Gap Q3 Earnings Call Nuggets: Categories and Cost Cuts

Gap Inc (NYSE:GPS) reported its third quarter earnings and in its subsequent conference call, the company answered the following analysts’ questions we thought you’d like to know.

Categories

Dorothy Lakner – Caris Company asked: Have you made more adjustments in some categories than in others?

Glenn K. Murphy – Chairman and CEO responded: Yes, definitely. Women’s.

This assortment shift certainly is broad based: It’s in kids, it’s in babies, it’s in men’s, but certainly in women’s. And I don’t want to leave anybody with the impression that the only issue we are dealing with at Old Navy is its women’s performance.

As I quoted a Gap Inc. number, it applies to Old Navy, which is double-digit negative comp in the third quarter. The issue is broader than just consumer acceptance of the value proposition, I’d also say, along with some other management team members, that some of the choices that were made.

The product acceptance is also an issue at Old Navy. It’s a combination of both.

Cost Cuts

Lorraine Hutchinson – Bank of America asked: I wanted to ask about SG&A dollars that declined in third quarter. That continues to be somewhat surprising given all the dramatic cost cuts that you took over the past few years. Can you talk a little bit about what you’ve cut and what’s left to cut as sales don’t come in line with expectations for the next few quarters?

Sabrina Simmons – EVP and CFO responded: We’re really pleased with how we managed expenses with great discipline again in the third quarter. I definitely would caution against extrapolating that trend forward into the fourth quarter.

Just underscoring your point, we definitely want to be careful in our most important and biggest quarter; we’re not cutting into areas like marketing and payroll. And you know, our SG&A can vary quarter-to-quarter even though the result was terrific in terms of leverage on a negative 5 comp in the third quarter.

Just as a reminder in the first quarter, we only had a negative 3 comp; we actually didn’t leverage. Expenses were flat as a percent of sales so it definitely varies quarter-to-quarter.

You can count on us to continue to be disciplined, but I wouldn’t extrapolate that strong as a trend forward. I would caution against that.