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Gap Inc. Net Climbs 60%

Third quarter comparable sales increased 6 percent.

Gap Inc., citing strength in key categories and full-price selling and a reversal of negative comps across U.S. divisions, reported a strong third quarter on Thursday.

This story first appeared in the November 16, 2012 issue of WWD.  Subscribe Today.

After years of being criticized as boring and losing relevance, the $13 billion San Francisco-based retailer appears to be moving closer to achieving a turnaround and on its way to its best year in recent history.

Net income for the quarter ended Oct. 27 reached $308 million, up 60 percent compared to $193 million reported in the same period last year. Third-quarter diluted earnings per share rose 66 percent to 63 cents, compared with 38 cents last year.

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Gap, which operates Gap, Old Navy, Banana Republic, Piperlime and Athleta, raised its guidance for fiscal year 2012 diluted EPS to $2.20 to $2.25, up from the August forecast of $1.95 to $2. This compares with diluted earnings per share of $1.56 in fiscal 2011.

Net sales for the third quarter increased 8 percent to $3.86 billion, compared with $3.59 billion for the same period last year. Third-quarter comparable sales increased 6 percent.

The company did not forecast fourth-quarter sales, unlike other retailers such as The TJX Cos. Inc. and Saks Inc., which have forecast downward partly because of Hurricane Sandy. Gap, however, was optimistic about the upcoming holiday season.

“We’re very pleased with our strong third-quarter financial performance, highlighted by how well customers have responded to our product,” said Glenn Murphy, Gap Inc.’s chairman and chief executive officer. “We are ready to compete and win this holiday season as we drive to build upon our top-line growth.”

In after-hours trading Thursday, Gap shares rose 3.4 percent, or $1.14, to $34.40. They closed at the bell at $33.26. Murphy said Gap, Old Navy and Banana Republic all had very good performances, collectively up 8 percent. “It was product-led. It’s key categories. Comp is an outcome,” he said.

He said that since spring, the Gap division’s elevated denim offering has driven the overall business and has been bringing in the right customers. He also cited Gap’s baby business; men’s and women’s suiting at Banana Republic, along with woven tops and at Old Navy, denim, specifically the “rock star” jean, and the kids business.

“The execution of the plan for the last 15 months has been good,” Murphy said during a conference call.

He listed some of the major shifts in the company’s approach to products and brands, citing a more wear-now approach. “We have been pushing new arrivals. The number of weeks Old Navy receives fresh new product is the highest it’s ever been,” he said.

He also explained why last month’s management restructuring installing global leaders over all the brands is important in moving the company away from being too America-centric. “Customers are clearly becoming more and more global,” Murphy said. “It’s very important to have one lens looking across the brands in all channels in all different countries.…It is important to understand local needs of our customers, but this is a global approach first.” This will lead to a much more consistent approach in assortments around the world, though they won’t be identical, Murphy said.

He also said he is comfortable with the company’s performance in China, and that four outlets will open there; Athleta continues to perform well in any kind of setting, be it a mall, a street location, a strip or lifestyle center.

Regarding pricing, Murphy said, full-price selling has been decent, adding, “Our actual initial pricing is very sharp, so our goal midterm and long term is to reduce our dependency to get off those prices. This is really early days for how high the bar can be on regular price selling.”

However, Murphy was balanced in his assessment of the business, noting that traffic —long a major problem — is still noticeably stronger in the value businesses (Old Navy and the outlets) than in Gap or Banana Republic. “It’s not a disaster. It’s just not what we believe it should be long term,” he said.

Murphy also said that after years of downsizing domestically, next year will be the last. All the closures did drag down sales. “If there is one area where productivity is the most significant opportunity is at Gap brand specialty,” he said.