Earnings Scorecard: Gap Inc.

| About: The Gap, (GPS)

One of the world's leading premier specialty retailer, Gap Inc. (NYSE:GPS) recently posted second-quarter 2011 results.

The Street analysts had nearly a week to ponder on the news. In the subsequent paragraphs that follow, we will cover the recent earnings announcement, analysts' estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Quarterly Review

Gap’s 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.

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.

Management Guidance for 2011

The company has maintained its fiscal 2011 earnings guidance in the range of $1.40 to $1.50 per share.

Agreement of Analysts

Estimate revision trends for the upcoming third quarter of 2011 portrayed a mixed sentiment among the analysts covering the stock. Over the last 7 days, 9 out of 26 analysts following the stock lowered their estimates for the upcoming quarter while 4 lifted the same.

Analyst estimates for fiscal 2011 though mixed portrayed a more positive bias with 10 of 23 analysts increasing their estimates while 5 making downward revisions, in the last 7 days.

Magnitude of Estimate Revisions

Considering mixed estimate revisions by analysts over the last 7 days, the consensus estimate for the third quarter of fiscal 2011 remained static at 34 cents per share. While for fiscal 2011, the consensus estimate has gone down by 1 cent to $1.47 per share.

Our Recommendation

In a drive to boost its international operations, Gap seeks to consolidate its foreign business under one division from London. The rationalized division will be headed by Stephen Sunnucks. Lackluster sales in North America compelled the company to expand overseas. In order to counter the mature domestic markets, Gap's agenda is to book as much as 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 in more than 90 markets, which are expected to further strengthen its top- and bottom-line performance, moving forward.

However, Gap operates in a highly fragmented market and competes with national and local department stores and discount stores, American Eagle Outfitters Inc. (NYSE:AEO) and The TJX Companies Inc. (NYSE:TJX), which offer products at fire sale prices. To retain the existing market share, the company may have to reduce its sales prices, which could affect margins. Moreover, due to its international exposure, Gap remains prone to currency fluctuation. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.

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'.