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Author: TMFJMo Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1388  
Subject: GPS 2Q2011 Earnings Takeaways Date: 8/19/2011 9:13 AM
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Here's the link to the company release:

http://www.gapinc.com/content/dam/gapincsite/documents/Press...

It's funny to me how when earnings come out the headlines read so differently. Some of these headlines would have you think that Gap is imploding like a dying star (let's hope that's not the case:).

Sales were up slightly, net income was down and EPS came in slightly higher than expectations, so playing the game they beat expectations by $0.02. Comps were down 2% and margins are also feeling pressured, but in all honesty if this comes as a surprise to anyone as of late then I would be, well, surprised. There is talk of another recession, the economy is still getting hammered and retail sucks typically in these types of environments anyway. It also bounces back pretty hard when things get better too, so I am still optimistic for the longer term.

They have repurchased a number of shares in the first half of the year and share count did go down which is nice. It's worth mentioning that 67 million shares have been repurchased for $1.4 billion which would imply about $21 per share. But share count hasn't gone down by quite that much on a sequential basis. At the end of 4Q2010 share count was 588 million and end of 2Q2011 is 542 million which is a difference of 46 million. So those those shares were repurchased closer to the $30 range thanks to share-based compensation, etc. But it's also worth noting that they yield 2.7% now on their dividend, so that is a nice positive. At the end of the day there are some companies (very popular in our Foolish universe I might add) that are much worse about buying back shares at inflated prices thanks to dilution. Gap isn't the worst, they aren't the best, life moves on for me. People are gonna get paid one way or another, that's for sure and this is nothing way out of order. I think Gap is pretty good about getting money back to shareholders.

Let's see how comps break down based on stores; it's not exactly a pretty picture:

•  Gap North America - -3% vs. -3% last year
•  Banana Republic North America - -2% vs. +4% last year
•  Old Navy - -flat vs. +2% last year
•  International - -4% vs. +3% last year

All this said, management reaffirmed guidance for the full year of $1.40 - $1.50 per share and it does appear that there will be some growth opportunities in the Athleta brand as well as International.

Management said on the call quite simply that it was a tough quarter. They will continue to focus on controlling costs and messaging the lines to their core audience. But they need to make sure they know exactly who their core audience is and I think that was part of the recent organizational changes within the company as they try to more or less change with the times.

The stock was flat in after hours and make no mistake, this is one that will go with sentiment. On days like yesterday it's gonna get hammered. But if we see any improvement in the economy, I still think that Gap has the brand power to be successful and we'll see the stock move up when that happens.

Foolish best,

Jason
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