Gap Expands in China Even as Earnings Drop

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The Gap, Inc. (NYSE:GPS) has taken investors on a roller-coaster ride over the past year. Shares have traveled in a jagged line between $32.35 and $46.56 over the past 52 weeks, climbing 35 percent on the year as of February 27. Shares touched their high in August, suffered two deep sell offs each followed by a dramatic rally in late 2013 and early 2014, and were back to within striking range when the company reported earnings after the market closed on Thursday.

The results were good because they exceeded analyst expectations, but not great because they reflect a tough holiday season in which both sales and earnings contracted. Fourth-quarter revenue fell 3.2 percent on the year to $4.58 billion, just shy of the mean analyst estimate of $4.6 billion. Fourth-quarter earnings fell 6.85 percent on the year to 68 cents per share, beating the mean analyst estimate of 66 cents per share. Earnings suffered in the wake of deep competitive discounting that, although it hurt the bottom line, drew customers to the store. Comparable sales were up 1 percent on the year — slow growth, but growth nonetheless.

For the year, revenue increased 3.18 percent to $16.15 billion, just missing the mean analyst estimate of $16.18 billion. Earnings increased 17.6 percent to $2.74 per diluted share, beating the mean analyst estimate by a penny. Comparable sales were up 2 percent for the year.

Shares fell about 1 percent in post-market trading on the news. At least for now, the earnings hit appeared to be enough to take the steam out of the stock’s recent rally. Shares are up 18.6 percent over the past month, riding the energy of an upgrade to Buy from analysts at UBS.

In addition to earnings, Gap announced that it will open an Old Navy location in mainland China. The store will open on March 1, building on “Gap brand’s three-year run of successful growth in the world’s second largest apparel market.” The opening hopefully foreshadows some energy for Gap’s Asia segment. Revenues from Asia account for about 9 percent of total revenue, and segment revenues decreased 1.6 percent on the year in the fourth-quarter. For the full-year, Asia-segment revenues increased 2.4 percent.

Gap made headlines earlier in August when Chair and CEO Glenn Murphy announced that the company would raise its hourly minimum wage to $10 per hour by 2015. The move is expected to impact about 65,000 employees. “Over the last five years, retail has changed rapidly, and we’ve stayed ahead of others by investing in technology,” Gap explained in an FAQ prepared for the announcement, “and yet, a customer’s lasting impression is often shaped by the interactions with the people in our stores. To connect and enhance the in-store and digital experience for our customers even more, we must attract and retain great talent.”

The company’s board of directors also announced a 10 percent increase in the annual dividend to $0.88 on Thursday.

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