Driven by increased sales along
with improved margins and a lower share count, Gap
Inc.’s (GPS) earnings of 49 cents per share for the second
quarter of fiscal 2012 beat the Zacks Consensus Estimate by a
penny. The earnings also climbed 40% from the last quarter’s
earnings of 35 cents.
Quarter in
Detail
During second-quarter, Gap’s net
sales increased 5.6% year over year to $3,575 million from $3,386
million in the previous-year quarter. Moreover, the company
registered a growth of 4% in its comps against a 2% decline in the
prior-year period. Further, quarterly sales were in line with the
Zacks Consensus Estimate.
The company’s second-quarter comps
mainly benefited from the continued positive trend in its North
American business. During the quarter, comps at the company’s
Gap North America, Banana
Republic North America and Old Navy North
America improved 7%, 7% and 3%, respectively.
Whereas, the company’s International
business comps declined 5% year over year.
Quarterly gross profit jumped 14.1%
year over year to $1,427 million, primarily due to lower input
costs. Consequently, gross margin expanded 300 basis points (bps)
to 39.9%.
Gap’s operating income for the
quarter came at $425 million, up from the prior-year quarter
operating income of $334 million. Moreover, operating margin
expanded 200 bps to 11.9% due to an expansion in gross margin.
Operating expenses increased $85 million from the previous-year
quarter due to increased marketing expenses for promoting Gap brand
and enhancing customer relationships.
Moreover, with efficient inventory
management, the company’s inventories were down 6% from the
prior-year quarter level. Further, Gap is expecting inventory
levels to decline in the low single-digit range at the end of the
third quarter of fiscal 2012 on a year-over-year basis.
Balance Sheet, Share
Repurchases and Dividend
At the end of the second quarter of
fiscal 2012, the company has cash and cash equivalents and
short-term investments of $2,114 million compared with $2,179
million in the year-ago period. Besides, free cash flow during the
first six months of fiscal 2012 was $673 million compared with $298
million in the previous-year quarter. The company’s shareholders
equity was $2,898 million. Gap’s total number of outstanding shares
declined about 12.1% to 479 million from 545 million reported in
the prior-year quarter.
During the six month period, the
company has made a capital expenditure of $297 million and expects
to expend $675 million in fiscal 2012. During the quarter, the
company deployed $349 million of cash toward share buybacks.
In the quarter, Gap paid a
quarterly dividend of 12.5 cents per share, an increase of 11% from
the prior-year quarter.
Store
Count
In the second quarter, Gap opened
29 company-operated stores and shuttered 20 locations, bringing the
total company-operated store counts to 3,035. Moreover, in the same
quarter, the company opened 8 stores and closed 2 stores in
franchise business, bringing the total franchise store counts to
250.
In an effort to improve customer
experience and boost productivity per square footage, the company
plans to strategically close and consolidate square footage at Gap
and Old Navy brands. In 2012, Gap intends to net open 15
company-operated stores and 50 – 75 franchise stores in different
locations. Moreover, it also expects to decrease net square footage
by 1% in fiscal 2012. In the second quarter, the company’s net
square footage decreased 2% to 36.8 million from 37.7 million in
the previous-year quarter.
Fiscal 2012 Earnings
Outlook Up
Better-than-expected quarterly
performance has prompted management to raise its fiscal 2012
earnings guidance. The company now expects earnings in the range of
$1.95 - $2.00 per share for fiscal 2012, an increase of 25% to
28.2% from fiscal 2011. Earlier, Gap was expecting earnings in the
range of $1.78 - $1.83 per share for fiscal 2012, an increase of
14% to 17% from fiscal 2011. The current Zacks Consensus Estimate
stands at $2.08 per share, above the company’s new guidance range.
Moreover, Gap is now anticipating an increase of 11% in operating
margin during fiscal 2012, up from previous guidance of 10%.
Our
Recommendation
We believe that the company’s
long-term strategic moves along with disciplined cost management
measures will not only provide financial flexibility, but will also
help the company to drive value proposition. Moreover, Gap’s
globally recognized brands complement each other, enabling it to
leverage its position in the sector.
Further, in order to boost the
international operations, Gap consolidated its foreign business
under one division from London. Lackluster sales in North America
compelled the company to explore business in other regions. To
counter the domestic market saturation, Gap is aiming to generate
30% of total sales from its overseas operations and online business
by 2013. For this, Gap has opened stores in China, Italy and
Australia and has launched an e-commerce business in more than 90
markets. These initiatives are expected to bolster the company’s
top- and bottom-line performance, moving forward.
However, Gap operates in a highly
fragmented market and competes with national and local department
stores and discount stores, such as American Eagle
Outfitters Inc. (AEO) and The TJX Companies
Inc. (TJX), which offer products at fire sale prices. To
retain the existing market share, the company may have to slash
sales prices, which could affect its margins.
Gap’s shares carry a Zacks #1 Rank,
which translates into a short-term Strong Buy rating. However, our
long-term recommendation on the stock remains ‘Neutral’.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
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