Driven by increased sales along with improved margins and a
lower share count,
) earnings of 49 cents per share for the second quarter of fiscal
2012 beat the Zacks Consensus Estimate by a penny. The earnings
also climbed 40% from the last quarter's earnings of 35 cents.
Quarter in Detail
During second-quarter, Gap's net sales increased 5.6% year over
year to $3,575 million from $3,386 million in the previous-year
quarter. Moreover, the company registered a growth of 4% in its
comps against a 2% decline in the prior-year period. Further,
quarterly sales were in line with the Zacks Consensus Estimate.
The company's second-quarter comps mainly benefited from the
continued positive trend in its North American business. During the
quarter, comps at the company's
Gap North America
Banana Republic North America
Old Navy North America
improved 7%, 7% and 3%, respectively. Whereas, the company's
business comps declined 5% year over year.
Quarterly gross profit jumped 14.1% year over year to $1,427
million, primarily due to lower input costs. Consequently, gross
margin expanded 300 basis points (bps) to 39.9%.
Gap's operating income for the quarter came at $425 million, up
from the prior-year quarter operating income of $334 million.
Moreover, operating margin expanded 200 bps to 11.9% due to an
expansion in gross margin. Operating expenses increased $85 million
from the previous-year quarter due to increased marketing expenses
for promoting Gap brand and enhancing customer relationships.
Moreover, with efficient inventory management, the company's
inventories were down 6% from the prior-year quarter level.
Further, Gap is expecting inventory levels to decline in the low
single-digit range at the end of the third quarter of fiscal 2012
on a year-over-year basis.
Balance Sheet, Share Repurchases and Dividend
At the end of the second quarter of fiscal 2012, the company has
cash and cash equivalents and short-term investments of $2,114
million compared with $2,179 million in the year-ago period.
Besides, free cash flow during the first six months of fiscal 2012
was $673 million compared with $298 million in the previous-year
quarter. The company's shareholders equity was $2,898 million.
Gap's total number of outstanding shares declined about 12.1% to
479 million from 545 million reported in the prior-year
During the six month period, the company has made a capital
expenditure of $297 million and expects to expend $675 million in
fiscal 2012. During the quarter, the company deployed $349 million
of cash toward share buybacks.
In the quarter, Gap paid a quarterly dividend of 12.5 cents per
share, an increase of 11% from the prior-year quarter.
In the second quarter, Gap opened 29 company-operated stores and
shuttered 20 locations, bringing the total company-operated store
counts to 3,035. Moreover, in the same quarter, the company opened
8 stores and closed 2 stores in franchise business, bringing the
total franchise store counts to 250.
In an effort to improve customer experience and boost
productivity per square footage, the company plans to strategically
close and consolidate square footage at Gap and Old Navy brands. In
2012, Gap intends to net open 15 company-operated stores and 50 -
75 franchise stores in different locations. Moreover, it also
expects to decrease net square footage by 1% in fiscal 2012. In the
second quarter, the company's net square footage decreased 2% to
36.8 million from 37.7 million in the previous-year quarter.
Fiscal 2012 Earnings Outlook Up
Better-than-expected quarterly performance has prompted
management to raise its fiscal 2012 earnings guidance. The company
now expects earnings in the range of $1.95 - $2.00 per share for
fiscal 2012, an increase of 25% to 28.2% from fiscal 2011. Earlier,
Gap was expecting earnings in the range of $1.78 - $1.83 per share
for fiscal 2012, an increase of 14% to 17% from fiscal 2011. The
current Zacks Consensus Estimate stands at $2.08 per share, above
the company's new guidance range. Moreover, Gap is now anticipating
an increase of 11% in operating margin during fiscal 2012, up from
previous guidance of 10%.
We believe that the company's long-term strategic moves along
with disciplined cost management measures will not only provide
financial flexibility, but will also help the company to drive
value proposition. Moreover, Gap's globally recognized brands
complement each other, enabling it to leverage its position in the
Further, in order to boost the international operations, Gap
consolidated its foreign business under one division from London.
Lackluster sales in North America compelled the company to explore
business in other regions. To counter the domestic market
saturation, Gap is aiming to generate 30% of total sales from its
overseas operations and online business by 2013. For this, Gap has
opened stores in China, Italy and Australia and has launched an
e-commerce business in more than 90 markets. These initiatives are
expected to bolster the company's top- and bottom-line performance,
However, Gap operates in a highly fragmented market and competes
with national and local department stores and discount stores, such
American Eagle Outfitters Inc.
The TJX Companies Inc.
), which offer products at fire sale prices. To retain the existing
market share, the company may have to slash sales prices, which
could affect its margins.
Gap's shares carry a Zacks #1 Rank, which translates into a
short-term Strong Buy rating. However, our long-term recommendation
on the stock remains 'Neutral'.
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