Gap Company Earnings: Turnaround Meets Valuation and Gravity

The company reaffirmed its fiscal year 2013 diluted earnings per share guidance of $2.52 to $2.60, although the market is disappointed that this guidance was not raised in light of Gap doing better than it expected. Gap’s operating margin was 14.2% in the first quarter, versus 11.3% last year, and it continues to expect 13% margins for this year. Here is how the same store sales went at each unit, but remember about the loss of that extra week:

• Gap Global: positive 3% versus positive 2% last year
• Old Navy Global: positive 3% versus positive 4% last year
• Banana Republic Global: flat versus positive 5% last year

Gap said that it ended the first quarter with $1.6 billion in cash and cash equivalents. Its share repurchases were $58 million during the quarter, and it ended with 466 million shares outstanding.

The company also said that it ended the first quarter of fiscal 2013 with a total of 3,428 store locations. Of those, some 3,105 were company-operated. Overall, 43 new store opened and 33 closed. Chairman and CEO Glenn Murphy said, “We are pleased with our strong start to the year, especially first quarter sales. We remain focused on continuing to deliver shareholder value.”

Gap’s problem today is not its earnings and not its guidance. The stock has recovered so much during its turnaround that it has to blow the doors off the hinges. This was good, but closing up 0.8% at $41.38 compared to a 52-week trading range of $25.02 to $41.86. Shares are down about 1% after the news in after-hours trading.