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Cost Controls Drive Gap Profits

Through inventory control and expense reductions on several fronts, Gap Inc. generated higher earnings for the first quarter despite eroding sales.

Through inventory control and expense reductions on several fronts, Gap Inc. generated higher earnings for the first quarter despite eroding sales.

This story first appeared in the May 23, 2008 issue of WWD.  Subscribe Today.

The San Francisco-based operator of Gap, Old Navy and Banana Republic said earnings increased 40 percent to $249 million, or 34 cents a share on a diluted basis, compared with $178 million, or 22 cents a share, for the first quarter last year.

Earnings from continuing operations for the first quarter of 2008 were up 21 percent to $249 million compared with $205 million last year.

Earnings from continuing operations exclude the loss from the discontinued Forth & Towne stores.

First-quarter sales slipped to $3.38 billion, compared with $3.55 billion last year. Comparable-store sales decreased 11 percent, compared with a decrease of 4 percent in the first quarter of the prior year.

Online sales increased 21 percent to $236 million, compared with $195 million for the first quarter of last year.

“We are pleased with our first-quarter results, as we delivered solid earnings growth in a difficult environment,” said Glenn Murphy, chairman and chief executive officer. “Looking ahead, we are focused on bringing compelling product and shopping experiences to our customers while managing costs tightly. We believe this approach is proving even more prudent given the current economic conditions.”

Comp sales were down in all divisions, with Gap North America off 7 percent, Banana Republic down 4 percent, Old Navy North America down 18 percent and the International stores at negative 5 percent. Inventory per square foot was down 17 percent in the quarter. Capital spending was $114 million.

Gap reported reductions in inventory and store payroll, as well as fewer remodels, all bringing down costs. There were also lower marketing expenses during the quarter, which Murphy characterized as “undoubtedly one of the toughest periods in recent history.”

He said the team was “driving a healthier margin business through solid inventory management, reducing and containing costs and taking a more disciplined approach to capital spending.”

However, he didn’t mince words on the challenges ahead. “We see no signs of improvement in the psyche of the American consumer. We need to internally advance the dialogue of how we will, at the right time, begin to stem and recapture our lost market share.”

 

He did say that at Gap brand, “customers are responding positively to our renewed focus on color and modern classics.”

But Old Navy “struggled” through the quarter. “The women’s business is certainly an issue. We have the right level of focus and a sense of urgency is being applied. The bottom line is we are not happy.”

He also discussed how Gap was working to get stores better information on inventory and sales, on a door-by-door basis, which is important. “Last November, I was personally disappointed on how vanilla and generic our stores were around the country.”

On store closings, Murphy said, “We will be closing stores going forward but at a decelerated rate. More store closures are in our future for the next three years, but the real opportunity comes from looking at the square footage of the store,” meaning right-sizing in many cases.

Most closings will come at the Gap brand, but all told there will be 115 store closings, corporate-wide, with about the same number of openings for no net gain in square footage.

During the first quarter, Gap brand cut $20 million in marketing at Gap brand.

The Gap reaffirmed its earning guidance of 8.5 to 9.5 percent of operating margin, and has a longer-term goal of around 12 percent.