Murphy Has The Gap Back on Track

I think people may look back at The Gap (GPS) trading around $15 in july and retrospectively recognize it to be the steal of the summer of '08.

Before Glenn Murphy was even hired by Gap, I said that if the new CEO was in the Edward Lampert at Sears (SHLD) or Julian Day at RadioShack (RSH) mold, shareholders would really benefit.

After he was hired I was positive on the choice based on his track record and continued to think he could produce there.

After Murphy announced his plans for the company, I could not help noticing something familiar about it.

As things has unfolded, the blueprint became more obvious. Shares have responded by climbing 14% from last summer's low, following Murphy's hire.

Back in June I said:

Gap shareholders are going to do just fine under Murphy. Let's not forget, with the exception of Wal-Mart (WMT), retailers are being savaged right now. The fact that Murphy's shareholders (because of the company's results) have escaped that must be telling us something, the plan is working.

Thursday night Gap released results and surprised many:

Gap reported that second quarter net earnings increased 51 percent through the combination of driving healthy margins and effectively managing costs.

For the quarter ended August 2, 2008, net earnings were $229 million, or $0.32 per share on a diluted basis, compared with $152 million, or $0.19 per share, for the second quarter last year.

The 2007 second quarter diluted earnings per share included $0.02 of expenses related to the company’s cost reduction initiatives. Excluding the $0.02 per share of expenses, second quarter diluted earnings per share last year on a non-GAAP basis were $0.21 per share. Please see the reconciliation of diluted earnings per share on a GAAP basis to diluted earnings per share excluding the expenses associated with the company’s cost reduction initiatives, a non-GAAP financial measure, in the table at the end of this release.

“External conditions aside, we continue to deliver improved earnings with healthy margins and I am pleased with our second quarter results,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “While we continue to pursue our 2008 financial strategy, we are very focused on bringing more customers into our stores.”

If that was not good enough, they backed their full year guidance and also said they are sitting on $1.7 billion in cash after bringing in another $340 plus million during the quarter and buying back 16.3 million shares. Here is an interesting number: 12.3% of the Gap's current market cap consists of the cash it has sitting in the bank.

Over the past year, retailers like Target (TGT), Macy's (M), Kohl's (KSS) and JC Penny (JCP) have all seen their profits and share prices fall (with as much as 50% decreases in some cases). Murphy's Gap has held its own and its share price, essentially flat over that time, reflects that.

My guess is Gap shareholders are some pretty happy folks right about now.

Disclosure: None