Specialty Numbers: Gap Stars as Markdowns Hit Competition

Gap Inc. scored twice on Thursday, once with strong second-quarter earnings and again by coaxing Patricia DeRosa out of her retirement.

Missy Elliott and Madonna pointed the way to Gap stores

Missy Elliott and Madonna pointed the way to Gap stores.

Photo By WWD Staff

NEW YORK — The turnaround is now official.

Gap Inc. struck a chord with its cords, enabling the nation’s largest apparel specialty retailer to complete a full year of earnings improvements in the second quarter.

The San Francisco-based company tripled its net income in the 13 weeks ended Aug. 2 to $209.3 million, or 22 cents a diluted share, reaching the high end of its earlier forecast and passing Wall Street’s best guess by 1 cent. That represents a 268.6 percent increase over the prior year’s income of $56.8 million, or 6 cents, and marked its fourth consecutive earnings increase.

Others among the many specialty retailers reporting results Thursday weren’t as fortunate. Limited Brands’ earnings improved despite softness in its apparel stores, but Charming Shoppes’, pressured by continuing aggravation at Lane Bryant, fell. Wet Seal weathered an eight-digit loss, as expected, but Aeropostale reversed a year-ago deficit.

Gap’s results left little room for interpretation or qualification, however. Summer marketing helped strengthen customer traffic, particularly at Gap and Old Navy, while better product assortments and inventory management resulted in more merchandise being sold at slightly better margins than during the same period last year, the company said.

In reporting a 9 percent increase in July sales, Gap said it expected earnings ranging between 20 and 22 cents.

Total sales for the quarter were $3.69 billion, representing an increase of 12.7 percent over the $3.3 billion reported for the same period last year. Comparable-store sales increased 10 percent, compared with a decrease of 7 percent in the second quarter of the prior year, and all divisions reported increases — 11 percent at Old Navy, 9 percent at Gap and 5 percent at Banana Republic.

Upgrading Gap to “buy” from “hold,” Todd Slater, a retail analyst with Lazard Frères, wrote in a research note that, while many specialty retailers, including Abercrombie & Fitch and American Eagle Outfitters, are struggling to find their fashion compass, “Gap seems to be invested in the right categories [corduroy, basic denim and lightweight, wear-now twill and canvas]. While other retailers are taking early markdowns on transitional and back-to-school inventory, a sign of early distress, Gap does not seem to be taking many unplanned markdowns, an indication that its assortments are selling at full price.”
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