Gap Climbs After Expected Quarterly Profit Exceeds Estimates

Gap Inc., the biggest U.S. specialty-apparel retailer, climbed the most in 15 months after saying it anticipates quarterly profit that surpassed analysts’ estimates, helped by gains in sales.

The San Francisco-based retailer rose 7.2 percent to $40.47 at 9:45 a.m. in New York after rising as much as 8 percent for the biggest intraday gain since August 2012.

Gap said profit in the third quarter ended Nov. 2 was as much as 71 cents a share, compared with 63 cents a year earlier. That exceeds the 66-cent average of analysts’ estimates. Net sales in the quarter rose 3.1 percent to $3.98 billion, Gap also said in a statement yesterday, beating the average estimate of $3.96 billion.

Chief Executive Officer Glenn Murphy is seeing success in turning around sales at the company, drawing customers to the Gap brand with new denim and fitness apparel and to Old Navy with its value-focused pricing.

“Of all the apparel retailers, Gap is still better positioned to gain share,” Poonam Goyal, a retail analyst for Bloomberg Industries, said in an interview. “October sales were good and the guidance was good, and hence the stock is up.”

Gap said comparable sales rose 4 percent in October, exceeding analysts’ average estimate for a 0.6 percent increase, according to Retail Metrics Inc. Same-store sales rose 1 percent in the third quarter, compared to a 6 percent gain a year earlier.

Sales Discounts

Same-store sales for the more than 10 retailers tracked by Retail Metrics rose 3.4 percent last month, excluding results from drugstores, the Swampscott, Massachusetts-based researcher said in an e-mailed statement yesterday. Analysts had estimated a 2.3 percent gain, the researcher said.

Gap may have boosted its sales through discounts, which were deeper across all brands in October than last year, according to research by Janney Capital Markets. The retailer yesterday said it expects to report profit margins on merchandise sold in the third quarter that were lower than the same time last year.

In the absence of a strong fashion trend like last year’s colored denim, apparel retailers are turning to discounts to woo shoppers, which may hurt margins in the fourth quarter as well. Gap announced Nov. 6 that its Old Navy brand will award $1 million to one shopper on Black Friday.

‘Tough Spot’

“Competitively they’re in a tough spot because teen and young-adult apparel is the most competitive category to be in right now,” Ike Boruchow, a New York-based analyst at Sterne, Agee & Leach Inc. said in a phone interview before the results were released. He has the equivalent of a sell rating on the shares.

Retailers from J.C. Penney Co. to L Brands Inc. reported a gain in monthly sales in October as cooler temperatures helped drive demand for sweaters and jeans. J.C. Penney posted its first monthly gain in almost two years as sales at stores open at least 12 months rose 0.9 percent in October, the company said yesterday. L Brands Inc., which owns the Victoria’s Secret and Bath & Body Works brands, said in a statement yesterday that comparable-store sales rose 8 percent, exceeding the estimate for a 2.5 percent increase.

Meanwhile, teen retailers saw sales decline in the third quarter as companies discounted merchandise to lure customers with no major fashion trend to drive sales. Abercrombie & Fitch Co. said this week that comparable-store sales fell 14 percent in the quarter ended Nov. 2. Third quarter same-store sales at American Eagle Outfitters Inc. fell 5 percent including online sales, the company said in a Nov. 6 statement.

Gap’s shares had gained 22 percent this year through the close yesterday, compared to a 23 percent rise in the Standard & Poor’s 500 Index.

The company will release its full third-quarter earnings results on Nov. 21.

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