscal 2011. The company is apprehensive of a likely fall in 2011 operating margin owing to cost inflation.

In fiscal 2011, the company plans to open approximately 190 new stores, mostly in international locations. The company also expects to close approximately 125 stores.

Peer Comparables

Gap competes with The TJX Companies Inc. (NYSE:TJX), among others. The latter reported fiscal fourth-quarter earnings growth of 12.0% climbing to $1.05 a share from 94 cents in the year-ago period.

Based in San Francisco, Calif., 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.

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."