Gap Inc. (GPS)
Q1 2009 Earnings Call Transcript
May 21, 2009 5:00 p.m. ET

Executives

Evan Price – Vice President, Investor Relations
Glenn K. Murphy – Chairman & Chief Executive Officer
Sabrina L. Simmons – Executive Vice President & Chief Financial Officer

Analysts

Janet Kloppenburg - JJK Research
Jeffrey Black - Barclays Capital
Stacy Pak – SP Research
Dorothy Lakner - Caris & Company
Richard Jaffe - Stifel Nicolaus & Co.
Laura Champine - Cowen & Company
Marni Shapiro - The Retail Tracker
Jennifer Black – Jennifer Black & Associates
Paul Lejuez - Credit Suisse
Brian Tunick - JPMorgan
Jeffrey Klinefelter - Piper Jaffray & Co.
Kimberly Greenberger - Citigroup
Dana Telsey - Telsey Advisory Group
Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Presentation

Operator

Good afternoon, ladies and gentlemen. My name is Justin and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. first quarter 2009 conference call. At this time, all participants are in a listen-only mode. For those analysts who have registered to participate in the question-and-answer session after the presentation, you may now press “*1” to enter the Q&A queue. If anyone should need assistance during the call, please press “*” key followed by the “0” key on your touchtone phone. I would now like to introduce your host, Evan Price, Vice President of Investor Relations.

Evan Price

Good afternoon, everyone. Welcome to Gap Inc.''s first quarter 2009 earnings conference call. For those of you participating in the webcast, please turn to slides 2 and 3. I''d like to remind you that the information made available on this webcast and conference call contains forward-looking statements, including those identified in today''s earnings press release, which is available on www.gapinc.com as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause our results to differ can be found in our Annual $report on Form 10-K for the fiscal year ended January 31, 2009, and today''s press release

Due to economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of May 21, 2009, and we assume no obligation to publicly update or revise our forward-looking statements, even as experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

This presentation includes the non-generally accepted accounting principle measure free cash flow, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of this measure to the GAAP financial measure is included in today''s earnings press release, which is available on www.gapinc.com.

Joining us on the call today are Chairman and CEO, Glenn Murphy, and Executive Vice President and CFO, Sabrina Simmons.

Now I''d like to turn the call over to Sabrina.

Sabrina L. Simmons

Thank you, Evan. Good afternoon, everyone. I will begin today by reviewing first quarter results, followed by commentary on our outlook for the second quarter.

We entered 2009 prepared for a difficult consumer environment. Although first quarter earnings are below last year, we are pleased that our commitment to operational discipline, especially around inventory management and average unit costing, resulted in merchandise margin improvement. In addition, we are encouraged that our product and marketing efforts are beginning to show traction at our largest brand, Old Navy.

Some highlights for the quarter. Net earnings were $0.31 per share; merchandise margins increased by 100 basis points; operating expenses were $73 million below last year; and operating margins were 11.3%, equal to last year.

For webcast participants, please turn to slide 4. First quarter earnings were $215 million, or $0.31 per share, compared to $249 million, or $0.34 per share, last year. Please not that last year''s earnings included about $15 million of pre-tax earnings benefit from a reduction of interest expense accrual.

First quarter effective tax rate was 39.1% and weighted average diluted shares were 697 million.