Gap Inc. First-Quarter Profit Jumps
Thursday May 22, 8:01 pm ET
By Jean Scheidnes
NEW YORK (Reuters) - Gap Inc. (NYSE:GPS - News) on Thursday reported a sharp rise in first-quarter profit, as more broadly appealing clothes helped lift sales without the need for aggressive discounting.
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The company marked its third consecutive quarter of earnings growth, as it regains its share of a shrinking U.S. apparel market. The company also has reported seven straight months of same-store sales growth, following a 29-month slide.
The largest U.S. specialty apparel retailer said earnings were $202 million, or 22 cents per diluted share, for the fiscal quarter ended May 3. That compared with $37 million, or 4 cents per share, in the prior year.
The San Francisco-based company, which operates 4,241 Gap, Old Navy and Banana Republic stores, earlier this month forecast earnings of 19 cents to 22 cents per share, which was higher than analysts' estimates at the time.
Analysts then adjusted their estimates to a mean of 21 cents, according to research firm Thomson First Call (News - Websites).
The company said its margin growth was driven by Old Navy and Gap domestic, its two largest divisions.
A year ago, Gap was still mired in a two-year slump, during which an ill-fated attempt to attract trend-conscious teens alienated older customers who missed the casual classics, and merchandise became too similar across the three chains.
For the past several months, the company has focused on clothes that appeal to a broad range of ages and marketing that distinguishes its three brands from each other.
EASY COMPARISONS?
"They're probably doing everything right, right now. But this improvement has come on top of very easy comparisons. The real test is going to be the second half of this year, when they're up against tougher sales and gross margin comparisons," said Howard Tubin, analyst for Cathay Financial LLC, a New York-based brokerage firm.
The first quarter was a struggle for most apparel retailers, as adverse weather and worries about the war in Iraq and the U.S. job market kept consumers from spending freely. This left the industry with excess inventory that could lead to steep markdowns in the second quarter.
But analysts said they were comfortable with Gap's inventory level of $2.1 billion because the year-earlier level of $1.8 billion was unusually low.
"Inventories were only marginally above sales growth. That is better than many other retailers that have reported," said analyst Emme Kozloff of Bernstein.
First-quarter sales rose 16 percent to $3.4 billion. Same-store sales, or sales at stores open at least a year, rose 12 percent after a 17 percent decrease in the prior year.
The namesake Gap stores are probably taking back market share from virtually all of its mall-based competitors, including teen chains American Eagle Outfitters Inc. (NasdaqNM:AEOS - News) and Abercrombie & Fitch Co. (NYSE:ANF - News), analysts said.
"The product is so good, I think they're gaining a lot of ground with teens. I don't think they're going after that business, I think it's just happening," said Jennifer Black of Wells Fargo Securities.
Analysts believe the lower-priced Old Navy stores, which have clothes for all ages under one roof, are taking share from discounters and department stores, including Target Corp. (NYSE:TGT - News), Kohl's Corp. (NYSE:KSS - News), Wal-Mart Stores Inc. (NYSE:WMT - News), J.C. Penney Co. Inc. (NYSE:JCP - News) and Sears, Roebuck and Co. (NYSE:S - News)
Gap shares closed up 55 cents, or 3.3 percent, at $17.20 on the New York Stock Exchange (News - Websites) before the release of the data.
(Additional reporting by Jackie Sindrich.) |
