Stock of the Day
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The Gap (GPS)
The Gap Fights Back Against the Retail Slump
The Gap may not be able to control the whims of American consumers, but they are trying their darndest to keep a tight grip on company costs to improve margins. The Gap surprised investors, analysts, and company officials alike with news released in its first-quarter earnings statement today, which indicated an encouraging turn of event s for the retailer. While profits are up, however, sales are still down and customers don't look to be perking up to Gap's fashion any time soon. Will the latest strategic efforts continue to support The Gap amid the sagging economy, or is it time to do a more thorough spring cleaning?
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| Stock Analysis |
In the first-quarter earnings statement released by The Gap today, there were signs of a turnaround. The results beat both company and analyst expectations as cost-cutting measures, fewer markdowns, and a tighter rein on inventories allowed a 40 percent spike in net profit over last year. Net income increased to $249 million, or 34 cents per share, from $178 million, or 22 cents per share, during the same period last year. Analysts had forecasted earnings of 30 cents per share, while the company had estimated a range of 30 to 32 cents per share. Revenue missed expectations, though, as sales dipped to $3.38 billion for the quarter from $3.55 billion in the first quarter last year. Analysts had expected $3.42 billion in revenue.
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The sliding revenue can be attributed to an 11 percent decrease in same-store sales as compared to last year. During the first quarter last year, sales in comparable-stores had only fallen 4 percent from the year prior. Sales generated by online purchases, however, increased in the first quarter by 21 percent over last year to $236 million. The steepest declines came from the Old Navy brand where same-store sales fell 18 percent in this quarter from last year as compared with a 5 percent slide experienced last year. Banana Republic North America stores dipped 4 percent this quarter and the Gap stores experienced a 7 percent decrease in same-store sales from the year prior. This quarter marks the 15th straight quarter that same-store sales have fallen, the worst stretch in the company's nearly 40 year history.
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The Gap's new chairman and chief executive, Glenn Murphy, who was hired last July, is the leading proponent of Gap's more disciplined approach to managing costs. In call to analysts, Murphy said, "We are pleased with our first-quarter performance in what undoubtedly was one of the most difficult retailing environments in recent memory." She also added that, "We see no signs of improvement in the psyche of the American consumer." The state of the retail market has caused Gap to take steps to better manage its clothing inventory, so that it can avoid the drastic markdowns that are typical of its stores, as well as reduce advertising expenses and layoff some employees. Wall Street has been encouraged by these latest efforts but consumers are not as inspired.
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Aside from a tight family budget to worry about, some recent fashion choices by the Gap have failed to attract shoppers. In particular, the Old Navy brand has just launched a new advertising campaign to promote its clothes to the young professional female, a vast departure from its reputation as the brand for low cost basics. It remains to be seen if that was a smart move for business. The Gap, which is the largest U.S. clothing chain, has reaffirmed its full-year outlook of $1.20 to $1.27 per share. Company shares, listed on the New York Stock Exchange, were up after the closing bell yesterday, but have dipped in early trading.
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