LOS ANGELES (Reuters) - Gap Inc <GPS.N> said on Thursday that first-quarter net profit jumped 40 percent, as tighter inventories, fewer markdowns and cost cutting helped lessen the effect of lower sales, and shares rose 2 percent in extended trading.
By Alexandria Sage
LOS ANGELES (Reuters) - Gap Inc <GPS.N> said on Thursday that first-quarter net profit jumped 40 percent, as tighter inventories, fewer markdowns and cost cutting helped lessen the effect of lower sales, and shares rose 2 percent in extended trading.
Chief Executive Officer Glenn Murphy said he saw "no signs of improvement in the psyche of the American consumer," but added that shoppers were responding positively to an improved assortment of classic clothing at its namesake Gap stores, even as the Old Navy chain continues to struggle.
The global apparel company, in the midst of a turnaround effort even as U.S. consumers are cutting back on spending, posted earnings that topped both company and Wall Street estimates, but sales were weaker than analysts expected.
!ADVERTISEMENT!First-quarter net income increased to $249 million, or 34 cents per share, from $178 million, or 22 cents per share, a year earlier.
That was above the 31 cents expected, on average, by analysts, according to Reuters Estimates, and Gap's own forecast of 30 cents to 32 cents per share.
Sales at the San Francisco-based retailer, which also operates the more upscale Banana Republic chain, fell nearly 5 percent to $3.38 billion from $3.55 billion, below the average analyst target of $3.44 billion.
Wall Street has applauded ongoing attempts to reduce spending, improve merchandise and limit markdowns at Gap's chains. Still, it has suffered from weaker traffic and declining same-store sales, a key gauge of retail performance, amid intense competition from rivals and past fashion missteps.
First-quarter same-store sales fell 11 percent, as previously announced.
The impact of the sales fall was softened by a 17 percent decline in inventory during the quarter. Those levels should also decline in the second quarter in the mid-teens on a percentage basis, Gap said. Excessive inventory increases the likelihood of markdowns, which crimp profit margins.
Inventory reductions can benefit the chain for about a year, said Needham & Co analyst Christine Chen.
"In this environment, it's absolutely the right thing to do. And more importantly, it trains the customer not to expect markdowns," she said.
A 2008 priority for Gap is on driving profit margin growth. This strategy, rather than focusing purely on sales growth, is intended to stabilize the business -- which has struggled in recent years -- until shoppers become accustomed to new, better-quality and more interesting items.
Operating profit margins are expected to range between 8.5 percent to 9.5 percent as a percentage of sales for fiscal 2008, Gap said. That margin was 11.3 percent in the first quarter from 7.3 percent a year earlier.
Similarly, gross margins of 39.7 percent in the quarter were above the 38.1 percent a year earlier.
Last month, the company said its lower-cost Old Navy chain had become too fashion-oriented, with a greater emphasis on young women's clothing that put off those shopping for basics.
Weakness at the chain prompted the departure of president Dawn Robertson in February. A replacement could be named within "the next number of months," Murphy said.
Old Navy posted the worst same-store sales decline in the quarter, off 18 percent, compared with decreases of 7 percent and 4 percent at Gap and Banana Republic stores, respectively.
Speaking to analysts, Chief Financial Officer Sabrina Simmons said improved merchandise would be seen by late fall at Old Navy, due to shortened turnaround times from design through production.
At Gap stores, analyst Chen said consumers had noticed improved merchandise, but cautioned: "In this environment, to get huge traffic gains you have to have a wow factor."
The company affirmed its fiscal 2008 net earnings view of $1.20 to $1.27 per share, compared with the $1.25 expected by analysts, on average.
The company said another 15 stores would close during the year, mostly within the Gap brand. No net square footage growth is expected during the year, with about 115 store locations opening and the same number closing.
Gap, which operates more than 3,000 stores globally, is valued at 14.5 times estimated 2008 earnings, at a premium to Macy's Inc <M.N> at 12 times, but below the Dow Jones Retail Index <.DJUSRT> at 16 times forward-looking projected earnings.
The company's shares rose 2.1 percent to $18.67 after closing at $18.29, up 1 percent on the New York Stock Exchange.
(Reporting by Alexandria Sage; editing by Jeffrey Benkoe and Andre Grenon)
