Old Navy Helps Limit Gap Net Slide

Old Navy profits helped Gap Inc. exceed expectations in the first quarter. Buckle again shines, while Aeropostale and PacSun post improved Q1 results.

The Buckle set the pace for earnings with a 43.5 percent profit increase.

Old Navy, long the Gap Inc.’s biggest problem, became something of a savior in the first quarter as the division’s improved results helped its parent firm exceed expectations despite a 13.7 percent profit decline.

This story first appeared in the May 22, 2009 issue of WWD.  Subscribe Today.

Net income for the three months ended May 2 totaled $215 million, or 31 cents a diluted share, 1 cent better than analysts’ consensus estimates but below the $249 million, or 34 cents, reported for the year-ago quarter.

Net sales fell 7.6 percent to $3.13 billion. While comparable-store sales fell 8 percent, Old Navy registered the smallest decline, 3 percent, versus slides of 12 and 13 percent for the North American units of Gap and Banana Republic, respectively.

Gap’s results came after the close of the market, as did improved bottom-line results from Aéropostale Inc. and Pacific Sunwear of California Inc. However, Zumiez Inc. weighed in with a loss versus a year-ago profit, although its results were somewhat better than analysts had expected.

Raising the performance bar to a level not matched by its specialty store competitors, The Buckle Inc. reported strong results before the market opened.

During an earnings call Thursday evening, Gap chairman and chief executive officer Glenn Murphy appeared to summarize the feelings of many retail executives during this first-quarter earnings season.

“The market conditions from our perspective continue to be challenging,” Murphy said. “I don’t think any business would ever want to produce results below last year, but with the conditions which we’re operating in, I think it was respectable, and versus a lot of our competitors, I was pleased with our performance.”

Murphy credited the results to a “more efficient economic model,” which gave the company a quarterly gross margin of 39.6 percent of sales, only fractionally below the 39.7 percent of last year’s first quarter.

Operating expenses were reduced 7.6 percent to $886 million, while marketing costs inched up 3.2 percent to $96 million, as the company put more money into the marketing campaigns of Old Navy and Athleta, the athletic concept acquired by Gap last September.

The strategy paid off as net sales at Old Navy dipped just 4.8 percent to $1.18 billion, and revenues at the company’s direct division jumped 13.1 percent to $267 million, thanks to the addition of Athleta to the company Web site last month.

“I think it’s one step at a time,” Murphy said of Old Navy. “As we look forward to the second quarter, we have to evolve the [marketing] campaign.”

Elsewhere, quarterly sales at Gap North America contracted 14.5 percent to $834 million, while Banana Republic’s declined 11.7 percent to $475 million.

Murphy acknowledged the need for increased marketing spend at Gap in order to drive traffic, but he also focused on the need for the brand to improve its merchandise.

“I do feel confident with the product at Gap,” he said. “We are really finding a way to speak to the customer.”

After The Buckle blew past analysts’ estimates with a 43.5 percent profit increase Thursday morning, shares of the Kearney, Neb.-based specialty retailer rose 5.3 percent to $34.57 later in the day.

Net income rose to $26.9 million, or 58 cents a diluted share, as sales in the quarter rose 24.6 percent to $199.7 million and grew 17.7 percent on a same-store basis. Analysts polled by Yahoo Finance expected earnings of 50 cents on sales of $195.4 million. Gross margin improved to 43.4 percent of sales versus 40.9 percent a year ago, principally on lower markdowns.

The company said its women’s business grew to 59.5 percent of the total, up from 55 percent in last year’s quarter, while men’s receded to 40.5 percent from 45 percent. Men’s average price points increased 9 percent to $48.05, while women’s price points rose 5.5 percent, to $41.10, in the year-ago quarter. Private label eased to about 28 percent of sales, from slightly under a third a year ago.

“Right now, there’s several good things going on with the brands, so that’s just taking the growth out of the private label at this point,” president and ceo Dennis Nelson said on the company earnings call.

The company opened six stores and closed one store during the quarter and anticipates opening 21 stores this year. It has 392 stores in operation.

Like Buckle, Aéropostale finished the quarter with higher sales and profits, but fell 1 cent short of analysts’ earnings expectations.

Net income rose 81 percent to $31.7 million, or 47 cents a share, from $17.5 million, as sales bounded 21.3 percent to $408 million and comps grew 11 percent.

Julian Geiger, chairman and ceo, said consumers would remain price-sensitive for the foreseeable future, but that the company would continue to keep up with fashion trends.

“While price is important, product is more important,” he noted on an earnings call Thursday afternoon.

The firm projected second-quarter earnings of 43 to 45 cents a diluted share, up from 31 cents a year earlier. Aéropostale has 911 North American stores targeting 14- to 17-year-olds.

Pacific Sunwear of California wasn’t able to generate a profit, but it did significantly shrink its first-quarter loss. However, the company continued to see its sales decline and said it expects more contraction ahead.

The Anaheim, Calif.-based teen retailer posted a loss of $8.7 million, or 13 cents a diluted share, compared with a loss of $37.1 million, or 53 cents a share, a year ago. Excluding charges from discontinued operations, the year-ago loss was 17 cents.

Sales in the first quarter fell 16.3 percent to $223.5 million while comps eroded 18 percent.

The loss was 16 cents better than analysts had expected.

Based on expectations of a decline of 17 to 20 percent in comps, it projected a loss of between 11 and 17 cents in the current quarter.

PacSun’s neighbor to the north, Zumiez, fell to a loss from a profit in the quarter, aggravated by double-digit comp declines.

The Everett, Wash.-based board sports apparel retailer recorded a loss of $1.7 million, or 6 cents a share, versus net income of $1.4 million, or 5 cents, a year ago. Net sales fell 2.4 percent to $76.8 million as comps stumbled 15.3 percent.

The loss was better than the 8 cents expected by analysts.

Rick Brooks, ceo, said the company is cautious about its near-term prospects, but believes it can expand its market share as the consumer environment improves. The company plans to open 36 stores in fiscal 2009.

Like PacSun, Zumiez expects continued comp declines in the low- to mid-20 percent range in the second quarter. The net loss for the period is expected to range between 14 and 17 cents a share.