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Gap Inc. Reports Flat Q2 Comps, Increased Earnings Per Share

Gap Inc. reported second quarter earnings Thursday that beat estimates by a penny per share. The release was made on the 45th anniversary of the day that company founders Doris and Don Fisher each spent $21,000 of their own money to start the company in 1969.

Net sales increased 3 percent for the quarter to $3.98 billion, in line with expectations, and net income earnings per share increased 17 percent over last year to $0.75 on a diluted basis. This included a $0.05 per share gain from an asset sale in July of $39 million. Overall gross margin dropped 110 basis points from last year to 39.4%, but improved compared to the first quarter.

The company’s second quarter comparable sales were flat compared with a 5 percent increase in the second quarter of last year. On the quarterly earnings conference call, CEO Glenn Murphy said the Gap store business in North America has not been as strong as he would like so far this year.

Total online sales increased 11 percent to $515 million, compared with $466 million in the same period last year.

Gap Global comparable store sales were down 5 percent versus a 6 percent increase last year. As part of Gap brand’s global expansion strategy, the company plans to enter India, the world’s second most populated country, through franchise-operated Gap brand stores in 2015. In addition, Gap brand continued to grow its store base in the greater China region with five new stores during the quarter, and is on track to finish fiscal year 2014 with approximately 110 Gap stores across mainland China, Hong Kong and Taiwan.

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Old Navy increased comparable sales 4 percent during the quarter, below last year’s positive 6 percent comparable sales. The brand continued its global expansion strategy during the quarter, opening three additional company-operated stores in mainland China, following its debut in that market earlier this year. In addition, Old Navy is on track to open about 20 stores in Japan this year, for a total of roughly 40 stores by year-end. Following the brand’s launch of franchise-operated stores in the first quarter of fiscal 2014, Old Navy expects to open a total of five franchise-operated stores in the Philippines during 2014.

Banana Republic Global comps were flat compared to a 1 percent drop last year.

Athleta, the company’s active lifestyle brand, which management feels has Nike as its key competitor, opened eight new stores during the second quarter for a total of 79 stores, and the brand remains on track to end fiscal year 2014 with close to 100 U.S. stores.

As the company continued to enhance its digital capabilities for customers, online net sales increased 11 percent to $515 million, on top of last year’s 27 percent increase. During the quarter, the company continued to advance its successful omnichannel platform with the expansion of its reserve in store service to all U.S. Gap stores. The company also launched its order in store pilot, with plans to roll out the service to select U.S. Gap, Banana Republic, Old Navy and Athleta stores later this year.

The company has 3,200 company operated stores, up from 3,164 at the end of last year. Last year, it opened 190 new stores, 58 of which were outlet stores, ending the year with a total of 532 outlets.

The company cited careful inventory management as a key strategy to avoid excessive discounting in the second half of the year.

“Building on last year’s strong performance, we are pleased to have grown our sales three percent and delivered solid improvement in earnings per share,” Glenn Murphy, chairman and chief executive officer of Gap Inc. said. “We remain focused on our strategic initiatives, as we turn our focus toward delivering a strong second half.”