Despite some “consumer fatigue” and the heavy promotional environment, Gap Inc. narrowly exceeded analysts’ expectations for third-quarter earnings with a 9.4 percent increase in net income.
This story first appeared in the November 22, 2013 issue of WWD. Subscribe Today.
However, the San Francisco-based retailer’s reaffirmation of full-year guidance implied earnings per share were below analysts’ consensus estimates for the year’s final three months, sending shares lower in after-hours trading.
Gap’s average unit retail was down, and traffic overall for the quarter was negative, though it picked up in October. Gap was also challenged by last year’s strong colored denim sales trends.
Officials said they expect the heavily promotional environment to continue through the fourth quarter but it will be working hard to improve AUR. “Two drivers will be conversion and units per transaction,” which improved last quarter and helped keep results positive.
“There is a little bit of fatigue out there when it comes to the consumer,” Gap chairman and chief executive officer Glenn Murphy said on a conference call.
Murphy also suggested that consumers could be tired from the industry’s constant promoting. “We are really trying to make sure we don’t become predictable, trying to be a little more provocative and find different ways to express value. It is the job of the marketers to speak in a way that it doesn’t cause [consumer] fatigue,” he said.
Also on Thursday, Gap said it is rolling out its Reserve in Store program where customers can shop online and have products reserved for them in stores for potential purchase there. Murphy said Reserve is a possible “game-changer” for Gap Inc. Reserve will be rolled out to all U.S. Banana Republic stores and more than 200 Gap stores in 15 major U.S. markets. The launch follows a successful pilot in San Francisco and Chicago-area Gap and Banana Republic stores, involving about 40 stores in total. Customers can reserve up to five items a day and within one hour receive an e-mail or text confirming items on hold, with pick-up instructions. Items are held in the store until close of business the next day.
For the three months ended Nov. 2, net income rose to $337 million, or 72 cents a diluted share, 1 cent above the 71-cent EPS result expected by Wall Street. Year-ago profits were $308 million, or 63 cents. In the third quarter, revenues picked up 2.9 percent to $3.98 billion from $3.86 billion in the year-ago quarter and were up 5 percent at constant currency.
Comparable sales were up 1 percent with the Gap brand’s 1 percent increase offsetting a flat performance for Old Navy and a 1 percent decline at Banana Republic.
Gap reaffirmed its full-year guidance for EPS of between $2.57 and $2.65, implying fourth-quarter EPS of 50 cents and 58 cents, below Wall Street’s earlier expectations of EPS of 69 cents.
After rising 1.5 percent to $41.86 during regular trading on Thursday, shares dipped 2.1 percent, to $41, in after-hours trading following the release of results.
Gap also said its board authorized a new $1 billion share repurchase program. The retailer aggressively bought back its own stock in the third quarter, spending approximately $790 million to take back 20 million shares.