After three quarters of losses, Gap reported its second consecutive profitable quarter late Thursday and, while earnings were down, they came in above expectations.
The San Francisco-based firm, the largest specialty apparel retailer in the nation, said late Thursday that it managed to eke out a profit of $56.8 million, or 6 cents a diluted share, for the second quarter ended Aug. 3. However, that is 36.7 percent lower than year-ago results of $89.8 million, or 10 cents.
Sales for the quarter notched up 0.7 percent to $3.27 billion from $3.25 billion. Comps decreased 7 percent on top of a 9 percent drop last year. All divisions landed in negative comp territory — Gap, 13 percent; Banana Republic, 5 percent, and Old Navy, 1 percent. Sales productivity per square foot fell to $86 from $94.
"I am pleased with the changes we made and the progress we are now seeing in the brands," Millard "Mickey" Drexler, Gap Inc. president and chief executive, said on a conference call. "The merchandise is more balanced and the inventory is more in tune with what the customer expects. We feel good about how the stores look and customers tell us they like what they see and we feel comfortable we are heading in the right direction."
Drexler announced in May that, upon appointment of his successor, he would leave the firm that he built into an American institution after 19 years.
Last week the company announced that despite the higher-than-expected drop in July comparable store-sales, its 28th consecutive decline, it raised its forecast to range between 4 and 5 cents. Accordingly, analysts raised their guidance to 5 cents from 3 cents.
Gap is betting on its fall assortment to work as inventories are expected to increase over last year’s depressed levels. Inventories ended the quarter down 14 percent at $1.9 billion, helping to lift merchandise margins at Gap’s three U.S. divisions, but are planned more conservatively for the balance of the year. Third-quarter stocks should be down in the low-single digits and fourth quarter’s up a similar amount.
Gap has seen the same early-August softness as other specialty retailers and currently trails expectations for the month. It’s hoped that its new TV commercials and magazine ads will help its sales plight, and it plans to continue to run sales events to stimulate traffic.Struggling to regain its once sure footing after two years of declines, Gap will be waging battle against a sluggish economy at the same time that it comes up against easier sales and comp comparisons in the back half of the fiscal year.
Last week, Gap unveiled its "For Every Generation" global marketing campaign, focusing on its heritage as an iconic brand. In addition to a mix of spreads and multi-page inserts in magazines and newspapers, Gap Thursday night began a television campaign directed by Peter Lindbergh. The eight 30-second spots each feature a specific jeans fit.
During the second quarter, Gap increased its square footage by 8.7 percent, ending the quarter with 3,139 locations containing 4,261 nameplates. Heidi Kunz, chief financial officer, said she is expecting square footage to grow 3 percent for the year.
Speaking of his new role as president of Gap brand, Gary Muto, said, "We remain confident in the overall direction of the merchandise assortment. Getting the product right is my number-one priority."
For the first half, net income plummeted 54.5 percent to $93.5 million, or 11 cents a diluted share, compared to income of $205.2 million, or 23 cents. Sales sank 4.1 percent to $6.16 billion from $6.42 billion
"Although our business is currently pressured by continued negative traffic trends, we believe we’ve achieved much of what we set out to do strategically in the first half of the year," Drexler said in a statement. "The foundation is in place for ongoing improvement at each of our brands. Our merchandise now reflects the quality and style our customers expect from us."
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