Gap Profits Up 29%

Sales rise 6 percent.

Has Gap Inc. finally turned itself around?

He didn’t exactly say that, but in his most upbeat conference call since joining Gap Inc. in 2007, chairman and chief executive officer Glenn Murphy said Gap’s second quarter was marked by “a lot of bright spots” and fueled by having the right styles, capitalizing on color, focusing on fit, and making “targeted investments in key categories where we wanted to dominate” including babyGap, denim, and suits and woven shirts at Banana Republic.

Gap’s net income for the second quarter rose 29 percent to $243 million, from $189 million in the year ago quarter. Diluted earnings per share increased 40 percent to 49 cents compared with 35 cents last year.

Net sales for the second quarter, which ended July 28, increased 6 percent to $3.58 billion compared with $3.39 billion for the year-ago quarter. Comparable-store sales increased 4 percent.

“Customers responded well to our product offerings across our brands, driving a healthy increase in sales and earnings per share during the quarter,” said Murphy, who for years has drawn skepticism from Wall Street and retail analysts about his ability to revive Gap, considering his background running drug stores in Canada and not as a fashion merchant.

“Our continued focus on product and store execution is helping to drive positive momentum and we’re committed to sustaining solid performance for the remainder of the year,” he said.

Given the second-quarter performance, the company raised its estimate for fiscal year 2012 diluted EPS to be in the range of $1.95 to $2.00, compared with $1.56 in fiscal year 2011.

While the signs point to a turnaround, Murphy was cautious, stating, “Sustained performance is what matters. Everybody is working hard to make sure we maintain the momentum in the back half.”

In North America, Gap and Banana Republic each had a 7 percent comp-store sales gain, while Old Navy was up 3 percent, making for a 4 percent comp overall. Direct sales rose 24 percent.

The only real concerns Murphy expressed were that traffic overall was negative, with the outlets and Old Navy experiencing better traffic than the Gap and Banana Republic, and that comparable-store sales abroad, with the difficult European economy, were negative 5 percent. But Murphy said he likes how Gap Inc. stores are concentrated in London, Paris, Milan and Rome, and positioned properly for when the continent rebounds.

Gap was able to overcome the traffic trends through higher average unit retail prices and better conversion rates driving the quarter. He added that a faster pipeline, getting some early reads on products through social media and forms of crowd sourcing, also helped the business.

In other highlights, Athleta opened 11 stores and will have 25 stores by yearend. Old Navy opened a store in Tokyo, its first unit outside North America, and also had an impressive response, setting the stage for a Japan rollout.

Murphy suggested Old Navy may be in for some major changes when its new president Stefan Larsson, formerly with H&M, starts in October. “He is coming in with a very strong perspective and position when it comes to product,” conceptually as well as from a design and merchandising standpoint, Murphy said.