Gap Inc. (GPS) reported strong fourth quarter fiscal 2009 results despite challenging market conditions. The company reported net income of $352 million or 51 cents per share during the quarter, compared to $243 million or 34 cents per share in the year-earlier quarter. The quarterly earnings beat the Zacks Consensus Estimate by a penny.
For fiscal 2009, Gap reported net income of $1.1 billion or $1.58 per share, compared to $967 million or $1.34 per share in fiscal 2008. The robust earnings were primarily driven by solid sales at its low-price Old Navy segment and the highest fourth quarter operating margins in over a decade. Net sales during the quarter were $4.24 billion compared to $4.08 billion in the year-ago quarter.
The Old Navy chain has benefited from the increasing preference among U.S. shoppers for lower-price stores due to the challenging macroeconomic environment. Comparable store sales increased 2% during the quarter compared to the year-earlier quarter.
Gross margins increased 550 basis points to 39.5% during the quarter compared to the year-ago quarter. Operating margins increased 410 basis points to 13.9% due to effective cost-control measures and prudent inventory management policies. Gross margin in fiscal 2009 increased 280 basis points year-over-year to 40.3%, while operating margin increased 210 basis points to 12.8%.
Gap is now focusing more on improving its business model by striking the right balance between its cost structure and merchandise by better aligning inventory with sales trends. The company reported a 1% decrease in year-over-year inventory per square foot.
During the quarter, Gap repurchased approximately 19 million shares for $413 million. For fiscal 2009, the company repurchased about 24 million shares for $510 million. At quarter end, Gap had $2.6 billion of cash and cash equivalents. For fiscal 2009, free cash flow of the company was $1.6 billion. Gap defines free cash flow as net cash generated from operating activities less expenses relating to the purchases of property and equipment.
In concurrence with strong quarterly results, Gap has decided to increase its annual dividend from 34 cents per share to 40 cents. During the quarter, the company opened 11 stores and closed 59 stores, bringing the fiscal 2009 figures to 47 and 101, respectively.
For fiscal 2010, the company expects to open about 65 stores and close 110 stores, including repositioning. The long-term growth investments of Gap include rolling out the new Old Navy store model to an additional 200 stores; opening its first Gap stores in China and Italy; expanding Banana Republic in Europe; and adding more Outlet stores in Canada, Europe and Asia.
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