Gap Keeps It Up

Gap's (NYSE: GPS  ) done it again, putting up another strong quarter of growth and making me more of a believer that the company's turnaround is for real. The balance sheet is clean, and the retailer's free cash flow and same-store sales growth are signs that it is slowly healing itself from the inside out.

Total sales rose 8% to $3.9 billion, with comparable-store sales increasing 6% on top of last year's 2% gain. Net income ballooned to $263 million, 94% (!) ahead of the prior quarter. Per share diluted earnings came in at $0.28 versus $0.15 in 2002's Q3.

The balance sheet reveals a company that is tightly managing its inventory, hanging onto its cash, and reducing its long-term debt. Inventory levels actually dropped year-over-year by 8%, continuing Gap's trend of keeping its inventories clean and lean.

Gap has really focused on its inventory over the past year, and it's doing a commendable job of both stocking the right items and stocking the right amount of them. Though you can't see how desirable Gap's clothes are just by looking at that inventory number, the fact that inventory dropped while same-store sales rose indicates that the retailer's fashions are hitting their marks with shoppers.

Also promising is that fact that all three divisions -- Gap, Old Navy, and Banana Republic -- posted better same-store sales. Banana Republic, in particular, generated comps growth of 11% on top of last year's 1% gain. That's impressive, and means that the chain's increased focus on more luxe fabrics and better marketing messages is paying off.

Down on the cash flow statement, through the first nine months of the year, Gap's churned out almost $504 million in free cash flow, substantially higher (to put it mildly) than last year's $67 million. Capital expenditures dropped, and as expected, Gap will end its year with a 2% drop in net square footage. In the next fiscal year, Gap expects net square footage to remain flat. I'm very happy to see that the company's going to continue keeping its new store growth muted.

One amusing tidbit from the company's conference call (thanks to CCBN/StreetEvents for the transcript) is that Gap executives kept being asked again and again if the company's thinking about an acquisition here or if it's thinking about adding a new brand or chain of stores. The impatience was evident, but I love the fact that Gap remained cautious and answered again and again that it had no such plans, and was still focused on its recovery. The company's still in no shape to think about expansion plans, as it will now face tougher comparisons in the fourth quarter and going forward. I'm glad to hear that management believes that, too.

It feels strange to me not to have anything to take the company to task for this quarter, but as a shareholder, I'm certainly not complaining. Gap's making all the right moves here to keep its turn-around motoring along. I'm (for once) looking forward to the fourth quarter and the holiday promise it holds.

LouAnn Lofton owns shares of Gap.

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LouAnn Lofton

LouAnn Lofton has been a writer (among a few other things) with The Motley Fool since January 2000. She's the author of the Fool's "Warren Buffett Invests Like a Girl: And Why You Should, Too," published in June 2011. You can follow her on Twitter via @LouAnnLofton.

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5/24/2016 4:04 PM
GPS $18.09 Down -0.32 -1.74%
Gap CAPS Rating: ***