Earnings Scorecard: Gap Inc.

On February 24, 2011, Gap Inc. (GPS) reported fourth-quarter fiscal 2010 earnings per share of 60 cents per share that rose 17.6% from 51 cents in the year-ago quarter and beat the Zacks Consensus Estimate of 57 cents a share.

For fiscal 2010, the company reported earnings growth of 19% to reach $1.88 per share from $1.58 per share reported in fiscal 2009. Earnings also beat the Zacks Consensus Estimate of $1.86 per share.

Quarterly Review

During the quarter, net sales grew 3.0% to $4,364 million from $4,236 million in the year-ago quarter. Same-store sales remained flat for the quarter. Total revenue also beat the Zacks Consensus Estimate of $4,357 million.

Quarterly gross profit fell 0.2% year over year to $1,669 million, and gross margin contracted 130 basis points (bps) to 38.0%. Operating expenses, as a percentage of sales, declined 90 bps year over year to 24.7% on the back of strict cost containment measures. Accordingly, Gap’s operating income rose marginally by 1.0% year over year to $593 million, while operating margin fell 30 bps to 13.6%.

Agreement of Analysts

After a week of the release of fourth quarter fiscal 2010 results, estimate revision trends depict a mixed response among analysts for the two sequentially following quarters as well as for fiscal years 2011 and 2012. Over the last 7 days, 5 of 23 analysts covering the stock positively adjusted their estimates while 7 moved in the opposite direction, for the first quarter of fiscal 2011. For the second quarter of fiscal 2011, the past one week saw 5 of 22 analysts lifting their estimates while 9 made downward revisions.

Over the last 7 days, 9 of 26 analysts revised their estimates upward while 12 reduced their estimates, for fiscal 2011. For fiscal 2012, 6 of 23 analysts increased their estimates while 3 moved in the opposite direction over the same timeframe.

Magnitude of Estimate Revisions

Given the shift in estimates this past week, the magnitude of estimate revisions depicts a pessimistic analyst outlook for the upcoming two quarters. Over the last 7 days, estimates for both the first and second quarters have decreased by 1 cent each to 45 and 39 cents, respectively. However, for fiscal 2011, analyst estimates have remained static for the past 7 days. For fiscal 2012, estimate revisions depict an optimistic analyst outlook in which the estimates have increased by 5 cents to $2.10 in the last 7 days.

Our Recommendation

Gap is one of the leading players in the highly fragmented specialty retail sector. Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Gap recently expanded its international presence by entering China and Australia, which is expected to further strengthen its top and bottom line performance, moving forward. The company’s China stores feature a full range of Gap adult, Gap Kids and Baby Gap merchandise while, in Australia, Gap will offer its brands through a franchisee.

Gap operates in a highly fragmented market and competes with well-established rivals like American Eagle Outfitters Inc. (AEO), J. Crew Group Inc. (JCG) and The TJX Companies Inc. (TJX). With the reduction in disposable income and a cut in consumer discretionary spending due to the recent economic downturn, the company like all retailers is under severe stress to maintain profitability.

Gap’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

GAP INC (GPS): Free Stock Analysis Report

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