This summary is based on the second quarter fiscal 2008 earnings call conducted by Gap Inc. (GPS) on August 21, 2008.
Management:
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Chairman and CEO: Glenn Murphy
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EVP and CFO: Sabrina Simmons
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VP of IR: Evan Price
Key Investors Issues
Total sales were $3.5 billion, down 5% versus last year as comp store sales were down 10% versus down 5% last year.
- Earnings were $229 million or 32 cents a share, up 51% from $152 million or 19 cents a share in 2007.
- The firm repurchased 16 million shares for $284 million.
Half Year Highlights:
- Net sales were $6.9 billion, down 4.2% from $7.2 billion in 2007.
- Earnings amounted to $478 million or 66 cents a share, up 44% from $331 million or 41 cents a share in the prior year.
Second Quarter Highlights
Earnings were $229 million or 32 cents a share, up 51% from $152 million or 19 cents a share in the prior year as gross margins increased 390 basis points to 38.2% versus 34.3% last year.
- Operating expenses decreased by $74 million to $965 million largely driven by reduced expenses related to the stores, some of which are driven by the decline in sales
- Total sales were $3.5 billion, down 5% versus last year as comp store sales were down 10% versus down 5% last year.
- Merchandise margin improved by 560 basis points versus prior year, driven by improvements in both regular price and markdown margins.
- Although occupancy cost deleveraged by 170 basis points, gross margin dollars increased by 6% to $1.3 billion.
The firm ended with $1.7 billion in inventory, down 14% versus the prior year and inventory per square foot was $39, down 17% versus down 6% in 2007.
- Year-to-date capital expenditures were $208 million as the firm opened 55 stores and closed 52 stores this year and ended the quarter with 3,170 stores.
- Total square footage is flat to prior yearend.
- Year-to-date free cash flow defined as cash from operation less capital expenditures was an inflow of $354 million compared with an inflow of $347 million last year.
- The firm repurchased a total of 16 million shares for $284 million at an average price of $17.45.
- It ended the second quarter with about $1.7 billion in cash and short-term investments.
Brand Performance:
- The firm is doing work behind the scenes and is getting itself ready to play more offensively minded when it comes to getting traffic through the front doors and across the lease line [ph] at the malls in which it is in.
- At Gap, the business consumer acceptance was still very positive for the product in July.
- It is hoped that the Julyy consumer acceptance is the beginning of Gap returning to being very consistent in how they approach and how they design into what their ultimate target consumer is and the brand positioning of Gap brand.
- Traffic continues to be the issue of at Banana Republic and the firm has been very focused on the external impact to the traffic, people who are in the competitive setting, specialty apparel and some department stores.
- The firm will have the potential to reduce somewhere between 10% and 15% of the square footage over the next three to five years.
Fiscal 2008 Outlook:
- The firm upped its full-year EPS guidance, which was previously stated on the July sales call as $1.30 to $1.35, up from a $1.20 to $1.27.
- Operating margin is increased to about 10% and full year capital expenditures down to about $450 million from $500 million, driven by fewer new stores and remodels.
- The number of new stores expected to open in 2008 has decreased by 15 stores to about 100 for the year, driven primarily by the Banana Republic.
Key questions and answers from the second quarter earnings call conducted by Gap Inc. (GPS) on August 21, 2008.
Lorraine Maikis (Merrill Lynch):
On SG&A opportunities going forward, are there other opportunities for cutting there?
Sabrina Simmons: As a reminder, in the back half, we are anniversarying our companywide cost reduction initiatives from last year. So, the comparisons do get more difficult.
We are looking at kind of across the board every line item, but with some of the bigger buckets being focused around driving continued efficiency in our store payroll and our logistics spend.
