Gap Inc. (GPS), a premier international specialty retailer, has reported healthy third quarter results despite challenging market conditions. The company reported net income of $307 million or 44 cents per share during the quarter compared to $246 million or 35 cents per share in the year-earlier quarter.
The robust earnings were primarily driven by strong sales at its low-price Old Navy segment and the highest third quarter operating margins in a decade. Net sales during the quarter were $3.59 billion compared to $3.56 billion in the year-ago quarter, largely due to a 10% increase in comparable sales across 1,060 Old Navy stores that account for about 40% of the total sales.
The Old Navy chain has benefited from the increasing preference among U.S. shoppers for lower-price and discount stores due to the continued challenging macroeconomic environment. Gross margins increased 380 basis points year-over-year to 42.5%. Operating margins during the quarter increased to 13.9% from 11.1% in the year-ago quarter due to effective cost-control measures and prudent inventory management policies.
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 9% decrease in year-over-year inventory per square foot. During the quarter, Gap repurchased approximately 4.1 million shares for $91 million, out of which 0.6 million shares were repurchased from individual members of the Fischer family.
Subsequent to the end of the quarter, the management also authorized an additional $500 million under its share repurchase program, including a $20 million share repurchase from the Fischer family. At quarter end, Gap had $2.4 billion of cash and cash equivalents. Year-to-date, free cash flow of the company was $931 million. Gap defines free cash flow as net cash generated from operating activities less expenses relating to the purchases of property and equipment.
During the quarter, Gap opened 13 stores and closed 15 stores, bringing the year-to-date figures to 36 and 42, respectively. For fiscal year 2009, the company expects to open about 50 stores and close 100 stores, including repositioning. With a strong performance in the fiscal 2009 third quarter, Gap is poised to regain its lost market share ahead of the holiday season supported by increased marketing campaigns and a focused approach to present a strong value proposition to customers.
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