Gap Earnings Call Insights: Key Improvements and Merchandise Margin

Gap, Inc. (NYSE:GPS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Key Improvements

Kimberly Greenberger – Morgan Stanley: Glenn the entire team has done such a terrific job in what appears to be a very intense and competitive retail environment. I don’t know if you’ve had a chance to sort of step back in and just look at what’s going on in your business relative to everyone else but could you just touch on some of the key operational and executional improvements that you guys have implemented over the last one or two years to stabilize and improve the performance? And are you seeing any kind of encouraging signs in the traffic trends in your stores that sort of potentially helping the comp trend?

Glenn K. Murphy – Chairman and CEO: Let me start with the first question. I’d say what we’ve been doing for the last three or four years is to balance out the Company’s portfolio. So, when the new management’s team started together, one of the comments that I think we made internally and possibly externally as we got — we’ve taken over a very nice hand, we just got to make sure we play it right now. Having a big business in the value sector is — that’s important, that’s Old Navy and we have a brand in the value sector so that’s a great opportunity and point of differentiation for us obviously Gap iconic, a more midmarket, Banana Republic a little more of let’s call it affordable luxury, versatility and what I would call versatile work. So, again all three brands being different from one another. One of the things I’ve tried to do since I’ve been here is make sure that while there is always a little bit of internal dynamic tension between the brands and let’s face it apparel is only so big. So, there is going to be a little bit where they intersect in certain categories, but try to make sure there is enough differentiation between the brands, I think that helps us. And then as you know for the last number of years, we’ve been pushing our online business, putting investments behind that because we know that’s the future and we’ve always had a great platform. We‘ve just been building in that platform and that is another great quarter for 27% growth and that’s good not only for where the customer is but it’s great for return on capital, great for return on sales and simultaneously we’ve been pushing the outlet business. So, good opportunity where two of our brands, where they’re established brands, but there’s a – you can have a value derivative of those brands. We put a lot of money and a lot of square footage and shipped it into this business and lastly, as we’ve gained confidence and made an investment in our international markets driven by our franchise business, which is contributing nicely, but still has a long way to go in terms of its size, a lot more Banana Republics, a lot more Gaps in countries we’re already in. Next year will be Old Navy’s chance to go into franchised markets, and that’s also a business that has some very nice return on sales and return on capital. So, I think the biggest thing we’ve done is to balance out the portfolio. Now, although they’re not significant contributors to this particular quarter, then you have the new brand play between Athleta, INTERMIX and Piperlime. So, I think one of our advantages and some people choose to have a singular brand and that’s where they focus and that may make sense for them, for us given how fragmented the apparel business is, where the leading market share player could have something like a mid to high single-digit, coming to the market with different brands and unique brands and multiple brands into different channels and into different geographies, obviously as we execute and we have a long, long way to go, as paying off as evidenced by this quarter. Now, traffic, I think we’ve been stating on our monthly calls, that traffic has been slightly negative, maybe some people reporting in this quarter had traffic that was maybe better than that. So, it seems like some had traffic that was worse than that. We would love to be able to continue to find the innovative and creative solutions that could get us the positive traffic. That’s certainly not a goal we’re giving up on, because our view is that somebody’s always delivering a positive comp, somebody’s always delivering positive traffic. That’s how we have to believe it, that in spite of our slightly negative traffic from – in the first and second quarter. We strongly believe there is positive traffic to be had. But then holistically when you add that up with or online business and put it together it’s a different picture. So we are finding a way to drive UPT’s to drive conversion to drive average transaction in this environment where in spite of the innovative and creative marketing we may be putting into place, we are seeing slightly negative traffic but we are not giving up on that. We have great real estate, because we’ve been around long time, we‘ve been repositioning our real estate over the last five years. So there is no excuse on the quality of the real estate of the business and we’ve certainly put capital into our stores. So now it’s up to the marketers and the store operators to turn that investment into positive traffic.

Merchandise Margin

Lorraine Hutchinson – Bank of America: Sabrina I just wanted to follow-up on the decline in merchandise margin this quarter. What were the drivers and what’s your outlook for the rest of the year?

Sabrina Simmons – EVP and CFO: So the merchandise margin was down very slightly. Fortunately as we’ve been calling out that a big driver to our gross margin opportunities going forward is going to be in rent and occupancy. So very much as we’d expect Lorraine. We are driving that expansion through rent and occupancy leverage on the positive comp. We said that past Q1 we were not going to have any tailwinds any longer, we just wanted to deliver our merchandise margins or our comp with healthy merchandise margins. We feel like in this environment we very much achieve that in Q2 and so we’ll always be looking to do well on that merchandise margin line, but a lot of our opportunity lies in the continuation of rent and occupancy leverage on a positive comp.

A Closer Look: Gap Earnings Cheat Sheet>>