NEW YORK, N.Y. – Gap Inc. reported a 9.4 per cent increase in third-quarter earnings, but the fashion retailer maintained a conservative annual profit outlook that suggests a tough holiday quarter ahead.
Like many retailers, Gap, which operates stores under names including its namesake, Old Navy, Banana Republic and Athleta, is heading into a fiercely competitive holiday shopping season where merchants are ramping up sales. Gap has been doing its part by offering constant discounts and is trying to lure shoppers with an incentive that lets customers earn $25 for every $50 they spend through Friday
The results, nevertheless, were among a few bright spots in a third-quarter earnings season that has many retailers including Wal-Mart Stores Inc. and Kohl’s Corp. lowering their guidance in an uncertain economy. Teen retailer Abercrombie & Fitch reported earlier Thursday a loss in its third quarter, dragged down in part by charges related to closing its Gilly Hicks stores. The teen retailer’s sales softened and it said sales weakness continues in the fourth quarter.
“There’s a little bit of fatigue out there when it comes to consumers so the question is, ‘Are we disappointed in the consumer sentiment, or … have we really not been innovative in order to give consumers a value proposition that doesn’t look like wallpaper, day in, day out,?’ ” Glenn Murphy, Gap’s CEO, told investors on a conference call after the results came out late Thursday.
Murphy added, “I think we’ve done a good job at Gap Inc. I think we can do a better job going forward.”
New designer collaborations, brighter fashions and livelier stores have helped invigorate sales since early last year, but the trend toward bright colours has passed, and Gap is trying to figure the next thing that will get shoppers excited enough to buy.
The San Francisco-based chain posted net income of $337 million, or 72 cents per share, in the three-month period ended Nov. 2. That compares with $308 million, or 63 cents per share, last year.
Revenue rose 2.8 per cent to $3.98 billion.
Analysts were expecting 71 cents per share on revenue of $3.98 billion, according to FactSet estimates.
Revenue at stores opened at least a year rose 1 per cent, compared with a 6 per cent increase a year ago. By division, Gap’s results were up 1 per cent, while Banana Republic’s metric was down 1 per cent. Old Navy was unchanged from a year ago.
The measure is considered a key indicator of a retailer’s health.
Gross profit margins fell 1.2 percentage points to 40 per cent in the quarter, as Gap heavily marked down goods.
Gap reiterated that it expects profits for the full year to be $2.57 to $2.65 per share. Analysts expect $2.75 per share, on average.
The company also said it’s increasing its stock buyback authorization by $1 billion. It repurchased approximately 20 million shares for about $790 million during the third quarter, completing all but $100 million of its existing share repurchase authorization.
The new repurchase authorization follows the company’s recent announcement to increase its annual dividend per share to 80 from 60 cents. That represents the second increase this fiscal year.
Shares fell 2 per cent, or 86 cents, to $41 in after-market trading Thursday, after closing up 62 cents at $41.86.
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