BUSINESS

Gap's 2Q profit up 29 per cent as turnaround takes hold

08/16/2012 04:19 EDT | Updated 10/16/2012 05:12 EDT
NEW YORK, N.Y. - Gap Inc. reported a 29 per cent increase in second-quarter net income as the fashion retailer's moves to liven up its clothing are attracting shoppers back to the stores.

Gap, which operates stores under its namesake, Old Navy, Banana Republic and Athleta, also raised its full-year profit guidance on Thursday, though it was below what analysts had expected.

The company, based in San Francisco, has struggled for years to reclaim its fashion status. But the latest results offer more confidence that a comeback, started in the first quarter, is taking hold. The company has stepped up its marketing and this spring and summer pushed trendy clothing like brightly colored jeans.

"Customers responded well to our product offerings across our brands, driving a healthy increase in sales and earnings per share during the quarter," said Glenn Murphy, chairman and chief executive in a statement. "We're committed to sustaining solid performance for the remainder of the year."

Gap earned $243 million, or 49 cents per share, in the three-month period ended July 28. That compares with $189 million, or 35 cents per share, in the year-ago period. Revenue rose 6 per cent to $3.58 billion in the quarter. Analysts had expected a profit of 48 cents on revenue of $3.57 billion, according to FactSet.

Revenue at stores opened at least a year was up 4 per cent for the quarter. By division, the metric rose 7 per cent at Gap and Banana Republic and 3 per cent at Old Navy. International same-store sales fell 5 per cent in the quarter.

The figure on revenue at stores open at least a year — or same-store sales — is a key statistic in retailing because it excludes the effect of opening and closing stores.

Gap has worked hard to bring customers back, from staff changes to new ad campaigns and partnerships with other designers. Among some of the standouts were a Gap Kids partnership with Diane Von Furstenberg and Banana Republic's partnership with AMC's hit show "Mad Men." The Banana Republic division also announced earlier this week that fashion designer Narciso Rodriguez will serve as an advisor to the brand beginning with the fall 2013 collection.

The Gap brand already had brought back Tracy Gardner as creative adviser. She's expected to make an imprint on holiday fashions, executives have said. Gardner, a former J. Crew executive, worked at Gap and Banana Republic in the late 1990s and early 2000s.

In April, the company named Stef Larsson, former head of global sales for trendy fashion retailer H&M, as president of the Old Navy brand. He'll start by the end of October, replacing Tom Wyatt, who resigned in February.

A February 2011, a management shake-up ended with a new president for the Gap brand, and more than a year ago the chain's design director, Patrick Robinson, was ousted. Gap also established a Global Creative Center and consolidated its marketing in New York.

Meanwhile Gap has been expanding in other countries as it pares back its fleet of U.S. Gap stores by 34 per cent by the end of 2013, compared with 2007, not including Gap Outlets. That will leave 700 Gap stores. The company plans to maintain its Old Navy stores in North America, but plans to make them smaller.

Based on strong second-quarter performance, Gap expects earnings per share for the full year to be in the range of $1.95 to $2.00. That compares with $1.56 per share in the year-ago period. Analysts had expected $2.09 per share.

Investors have pushed Gap shares up almost 80 per cent since the beginning of the year to about $34 from $19. On Thursday, shares slipped 27 cents to close at $34.34, but added 41 cents in after- hours trading. The financial results were released after the market closed.