Gap Inc. (GPS)
Q3 2009 Earnings Call Transcript
November 19, 2009 5:00 p.m. ET

Executives

Evan Price - Vice President of Investor Relations
Glenn Murphy - Chairman and Chief Executive Officer
Sabrina Simmons - Executive Vice President and Chief Financial Officer

Analysts

John Morris - BMO Capital Markets
Jeff Klinefelter - Piper Jaffray
Jeff Black - Barclays Capital
Kimberly Greenberger - Citigroup
Paul Lejuez - Credit Suisse First Boston
Janet Kloppenburg - JJK Research
Adrienne Tennant - Friedman, Billings, Ramsey & Company
Brian Tunick - JPMorgan
Michelle Tan - Goldman Sachs
Marnie Shapiro - The Retail Tracker
Stacy Pak - SP Research
Lorraine Hutchinson - Banc of America/Merrill Lynch

Presentation

Operator

Good afternoon ladies and gentlemen. My name is Dixie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. third quarter 2009 conference call. At this time, all participants are in a listen-only mode. Today''s analysts, who have wish to participate in the question-and-answer session after the presentation, you may now press star one to enter the Q&A queue. If anyone should require assistance during the call please press the star key followed by the zero 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 third quarter 2009 earnings conference call. For those of you participating in the web-cast please turn to slides two and three. I''d like to remind you that the information made available on this web-cast and conference call contains forward-looking statements including those identified in today''s earnings press release which is available on 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 results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 31st, 2009. Investors should also consult our quarterly report on Form 10-Q for the quarter ended August 1st, 2009 and today''s press release.

Future 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 November 19th, 2009 and we assume no obligation to publicly update or revise our forward-looking statements even if 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 Principal 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 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 Simmons

Thank you, Evan. Good afternoon everyone. We are pleased with our third quarter performance. We met our goal of improving our comp store sales trends and we did it while delivering the highest third quarter gross margin rate in the past 10 years. These two factors drove a 25% increase in net earnings. And now more highlights for the quarter.

Diluted earnings per share were $0.44 versus $0.35 last year. Gross margin improved by 380 basis points to 42.5%. Operating margin was 13.9% versus 11.1% last year and year-to-date free cash flow was $931 million.

For web-cast participants please turn to slide four. Third quarter net earnings were $307 million compared to $246 million last year. Third quarter effective tax rate was 38.6% and weighted-average diluted shares were 704 million.

Please turn to slide five for sales performance. Third quarter net sales were $3.59 billion up 1% to last year. Total company comp store sales were flat in the quarter versus down 12% last year. Please refer to our earnings press release located on gapinc.com for total sales and comps by division.