Gap, Inc. (GPS-NYSE) has managed to do something that shareholders have not been used to: they beat earnings expectations.  The company posted $0.22 EPS net, but before a $0.03 charge for Forth & Towne earnings were $0.25 EPS and revenues were $3.56 Billion.  First Call estimates were $0.24 and $3.48 Billion.  The company even offered an annual forecast of $0.80 to $0.90 EPS versus $0.87 estimates, and that is on a 39% 2007 tax rate forecast instead of the 37% for this quarter.  This isn’t an entire win with the drop in same store sales continuing, but it is ‘less bad" than its previous path:

Store                                                2007          2006
Gap North America              -4%      – 8%
Banana Republic N.A          -2%      – 5%
Old Navy N.A.                         -5%      – 11%
International                           -3%      – 11%

Bob Fisher, interim President/CEO: "We are actively working to fix our core business, retain and recruit talent, and streamline operations so that our organization can be more nimble and efficient.  We took important steps in the first quarter by strengthening leadership teams and refining strategies at Gap and Old Navy. While we are making progress, there is more work to be done."

Gross margin of 38.1 percent declined 2.1 points in the first quarter compared to the prior year, driven primarily by markdown activity at Gap brand. Operating margin for the first quarter was 7.3 percent. The company continues to expect that the operating margin for fiscal year 2007 will be in the high single-digits.  The company reported that inventory per square foot was down 8 percent at the end of the first quarter on a year-over-year basis as compared to being down 5 percent last year. The company now expects the percent change in inventory per square foot at the end of the second quarter in fiscal year 2007 to be down in the low-single digits, compared with a 6 percent decline in the second quarter of fiscal year 2006. The company expects the percent change in inventory per square foot at the end of the third quarter of fiscal year 2007 to be down in the low-single digits, compared with flat inventory per square foot in the third quarter of fiscal year 2006.

Shares are up almost 1% after-hours at $18.47, and the 52-week trading range is $15.91 to $21.39.  This one still may be more attractive with more cutbacks, as a private company (as Jim Cramer hopes), or even being split up into parts or as a smaller company.  That doesn’t sound in the works yet and the company may require new leadership before massive changes can be expected.  But this still looks like a "less bad" situation than prior quarters under Paul "The Gimp" Pressler.

Jon C. Ogg
May 24, 2007

Jon C. Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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