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.

Victoria’s Secret’s comps rose 6 percent, and operating income increased 20.7 percent to $174.9 million from $144.9 million. B&BW comps rose 4 percent and operating income rose 66.2 percent to $52.2 million from $31.4 million.

Meanwhile, the apparel group’s comps were flat and it lost $2.8 million, reversing year-ago profits of $3.3 million. Express’ comps rose 1 percent while Limited stores fell 4 percent.

The company also said August sales have been below plan at its apparel group and overall comps have been trending somewhat below its plan for low-single-digit growth. However, LB said it is comfortable with the third- and fourth-quarter consensus estimates of 4 cents and 74 cents, respectively, which represents earnings growth of 13 percent for the fall, and is predicated on low-single-digit comp growth.

To make up for the August shortfall, LB chief financial officer Ann Hailey said on a morning conference call that the retailer, beginning in September, will revise its markdown cadence, moving away from discounting entire stores and instead focusing on key item promotions. These will be supplemented by regular sales in which distressed inventories would be cleared if necessary.

“We are trying to back off of day-in and day-out discounting of the entire store, so we are making money on the best items instead of discounting everything equally,” Hailey said.

On the call, Grace Nichols, president and chief executive of VS stores, said beauty sales beat plan and June’s semiannual sale was successful even as full-priced products moved well.

On the other hand, Michael Weiss, president and chief executive of Express, said strength in knit tops, jeanswear and other key items was offset by weakness in sweaters, wovens and accessories.

Denim, he said, got off to a slow start in July with a negative 1 percent comp. Core products met expectations, but novelty denim sales did not.

For the first half, LB’s income rose 49.9 percent to $199.5 million, or 38 cents a share, compared with $133.1 million, or 26 cents. Excluding nonrecurring items, income would have fallen 5.4 percent to $151.8 million, or 29 cents, compared with $160.5 million, or 30 cents. Sales for the six months increased 3.9 percent to $3.86 billion from $3.71 billion.
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