Gap Q2 Conference Call
A Fool Conference Call Synopsis*
By Yi-Hsin Chang (TMF Puck)
Gap Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>
One Harrison Street
San Francisco, CA 94105
Phone: (650) 952-4400
http://www.gap.com
ALEXANDRIA, VA (Aug. 13, 1998) /FoolWire/ -- Casual clothing retailer Gap Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> reported second quarter earnings of $136.9 million, up 97% from $69.5 million in the same year-earlier period. On a per-share basis, earnings doubled to $0.34 from $0.17 last year. Sales increased 42% to $1.905 billion from $1.345 billion. Comparable-store sales improved 19% versus 4% growth in 1997.
For the first half of the year, earnings totaled $272.9 million, a 78% increase from $153.8 million a year ago. Earnings per share gained 81% to $0.67 from $0.37. Sales increased 41% to $3.625 billion from $2.576 billion, with same-store sales up 18% compared with nada change in 1997.
Operations overview. Although the company doesn't break out numbers for its individual divisions, it did say that the rate of growth in sales for the quarter in its Gap division was in the low 20% range, GapKids sales grew in the high single-digits, Banana Republic saw growth in the mid-teens, while Old Navy grew in the low 20s. The greatest gains in profit were in its Old Navy and International divisions. Productivity was high as the company's merchandise margin less occupancy expense was the highest it's been since 1985.
Inventory was up 39% to $1.103 billion at the end the quarter as the company shifted even more toward its strategy of stocking an ample supply of all sizes of its core items such as khakis and jeans as well as higher quantities of the more popular sizes. The rationale behind this strategy is that the company doesn't want to miss sales because a customer couldn't find the right size. The company also said that inventories are very clean from a markdown standpoint -- that is, there's very little merchandise left over from the first half of the year.
Through multiple-location contracts with mall landlords, the company has been able to negotiate for better package deals, which means lower occupancy costs.
Advertising. Seeing that its more aggressive advertising campaign has driven strong growth in sales, the company continued to increase advertising spending as it ran TV ads promoting Gap khakis and denim, and Old Navy. First half operating expense rose 2.4%, largely due to increased advertising spending, which exceeded 5% of sales this quarter. In fact, Gap spent more on ads in the first half of the year than in all of 1997. The company also expects advertising spending this year to represent 4% of sales -- 100 basis points above last year. Its new TV ad campaign promoting khakis in Japan, Canada, and the U.K. has been well received. In 1999, Gap likely will continue increasing ad spending, which may at some point be as high as 5% of sales.
New Stores. In the first half, the company opened 147 new stores versus 141 in the same period last year, closed five stores, and expanded 73, increasing the total number of stores to 2,272 and the total square footage by 22% to 16.8 million. As of Aug. 1, there were 1,068 Gap stores totaling 7.3 million square feet, 601 GapKids stores totaling 2.5 million square feet, 271 Banana Republic stores totaling 1.8 million square feet, and 332 Old Navy stores totaling 5.2 million square feet.
Gap still expects to open 300 to 350 new stores this year for an 18% to 20% square footage growth. In addition, the company is remodeling more than 90 stores and expanding about 100.
Looking forward. In the third quarter, the company is running "original fit jeans" TV ads for the back-to-school season. It also plans to open a handful of GapBody stores -- selling underwear, sleepwear, and personal-care products -- in the second half, including its first one in New Jersey in Q3. The company also will launch the new Banana Republic catalog later this month.
The company is aiming to achieve $8.5 billion in sales for the year, but with difficult year-on-year comparisons for the second half, Gap would be happy to get mid-single-digit growth in same-store sales for the balance of the year. It expects margins close to last year's levels, which were the highest they had been in a decade. Until at least after the back-to-school season, which runs through September, the company is comfortable with the current range of EPS estimates of $1.80 to $1.85, which would mean 40% growth over last year.
Notable Quote. "We cannot confirm or deny whether Time magazine was right in its allegation about the [Monica Lewinsky] dress being a product from the Gap."
* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.