Operating expenses were $991 million, down $217 million versus the prior year.
- Store related expenses like store payroll, packaging and supplies, which tend to vary with sales, were the primary drivers of the decrease.
- Other drivers were reductions in marketing and lower corporate overhead expenses, primarily in the area of bonus and payroll and benefits.
- Marketing expenses for the quarter were $138 million, down $11 million versus last year.
The firm ended the period with $1.5 billion in inventory, down 4% versus the prior year.
- Investigate per square foot was $35, down 6.2% on top of a 15% reduction in 2007.
- Gap Inc ended the fourth quarter with about $1.8 billion in cash. The strong cash flow generation, along with a healthy cash balance, allows the firm to continue self-funding operating needs while maintaining a significant cash reserve.
- Gap Inc repurchased about 12 million shares for $146 million.
Fiscal 2009 Outlook
– The financial priorities remain the same; delivering healthy merchandise margins, maintaining discipline around cost management, generating free cash flow, and focusing on return on invested capital.
-The goal of healthy margins can be achieved through managing inventory and reducing average unit cost.
- Traffic is viewed as a proxy for consumer demand and current traffic trends are an important input for inventory buying decisions.
The percentage change in inventory per square foot at the end of the first quarter is expected to be down in the high single digits on top of the 17% decline last year.
- The other factor that can support healthy margins is a further reduction in average unit cost.
- In addition to the focus on average unit cost savings, the firm remains committed to reducing operating expenses.
- Given that SG&A was reduced by nearly half a billion dollars in 2008, the level of savings will be less in 2009.
First quarter 2009 operating expenses should be down $10 to $30 million versus first quarter last year.
- Marketing expenses in the first quarter of this year are expected to be up slightly compared to the $93 million spent in the first quarter last year, driven by investments in the newly acquired business, Athleta.
- The target cash balance is about $1.5 billion with the primary objective in investing cash being to principal preservation and liquidity.
- Given current market conditions, the yield on the $1.8 billion of cash should be close to zero in the near term.
The anticipated capital spend is about $350 million, a decrease of about $80 million over the prior year, driven by fewer new stores.
- The firm is maintaining its annual dividend of 34 cents per share.
- However, given that the cash balance is more in line with the target of about $1.5 billion, the share repurchase program will likely slow in 2009, especially in the first half.
- A healthy balance sheet and ability to generate significant free cash flow are true advantages that allow the firm to compete effectively this year.
Key questions and answers from the fourth quarter fiscal 2009 earnings call as presented by Gap Inc (GPS) on February 26, 2009
Lorraine Maikis (Bank of America/Merrill Lynch):
Can you just talk about why in this environment you are opening new stores and give us an idea of the performance of the outlet, if that is driving those openings?
Glenn Murphy: We believe in our international business, namely the corporate international business we control in the U.K., the Republic of Ireland, France and Japan, we still have some opportunities to open some stores.
One of those is that Banana Republic really just has one store currently and it is at Regent Street in London, so we see some opportunities for Banana Republic in the U.K. In Japan as we go forward there are also some Banana Republic opportunities.
They are more store in store opportunities in department stores. Then we have some outlet opportunities in North America, mostly in Canada, where we only have two outlet stores right now, and in Japan, where we only have 10 - 10 in the U.K. - where we have less than 10.
So that 50 new stores, is split between international and outlets.
Lorraine Maikis (Bank of America/Merrill Lynch);
Could you give us an update on your real estate initiatives on how the discussions with the landlords are going about closing or consolidating stores?
Glenn Murphy: When it comes to the store closures, and as leases expire and they get terminated, then we have a chance to close stores to a combination of relocations.
