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Gap posts highest third-quarter operating margin in a decade
Nov '09
Gap Inc. reported that net earnings for the third quarter, which ended October 31, 2009, increased 25 percent to $307 million, or $0.44 per share on a diluted basis, compared with $246 million, or $0.35 per share on a diluted basis, for the same period last year.

“We're pleased with our third quarter results, particularly our ability to deliver earnings 25 percent above last year and our highest third-quarter operating margin in a decade,” said Glenn Murphy, chairman and chief executive officer. “Looking ahead to the holiday season, we're focused on gaining market share as we invest in marketing and present a strong value proposition to customers across our brands.”

Financial Performance Highlights

• Third quarter diluted earnings per share increased to $0.44 from $0.35 last year.
• Third quarter net sales increased one percent to $3.59 billion compared with $3.56 billion last year.
• Third quarter gross margin increased 380 basis points to 42.5 percent; and third quarter operating margin increased to 13.9 percent compared with 11.1 percent last year.
• Year to date free cash flow was $931 million.

Sales Results

Third quarter net sales were $3.59 billion, compared with $3.56 billion for the third quarter of last year. The company's third quarter comparable store sales were flat compared with a decrease of 12 percent for the third quarter of last year.

Operating Expenses

Due largely to investments in fall marketing at Gap and Old Navy, operating expenses were up $40 million in the third quarter of fiscal year 2009 compared with last year.

The company expects operating expenses in the fourth quarter of fiscal year 2009 to be up about $100 million to $120 million compared with the prior year. This increase is due to increased marketing expense, higher variable store-related costs related to the company's objective of driving comparable store sales improvement, and higher bonus expenses in the fourth quarter.

The company expects fourth quarter marketing expenses to be up about $45 million compared to the fourth quarter of last year.

Effective Tax Rate

The effective tax rate was 38.6 percent for the third quarter of fiscal year 2009. The company continues to expect that the effective tax rate will be about 39 percent for fiscal year 2009.

Share Repurchases

During the third quarter, the company repurchased approximately 4.1 million shares for $91 million. Approximately 0.6 million of the total 4.1 million shares were repurchased from individual members of the Fisher family as part of previously announced purchase agreements with them.

In a separate release today, the company announced that its board of directors authorized an additional $500 million share repurchase program, and that it has entered into new purchase agreements with members of the Fisher family. The company expects that about $20 million (approximately 4 percent) of the $500 million share repurchase program, will be purchased from these Fisher family members.

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