Massive casual apparel retailer Gap (NYSE:GPS) hasn't exactly been a magnet for good publicity lately. Earlier this month, the company announced that working conditions at most of its overseas factories were found to be substantially below its standards. While longtime corporate activists might not have been surprised by the company's findings, Gap's announcement was a rare corporate admission of the seamier side of overseas manufacturing.
Gap investors, therefore, must have appreciated the boost from the after-market announcement of impressive fiscal Q1 (ended May 1) financial results. Revenues rose 9% year over year to $3.7 billion, while same-store sales rose 7%. Same-store sales were down from last year's 12% jump, but solid nonetheless, especially as all four of the company's operating divisions managed to improve both numbers. (The upscale Banana Republic line was the big winner, as comps rose 21% during Q1.) All this, meanwhile, was accomplished with fewer stores.
Other numbers on the income statement were similarly impressive. Gross margins improved substantially, indicating fewer markdowns, while operating margins rose as well, though they fell slightly if you add in a $30 million pretax loss the company took to pay down debt early. With interest expense eating up a much smaller chunk of sales than last year, net margins improved to 8.5% from 6%. Diluted earnings per share rose roughly 45%, even with a higher share count.
In late February, longtime Gap-watcher Rick Aristotle Munarriz, with whom I once debated the company's fortunes, urged caution among investors even as the company turned in solid 2003 numbers. His argument was that we should wait for improved earnings and same-store sales during the Gap turnaround before jumping in. Wise words -- but Q1's results are a strong indicator that things are panning out.
Is Gap's turnaround complete? What else does the retailer need to do? Give your opinion on our Gap discussion board.
Fool contributor Dave Marino-Nachison doesn't own shares of Gap.
