The Gap(GPS) reported earnings of 44cents for the fiscal third quarter, right in line with the guidance they updated back on November 5th. They also announced a $500million stock buyback.
Gross margin was up almost 4% versus a year ago thanks to better inventory management and less markdowns.
The street seems to expect fourth quarter gross margin improvement to be as impressive as this quarter's was, but management guidance in the press release suggests that they may be a bit more promotional in an attempt to grab market share. If that's the case, actual earnings may disappoint by a few pennies per share.
“We’re pleased with our third quarter results, particularly our ability to deliver earnings 25 percent above last year and our highest third-quarter operating margin in a decade,” said Glenn Murphy, chairman and chief executive officer. “Looking ahead to the holiday season, we’re focused on gaining market share as we invest in marketing and present a strong value proposition to customers across our brands.”
The "gaining market share" comment is of particular importance. As I compare expectations for this year and 2010 with peak margin results back in 2004, the expectations for sales-per-square-foot gets my attention. CEO Glenn Murphy has done a remarkable job (as I continually point out), but he can only streamline so much. At some point, they need top line growth. The problem in that area is that this sector has gotten more and more crowded over the years.
2009 and 2010 sales-per-square-foot will come in around $360 and $370 a foot, versus $445 in 2004. A return to that level would send Gap stock FLYING past $30, but as the chart below shows, it's a dog-eat-dog fight among an ever-more crowded field for those sales.
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