Thursday, August 20, 2009

The Gap beats by a penny (GPS)

AlphaNinja - The conference call is ongoing but I thought I'd share the Gap's (GPS) results.

They beat earnings expectations by 1cent, earning 33cents per share in the second quarter versus 32cents a year earlier, and the 32cent street expectation.

--Gross profit margin improved 1.5 percent year-over-year, as the company's focus on full-priced selling continues to be more important than chasing lower-margin sales.

--Operating expenses increased as a percent, as fixed costs are covered by lower sales.

Updates to my earnings model. I have them earning below the street this year and above the street next year. That will hinge on several factors. I'm trusting CEO Glenn Murphy to be extremely diligent about the new marketing spend the company is embarking on. And I think they will surprise the street in terms of margin expansion. Note that while I'm more bullish than the street for FY2010, the company still has a LOT of upside if they can recover sales and profitability levels (on a per-square foot basis) seen in the 2003/2004 timeframe - a good possibility given the focus of this new management.

At these levels we're looking at an FCFY around 10-11%, certainly a good value. It's up 30% since I last flagged it as a good FCF value, and while I'd certainly say buy it here, we may see better opportunities if the market as a whole falls. Sorry I can't offer more conviction, but as this FCFY chart shows below, the better the yield the better the stock outperformance:

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