I've got to give it up for Gap (NYSE:GPS). As a shareholder who's skeptical about the specialty retailer's recovery, I was expecting less-than-thrilling second-quarter results.
Sure, I figured sales and earnings would be up. Having fallen so far by this time last year, that would be easy. Same-store sales would also eclipse the dismal results of recent years, but how would things measure up elsewhere? And would any of this really signal progress?
What I saw surprised me. The quarter really was strong, and Gap does seem to be making its way back to good health.
Now, I have to admit I'm not a full-fledged believer yet. The third quarter will tell the tale. After all, it was in the third quarter last year that Gap began inching its way out of the hole, and comparisons get tougher as we move into the crucial back-to-school season and beyond. Only then can Gap justify a move from $8.35 to around $19 per share in less than a year.
Since I can't predict the future, and since third-quarter results are still a ways off, let's look at what we can see. I mean, there's no reason not to celebrate the company's solid Q2 results.
Total revenues for the quarter increased 13% to $3.7 billion on a 10% jump in same-store sales (though admittedly, that's coming off last year's 7% drop and the second-quarter 2001's decline of 9%).
Net income, meanwhile, more than tripled to $209 million from $57 million. In fact, Gap earned more in this one quarter than it did in the first two quarters combined in each of the past two years. Earnings per diluted share came in at $0.22 versus $0.06.
The cash flow statement also looks good. Capital expenditures declined 40%, and the business generated $235 million in free cash flow through the first six months of the year.
Gap's fashion mix continues to resonate with customers, and because it's discounting less, gross margins improved to 36% from 33%. Inventories increased a respectable 9%, while total debt stayed roughly the same. Moving into the third quarter, Gap looks to be in good shape, operationally lean and strong, and headed (finally) in the right direction.
Can Gap pull off another outstanding quarter of growth? I certainly hope so. Until I know for sure, you can bet I'll be watching the monthly same-store sales reports and monitoring the new fall fashions filling its stores.
As mentioned above, LouAnn Lofton owns shares of Gap, which is almost as fun as celebrating The Motley Fool's 10th anniversary with 10 Ways to Make More Money Now!
