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Gap Q4 Earnings Rise 10% as Old Navy Moves Full Steam Ahead

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Gap Inc., owner of the Gap, Banana Republic, Old Navy, Athleta and other brands, announced fourth quarter and full fiscal year financial results.

For the quarter ending Jan. 31, net sales were up 3 percent (5 percent when adjusted for foreign currency fluctuations) to $4.71 billion, in line with estimates, compared with $4.58 billion for the fourth quarter of fiscal year 2013. The company’s fourth quarter comparable sales rose by 2 percent, driven primarily by an 11 percent increase in same-store sales at Old Navy. Total online sales were $792 million for the fourth quarter of fiscal year 2014 compared with $698 million in the fourth quarter last year.

Old Navy, which supplies trend-right apparel and accessories for the whole family, has been buoyed by product consistency and great marketing, including a wildly successful year-long advertising campaign featuring SNL alum and “Parks and Recreation” star Amy Poehler.

Fourth-quarter gross margin expanded by 40 basis points to 35.2% of net sales.

Net income for the fourth quarter of fiscal year 2014 was $319 million. Earnings per share increased 10 percent to $0.75 per share on a diluted basis, a penny ahead of consensus estimates, compared with $0.68 per share during the fourth quarter last year.

For fiscal year 2014, net sales increased 2 percent (3 percent on a constant currency basis) to $16.44 billion, compared with net sales of $16.15 billion for the 2013 fiscal year, driven by strong performance at Old Navy. The company’s comparable sales for fiscal year 2014 were flat versus a 2 percent increase in the prior year. Comparable sales by global brand fell by 5 percent at Gap, were flat at Banana Republic, and rose 5 percent at Old Navy. For fiscal year 2014, total online sales were $2.5 billion compared with $2.26 billion for fiscal year 2013.

For the full year, gross profit increased by $65 million to $1.7 billion and gross margin expanded by 40 basis points to 35.2%.

Net income for fiscal year 2014 was $1.26 billion, or $2.87 per share on a diluted basis, compared with $2.74 per share on a diluted basis for the 2013 fiscal year.

Gap Inc. continued to execute its long-term global growth strategy by adding 39 new stores in greater China during fiscal year 2014, including seven new Old Navy stores and 32 new Gap stores. Additionally, the company announced plans to open about 40 new stores in greater China during fiscal year 2015. Building on its success as a performance and lifestyle brand, Athleta grew its U.S. footprint to 101 stores during fiscal year 2014, and the brand plans to open about 20 additional U.S. stores during fiscal year 2015. The company closed 17 net Gap brand stores in North America in 2014.

During fiscal year 2014, Gap Inc. continued to deliver new digital capabilities to customers and made further progress in mobile and personalization. The company launched its new Order in Store capability, building upon its current omnichannel suite including Reserve in Store, Find in Store and Ship from Store, which are now widely available across the company’s U.S. store fleet.

The company expects diluted earnings per share to be in the range of $2.75 to $2.80 for fiscal year 2015, taking into account the estimated negative impact of foreign currency fluctuations and delayed merchandise receipts at West Coast ports. Gap Inc.’s largest foreign subsidiaries are in Canada and Japan, with combined sales in these two countries of over $2 billion. Both the Japanese yen and the Canadian dollar have depreciated by about 30 percent over the past two years. The continuing depreciation of these and other currencies against the dollar are expected to negatively impact results.

During the quarterly earnings conference call, CEO Art Peck shared with analysts management’s dissatisfaction with the Gap brand: “None of us are satisfied with the performance that we’re seeing at Gap. I made a very quick change with senior leadership there. I did this because we were not seeing the performance improvement in the business that we needed to see. And specifically, I was not seeing the women’s product back on track the way it needed to be for the brand to perform to its potential.”

Peck cited signs of improvement in the denim business, but reiterated the importance of the the women’s business where they will focus on improving “an aesthetic issue” which has recently hurt growth.

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