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Press release from Business Wire

Gap Inc. Reports First Quarter Earnings Per Share of 47 Cents, an 18 Percent Increase over Last Year

<p class='bwalignc'> <b>Net Sales up 6 Percent, Comparable Sales up 4 Percent</b> </p> <p class='bwnowrap'> </p>

Thursday, May 17, 2012

Gap Inc. Reports First Quarter Earnings Per Share of 47 Cents, an 18 Percent Increase over Last Year16:00 EDT Thursday, May 17, 2012 SAN FRANCISCO (Business Wire) -- Gap Inc. (NYSE:GPS) today reported that net sales for the first quarter, which ended April 28, 2012, increased 6 percent to $3.5 billion compared with $3.3 billion for the first quarter last year. The company's first quarter comparable sales increased 4 percent. Net income for the first quarter was $233 million, flat compared with the first quarter last year. First quarter diluted earnings per share increased 18 percent to $0.47 compared with $0.40 last year. “During the quarter, we improved sales, grew earnings per share, and continued investing in the business to drive performance,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “We're pleased with the progress we're making against our 2012 priorities in both our domestic business and global growth initiatives.” Given first quarter performance, the company has raised its estimate for fiscal year 2012 diluted earnings per share to be in the range of $1.78 to $1.83, representing a 14 percent to 17 percent increase over fiscal year 2011 diluted earnings per share of $1.56. Additional First Quarter Highlights In North America, Gap, Banana Republic, and Old Navy each delivered positive comparable sales for the quarter. Total net sales for the Gap Inc. Direct division increased 18 percent to $410 million compared with $348 million last year. Net sales for regions outside of North America (including online and franchise) were $511 million compared with $454 million last year, an increase of 13 percent. Franchise net sales increased 30 percent compared with last year, and the company entered three new markets during the quarter. The company continued to expand its store base in China, opening 7 new stores during the first quarter. First Quarter Comparable Sales Results The company's first quarter comparable sales were up 4 percent compared with a 3 percent decrease in the first quarter last year. Comparable sales for the first quarter of fiscal year 2012 were as follows: Gap North America: positive 5 percent versus negative 3 percent last year Banana Republic North America: positive 5 percent versus negative 1 percent last year Old Navy North America: positive 4 percent versus negative 2 percent last year International: negative 4 percent versus negative 6 percent last year First Quarter Net Sales Results The following tables detail the company's first quarter net sales:                 ($ in millions)Quarter Ended April 28, 2012GapOld NavyBananaRepublicFranchise (3)Piperlime and AthletaTotal (4)Percentage of Net Sales U.S. (1) $ 757 $ 1,136 $ 484 $ - $ - $ 2,377 68 % Canada 73 83 45 - - 201 6 Europe 153 - 15 18 - 186 5 Asia 223 - 30 20 - 273 8 Other regions   -   -   -   40   -   40 1   Total Stores reportable segment 1,206 1,219 574 78 - 3,077 88 Direct reportable segment (2)   110   163   48   -   89   410 12   Total $ 1,316 $ 1,382 $ 622 $ 78 $ 89 $ 3,487 100 %     ($ in millions)Quarter Ended April 30, 2011GapOld NavyBananaRepublicFranchise (3)Piperlime and AthletaTotal (4)Percentage of Net Sales U.S. (1) $ 743 $ 1,097 $ 460 $ - $ - $ 2,300 70 % Canada 70 88 43 - - 201 6 Europe 161 - 11 15 - 187 5 Asia 190 - 24 16 - 230 7 Other regions   -   -   -   29   -   29 1   Total Stores reportable segment 1,164 1,185 538 60 - 2,947 89 Direct reportable segment (2)   96   140   41   -   71   348 11   Total $ 1,260 $ 1,325 $ 579 $ 60 $ 71 $ 3,295 100 % (1) U.S. includes the United States and Puerto Rico. (2) Online sales shipped from distribution centers located outside the U.S. were $34 million ($22 million for Canada and $12 million for Europe) and $26 million ($18 million for Canada and $8 million for Europe) for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. (3) Franchise sales were $78 million ($69 million for Gap and $9 million for Banana Republic) and $60 million ($53 million for Gap and $7 million for Banana Republic) for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. (4) Net sales for regions outside of North America, including online and franchise, were $511 million and $454 million for the thirteen weeks ended April 28, 2012 and April 30, 2011, respectively. Additional Results and 2012 OutlookEarnings per Share First quarter diluted earnings per share of $0.47 increased 18 percent compared with $0.40 for the first quarter last year. This includes a benefit of about $0.01 related to favorable reassessments of tax positions in the quarter. The company raised its guidance for fiscal year 2012 diluted earnings per share to be in the range of $1.78 to $1.83. Depreciation and Amortization The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, for fiscal year 2012 to be about $475 million. Operating Expenses First quarter operating expenses were $980 million, up $62 million compared with the first quarter last year. Marketing expenses for the quarter were $139 million, up $20 million compared with the first quarter last year, driven primarily by increased investments in customer relationship marketing and Gap brand marketing. The company does not expect to leverage operating expenses for the full year given its plans to invest prudently in growth initiatives and its domestic business. Operating Margin The company continues to expect operating margin for fiscal year 2012 will be about 10 percent. Effective Tax Rate The effective tax rate was 37.5 percent for the first quarter of fiscal year 2012. The company continues to expect the full year effective tax rate will be about 39.5 percent for fiscal year 2012. Inventory On a year-over-year basis, inventory per store was down about 7 percent at the end of the first quarter of fiscal year 2012. The company expects inventory per store to be about flat at the end of the second quarter of fiscal year 2012 compared with the end of the second quarter last year. Cash, Cash Equivalents, and Short-term Investments The company ended the first quarter of fiscal year 2012 with $2.0 billion in cash, cash equivalents, and short-term investments. Year to date, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $216 million compared with an inflow of $104 million last year. Please see the reconciliation of free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this press release. Share Repurchases First quarter share repurchases were $18 million, and the company ended the first quarter of fiscal year 2012 with 491 million shares outstanding. The level of share repurchase activity in fiscal year 2012 is expected to be more modest than in fiscal year 2011. Dividends The company paid a dividend of $0.125 per share during the first quarter of fiscal year 2012, which was an increase of 11 percent compared with the first quarter last year. Including this first quarter dividend, the company expects to pay $0.50 per share in dividends for fiscal year 2012. Capital Expenditures Year to date, capital expenditures were $148 million. The company maintains its expectation that fiscal year 2012 capital spending will be approximately $600 million. Real Estate The company ended the first quarter of fiscal year 2012 with a total of 3,270 store locations in 41 countries, 3,026 of which were company-operated. During the first quarter of fiscal year 2012, the company opened 32 and closed 42 company-operated store locations. Net square footage of company-operated stores was 36.9 million at the end of the first quarter, a decrease of 2 percent from 37.8 million at the end of the first quarter of fiscal year 2011. This decrease reflects Gap Inc.'s strategy to optimize square footage in North America. The company now expects net openings of about 15 company-operated stores and about 50 to 75 franchise stores during fiscal year 2012. Net square footage for company-operated stores is expected to decrease by about 1 percent by the end of fiscal year 2012 compared with the end of fiscal year 2011. Store count, openings, closings, and square footage for our stores are as follows:           Quarter Ended April 28, 2012Store Locations Beginning of Q1Store Locations OpenedStore Locations ClosedStore Locations End of Q1Square Feet(millions) Gap North America 1,043 5 26 1,022 10.5 Gap Europe 193 - 1 192 1.7 Gap Asia 152 11 2 161 1.6 Old Navy North America 1,016 6 8 1,014 17.9 Banana Republic North America 581 6 3 584 4.9 Banana Republic Asia 31 3 2 32 0.2 Banana Republic Europe 10 - - 10 0.1 Athleta North America 10 1 - 11 - Company-operated stores total 3,036 32 42 3,026 36.9 Franchise 227 22 5 244 N/A Total 3,263 54 47 3,270 36.9 Webcast and Conference Call Information Katrina O'Connell, vice president of Corporate Finance and Investor Relations at Gap Inc., will host a summary of the company's first quarter fiscal year 2012 results during a live conference call and real-time webcast at approximately 5 p.m. Eastern Time today. Ms. O'Connell will be joined by Glenn Murphy, Gap Inc. chairman and chief executive officer, and Sabrina Simmons, Gap Inc. chief financial officer. To access the conference call, please dial (800) 374-1731, or (706) 679-5876 for international callers. The webcast can be accessed from the Financial News and Events page of the Investors section at www.gapinc.com. A replay of the call will be available on www.gapinc.com. May Sales The company will report May sales on May 31, 2012. Forward-Looking Statements This press release and related conference call and webcast contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding the following: global growth initiatives; earnings per share for fiscal year 2012; depreciation and amortization for fiscal year 2012; operating margin for fiscal year 2012; effective tax rate for fiscal year 2012; inventory per store at the end of the second quarter of fiscal year 2012; level of share repurchases in 2012; annual dividend per share for fiscal year 2012; capital expenditures for fiscal year 2012; optimizing square footage; store openings and closings for fiscal year 2012; real estate square footage for fiscal year 2012; gaining market share online; future Athleta stores, and future stores in China and Japan; improving sales; reinvesting in the business; growing earnings per share; leveraging rent and occupancy on a positive comp; investments in domestic business in 2012, and impact on operating expenses; delivering healthy merchandise margins; average unit costs in 2012; and investments in international growth, global IT, e-commerce, store payroll and marketing. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause the company's actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following: the risk that adoption of new accounting pronouncements will impact future results; the risk that changes in general economic conditions or consumer spending patterns could adversely impact the company's results of operations; the highly competitive nature of the company's business in the United States and internationally; the risk that the company or its franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences; the risk to the company's business associated with global sourcing and manufacturing, including sourcing costs, events causing disruptions in product shipment, or an inability to secure sufficient manufacturing capacity; the risk that the company's efforts to expand internationally may not be successful; the risk that the company's franchisees will be unable to successfully open, operate, and grow their franchised stores in a manner consistent with the company's requirements regarding its brand identities and customer experience standards; the risk that the company or its franchisees will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying or terminating leases for existing store locations effectively; the risk that comparable sales and margins will experience fluctuations; the risk that changes in the company's credit profile or deterioration in market conditions may limit its access to the capital markets and adversely impact its financial results and its ability to service its debt while maintaining other initiatives; the risk that trade matters could increase the cost or reduce the supply of apparel available to the company and adversely affect its business, financial condition, and results of operations; the risk that updates or changes to the company's IT systems may disrupt its operations; the risk that actual or anticipated cyber attacks, and other cybersecurity risks, may cause the company to incur increasing costs; the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect the company's operations and financial results; the risk that acts or omissions by the company's third-party vendors, including a failure to comply with the company's code of vendor conduct, could have a negative impact on its reputation or operations; the risk that the company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program; the risk that the company will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; and the risk that changes in the regulatory or administrative landscape could adversely affect the company's financial condition, strategies, and results of operations. Additional information regarding factors that could cause results to differ can be found in the company's Annual Report on Form 10-K for the fiscal year ended January 28, 2012, as well as the company's subsequent filings with the Securities and Exchange Commission. These forward-looking statements are based on information as of May 17, 2012. The company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. About Gap Inc. Gap Inc. is a leading global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Banana Republic, Old Navy, Piperlime, and Athleta brands. Fiscal 2011 net sales were $14.5 billion. Gap Inc. products are available for purchase in over 90 countries worldwide through about 3,000 company-operated stores, about 200 franchise stores, and e-commerce sites. For more information, please visit www.gapinc.com.   The Gap, Inc.CONDENSED CONSOLIDATED BALANCE SHEETSUNAUDITED       ($ in millions)April 28, 2012April 30, 2011 ASSETS Current assets: Cash, cash equivalents, and short-term investments $ 2,047 $ 2,467 Merchandise inventory 1,591 1,713 Other current assets   807   690 Total current assets 4,445 4,870 Property and equipment, net 2,521 2,559 Other long-term assets   606   598 Total assets $ 7,572 $ 8,027   LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 59 $ 3 Accounts payable 1,016 1,053 Accrued expenses and other current liabilities 920 949 Income taxes payable   59   85 Total current liabilities   2,054   2,090 Long-term liabilities: Long-term debt 1,566 1,246 Lease incentives and other long-term liabilities   935   920 Total long-term liabilities   2,501   2,166 Total stockholders' equity   3,017   3,771 Total liabilities and stockholders' equity $ 7,572 $ 8,027     The Gap, Inc.CONDENSED CONSOLIDATED STATEMENTS OF INCOMEUNAUDITED   13 Weeks Ended($ and shares in millions except per share amounts)April 28, 2012   April 30, 2011 Net sales $ 3,487 $ 3,295 Cost of goods sold and occupancy expenses   2,112   1,991 Gross profit 1,375 1,304 Operating expenses   980   918 Operating income 395 386 Interest, net   22   5 Income before income taxes 373 381 Income taxes   140   148 Net income $ 233 $ 233   Weighted-average number of shares - basic 489 583 Weighted-average number of shares - diluted 494 588   Earnings per share - basic $ 0.48 $ 0.40 Earnings per share - diluted $ 0.47 $ 0.40     The Gap, Inc.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED       13 Weeks Ended($ in millions)April 28, 2012   April 30, 2011 Cash flows from operating activities: Net income $ 233 $ 233 Depreciation and amortization (a) 123 129 Change in merchandise inventory 24 (80 ) Other, net   (16 )   (51 ) Net cash provided by operating activities   364     231     Cash flows from investing activities: Purchases of property and equipment (148 ) (127 ) Purchases of short-term investments (75 ) - Maturities of short-term investments - 50 Change in other assets   (8 )   (2 ) Net cash used for investing activities   (231 )   (79 )   Cash flows from financing activities: Proceeds from issuance of long-term debt - 1,246 Payments of long-term debt issuance costs - (11 ) Payments of long-term debt (40 ) - Proceeds from share-based compensation, net of withholding tax payments 66 28 Repurchases of common stock (22 ) (518 ) Excess tax benefit from exercise of stock options and vesting of stock units 15 10 Cash dividends paid   (61 )   (66 ) Net cash provided by (used for) financing activities   (42 )   689     Effect of foreign exchange rate fluctuations on cash   (4 )   15   Net increase in cash and cash equivalents 87 856 Cash and cash equivalents at beginning of period   1,885     1,561   Cash and cash equivalents at end of period $ 1,972   $ 2,417       (a) Depreciation and amortization is net of amortization of lease incentives.   The Gap, Inc.SEC REGULATION GUNAUDITED     RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW   13 Weeks Ended($ in millions)April 28, 2012   April 30, 2011 Net cash provided by operating activities $ 364 $ 231 Less: purchases of property and equipment   (148 )   (127 ) Free cash flow (a) $ 216   $ 104   _________ (a) Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results. Gap Inc.Investor Relations:Mike Jenkins, 415-427-4454investor_relations@gap.comorMedia Relations:Stacy Rollo, 415-427-6230press@gap.com