Gap Inc. (GPS) reported fiscal 2010 first-quarter earnings of 45 cents per share after the closing bell on Thursday. The result topped both the Zacks Consensus Estimate of 43 cents and the year-ago earnings of 31 cents per share. The strong performance was primarily driven higher sales led by its low-price Old Navy segment and improved margins.

Bolstered by the strong quarterly performance, The Gap also lifted its earnings guidance for fiscal 2010 to a range of $1.77 to $1.82 per share from its earlier guidance of $1.70 to $1.75. The revised guidance remains in line with the Zacks Consensus Estimate of $1.80 per share, which dipped by 3 cents in just the past week.

Meanwhile, during the quarter, net sales grew 6% to $3.3 billion from $3.1 billion in the prior-year period. Comparable store sales expanded 4% in the quarter, led by a 7% growth in Old Navy. The Old Navy chain has continued to benefit from the increasing preference among U.S. shoppers for lower-price stores due to the challenging macroeconomic environment.

In the reported quarter, The Gap opened 9 stores and closed 19 locations, and ended the quarter with a total of 3,085 stores.

Gap’s gross profit recorded a growth of 13.1% year-over-year to $1.4 billion, while gross margin increased 250 basis points (bps) to 42.1%. Operating income grew 34.3% year-over-year to $474 million, while operating margin rose 290 bps to 14.2% due to higher gross margin and effective cost-control measures.

During the quarter, The Gap bought back approximately 14 million shares for a total consideration $296 million, while dividends increased 18% from the year-ago period, in line with company policy of rewarding shareholders. At quarter end, the company had $2.5 billion of cash and cash equivalents, compared to $1.7 billion in the year-ago period.

Looking ahead, The Gap expects to launch 65 stores in fiscal 2010, while closing 110 stores. The company also plans to deploy $575 million towards capital expenditure, primarily towards store remodels, international openings and online launch in Europe and Canada.

We presently have an Outperform recommendation on the stock.
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