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Gap Quarterly Profit Rises 29% to Beat Analyst Estimates

Gap Second-Quarter Profit Rises 29% to Beat Analyst Estimates
Gap Inc.’s stock increase has been among the biggest in the Standard & Poor’s 500 Index this year, as new merchandise and marketing at its namesake brand in North America drove the best first half of same-store sales since 2003. Photographer: Jerome Favre/Bloomberg

Gap Inc., the largest U.S. specialty-apparel retailer, reported a 29 percent rise in quarterly profit that topped analyst estimates, aided by domestic sales, and raised its full-year earnings forecast.

Net income for the quarter ended in July rose to $243 million, or 49 cents a share, from $189 million, or 35 cents, a year earlier, the San Francisco-based company said yesterday in a statement. The average analysts’ projection was for 48 cents a share, according to data compiled by Bloomberg. The company had forecast a range of 47 cents to 48 cents on Aug. 2.

Gap’s stock had the fourth-biggest increase on the Standard & Poor’s 500 Index this year, as new merchandise and marketing at its namesake brand in North America drove the best first half of same-store sales since 2003. Second-quarter sales rose 5.6 percent to $3.58 billion, the best in five years, driven by Gap and Banana Republic brands in North America, the company said earlier this month.

Gap is managing its inventory better and using fewer discounts and promotions, which bodes well for the second half of the year, Jennifer Davis, an analyst at Lazard Capital Markets in New York with a buy rating on the stock, wrote in an e-mail. “The full-year guidance is conservative,” she wrote.

Fiscal full-year profit may be $1.95 to $2 a share, the company said, up from a previous forecast in May of $1.78 to $1.83. The average estimate of 26 analysts was $2.08 a share.

‘Solid Results’

The shares rose 4.1 percent to $35.74 at 9:59 a.m. New York time. The stock had risen 85 percent this year through yesterday.

“The increased focus on product and marketing continues to resonate with consumers and will continue to drive solid results,” Randal Konik, a New York-based analyst at Jefferies Group Inc. with a buy rating on the stock, wrote in a note before the report. Konik said he anticipates fall and holiday designs to improve further from successful spring merchandise.

Analysts have been viewing Gap’s sales success as the start of a turnaround, with new talent at the company’s Gap, Old Navy and Banana Republic brands working to regain sales from rivals like J. Crew Group Inc. and Hennes & Mauritz AB.

Gap said earlier this week it hired U.S. designer Narciso Rodriguez as an adviser for Banana Republic, which Konik wrote “is yet another data point showing the elevated fashion at Gap Inc.’s brands.” Earlier this year, the company hired back J. Crew executive Tracy Gardner for a similar role at Gap and Jill Stanton, former vice president of global apparel at Nike Inc., to advise at Old Navy.

‘Positive Momentum’

“Customers responded well to our product offerings across our brands,” Chief Executive Officer Glenn Murphy said in the statement. “Our continued focus on product and store execution are helping to drive positive momentum and we’re committed to sustaining solid performance for the remainder of the year.”

Marketing expenses rose to $147 million in the quarter, a $33 million increase from last year, primarily driven by investments in the Gap brand, the company said. Operating margin will be about 11 percent for the year, up from the 10 percent guidance in May, according to the statement.

Inventory dollars per store fell 6 percent at the end of the second quarter and the company said it expects inventory dollars per store to be down in the “low single digits” at the end of the third quarter compared with the year-earlier period.

Comparable store sales rose 4 percent in the quarter, and in July, sales by the same measure jumped 10 percent.

Gap slid 16 percent in 2011 when sales fell to a three-year low, as the retailer was plagued by a surge in cotton prices and missteps including a failed marketing campaign at its Old Navy division.

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