Earnings Scorecard: Gap Inc.

On November 18, 2010, Gap Inc. (GPS) reported third-quarter fiscal 2010 earnings per share of 48 cents, and met the Zacks Consensus Estimate. The company continues to expect earnings of $1.77 to $1.82 per share for fiscal 2010, compared with $1.58 per share earned in the prior year.

Quarterly Review

Gap Inc.’s third-quarter 2010 earnings of 48 cents per share rose 9.0% from last year’s 44 cents and remained in line with the Zacks Consensus Estimate.

During the quarter, net sales grew 1.8% to $3.65 billion from $3.59 billion in the year-ago quarter. Same-store sales remained flat for the quarter. Quarterly gross profit fell 1.2% year over year to $1.51 billion, and gross margin contracted 130 basis points (bps) to 41.2%. Gap’s operating income rose marginally by 1.0% year over year to $504 million, while operating margin fell 10 bps to 13.8%.

For a full coverage on third quarter earnings, read: Gap Meets Estimate, Affirms Outlook

Agreement of Analysts

Estimate revision trends depict a mixed and positive sentiment among analysts for the upcoming fourth quarter of fiscal 2010 and fiscal year 2010, respectively. Over the last 30 days, 7 of 25 analysts covering the stock positively adjusted their estimates upward while 4 moved in the opposite direction, for the fourth quarter of fiscal 2010. For fiscal 2010, 13 of the 20 analysts covering the stock have lifted their estimates with no downside movement by any analyst in the last 30 days.

Analysts highlight the company’s continued cost discipline, focus on share repurchase, international growth and quickening lead times as catalysts to spur future earnings growth. They, however, believe that merchandise margins could continue to remain under pressure in the near term, as the company persists to work through excess inventory domestically.

In the last 30 days, 6 analysts out of 15 have revised their estimates upward for the first quarter of fiscal 2011. For fiscal year 2011, 16 analysts out of 26 moved their estimates upward and 2 analysts reduced their estimates.

Magnitude of Estimate Revisions

The magnitude of estimate revisions depicts an optimistic analyst outlook for the fiscal years 2010 and 2011. Over the last 30 days, estimates for both the years have increased by 2 cents and 3 cents, respectively. However, for the fourth quarter 2010 and fist quarter 2011, analyst estimates have remained static for the past one month.

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 into 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, GapKids and babyGap 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 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 for the stock remains ‘Neutral’.

GAP INC (GPS): Free Stock Analysis Report

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