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Gap Inc. Profits Up 61%

The company's fourth-quarter results beat Wall Street's expectations by 2 cents.

The Gap Inc. is showing continued turnaround muscle as its fourth-quarter results, reported after Thursday’s market close, bested Wall Street’s consensus expectations by 2 cents.

Shares of Gap rose 1.3 percent to $32.92 and then gained 2.2 percent to $33.65 in early after-market trading following the earnings report.

For the three months ended Feb. 2, net income rose 61 percent to $351 million, or 73 cents a diluted share, from $218 million, or 44 cents, a year ago. Net sales for the period rose 10.3 percent to $4.73 billion from $4.28 billion.

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For the North American businesses in the quarter, Gap posted a 4 percent comparable-store sales gain; Banana Republic was up 3 percent and Old Navy rose 8 percent. International comps were down 2 percent. According to the company, the Gap, Banana Republic and Old Navy businesses in North America each posted positive comparable sales for four consecutive quarters. In the U.S., Gap sales rose 4 percent to $972 million; Banana Republic sales gained 6.3 percent to $655 million, and Old Navy sales climbed 11.5 percent to $1.46 billion.

For the year, net income rose 36.3 percent to $1.14 billion, or $2.33 a diluted share, from $833 million, or $1.56, last year. Net sales rose 7.6 percent to $15.65 billion from $14.55 billion. The Gap Inc. Direct division saw $1.9 billion in net sales, or a 24 percent increase over fiscal year 2011.

Glenn Murphy, chairman and chief executive officer, said during the conference call regarding the fourth quarter: “We believe there’s a lot more business to be had for us in December. When I look at the business and dissected it and spent time with the teams after the holidays, we still have quite a bit of opportunity available to us [to unlock] between Thanksgiving and Christmas. The consumer patterns are really shifting and we have a big amount of business done around Thanksgiving and Black Friday, and a lot of business being done the last three days before Christmas.”

He said the company needs to figure out the three weeks in between. As for its $130 million acquisition of specialty retailer Intermix on Dec. 31, Murphy said, “We love that business. There are a lot of talented people at Intermix. We are going to help them when it comes to the integration strategy [and] we feel better about the decision we made today than six weeks ago.”

As for why the company is doing so well, the ceo had one answer: “It starts, for me, and ends with product.”

He also gave kudos to the merchant and design teams for product that is “absolutely right on [for] what the brands stand for.”

Murphy also addressed some sourcing policy changes at the company, noting that a few years ago during the recession it was focused more on vendors and margin rate, negotiating cut-and-make prices. Under the new focus on chasing rapid response and putting new styles to work inside of a season, the company has focused on stronger relationships with mills and fabrics because a company that wants speed and understands the gross margin upside has to “have fabric ready to go.”

As for the overseas business, Murphy said China continues to do well for Gap Inc., where it has core Gap stores, an outlet business and an online operation. He said they plan to open 35 stores in China in 2013.

The first international store for Old Navy was opened in 2012 in Tokyo. The company said it plans to open as many as 20 more stores in 2013. Murphy said customer response has been great because “what’s missing for so many customers in Tokyo is a family brand based on [an] American aesthetics value proposition.”

As for fiscal year 2013, Murphy said the company has been spending time asking questions about the customer and the economy: “That’s important for us. With the new global platform we have choices. Where do we think the biggest potential is for us?”

The ceo said the company needs to “continue to give her reasons to buy. More excitement. Think of some examples last year: We launched the Rockstar jeans at Old Navy that was provocative. That gave her a reason to buy. When Gap came up with the marketing campaign called Icons Redefined, that gave her a reason to buy. If you are going to win in this environment, doing the same thing all over again is not a winning strategy. We have to bring more and more uniqueness, differentiation and excitement to the business. So beyond that, some big priorities for us as we look forward, one is the growth.”

The ceo also spoke cryptically about “some really good ideas that will be launched in 2013, which we will talk about down the road. We have to have this to win long-term.”

Sabrina Simmons, the firm’s chief financial officer, said the company will use a balanced approach to deliver on its financial goals: “We will focus on growing sales with healthy merchandise margins, managing our expenses in a disciplined manner, and delivering operating margin expansion and earnings-per-share growth.”

The cfo added that Gap expects to “grow operating margin from about 12% in 2012 to about 13% in 2013.” She added that it is also committed to returning excess cash to shareholders. Separately, the company raised its dividend by 20 percent to 60 cents in fiscal year 2013, with the first quarterly payment of 15 cents a share payable on May 1 to shareholders of record as of April 10, 2013.

The company provided fiscal 2013 guidance and said diluted earnings-per-share is expected at between $2.52 and $2.60, representing an 8 to 12 percent increase from fiscal year 2012.