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Building Up Gap: As Net Climbs 55%, Chain Plots Acquisitions

Gap Inc.’s earnings more than doubled to $312 million in the first quarter on sales that gained 9.4 percent to $3.67 billion.

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NEW YORK — Gap Inc.’s turnaround has legs. And they’re steady enough for the retailer to actively pursue growth opportunities — including an acquisition or two.

Also on Gap’s plate is the launch this July of a women’s plus size line at Old Navy targeting the younger customer, management said on a conference call after posting stellar first-quarter results.

This story first appeared in the May 21, 2004 issue of WWD.  Subscribe Today.

On Thursday, the specialty retailer reported a 54.5 percent jump in net income, boosted by higher sales, better inventory controls and stronger customer response to the merchandise across the retailer’s three distribution channels.

Paul Pressler, president and chief executive officer, said, “We are delighted with the progress we are making in the business.”

He noted that for the company, the turnaround phase has been “all about getting the business back on stable ground.”

Gap Inc. suffered 10 consecutive quarters of negative same-store sales until October 2002 when it posted its first same-store sales gain. Since then, quarterly comps have remained in the black.

The firm has been focused on gaining a deeper understanding of how to serve the Gap customer, elevating the designs at Banana Republic with a focus on affordable luxury, and determining how to maximize the customer segment at Old Navy.

While Pressler said that there’s still more work ahead, Gap is also looking at opportunities that are available. He noted that the company sees “not just one, but multiple opportunities.” One area of focused attention is how to obtain growth within the value sector, the ceo said. Other considerations involve reviewing key customer demographics that are not currently served by the current offerings by each of the three brands.

Net income for the three months ended May 1 skyrocketed to $312 million, or 32 cents a diluted share, from $202 million, or 22 cents, in the year-ago quarter. Sales gained 9.4 percent to $3.67 billion from $3.35 billion, while comparable store sales rose 7 percent on top of last year’s 12 percent comps gain.

Comps were strong in the U.S. The Gap U.S. store division was up 5 percent versus 12 percent last year, while its Gap international business was down 5 percent against a positive 13 percent a year-ago. Sales were essentially flat at $1.2 billion for the U.S. business in the same two time periods, but rose to $437 million from $412 million a year ago for the international operation.

In its other divisions, Banana Republic’s comps came in with a 21 percent increase against last year’s 1 percent. Sales increased to $503 million from $411 million last year. At Old Navy, comps rose 9 percent compared with a 16 percent gain last year, while sales inched up to $1.5 billion from $1.4 billion.

Jenny Ming, president of Old Navy, noted that the division is celebrating its 10th birthday, and has spent the past year focused on rolling out maternity to 160 stores so far, as well as looking to build awareness of the brand in the Hispanic marketplace.

As for Old Navy’s new venture, the plus size line will showcase the fall assortment in 55 stores and online. Ming pointed out that women in their 20s make up the fastest-growing group within the plus size sector. The line, highlighted in a shop-within-a-shop format, will include an increase in fashion options for the consumer.

Gap’s earnings were announced after the financial markets closed. Before earnings were released, however, the expectation among some analysts was that if Gap can continue its upward trend, there is a chance it may regain investment grade rating within a year.

Gap’s debt ratings have been raised by both Moody’s Investors Service and Fitch Ratings. Margaret Mager, analyst at Goldman Sachs, wrote in a report on Thursday before Gap announced its results that the retailer continues to “improve its fundamentals through inventory controls, targeted markdown management and more regular-price selling.”

Mager noted, “While all credit rating agencies still rate [Gap] debt noninvestment grade, we believe an investment grade rating could be achieved in the next nine to 12 months.”

According to SG Cowen analyst Lauren Cooks Levitan, the rating upgrades highlight the operational improvements that Gap has made, and if proven sustainable, paves the way for further upgrades.

Also posting stellar first-quarter results Wednesday was specialty retailer Aeropostale, which reported net income climbing 196.4 percent to $6.3 million, or 11 cents, from $2.1 million, or 4 cents, in the prior year on sales that rose 49.4 percent to $167.7 million from $112.2 million.

Same-store sales increased 18.9 percent while sales per square foot by the end of the quarter rose to $97.50 from $82.10.

The gross-margin rate jumped to 29.3 percent in the quarter ended May 1 from 27 percent in the prior year while selling, general and administrative costs as a percent of sales fell to 23.3 percent from 24 percent.

Julian R. Geiger, chairman and ceo, said in a statement the firm’s “positive momentum continues, and we are excited about our prospects for the remainder of the year.”

In turn, management raised its earnings guidance for the second quarter, and expects comp sales to “achieve high single digits” with earnings coming in around 11 cents versus 7 cents in the prior period.

The Wet Seal Inc. also reported quarterly results, but both the top and bottom lines showed deep erosion. The net loss was $20.3 million, or 68 cents, in the quarter ended May 1, compared with a loss of $8.5 million, or 29 cents, in the prior year on sales that fell 17 percent to $99.8 million from $120.2 million.

Excluding the firm’s Zutopia division, which is discontinued, the net loss per share from continuing operations was 53 cents versus an adjusted loss of 25 cents in the prior year.

Peter D. Whitford, ceo of Wet Seal Inc., said in a statement, “Consistent with our turnaround plan, we are not anticipating a significant change in momentum in our business until the third quarter, when we expect to see the full benefits of our new merchandise assortment and all of our planned marketing initiatives.”

— With contributions from Arthur Zaczkiewicz

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