By  on February 26, 2010

Gap Inc., citing momentum at the Old Navy division and strong cost controls, posted a fourth-quarter earnings increase of 45 percent and revealed plans this year to expand into Italy and China.

Gap on Thursday reported net profits of $352 million, or 51 cents a diluted share, for the fourth quarter ended Jan. 30 versus $243 million, or 34 cents, a year ago. Sales rose to $4.24 billion from $4.08 billion, with a 2 percent rise in comparable-store sales. Online sales increased 3 percent to $329 million.

For the year, total earnings reached $1.1 billion from $967 million, with earnings per share rising 18 percent to $1.58 from $1.34. Net sales were $14.2 billion compared with $14.53 billion, and comparable-store sales decreased 3 percent. The company’s online sales increased 9 percent to $1.12 billion, compared with $1.03 billion in the prior year.

For 2010, the company expects diluted earnings per share of $1.70 to $1.75 and operating margin to grow to about 13 percent. Gap ended the fourth quarter with $2.6 billion in cash and cash equivalents and short-term investments.

“Led largely by our progress at Old Navy, we ended 2009 with a much-improved economic model and strong balance sheet,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “We’re now ready for our business to grow and move forward, as we aim to gain market share in North America and make a series of investments to bring our well-known brands to more customers around the world.”

With strong cash flow and growing confidence in its performance, particularly on the financial side and with Old Navy, Gap raised its annual dividend 18 percent to 40 cents from 34 cents, and authorized an additional $1 billion in share repurchases on top of the 24 million shares purchased for $510 million last year.

In addition, the San Francisco-based retailer said it will expand into Italy and China late in 2010. Aside from operating stores for all divisions in the U.S. and Canada, Gap brand has stores in Japan, the U.K., France and Ireland, while Banana Republic has units in Japan and the U.K.

Specifically, Gap and Banana Republic flagships will open side-by-side in Milan, on the Corso Vittorio Emanuele. The three-level, 25,500-square-foot Gap in Milan will sell Gap, GapKids, babyGap, GapBody and GapMaternity. The 17,500-square-foot Banana Republic there will sell the women’s and men’s ready-to-wear, accessories and personal care products. Rome is on the agenda for 2011 as well, and in China, the company is planning Gap brand stores. Separately, Gap has franchises in 19 countries.

“You won’t hear anyone talking about a turnaround plan. We have started talking about how the business is going to grow,” Murphy said on a conference call.

Remodels are accelerating at all brands, with 160 additional Old Navys set, bringing the total to 250 by year end. Gap and Banana Republic are also moving forward on remodels. The company is also furthering the “supermodelquin” campaign, relaunching kids’ denim this year, and “finding more ways to speak about product,” Murphy said.

“One brand may not be doing well, but the corporation still delivers results,” Murphy said. “Now we have to be more of a market share gaining organization in a mature North American market.”

As far as the Gap brand, “business is not improving at a rate that I think people in the analyst and shareholder community has expected,” though there were fairly noticeable improvement in January and December comps, he added.

He cited “a drumbeat making sure the denim message stays front and center. There’s pressure on the team to make sure there is news in our most important category. It is critical to get Gap back on the trend and trajectory it needs to go on. I do think there are some evolving and improving components of the Gap brand.”

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