Byline: Thomas J. Ryan

NEW YORK — Boosted by strong sales at Banana Republic, better than expected profits at Old Navy and significantly improved gross margins, The Gap Inc. reported Thursday that earnings jumped 30.2 percent in the fourth quarter, handily beating Wall Street estimates.
Margins rose 160 basis points in the quarter, driven by healthy sell-throughs during the Christmas season that made for an easy January liquidation and good customer reaction to early full-price spring merchandise.
The Gap announced aggressive plans to add 175 to 200 stores in 1996, for a 16 percent increase in square footage. Of this, 60 to 75 units will be Old Navy, representing about a 50 percent increase in stores for the 131-unit chain. Expansion plans for the other divisions were not specified.
“The Gap is the America’s leading apparel specialty store,” said Peter Schaeffer, an analyst at Dillon Read. “Earnings and sales momentum are certainly back on line, and 1996 should be a stellar year for the company.”
The San Francisco-based retailer earned $154.6 million, or $1.08 a share, in the quarter ended Feb. 3, up from $118.8 million, or 82 cents, a year earlier. Wall Street’s average earnings estimate was $1.02 a share.
Sales climbed 25.8 percent to $1.5 billion from $1.2 billion. Same-store sales gained 4 percent, following a 1 percent gain in the year-ago quarter.
Banana Republic led the way in the quarter, ringing up a same-store sales gain of about 12 percent, followed by GapKids, which posted an 8 percent gain. Gap Stores’ same-store sales rose about 2 percent.
Old Navy, the new lower-price format, generated mid-single-digit operating margins in the year, a target reached much sooner than management had expected. At the end of 1995, Old Navy was the second-largest chain in selling square footage after the core Gap chain.
Millard S. Drexler, president and chief executive officer, said The Gap’s strong performance in the second half brought full-year earnings to record levels.
“Our brands proved strong in a difficult retail environment as all of our divisions were profitable in 1995,” he added.
In anticipation of the strong results and a 2-for-1 stock split, announced Tuesday, Gap shares hit a 52-week high of 53 7/8 on the New York Stock Exchange Wednesday. It gave back some of the gain Thursday, dropping 1/2 to 53 3/8.
Still, Wall Street was particularly impressed by The Gap’s ability to boost gross margins to 37.8 percent of sales from 36.2 percent, particularly in light of the dismal apparel sales climate.
The quarter’s profit gain came despite an increase in selling, general and administrative expenses to 21.3 percent of sales from 20.5 percent due to higher advertising costs. The bulk of the advertising supported new Old Navy stores, The Gap’s personal care line and two new stores in Germany. The company opened two new stores in Tokyo on Thursday.
John D. Morris, at Prudential Securities, said The Gap’s strategy of trying to sell more to its core customer paid off.
“They did a great job in presentation,” Morris said. “They used bold and bright colors and eye-catching items in the windows to create a differentiated look in the mall that drew customers in.”
Morris said The Gap was helped by strong sales of higher-margin categories of women’s apparel and personal care goods. He said the retailer’s prepackaged presents, such as its line of Christmas flannel pajamas in a sack, were big winners.
Earnings in the year advanced 10.6 percent to $354 million, or $2.46 a share, from $320.2 million, or $2.20, a year earlier. Sales gained 18.1 percent to $4.4 billion from $3.7 billion. Same-store sales were flat versus a 1 percent gain the prior year.
Prompted by the strong results, analysts hiked their 1996 estimates for The Gap, and Wall Street now expects it to earn between $2.75 and $2.95 a share.
The Gap faces easy comparisons in the first half, and analysts said the firm enters 1996 with better fashion, strong basics and higher initial markups. The Gap expects capital expenditures will approach $350 million this year. Management told analysts it plans to increase its investment in brand advertising, add new domestic and international distribution centers, and create a European support office. Management also said the new stores would be smaller, which analysts said should improve sales productivity.

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