Second-quarter profit down at Gap Inc

24 Aug '11

5 min read

Comparable sales for the second quarter of fiscal year 2011, including the associated comparable online sales, were as follows:

• Gap North America: negative 3 percent versus negative 3 percent last year
• Banana Republic North America: negative 2 percent versus positive 4 percent last year
• Old Navy North America: flat versus positive 2 percent last year
• International: negative 4 percent versus positive 3 percent last year

Additional Results and 2011 Outlook

Earnings per Share
The company reaffirmed its guidance for fiscal year 2011 diluted earnings per share of $1.40 to $1.50.

Depreciation and Amortization
The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, for fiscal year 2011 to be about $550 million.

Operating Expenses
The company continued to manage costs tightly in the second quarter of fiscal year 2011. Second quarter operating expenses were $917 million, which was flat to last year. Marketing expenses for the quarter were $114 million, up $13 million compared with last year, driven primarily by Old Navy and the company's online businesses. As a percentage of net sales, operating expenses leveraged 50 basis points.

Effective Tax Rate
The effective tax rate was 39.6 percent for the second quarter of fiscal year 2011. The company continues to expect that the effective tax rate will be about 39 percent for fiscal year 2011.

Inventory
The company reported that inventory dollars per store were up 5 percent at the end of the second quarter of fiscal year 2011 compared with the second quarter of last year, in line with guidance. As stated earlier this month, the company implemented improvements during the second quarter that enhanced the precision of estimating in-transit inventory. This change did not have any impact to the company's income statement.

The company expects inventory units per store to be down in the third quarter. However, the company expects inventory dollars per store at the end of the third quarter to be up in the high single digits compared with the third quarter of last year, driven primarily by product cost increases.

Cash and Cash Equivalents and Short-term Investments
The company ended the second quarter of fiscal year 2011 with $2.2 billion in cash and cash equivalents and short-term investments. Year to date, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $298 million compared with an inflow of $292 million last year. Please see the reconciliation of free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release.

Share Repurchases
During the first half of fiscal year 2011, the company repurchased about 67 million shares for $1.4 billion. At the end of the second quarter of fiscal year2011, the company had $671 million remaining on its current $2 billion share repurchase authorization.

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