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Improved merchandise margins drive Gap's Q2 gross margin

21
Aug '09
Glenn K. Murphy, Chairman and CEO
Gap Inc. reported that net earnings for the second quarter, which ended August 1, 2009, were $228 million, or $0.33 per share on a diluted basis, compared with $229 million, or $0.32 per share on a diluted basis, for the second quarter last year.

“We're proud to deliver second quarter earnings per share above last year, especially during a challenging environment,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “Building upon two years of work improving our economic model, we're now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share.”

Sales Results
Second quarter net sales were $3.25 billion, compared with $3.50 billion for the second quarter of last year. The company's second quarter comparable store sales decreased 8 percent, compared with a decrease of 10 percent for the second quarter of last year. The company's online sales for the second quarter of 2009, which includes Athleta, increased 17 percent to $224 million, compared with $191 million for the second quarter of last year.

Additional Results and 2009 Outlook
Margins
Gross margin of 39.7 percent increased 150 basis points for the second quarter compared with the prior year.

Operating margin was 11.6 percent for the second quarter compared with 10.7 percent for the prior year.

Operating Expenses
Operating expenses were down $52 million in the second quarter of fiscal year 2009 compared with the prior year. The company expects operating expenses in the third quarter of fiscal year 2009 to be flat to up about $20 million compared with the third quarter of last year, primarily driven by the expected increase in marketing expense of about $25 million in the third quarter of fiscal year 2009 compared with the third quarter of last year.

Effective Tax Rate
The effective tax rate was 39.4 percent for the second 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
The company announced that it will likely resume share repurchases in the third quarter of fiscal year 2009.

Cash and Cash Equivalents and Short-term Investments
The company ended the second quarter with $2.1 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 $589 million.

Inventory
On a year-over-year basis, the company reported that inventory per square foot was down 14 percent at the end of the second quarter. At the end of the third quarter of fiscal year 2009, the company expects inventory per square foot to be down in the high-single digits compared with the third quarter of fiscal year 2008.


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