By  on May 13, 1994

NEW YORK -- Strong sell-throughs of its fashion offerings helped The Gap Inc.'s earnings jump 53 percent in the first quarter ended April 30, surpassing Wall Street's estimates.

Earnings totaled $63.5 million, or 44 cents a share, up from $41.5 million, or 29 cents, a year earlier. Wall Street's average estimate for the latest quarter was 37 cents a share.

Sales climbed 17 percent to $751.7 million from $643.6 million. Same-store sales advanced 7 percent versus a 1 percent decline a year earlier.

Donald G. Fisher, chairman and chief executive officer, said the performance reflected a strong consumer response to its fashion merchandise, especially women's offerings.

"Merchandise margins improved significantly -- the result of higher initial margins and less promotional activity than in last year's first quarter," Fisher said.

Gross margins jumped to 38.5 percent of sales from 34.1 percent, while inventories declined 4.1 percent to $346.5 million, impressing Wall Street. "They continued to get a continued good response to Gap fashion and that drove merchandising margins up," said Thomas H. Tashjian, at First Manhattan Co., pointing out that fashion merchandise typically carries much higher prices and margins than basics.

Gap Kids and Banana Republic outperformed the Gap stores, but all divisions racked up strong performances, analysts said.

"Every part of the business across the board was strong, particularly sales and margins," said Barry Bryant, an analyst at Ladenburg, Thalman & Co.

Bryant said women's fashion apparel in particular boosted margins at the Gap stores chain and Banana Republic.

The Gap's same-store sales were estimated to have risen about 5 percent. Analysts said this division was helped by tight control over expense and inventory, with margins benefiting from more women's fashion offerings.

Tashjian said the company's new Workout activewear line, which is now in 300 Gap stores, shows the company's ability to differentiate its core basic offerings to gain higher price and margins. The Gap chain has also introduced shoes in about 100 stores.

Banana Republic is estimated to have shown a same-store gain in the high teens, with margins also benefiting from a good response to additional women's fashion offerings.Banana Republic recently added a line of small leather products and a narrow assortment of jewelry to its merchandise mix, which has seen excellent sell-throughs.

At Gap Kids, same-store sales were estimated to have climbed in the low double digits. The Baby Gap prototype, which has been rolled out to nearly all Gap Kids stores, continues to perform well. In Canada, where the company operates 41 Gap stores and 23 Gap Kids stores, sales and earnings were strong, analysts said. Banana Republic plans to enter Canada with three stores in 1995.

The Gap's United Kingdom stores are profitable despite higher occupancy costs than U.S. sites. In the United Kingdom, the Gap has 45 stores; 10 are Gap Kids units.

Analysts estimate that the new Old Navy Clothing Co. store concept, which targets the mass middle-market customer, will have 45 to 50 units open by yearend, with many representing conversions of the Gap Warehouse stores. The first three Old Navy stores opened in March.

Tashjian expects the company to show a 20 percent increase in square footage this year, with 40 percent representing the launch of the Old Navy concept.

In all, The Gap is projecting capital expenditures of around $275 million in 1994 to open 185 to 200 new stores and expand 90 stores.

The Gap chain, which currently has 772 stores in the U.S., expects to add about 45 more this year. Banana Republic, with 179 stores currently, is expected to add about 20. Gap Kids, which has 283 stores in operation, is slated to open 45 to 50, while 25 to 30 international openings are planned this year.

The Gap's stock closed at 45 1/4, up 3/8, on the New York Stock Exchange.

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