This summary is based on the third quarter fiscal 2008 earnings call conducted by Gap Inc. (GPS) on November 20, 2008.
Management:
Chairman and CEO: Glenn Murphy
EVP and CFO: Sabrina Simmons
VP of IR: Evan Price
Key Investor Issues:
- Q3 EPS were 35 cents versus 30 cents last year.
- Quarterly gross margin improved by 120 basis points to 38.7%.
- The management repurchased 5.7 million shares during the quarter.
- The third quarter effective tax rate was reported at 38.2%.
Third Quarter Financial Highlights:
Third quarter net sales were $3.56 billion, down 8% versus last year.
- The total company comp store sales dipped 12% in the quarter versus 5% last year.
- The management reported that a contributor to the spread between net sales and comp sales was the continued growth of the online division which grew 15% to $284 million.
The merchandise margins improved 270 basis points, partially offset by 150 basis points of occupancy de-leveraging.
- The drivers of merchandise margin improvement were increases in both regular and mark down margins.
- The gross margin dollars decreased 5% to $1.38 billion.
Third quarter operating expenses were $984 million.
- This represents a decrease of $95 million from the previous year quarter.
- Despite the decline in sales, the company still leveraged operating expenses for 40 basis points.
- The drivers of the decrease were lower corporate overhead expenses and reduced store related expenses.
- Marketing expenses were $121 million versus $124 million last year.
- The management advised that the cost reduction efforts are executed in a manner that is mindful of preserving the quality of both product and customer store experience.
The company ended the third quarter with $2.22 billion in inventory, down 10% over the third quarter of 2007.
- Inventory per square foot was about $51, 13% less than last year.
The year-to-date capital expenditures were $315 million.
- The management reported that company-wide, 92 stores were opened and 69 stores were closed.
- This is inclusive of 16 that were repositioned.
- The company ended the quarter with 3,190 stores.
- The year-to-date free cash flow was an in-flow of $519 million versus an in-flow of $484 million last year.
The company ended the third quarter with $1.6 billion in cash and short-term investments.
- This was above the cash target of about $1.5 billion.
- The management keeps enough cash on the balance sheet not only to fund all of the working capital needs but also to have a cash reserve that will sustain operations through a long downturn.
- The company had $188 million of debt on the balance sheet at the end of Q3.
- The management advised of its intention to pay down $138 million of this debt on December 15 when it matures, leaving the company with virtually no debt.
- The management repurchased a total of 5.7 million shares in the third quarter for $100 million.
- Year-to-date, the company has repurchased 33.4 million shares for $600 million.
Old Navy:
- The management introduced a new $5, $10 and $15 shop which has particularly done well.
- The company will continue to emphasize on the marketing ahead of Thanksgiving and the holiday season.
