Driven by continued increase in sales along with improved
margins and a lower share count,
) earnings of 63 cents a share for the third quarter of fiscal
2012 soared 66.0% from 38 cents reported in the comparable
prior-year quarter. Further, the quarterly earnings came in line
with the Zacks Consensus Estimate.
Quarter in Detail
During third-quarter, Gap's net sales increased 8.0% year over
year to $3,864.0 million from $3,585.0 million in the
previous-year quarter. Moreover, the company registered a growth
of 6% in its comps against a 5% decline in the prior-year period.
However, quarterly sales missed the Zacks Consensus Estimate of
The company's third-quarter comps mainly benefited from the
continued positive trend in its North American business, Gap,
Banana Republic, and Old Navy. During the quarter, comps at the
Gap North America
Banana Republic North America
Old Navy North America
improved 7%, 6% and 9%, respectively. Whereas the company's
business comps declined 3% year over year.
Quarterly gross profit jumped 21.2% year over year to $1,593.0
million, primarily due to lower input costs. Consequently, gross
margin expanded 450 basis points (bps) to 41.2%.
Gap's operating income for the quarter came at $520.0 million,
up from the prior-year quarter operating income of $346.0
million. Moreover, operating margin expanded 380 bps to 13.5% due
to an expansion in gross margin. Operating expenses increased
$105.0 million from the previous-year quarter due to increased
marketing expenses for promoting Gap brand and enhancing customer
Moreover, with efficient inventory management, the company's
inventories were down 4.0% from the prior-year quarter level.
Further, Gap is expecting inventory levels to increase in the low
single-digit range at the end of fiscal 2012 on a year-over-year
Balance Sheet, Share Repurchases and
At the end of the third quarter of fiscal 2012, the company
has cash and cash equivalents and short-term investments of
$1,770.0 million, compared with $1,417.0 million in the year-ago
period. The company's shareholders equity was $3,161.0
Gap's total number of outstanding shares declined about 3.4%
to 488.0 million from 505.0 million reported in the prior-year
quarter. Lower share count in the quarter contributed about 2
cents to earnings per share in the quarter.
Free cash flow during the first nine months of fiscal 2012 was
$776.0 million compared with $222.0 million in the last year
period. During these nine months, the company has made a capital
expenditure of $449.0 million and expects to expend $675.0
million in fiscal 2012. During the quarter, the company deployed
$96.0 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.
Further, Board of Directors sanctioned a quarterly dividend of
12.5 cents to be payable on January 30, 2013, to the stockholders
of record as on January 2, 2013.
In the third quarter, Gap opened 46 company-operated stores
and shuttered 13 locations, bringing the total company-operated
store counts to 3,068. Moreover, in the same quarter, the company
opened 25 stores and closed 4 stores in franchise business,
bringing the total franchise store counts to 271.
In an effort to improve productivity per square footage, the
company plans to strategically close and consolidate square
footage at Gap and Old Navy brands. In 2012, Gap continues to
anticipate net openings of 15 company-operated stores and 50 - 75
franchise stores in different locations.
Moreover, it expects to decrease its net square footage by 1%
in fiscal 2012. In the third quarter, the company's net square
footage decreased 2% to 36.9 million from 37.6 million in the
Fiscal 2012 Earnings Outlook Up
Healthy quarterly performance has prompted management to raise
its fiscal 2012 earnings guidance. The company now expects
earnings in the range of $2.20-$2.25 per share for fiscal 2012,
an increase of 41%-44.2% from fiscal 2011. Earlier, Gap was
expecting earnings in the range of $1.95-$2.00 per share for
fiscal 2012, an increase of 25%-28.2% from fiscal 2011. The
current Zacks Consensus Estimate stands at $2.25 per share, in
line with the company's new guidance range. Moreover, Gap is now
anticipating an increase of 12.0% in operating margin during
fiscal 2012, up from previous guidance of 11.0%.
One of the company's peers
Ross Stores Inc.
) recently reported earnings of 72 cents per share for
third-quarter 2012, in line with the Zacks Consensus Estimate.
The quarterly results grew 14% from the prior-year level of 63
cents a share.
We believe the company's relentless focus on turnaround
strategies for improvising the top line are paying off, which is
reflected in its solid comps and sales performance in the recent
months. The company has now posted positive comps for four
consecutive months (July, August, September and October).
Further, Gap's long-term strategic moves, along with
disciplined cost management measures will not only provide it
financial flexibility, but will also help reduce operating
expenses. Moreover, Gap's globally recognized brands complement
one another, enabling it to leverage its position in the
Currently, Gap's shares maintain a Zacks #2 Rank, which
translates into a short-term Buy rating. Our long-term
recommendation on the stock remains Outperform.
GAP INC (GPS): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis
To read this article on Zacks.com click here.