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Gap Posts Solid Profits in 4Q

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Gap Inc.’s (GPS - Free Report) earnings of 73 cents a share for the fourth quarter of fiscal 2012 soared 65.9% from 44 cents reported in the comparable prior-year quarter. Further, the quarterly earnings came in above the Zacks Consensus Estimate of 71 cents.

For fiscal 2012, the company reported earnings of $2.33 per share, rising 49.4% from $1.56 per share in fiscal 2011. Earnings for the fiscal also surpassed the Zacks Consensus Estimate of $2.29.

During the fourth quarter, Gap’s net sales increased 10.3% year over year to $4,725.0 million from $4,283.0 million in the previous-year quarter. Moreover, the company registered growth of 5% in its comps against a 4% decline in the prior-year period. However, quarterly sales missed the Zacks Consensus Estimate of $4,651.0 million.

The company’s fourth-quarter comps mainly benefited from the continued positive trend in its North American businesses, which include Gap, Banana Republic, and Old Navy. During the quarter, comps at the company’s Gap North America, Banana Republic North America and Old Navy North America improved 4%, 3% and 8%, respectively while the company’s International business comps declined 8% year over year.

Net sales for fiscal 2012 increased 7.6% year over year to $15,651.0 million, while it surpassed the Zacks Consensus Estimate of $15,583.0 million. In fiscal 2012, comps rose 5% versus a 4% decline witnessed in fiscal 2011. The rise in comps was driven by growth in the company’s North American comps, including a 6% rise in Gap North America, 5% increase in Banana Republic and 6% growth in Old Navy. This was offset by a 3% decline in international comps.

Quarter in Detail

Quarterly gross profit jumped 26.4% year over year to $1,776.0 million, due to increased sales offset by slightly higher input costs. Consequently, gross margin expanded 480 basis points (bps) to 37.6%.

Gap’s operating income for the quarter came in at $602.0 million, up from the prior-year quarter operating income of $372.0 million. Moreover, operating margin expanded 400 bps to 12.7% due to an expansion in gross margin. Operating expenses increased $141.0 million from the previous-year quarter to $1,174.0 million.

Moreover, with efficient inventory management, the company’s inventories were up 8.6% to $1,758.0 million in fiscal 2012 compared with the prior-year level. Inventory dollars per store at the end of fiscal 2012 increased 5%, which is in line with comparable sales.

Balance Sheet, Share Repurchases and Dividend

The company ended fiscal 2012 with cash and cash equivalents and short-term investments of $1,510.0 million, compared with $1,885.0 million in the year-ago period. The company’s shareholders’ equity was $2,894.0 million.

Free cash flow for fiscal 2012 was $1,277.0 million compared with $815.0 million in the last-year period. During fiscal 2012, the company made capital expenditure of $659.0 million and expects to expend $675.0 million in fiscal 2013. During the quarter, the company spent $563.0 million to buy back 18 million shares, bringing full year share buybacks to 34 million shares for $1 billion.

Concurrent with its earnings release, Gap announced plans to increase to its annual dividend by 20% to 60 cents per share. Consequently, the company declared a quarterly dividend of 15 cents per share, payable on or after May 1, 2013, to the stockholders of record as on Apr 10, 2013.

Store Count

In the fourth quarter, Gap opened 58 company-operated stores and shuttered 62 locations, bringing the total company-operated store counts to 3,095. Moreover, in the same quarter, the company opened 43 stores and closed 2 stores in franchise business, bringing the total franchise store counts to 312. This brings the company’s total store count as of Feb 2, 2013 to 3,407 million.

Fiscal 2013 Outlook

In fiscal 2013, Gap expects earnings in the range of $2.52–$2.60 per share, an increase of 8%–12% from fiscal 2012. Moreover, Gap anticipates operating margin to be approximately 13.0% in fiscal 2013, while depreciation and amortization, net of amortization of lease incentives, is expected to total $475 million.

Further, Gap is expecting inventory per store to increase in the mid single-digit range at the end of first quarter of fiscal 2013 on a year-over-year basis.

In fiscal 2013, the company expects to open 160 company-operated stores and close 80 of them. Store openings will mainly be focused on opening more Athleta, Gap China, Old Navy Japan, and global outlets. Store closures will be weighted towards shutting Gap North American outlets, in sync with its previously announced strategy. In fiscal 2013, the company expects its net square footage to increase by 1%.


We believe the company’s relentless focus on turnaround strategies for improvising the top line are paying off, which is reflected in its solid comps and sales performance in the recent months. The stock currently carries a Zacks Rank #2 (Buy).

Other stocks performing well among the apparel/shoe retailers include Express Inc. (EXPR - Free Report) , which has a Zacks Rank #1 (Strong Buy), Foot Locker Inc. (FL - Free Report) and Urban Outfitters Inc. (URBN - Free Report) , both of which have a Zacks Rank #2 (Buy).

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Urban Outfitters, Inc. (URBN) - free report >>

Express, Inc. (EXPR) - free report >>

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